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https://www.courtlistener.com/api/rest/v3/opinions/8492657/ | POST-TRIAL MEMORANDUM DECISION
STUART M. BERNSTEIN, Bankruptcy Judge.
The chapter 7 trustee commenced this adversary proceeding to recover title to the shares and proprietary lease pertaining to a cooperative apartment. The debtor originally acquired the shares and lease in his own name. He contends that he transferred a 50% interest to his wife in 1984 (the “1984 Transfer”), and the remaining 50% interest in 1994 (the “1994 Transfer”). The trustee contends that the purported transfers were never completed, but if they were, they are avoidable.
At the conclusion of the September 9,1997 trial, I ruled that the 1994 Transfer was ineffective, and the debtor’s wife had failed to prove a basis for imposing a constructive trust in her favor. (See Trial Transcript (“Tr ”) 105-06.) I now conclude that the 1984 Transfer was also ineffective. Accordingly, the debtor owned the entire interest in the cooperative apartment on the petition date, and the trustee may sell this interest pursuant to 11 U.S.C. § 363.
BACKGROUND
The defendants, Joseph S. Lefrak (“Joseph”), an attorney, and Susan Lefrak (“Susan”) married in September 1952, (Tr. 27), and moved into apartment 14D at 983 Park Avenue (“Apartment”) in Manhattan in 1976. (Id. at 28.) In 1982, the budding converted to cooperative ownership, and the defendant 983 Tenants Corp. (the “Corporation”) became the owner. Joseph “bought” the Apartment. He received a certificate evidencing his ownership of 919 shares in the Corporation (Plaintiffs Exhibit (“PX”) C), and entered into a proprietary lease with the Corporation to occupy the Apartment.1 Joseph financed his purchase, in part, with a loan from Dime Savings Bank (“Dime”), pledging his shares and proprietary lease as security for repayment. (Tr. 30.) Thereafter, Dime retained possession of the share certificate. There is no evidence that Susan was liable for repayment of the Dime loan, and as discussed below, there is evidence that she was not.
The 1984 Transfer
In 1984, Joseph decided to give Susan a 50% ownership interest in the Apartment. This involved transferring his 100% interest to himself and Susan as joint tenants with rights of survivorship. Paragraph 16(a)2 of *933the proprietary lease establishes certain formalities as a condition to transfer of the shares and lease. In some cases, it also requires the Corporation’s consent. The assignor must deliver an executed assignment to the Corporation, (¶ 16(a)(i)), the assignee must deliver an executed agreement to the Corporation under which she agrees to assume and be bound by the terms and covenants of the proprietary lease (ie., an acceptance and assumption agreement), (¶ 16(a)(ii)), and the assignor’s shares must be “transferred to the assignee, with proper transfer taxes paid, and stamps affixed.” (¶ 16(a)(iii)). If the transfer.is not between spouses, the parties must also obtain the consent of the Corporation. (¶ 16(a)(v)).
Joseph failed to comply with the terms of the proprietary lease; he confused the separate. requirements of formality and consent. Sometime in 1984, Joseph contacted Dime— who held the share certificate — to obtain its consent to the transfer of the shares. Dime advised Joseph to obtain the consent of the Corporation. On September 17, 1984, Joseph wrote to the president of the Corporation, requesting its consent to the transfer of his shares to himself and Susan jointly. (Defendants Lefraks’ Exhibit (“DX”) 1.) By letter dated October 3, 1984, the Corporation gave its consent, noting, however, that “[pjursuant to Paragraph 16a(v) of the Proprietary Lease it would seem that this consent is superfluous.” (DX 2.) To this point Joseph had not executed an assignment of the lease, and Joseph and Susan had not executed an acceptance and assumption agreement.
Armed with the October 3, 1984 letter, Joseph wrote to Dime requesting Dime’s consent to the transfer of share' ownership to himself and Susan jointly, with right of sur-vivorship. (DX 4.) He enclosed the October 3 letter in addition to the results of a judgment and lien search on Susan and a check covering Dime’s processing fees. Dime wrote back that it was in receipt of the “necessary documentation in order to change title,” and was forwarding the documents to its attorneys, Jackson & Nash. (DX 5.) On December 18, 1984, an associate in Joseph’s law firm wrote to Jackson & Nash. She asked Dime’s counsel (1) to forward any documentation that had to he executed to effectuate the transfer and (2) to call to schedule a closing, if one was necessary. (DX 5.)
Inexplicably, the matter lay dormant for the next three years. There is no evidence that Joseph again communicated with Dime or the Corporation until September 2, 1987. On that day, Joseph wrote to Ms. Meryl Sacks at M.J. Raynes, Inc., evidently the Corporation’s managing agent. (PX D.) He acknowledged that he was the sole owner of the shares, and requested a transfer of the shares from himself to himself and Susan, as joint tenants.
In September 1987, Joseph also wrote to Dime, again requesting permission to add Susan’s name to the share certificate. On September 17, 1987, Dime wrote back, inter alia, “requesting various documents necessary in order to add his wife’s name on the co-op loan.” (DX 7)(Emphasis .added.)3 Dime’s request indicates that Susan was not liable for repayment of the loan. Further, Dime understandably would not consent to. the transfer of its collateral unless Susan became hable for the debt secured by the collateral.
On or about November 10, 1987, and for the first time, Joseph executed an assignment, and both he and Susan executed an acceptance and assumption agreement. An associate with Joseph’s law firm transmitted these and other documents to Dime, (DX 6), *934but the evidence does not establish that anyone ever transferred the assignment or the acceptance and assumption agreement to the Corporation.4 The November 10 letter does not reflect that it transmitted documentation making Susan “liable on the co-op loan,” although a letter from the same associate written on January 11, 1988, states that it did. (DX 7.)
By this time, a new problem arose. Dime apparently misplaced Joseph’s loan file which contained both the stock certificate and the proprietary lease. On January 11, 1988, Joseph’s associate again wrote to Dime, recounting the recent unsuccessful efforts to transfer the shares and the problem of the lost shares and lease. (DX 7.) According to this letter, a Dime officer had advised Joseph’s associate five days earlier that if she could not locate the missing certificate and lease by the end of that day, she would prepare affidavits of lost certificate and lost proprietary lease, “so that we could proceed to obtain new documents to close this transaction.” The letter ended with the request that Dime prepare the affidavits and send them to its counsel so that the parties could schedule a closing and “finalize this transaction.”
The record does not reflect any subsequent communication or activity between Joseph and Dime. The parties never closed their transaction, and Dime never transferred or consented to the transfer of an interest in the shares to Susan.
The 1994 Transfer
In October 1992, the Lefraks separated, Joseph moved out and Susan continued to reside in the Apartment without him. (Tr. 29.) The Lefraks believed that despite the false starts and problems regarding the transfer, they owned the Apartment jointly. According to Joseph’s testimony, they subsequently entered into an oral separation agreement pursuant to which, inter alia, Joseph agreed to transfer his remaining 50% interest to Susan. (See Tr. 40-41.) On October 24, 1994, Joseph wrote to the Corporation’s president stating that he had “relinquished” his “one-half interest” in the shares and the proprietary lease, making Susan the sole owner. (DX 9.)
The only evidence of a response came two years later. By letter dated November 12, 1996, (DX 10), written after the commencement of this case, the Corporation reminded Joseph that it had previously approved the transfer of the Apartment from his name alone to him and Susan jointly. Moreover, “[although the ministerial act of effecting that transfer never occurred, it was the cooperative’s intent that the transfer take place.” It concluded, however, that because of the bankruptcy, no transfer could take place ■without bankruptcy court approval.
DISCUSSION
A. Introduction
The only remaining issue in this matter concerns the effectiveness of the 1984 Transfer. If it was effective, Joseph and Susan owned the Apartment jointly on the petition date. If it was not effective, Joseph’s 100% interest became property of the estate, and the trustee may sell it. The parties’ interests in the Apartment must be determined in accordance with state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 186 (1979).
The nature of cooperative apartment ownership is sui generis. The owner holds shares in the corporation that owns the apartment building, and his share ownership entitles him to a proprietary lease. State Tax Comm’n v. Shor, 43 N.Y.2d 151, 400 N.Y.S.2d 805, 806, 807-08, 371 N.E.2d 523, 524, 526 (1977); see In re Estate of Carmer, 71 N.Y.2d 781, 530 N.Y.S.2d 88, 525 N.E.2d 734, 735 (N.Y.1988)(interest represented by the shares is in reality a right to possess real property). The shares and lease are inseparable; the transfer of one without the other would be futile, and therefore ineffective. United States v. 110-118 Riverside Tenants Corp., 886 F.2d 514, 517-18 (2d Cir.1989), cert. denied, 495 U.S. 956, 110 S.Ct. 2560, 109 L.Ed.2d 743 (1990); see Bell v. Alden Owners, Inc., 199 B.R. 451, 463 (S.D.N.Y.1996); cf. Swatzburg v. Swatzburg, 137 Misc.2d 1042, 523 N.Y.S.2d 399, 399-400 (N.Y.Sup.Ct.*9351987) (judgment creditor cannot execute on co-op shares, as distinct from the proprietary lease). Here, the proprietary lease reflects this requirement.
The Lefraks contend, in substance, that Joseph gave Susan an inter vivos gift of., a 50% joint interest in the Apartment in 1984, or at the latest, 1987. Under New York law, the three elements of an inter vivos gift are donative intent, delivery, and acceptance. Muserlian v. Commissioner of Internal Revenue, 982 F.2d 109, 113 (2d Cir.1991); Gruen v. Gruen, 68 N.Y.2d 48, 505 N.Y.S.2d 849, 852-53, 496 N.E.2d 869, 872 (1986); In re Estate of Szabo, 10 N.Y.2d 94, 217 N.Y.S.2d 593, 594-95, 176 N.E.2d 395, 396 (1961); In re Van Alstyne, 207 N.Y. 298, 100 N.E. 802, 805 (1913). The party asserting the gift must establish each element clearly and unambiguously, von Kaulbach v. Keoseian, 783 F.Supp. 170, 175-76 (S.D.N.Y.1992); Mortellaro v. Mortellaro, 91 A.D.2d 862, 458 N.Y.S.2d 390, 390 (4th Dep’t 1982); see Midland Ins. Co.. v. Friedgood, 577 F.Supp. 1407, 1412 (S.D.N.Y.1984)(the proof must be scrutinized carefully and critically).
The record supports a finding of both do-native intent and acceptance. It contains correspondence expressing Joseph’s desire to effect the transfer, (DX 1, 4, 5; PX D), and Susan’s acceptance, (DX 6, letter dated Nov. 21, 1984.) Moreover, in late 1987, Joseph executed an assignment of the proprietary lease, (DX 6), and both he and Susan executed an acceptance and assumption of the proprietary lease. (Id.)
The defendants must also prove, however, that Joseph delivered his 50% interest to Susan.5 Delivery need only be “as perfect as the nature of the property and the circumstances and surroundings of the parties will reasonably permit.” Gruen v. Gruen, 505 N.Y.S.2d at 854, 496 N.E.2d at 874 (quoting In re Estate of Szabo, 217 N.Y.S.2d at 594-95, 176 N.E.2d at 396). It must, however, reach the “point of no return,” and the donor must surrender dominion and control irrevocably to the donee. In re Estate of Szabo, 217 N.Y.S.2d at 594-95, 176 N.E.2d at 396; see also Gruen v. Gruen, 505 N.Y.S.2d at 854-55, 496 N.E.2d at 874; In re Van Alstyne, 100 N.E. at 805; Beaver v. Beaver, 117 N.Y. 421, 22 N.E; 940, 941 (1889).
Initially, the proof that Joseph “delivered” the proprietary lease is equivocal. Joséph delivered a fully executed lease assignment to Dime, (DX6), but there is no proof that he transmitted it to Susan or the Corporation. Assuming, however, that Joseph effectively delivered the proprietary lease, he also had to deliver the share certificate to complete the inter vivos gift of the 50% interest. As already noted, the shares and lease áre inseparable, and the attempt to transfer one without the other is ineffective. United States v. 110-118 Riverside Tenants Corp., 886 F.2d at 517-18.
B. The Delivery of the Share Certificate
A share certificate is not an interest in property, but only evidence of an interest. Elyachar v. Gerel Corp., 583 F.Supp. at 918. As a rule, the donor must physically deliver the share certificate to deliver the underlying interest. See In re Ruszkowski’s Estate, 45 Misc.2d 380, 256 N.Y.S.2d 983, 985-86 (N.Y.Surr.Ct.1965) (citing cases); Reinhard v. Sidney S. Robey Co., 110 Misc. 152, 179 N.Y.S. 781, 783 (N.Y.Sup.Ct.), aff'd, 193 A.D. 926, 184 N.Y.S. 946 (4th Dep’t 1920). Physical delivery is not, however, always practical. For example, the donor may retain a life or joint interest, and accordingly, desire to retain the share certificate. Under those circumstances, how does the donor retain the certificate but surrender dominion and control?
The. New York Court of Appeals answered this question in the leading case of In re Estate of Szabo, 10 N.Y.2d 94, 217 N.Y.S.2d 593, 176 N.E.2d 395 (1961). There, the decedent’s stock split 3-1. She endorsed one of her four .certificates to herself and the peti*936tioner as joint tenants with right of survivor-ship. She retained all four certificates, and directed her niece to have the company transfer all of the stock to joint ownership on the corporate books, but only when new, post-split certificates became available. The decedent died three days before the corporation issued the new certificates.
The Court of Appeals acknowledged that one who gives a part interest in shares is likely to retain the certificates, and a symbolic delivery will suffice.6 Id. at 594-95, 176 N.E.2d at 396. However, without physical delivery, the gift is not complete until the corporation records the transfer on its books:
[E]ven [symbolical] delivery must proceed to a point of no return, and this point can only be reached when there is a transfer of record on the stock books of the company. Obviously the donor does not surrender dominion and control of a part interest until the transfer of record is made because up until that time he may change his mind and withdraw his directive to the transfer agent.
Id. at 595, 176 N.E.2d at 396; accord Kaulbach v. Keoseian, 783 F.Supp. at 176; Elyackar v. Gerel Corp., 583 F.Supp. at 918; Clarkson Co. v. Shaheen, 533 F.Supp. 905, 921-22 (S.D.N.Y.1982); see In re Carroll, 100 A.D.2d 337, 474 N.Y.S.2d 340, 344 (2d Dep’t 1984) (transfer on corporate books divested donor of control, despite his retention of the share certificate); In re Estate of Cristo, 86 A.D.2d 700, 446 N.Y.S.2d 555, 556-57 (3d Dep’t 1982) (failure to complete stock transfer ledger or certificate stubs is determinative where the donor retains beneficial interest in the shares represented by the certificates).
The Court of Appeals in Szabo concluded that there was no inter vivos gift. The corporation did not record the transfer during the decedent’s lifetime, and her death revoked the transfer agent’s authority to make the transfer of record. 217 N.Y.S.2d at 594-95, 176 N.E.2d at 396-97. This conclusion extended to the certificate that the decedent had actually endorsed. Although this was evidence of the decedent’s intent, it was not sufficient to complete the symbolic delivery. Until her death, she could revoke the transfer agent’s authority to complete the transfer. Id.
Here, Joseph never delivered the shares to Susan. They remained in Dime’s possession at all times. It is true that Joseph would not have been expected to make actual physical delivery because he retained a joint interest with Susan.7 Nevertheless, he also failed to make a symbolic delivery of the shares. None of the writings in evidence expresses a present intention to make a gift of the interest. The various letters sent by Joseph or his associates refer prospectively to his desire to make a transfer, and not to an antecedent or contemporaneous transfer. (See DX 1, 4, 7.)
More important, the Corporation never recorded the transfer on its stock records.8 If *937this leads to a result Joseph did not intend, he must accept the blame. Both the Corporation and Dime were amenable to the idea of the transfer. But after initiating the transfer process in 1984, Joseph abandoned it for three years. By the time that the Lefraks executed an assignment and an acceptance and assumption of the proprietary lease in 1987, the Dime file, which had been transmitted to Jackson & Nash in 1984, had been misplaced. In early 1988, Joseph finally abandoned all efforts to complete the transfer process.9
As a result, Joseph retained dominion and control over the entire interest in the Apartment. Prior to bankruptcy, Joseph could have satisfied the Dime loan and recovered the shares and proprietary lease. He could have executed a new assignment of the lease, endorsed the share certificate, and delivered both to a third party purchaser. Assuming that the purchaser executed an acceptance and assumption agreement and the Corporation consented to the transfer, the purchaser would become the new shareholder and proprietary lessee. Under the Corporation’s bylaws, (art. VI, § 4),10 the purchaser would be entitled to surrender Joseph’s endorsed certificate, and compel the Corporation to record the transfer on its records. In essence, he could have transferred the shares and lease without Susan’s knowledge or consent.
One case that the Lefrak’s cite nevertheless upheld the transfer of an interest despite the absence of physical delivery or recordation. In Chiaro v. Chiaro, 218 A.D.2d 369, 623 N.Y.S.2d 312 (2d Dep’t), appeal denied, 86 N.Y.2d 708, 634 N.Y.S.2d 442, 658 N.E.2d 220 (1995), the wife in a divorce action claimed that her husband’s parents had given a cooperative apartment to the couple during their marriage. The parents denied the gift. Moreover, they never delivered the share certificate, (id., 623 N.Y.S.2d at 314), and the opinion implies that the corporation never recorded the transfer to the donees.11
The court nevertheless concluded that the parents had made a constructive delivery of the interest, “sufficient to divest the [donors] of dominion and control over the unit.” Id. The donees resided in the apartment for nearly their entire marriage, they made expensive renovations to the apartment, they voted at co-op board meetings with the knowledge of the parents, and at certain meetings, one of the parents voted a proxy signed by the couple. Id.
The Chiaro court’s conclusion is hard to square with New York law, particularly since it did not cite Szabo. Clearly, no delivery occurred. It appears, instead, that the Chiaro court rested its finding of divestiture of dominion and control on some type of waiver or estoppel. Waiver is discussed below, and to the extent that estoppel can substitute for the delivery requirements under Szabo, the doctrine is not applicable in this case. There is no proof that the Corporation represented to the Lefraks that they owned the Apartment jointly,12 or that the *938Lefraks changed their position under the mistaken belief that they did.13
C. The Waiver of the Recordation Requirement
The Lefraks argue that even if recordation was necessary to complete the transfer of Joseph’s interest, the Corporation waived the requirement. They conclude, therefore, that the transfer should be deemed to have occurred. This argument, however, misses the point. It confuses the formality requirements imposed under the proprietary lease with the delivery requirements imposed under state law with respect to the law of inter vivos gifts.
A corporation typically requires that stock transfers be recorded on its books. Such a requirement operates solely for the protection of the corporation, and lack of compliance does not prevent the passing of title in the shares as between the parties provided that proper delivery has occurred. See Chemical Nat’l Bank v. Colwell, 132 N.Y. 250, 30 N.E. 644, 645 (1892) (delivery complete upon transfer of certificate with assignment and power of transfer); In re Estate of Cristo, 446 N.Y.S.2d at 556 (delivery complete under U.C.C. Article 8); In re Will of Katz, 142 Misc.2d 1073, 539 N.Y.S.2d 659, 662 (N.Y.Surr.Ct.1989) (delivery complete upon physical transfer of share certificate); In re Ruszkowski’s Estate, 256 N.Y.S.2d at 985-86 (same). In such cases, “[t]he question is simply, were all of the usual elements ... of a completed gift inter vivos present?” In re Maijgren’s Estate, 193 Misc. 814, 84 N.Y.S.2d 664, 670 (N.Y.Surr.Ct.1948).
Nevertheless, in certain cases, recordation may be necessary to complete delivery. Szabo held that where the donor retains a part interest and does not physically deliver the certificate, the corporation must record the transfer in its stock records. This requirement does not derive from the corporation’s insistence on its own formal requirements. Rather, it is necessary under the law of gifts to strip the donor of dominion and control over the interest represented by the shares. Thus, just as failure to satisfy corporate formalities does not prevent an inter vivos gift where the donor completes physical delivery of the share's, the corporation’s waiver of its formalities does not transform an incomplete delivery into a completed one.14
The Lefraks also argue that the Corporation’s acceptance of maintenance checks somehow waived any objection to the Lef-raks’ failure to comply with the Corporation’s transfer formalities. Joseph always paid the maintenance. (Tr. 12.) Acceptance of maintenance checks from Joseph is consistent with the position that the transfer never occurred; absent a valid transfer, the.proprietary lease required Joseph, the sole proprietary-lessee, to pay the maintenance.
CONCLUSION
Joseph failed to demonstrate clearly and unambiguously that he surrendered dominion and control over the interest he claims he transferred to Susan. As noted, until the bankruptcy, he could have transferred the shares and lease to a third party without Susan’s knowledge or consent. Further, he could not transfer the lease without also transferring the shares, and the lease transfer must fall on this ground as well. Accordingly, the trustee is entitled to a declaration that the entire interest in the Apartment is property of the estate.
The foregoing constitutes the Court’s findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a), made applicable by *939Fed.Bankr.R. 7052. The trustee is directed to settle a judgment on notice.
. The copy of the lease received in evidence as PX A is unsigned, but there is no dispute that Joseph alone signed it
. Paragraph 16(a) provides, in relevant part:
(a) The Lessee shall not assign this lease or transfer the shares to which it is appurtenant or any interest therein, and no such assignment or transfer shall take effect as against the Lessor for any purpose, until
(i) An instrument of assignment in a form approved by Lessor executed and acknowledged by the assignor shall be delivered to the Lessor; and
(ii) An agreement executed and acknowledged by the assignee in a form approved by Lessor assuming and agreeing to be bound by all the covenants and conditions of this lease to be performed or complied with by the Lessee on and after the effective date of said assignment shall have been delivered to the Lessor, or, at the request of the Lessor, the assignee shall have surrendered the assigned lease and entered into a new lease in the same form for the remainder of the term, in which case the Lessee’s lease shall be deemed cancelled as of the effective date of said assignment; and
(iii)All shares of the Lessor to which this lease is appurtenant shall have been transferred to the assignee, with proper transfer taxes paid and stamps affixed; and
*933(v) Except in the case of an assignment, transfer or bequest to the Lessee's spouse, of the shares and this lease, and except as provided in Paragraph 38 of this lease, consent to such assignment shall have been authorized by resolution of the Directors, or given in writing by a majority of the Directors; or, if the Directors shall have failed or refused to give such consent within thirty (30) days after submission of references to them or Lessor’s agent, then by lessees owning of record at least sixty-five (65%) percent of the then issued shares of the Lessor. Consent by lessees as provided for herein shall be evidenced by written consent or by affirmative vote taken at a meeting called for such purpose in the manner as provided in the ByLaws.
. None of the parties introduced the September 1987 correspondence between Joseph and Dime. Their communications are reflected in a January 11, 1988 letter received in evidence as DX 7.
. At trial, Joseph only speculated that the documents were delivered. (See Tr. 80.)
. The donor can give a partial interest in property. See In re Estate of Szabo, 217 N.Y.S.2d at 594-95, 176 N.E.2d at 396 (gift of joint interest in shares); Gruen v. Gruen, 505 N.Y.S.2d at 852-55, 496 N.E.2d at 872-74 (present gift of remainder interest, with donor reserving a life estate); Elyachar v. Gerel Corp., 583 F.Supp. 907, 917-20 (S.D.N.Y.1984) (Sofaer, J.) (gift of beneficial interest in shares, with donor retaining management control of the corporation).
. For example, a symbolic delivery would occur where the donor does not deliver the property, but instead, delivers an instrument that expresses a present transfer of the property (as opposed to a future transfer). See, e.g., In re Estate of Monks, 171 Misc.2d 514, 655 N.Y.S.2d 296, 299-300 (N.Y.Surr.Ct.1997).
. I had raised the issue of whether Article 8 of New York’s Uniform Commercial Code ("U.C.C.") governs the transfer of Joseph's co-op shares, and if it does, whether Joseph satisfied its terms. The first question is unresolved. See ALH Properties Ten, Inc. v. 306-100th St. Owners Corp., 86 N.Y.2d 643, 635 N.Y.S.2d 161, 163, 658 N.E.2d 1034, 1036 (1995) (refusing to decide whether a co-op share certificate is a "security” within the meaning of Article 8 of the U.C.C.). The second question must be answered in the negative. If Article 8 does apply, Joseph failed to effect a delivery under its terms. The shares would be "certificated securities." Since Dime acted as a pledgee and not as a "financial intermediary" with respect to the shares, see N.Y.U.C.C. § 8-313(4) (McKinney 1990) (defining "financial intermediary”), the U.C.C. recognizes only two methods of transfer. First, the transferee may acquire possession. U.C.C. § 8-313(1 )(a). Second, if the securities are held by a third party, the third party must acknowledge that it holds the certificated security for the new owner. Id., § 8-313(l)(e). Joseph and Susan never acquired possession of the share certificate; it always remained in Dime's possession. Further, Dime never acknowledged that it held the certificate for Joseph and Susan as joint owners.
.The Lefraks point to the Corporation's letters dated October 3, 1984 (DX 2), and November 12, 1996 (DX 10) as evidence that the Corporation’s *937records reflect a completed transfer. The first, (DX 2), simply gives consent to the transfer but acknowledges that consent is unnecessary. The second, (DX10), actually confirms that the Corporation’s records do not reflect the transfer. The Corporation’s outside counsel wrote to Joseph that “although the ministerial act of effecting the transfer never occurred it was the cooperative’s intent that the transfer take place.” The Corporation’s "intent” is consistent with its consent, but neither intent nor consent are material. Rather, the recordation of the transfer, which the letter calls "ministerial,” is essential to effect delivery.
.Joseph testified that when he learned of the missing Dime file, he prepared and forwarded an affidavit of lost certificate to the Corporation. (Tr. 78.) This testimony is not credible. Dime lost the certificate and would have had to prepare the affidavit. (DX 7.) In addition, Joseph failed to produce any evidence of this affidavit at trial.
. The Corporation’s by-laws are part of the Offering Plan which was received in evidence as PX B.
. If the donees were the record owners, the court could have easily decided the case on that basis.
. For example, there is no proof that the Corporation sent annual statements to both Lefraks, as joint shareholders, setting forth the amount of mortgage interest or real estate taxes they could deduct for income tax purposes.
. The Lefraks occupied the Apartment together before the purported transfer, and continued to occupy the Apartment in the same manner after-wards. Joseph left the Apartment because the Lefraks separated. In addition, there is no evidence that Susan exercised a shareholder’s right to vote her interests at an annual or special meeting of shareholders, or delivered a proxy to anyone to exercise those rights.
. In any event, the Lefraks offered no proof that the Corporation intentionally waived its formal requirements of recordation. Indeed, at trial, it argued that the transfer had not been completed. (Tr. 9-10.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492658/ | OPINION
David A. SCHOLL, Chief Judge.
A. INTRODUCTION
Two questions are presented by the above-captioned adversary proceeding (“the Proceeding”): (1) Who is entitled to the $27,-517.00 (“the Funds”)' owed to DE-PEN LINE, INC. (“the Debtor”) by Plaintiff CF MOTOR FREIGHT (“CF”), Defendant ANDREW N. SCHWARTZ, Chapter 7 Debtor’s trustee (“the Trustee”), or Defendant DELTA INVESTMENTS, LTD. (“DIL”), the self-described “factor” of the Debtor’s accounts; and (2) Is CF, as the interpleader plaintiff in the Proceeding, entitled to attorney’s fees and costs out of the fund and, if so, how much? We conclude that the Trustee is, for the most part, entitled to the Funds, with CF being entitled to modest attorneys’ fees and costs, fixed by us at $1,150, out of that amount.
B. PROCEDURAL AND FACTUAL HISTORY
The underlying Chapter 7 bankruptcy case was filed on January 24, 1996. The Trustee reported, at the November 18, 1997, trial of the Proceeding, that the Funds were the only asset of the Debtor’s estate. Considering this fact, administration of this ease has been painfully slow. On September 23, 1996, we directed the Trustee to file the final audit papers in this case by April 1, 1997. Given the limited assets of the estate, this schedule itself could be criticized as overly liberal. Nevertheless, not realizing the modesty of the estate, we granted the Trustee an extension until October 31,1997. As it developed, the extended deadline was also not met and a further extension was requested by the Trustee in light of the pendency of the Proceeding.
The Complaint in the Proceeding avers that the Trustee demanded the Funds from. CF as early as May 28, 1997, and that they were paid over to him on July 23, 1997. It seems to us that the Trustee could have easily met the October 31, 1997, deadline, even assuming arguendo that it was necessary for him to file an action in this court to establish his rights .to the Funds vis-a-vis DIL, had he had a mind to do so.
In fact, the Trustee’s failure to either administer the Funds quickly and put them out of the reach of DIL or file any action believed necessary to resolve his rights to the Funds prompted the Proceeding and cost the estate the fees payable to CF, although we will allow CF considerably less than it requested on this score.
As it developed, DIL filed a state court action (“the State Action”) against CF seeking to recover the Funds on March 14, 1997. This action was suspended during negotiations among all three parties which came to naught. When DIL indicated an intent to proceed with the State Action after months of non-resolution, CF filed the instant proceeding on September 26, 1997, contending that they were interpleading the Funds and seeking to enjoin DIL from prosecuting the State Action against it.
At the trial of the Proceeding on its first scheduled trial date of November 18, 1997, only brief testimony of the Trustee was adduced. DIL’s counsel explained that his client’s principal was rather unexpectedly not present. However, we note that no continuance was sought. The Trustee testified that he had no evidence that DIL advanced funds to the Debtor. other than the exhibits attached to DIL’s Answer, which include copies of a check in the amount of $13,400.31 payable to the Debtor from DIL. The Trustee *949also noted that DIL had not filed a proof of claim in this case at any time, the bar date of December 31,1996, having long passed.
The documents of record also establish certain underlying facts. On or about July 21, 1995, DIL entered into a Factoring Agreement (“the Agreement”) with the Debt- or. Accordingly, the invoices are stamped with a statement that they have been “sold and assigned” to DIL and that DIL only is to be paid on account. However, the Agreement also provides that
[i]f after a period of 60 days from date of invoices, payment has not been received, DIL will charge back to DE-PEN the monies advanced on that invoice plus the full factor fee, to be deducted from the following week [sic] advance payment.
The Agreement further states that DIL will pay to the Debtor eighty-six (86%) percent of the face amount of each invoice transferred to it immediately and will retain a four (4%) percent factoring fee. The remaining ten (10%) percent was apparently to be paid to the Debtor only upon collection of the amount payable.
From November 1995 to January 1996, the Debtor performed certain services for CF for which CF was obliged to pay it $27,517.00. Payment of that amount was outstanding as of January 24, 1996, the date on which the Debtor filed for bankruptcy. The Trustee testified that no other similar disputes have arisen and, as noted supra, that the Funds constitute the entire proceeds of the Debtor’s estate.
At the close of the hearing CF asserted its claim to “reasonable attorney’s fees” and costs of several thousand dollars. The Trustee disputed any such claim, contending that the Proceeding was not a “true” inter-pleader action because the Funds in dispute had already been paid over to him rather than having been deposited into court.
We ultimately directed CF to quantify and support its claim for attorney’s fees and costs, by November 24, 1997; DIL to file a brief in support of its claims by December 3, 1997; and the Trustee to respond to all of the foregoing by December 11, 1997. CF submitted a detailed application for compensation, requesting compensation for 54.3 hours of services at $100/hour, or $5,430, and costs of $301.68. The bulk of this time was spent in legal research on the law of inter-pleader, drafting the Complaint, preparing a pre-trial memorandum of law, and preparing for and attending the trial.
It its post-trial submission, DIL argued that, under the terms of the Agreement, it advanced funds to the Debtor in consideration for the Debtor’s complete assignment of its rights to collect the CF account. Despite the nomenclature of the Agreement, it did not vigorously contend that it is actually a “factor” under the terms of the Agreement.
C. DISCUSSION
1. The Trustee Is Entitled to Retain the Funds.
We begin by attempting to define DIL’s rights as a “factor.”
Under the traditional concept of the term, a “factor” is one who is specially employed to receive goods from a principal and to sell them on behalf of the principal for compensation in the form of a commission.
42 AM.JUR.2d 5 (1995), citing, e.g., Taylor v. Wachtler, 825 F.Supp. 95, 103 (E.D.Pa.1993), referencing Pennsylvania law.
However, that text goes on to explain that [w]hile in the past the terms “factor” and “commission merchant” were used interchangeably, “factoring” in modern commercial practice is understood to refer to the purchase of accounts receivable from a business by a “factor” who thereby assumes the risk of loss in return for some agreed discount. Indeed, the factor has emerged primarily as a financier, often a finance company or similar institution, which provides its clients (usually manufacturers or other suppliers of goods) with needed working capital and other financial assistance by purchasing their accounts receivable (footnotes omitted).
32 AM.JUR.2d, supra, at 6. Indeed, DIL was not a “commission merchant” for the Debtor, but instead purportedly purchased the Debtor’s accounts receivable and thus served as its financier.
*950Speaking of “modern” factors, 4 J. WHITE & R. SUMMERS,' UNIFORM COMMERCIAL CODE 66 (4th. ed.1995), states pertinently as follows:
Article 9 applies to sales of accounts and chattel paper primarily because of their financing character. The reasons for this rule are most obvious with respect to certain sales of accounts and chattel paper done by “factors.” “Factors” are lenders in sheep’s clothing; routinely they “buy” accounts without recourse (footnote omitted).
Controlling authority in this jurisdiction, as White and Summers suggest, applies Article 9 of the Uniform Commercial Code (“the UCC”) to such transactions. Major’s Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 542-46 (3d Cir.1979). Accord, Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948, 954-58 (10th Cir.1993), cert. denied, 510 U.S. 993, 114 S.Ct. 554, 126 L.Ed.2d 455 (1993); In re Vigil Bros. Construction, Inc., 193 B.R. 513, 516-17 (9th Cir. BAP 1996); In re Flowers, 78 B.R. 774, 776 (Bankr.D.S.C.1986); and In re Cripps, 31 B.R. 541, 542-44 (Bankr.W.D.Okla.1983).
In its post-trial submission, DIL attempts to distinguish Vigil because that case involved an assignment of an account in consideration for an obligation of the general contractor-debtor to a subcontractor-assignee. 193 B.R. at 515. Cripps is “distinguished” on the ground that the court there held that “title doesn’t matter,” while, here, “the parties intended the assignment as an absolute sale and not a security interest.” Memorandum: Re Claim of Delta Investments Ltd., at 4. No effort is made to distinguish Major’s Furniture, although, at the close of the trial, we cited this case to the parties as an apparently controlling authority.
With respect to the argument that the transaction at issue involved an “assignment,” we note that an “assignment” is an “absolute and complete” transfer of property from one party to another. See, e.g., In re Lease-A-Fleet, Inc., 141 B.R. 853, 861-62 (Bankr.E.D.Pa.1992). We also note that it has been held in Pennsylvania, as it has elsewhere, that “[cjourts will not be controlled by the nomenclature the parties apply to their relationship.” Kelter v. American Bankers’ Finance Co., 306 Pa. 483, 492, 160 A. 127, 130 (1932). In Smith-Faris Co. v. Jameson Memorial Hospital Ass’n, 313 Pa. 254, 260, 169 A. 233, 235 (1933), for example, it was said that
“[n]either the form of a contract nor the name given it by the parties controls its interpretation. In determining the real character of a contract courts will always look to its purpose, rather than to the name given it by the parties. *** The proper construction of a contract is not dependent upon any name given it by the parties, or upon any one provision, but upon the entire body of the contract and its legal effect as a whole.” 6 [W. McKIN-NEY & B. RICH, RULING CASE LAW] ■p.836, § 226. [(1915)]
Accord, Capozzoli v. Stone & Webster Engineering Corp., 352 Pa. 183, 186-87, 42 A.2d 524, 525 (1945). See also In re Joseph Kanner Hat Co., 482 F.2d 937, 940 (2d Cir.1973) (“courts will determine the true nature of a security transaction, and will not be prevented from exercising their function of judicial review by the form of words the parties may have chosen”).
In Kanner, supra, 482 F.2d at 938, the debtor obtained a loan of $25,000 from a bank and executed an assignment to the bank of $25,000 which was due to the debtor from a third party. The bank contended that the assignment constituted a transfer of an absolute right to collect whatever monies were due to the debtor from the third party. Id. The debtor’s trustee in bankruptcy, however, argued that the transaction created no more than a security interest under the UCC, that the security interest had not been perfected by filing, and that the trustee’s interest was -entitled to priority over the bank’s. Id. The court, looking to the true nature of the transaction, did not consider itself restricted by the form of words used by the parties. Id. at 940. Noting that the bank regarded and treated the assignment as a method of payment of a loan, the court held that, despite the “absolute assignment” of the entire claim, the transaction was no more than an assignment for security. Id.
*951In Major’s Furniture, supra, 602 F.2d at 545, the court commented on the relevance of a leader’s recourse against its debtor to the risks allocated in the agreement in question. It noted that the district court had properly found there was
“an obligation to repurchase any account after the customer was in default for more than 60 days. Castle only assumed the risk that the assignor itself would be unable to fulfill its obligations. Guaranties of quality alone, or even guarantees of collec-tibility alone, might be consistent with a true sale, but Castle attempted to shift all risks to Major’s, and incur none of the risks or obligations of ownership.”
The court thus concluded that none of the risks present in a true sale were present in the transaction before it.
As in Major’s Furniture, in the case at bar, a 60-day chargeback provision was present in the Agreement between DIL and the Debtor. It indicates, as is quoted in full at page 949 supra, “after a period of 60 days from date of invoices, payment has not been received, DIL will charge back to DE-PEN the monies advanced on that invoice.” Upon carefully reviewing the Agreement and, in particular, the chargeback provision just quoted, we find that the risks which are characteristic of a true sale are not accepted by DIL in the Agreement. In light of the above, we find that the Agreement between DIL and the Debtor merely creates a security interest in favor of DIL. It is neither a traditional “factoring agreement,” nor, since the transfer is not absolute, does it constitute an assignment.
Because Article 9 applies to assignments of accounts, the perfection requirements of Article 9 govern these transactions. See J. WHITE & R. SUMMERS, supra, at 64-66. In accordance therewith, the purportedly secured party must have filed a financing statement to have perfected its security interest. Vigil, supra, 193 B.R. at 517; and Cripps, supra, 31 B.R. at 543-44, are thus indistinguishable from the instant case on this point.
In the case at bar, DIL has admittedly failed to file a financing statement to protect any security interest which it might be found to have in the Debtor’s accounts. DIL’s failure to file a financing statement makes its interest that of an unsecured creditor which has not filed a proof of claim. In fight of this conclusion, we hold that the Trustee is entitled to recover the Funds.
2. CF Is Entitled to Only Modest Attorney’s Fees and Costs of $1,150.
Having determined the first and more important issue as to which party, between DIL and the Trustee, is entitled to the bulk of the Funds, we now turn to the second issue, CF’s request for attorney’s fees and costs arising out of the Proceeding in the total amount of $5,731.68.
In order to prevent the possibility of DIL’s further prosecuting its claim in the State Action against CF and possibly subjecting CF to multiple liability, we agree with CF that an injunction is appropriate. “An injunction against overlapping lawsuits obviously is desirable to insure the effectiveness of the interpleader remedy. It prevents multiplicity of actions and reduces the possibility of inconsistent determinations or the inequitable distribution of funds.” 7 Charles Alan WRIGHT, Arthur R. MILLER, Mary Kay KANE, FEDERAL PRACTICE AND PROCEDURE 612 (2d ed.1986). See also First Interstate Bank of Oregon, N.A. v. United States, 891 F.Supp. 543, 548 (D.Or.1995) (injunctive relief against prosecuting or commencing other actions is “generally contemplated in interpleader actions”); and Jefferson Standard Life Ins. Co. v. Smith, 161 F.Supp. 679, 681 (D.S.C.1956) (granting permanent injunction). We conclude that an injunction against further prosecution of DIL’s State Action is necessary to effectuate our judgment that the bankruptcy estate is the proper owner of the Funds. We note that the above cases conclude that an injunction is an appropriate remedy for the plaintiff in an interpleader action.
We agree with CF that, although it paid the Funds to the Trustee, the potential which it faced for multiple liability was real and constituted a basis for interpleader, despite the Trustee’s assertions to the contrary. *952Since neither the Trustee, who had clear access to this court to do so, nor DIL proceeded to file an action to resolve their competing claims, CF was, unfortunately, obliged to do so.
We do note, as is observed in 4 J. MOORE FEDERAL PRACTICE, ¶ 22 .06, at 22-99 (3d ed.1997), that “[t]here is no provision in either the Federal Interpleader Act or Rule 22 concerning the award of attorney’s fees or costs to the stakeholder in an interpleader proceeding.” However, that text, id., at 22-99 to 22-100, goes on to state that
[d]espite this sparse express authorization, modern federal practice follows the traditional equity rule that gives the trial court discretion to allow a disinterested stake holder to recover attorney’s fees and costs from the stake itself.... Courts usually make such an award to a disinterested stakeholder who concedes liability in full, deposits the disputed funds with the court, and seeks discharge from the litigation ... (footnotes omitted).
We agree with-CF that it is a “disinterested stakeholder” which asserts no interest to the Funds except its attorney’s fees and costs. Although the Funds were paid to the Trustee rather than into court, a variation with which, the Trustee could scarcely be expected to quarrel, the Trustee appears to concede that the dispute with DIL must be resolved before he could make distribution. We therefore conclude that CF, as an inter-pleader plaintiff, is entitled to certain attorney’s fees and costs out of the Fund themselves.
However, we do not agree that it would be a proper exercise of our discretion to conclude that CF is entitled to an award of any amount close to $5,731.68. As we stated in In re Temp-Way Corp., 80 B.R. 699, 705-06 (Bankr.E.D.Pa.1987), in reducing a stakeholder’s request for $2,645 to $460.00,
such an award is likely to be nominal, [3A J. MOORE, FEDERAL PRACTICE, ¶22.16[2],] at 22-174 [(2d ed. 1987)] ... because “the only services for which compensation is normally sought are those connected with the preparation and filing of a single pleading [for interpleader].” Id. at 22-173. As was aptly stated by the Court in Hunter v. Federal Life Insurance Co., 111 F.2d 551, 557. (8th Cir.1940):
“Under ordinary circumstances there would be no justification for seriously depleting the fund deposited in court by a stakeholder through the allowance of large fees to his counsel. The institution of a suit in interpleader, including the depositing of the fund in the registry of the court and procuring of an order of discharge of the stake holder from further liability, does not usually involve any great amount of skill, labor or responsibility, and, while a completely disinterested stakeholder should not ordinarily be out of pocket for the necessary expenses and attorney’s fees incurred by him, the amount allowed for such fees should be modest.” ...
Accord, e.g., In re OEM Industrial Corp., 135 B.R. 247 (Bankr.W.D.Pa.1991) (inter-pleader’s demand for $12,938.62 in fees and costs is reduced to $1,000 fees plus $120 costs).
CF is represented by a large firm, Mor-' gan, Lewis & Boekius, L.L.P. The particular attorney assigned, Robert C. Farley, Jr., is a young associate, as indicated by his low billable rate of $100/hour. Because the Proceeding' perhaps represented Farley’s first extensive encounter with interpleader, he proceeded to undertake considerable research, took many hours preparing a complaint, and spent additional time preparing memoranda and for trial, which, as it developed, featured only the Trustee and lasted less than half an hour.
While we do not doubt that Farley expended the time and energy documented, it would be unjust to exercise our discretion in such a manner as to deplete the Funds as a means of furthering Farley’s learning experiences. We submit that experienced counsel would have ascertained that CF’s award of fees and costs would be nominal and would have done nothing but expend an hour or two preparing the complaint and then let the Trustee and DIL tend to the trial and briefing. Following the lead of OEM, supra, we will therefore limit the award of attorney’s fees and *953costs payable to CF from the Funds to $1,000 plus the present filing fee of $150.
D. CONCLUSION
An order consistent with this disposition, plus our granting the Trustee’s motion to extend the deadlines for filing the Final Audit papers, will be entered.
ORDER
AND NOW, this 15th day of December, 1997, upon discovering a transcription error in paragraphs 1 and 2 of our Order of December 12, 1997 (“the Order”), resolving the above-captioned proceeding (“the Proceeding”) and the motion (“the Motion”) of the Trustee to extend the time to file his Final Audit papers, it is hereby ORDERED AND DECREED as follows:
The funds of $27,517.54 at issue (“the Funds”) are AWARDED to ANDREW N. SCHWARTZ (“the Trustee”), subject to the surcharge in favor of CF MOTOR FREIGHT (“CF”) set forth in paragraph 4 of this Order.
3. DELTA INVESTMENTS, LTD. is ENJOINED from attempting to collect the Funds from CF, in any lawsuit in any court.
4. CF is AWARDED attorney’s fees of $1,000 and costs of $150 to be paid from the Funds.
5. The Motion is GRANTED.
6. The Trustee or his counsel shall file all papers, including any remaining Fee Applications, necessary to conduct a Final Audit hearing, and serve a Certification of such filing upon the court in chambers, on or before January 30,1998.
7. If the Applications and timesheets of the Trustee and the Trustee’s professionals are not filed and served by January 30,1998, the Trustee’s commissions may be limited to $500 and all compensation of the Trustee’s professionals may be barred.
8. The Final Audit hearing in this case shall be conducted on
TUESDAY, MAY 19, 1998, AT 9:30 A.M. and shall be held in Bankruptcy Courtroom No. 1, Second Floor, 900 Market Street, Philadelphia, PA 19107.
9.The Trustee or counsel for the Trustee shall submit an Order of Distribution with the Audit papers, and shall thereafter file, and serve a Certification of such filing upon the court in chambers, the cancelled checks and zero bank statement; or an order, pertaining to disbursements made pursuant to the Order of Distribution, setting forth that there is a zero balance in the account and that the cancelled checks are no longer available on or before October 1,1998. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492661/ | MEMORANDUM OPINION
LETITIA Z. CLARK, Bankruptcy Judge.
The court has considered the Debtor’s Motion for Authorization of Sale of Assets, Including Corporate Entity, Through Auction and Authorizing Auction Procedure (Docket No. 109), and has previously entered an order (Docket No. 150) disposing of the motion in part. The following are the Findings of Fact and Conclusions of Law of the court. A separate conforming Judgment will be entered. 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
Partners Oil Company (“Debtor”) filed a voluntary Chapter 11 petition on March 1, 1995. Debtor’s plan was confirmed by order entered October 17,1995.
The plan provides for the sale of Debtor’s assets prior to or subsequent to confirmation. The court has previously entered an order (Docket No. 150) authorizing Debtor to sell items other than the “Stanton Well”, a gas well located in Pope County, Arkansas.
The Stanton Well is subject to a Joint Operating Agreement between Essex Exploration, Inc. as operator, and six non-operators. Debtor is a successor in interest to an operating interest previously held by Essex. Weiser-Brown Oil Company (“WBOC”) is a non-operator party to the agreement.
The Joint Operating Agreement provides in relevant part:
Each party shall have the right to take in kind or separately dispose of its proportionate share of all oil and gas produced from the Contract Area, exclusive of production which may be used in development and producing operations and in preparing and treating oil for marketing purposes and production unavoidably lost.
(Debtor’s Exhibit 3, at p. 6)
Exhibit “E” to the Joint Operating Agreement is a Gas Balancing Agreement, which by its terms automatically becomes effective in the event any party fails or is unable to take and market its share of the gas as produced for any reason. The Gas Balancing Agreement provides in relevant part:
3.
... All gas (including overproduction or make-up) taken and marketed by a party in accordance with the terms of this Agreement, regardless of whether such party is underproduced or overproduced, shall be regarded as gas taken for its own account with title thereto being in such party.
6.
Any party who is underproduced as to a given category of gas shall endeavor to bring its taking of gas of that category into balance. After delivering written notice to the Operator, any party may begin taking and delivering to its purchaser(s) its full share of each category of gas produced. To allow for the recovery and makeup of underproduced gas in a category and to balance the gas account for the interests, the underproduced party or parties for a category of gas shall after written notice to the Operator, also be entitled to take up to an additional fifty percent (50%) of the monthly quantity of that category of gas attributable to each overproduced party
7.
If at the termination of gas production of a given category of gas, an imbalance exists between the parties, a monetary settlement of the imbalance between the parties shall be made within a reasonable length of time after such gas production permanently ceases. The amount of the monetary settlement will be limited to the proceeds actually received by each overproduced party at the time of overproduction, less *401royalties and taxes paid on such overproduction ...
(Debtor’s Exhibit 3, at Exhibit “E”, p. 1-3).
Debtor seeks authority to sell its interest in the gas produced by the Stanton Well free and clear of liens. Debtor contends that the Joint Operating Agreement, including the Gas Balancing Agreement, is an executory contract, which was rejected pursuant to the provision in the confirmed plan rejecting all executory contracts not previously assumed.
WBOC contends that Debtor’s duties under the Gas Balancing Agreement constitute a covenant running with the land. WBOC asserts that its underproduced share of gas is its property, and thus may not be conveyed by Debtor.
The parties stipulate that Debtor had overproduced and that WBOC had underproduced under the Gas Balancing Agreement as of the petition date. Greg Olson, the Debtor’s president, testified that he estimates the imbalance in production to be approximately $70,000.00 and the total value of the gas to be approximately $135,000.00. The court finds Olson’s uncontroverted testimony credible.
Conclusions of Law
The sale of property of the Debtor’s estate free and clear of liens is governed by Section 363(f). That section provides:
The trustee may sell property under subsection (b) or (e) of this section free and clear of any interest in such property of an entity other than the estate, only if—
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4)such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
11 U.S.C. § 363(f).
The language of the Gas Balancing Agreement is determinative of the relative rights of the parties. Under Section 3 of the Gas Balancing Agreement, title to gas taken and marketed by a party rests in the party taking and marketing the gas. Under Section 7 of the Agreement, an underproduced party may be compelled to accept a money satisfaction of its interest.
WBOC’s assertion that the estate has no interest in the property as a result of its overproduction is without merit. WBOC’s interest pursuant to the Gas Balancing Agreement is best characterized as a lien.
Under Arkansas law, an oil and gas lease conveys to the lessee an interest in the land. Arkansas Louisiana Gas Co. v. Evans, 232 Ark. 495, 338 S.W.2d 666 (1960); Clark v. Dennis, 172 Ark. 1096, 291 S.W. 807 (1927). The interest at issue before the court is not the oil and gas lease, but rather a Gas Balancing Agreement entered into by the parties pursuant to their Joint Operating Agreement.
The Stipulation of Interest and Conveyance (Weiser-Brown Exhibit B) does not affect the rights of the parties as it pertains to the Gas Balancing Agreement, because, by its own terms, it is subject to the Leases, Joint Operating Agreement, and Gas Balancing Agreement.
The court concludes that the Debtor may sell its interest in the Stanton Well in Pope County, Arkansas free and clear of the lien of Weiser-Brown Oil Company, with such lien to attach to the proceeds of sale.
Based on the foregoing, the court will enter a separate conforming Judgment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492662/ | *412
ORDER
RICHARD L. SPEER, Chief Judge.
This cause comes before the Court after Hearing on Show Cause as to Why the IRS Should Not Be Held in Contempt. From the arguments and discussions at the Hearing, this Court concludes that the IRS has not violated the discharge injunction by attempting to collect discharged debts.
The debtors in the two separate bankruptcy cases, Paul Hinkleman and his spouse, Cynthia Hinkleman, are understandably alarmed by the tax liability the IRS continues to assert against them for taxes, interest, and penalties relating to their failure to timely file their tax return(s) for 1985. Particularly upsetting to the Hinklemans is an additional assessment the IRS made concerning their 1985 tax liability as the result of their filing of a 1040 form in 1995. Though the IRS had previously assessed taxes for 1985, it became aware of additional unpaid taxes through the 1040 form filed in 1995. This tax was based upon additional income Mrs. Hinkleman received in 1985 when she “cashed in” a retirement account. The IRS assessed the Hinklemans for this new amount in December of 1995, including the interest and penalties that would accrue from April 15, 1986, when the tax was originally due. According to the IRS, this new assessment, combined with the interest and penalties and unpaid portion of their employment income taxes, leaves them with a present tax liability of around Thirteen Thousand Dollars ($13,000.00).
The Hinklemans are also concerned about the magnitude of the debt notwithstanding the fact that they have already made substantial payments to the IRS. This is apparently due to the accrual of interest and penalties. Though this may seem unfair, this Court cannot question the intention embodied interest and penalties. Though this may seem unfair, this Court cannot question the intention embodied in the Internal Revenue Code which requires that a taxpayer compensate the government for the use of the tax money not paid. It was undoubtedly contemplated that a taxpayer should not benefit from not paying taxes in a timely manner either by earning interest on the monies not paid to the IRS, or by avoiding paying interest on loans that were not taken by virtue the use of these monies. Though the interest rates during many of the years for which the Hinklemans’ tax debt grew may have been high, so too would the interest have been on other debts the Hinklemans no longer had to maintain due to their ability to use the monies that should have been paid to the IRS. Though this Court is sympathetic to the Hinkleman’s financial plight, similar arguments could be made by many, many taxpayers who nevertheless pay their taxes when due.
Even were this Court to consider the substitute returns filed by the IRS in 1989 and 1990 to be “returns” under the Bankruptcy Code, they would still have been filed within three years of the bankruptcy petition, and would therefore still be nondischargeable. Accordingly, the Hinklemans cannot show that the IRS has attempted to collect any discharged taxes because the 1985 tax liability was not discharged. Thus, the IRS should not be held in contempt, and this Court has no necessity or jurisdiction to determine the Hinklemans’ tax liability.
Accordingly, it is
*413ORDERED that the IRS shall not be held in contempt in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492663/ | OPINION
PRO, District Judge.
Walter Palmer (“Palmer”) appeals the ruling of the bankruptcy court in granting an exemption from discharge to the Internal Revenue Service (“IRS”) for the tax debts listed in Schedule E of his Chapter 7 Petition. Palmer filed his Opening Brief (# 110) on June 17, 1997. Appellees (hereinafter the “IRS”) filed an Answering Brief (# 111) on July 2, 1997. Palmer filed a Reply (# 112) July 14, 1997.
I. Background
On May 7, 1992, Palmer filed a Chapter 7 bankruptcy petition. Palmer listed the IRS as the only creditor on Schedule E of his Chapter 7 bankruptcy petition. On August 20, 1992, Palmer received a discharge for all debts and his Chapter 7 ease was closed. The IRS did not file a proof of claim or a complaint objecting to the discharge of the debt. However, on September 14, 1993, the IRS notified Palmer of its intent to levy his Civil Service Disability Retirement benefits for the tax periods 1986 and 1987. The IRS starting seizing Palmer’s monthly disability benefits in October 1994.
On April 26, 1995, Palmer filed a motion to reopen his bankruptcy case which the bankruptcy court granted on June 15, 1995. Subsequently, Palmer filed a Complaint to Discharge Invalid, Unlawful Debt, which sought a determination by the bankruptcy court that his tax debts and liabilities for the years 1986 and 1987 had been discharged. On November 27, 1995 the United States filed a Motion for Summary Judgment and memorandum in support thereof (#43 and 45, respectively). The bankruptcy court held a hearing in the matter on January 4, 1996.
On February 5,1996, the bankruptcy court entered a Judgment (# 67), which ordered: the tax claims of the IRS, for taxable years 1986 through and including 1991, exempt from discharge; all claims of the Debtor dismissed with prejudice; all remaining hearings in this bankruptcy case vacated; and the bankruptcy case closed. On February 14, 1996, Palmer filed a Notice of Appeal of the Judgment.
II.Standard of Review
The Court reviews the bankruptcy court’s findings of fact for clear error and conclusions of law de novo. In re Pace, 67 F.3d 187, 191 (9th Cir.1995); In re Unicom Computer Corp., 13 F.3d 321, 323 (9th Cir.1994). The Court will not disturb the bankruptcy court’s denial of discharge decision absent a clear abuse of discretion. In re Roosevelt, 87 F.3d 311, 314 (9th Cir.1996).
III.Discussion
A ABUSE OF DISCRETION
The Bankruptcy Court did not abuse its discretion in exempting from discharge the tax debts listed in Schedule E of Palmer’s *437Chapter 7 petition because Palmers tax debts were not discharged in bankruptcy.
Section 727(b) of the Bankruptcy Code, which defines the scope of a Chapter 7 debtor’s discharge, provides that a discharge is subject to the provisions of § 523. 11 U.S.C. § 727(b). Thus, the bankruptcy court can only discharge those debts that are dis-chargeable under 11 U.S.C. § 523. In re Beezley, 994 F.2d 1433, 1434 (9th Cir.1993). Taxes are among the debts described and excluded from discharge in § 523(a). 11 U.S.C. § 523(a)(1)(B)®. Specifically, § 523(a) provides that “[a] discharge under § 727 ... does not discharge an individual debtor from any debt for a tax ... with respect to which a return, if required was not filed.” Id. Therefore, the bankruptcy court could not have discharged Palmer’s tax liabilities.
Palmer argues that the IRS has not shown that tax returns were “required.” However, the IRS assessed the income tax liabilities against Palmer for the years 1986 through and including 1991. (See Ronald Thorley Decl. (# 41), Ex. 1, Form 4340, Certificate of Assessments and Payments for Walter Palmer for the tax periods December 31, 1986 through December 31, 1991). Palmer does not allege that he filed returns for any of the periods at issue and presents no evidence indicating that the assessments by the IRS are inaccurate. Thus, this Court presumes that the assessments by the IRS are correct. In re Abbate, 187 B.R. 9, 12 (D.Nev.1995).
Palmer next argues that the IRS waived its right to collect on the “alleged debt listed in Schedule E” of his petition because it faded to file a proof of claim in his Chapter 7 bankruptcy. The IRS did not have to file a proof of claim in Palmer’s case because there were no assets to distribute. In re McKinnon, 165 B.R. 55, 56 (Bankr.D.Me.1994). “In a case without assets to distribute the right to file a proof of claim is meaningless and worthless.” In re Mendiola, 99 B.R. 864, 867 (Bankr.N.D.Ill.1989) The bankruptcy rules, therefore, permit the court to dispense with the filing of proofs of claim in a no-asset case. Thus, although the IRS did not file a proof of claim, it did not waive its right to collect outstanding tax liabilities.
Finally, Palmer argues that his tax liabilities should have been discharged because the IRS failed to file a complaint objecting to the discharge of the debt included on Schedule E as required by the Federal Rules of Bankruptcy Procedure 4004(a) and 4007(e). However, the facts on which Palmer relies are irrelevant to the issue of dischargeability under § 523(a)(1)(B)®. As discussed, supra, because the tax liabilities assessed for the years 1986 through and including 1991 are nondischargeable, it is inconsequential that the IRS did not file a motion pursuant to 4004(a) and 4007(c).
IT IS THEREFORE ORDERED THAT the Judgment entered by the bankruptcy court on February 5, 1996 is AFFIRMED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492664/ | CARL L. BUCKI, Bankruptcy Judge.
On September 16, 1996, this Court approved the appointment of Damon & Morey LLP as counsel for St. Rita’s Associates Private Placement, LP, the debtor herein. For nearly a year thereafter, Damon & Morey directed the debtor through the difficult obstacles of Chapter 11. Upon completion of its services, the firm filed its final application for the allowance of fees and disbursements totaling $99,868.49. Although the debtor has achieved its quest for plan confirmation, it contends that the requested allowance is excessive and should be substantially reduced.
Damon & Morey acknowledges two errors in its application: that the rate charged for one of its associates is ten dollars per hour more than was agreed, and that the firm should not have charged for 3.9 hours of effort to secure waivers of potential conflicts of interest. With these adjustments, the firm has reduced its requested allowance to the sum of $93,879.99. Nonetheless, the debtor persists in vigorously opposing this lesser amount. The Court has reviewed the debtor’s written objections, and has presided over three days of testimony and argument. In addition to its general objections, the debtor specifically attacks more than 200 time entries. For ease of presentation, the Court has organized the debtor’s objections into the following nine conceptual areas:
1. Implied or Quasi Contract: The debtor contends that Damon & Morey should be held to the terms of an implied contract that would limit its fees to a sum no greater than $60,000. At the evidentiary hearing, the debtor relied upon the testimony of Joseph M. Jayson, the president of the general partner of the debtor. He stated that prior to the law firm’s engagement, attorneys from Damon & Morey had estimated that legal fees would likely total between $20,000 and $40,000, but would not exceed $60,000. Furthermore, Mr. Jayson asserted that although he had requested monthly billing summaries, the only such statement arrived after the attorneys had exceeded their original estimate of time charges. Noting that the applicant had failed to prepare an engagement letter, the debtor’s new counsel argued that Damon & Morey had thereby assumed the risk of ambiguity with respect to fee disputes.
*493William F. Savino, the partner responsible for this file at Damon & Morey, contradicted the statements (of the debtor’s principals. He asserted that $60,000 was only a good faith estimate of the anticipated charges, that all parties had clearly understood that the actual fee could indeed be higher, that unanticipated problems necessitated the rendering of additional services, and that despite the absence of written billing summaries, his client was fully appraised of the value of the services that Damon & Morey was providing. Conceding the absence of an engagement letter, Mr. Savino contended that the formality was not required and, under the circumstances, was unnecessary.
The ideal relationship between attorney and client is one which is mutually beneficial. In exchange for sound legal representation, the client commits to pay a reasonable compensation to his counsel. As in the present instance, fee disputes may relate to either or both sides of this equation. Clients may question either the quality of representation or the reasonableness of the resulting charges. ■ The purpose of an engagement letter is to clarify the expectations of clients and counsel, with respect to such issues as the scope of services, the timetable for their delivery, and the charges which must ultimately be paid. Such clarifications help to define standards that might otherwise become the subject of dispute.
The debtor correctly notes that a well crafted engagement letter will serve to avoid misunderstandings between attorneys and their clients. However, no magic attaches to the mere title of such an instrument. Rather, the critical goal is to memorialize the terms of an attorney’s engagement, prior to the actual rendering of service. Such is also precisely the purpose of the application for appointment of counsel pursuant to section 327 of the Bankruptcy Code.
Section 327 requires that the Bankruptcy Court approve the employment of an attorney by the trustee or debtor in possession. Setting the conditions for this approval is Bankruptcy Rule 2014. It provides that the application for employment of counsel “shall state the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, [and] any proposed arrangement for compensation____” To the extent that the arrangement for compensation was to include a monetary limitation, the application for appointment of counsel should have reported such a provision. In this instance, it did not.
On béhalf of the debtor, Joseph M. Jayson signed the application for authority to employ counsel on July 26, 1996. Absent good reason to the contrary, parties are to be bound to the effect of such voluntary signature. Moreover, in this instance, the presence of debtor’s in-house counsel provided further assurance that Mr. Jayson would have given this application his due consideration.' With regard to a cap on fees, the silence of the application is inconsistent with that testimony of Mr. Jayson which is the basis of the debtor’s claim of an implied contract. In contrast, the application was careful to disclose that Joseph M. Jayson had personally guaranteed the fees of Damon & Morey. Interestingly, the guarantee agreement also lacks any reference to a limitation on fees.
The requirements of Bankruptcy Rule 2014 serve to clarify in advance the terms and conditions for the employment of counsel and other professionals. Thus, in a bankruptcy proceeding, the application for appointment of counsel will fulfill the purpose and objective of a retainer agreement. In the absence of any reference in the employment application to a limitation of fees, this Court must presume that the debtor has agreed to pay the fair and reasonable value of services rendered. Having presented no compelling evidence of a cap on the legal fees of Damon & Morey, the debtor has failed to demonstrate an implied contract for terms other than as set forth in the employment application.
Damon & Morey could have avoided much misunderstanding if it had honored its client’s request for monthly billing summaries. Although such regular communication is the preferred procedure, the testimony establishes that in this instance, the debtor was generally aware of its liability for legal ser*494vices. The Court finds persuasive the testimony of counsel from Damon & Morey, that extraordinary circumstances compelled the expenditure of more time than the parties had originally anticipated. In particular, counsel noted the inability to secure substitute financing as a primary reason for the gap between projected and actual services. Satisfied with the firm’s explanations, the Court will allow reasonable compensation for all necessary services, without the limitation of any other cap on fees.
2. Duplicate Appearances of Counsel: The debtor has identified 94.1 hours of time which allegedly involve a duplication of services by attorneys at Damon & Morey. Of this amount, 61.6 hours were occasions during which two attorneys were present with principals of the debtor at meetings or other proceedings. The debtor argues that either one of the attorneys could have provided adequate representation, and that accordingly, the requested allowance for this time should be reduced by approximately half.
All of the supposed duplications involved the same two attorneys: a male partner and a female associate. Both testified that from the outset of their representation, male principals of the debtor made suggestive remarks to the associate. For example, an officer of the debtor’s general partner would regularly comment about the associate’s clothing and physical appearance. Some of these remarks were particularized to certain anatomical features. Members of the debtor’s management team suggested that the associate would make an ideal date for one of them. The associate testified that she found these comments to be particularly upsetting, due to the fact that she is married and has two children. The Court can understand the associate’s special reason for apprehension, but views sexually inappropriate statements to be reprehensible under all circumstances, irrespective of the marital status of the person to whom they are directed. So egregious was the harassment that the debtor’s in-house counsel warned its principals to refrain from making any more improper declarations.
The Damon & Morey partner testified that upon learning about the harassment of his associate, he promptly and unequivocally asked that such conduct be stopped. Nonetheless, the debtor’s principals persisted with at least some of their verbal indiscretions. Because the associate desired to continue her work on the case, the partner deemed it necessary to attend all meetings between the associate and representatives of the client.
The debtor now contends that the bankruptcy estate should not bear the burden and cost of double representation. It argues that for any meeting at which the responsible partner was present, the associate was simply not needed. The debtor urges that even if harassment were present, counsel is obliged to employ that remedy which is least costly to the estate. In its view, the proper response should have been to reassign the associate to a different file, so as to avoid any recurrence of the problem without need for duplication of services.
Section 330(a)(4)(A) establishes the rule applicable for all proceedings in Chapter 11, that “the court shall not allow compensation for(i) unnecessary duplication of services; or (ii) services that are not (I) reasonably likely to benefit the debtor’s estate; or (II) necessary to the administration of the case.” Notably, this prohibition extends only to compensation for those duplications which are unnecessary or unlikely to benefit the estate. In the view of this Court, some appropriate response to the debtor’s harassment was not only necessary, but essential to beneficial representation by Damon & Morey. Under the circumstances, a part of one such appropriate response could include the partner’s presence at all meetings between the associate and any member of the debtor’s management team. In reviewing requests for compensation, this Court will not displace the reasonable exercise of professional judgment. Satisfied that the harassment compelled an appropriate response, the Court finds that no unnecessary duplication occurred from the presence of two attorneys at meetings with the debtor. Due to the risk of further harassment, this presence became an appropriate component of an overall representation that was, as required by section 330(a)(4)(A), “reasonably likely to benefit the debtor’s estate” and “necessary to the administration of the case.”
This Court rejects the suggestion that Damon & Morey should have reassigned its *495associate to a different, less troublesome case. The practice of law holds no room for sexual harassment. A female associate has every right to practice in any area in which she is competent. A law firm has every right to enjoy the benefit of her productivity. In a particular assignment, the associate may find opportunities for advancement, professional development, or personal satisfaction. The firm may properly desire to continue an assignment because it represents an efficient use of resources, because the assignment satisfies the firm’s development strategies, or merely because it is the right thing to do. A mandate for reassignment would unjustly punish the victim of harassment, and provides no effective solution to a problem of serious concern to the integrity of our legal system.
Every attorney who practices before this Court is a professional whose personal dignity is deserving of respect at all times. Reasonable steps to protect that dignity are as appropriate an expenditure of resources as is legal research and the careful proof reading of papers. In the present instance, the debtor’s plan sets a fixed rate of distribution on account of unsecured claims. Thus, legal fees become an expense which the debt- or’s equity holders will ultimately pay. Because current management was itself responsible for the harassing statements, the debtor is justly charged with the expense of meeting with two attorneys. But compensation for these services would still have been properly allowed, even if creditors were indirectly paying the costs of administration, or even if someone other than management had caused the harassing statements. As contemplated by section 330(a) of the Bankruptcy Code, “necessary services” must include reasonable measures to assure a safe and harassment-free environment for all legal personnel. Such steps are a proper cost of doing business which, if particularized to an individual file, are fully compensable in the bankruptcy proceeding. This decision is not to suggest that the occurrence of harassment will ever create an unlimited license for the unfettered duplication of services. Rather, this Court merely holds that it will allow compensation for a reasonable and appropriate response, such as that taken in the present instance.
3. Other Duplications of Services: The debtor alleges that in addition to attendance at meetings between counsel and members of the debtor’s management team, further duplications of service occurred with respect to another 32.5 hours. Part of this time represents, occasions in which two attorneys were coordinating their work with one another on the same date. Such efforts are an appropriate accommodation to the demands of a large practice, and will be compensated. Nonetheless, the Court does find unnecessary duplication in the participation by two attorneys in telephone conferences on November 5, 1996, and on January 23, February 3, and February 13 of 1997. Altogether, these entries represent 4.5 hours spent by the associate whose efforts duplicated those of the partner. Accordingly, the Court will disallow compensation for this time, having a value of $517.50.
4. Preparation of Disclosure Statements and Reorganization Plans: The debt- or has identified 123.8 hours of services that relate to the preparation of disclosure statements and plans of reorganization. In addition, counsel conducted extensive research on issues of plan confirmation, particularly with regard to procedures for a “cram-down” under 11 U.S.C. § 1129(b). The debtor claims that this time is excessive, and should be disallowed in substantial part. The Court has reviewed each of the entries at issue. A portion of this time (8.1 hours) represents duplications that were necessitated by the debtor’s harassing conduct. Individually, each of the entries appears to be reasonable. Collectively, however, the total effort exceeds the amount of time that the Court would have expected for preparation of a disclosure statement and plan in a case having the present level of complexity. Accordingly, the Court will reduce the requested allowance by $2,600.
5. Legal Education vs. Research: The debtor asks that the court disallow compensation for portions of entries totaling 27.5 hours, on the basis that they include attorney education. A fine distinction exists between legal research and generalized legal education. No attorney will ever possess sufficient knowledge to avoid the imperative for legal research at one time or another. Com*496pensation is always appropriate for necessary research that specifically relates to the subject of the representation. On the other hand, counsel is expected to maintain a basic level of skill, and will receive no special compensation for fundamental or routine continuing education. In this instance, the Court finds that all but one of the questioned entries represents appropriate research in this complex case. The entry of 1.9 hours on August 15, 1996, however, appears to involve the review of an update service. Relating to current developments of law, this effort was educational in nature, and will be disallowed for a value of $218.50.
6. Preparation of Schedules and Use of Paraprofessionals: Damon & Morey seeks compensation for 38.5 hours of associate time devoted to the preparation of the debtor’s bankruptcy petition and the related schedules and statement of affairs. Contending that a para-professional could more efficiently have performed these tasks, the debtor urges the Court to limit its allowance to the normal paralegal charge for a similar expenditure of time. In response, the partner in charge of this file at Damon & Morey asserts his view that paralegals generally lack the skills needed to prepare a bankruptcy petition and supporting documents.
Paraprofessionals are not licensed practitioners of the law. Rather, their tasks are purely ancillary to those of the attorney under whose direct supervision they must work. Although section 330(a)(1) of the Bankruptcy Code allows compensation for the services performed by a paraprofessional whom an attorney employs, nothing in the Code commands the use of such staff. Section 327 allows the employment of “attorneys ... that do not hold or represent an interest adverse to the estate, and that are disinterested persons.” As in the present instance, the debtor employs an attorney, not an independent paraprofessional. When it approved the Order authorizing Damon & Morey’s employment, this Court considered only the firm’s qualification to serve as attorneys, and not the qualifications or even the presence of any paraprofessionals. Being a matter of no relevance to selection of counsel, the absence of paralegals within the firm structure cannot thereafter serve as a basis for denial of compensation.
The prefix “para" derives from the Greek preposition meaning “beside” or “along side of.” Without professional license, paralegals work “along side of’ the attorneys appointed to serve as counsel. In recognition of their non-professional status, paralegals require careful supervision by the attorney who may choose to use their services. Whether a task is appropriate for assignment to a paralegal is a matter of professional judgment. In exercising this judgment, attorneys must consider the assignment’s complexity, the skill and experience of the available staff, and the attorneys’ own level of comfort regarding their ability to exercise supervision. This Court will not substitute its own judgment for that of the attorneys who are charged with responsibility for a debtor’s representation. When attorneys believe that their existing paralegal staff lacks sufficient skill to complete a particular task, that judgment is to be respected, and is not to become the basis for challenge of the attorney’s fee application.
Although expressed as a dispute involving the use of paralegals, the debtor’s objection does highlight a more fundamental problem with the allowance of time for preparation of schedules. The greater concern is not whether paralegals should have performed this particular work, but whether the law firm should have performed this amount of service at all. Typically, the task of collecting information for the statement of affairs and schedules is one which the debtor and its staff are to perform with appropriate guidance of counsel. At the hearing, members of the debtor’s management team testified that the debtor’s in-house counsel had prepared an initial draft of the schedules. Counsel from Damon & Morey responded that the initial draft contained several deficiencies, and in particular, did not address the status of debenture holders. Nonetheless, the schedules do not appear to be overwhelmingly complex. After taking into account the greater efficiency which would be expected from experienced counsel, the Court finds that preparation of the petition and schedules should have required no more than thirty hours of attorney time. Accordingly, the fee request will be reduced by $977.50, to allow only for that amount of time.
*4977. Compensation for Secretarial Functions: Attorneys are always free to perform secretarial functions, but will not receive compensation at attorney rates for those tasks. The debtor correctly objects to entries for filing work on July 31, 1996, for preparation of mailings on January 30, 1997, and for the faxing of documents on September 30 and October 10, 1996. Altogether, this time totals 1.8 hours having a value of $207.
8. Appointment of Damon & Morey: The debtor objects to 10.1 hours which Damon & Morey devoted to the resolution of conflicts and the finalization of its own appointment as general counsel. In response, the firm has already waived voluntarily its claim relative to 3.9 hours to resolve conflict issues, but asserts that the balance of its request is routine and should be allowed.
Section 327 of the Bankruptcy Code requires that a debtor in possession obtain Court approval for the retention of counsel. For this reason, debtor’s counsel is properly compensated for those efforts that serve only to obtain such approval. For example, this Court has always allowed compensation for the preparation of the application for appointment. A waiver of conflicts, however, is mandated not to fulfill a unique requirement of the Bankruptcy Code, but under generally applicable standards of representation. Being not a component of but a prelude to representation, expenditures of time to arrange such written waivers are not compensable. Damon & Morey has correctly withdrawn any claim for time expended to secure waivers of conflicts of interest from its pre-existing clients. Once those conflicts were resolved, however, the character of Damon & Morey’s activity changed to that of satisfying the mandate for Court approval under 11 U.S.C. § 327. The order of appointment operated not to resolve conflicts, but to confirm that any conflict had already been resolved. Aside from the 3.9 hours for which Damon & Morey no longer seeks compensation, this area of dispute appears to involve either the drafting of an application for appointment of counsel or preparation for a hearing on that application. The first of these tasks is routine, while the second was required by the Court. Because both were performed to fulfill the special requirements of section 327, the debtor shall compensate Damon & Morey for the remaining 6.2 hours of disputed entries. .
9. Unnecessary Time Expenditures: The balance of the debtor’s objections relate primarily to the expenditure of time that is alleged to be excessive or unnecessary. ■ Although most of the requested allowances are appropriate, some entries do not warrant approval of the full amount that is requested.
Damon & Morey expended approximately 30 hours on the selection of special counsel to handle a tax dispute. Beginning on August 12, 1996, attorneys at Damon & Morey spent five hours to prepare an application for appointment of special counsel. Then in early September, Damon & Morey reevaluated this approach, abandoned the application for appointment of special counsel, and instead, moved to assume an executory contract under which the debtor had employed that same special counsel prior to the bankruptcy filing. The Court agrees with the debtor that a careful analysis of the possible approaches should have occurred at the outset, prior to preparation of papers. Furthermore, by the time Damon & Morey decided to change its approach, time constraints necessitated that counsel move to shorten the time for notice of the motion to assume the executory contract. Such a motion should not have been necessary, and accordingly is not compensable. Altogether, with regard to the appointment of special counsel, the Court will disallow 8.2 hours of time.
The debtor correctly objects to the allowance of 1.2 hours of time on September 5, 1996, to prepare a motion that was never filed. Rather, counsel should have completed their analysis of appropriate strategies prior to assigning an associate to prepare the necessary papers. An entry for two-tenths of an hour on December 23, 1996, appears to relate to a different file. Entries for 2.7 hours on March 19, 1997, for 1.5 hours on March 25, 1997, and for 1.8 hours on April 3, 1997, involve the examination of deposition transcripts. Counsel had taken these depositions in anticipation of objections to the debtor’s Plan of Reorganization. By the time that the associate at Damon & Morey actually under*498took to review the transcripts, a settlement was already in prospect. The Court agrees with the debtor that Damon & Morey should have arranged to defer the transcript review until the outcome of the settlement had become known. Because the controversy was indeed settled, the review of the transcripts was ultimately unnecessary for representation of the debtor.
The Court also agrees that the applicant devoted a somewhat excessive amount of time to the services described on the entries for October 7 and 30, and for November 15, 25, and 26 of 1996, and in 1997, on January 3, 8, and 22. After allowing for that portion of the request that is reasonable, the court will deny compensation for 10.6 hours.
Altogether, this ninth area of objection has identified unnecessary efforts totaling 26.2 hours and having a value of $3,057. The Court has reviewed all of the debtor’s other objections, and finds them to be either without merit or resolved by reason of the applicant’s voluntary adjustment to its fee request.
Disbursements: Damon & Morey’s fee application includes a request for reimbursement of advances for disbursements totaling $3,835.99. Among these advances are photocopy charges of $2,073. At the firm’s standard charge of ten cents per page, this sum represents more than 20,000 photocopies. The decisions of this Court are based on the weight of argument, not on the weight of paper. Many of the pleadings in this case contain unnecessary exhibits. Of particular concern are excessively long notices to unsecured creditors. For example, Damon & Morey expended $210.50 to make for each creditor a copy of the nineteen page notice of motion and application for its own appointment as counsel. A more concise notice could have provided adequate information for creditors, but with far less risk that the volume of paper might cause the notice to be ignored. Finding the amount of copying to be unnecessary and perhaps counterproductive, the Court will reduce the allowance for disbursements by $200.
Calculation of Final Allowance
In calculating the final allowance for Damon & Morey, this Court begins with the reduced sum that the firm now requests, in the amount of 93,879.99. Against this claim, the Court will require a reduction of $ 517.50, by reason of the third objection relating to duplication of services; of a further $2,600, by reason of the fourth objection relating to preparation of the Plan and Disclosure Statement; of a further $218.50, by reason of the fifth objection relating to legal education; of a further $977.50, by reason of the sixth objection relating to preparation of schedules; of a further $207, by reason of the seventh objection relating to requests for compensation for secretary functions; of a further $3,057, by reason of the ninth objection relating to unnecessary time expenditures; and of a further $200 by reason of the Court’s concerns regarding disbursements. Accordingly, after taking into account all of the foregoing, the Court will grant to Damon & Morey a final allowance for fees and disbursements in the total amount of $86,102.49.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492665/ | MEMORANDUM OPINION
FRANK R. MONROE, Bankruptcy Judge.
The Court held a hearing on July 7, 1997, on the Motion of Klutts Land, Inc. to Dismiss (“Motion”). On June 26, 1997, Klutts Land, Inc. filed a Notice of Intent to Present Matters Outside the Pleadings Re: Adversary Complaint and Request that 12(b)(6) Motion by Treated as One for Summary Judgment (“Request”). The IRS failed to respond and the Court granted the Request. At the conclusion of the hearing the Court made findings on the record of those facts established by summary judgment evidence. The Court took one legal issue under advisement. Counsel for both parties were requested to file briefs on that issue. To date no briefs have been received from either counsel. Therefore, the Court has conducted its own independent legal research on the issue. This Memorandum Opinion is issued as a statement of material facts that are not in genuine dispute and conclusions of law under Bankruptcy Rule 7056. In addition, those findings stated on the record are incorporated herein by reference as well.
Facts not in Genuine Dispute
Klutts Land, Inc. is a Texas corporation which was incorporated on May 5, 1969, by Alvis Vandygriff, Frank Scolfield and James K. Presnal. From the inception of the corporation, Barney C. Klutts and Hazel Joyce Klutts (the “Parents” of Debtor Carlos J. Klutts) have been members of the board of directors. Mr. Klutts is the president and registered agent for the corporation. Mrs. Klutts is the secretary/treasurer. There are no other officers. Neither of the Debtors, Carlos Klutts or his wife, Cynthia, have ever been on the board of directors, nor have they ever been officers of Klutts Land, Inc. Barney and Joyce Klutts, the sole shareholders of Klutts Land, Inc., formed it for the purpose of buying, selling, and developing real estate. This is the only business the corporation has been involved in since its inception. The Debtors have never owned any interest in Klutts Land, Inc.
On March 1, 1991, Debtor’s Parents purchased 68.93 acres of land situated in the Francis Berry Survey, A-2, in Caldwell County, Texas from the Debtors (“Tract One”). The consideration paid for the purchase was the assumption of the Debtors’ first lien indebtedness owed to Victoria Bank and Trust as successor in interest to First *560National Bank of San Marcos which was then in the approximate amount of $192,000.
Subsequently, on May 2, 1991, Debtor’s Parents negotiated a payoff of that debt; and, in fact, they did pay it off with their personal funds thereby securing a release of the lien.
On January 15, 1993, Klutts Land, Inc. purchased in the ordinary course of its business Lot 20, Stratford Place, in Travis County, Texas from Sage Land Company (“Tract Two”). The settlement statement reflects that the purchase price paid for this property was $105,000. There is no dispute that the Debtors had no part in the purchase of this property by Klutts Land, Inc.
On October 19, 1993, Klutts Land, Inc. transferred Tract Two to the Debtor’s Parents in exchange for Tract One. The issues of equal consideration or gain on the transaction are not material for purposes of this Memorandum Opinion. The IRS alleges it had an enforceable lien on Tract One on the date that the Debtor’s Parents purchased the property from the Debtors, March 1, 1991, and that their lien is enforceable against Tract One in the hands of Klutts Land, Inc. However, it was not until February 10, 1992, that the IRS filed its first tax lien of record against the Debtors, Carlos and Cynthia Klutts.
On December 2, 1993, the Debtor’s Parents created the Stratford Place Trusts, and named Mr. Alan Bergstrom as Trustee. They then transferred Tract Two into that trust. The beneficiaries of the trust are the Debtors and the Debtors’ children. The extent of the IRS claim against Tract Two is not an issue in Klutts Land, Inc.’s Motion and is not dealt with herein.
Issue
Did the IRS have a lien on Tract One it can enforce against Klutts Land, Inc.?
Conclusions of Law
The first lien filed of record by the IRS against the Debtors was on February 10, 1992, almost one year after the Debtors sold Tract One to Debtor’s Parents for an effective consideration of $192,000.
The IRS, however, contends that the transfer from the Debtors to the Debtor’s Parents was a fraudulent transfer and that, therefore, the Debtors were the legal owners of Tract One at the time the first federal tax lien was filed. But, the IRS failed to submit any summary judgment evidence on that issue. Their argument is, therefore, totally devoid of any substantiation or merit as we shall more fully illustrate later.
Next, the IRS argues that pursuant to 26 U.S.C. § 63211 a lien attached to Tract One while the Debtors owned it, and that under 26 U.S.C. § 7425 notice of the transfer of that property had to be given to the United States or the lien followed the property as a matter of law.2
There is no dispute that the first federal tax lien filed of record was filed long after the date that the Debtors sold Tract One to the Debtor’s Parents. The IRS did not favor us with the date of their alleged § 6321 lien; but, even assuming its existence of March 21, 1991, subsequent purchasers for value, without notice, would acquire title to the property *561free from it. Thus, it is clear that the entire success of the IRS’s argument hinges on whether or not the Debtors’ sale of Tract One to the Debtor’s Parents was fraudulent.
The Fifth Circuit has held that if a taxpayer transfers property prior to the time a tax lien arises, the United States may set aside the transfer if it is fraudulent under the law of the state where the property is located. United States v. Jones, 631 F.Supp. 57 (W.D.Mo.1986) citing, United States v. Kaplan, 277 F.2d 405, 408 (5th Cir.1960) (emphasis added).
The Court in Jones looked to applicable Missouri state law and found several “badges of fraud”, i.e. (1) the taxpayers had transferred almost all of their assets at a time when they were facing three different foreclosure actions and federal tax liens, (2) the transfers occurred at a time when the taxpayers were insolvent, (3) the consideration was less than one-sixth the purchase price of two years before, (4) the transfer was subject to a secret trust in favor of the debtors and their son, and (5) the debtors had unlimited use of the property and bore substantially all the responsibilities of ownership.
As in Missouri, Texas has adopted the Uniform Fraudulent Transfer Act. In pertinent part, it states that a transfer is fraudulent as to present and future creditors if,
“____ the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.” (emphasis added).
Tex. Bus. & Com.Code Ann. § 24.005 (Vernon Supp.1997).
Thus, if reasonably equivalent value is not paid for the property or if actual intent to hinder, delay, or defraud established, then the transfer is fraudulent.
Even though the Texas statute provides two alternative grounds for inferring a fraudulent transfer, none of the cases the Court has researched, including the Texas cases, have treated inadequate consideration as a separate grounds for inferring fraudulent transfer. They have considered inadequate or no consideration as merely one element in proving fraudulent intent, i.e. an “indicia of fraud”.
Thus, the Fifth Circuit in applying Texas law has stated,
“[w]hen .several of these indicia of fraud are found, they can be the proper basis for an inference of fraud ... Such indicia of fraud, we stated, include (1) the debt- or’s transfer of valuable property without consideration; (2) a close personal relationship between the parties to the conveyance; (3) the debtor’s retention of possession and indicia of ownership of the property; and (4) the debtor’s transfer of all of his property, especially if to different members of his family, leaving him unable to pay his debts.” (citations omitted) (emphasis added).
Roland v. U.S., 838 F.2d 1400, 1402 (5th Cir.1988).
In Roland the taxpayers had transferred their home to themselves and to their 15 year old son as Trustee’s of a “church” existing solely on paper, without consideration. Proceeds from a subsequent sale of their home were then used to purchase property in Detroit, Texas. The deed of trust to that property listed the son as buyer. However, the taxpayers made the mortgage payments, and lived continuously on the property while their son remained in Irving to finish high school. The Rolands also paid or helped their son pay the taxes, utility bills, and the insurance on the Detroit property. No rental income was ever reported by the son. Although the taxpayers did not transfer all of their assets, the Fifth Circuit found that the facts were *562sufficient indicia of fraud and upheld the right of the IRS to levy on the property to satisfy back taxes.
Once these indicia of fraud are shown, and the presumption of fraud arises, then the burden shifts to the defendant to establish that the transfer was not fraudulent. U.S. v. Kaplan, 277 F.2d 405, 408-9 (5th Cir.1960).
Here the IRS must, therefore, establish a presumption of fraud. If they have failed to do so, then the case is ripe for summary judgment. BMG Music v. Martinez, 74 F.3d 87, 90 (5th Cir.1996).
In BMG the Fifth Circuit held that,
“[ijntent to defraud, however, can be decided as a matter of law. For example, summary judgment is appropriate in ‘intent to defraud’ cases when the defendant admits the fraud, the conveyance instrument is fraudulent on its face, the defendant retains an interest in the property inconsistent with the conveyance alleged, or the evidence indisputably reveals that the transfer was made without an intent to defraud.”
BMG, 74 F.3d at 90.
Thus, the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits on file (none were filed by the IRS) must show pursuant to the Texas fraudulent transfer statute (1) actual intent of the debtors to hinder, defraud or delay or, in the alternative, (2) that reasonably equivalent value was not received for the property. If they do not, but instead indisputably reflect that the transfer was made without an intent to defraud, then the matter is ripe for a motion for summary judgment.
Here, the IRS has shown neither actual intent or lack of adequate consideration. In fact, the IRS has produced no evidence at all.
First, there is no evidence that property was sold for other than a reasonably equivalent value. The Debtor’s Parents gave valuable consideration for the property. They assumed the first lien indebtedness on the property in the amount of $192,000, which indebtedness they later paid in full. No evidence has been produced by the IRS to show that the property was actually worth more than $192,000. Thus, this indicia of fraud does not exist.
Secondly, the IRS has not established an intent to defraud. The only possible indicia of fraud present is that the Debtors (1) sold the property to their paternal parents in 1991 for good and valuable consideration, (2) that the paternal parents conveyed that property to a corporation they owned in trade for a different piece of property almost 2)6 years later in 1993, and (3) 6 weeks later the paternal parents placed Tract Two into a trust for the Debtors and their children. This does not, without more, create even a fact issue.
The undisputed facts establish that the 1991 sale of Tract One was an arms-length transaction. There is no evidence that the Debtor’s Parents had knowledge of the, as of yet, unrecorded IRS tax lien. There is no evidence that the Debtor’s Parents had knowledge that the Debtors owed the IRS any money. There is no evidence that the Debtors were rendered insolvent by this transaction. There is no evidence that this was a transfer of all or nearly all of the Debtors’ assets. There is no evidence that this was a conveyance in anticipation of suit. The transfer documents contained no unusual clauses. Lastly, there was no retention of possession by the Debtors or any incidents of ownership of Tract One.
The IRS has failed miserably to come forward with even a scintilla of evidence to support their bold allegations.
The Fifth Circuit has stated that,
“summary judgment is appropriate in any case ‘where critical evidence is so weak or tenuous on an essential fact that it could not support a judgment in favor of the non-movant’ ”.
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994) (en banc) (citing Armstrong v. City of Dallas, 997 F.2d 62 (5th Cir.1993)).
Rule 56(c) governs summary judgments. Summary judgment must be rendered forthwith if,
“the pleadings, depositions, answers to interrogatories, and admissions on file, to*563gether 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.”
Rule 56(c) of the Federal Rules of Civil Procedure.
Once the moving party has met this burden by establishing an absence of a genuine issue of material fact, as they have here, it is incumbent upon the non-moving party to submit “competent summary judgment evidence” that there is indeed a “material factual dispute”. Clark v. America’s Favorite Chicken Co., 110 F.3d 295, 297 (5th Cir.1997) citing McCollum Highlands, Ltd. v. Washington Capital Dus. Inc., 66 F.3d 89, 92 (5th Cir.1995) (citing Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994)(en banc)).
Moreover,
“Unsupported allegations or affidavit or deposition testimony setting forth ultimate or conclusory facts and conclusions of law are insufficient to defeat a motion for summary judgment. Duffy v. Leading Edge Products, Inc., 44 F.3d 308, 312 (5th Cir.1995) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986).”
Clark, 110 F.3d at 297.
The IRS has failed to meet their required burden.3 In fact, they have failed to submit any competent summary judgment evidence to controvert the movant. Klutts Land, Inc. has, on the other hand, met their burden of proof by establishing that no genuine issue of material facts exists and that they are entitled to summary judgment as a matter of law.
. Section 6321 states,
"[i]f any person liable 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 lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."
26 U.S.C. § 6321.
. Section 7425 states in pertinent part,
"(3)27 a sale of property on which the United States has or claims a lien, or a title derived from enforcement of a lien, under the provisions of this title, made pursuant to an instrument creating a lien on such property, pursuant to a confession of judgment on the obligation secured by such an instrument, or pursuant to a nonjudicial sale under a statutory lien on such property—
(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale in the manner prescribed in subsection (c)(1) ...”
26 U.S.C. § 7425(b).
. The non-movant’s burden was discussed at length by the Fifth Circuit in Little v. Liquid Air Corp., 37 F.3d at 1075. The Fifth Circuit said, "[tjhis burden is not satisfied with 'some metaphysical doubt as to the material facts,’ Matsushita, 475 U.S. at 586, 106 S.Ct. at 1356 by 'conclusory allegations’, Lujan, 497 U.S. at 871-73, 110 S.Ct. at 3180, by 'unsubstantiated assertions,’ Hopper v. Frank, 16 F.3d 92 (5th Cir.1994), or by only a 'scintilla' of evidence, Davis v. Chevron U.S.A., Inc., 14 F.3d 1082 (5th Cir.1994)". | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492667/ | *603
MEMORANDUM OPINION
LETITIA Z. CLARK, Chief Judge.
The court has heard the Second Application To Approve Advisory Committee’s Employment of Counsel (Docket No. 4011), filed by the Advisory Committee of Major Funding Corporation (“Committee”). 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 approving the employment of Weycer, Kaplan, Pulaski & Zuber (“WKPZ”). This employment is initially limited in scope, and fees and expenses are subject to review by the bankruptcy court. 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.
A BRIEF HISTORY
This is a case in which the original corporation was a purchaser of notes on homes, and on home improvements, (which it sometimes participated in encouraging, thereby creating the opportunity for its lien), all generally relating to homes in a lower income market. The corporation then marketed itself to investors through advertisements in newspapers and elsewhere, offering the investors a chance to earn eighteen percent (18%) on their money in a “risk free” environment in which they were “fully secured” by the notes. The Texas Attorney General became interested in Major Funding, and eventually obtained, in the state courts, various cease and desist orders against the corporation, aimed at its activities on both fronts — to cease encouraging the creation of and acquisition of the hens on peoples’ homes, and to cease marketing itself to investors in the glowing terms it had used in its advertisements. The State referred to the operations of the corporation as a “pyramid scheme.” The principal of the corporation, one James Sorce, was eventually indicted and apparently fled the country. After the cease and desist orders, the debtor filed bankruptcy. Over fifteen hundred (1500) investors were left with claims of approximately fifty million dollars against the debtor. After confirmation of a plan on April 10, 1991 (Docket No. 3194), Ronald J. Sommers was appointed as the Liquidating Trustee under the plan (“Trustee”). He is a trustee of extensive experience in complex cases in this district, in state court as well as in bankruptcy court. He testified extensively at the hearing on this matter. He was calm, courteous, credible, and well informed about the Liquidating Trust, of which he is the fiduciary. The Plan also created an Advisory Committee pursuant to its Article VII, Subsection B, to carry *604out duties under 11 U.S.C. § 1103, and to advise and consult with the Liquidating Trustee on post confirmation operations and expenses.
The Trustee began the process of organizing the papers left by the corporation. The corporation had promised its investors that they would be fully secured in particular properties, “their” properties, the deeds on which the corporation would hold as a matter of convenience. It had assured them that they could have deeds issued in the investors’ names if they so chose. Some did so choose, and some parcels were “deeded” to more than one individual. One of the Trustee’s first duties, in dealing with a very angry body of investors who felt themselves defrauded by the corporation, was to begin litigation to recover these parcels from those individual investors, and to retain those properties for the benefit of all the investor class. In this, he was eventually successful. This angered those investors who had obtained “deeds.”
The records of the corporation were in disarray, and the process of locating the documents identifying the properties was itself somewhat difficult. Not all the papers were well drawn, and this also occasioned some litigation to establish the nature and extent of the liens held by the corporation. It was also necessary to reach settlements with the State of Texas Attorney General. The Trustee also began the process of trying to collect the monies for mortgage and home improvement loans from the homeowners. In this, he has over the years obtained a fair degree of success.
Once the Trustee had the deeds and home improvement liens in sufficient order that they might, with accuracy, be called a “portfolio”, he initiated the process of determining if there was a market for this “portfolio”. In October, 1992, the Trustee identified several capable buyers for the portfolio, and put the proposed purchase before the Advisory Committee. They turned the offer down, apparently believing that the properties in the portfolio could be managed to yield more over time than was reflected in the “present value” represented by the offer. (Testimony of Michael Jayson).
This, in effect, shifted the job of the Trustee from that of making the portfolio saleable to that of managing the properties. To that end, he employed Ms. Ilsa Pappas, who testified before the court, and appears highly capable and effective. She testified, inter alia, that she makes many of her monthly collections in person at the properties, often with her husband (unpaid) as her companion, in view of the neighborhoods she visits for this purpose, and the attitude of some of the homeowners. All members of the Creditors’ Committee who testified seem satisfied with her work and with her responsiveness if they call with questions or a desire to visit the office from which the affairs of the Liquidating Trust are managed. She testified that she has also made it clear that any of them who wish are welcome to observe any of the collections process as she makes her rounds, but that none have taken up this offer.
Notwithstanding their respect for Ms. Pap-pas and her accessibility, there came a time when some members of the Committee believed that the process of bringing to order the affairs of this debtor, and thereafter, the management of the properties, was taking too much time and costing too much money.
EVENTS LEADING TO THE INSTANT MATTER
The Committee filed an Application To Employ Counsel (Docket No. 3958). The Trustee opposed the application on the ground that the Plan did not specifically authorize the Committee to retain counsel. This court denied the employment application (Docket No. 3969). The United States District Court for the Southern District of Texas affirmed. The Fifth Circuit Court of Appeals reversed and remanded for this court to determine if there was a necessity for counsel for the Advisory Committee (Docket No. 4016; Matter of Advisory Committee of Major Funding Corp., 109 F.3d 219 (5th Cir.1997)). The Committee filed a Second Application to employ WKPZ. The Second Application was opposed by the Trustee on the basis that the Committee does not need counsel, and that the Trustee would be violating his fiduciary duty to the Liquidating Trust if he failed to so urge. It is this *605Second Application which is presently under consideration by the court.
DISCUSSION
The question of whether the Advisory Committee needs counsel is a troublesome one. Initially, it is not clear that most of the fifteen hundred (1500) investors believe that such counsel is needed, or want the fees and expenses of such counsel to come out of the assets collected by the Trust. This is so because, so far as appears in the record, these investors have not been polled on this question. So far as appears in the record, no bylaws have been created for the election of the Advisory Committee members, or for determining what issues should be put before the Committee, or before the entire class of investors, for a vote. While this is a Committee created by a plan, its duties are identified in the plan by reference to 11 U.S.C. § 1103. Pursuant to 11 U.S.C. § 1103, the most common method for a committee to establish governance procedures is by adopting bylaws. 7 Collier on Bankruptcy ¶ 1103.02, 1103.05 (Matthew Bender, 15th Ed. Revised 1996). The Committee should also strive to achieve unanimity. The committee is charged with representing the interests of its constituency and each member should be keenly aware of its duty to the entire constituency. While the bylaws will presumably allow the committee to act in most instances without unanimous approval, such situations should be avoided whenever possible. 7 Collier on Bankruptcy ¶ 1103.02[2] (Matthew Bender, 15th Ed. Revised 1996).
J. Dirk DeJong is the Chairman of the Committee for the Debtor. The court notes that Mr. DeJong was one of the investors in Major Funding. He is now retired from his previous employment, and devotes considerable time to attempting to recoup some of his investment in Major Funding by exercise of his own conception of how the surviving Liquidating Trust should be managed.
Mr. DeJong testified extensively before the court at the hearing on this matter. He exhibited strong personal feelings about how the Liquidating Trust should be managed, and considerable hostility toward the Trustee. He seemed satisfied with the work of Ms. Pappas. His stewardship of the Committee has not resulted in any bylaws, and his method of polling his Committee appears informal at best. It does not appear that during his stewardship he has ever caused to be polled the investor class as a whole. He has tried to “piggyback” some communications onto various mailouts the Trustee has sent to the entire investor class. This the Trustee has declined, and this appears to have angered Mr. DeJong. Mr. DeJong is so angry, first at the loss of his money to Major Funding Corporation, and now at the slow process of partial recovery in which the Trustee is engaged, that his testimony was not fully credible.
In view of the Committee’s inability thus far to function effectively without the assistance of counsel, even in the most basic area of establishing representative self governance, the court concludes that counsel is needed, at least to the extent of assisting the Committee in the creation of bylaws to accomplish this goal. These bylaws must include terms dealing with those occasions which call for polling the entire investor class, and the manner in which such polls are to be taken. Once these have been established, an estimate of the cost of various tasks which Mr. DeJong would like the Committee’s counsel to undertake, including requesting counsel to bring an action against the Trustee, can be obtained from the selected counsel, and made available to the investor class who will in effect be funding these actions out of the monies collected by the Liquidating Trust. Accordingly, the court approves the employment of WKPZ for the initial purpose of assisting the Committee in establishing representative self governance.
When a committee retains an attorney or other professional, the terms of such employment should be clearly established at the outset. All compensation is awarded by the court. Any entity seeking compensation or reimbursement from the estate must submit to the court an application conforming to the requirements of Bankruptcy Rule 2016(a). This rule applies to a creditor, committee, or other entity that files an application for payment by the estate of fees of *606professionals retained by the entity. The rule is clearly meant to cover all applicants seeking compensation pursuant to section 330 of the Code. This includes trustees and examiners, as well as persons employed pursuant to sections 327 and 1103 of the Bankruptcy Code. 7 Collier on Bankruptcy ¶ 1103.03 and 2016.03 (Matthew Bender, 15th Ed. Revised 1996). Proposed counsel argue that since this is a post confirmation Advisory Committee, he should not have to comply with these statutory and rule safeguards. The court is not persuaded that counsel is entitled to be exempted from these safeguards. Even if it were permissible for counsel to be excepted from these safeguards, it would not be advisable in this case, in light of the Advisory Committee’s fledgling status as an entity able to representatively govern itself. Thus, the court finds that WKPZ is required to comply with Bankruptcy Rule 2016 and Bankruptcy Local Rule 2016, setting forth the standards for submission of fee applications to the court. All fee applications submitted to the court by WKPZ will be subject to the court’s review and approval prior to payment by the Liquidating Trust. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492668/ | ORDER DISAPPROVING REAFFIRMATION AGREEMENT
ALEXANDER L. PASKAY, Chief Judge.
Ordinarily, a ruling which approves or disapproves a reaffirmation agreement does not require a written statement of the reasons underlying the ruling. However, the Reaffirmation Agreement under consideration in this Chapter 7 liquidation case tops the cake and warrants comments. These comments are warranted in order to point out the outer limits of the currently ongoing frenzy by creditors, who are strong arming hapless pro se debtors at their meetings of creditors and squeezing out reaffirmation agreements from them.
In the present instance, the Debtors, Russell Alan Brown, Sr. and Catina Lynn Brown, financed an automobile with American General Finance, Inc. (American General). The automobile was repossessed by American General almost a year before the commencement of this Chapter 7 case. It appears that the Debtors also financed the purchase of some jewelry for which they still owed $15.62 at the time they filed their Petition. Since the date of the filing, the Debtors paid off this munificent balance of $15.62. Notwithstanding, the representative of American General who apparently is a regular in attendance at the meetings of creditors, wasted no time and pressed into the shaky hands of the Debtors, the Reaffirmation Agreement Form prepared by American General. Of course, the Debtors signed the Reaffirmation Agreement without having any idea what they were signing. American General, upon realizing that the Debtors are no longer indebted to American General, struck the title of the document, inserted by hand the word “Redemption” and acknowledged that the amount of $15.62 in fact had been paid. Notwithstanding an attempt to change the title of the document, the document is still a reaffirmation agreement in a form prepared by American General which is used to obtain Reaffirmation Agreements from consumer debtors.
The Debtors sought this Court’s approval of the Reaffirmation Agreement as *663required by Section 524(d) of the Bankruptcy Code. The Debtors appeared at the duly scheduled hearing, but no one appeared from American General. Of course, it did not take heavy and deep soul searching to conclude that the Reaffirmation Agreement was nothing but an attempt, consistent with the regular routine of American General, to coerce the Debtors to reaffirm a non-existent debt in an amount which, even if a valid obligation which it is not, was de minimis and not worth the paper on which the Reaffirmation Agreement was printed.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Reaffirmation Agreement be, and the same is hereby disapproved. Further, to the extent that the Reaffirmation Agreement may be construed to be a redemption agreement, which it is not, the motion to redeem is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492669/ | ORDER ON MOTION TO STRIKE DEFENDANT’S MOTION FOR ABSTENTION
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a reopened Chapter 7 case originally filed by Frank P. and Santina Macagnone (Debtors) on March 2, 1988. In due course, the Debtors received their discharge and the case was closed. The Debtors’ motion to reopen the closed case was granted and this Court entered an Order, reopening the case on September 5,1996 for the limited purpose of permitting the Debtors to seek a determination of the dischargeability, vel non, of certain tax obligations which apparently are asserted by the United States of America (Government).
On October 3, 1996, the Debtors filed their Complaint which was immediately attacked by the Government. On February 3, 1997, this Court granted the Government’s Motion to Dismiss in part. The Motion to Dismiss as it related to Counts II and III was denied. On November 6,1996, the Debtors filed their Amended Complaint. In Count I of the Amended Complaint, the Debtors seek a determination that of their income tax liability for the years 1980,1981,1982,1983,1984 and 1985 has been discharged. In Count II, the Debtors seek a determination of the legality of taxes and/or penalties on and additions to their income tax liability for the same years. In Count III, the Debtors seek a determina*670tion of the nature and validity of the lien claimed by the Government. In addition, Count III also seeks a determination of the validity of a federal tax lien for 1040 taxes allegedly owed by the Debtors.
The present matter under consideration is a Motion for Abstention filed by the Government and a Motion to Strike the Motion for Abstention filed by the Debtors.
MOTION TO STRIKE
The Motion to Strike the Government’s Motion for Abstention filed by the Debtors is based on the undisputed facts that facially the Motion for Abstention is untimely. The Motion to Strike is based upon Local Rule 5011-2 of the United States Bankruptcy Court for the Middle District of Florida, which provides:
A motion to abstain from a case or proceeding under either 11 U.S.C. § 305 or 28 U.S.C. § 1334(c) shall be filed with the Clerk not later than the time set for filing a motion to withdraw the reference pursuant to Local Rule 5011-1 of these rules ...
Thus, it is evident that the Motion for Abstention was not filed within the time provided by the Local Rule and, therefore, technically the Debtors’ Motion to Strike is well founded and should be granted.
It should be noted, however, that all rules of procedure are designed to avoid technical delays and assist in the prompt administration of justice. Clearly, the law favors a resolution of disputes on their merits and not on the overly technical interpretation of the rules of procedure. A challenge based on untimeliness is always measured by its impact on the other side and what prejudice, if any, is caused by the tardiness.
These general propositions are not very helpful in the present instance because the Motion for Abstention really goes to the heart of the matter and directly relates to the Debtors’ right to litigate the issues raised by the Amended Complaint long after the original Chapter 7 case was closed. In the present instance, the Government urges that abstention is proper because the Debtors’ case was closed and the case is still a no asset case and to litigate this matter would serve no valid bankruptcy purpose. In support of this proposition, the Government contends that since this is a no asset case, the determination of the Debtors’ tax liability has no impact whatsoever on the rights of parties in interest. This is unlike a Chapter 11 or Chapter 13 case where the extent of the Debtor’s liability is crucial and directly relates to the feasibility of the plans filed. Second, the Government urges that the Debtors had adequate remedies at law in that they could have litigated this matter in Tax Court or in the alternative could pay the taxes assessed and then seek a refund by filing suit in the United States District Court. Lastly, the Government argues that litigating this matter would be a time consuming and extremely complex and difficult litigation which is totally unnecessary considering the administration in the bankruptcy case and would place an undue and unnecessary burden on the resources of this Court.
Concerning the first proposition, it is clear that the fact that the ease of the Debtors is a no asset case is of no consequence. It is clear that the well established policy purpose of all bankruptcy legislation is twofold, one to assure the administration of assets of the debtor effectively and fairly and second, which is equally important, in the case of an individual to give a debtor a “new opportunity in life and the clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Perez v. Campbell, 402 U.S. 637, 648, 91 S.Ct. 1704, 1710, 29 L.Ed.2d 233 (1971); Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970); Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934); Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 304 (11th Cir.1994).
The second proposition posited by the Government equally presents no viable alternative for two reasons. First, the Government concedes that the Debtors no longer have an opportunity to resort to the Tax Court because they are barred by the statute of limitations to litigate this issue. In this connection the Government urges that the fact they have missed the boat and did not seek a determination of the liability for more than six years after they obtained their dis*671charge is of no excuse. Clearly, the second alternative, to pay the taxes which in this instance are in excess of $75,000 and then sue for a refund would place an extreme burden on these Debtors and clearly is not a viable alternative.
The third ground suggested for abstention by the Government, that to litigate these issues is time consuming and complex is equally not persuasive.
The relief sought by the Debtors is pursuant to § 505(a)(1) of the Bankruptcy Code which authorizes the Bankruptcy Court to determine the amount or legality of any tax whether or not previously assessed, whether or not paid and whether or not contested before and adjudicated by a judicial or administration tribunal of competent jurisdiction. There is no question that under the appropriate circumstances it is appropriate to consider the Debtors’ Motion under this Section seeking a determination of a tax liability.
The present matter is presented for this Court’s consideration by the Debtors in a Chapter 7 ease which was and still is a no asset case, has been closed many years ago and reopened for the purpose of permitting the Debtors to seek relief under this Section. It is true, as a general proposition, as the Government urges, that the Debtors cannot invoke the jurisdiction of the Bankruptcy Court in a matter which has no bankruptcy purpose. In re Stanley, 114 B.R. 777 (Bankr.M.D.Fla.1990). There is a plethora of authority to support the proposition that where such determination would not serve any bankruptcy purpose or where the factors indicate that the Court should defer the determination to another forum, the Court should abstain. In re Diez, 45 B.R. 137, 139 (Bankr.S.D.Fla.1984); In re Kaufman, 115 B.R. 378 (Bankr.S.D.Fla.1990); In re Smith, 122 B.R. 130 (Bankr.M.D.Fla.1990); In re Millsaps, 133 B.R. 547 (Bankr.M.D.Fla.1991); In re American Motor Club, Inc., 139 B.R. 578 (Bankr.E.D.N.Y.1992); In re Hunt, 95 B.R. 442 (Bankr.N.D.Tex.1989); Starnes v. United States, 159 B.R. 748 (Bankr.W.D.N.C.1993); Parsons v. United States, 153 B.R. 585 (Bankr.M.D.Fla.1993); Byerly v. Internal Revenue Service, 154 B.R. 718 (Bankr.S.D.Ind.1992).
The court in the case of In re Mill-saps, supra having extensively reviewed the legislative history of § 505 concluded that the purpose of the enactment was not to provide another tax litigation forum when there is no need for a determination of the amount of the tax for estate administration purposes and Congress did not intend or foresee that the bankruptcy court would be the forum for such litigation. 124 Cong.Ree. H11095, H11110-H11111 (1978). While this Court has no difficulty in accepting these basic propositions, it is also constrained to note, however, that under certain circumstances this Court should exercise its jurisdiction to assist the Debtors to obtain a fresh start in life when such determination would serve that purpose.
It is clear that concerning the tax liability of the Debtors which have been conceded by the Government to be dischargeable, it is evident that abstention is appropriate because it is unwarranted to conduct long involved tax litigation to determine the amount of a dischargeable tax obligation. The Government initially conceded that the income tax liabilities for 1980,1981,1984 and 1985 are dischargeable and no longer disputes that the taxes for 1982 and 1983 are equally dischargeable. Thus, concerning these years, based on the income tax liabilities, this Court is satisfied that abstention is proper and should be granted.
The tax liability of the Debtors based on 26 U.S.C. § 6672, that is the liability for 100 percent assessment for nonpayment of payroll taxes, is clearly an issue which should be litigated before this Court as the proper forum. There is no valid reason why the Debtors should not be permitted to establish the tax liability in this forum. Such a determination, if the Debtors prevail, would clearly and significantly assist their attempt to obtain a fresh start in life.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion to Abstain filed by the United States of America be, and the same is hereby, granted in part and denied in *672part and the Court shall not consider the claim set forth in Count I of the Amended Complaint. It is further
ORDERED, ADJUDGED AND DECREED that the Motion to abstain concerning the claim in Count II be, and the same is hereby, denied and the issues involved in Count II of the Amended Complaint shall be scheduled for pretrial conference before the undersigned in Courtroom C, 4921 Memorial Highway, Tampa, FL 38634, on December 30,1997 at 10:15 am. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492670/ | HELEN S. BALICK, Chief Judge.
This is the court’s decision on the motion for judgment on the pleadings or, in the alternative, motion for summary judgment or, in the alternative, motion to dismiss by debtor-defendant Robert C. Redden. This is a core proceeding. 28 U.S.C. § 157(b)(2)(I).
I. Legal Standard
Because of the nature of the complaint, and the issues raised by defendant Redden’s alternative dispositive motions, it will be necessary to consider evidence in addition to the complaint and answer. Therefore, the court will consider the motion for summary judgment of Redden. On a motion for summary *740judgment, the court will view the record and the inferences therefrom in the light most favorable to the non-moving party. Hon v. Stroh Brewery Co., 835 F.2d 510, 512 (3d Cir.1987). If that record shows no genuine issues as to any material fact, and that the moving party is entitled to judgment as a matter of law, then summary judgment shall be granted in favor of the movant. Fed.R.Bankr.P. 7056(c). American Automobile Ins. Co., v. Indemnity Ins. Co., 108 F.Supp. 221, 224 (E.D.Pa.1952), aff'd, 228 F.2d 622 (3d Cir.1956) (per curiam).
II. Facts
Edward R. Collum sued Robert C. Redden in the Circuit Court for the City of Alexandria. State of Virginia. In that action, Collum alleged that Redden committed common law fraud in connection with the sale of a house in Virginia, and sought money damages from Redden. Redden did not answer the complaint, and the Circuit Court entered a default judgment for $62,000.00 plus interest and attorney’s fees of $21,950.00 on Count I, and $65,000.00 in actual damages, and $10,000.00 in punitive damages plus interest on Count II.
Robert C. Redden filed a chapter 7 bankruptcy case in this court on November 13, 1995. Collum filed a complaint in this court on February 16, 1996, seeking a determination that Redden’s debt due to Collum is an exception to the discharge of debt under 11 U.S.C. § 523(a)(2)(A).1 Redden filed an answer and the motion for summary judgment.
III. Discussion
The complaint does not directly allege the elements of section 523(a)(2)(A).2 Instead, Collum’s complaint recites his view of the procedural history of the events in the Virginia action, including the allegations contained in the Virginia complaint. As Redden’s motion for summary judgment points out, Collum’s complaint here impliedly asserts that the elements of § 523 are fulfilled by the prior Virginia State court’s default judgment against Mr. Redden, and furthermore, that Collum is asking this court to apply collateral estoppel, or issue preclusion, so that the fraud issue can not be re-litigated in bankruptcy. Redden argues that the elements of collateral estoppel are not satisfied, and therefore that summary judgment is appropriate. The court will decide this question first—whether the Virginia court’s judgment can be used to preclude any of the elements of fraud from being litigated again.
The rules for issue preclusion in the State of Virginia control in this court. E.g., Migra v. Warren City School, 465 U.S. 75, 81, 104 S.Ct. 892, 896, 79 L.Ed.2d 56 (1984). In Virginia, there is a four-part test to determine whether a party can be collaterally estopped from litigating a claim. The four-part test for collateral estoppel is:
(1) the two parties, or their privies, must be the same;
(2) the factual issue sought to be litigated actually must have been litigated in prior action;
(3) the determination must have been essential to the prior judgment; and
(4) it must have been determined by a valid and final judgment.
Angstadt v. Atlantic Mut. Ins. Co., 249 Va. 444, 457 S.E.2d 86, 87 (1995); Bates v. Devers, 214 Va. 667, 202 S.E.2d 917, 921 (1974). A fifth element of mutuality is also required. Norfolk & Western Ry. v. Bailey Lumber Co., 221 Va. 638, 272 S.E.2d 217, 218 (1980).
The first element is met because Mr. Collum and Mr. Redden are the same parties in both cases. The second element, *741that the issue was actually litigated, turns on whether the default judgment in the State Court can fulfill the requirement of actual litigation.
In TransDulles Center, Inc. v. Sharma, 252 Va. 20, 472 S.E.2d 274 (1996), the State Supreme Court of Virginia addressed this question in the context of a landlord’s prior default judgment against a tenant. The Supreme Court of Virginia stated: “Virginia law does not support a blanket exemption from the application of collateral estoppel in the case of a default judgment.” Id. 472 S.E.2d at 276. The TransDulles court then considered whether a tenant’s personal liability was actually litigated in the default judgment, on the basis of which the landlord asked the court to apply collateral estoppel. The court reviewed the nature of the evidence introduced in the prior hearing, which included “[tjestimonial and documentary evidence [presented] ex parte.” Id. After finding that each element of collateral estoppel was satisfied, the TransDulles court applied issue preclusion to a subsequent action by the landlord against the tenant. Thus, Virginia does allow default judgments to fulfill the requirement of actual litigation for collateral estoppel purposes depending upon the circumstances of the default judgment.
Upon reviewing the record sub judice, this court realized that the record was insufficient for making even the limited findings of facts concerning whether a genuine issue of fact existed concerning whether the prior Virginia action, Collum v. Redden, Case no. 95-0215, was “actually litigated.” Therefore, this court issued interrogatories to the parties to further develop the record. Docket no. 26. The parties responded and attached affidavits, Virginia Court pleadings, and other documents.
Upon this expanded record, the admissible facts show that Collum moved for a default judgment on May 2, 1995. According to an affidavit of Joseph V. McGrail, Esquire, the Virginia attorney representing Collum, there was a hearing on May 10, 1995 on this motion. Collum at this time submitted an overdue note, an amendment to the note, and an affidavit of indebtedness. The Circuit Court for the City of Alexandria entered a partial default judgment. This judgment made no findings as to the elements of fraud.
Thereafter, on May 24, 1995, that court held a two hour evidentiary hearing for the purposes of determining damages for the partial default judgment. Only Collum appeared at this hearing, and he introduced evidence, including witnesses, in support of his claim for damages. On May 25,1995, the Circuit Court issued an amended and final judgment order. This judgment also made no findings as to the elements of fraud. Redden was not given notice of either hearing.
On this record, viewed in the light most favorable to Collum, the issues underlying the fraud action in the Virginia action were not actually litigated as a matter of law. Because of the way Collum’s complaint is drafted, such a finding of actual litigation is critical to the merits of the complaint. Therefore, as a matter of Virginia law, the defendant Redden is entitled to judgment in his favor on Collum’s complaint.
In his briefing, Redden has also argued that Collum’s complaint failed to properly allege facts that would establish the requisite elements of section 523. It is not necessary to address this argument.
IV. Conclusion
Plaintiff Collum has filed a dischargeability complaint. The complaint does not directly allege facts that address the elements of 11 U.S.C. § 523. Instead, Collum has alleged facts pertaining to a prior Virginia action which he believes pleaded the elements of section 523, and to which he believes collateral estoppel or issue preclusion applies. Thus, a prima facie element of Collum’s complaint is that issue preclusion applies. This court, however, has found that as a matter of law, issue preclusion does not apply to the Virginia default judgment. Therefore, judgment on the merits of this complaint must be GRANTED in favor of Redden and against Collum.
However, this does not mean that Collum can not file a complaint seeking relief of the type available under section 523, if that complaint directly alleges facts that would state *742such a claim for relief. Because of the passage of time, the filing of a new complaint might raise issues relating to Bankruptcy Rule 4007(c). To avoid unnecessary litigation on these issues, the court GRANTS Collum leave to file and serve an amended complaint on or before December 22, 1997. Any amendments must be consistent with Bankruptcy Rule 7015.
IT IS SO ORDERED.
. Actually, the complaint cited "11 U.S.C. § 523(2)(a).” There is no such sub-section of section 523, however, it is clear from the pleadings that the plaintiff intended to cite section 523(a)(2)(A).
. 11 U.S.C. § 523(a)(2)(A) reads in part:
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 financing 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 ...
Collum has the burden of proof by a preponderance of the evidence on each element of section 523. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492671/ | OPINION AND ORDER1
JOHN J. THOMAS, Bankruptcy Judge.
The instant Adversary was initiated by Plaintiff, Lawrence G. Frank, in his capacity as Trustee for the Debtor, Clintondale Mills, Inc. The Complaint requests the Court to enter judgment in favor of the Plaintiff and against the Defendant in the amount of Fifty-Eight Thousand Three Dollars and Fifty-Seven Cents ($58,003.57) which is the outstanding balance due and owing the Debtor *744by the Defendant for the prepetition delivery of flour. The Defendant responded it does not owe a balance to the Plaintiff. Rather, primarily, because of breach of a prepetition contract, the Debtor owes the Defendant Eighty-Five Thousand Three Hundred Twenty-Six Dollars and Forty-Three Cents ($85,326.43). The facts have been stipulated to by the parties and are as follows:
1. On May 22, 1995, David E. Johnson, owner of Clintondale Mills, wrote a letter to Keith Natoli, the general manager of Benzel Bretzel Bakery, confirming the price quoted for delivery of loads of flour at a certain dollar amount per CWT (per hundred weight) for the months of August, 1995 through June, 1996. This letter is attached as exhibit “A” to the Answer and Counterclaim of the Defendant.
2. From May 25, 1995 through June 27, 1995, the Debtor made various deliveries of flour to the Defendant which deliveries are evidenced by invoices attached as Exhibit “A” to the Complaint. Those invoices total $58,003.57 and were not paid by the Defendant at the time of the filing of the petition.
3. By letter dated June 29,1995 (attached as Exhibit “B” to the answer and counterclaim) from Ernest J. Cimadamore, president of Clintondale Mills to Keith Natoli, the Debtor confirmed that it would compensate the Defendant for such cost of flour, over the price that the Defendant had previously contracted with the Debtor for that period from June 28,1995 until July 17,1995.
4. Attached as Exhibit “C” to the Answer and Counterclaim is a letter dated July 7, 1995 signed by Keith Natoli to Ernest Cimadamore confirming various issues raised at a meeting the prior day, July 6, 1995, at Clintondale Mills. The letter, inter alia, confirmed a credit of Nine Thousand Two Hundred Ninety-Five Dollars ($9,295.00) representing the market difference from the contract price and the purchase price for ten loads of flour from the time period of June 28,1995 to July 17, 1995. The letter further confirmed that Clintondale Mills would hon- or the contract of May 22, 1995 and would cover the difference in the contract price and the replacement purchase price, if necessary. The contract represented a purchase of 131 loads of flour to be delivered at times between August 1, 1995 and June 30, 1996 for a total credit of $134,035.00.
5. On July 18, 1995 debtor filed a Chapter 11 petition.
6. On March 22, 1996, the Chapter 11 case was converted to one under Chapter 7.
7. The May 22, 1995 contract was not assumed by the Debtor and therefore was deemed rejected by the Debtor under the provisions of 11 U.S.C. § 365(g)(1).
Based upon these facts, the Plaintiff seeks turnover of the Fifty-Eight Thousand Three Dollars and Fifty-Seven ($58,003.57) and further argues that pursuant to 11 U.S.C. § 553 the Defendant improved its position as a creditor to the Debtor during the ninety (90) day period prior to the Bankruptcy by exercising its setoff rights.
The Defendant’s response can be summarized as follows. The Defendant properly exercised its rights of setoff during the ninety (90) day period but, nevertheless, did not owe the Plaintiff any debt during that same time. As an alternative argument, the Defendant urges the equitable doctrine of recoupment should disallow the Plaintiffs Complaint against the Defendant. Finally, the Defendant asserts a second setoff as a counterclaim to the Plaintiffs Complaint.
DISCUSSION
The Bankruptcy Code does not contain a recoupment provision. The common law doctrine of recoupment provides an exception to setoff in bankruptcy cases. Recoupment “is setting up of a demand arising from the same transaction as the plaintiffs claim or cause of action, strictly for the purpose of abatement or reduction of such claim.” 4 COLLIER ON BANKRUPTCY § 553.03, at 553-15-17 (emphasis added). This doctrine is justified on the grounds that “where the creditor’s claim against the debtor arises from the same transaction as the debtor’s claim, it is essentially a defense to the debtor’s claim against the creditor rather than a mutual obligation, and application of the limitations on setoff in bankruptcy would be *745inequitable.” Lee [v. Schweiker], 739 F.2d [870] at 875 [(1984)]. Thus, so long as the creditor’s claim arises out of the identical transaction as the debtor’s, that claim may be offset against the debt owed to the debtor, without concern for the limitations put on the doctrine of setoff by Code section 553. [In re] Davidovich, 901 F.2d [1533] at 1537 [(1990)]. In the bankruptcy context, recoupment has often been applied where the relevant claims arise out of a single contract “that provide[s] for advance payments based on estimates of what ultimately would be owed, subject to later correction.” InreB & L Oil Co., 782 F.2d 155, 157 (10th Cir.1986). However, an express contractual right is not necessary to effect a recoupment. See In re Holford, 896 F.2d 176, 178 (5th Cir.1990). Nor does the fact that a contract exists between the debtor and creditor automatically enable the creditor to effect a recoupment. In re University Medical Center, 973 F.2d 1065 (3rd Cir.1992).
Based upon the facts and the above quoted language from the Third Circuit, the Court finds that the equitable doctrine of recoupment does not apply and cannot serve as a defense for the Defendant. This is so, primarily, because the facts present a series of separate contracts for the delivery and purchase of flour rather than a single transaction.
11 U.S.C. § 553 (Setoff) provides in its entirety as follows:
(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that—
(1) the claim of such creditor against the debtor is disallowed;
(2) such claim was transferred, by an entity other than the debtor, to such creditor—
(A)after the commencement of the case; or
(B)(i) after 90 days before the date of the filing of the petition; and
(ii) while the debtor was insolvent; or
(3)the debt owed to the debtor by such creditor was incurred by such creditor—
(A) after 90 days before the date of the filing of the petition:
(B) while the debtor was insolvent; and
(C) for the purpose of obtaining a right of setoff against the debtor.
(b)(1) Except with respect to a setoff of a kind described in sections 362(b)(6), 362(b)(7), 362(b)(14), 365(h), 546(h), or 365(i)(2) [sic], of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the 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
(B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
(2) In this subsection, “insufficiency” means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.
(C)For the purpose of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.
The following requirements must be met to setoff pursuant to § 553: A creditor owes a prepetition debt to the debtor; the debtor owes a prepetition debt to that creditor; and, the debts in question are mutual. In re MetCo Mining and Minerals, Inc., 171 B.R. 210 (Bkrtcy.W.D.Pa.1994). The parties agreed that there was mutuality of debts and that the creditor owed a prepetition debt to the Debtor. An open issue is whether there *746was a prepetition debt owing from the Debt- or to the Defendant and if so, the amount of that debt.
This issue of the existence of a prepetition debt is partially resolved by reference to the letter of June 7, 1995, which provides that the Debtor will give the Defendant a credit of Nine Thousand Two Hundred Ninety-Five Dollars ($9,295.00) for deliveries of flour made during the period June 28, 1995 to July 17, 1995. A prepetition debt did run from the Debtor to the Defendant for at least that amount.
The next issue is whether the balance of the debt alleged by the Plaintiff, approximating One Hundred Thirty-Four Thousand Dollars ($134,000.00) and representing the difference in the contract price and the delivery price of flour as referenced in the May 22,1995 contract arose prepetition or postpetition. While the contract was entered into prepetition the delivery of the flour was to occur during a period after the petition was filed. The Defendant argues that there was no breach of the contract prepetition and, therefore, the Plaintiff did not owe a prepetition debt to the Defendant on the May 22, 1995 contract. The Plaintiff argues that when an executory contract is rejected it is considered a breach of that contract which relates back to immediately before the date the petition is filed. The Plaintiff cites § 365(g)(1) of the Bankruptcy Code in support. That Section reads as follows:
(g) Except as provided in subsections (h)(2) and (i)(2) of this section, the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease—
(1) — if such contract or lease has not been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title, immediately before the date of the filing of the petition;
The Plaintiff’s position is further supported by the cases of, Express Freight Lines, Inc. v. Kelly, 130 B.R. 288 (Bkrtcy. E.D.Wis.1991) and In re Mace Levin Associates, Inc., 103 B.R. 141 (Bkrtcy.N.D.Ohio 1989). We agree. For purposes of determining the amount of prepetition debt from the Debtor to the Defendant, we find that the postpetition breach effectuated a breach just prior to the filing of the petition and that the total outstanding prepetition debt from the Debtor to the Defendant is One Hundred Forty-Three Thousand Three Hundred Thirty Dollars ($143,330.00).
The next issue for resolution is determining the amount, if any, the Plaintiff can recover under § 553(b). This determination rests entirely on whether the Defendant exercised its rights of setoff prepetition. Furthermore, if the Defendant did exercise that right, what was the amount claimed to be setoff? Lastly, did that setoff improve the creditors position vis-a-vis the Debtor using the formula provided in the Bankruptcy Code at § 553(b)(1)?
In addressing the question as to whether a creditor’s actions, or refusal to act, constituted an exercise of its setoff rights, the Supreme Court of the United States in the case of Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) wrote that:
A requirement of such an intent is implicit in the rule followed by a majority of jurisdictions addressing the question, that a setoff has not occurred until three steps have been taken: (i) a decision to effectuate a setoff, (ii) some action accomplishing the setoff, and (iii) a recording of the set-off. See, e.g., Baker v. National City Bank of Cleveland, 511 F.2d 1016, 1018 (C.A.6 1975) (Ohio law); Normand Josef Enterprises, Inc. v. Connecticut Nat. Bank, 230 Conn. 486, 504-505, 646 A.2d 1289, 1299 (1994).
The formula this Court must follow to determine the extent of the setoff the Plaintiff can recover is set forth in § 553(b)(1) and (2). This formula was adequately explained by the Court in the ease of Express Freight Lines, Inc. v. Kelly, supra at 293.
This section creates an “improvement in position” test. The key factor in the test is what is termed “insufficiency,” defined at 11 U.S.C. § 553(b)(2) as the “amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such a claim.” In other *747words, this figure is the balance due to the creditor after making allowances for the “mutual debt owing.” This balance due is calculated at the time of the bankruptcy petition and at 90 days before filing or anytime within the 90 days before filing that any amount was due the creditor, whichever is later. If the creditor’s position improved, that is, if the net amount after setoff due the creditor on the date of filing is less than the net amount after setoff due at the time of the calculation in the 90 day period prior to filing, the difference in these amounts is recoverable by the trustee. See Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1040 (5th Cir.1987); Brooks Farms, 70 B.R... at 372; see also In re Madcat Two, 127 B.R. 206, 209 (Bankr.E.D.Ark.1991).
The Plaintiff argues that there are two separate times that the Defendant could be considered to have exercised its right of setoff. The first event is the letter of July 7, 1995, approximately ten (10) days prior to the filing of the petition. The next day setoff could have occurred was immediately preceding the filing of the Bankruptcy. While the Bankruptcy Code specifically provides that a postpetition breach through rejection of an executory contract results in a prepetition breach of contract claim, the same argument cannot be made that the postpetition rejection automatically creates a setoff by operation of law immediately prior to the filing of the bankruptcy. The Plaintiffs Brief does not provide any ease law to support the argument that the setoff occurred immediately prior to the filing of the petition. Furthermore, as the Supreme Court wrote in the Citizens Bank of Maryland v. Strwmpf case, supra, there has to be a decision to effectuate a setoff together with some action accomplishing the setoff and a recording of the setoff. The Court has found no support for Plaintiffs position in the Bankruptcy Code or ease law.
The July 7, 1995 letter, attached as Exhibit “C” to the answer and counterclaim, undoubtedly exercises a right of setoff in the amount of Nine Thousand Two Hundred Ninety-Five Dollars ($9,295.00) representing the difference from the contract price and the purchase price for ten (10) loads of flour for the period "of June 28, 1995 to July 17, 1995. At the time of this letter, the Defendant was indebted to Clintondale Mills in excess of Fifty Eight Thousand Dollars ($58,-000.00). The Court finds that this letter did express the Defendant’s intent to exercise its rights of setoff concerning the debt it had to Clintondale Mills on July 7,1995.
This finding, however, will not satisfy the Plaintiff because he asserts that the July 7, 1995 letter further operates as a setoff to the May 22, 1995 contract. This position is unsupported. The language of the July 7, 1995 letter does address the earlier contract of May 22, 1995 but only to the extent that it reiterates and confirms the terms of the earlier contract. Based upon the foregoing, the Court finds that the only prepetition setoff which occurred in this case was on July 7, 1995 in the total amount of Nine Thousand Two Hundred Ninety-Five Dollars ($9,295.00).
The Court will now address the amount which the Plaintiff can recover because of the setoff.
Pursuant to § 553(b)(1), the Plaintiff may recover from the creditor the amount so setoff to the extent that any insufficiency which existed on the date of such setoff was less than the insufficiency on the later of ninety (90) days before the date of the filing of the petition and the first date during the ninety (90) days immediately preceding the date of the filing of the petition on which there was an insufficiency. The Court finds that on July 7, 1995, the date determined to be the setoff date, the Defendant owed the Debtor Fifty-Eight Thousand Three Dollars and Fifty-Seven Cents ($58,003.57) and the Debtor owed the Defendant Nine Thousand Two Hundred Ninety-Five Dollars ($9,295.00). On July 7, 1995, there was a zero insufficiency pursuant to the definition provided in § 553(b)(2), the claim against the Debtor ($9,295.00), did not exceed the mutual debt owing to the Debtor by the holder of such claim ($58,003.57).
The Court’s analysis does not stop at this point. The date of setoff must be compared with one of two other relevant dates estab*748lished in the mathematical formula this Court must apply pursuant to § 553(b)(1) in order to determine the extent which the Plaintiff can recover the setoff. Those dates are ninety (90) days prior to the date of the filing of the bankruptcy or the first date within the ninety (90) days prior to filing of the bankruptcy in which there was an insufficiency. There was no insufficiency ninety (90) days prior to the filing of the bankruptcy according to the record presented to the Court. As already determined, there was no insufficiency on the date of the setoff on July 7, 1995. The Plaintiffs main argument is that the relation back of the debt as a result of the postpetition breach of the contract through rejection created an insufficiency just prior to the date of the filing of the bankruptcy. The Court finds absolutely no support for the Plaintiffs position. The relation back of the breach is a fiction created by statute. There was no corresponding fiction created by the language of § 553 to find that the postpetition breach can create a prepetition debt which can be used for calculation of the insufficiency under § 553(b)(1). The language of the section is explicit in that the Plaintiff can recover from the creditor the amount setoff to the extent that the insufficiency on the date of setoff was less than an insufficiency which was created or existed ninety (90) days before the date of the filing or the first date within the ninety (90) days in which there was an insufficiency. Here, there was no insufficiency on or within ninety (90) days from the date of the petition and therefore the Plaintiffs attempt to recover the Nine Thousand Two Hundred Ninety-Five Dollars ($9,295.00) setoff fails under § 553. This finding would comport with the purpose of § 553(b), that is to regulate prepetition conduct.
Additionally, the Defendant raised a second setoff by way of a counterclaim to this Adversary. In short, the second counterclaim directs itself to the remaining portion of the Plaintiffs original claim for Fifty-Eight Thousand Three Dollars and Fifty-Seven Cents ($58,003.57). The amounts of the mutual debts between the parties were stipulated to thus, acknowledging those mutual debts.
Whether to permit a setoff is in the discretion of the Court. In re Penn Central Transportation Co., 486 F.2d 519 (3rd Cir.1973); Brunswick Corporation v. Clements, 424 F.2d 673 (6th Cir.1970). Principles of equity apply in making that decision. Brunswick, supra at 675. Equity dictates that because of the admission by the Debtor that it owes the creditor a total debt of One Hundred Forty-Three Thousand Three Hundred Dollars ($143,300.00), the Court not order the creditor to turnover Fifty-Eight Thousand Three Dollars and Fifty-Seven Cents ($58,003.57) to the Plaintiff.
The record establishes that there is a deficiency owed to the Defendant amounting to Eighty-Five Thousand Three Hundred Twenty-Six Dollars and Forty-Three Cents ($85,326.43). The Court will not enter judgment against the estate for that amount. The Court will recognize, however, that the Defendant may have a claim against the estate for that amount. An appropriate Order will follow.
. Drafted with the assistance of Richard P. Rogers, Law Clerk. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492672/ | *920
ORDER
JOHN S. DALIS, Chief Judge.
Richard E. Savage filed this case under Chapter 7 of Title 11, United States Code. In adversary proceeding Richard Edgar Savage v. The United States of America, No. 97-01019A a consent order was entered determining the personal liability of the debtor for all unpaid assessments, taxes, penalties, interest, and statutory additions of individual income taxes to the Internal Revenue Service of the United States (“IRS”) for the periods ending 12/31/86, 12/31/87, 12/31/88, and 12/31/89 discharged in this case on September 11, 1997. Richard E. Savage now moves to avoid the discharged tax liability lien, alleging that the lien does not survive the discharge in this case, and impairs Debtor’s exempted property under 11 U.S.C. § 522(b) and Official Code of Georgia Annotated (O.C.G.A.) § 44-13-100.
The issue presented is whether the portion of the properly filed IRS lien for penalties and other statutory additions are avoidable to the extent the hen encumbers the Debtor’s claimed exempt property. There is no dispute that the lien of the IRS was properly filed or that the Debtor’s claim of exemption is proper. While Debtor argued at hearing that all aspects of the federal tax lien were avoidable, in briefs submitted in support of the motion “assume[d] for the sake of argument,” that the tax portion of the lien was not avoidable. Therefore, I address only that portion of the lien involving penalties and statutory additions and assume the tax portion is not avoided.
The Debtor asserts that pursuant to 11 U.S.C. § 522(h)1 the Debtor may avoid a lien on his property to the extent that he could have exempted such property under 11 U.S.C. § 522(g)(1)2 if the trustee had avoided such transfer to the extent that the lien is avoidable by the trustee under 11 U.S.C. § 724(a)3 and the trustee had not attempted to avoid such lien. The trustee in this case could have avoided the portion of the IRS lien for penalties and statutory additions that secured a claim of the kind specified in 11 U.S.C. § 726(a)(4)4 but the trustee did not attempt to do so. The Debtor’s analysis ignores § 522(c)(2)5.
*921Section 522(c)(2)(A) supports the Debtor’s analysis as it generally applies to any fine, penalty, or forfeiture or for multiple, exemplary, or punitive damages that are not compensation for actual pecuniary loss suffered by the holder of the claim. Section 522(c)(2)(A) establishes that property claimed as exempt by the debtor remains liable for any prepetition debt of the kind described under § 726(a)(4), a non-compensatory penalty, if not avoided under § 724(a). Following the Debtor’s argument, to the extent that the lien is of the type described under § 724 and therefore § 726(a)(4) is avoidable under § 522(h) and (g), the exempt property is no longer liable on the claim. However, the analysis must continue and consider the limitations places upon the general provisions of § 726(a)(4) dealing with “any fine, penalty, or forfeiture,” by the specific exception under § 522(c)(2)(B) pertaining to tax liens.
Debtor argues that the tax penalties and statutory additions portion of the IRS tax lien are not “tax liens” under § 522(c)(2)(B). However, penalties are part of the “tax liens” covered by this section. In re DeMarah, 62 F.3d 1248, 1251 (9th Cir.1995). Tax liens encompass all taxes and penalties, because nothing within the text of the section divides the tax lien into separate components, “[n]or does the Internal Revenue Code distinguish between the tax and any penalty or interest when it provides for the imposition of liens. It says:
If any person liable to pay any tax neglects or refuses to pay that same after demand, the amount (including any interest, additional amount, addition to tax, or accessible penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. 26 U.S.C. § 6321 (emphasis added).
Id. at 1251-1252.
Therefore, the entire amount of the IRS lien comprises its “tax lien.” Id. As a result, the exempt property remains subject to the tax liens which include tax penalty debts by the clear text of this section. In re Swafford, 160 B.R. 246, 248 (Bankr.N.D.Ga.1993); In re Rench, 129 B.R. 649, 651 (Bankr.D.Kan.1991); In re Gerulis, 56 B.R. 283, 287-88 (Bankr.D.Minn.1985). Section 522(c)(2)(B) specifically excepts tax liens from the effect of the general provision of § 522(c)(2)(A) and the avoidance provisions of § 724(a) as it pertains to any non-compensatory fine, penalty or forfeiture. D. Ginsberg & Sons v. Popkin, 285 U.S. 204, 208, 52 S.Ct. 322, 323, 76 L.Ed. 704 (1932) (“Specific terms prevail over the general in the same or another statute which otherwise might be controlling.”); Gastaneda-Gonzalez v. Immigration & Naturalization Serv., 564 F.2d 417, 423 (D.C.Cir.1977) (“a specific [subsection] provision prevails over a more general [section]”).
It is therefore ORDERED that Debtor’s Motion to Avoid Lien of the Internal Revenue Service of the United States of America for unpaid assessments, taxes, penalties, interest and additions to the extent the liens encumber the property claimed as exempt is denied.
. 11 U.S.C. § 522(h). Exemptions.
(h) The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if—
(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and
(2) the trustee does not attempt to avoid such transfer..
. 11 U.S.C. § 522(g)(1).
Notwithstanding § 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under §§ 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if—
(1)(a) such transfer was not a voluntary transfer of such property by the debtor; and
(b) the debtor did not conceal such property; or
(2) the debtor could have avoided such transfer under section (f)(2) of this section.
. 11 U.S.C. § 724. Treatment of certain liens.
(a) The trustee may avoid a lien that secures a claim of a kind specified in section 726(a)(4) of this title.
. 11 U.S.C. § 726(a)(4). Distribution of property of the estate
(a) Except as provided in section 510 of this title, property of the estate shall be distributed—
(4) fourth, in payment of any allowed claim, whether secured or unsecured for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim.
. 11 U.S.C. § 522(c)(2).
(c) Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose, or that is determined under section 502 of this title as if such debt had arisen, before the commencement of the case, except—
(2) a debt secured by a lien that is—
(A)(i) not avoided under subsection (f) or (g) of this section or under sections 544, 545, 547, 548, 549 or 724(a) of this title; and
(ii) not void under section 506(d) of this title; or
(B) a tax lien, notice of which is properly filed---- | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492673/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
“Is this a great country or what?”, In re Cruz, 179 B.R. 975, 978 (Bankr.S.D.Fla.1995). The defendant in this adversary proceeding, brought pursuant to 11 U.S.C. § 523(a)(2)(A) to determine the dischargeability of credit card debt, epitomizes the conservative family values ideal of the stay at home mom who raises the children, buys groceries, and cooks, while her husband works to support the family. Sheila Mack is a housewife who was last employed in 1986. She has no income of her own except for a little babysitting money, perhaps as much $20.00 per month, and occasional money from her husband, as much as $100.00 per month. Her husband, prior to the filing of their joint petition under Chapter 7 of the Bankruptcy Code, was employed as a sales supervisor for a beverage distributorship earning approximately $32,000.00 per year. During the course of their ten (10) year marriage, Mr. Mack earned all of the family income and handled all of the family’s finances. While the defendant had her own bank account, all of the family’s bills were paid through Mr. Mack’s bank account, for which he was the sole account holder and the sole signatory authority. The defendant never saw any of the bills that came into the house and she and her husband did not discuss finances.
Notwithstanding the defendant’s total reliance on her husband, she had credit cards in her own name. The scheduled creditors in this case reflect that in addition to the claim *983of plaintiff in this proceeding, the defendant had three (3) other credit cards in her own name, with balances totaling roughly $12,-600.00. Exactly when these other credit cards were obtained by the defendant and when the charges were incurred on them was not introduced' at trial, but the defendant did testify that most of the charges were made prior to her receipt of the card giving rise to this proceeding. In late 1995, plaintiff sent to defendant, completely unsolicited, a one page form entitled “30- Second Response Certificate” inviting her to accept its invitation for a customized VISA Gold account. The invitation had an expiration date of December 26, 1995. The only information requested was her social security number, home phone number, and annual household income. In early 1996, the defendant received her new credit card and a pre-printed cash advance check, characterized on her account statement as a “promotional cash advance” in the amount of $3,000.00. The cash advance check had a printed date of March 28, 1996 and the defendant, upon receipt, endorsed it and deposited it into her checking account. The advance was posted on her VISA account on April 19, 1996. On May 13, 1996, defendant wrote another cash advance check, one of which is apparently provided with each monthly statement by plaintiff, for the sum of $1,000.00, payable to her husband. After that, no other charges are reflected until late June when defendant began utilizing the credit card for purchases at the end of June and through the month of July for family related items such as groceries, clothing, gasoline, and dentist bills. The last charge by the defendant occurred on July 25, 1996. The total purchases as reflected on the billing statement ending July 26, 1996 were $971.53. A payment of $80.00 was made against the account on June 27th and a payment of $82.00 was made on July 31st. At the time of the commencement of this bankruptcy case, on November 26,1996, the balance due on the account was $5,472.93. The credit limit was $5,000.00. The credit card had not been revoked when the charges were made.
The defendant testified that when she took the two cash advances and utilized the credit card, she believed that her husband was paying the bills. She was unaware of any family financial difficulties since her husband had not discussed the family finances with her. Finally, during the summer of 1996, he advised her that they were in financial difficulty. The purpose of the $1,000.00 cash advance, which she had made to her husband in May, was to assist him in paying bills. However, even at that time it does not appear that he fully confided in her regarding the depth of the family’s financial problems. When he did advise her of their difficulties, she ceased making charges on the account. In October of 1996, the defendant and her husband made an appointment with and went to see the Consumer Credit Counseling Service of Central Florida, Inc. That appointment was October 29, 1996. As a result of that appointment, they concluded that their credit situation was hopeless and then sought the assistance of a bankruptcy attorney leading to the filing of this ease.
The schedules reflect that, between the two of them, the defendant and her husband had 12 credit cards with total indebtedness of $52,733.29. Plaintiff seeks to have its claim excepted from discharge alleging that defendant incurred the debt at a time when she was unable to pay, that she either knew or should have known of the inability to pay, and that she acted with intent to deceive the plaintiff. Trial was conducted on October 28, 1997. The only evidence presented by plaintiff, other than the testimony of defendant in court and through responses to plaintiffs request for admissions and plaintiffs interrogatories were the credit card statements, the two cash advance checks, and the defendant’s bankruptcy petitions and schedules.
The issue of the dischargeability of credit card debt has spawned perhaps more judicial opinions than any other issue in the field of bankruptcy law over the past few years. This, court’s most recent analysis of the issue is contained in In re Cox, 150 B.R. 807 (Bankr.N.D.Fla.1992). In Cox, I determined that the standard for excepting a credit card debt from discharge pursuant to § 523(a)(2)(A) is “actual fraud,” focusing solely upon the debtor’s intent at that time the charges were incurred. Id at 811. In evaluating the debtor’s intent, I applied what *984has widely become accepted as a non-exclusive list of twelve factors which a court may consider in determining the debtor’s intent at the time the- charges were .made. These factors are:
1) The length of time between the charges and the filing of the bankruptcy;
2) Whether an attorney has been consulted concerning the filing of bankruptcy before the charges are made;
3) The number of charges;
4) The amount of the charges;
5) The financial condition of the debtor when the charges were made;
6) Whether the charges exceeded the credit limit of the account;
7) Whether there were multiple charges on the same day;
8) Whether the debtor was employed;
9) The debtor’s prospects for employment;
10) The financial sophistication -of the . debtor;
11) Whether the debtor’s spending habits suddenly changed; and
12) Whether the charges were incurred for luxuries or necessities.
Id. While analysis of the twelve factors is a tool for trying to determine the debtor’s intent, the factors cannot be applied in a mechanical fashion. Furthermore, the test for determining fraudulent intent is not an objective standard of whether or not a reasonable person should have known of his inability to pay, but rather a subjective standard of actual intent. In re Koop, 212 B.R. 106 (Bankr.E.D.N.C.1997). While the debtor’s ability or inability may be a factor to consider in determining the existence of fraudulent intent, such ability should not be the primary focus of the inquiry since ability to repay a debt relates to the debtor’s financial condition. Under § 523(a)(2), only a written representation of the debtor’s financial condition can be the basis for an allegation of fraud.
Finally, under the common law fraud theory applicable here, the Supreme Court in Field v. Mans, 516 U.S. 59,116 S.Ct. 437,133 L.Ed.2d 351 (1995), has made it clear that a creditor must demonstrate justifiable reliance on any alleged misrepresentation by the debtor.
In evaluating the evidence presented at trial against the twelve factors, I am unable to conclude that plaintiff has proven by a preponderance of the evidence that the defendant lacked the intent to pay the charges- on her account at the time they were made. The two convenience checks in the total amount of $4,000.00 were drawn on more than six months before defendant and her husband consulted a bankruptcy attorney and filed the bankruptcy petition. The last charge made on the account was four (4) months prior to the filing and a payment was made subsequent to the last charge on the account. The charges were not incurred for luxury items, the debtor’s spending habits did not change leading up to the bankruptcy, and the defendant is anything but financially sophisticated. While the credit limit on the account was exceeded, the total charges made by the defendant did not exceed the limit. The limit was exceeded only when the various late charges and interest were added to the account balance. While the defendant and her husband were in dire financial circumstances at the time the charges were made, the evidence establishes that she was not aware of those circumstances. The facts that a payment was made after the last charge was incurred and that the defendant and her husband sought assistance from Consumer Credit Counseling are further evidence of a lack of intent to defraud. Based on the foregoing analysis, I find that plaintiff has not demonstrated by the preponderance of the evidence that the defendant did not intend to repay the debt when the charges were incurred.
Further, regardless of the debtor’s intent, plaintiff failed to present any evidence that it justifiably relied on any representations, implied or otherwise, that defendant had the intent or the ability to make payments. Plaintiff presented absolutely no evidence that it did anything to determine whether or not this defendant had even the slightest ability to repay a $5,000.00 line of credit. The facts of this case clearly establish that at the time the defendant was of*985fered the credit card she, individually, had absolutely no ability to pay, and it is inconceivable that any kind of credit check on defendant would have suggested that she could pay. Where, as in this case, it appears that the credit card issuer has not shown any credit investigation prior to issuing the credit card, the court cannot find that it justifiably relied on any representations, fraudulent or otherwise made by the defendant. See, F.C.C. National Bank v. Cacciatore, (In re Cacciatore), 209 B.R. 609 (Bankr.E.D.N.Y.1997). Even had plaintiff performed a credit check, given defendant’s financial condition it would be extremely difficult to find that any reliance was justified.
My finding that the debt in the instant case is dischargeable should not in any way be construed as condoning the financial irresponsibility of the defendant. She apparently felt free to purchase whatever she wanted by utilizing the credit card, without ever wondering whether she and her husband could pay off the account. However, the irresponsibility of the plaintiff in initially making the offer of credit, and then practically throwing money at her in the form of a preprinted $3,000.00 convenience cheek is appalling. Before the issuer of a credit card can hope to have any claims declared nondischargeable, it must demonstrate that it exercised at least some degree of diligence in determining the credit worthiness of the recipient.
Based on the foregoing findings and conclusions, made in accordance with Fed. R.Bankr.P. 7052, I find that the claim of plaintiff First Deposit National Bank is not excepted from discharge. A separate final judgment will be entered in accordance herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492674/ | ORDER GRANTING RIVERWOOD COMMUNITY DEVELOPMENT DISTRICT AND INDENTURE TRUSTEE’S MOTION FOR RELIEF FROM DEFAULT AND DEFAULT JUDGMENT (DOC NOS. 32 & 39) AND ORDER GRANTING INDENTURE TRUSTEE’S MOTION TO INTERVENE (DOC. NO. 37)
ALEXANDER L. PASKAY, Chief Judge.
This is a Chapter 11 case and the matters under consideration in this adversary proceeding are three Motions, the first of which is a Motion for Relief from Default and Default Judgment filed on October 3, 1997 by Riverwood Community Development District (RCDD) seeking relief from the Partial Final Judgment entered by this Court on September 23, 1997 by default. The second is a Motion for Relief from Default and Default Judgment which was filed on October 17, 1997 by First Union National Bank of Florida, as Indenture Trustee (First Union). Finally, First Union also filed a Motion to Intervene on October 15, 1997, seeking to intervene in this adversary proceeding as a defendant. Plaintiff Select Management Holdings, Inc. (Select) vigorously opposed the Motions. A brief recap of the current procedural posture of this litigation should be helpful in order to place these three Motions under consideration in proper focus.
On June 4, 1997 the Debtor Riverwood Land Company, L.P. (Debtor) and its affiliates filed their separate Petitions for Relief under Chapter 11. On July 25, 1997, Select filed its Complaint seeking to subordinate all the claims of Defendants Robert M. Taylor, Bryan P. Borwin, Lander Income Fund, L.P., B. Charles Ames, The Mariner Group, Inc. and RCDD to its claims or, in the alternative, to equitably subordinate all the Defendants’ claims of the Riverwood Noteholders or, in the alternative, to classify all Defendants, claims as equity claims.
MOTION TO SET ASIDE THE FINAL JUDGMENT BY DEFAULT
The Summons, along with a copy of the Complaint was served by first class mail on “The Riverwood Community Development *987District” in care of Thomas C. Smith, Chairman at 4100 Riverwood Drive Port Charlotte, FL 33953. In addition, Select also mailed a Summons along with a copy of the Complaint by registered mail, return receipt requested. It is admitted that the receipt was acknowledged by a signature on the green card apparently of an agent of Thomas C. Smith, although not by the signature of Thomas C. Smith. According to the Affidavit of Thomas C. Smith filed in support of the Motion on October 3, 1997, the address was not the address of the Debtor. Rather, the address was a place where Mr. Smith had been receiving some of his mail. RCDD does not challenge the sufficiency of the service but merely relies on these facts in support of its contention that RCDD’s failure to timely respond to the Complaint was due to excusable neglect.
In Pioneer Investment Services Co. v. Brunswick Associates, L.P., 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), the United States Supreme Court elaborated on the definition of “excusable neglect.” The Court concluded that the determination of what factors constitute excusable neglect is “... an equitable one, taking account of all relevant circumstances surrounding the party’s omission.” Id. at 395, 113 S.Ct. at 1498. These factors include (1) danger of prejudice to the debtor; (2) the length of delay and its potential impact on judicial proceedings; (3) the reason for the delay, including whether it was within the reasonable control of the movant; and (4) whether the movant acted in good faith. Id.
Select agrees with the general principles set forth in Pioneer, but argues that the record falls short of facts which would warrant a conclusion that RCDD did, in fact, meet its burden as set forth in Pioneer. Select alleges that Thomas C. Smith’s conduct was inexcusable neglect since he was properly served and he disregarded the command of the Summons. RCDD argues, however, that their omission was not the type of negligence contemplated by Pioneer. RCDD further contends that they acted in good faith and that the delay was not within their reasonable control. RCDD contends that the Summons were not mailed to its regular place of business and that the oversight of not responding to the Complaint is understandable in light of the fact that it came in just as Mr. Smith’s other personal mail did, not specifically listing RCDD separately from the other defendants. Lastly, RCDD argues that if the Motion is not granted, RCDD will be prejudiced and that the note holders will not be prejudiced. RCDD contends that if it is unable to defend against the subordination of claims sought by Select, it will be in default and the holders of the bond will be greatly harmed because they will receive the funds they are entitled to receive under the first bond issue. Moreover, the noteholders do not have a mortgage on the real estate holdings of the Debtor. They are merely holders of unsecured notes although Chess Trustee Corporation, acting as Indenture Trustee, has a mortgage which is junior to the statutory lien of RCDD. Chess Trustee Corporation also claims to have a security interest on intangibles, the funds generated from the sale of lots and possible funds generated from other sources.
In Cheney v. Anchor Glass Container Corp., 71 F.3d 848 (11th Cir.1996), the Eleventh Circuit Court of Appeals followed the reasoning of Pioneer and applied a balance test based upon the relevant circumstances for the delay. Ultimately, the Court in Cheney determined the late filing to be an innocent oversight and found no evidence of bad faith which would warrant forfeiture of the Appellant’s right to a full trial of his cause. Id. at 850. See also Advanced Estimating System Inc. v. Riney, 77 F.3d 1322 (11th Cir.1996) (citing Pioneer’s standard of excusable neglect as an “elastic concept” based upon the court’s discretionary judgment.)
Further, in support of RCDD’s timely filed Motion, RCDD relies on the Eleventh Circuit case of, Florida Physician’s Insurance Company v. Ehlers, 8 F.3d 780 (11th Cir.1993). There, the Court reasoned that defaults are viewed with disfavor because of the strong policy of determining cases on their merits. Id. at 783. In Florida Physician’s Insurance Company, supra, the court followed the reasoning that in order to establish mistake, inadvertence, or excusable neglect, the defaulting party must show that: (1) it had a *988meritorious defense that might have affected the outcome; (2) granting the motion would not result in prejudice to the non-defaulting party; and (3) a good reason existed for failing to reply to the complaint. Id. The Court reasoned that since the burden of proving all three elements was not met, the Court would not allow the entry of a default judgment, instead favoring a trial. on the merits of the case.
In the present case, RCDD contends that it has a meritorious defense. The basis of the Complaint is an alleged misrepresentation in connection with the issuance of the unsecured promissory notes which had nothing to do with the transaction surrounding the sale of the notes. RCDD, therefore, requests that this Court set aside the entry of the default judgment and instead allow a trial on the merits of its cause of action for fraudulent misrepresentation.
It should be pointed out that as a general proposition, courts do not favor disposition of legitimate disputes by default and lean over backwards to relieve defaults if the party seeking the relief was diligent and had a legitimate defense against the claim asserted. While it is true that the party seeking the relief has the burden pointed out by the Supreme Court in Pioneer, supra, and the Eleventh Circuit in Cheney, supra; Advanced Estimating System, supra; &nd Florida Physician’s, supra, the burden is not difficult to overcome. A plausible explanation which supports the relief sought shall suffice and warrants the granting of such relief. In the present instance, the Court having reviewed the relevant portion of the record is satisfied that, in fairness, RCDD and First Union should be entitled to present their defenses and, therefore, this Court finds that their Motions well taken and should be granted.
MOTION TO INTERVENE
The final matter under consideration is a Motion to Intervene filed by First Union. First Union requests that this Court grant its Motion to Intervene which would allow them to join as a defendant in the above-captioned adversary proceeding in order to protect the bondholders of the first bond •issue pursuant to the Indenture Trust. The right to intervene is governed by F.R.Civ.P. 19 and F.R.Civ.P. 20 as adopted by F.R.B.P. 7019 and F.R.B.P. 7020. Rule 7019, provides that a person shall be joined as a party in action,
... except that (1) if an entity joined as a party raises the defense that the court lacks jurisdiction over the subject matter and the defense is sustained, the court shall dismiss such entity from the adversary proceeding and (2) if an entity joined as a party properly and timely raises the defense of improper venue, the court shall determine, as provided in 28 U.S.C § 1412, whether the party shall be transferred to another district or whether the entire adversary proceeding shall be transferred to another district.
In addition, Rule 7020, provides,
All persons may join in one action as defendants if they assert any right to relief jointly, severally, or in the alternative in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all these persons will arise in the action.
This Court is satisfied that under F.R.B.P. 7020, a permissive joinder of the parties is appropriate in the present instance and, therefore, First Union’s Motion to Intervene in the above-captioned adversary proceeding is well taken.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motions For Relief From Default and Default Judgment filed by RCDD and First Union be, and the same are hereby, granted and the Partial Final Judgment of Default Against Defendants Taylor, Brown and The Riverwood Community Development District entered on September 23, 1997, is hereby set aside. The Defendants shall have fifteen (15) days from the date of this Order to file their respective answers or other responsive pleadings to the Complaint.
It is further
ORDERED, ADJUDGED AND DECREED that the Motion to Intervene filed *989by First Union be, and the same is hereby granted. First Union is authorized to intervene and shall have fifteen (15) days from the date of this Order to file an answer or other responsive pleading to the Complaint. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492675/ | ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
GEORGE L. PROCTOR, Bankruptcy Judge.
This proceeding is before the Court upon Plaintiff’s Motion for Summary Judgment on Claim for Unpaid Original Freight Charges and Interest Thereon. After a hearing on December 18, 1997, the Court makes the following Findings of Fact and Conclusions of Law:
FINDINGS ÓF FACT
1. Olympia Holding Corporation (Debtor) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on October 16, 1990. An Order converting the debt- or’s case to a Chapter 7 case was entered on March 11,1991.
2. Lloyd T. Whitaker (Plaintiff) was appointed Trustee in the Chapter 11 ease, and became the Chapter 7 Trustee after the conversion.
3. Plaintiff filed a Complaint for Turnover of Property and for Money Judgment against Defendant on September 3,1991.
4. The second amended complaint, filed on September 24,1997, seeks the turnover of money owed to Plaintiff, plus interest, as a result of unpaid freight services rendered by the debtor to the defendant.
5. On October 17, 1997, the plaintiff filed a Motion For Summary Judgment on Claim for Unpaid Original Freight Charges, seeking $5,025.96, plus prejudgment interest.
6. The defendant filed a Memorandum of Law in Opposition to Plaintiffs Motion for Summary Judgment pn December 12, 1997. The defendant does not dispute Plaintiffs claim for $5,025.96 for unpaid, original freight bills. The defendant argues that prejudgment interest should not be assessed.
7. A hearing on the plaintiffs motion was held on December 18,1997.1
CONCLUSIONS OF LAW
Plaintiff is entitled to recover $5,025.96 from the defendant for unpaid freight charges. The claim is in the nature of a breach of contract claim, and the Court exercises its discretion to award prejudgment interest to Plaintiff.2 Plaintiff is entitled to prejudgment interest from the date of shipment at the rate set by 28 U.S.C. § 1961 as of the date of hearing, December 18, 1997 (5.468%). It is,
ORDERED:
1. Plaintiffs Motion for Summary Judgment is granted.
2. The Court will enter a separate judgment in favor of Plaintiff in accordance with this Order.
. The hearing was noticed to defendants who have similar adversary proceedings pending before this Court, and the Honorable C. Timothy Corcoran, III, United States Bankruptcy Judge, Middle District of Florida, Tampa Division. John Cutler and Llamar Smith, counsel for defendants in similar adversary proceedings, were present at the hearing in opposition to Plaintiff's Motion for Summary Judgment.
. Plaintiff has suggested in his proposed Order and Judgment that prejudgment interest is to be compounded annually in accordance with 28 U.S.C. § 1961(b). This issue was not addressed at the hearing, and the Court declines to compound the prejudgment interest annually. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492676/ | ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on December 4, 1997, on the Plaintiff, Citizens Bank of Rhode Island’s (“Citizens”), Motion for Summary Judgment. Citizens filed this adversary proceeding to determine the validity, extent and priority of its security interest in virtually all of the assets of the estate, and to require the Trustee to turnover the proceeds from the liquidation of Citizen’s collateral. The Trustee filed an Objection and Counterclaim against Citizens under 11 U.S.C. § 553, alleging that Citizens improperly setoff $291,-924 in the ninety days preceding the bankruptcy.
In considering requests for summary judgment, courts in this Circuit use the following guidelines:
[Sjummary judgment should be bestowed only, when no genuine issue of material fact exists and the movant has successfully demonstrated an entitlement to judgment as a matter of law. See Fed.R.Civ.P. 56(c). As to issues on which the movant, at trial, would be obligated to carry the burden of proof, he initially must proffer materials of evidentiary or quasi-evidentiary quality ... that support his position.... When the summary judgment record is complete, all reasonable inferences from the facts must be drawn in the manner most favorable to the nonmovant.... This means, of course, that summary judgment is inappropriate if inferences are necessary for the judgment and those inferences are not mandated by the record.
Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 763 (1st Cir.1994) (citations omitted) (footnote omitted).
*97At oral argument, the Trustee conceded the merits of Citizens’ Complaint, leaving in dispute only those raised in the Trustee’s Counterclaim. As to these, we find that genuine issues of material fact exist, and that neither party is entitled to summary judgment.
We agree with the Trustee’s contention that Citizens’ actions on April 16, 1997, fall within the scope of Section 553 as a set off and cannot be classified as merely a foreclosure of its collateral. On the other hand, we agree with Citizens’ interpretation of the improvement in position test of Section 553(b). If Citizens is a fully secured creditor, i.e., not underseeured, there can be no insufficiency under Section 553(b) and therefore no recoverable setoff. See Moody & Newton, Inc. v. Sun Bank/Suncoast, N.A. (In re Moody & Newton, Inc.), 64 B.R. 211, 212 (Bankr.M.D.Fla.1986); Quinn v. Montrose State Bank (In re Intermountain Porta Storage, Inc.), 74 B.R. 1011, 1017 (D.Colo.1987). Since the dispositive issue, i.e., the value of the collateral securing Citizens’ claim is disputed, this matter is not ripe for summary judgment.
The parties are directed to deposit the proceeds of the sale of the collateral into a joint escrow account, pending the resolution of the Trustee’s Counterclaim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492724/ | *345
MEMORANDUM
JOHN C. MINAHAN, Jr., Bankruptcy Judge.
This Chapter 12 bankruptcy case presents the question of whether the debtor-in-possession may obtain post-confirmation financing under terms which grant the lender priority over allowed secured claims provided for in the confirmed plan. I conclude that the plan is binding upon the parties in accordance with its terms, and that secured creditors holding first liens in the debtor’s property may not be subordinated to post-confirmation financiers under authority of section 364 of the Bankruptcy Code.
Under the terms of the confirmed plan in this case, Nebraska State Bank (the “Bank”) holds a first lien on machinery, livestock, and certain real estate of the debtor. The debtor seeks authority of the court under Section 364(d)(1) of the Bankruptcy Code to borrow funds for its 1998 livestock expenses from a third party lender, and to grant the third party lender a security interest senior in priority to the first lien held by the Bank under the confirmed plan.
The debtor asserts that under authority of § 364(d)(1), the court may authorize the debtor to grant a first priority lien to the new lender. The debtor acknowledges that the confirmed plan provides that the Bank shall retain its first priority lien until it is paid in full. But, the debtor asserts that the Bank’s interest in collateral will be adequately protected even if the third party is granted a senior lien. The debtor then asserts that the senior lien is authorized under § 364(d)(1).
I conclude that section 364(d)(1) does not apply to post-confirmation borrowings. The confirmation of a Chapter 12 plan vests all the property of the estate in the debtor. See 11 U.S.C. § 1227(b). As stated by Judge Conrad in the context of a Chapter 11 case, wherein § 1141(b) vests property of the estate in the debtor upon confirmation:
By its express terms, § 364(d)(1) only authorizes a superpriority lien on “property of the estate.” After confirmation, no property remains in the estate to which the superpriority lien can attach.
See In re Hickey Properties Ltd., 181 B.R. 173, 174 (Bankr.D.Vt.1995).
Furthermore, consistent with § 1225(a)(5)(B), the confirmed plan in this case provides that the Bank shall retain its liens until its claim is paid in full. Section 364(d)(1) should not be construed to impair the rights of a secured creditor under a confirmed plan. Under section 1227(a), the plan is binding on the parties according to its terms, and the debtor does not have the right, after confirmation, to subordinate the Bank’s claim. Such subordination would be contrary to the express terms of the plan. The new lender could be granted a lien senior to that of the Bank only if the plan provided for such subordination.
I therefore conclude that the Debtor’s Supplemental Application to Incur Secured Indebtedness (Fil.# 90) is denied, and that the objection by Nebraska State Bank (Fil.# 93) is sustained. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492725/ | ORDER
JOYCE BIHARY, Bankruptcy Judge.
This Chapter 11 case involves questions regarding the applicability of the doctrines of waiver and excusable neglect to the 60-day deadline in 11 U.S.C. § 365(d)(4) for assuming a non-residential lease. Proeedurally, this case is before the Court on several motions relating to a lease between debtor Federated Food Courts, Inc. (“Federated”) and Magnolia Bluff Factory Shops Limited Partnership (“Magnolia”). The debtor leases certain real property from Magnolia to operate a food court in a shopping mall in Darien, Georgia. Magnolia filed a motion to dismiss the ease or to have the automatic stay lifted, alleging non-payment of post-petition rent and seeking relief to proceed with eviction proceedings against the debtor. Debtor filed a motion to extend the time to assume or reject the lease one day after the 60-day deadline set forth in 11 U.S.C. § 365(d)(4). Magnolia objected, arguing that this late filing resulted in an automatic rejection of the lease, that debtor’s motion to extend must be denied, and that debtor’s case should be dismissed or Magnolia should be granted relief from the automatic stay to repossess the premises. Debtor argues that Magnolia has waived any rights to assert automatic rejection under § 365(d)(4) and that the late filing of debtor’s motion to extend the time to assume the lease was the result of excusable neglect, such that the debtor should still have an opportunity to assume the lease. After reviewing the record and the briefs submitted, the Court concludes that the facts do not support a finding of waiver. However, the Court invites counsel to give more thoughtful consideration as to whether the Court has the authority to enlarge the time deadline in § 365(d)(4), if the Court finds that the late filing was the result of excusable neglect.
I. Facts
The parties stipulated to a number of facts. On January 13, 1995, Universal Hospitality Corporation (“Universal”), as tenant, entered into a lease for the operation of a food court at Magnolia Bluff Factory Shops in Darien, Georgia with Prime Retail, L.P. (“Prime Retail”), as landlord (the “Lease”). Pursuant to an “Assignment of Lease Agreement” dated December 1, 1995, the debtor Federated is the successor in interest and assignee of all of Universal’s rights and obligations as tenant under the Lease. Magnolia is the successor in interest to Prime Retail as landlord under the Lease.
Debtor filed this Chapter 11 case on November 28, 1997. On December 11, 1997, Magnolia sent a letter to the debtor’s parent corporation, demanding payment of the post-petition rent in the amount of $20,514.06 that Magnolia claimed was due under the Lease for December of 1997. On December 17, 1997, debtor’s counsel sent a reply letter to Magnolia disputing the amount of rent Magnolia claimed was owed under the Lease, and setting forth the debtor’s contention that the Lease had been verbally modified to change the amount of rent owed under the Lease. Debtor contended that under the alleged modifications, Magnolia was entitled to 10% of the December sales, net of sales tax, and *392the letter advised that debtor would pay December rent during the first week of January. On December 24, 1997, Magnolia’s in-house counsel delivered a letter to debtor’s counsel which (i) denied debtor’s contention that the Lease had been modified to change the amount of rent owed under the Lease, and (ii) demanded full payment of all post-petition rent which Magnolia again claimed was in the amount of $20,514.06.
On or about January 6, 1998, debtor mailed a check for $7,960.61 to Magnolia as the amount of December rent debtor claimed was owed under the Lease, as allegedly modified. The cheek was deposited by Magnolia and cleared the debtor’s bank account. On January 9, 1998, Magnolia sent a letter to counsel for the debtor, demanding payment of January rent, which Magnolia claimed was owing in the amount of $19,231.93.
On January 15, 1998, the first meeting of creditors was held pursuant to 11 U.S.C. § 341, at which time the debtor informed Magnolia’s counsel that the debtor intended to litigate the issue of the enforceability of the alleged modification to the Lease, and to assume the Lease if the modification were upheld. Debtor and its counsel further stated at that meeting that if the alleged modification were not upheld, debtor’s reorganization efforts would fail.
On January 21,1998, Magnolia filed a “Motion to Dismiss or in the Alternative Motion for Relief from the Automatic Stay.” The motion alleged, among other things, that debtor had failed to pay all of the post-petition rent which Magnolia claimed was owed under the Lease. This motion was set for a hearing on February 11,1998, by Order and Notice entered January 23, 1998.1 On January 28, 1998, debtor filed a “Motion to Extend Time Within Which to Assume or Reject Unexpired Lease of Non-Residential Real Property” (the “Motion to Extend”), along with a proposed Order and Notice setting a hearing date of February 11, 1998 on the Motion to Extend and providing that the time to assume or reject would be extended through the hearing date. The proposed Order and Notice was entered on February 3, 1998. On January 28, 1998, debtor also filed a complaint against Magnolia (Adversary Proceeding No. 98-6060), seeking, among other things, a declaratory judgment as to whether the Lease had been modified.
On or about February 4, 1998, debtor mailed a check for $4,674.90 to Magnolia as the amount of January rent debtor claimed was owed under the Lease, as allegedly modified. To date, debtor’s check for $4,674.90 has not been deposited by Magnolia, and the check has not cleared debtor’s bank account.
On February 9, 1998, at approximately 5:00 p.m., Magnolia’s counsel contacted debt- or’s counsel and informed him that Magnolia believed debtor’s Motion to Extend was untimely filed, as it was filed 61 days rather than 60 days after the case was commenced. It is undisputed that both debtor’s Motion to Extend and debtor’s complaint for declaratory judgment were filed on January 28, 1998, which is 61 days after the Chapter 11 case was filed. Debtor’s counsel contends, and Magnolia has not disputed, that the filing of the motion and complaint 61 days after the case was commenced, as opposed to 60 days, occurred as a result of an honest mistake in calculating the number of days which had elapsed since the case was filed. It is undisputed that the late filing was not the result of any improper conduct or fraud. Upon learning of the mistake, debtor’s counsel promptly wrote the Court a letter on February 10, 1998, with a copy to Magnolia’s counsel, explaining the miscalculation. Debtor’s counsel explained that he knew he filed the bankruptcy case the day after Thanksgiving, but he believed the day after Thanksgiving was November 29, instead of November 28. Thus, his calculation was one day off.
On February 10, 1998, Magnolia filed a supplemental brief, arguing that the Lease had been automatically rejected pursuant to 11 U.S.C. § 365(d)(4). On the same date, debtor filed a motion to assume the Lease, as allegedly modified. On February 11, 1998, the Court held the scheduled status confer*393ence and hearings. After hearing argument from counsel, the Court instructed the parties to submit stipulated facts and gave counsel time to file briefs as to whether the doctrines of waiver or excusable neglect applied.
On February 11, 1998, Magnolia sent a letter to debtor’s counsel signed by Allen Underwood as general manager, demanding the rent payment for February, which Magnolia claimed was owing in the amount of $19,231.93. Two days later, on February 13, 1998, Magnolia’s bankruptcy counsel Brad Baldwin delivered a letter to debtor’s counsel, stating, inter alia, that Magnolia had not deposited debtor’s cheek for $4,674.90; that Magnolia disputed any contention that the check constituted the correct amount of rent owed under the Lease; and that Magnolia did not waive its claim that the Lease was rejected as a matter of law on January 27, 1998.
On February 17, 1998, Magnolia’s counsel Mr. Baldwin wrote debtor’s counsel, advising him that the February 11, 1998, letter sent by Mr. Underwood was a form letter written without prior knowledge or notification of Magnolia’s counsel, and that Magnolia did not waive any claim that the Lease with Federated was rejected as a matter of law on January 27,1998.
The parties seem to dispute whether the debtor is properly operating the food court. Magnolia submitted an affidavit, attaching some customer complaints. Debtor submitted an affidavit by its president to the effect that it is operating successfully. Whether debtor’s food service is satisfactory is not germane to the limited issues now before the Court, and the Court accordingly makes no findings on the adequacy of the product delivered by the debtor.
II. Legal Analysis
Section 365(d)(4) of the Bankruptcy Code contains special time limitations for assuming or rejecting leases of non-residential real estate under which the debtor is a lessee. The statute provides, in pertinent part:
[I]f the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor.
This provision was added to the Bankruptcy Code by the Bankruptcy Amendments and Federal Judgeship Act of 1984, and was “intended to reduce the time that a lessor must wait either to reacquire property or learn that the debtor or trustee had decided to assume the benefits and burdens of the lease.” 3 Lawrence P. King, Collier On Bankruptcy ¶ 365.04[3] at 365-32 (15th ed.1997). Although § 365(d)(4) refers to the “trustee,” the Bankruptcy Code provides that the debtor-in-possession “shall have all the rights ... and shall perform all the functions and duties ... of a trustee serving in a case” under Chapter 11. 11 U.S.C. § 1107(a); see South Street Seaport Ltd. Partnership v. Burger Boys, Inc. (In re Burger Boys, Inc.), 94 F.3d 755, 758 n. 3 (2d Cir.1996).
Pursuant to 11 U.S.C. § 365(d)(4), a debtor’s failure to file a timely motion to assume or a motion to extend the time to assume or reject an unexpired lease of nonresidential real property results in the automatic rejection of that lease as a matter of law. See Mutual Life Ins. Co. v. Dublin Pub, Inc. (In re Dublin Pub, Inc.), 81 B.R. 735, 737 (Bankr.N.D.Ga.1988); Ok Kwi Lynn Candles, Inc., 75 B.R. 97, 100 (Bankr.N.D.Ohio 1987). The date of the order for relief in this case was November 28, 1997. The 60-day deadline for filing a proper motion expired on January 27, 1998. Debtor did not file its motion for an extension of time to assume or reject the Lease until January 28, 1998, one day after the deadline. Thus, it would appear that the Court does not have the authority to grant an extension of time for the debtor to assume or reject the Lease.
Debtor offers two arguments in the hopes of avoiding the determination that the Lease has been automatically rejected. First, debt- or argues that Magnolia has waived its right *394to assert the automatic rejection provision of § 365(d)(4). Magnolia does not dispute that waiver is available as a defense here. See Ranch House of Orange-Brevard, Inc. v. Gluckstern (In re Ranch House of Orange-Brevard, Inc.), 773 F.2d 1166 (11th Cir.1985) (where the Eleventh Circuit recognized the continued validity of waiver as a defense to the argument that a lease has been rejected as a matter of law); see also In re Haute Cuisine, Inc., 57 B.R. 200 (Bankr.M.D.Fla.1986); In re T.F.P. Resources, Inc., 56 B.R. 112 (Bankr.S.D.N.Y.1985).
Courts have applied a traditional waiver analysis to the 60-day deadline in § 365(d)(4). A waiver requires, “(1) the existence at the time of the waiver of a right, privilege, advantage, or benefit which may be waived; (2) the actual or constructive knowledge thereof; and (3) an intention to relinquish such right, privilege, advantage, or benefit.” Haute Cuisine, 57 B.R. at 203. The waiver “may be expressed or implied from conduct,” but when waiver is implied from conduct, “such conduct must make out a clear case of waiver.” Id.
The facts argued by debtor do not support a finding of waiver. First, debtor asserts that at the first meeting of creditors, debtor informed Magnolia that debtor intended to litigate the issue of the modification of the lease and to assume the lease if the modification were upheld. Debtor argues that Magnolia did not or express any opposition to this procedure and that silence at this meeting amounts to a waiver. The first meeting of creditors was held on January 15, 1998, twelve days before the expiration of the deadline under § 365(d)(4). The failure by Magnolia’s counsel to make a responsive statement at the § 341(a) meeting cannot possibly demonstrate an intention by Magnolia to relinquish the right to assert automatic rejection under § 365(d)(4), if the debtor failed to file a timely motion to assume by January 27, 1998. In fact, only six days after the first meeting of creditors, on January 21, 1998, Magnolia filed a motion to dismiss and a motion for relief from the automatic stay, making it perfectly clear that Magnolia sought possession of the premises.
Second, debtor makes much of the fact that Magnolia received and cashed a check for December rent in the amount of $7,960.61. Debtor sent the check on January 6, 1998, before the § 365(d)(4) deadline for assumption. Magnolia correctly points out that § 365(d)(3) of the Bankruptcy Code contains an anti-waiver provision regarding a landlord’s receipt of rental payments. This subsection requires the debtor to timely perform obligations under an unexpired lease of non-residential real property, until the lease is accepted or rejected. The last sentence of § 365(d)(3) provides as follows: “Acceptance of any such performance does not constitute waiver or relinquishment of the lessor’s rights under such lease or under this title.” Thus, Magnolia’s acceptance of rent before the lease was assumed or rejected, i.e., within the 60-day period, is not a waiver of Magnolia’s right to claim the lease was rejected on January 28, 1998. See In re Urbanco, Inc., 122 B.R. 513, 517 (Bankr.W.D.Mich.1991); In re Dial-A-Tire, Inc., 78 B.R. 13, 16 (Bankr.W.D.N.Y.1987); In re Re-Trac Corp., 59 B.R. 251, 256-57 (Bankr.D.Minn.1986).
Debtor similarly argues that waiver arises from Magnolia having received a rent payment for January, which payment debtor made in early February. However, Magnolia never cashed this check, and Magnolia’s counsel’s letter of February 13,1998, made it clear that Magnolia was insisting on, among other things, asserting its rights under § 365(d)(4).
Debtor also contends that Magnolia’s letter dated February 11, 1998, demanding payment under the Lease is inconsistent with the position that the Lease had been rejected and amounts to a waiver. Debtor cites In re Dulan, 52 B.R. 739 (Bankr.C.D.Cal.1985) to support this argument. The facts in Dulan were quite different. There, the landlord’s counsel wrote debtor’s counsel inviting a lease assumption and urging debtor’s counsel to revise the Chapter 13 plan to provide for an assumption of the lease. Here, the letters written by landlord’s counsel dated February 13 and February 17, 1998, do not in any way invite lease assumption and in fact make it quite clear that Magnolia maintains the *395Lease was rejected by operation of law under § 365(d)(4). Moreover, Magnolia’s counsel filed briefs arguing automatic rejection on February 10,1998, and took the position that the Lease was rejected in open court on February 11, 1998. In the face of the briefs filed on February 10, 1998, the position announced in open court on February 11, 1998, and the letters written by landlord’s counsel on February 13 and 17, 1998, a collection letter by Magnolia’s general manager on February 11, 1998, is not clear evidence of Magnolia’s intent to relinquish its rights under § 365(d)(4).
Finally, on March 9,1998, debtor filed a supplemental brief in which it alleged additional facts pertaining to a buffet provided by debtor for some 40 guests of Magnolia. Debtor attached a copy of a letter dated February 25, 1998, from Ms. Daniel, associate general counsel at Prime Retail, addressed to debtor’s counsel, requesting an estimate of the price of a buffet for 40 guests. Debtor also attaches a copy of a letter dated March 4, 1998 from Magnolia’s marketing director, thanking and complementing debtor on the buffet. Debtor suggests that Magnolia’s willingness to order food from the debtor and to have it included as “gross sales” under the Lease amounts to a waiver of Magnolia’s argument that the Lease has been rejected. Magnolia’s response is that Magnolia had tour guides visiting the shopping center, and that until debt- or is evicted, Magnolia has no option but to request that the debtor provide food service for shopping center customers. Under the circumstances, Magnolia’s use of the food court to feed customers is not a waiver.
Second, debtor argues that the equitable doctrine of “excusable neglect” should operate here to excuse the late filing of debtor’s Motion to Extend. Debtor relies on Fed. R. Bankr.P. 9006(b), entitled “Enlargement,” which provides, in pertinent part:
(1) In General. Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules or by a notice given thereunder or by order of court, the court for cause shown may at any time in its discretion (1) with or without motion or notice order the period enlarged if the request therefor is made before the expiration of the period originally prescribed or as extended by a previous order or (2) on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect.
(emphasis added). Debtor cites the 1993 Supreme Court decision of Pioneer Investment Svcs. Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) and urges the Court to find that the untimely filing was the result of excusable neglect.
In Pioneer, the Court considered whether an attorney’s inadvertent failure to file a proof of claim before expiration of the bar date could constitute “excusable neglect” within the meaning of Fed. R. Bankr.P. 9006(b)(1). The court examined the meaning of that term in analogous contexts, such as Fed.R.Civ.P. 60(b), and concluded that it encompasses situations in which a failure to comply is attributable to negligence. Id. at 394-95, 113 S.Ct. at 1497-98. Whether the party’s neglect of a deadline may be excused is an equitable decision turning on all relevant circumstances surrounding the party’s omission. Id. The factors to consider include (1) the danger of prejudice to the [opposing party], (2) the length of the delay and its potential impact on judicial proceedings, (3) the reason for the delay, including whether it was in the reasonable control of the movant, and (4) whether the movant acted in good faith. Id.; see also Advanced Estimating System, Inc. v. Riney (In re Advanced Estimating System, Inc.), 130 F.3d 996, 997-98 (11th Cir.1997).
The difficulty here is that Bankruptcy Rule 9006(b) is a rule governing the enlargement of time periods prescribed in other Bankruptcy Rules or court orders. Bankruptcy Rule 9006(b) refers to deadlines set by “these rules or by a notice given thereunder or by order of the court.” It does not refer to enlarging time periods prescribed by statute. The 60-day deadline for filing a motion to assume a non-residential lease, however, is set by statute, not by the Bankruptcy Rules, not by a notice given under the Bankruptcy *396Rules, and not by an order of the Court. Thus, it would seem that Bankruptcy Rule 9006(b)(1) does not give the bankruptcy court the discretion to allow a late motion to extend the time for assuming a lease, even if the mistake were the result of excusable neglect. However, the parties did not address this issue at any length in their briefs. The issue, simply stated, is whether a court can enlarge a statutory deadline using a federal rule of procedure allowing a late filing for excusable neglect. Case law outside the area of bankruptcy law would be helpful, as there are federal rules of procedure worded much like Bankruptcy Rule 9006(b)(1) which give courts discretion to enlarge time periods set by rules, upon a finding of excusable neglect. Have the courts used those other federal rules to enlarge filing deadlines set by federal statutes? Briefs on this matter must be filed and served by April 14, 1998. The Court will consider the briefs carefully and issue a ruling promptly.
. The initial status conference was also set for February 11, 1998, by Order entered January 13, 1998. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492726/ | MEMORANDUM OPINION (AMENDED)
DOUGLAS O. TICE, Jr., Bankruptcy Judge.
Debtors move for reconsideration of the court’s order entered March 20, 1998, which allowed the secured proof of claim of Haverty’s Furniture. Haverty’s counsel has filed a memorandum in opposition to debtors’ motion. This opinion incorporates the court’s order of March 20,1998.
Facts
On May 12, 1997, the court entered an order confirming the debtors’ chapter 13 plan. Debtors’ plan was on the prescribed form required by Local Rule 3015-2 of the Eastern District of Virginia, and copies were mailed to all creditors. Paragraph B-4 of the plan provided for payment of Haverty’s secured claim. The plan stated that Haverty’s collateral security had a fair market value of $2,000.00 and provided for full payment of this sum with interest. To the extent that Haverty’s proof of claim exceeded $2,000.00 it was treated as unsecured. The *525plan further provided for payment of “at least 5%” of unsecured claims.
In addition to the form language, Par. B-4 contained the following additional statement, set out in bold print:
In accordance with 11 U.S.C. § 506(d), any claim of lien above the value of the secured claim shall be void, and liens shall be released upon payment of the value set forth below, or the indebtedness, whichever is less, or upon discharge if no proof of claim is filed, [emphasis in original]
On June 9, 1997, Haverty’s, which had not objected to confirmation of debtors’ plan, filed a proof of claim in the total amount of $6,431.41. Of this sum the amount of $5,400.00 was claimed as secured and $1,031.41 was unsecured.
On January 8,1998, debtors filed an objection to Haverty’s claim which stated that the secured portion of the claim should not exceed $2,000.00 as was provided in the confirmed plan.
Following a hearing on the claim objection, the court entered an order on March 20, 1998, overruling debtors’ objection and scheduling a valuation hearing. Debtors’ present motion for reconsideration followed. Subsequently, the parties have stipulated that Haverty’s collateral has a value of $4,500.00.
Discussion And Conclusions
In their reconsideration motion, debtors rely upon a recent 4th Circuit decision which upholds in the context of a chapter 11 bankruptcy case the “firm and longstanding” principle that a final order of a court having jurisdiction over the subject matter cannot be collaterally attacked by a party who had proper notice of the entry of the order. See Spartan Mills v. Bank of America, Illinois, 112 F.3d 1251, 1255 (4th Cir.) cert. denied, — U.S. -, 118 S.Ct. 417, 139 L.Ed.2d 319 (1997). See also, Celotex Corp. v. Edwards, 514 U.S. 300,115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Debtors thus assert that the order of confirmation that approved Haverty’s secured claim at a value of $2,000.00 is res judicata and therefore takes precedence over Haverty’s proof of claim. See 11 U.S.C. § 1327(a).
However, the holding in Spartan Mills, which concerned the finality of a bankruptcy court order in an adversary proceeding, is not dispositive of this case. Both that case and this involve issues of notice. The principal question here is whether by virtue of notice contained in debtors’ chapter 13 plan, the claimant Haverty’s had “due process notice” of the cramdown valuation of its secured proof of claim so as to give preclusive effect to the order confirming the plan. See, Spartan Mills, 112 F.3d at 1255.
The same issue was addressed in my prior decision of In re Rodnok, 197 B.R. 232 (Bankr.E.D.Va.1996), where this court held that the debtors’ chapter 13 plan, which was in the form prescribed by our Local Rule 3015-2(A), did not contain sufficient notice to a secured creditor and therefore did not effect a “cramdown” of the secured claim at the value stated in the plan.1 Rodnok held that the order confirming the plan did not displace the secured creditor’s proof of claim, which asserted a higher collateral value than allowed in the plan. For this ruling the court relied upon Piedmont Trust Bank v. Linkous (In re Linkous), 990 F.2d 160 (4th Cir.1993), where under facts similar to those here the court of appeals ruled in the secured creditor’s favor, holding that the secured creditor was entitled to notice that is “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” 990 F.2d at 162.2 The court of appeals cited *526Bankruptcy Code § 506(a) and Fed. R. Bankr.P. 3012 as providing the framework for valuing collateral, noting that Rule 3012 provides that the court determine the value of a secured claim “after a hearing on notice to the holder of the secured claim.” 990 F.2d at 162. Absent notice that the secured creditor’s claim was to be valued in the plan confirmation process, the court held that the value of the creditor’s proof of claim was not fixed by the plan. 990 F.2d at 163.
Thus in Rodnok, this court also held that the confirmed chapter 13 plan did not provide appropriate notice to the secured creditor of a valuation under Bankruptcy Rule 3012 and § 506(a) so as to fix the value of the claim. Following the court’s ruling in Rod-nok, the chapter 13 trustees of the Eastern District of Virginia suggested that the court consider changing the prescribed chapter 13 plan form so as to require debtors to include what would amount to appropriate “due process notice” of the valuation of secured creditors’ claims. The proposed change would provide finality on any valuation issues in the chapter 13 confirmation order and facilitate the processing and payment of claims.
The court has recently adopted local rules changes which include the proposed modification to the chapter 13 plan form. Paragraph B-3 of the revised plan form provides the following:
B-3. CREDITORS SECURED BY PROPERTY OTHER THAN REAL ESTATE-DEBTOR TO RETAIN COLLATERAL. Creditors whose claims are secured by property other than real estate whose collateral is to be retained by the debtor shall retain their liens and be paid as indicated below. Insurance will be maintained upon such collateral at the debtor’s expense, in accordance with the terms of the contract and security agreement creating such security interest.
a. To be Paid in Full Through Trustee. Creditors named below whose claims are allowed will be paid the equivalent of 100% of the present fair market value of their collateral not to exceed the balance of the obligation, in deferred cash payments. The excess of such a creditor’s claim, over and above the fair market value of its collateral, will be paid as an unsecured claim.
Creditor:
Balance due: $
Collateral description:
Replacement value: $
Source of valuation:
Interest rate: %
Balance due to be amortized by monthly payments through trustee of $_for _months.
To be paid through the trustee on a fixed monthly basis as set forth above or on a pro rata basis.
The debtor hereby moves to value the collateral at $_ in accordance with 11 U.S.C. § 506(a), F.R.B.P. 3012, and L.B.R. 3015-2. [emphasis in original]
As set out in the court’s findings of facts, the debtors’ plan in this case has included the following additional notice to secured creditors, including Haverty’s:
In accordance with 11 U.S.C. § 506(d), any claim of lien above the value of the secured claim shall be void, and liens shall be released upon payment of the value set forth below, or the indebtedness, whichever is less, or upon discharge if no proof of claim is filed, [emphasis in original]
Although the more appropriate statutory reference would be § 506(a) rather than § 506(d), the debtors’ plan notice to Haverty’s is not all that different from the new notice in the revised court prescribed form set out above. I find the plan satisfied due process notice requirements to Haverty’s in that the notice of valuation set out in the plan “was reasonably calculated” to give Haverty’s ample notice of the fixing of the value of its secured claim at $2,000.00.3
*527The court having concluded that Haverty’s received proper notice of the valuation of its claim finds this case distinguishable from the ruling in Bodnok. Therefore the debtors’ motion to reconsider will be granted. An order will be entered sustaining the debtors’ objection to Haverty’s secured proof of claim and allowing the claim only as it is provided for in the debtors’ confirmed chapter 13 plan.
. The plan form in use at the time of Rodnok was similar to the new form set out below but excluding the bold print collateral valuation language.
. In the Spartan Mills opinion, the court of appeals sets out this quoted language, citing Lin-kous, among other sources. 112 F.3d at 1257. However, that opinion contains no other discussion of Linkous, a curious omission given the similarity of issues between the two cases. Spartan Mills also seems to sidestep the Fourth Circuit’s much discussed earlier decision in Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir.1995). 112 F.3d at 1256. The court's seeming change of direction so as to uphold final bankruptcy court orders against collateral attack, undoubtedly *526stems from the Supreme Court's Celotex opinion, 514 U.S. at 300, 115 S.Ct. 1493.
Nevertheless, I find Linkous a more compelling authority than Spartan Mills in the instant case because Linkous was a chapter 13 case involving the same valuation of collateral issue raised here.
. Certainly the notice here is much more informative than the notice found to be inadequate by the court of appeals majority in Linkous. In *527Linkous, creditors were sent only a notice of the hearing on confirmation and a summary of the debtor's chapter 13 plan; the summary made no mention of the valuation of the secured claim. 990 F.2d at 161. Even so. Circuit Judge Chapman filed a lengthy dissent, asserting that the creditor received notice which satisfied due process requirements. 990 F.2d at 163-66.
The court is mindful of the fact that in the instant case the debtors' chapter 13 plan valued Haverty’s collateral at $2,000.00, whereas in the course of their objection to Haverty’s proof of claim the debtors have stipulated a value of $4,500.00. What is significant under the new chapter 13 plan procedure adopted by the court and under the judicial atmosphere seemingly advanced by Celotex and Spartan Mills is that creditors must make even more effort to keep themselves reasonably informed so that they may timely assert their rights in bankruptcy cases. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492727/ | OPINION
LARRY LESSEN, Bankruptcy Judge.
The issue before the Court is whether the fees charged by a law firm for simple, routine Chapter 7 cases exceed the reasonable value of such services pursuant to 11 U.S.C. § 329(b).
Peter Francis Geraci obtained his license to practice law in the State of Illinois in 1974. He is also admitted to practice in five other states, several federal district courts, and two *589circuit courts. His main office is in Chicago, Illinois. In addition, he maintains satellite offices in Wisconsin, Indiana, and the Chicago suburbs. He has recently expanded his practice to the Central District of Illinois.
Mr. Geraci concentrates his practice of law in two areas: consumer Chapter 7 bankruptcy and personal injury. Mr. Geraei’s firm filed 6, 000 bankruptcy cases in 1996, 97% of which were under Chapter 7 of the Bankruptcy Code. He claims that his “firm files more bankruptcy cases than any other in the nation, and therefore, more than any other firm in the world.” He expects to do 10% to 15% of consumer bankruptcies in Central Illinois in 1997.
Mr. Geraci’s firm employs 25 attorneys. Two of those attorneys, Rhonda Sue Grey and Steven Diamond, appeared with .Mr. Geraci at a hearing on January 14, 1997. Ms. Grey has been practicing law for less than six months; Mr. Diamond has been practicing law for less than five years. Overall, six or seven of the attorneys in the Geraci firm have less than two years of experience, and most have less than five years of experience. Mr. Geraci could only identify three attorneys in his firm with more than five years of experience, and he could not even name one of them other than to describe him as someone from Wisconsin with 13 years of experience.
Mr. Geraci obtains his bankruptcy clients through referrals and television advertising. In the fall of 1996, Mr. Geraci began running his television ads on local television stations. The 15 eases involved in this proceeding were filed on October 18, November 26, or December 2 of 1996. The fees charged in these cases range from one at $850, three at $895, five at $995 or $1000, four at $1095 or $1100, and two at $1195. The United States Trustee believes that these fees are excessive, and filed a motion for Mr. Geraci to show cause why the fees charged in these cases is reasonable. The United States Trustee requests that any excessive fees in the no asset cases should be returned to the Debtors.
Mr. Geraci is a strong believer in the free market. He believes that the market is capable of determining attorney’s fees and that the United States Trustee and the Bankruptcy Court should not interfere with the fees mutually agreed upon by the Debtors and Mr. Geraci. The problem with Mr. Geraci’s argument is that it is based upon the fallacy that the United States has a totally free market, when in fact what we have is a regulated free market. Various federal and state agencies regulate all aspects of commerce with rules and regulations, including laws protecting consumers and the environment, regulating employer-employee relationships, antitrust activities, and securities trading. In the bankruptcy context, Congress enacted 11 U.S.C. § 329 to prevent overreaching by a debtor’s attorney and to protect the creditors. H.R. Rep. No. 595, 95th Cong. 1st Sess. 329 (1977), U.S.Code Cong. & Admin. News pp. 5963, 6285; S.Rep. No. 989, 95th Cong.2d Sess. 39-40 (1978), U.S.Code Cong. & Admin. News pp. 5787, 5825-5826. Section 329 provides as follows:
(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.
(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to—
(1) the estate, if the property transferred—
(A) would have been property of the estate; or
(B) was to be paid by or on béhalf of the debtor under a plan under chapter 11, 12, or 13 of this title; or
(2) the entity that made such payment.
Section 329(b) permits the Court to deny compensation to an attorney, to cancel an agreement to pay compensation, or to *590order the return of compensation paid if the compensation exceeds the reasonable value of the services provided. A determination of reasonableness under § 329 is largely a factual inquiry made on a ease-by-case basis. Factors to be considered in determining reasonable compensation include the time spent, the intricacy of the questions involved, the size of the estate, the rates typically charged by the local bar, the experience of the attorney, the opposition encountered, and the results obtained. In re Swartout, 20 B.R. 102 (Bankr.S.D.Ohio 1982); In re J.J. Bradley & Co., 6 B.R. 529 (Bankr.E.D.N.Y.1980). The burden of proof on all issues related to fees is on the attorney seeking the fees. NAACP v. City of Evergreen, 812 F.2d 1332, 1338 (11th Cir.1987).
Five attorneys from the Springfield Division of the Central District of Illinois testified as to the rates typically charged by the local bar for Chapter 7 cases. Alan Bourey has been practicing bankruptcy law in Decatur, Illinois, for 20 years. He concentrates in Chapter 7 and 13 work, and he works almost exclusively on behalf of debtors. He handles between 150 and 200 bankruptcy cases every year, and he is familiar with fees in the Decatur area. The average fee for a Chapter 7 case is $400 in the Decatur area. Fees range from a low of $250 to the high of $1450 charged by Mr. Geraci. Mr. Bourey charges $250 for a single person with no reaffirmations and $300 for a couple with no reaffirmations. Reaffirmations are billed at $50 each with a cap at $150 for three or more reaffirmations. If a business is involved, the fees are higher. Mr. Bourey’s fees do not generally increase if there is an asset. Adversaries are billed at $150 if settled or resolved, plus $100 per hour. Mr. Bourey testified that his fees are based on competition and his hourly rate.
Mr. Bourey reviewed the 15 eases at issue in this proceeding. He described the cases as unusually easy. None of the cases would be undesirable. He stated that he would charge between $250 and $500 for these cases. He described Mr. Geraci’s fees as unreasonably high.
George Chesley has been practicing law in Bloomington, Illinois, for 24 years. He has concentrated on debtor-creditor law for the last 15 years. He does Chapter 7s, 11s, and 13s. In 1996, he filed 75 Chapter 7 consumer eases. He testified that fees for Chapter 7 cases in the Bloomington area range from $300 to $500. He charges a flat fee of $475 for a Chapter 7 ease, and this fee includes reaffirmations and redemptions. Adversaries are billed at $120 per hour. He arrived at these fees based on his many years of experience and conversations with clients and other lawyers.
Mr. Chesley reviewed the 15 cases involved in this proceeding. He stated that he found nothing novel or complex in any of them. He would not have turned down any of these cases. He opined that an appropriate fee in these cases would be in the range between $300 and $500, with the exception of the Pittman case which has 12 secured creditors and for which he would have charged $575. He described Mr. Geraci’s fees as excessive.
Lars Eric Ostling has been practicing bankruptcy law for 20 of the 22 years that he has practiced law. His main office is in Bloomington, and he also maintains offices in Pontiac, Lincoln and Decatur. He files between 250 and 300 bankruptcy cases a year. Most of his eases are filed under Chapter 7, but he also does some Chapter 13 work and two or three Chapter 11s every year. He does not represent creditors. He testified that he charges between $350 and $400 for Chapter 7 consumer work, depending on the number of reaffirmations. He charges an additional $150 for cases in Pontiac which he described as necessary to account for travel time, but he only charges $250 for cases in Decatur because of the lower overhead in Decatur.
Mr. Ostling did not find anything novel, complex, or undesirable in any of the cases at issue. He spotted a potential substantial abuse problem under 11 U.S.C. § 707(b) in Pittman, and he was not sure why Mr. Gera-ci’s clients were intending to reaffirm on unsecured credit card debt as indicated in their Statements of Intention. He thought that Mr. Geraci’s fees were high.
*591William Krajec has been licensed to practice law since 1968, and has practiced bankruptcy law for the last 21 years, the last 20 of them in the Central District of Illinois. He represents debtors exclusively and concentrates on Chapter 7s and 13s. Last year he filed 22 bankruptcy eases a month. He is familiar with fees in the Springfield area and described his own fees as being in the lower range. He charges $325 for a case with no reaffirmations or hen avoidances and $375 for cases with reaffirmations or lien avoid-ances. The fee is the same whether there are assets, priority debt, or the case is filed on an emergency basis. His hourly rate is $95 per hour. He determined his fees based on competition.
Mr. Krajec testified that his fees would have been as quoted above for the eases at issue, with the possible exception of the Day case. The Debtors’ bankruptcy schedules in Day showed substantial equity in real estate. Mr. Krajec stated that if the Debtors wanted to retain this property he would have steered them to a Chapter 13 for which he would have charged $800. If he took Day as a Chapter 7, his fee would have been $375.
John Narmont has been practicing bankruptcy law in Springfield and Auburn for 30 years. He does Chapter 7s, 12s, and 13s. In 1996 he filed 320 bankruptcy cases. He does very little work for creditors. He is familiar with fees for Chapter 7 cases in the area, and they range from $350 to $600. He charges a flat fee of $400. This fee includes reaffirmations and lien avoidances. Mr. Narmont’s fee does not change if assets are involved.
Mr. Narmont reviewed the instant cases, and he did not find anything novel, complex or undesirable about the cases. He thought that a $400 flat fee would be reasonable in all of the cases. He expressed a concern that the schedules in some of the cases showed an intent to reaffirm on unsecured credit card debt.
Mr. Geraci discounted the testimony from the five attorneys. He described this testimony as being of “limited evidentiary value” because fees in this area are “artificially depressed,” but he could not explain what was “artificial” about the fees.
Mr. Geraci emphasized that attorney’s fees for Chapter 7 cases have been stagnant for the last 15 to 20 years. All of the attorneys who testified agreed with Mr. Geraci that they are charging about the same for Chapter 7 cases that they charged 15 to 20 years ago. Mr. Geraci explained that this was because the lawyers do not value themselves as attorneys and they are afraid to raise fees. More satisfactory explanations were offered by the other witnesses. Mr. Chesley pointed to the Supreme Court’s decision to permit lawyers to advertise as promoting competition between lawyers. All of the attorneys agreed that improvements in technology have made the preparation of bankruptcy petitions and schedules much easier than years ago. Mr. Ostling recalled preparing bankruptcy schedules with carbon paper. In addition, the huge increase in the volume of bankruptcies over the last two decades has made bankruptcy practice much more economical. Mr. Narmont explained that, with the increased bankruptcy filings, it does not take much more time to come over to the Bankruptcy Court for six hearings than it does for one hearing. Finally, Mr. Chesley noted that an increase in attorney specialization has helped to keep fees down.
Mr. Geraci offered his opinion that a fee of $350 is so unusually low that no one can make a profit at this level. This opinion was contradicted by all the attorneys who testified. They all stated that their bankruptcy work was profitable. Mr. Bourey stated that he would not be doing bankruptcy work if he was not making money. Mr. Chesley stated that his bankruptcy practice was more profitable than servicing clients on an hourly basis.
Mr. Geraci testified that he charges the same fees everywhere he practices. This assertion is difficult to verify from the cases before the Court because these cases show fees ranging from $850 to $1195. All of the cases are relatively simple cases, and there is little apparent difference in the work required by each case. In any event, *592reasonable hourly rates are determined by the prevailing market rate in the relevant legal community for similar services by lawyers of reasonably comparable skills, experience and reputation. Blum v. Stenson, 465 U.S. 886, 889 n. 11, 104 S.Ct. 1541, 1547 n. 11, 79 L.Ed.2d 891 (1984). The relevant legal community used in determining the prevailing market rate for this Court is the legal community within the Springfield Division of the Central District of Illinois. The fees charged by Mr. Geraci in Chicago, Indianapolis, Milwaukee and other cities are not relevant to the Court’s consideration of Mr. Geraci’s fees.
Mr. Ostling offered a cogent economic explanation for the reason that fees vary by community. Mr. Ostling explained that the basic fee for a Chapter 7 case in Bloomington is $400, but he charges an additional $150 in Pontiac because of the travel time involved in going to the bankruptcy hearings which are held in Kankakee. In Decatur, however, Mr. Ostling charges only $250 for a Chapter 7 ease because of his low overhead in Decatur. Mr. Ostling noted that he pays $11.86 per square foot for his rent in Bloomington and $4.50 per square foot in rent in Decatur. Moreover, competition from State Farm and other businesses in Bloomington force Mr. Ostling to pay $12 per hour for a secretary in Bloomington, but he can hire secretarial help in Decatur for only $6 per hour. Thus, the market forces so admired by Mr. Geraci result in different fees in different communities.
Mr. Geraci concedes that the Court has the power under § 329(b) to review fees where they are unreasonable. However, he argues that his fees are reasonable. He refused to answer the Court’s query as to the point at which fees become unreasonable.
Mr. Geraci argues that his fees are justified by the quality of his work. There is no evidence in these 15 cases to support Mr. Geraci’s bold assertion. The work product in these cases is certainly no better than average. These cases are very simple cases. Mr. Geraci has not filed a motion to redeem, a motion to avoid a lien, a motion for turnover, or any other motion that might require a court appearance in any of these eases. The Statements of Intent in these cases indicate an intention to reaffirm on almost everything, including unsecured credit cards. This Court does not believe that a reaffirmation on an unsecured credit card is in the best interests of debtors. The Court is particularly concerned about the statements on the schedules in Massey that the Debtors intend to contact the creditor to reaffirm the balance in full on four of the five unsecured debts, three of which are credit cards.
Mr. Geraci’s work is also not on a par with other bankruptcy practitioners in the District. In Pittman, Mr. Geraci placed Normal, Illinois, in Champaign County rather than McLean County. Mr. Geraci did not sign the Rule 2016(b) Statement in Renfro, and his signature on the Rule 2016(b) Statement was undated in Pittman and Lilly. In Parnell, Mr. Geraci did not sign a Rule 39 Affidavit, and his signature on the petition was undated.
Mr. Geraci’s motion practice leaves something to be desired. Mr. Geraci filed a Motion to Consolidate 13 cases, but only filed the motion in one case. The proper method is to file the motion in each case which is the subject of the motion to consolidate. Mr. Geraci was apparently motivated to file the one motion because the attachments to his motion would have been costly to reproduce in all 13 cases. These attachments, however, were largely irrelevant and immaterial to the issue in this case.
Mr. Geraci’s abilities as a trial lawyer also do not meet the standards one usually finds in federal court. At the close of the United States Trustee’s ease, Mr. Geraci moved for a directed verdict. As most experienced trial lawyers realize, a motion for a directed verdict is inappropriate where there is no jury to direct. The proper motion is a motion for involuntary dismissal under F.R.Civ.P. 41(b). This distinction is often important because Rule 41(b) allows the judge to rule on conflicts of evidence and credibility, unlike a *593motion to direct a verdict in a jury case where the judge may not resolve such conflicts.
Mr. Geraci’s appellate work has also been criticized. A good appellate lawyer uses his skill and experience to select an appropriate case to appeal. In addition, the filing of a timely appeal is the first step in any successful appeal. One of the myriad documents attached to Mr. Geraci’s Response to the Motion to Show Cause is the transcript of a hearing before District Judge Kocoras in Geraci v. Bryson, No. 96-C-4970 (N.D.Ill. East. Dir. Sept. 24, 1996). The transcript includes the following exchange between Judge Kocoras and Mr. Diamond of the Ger-aci firm:
The Court: And you did not file an appeal timely, although untimely you filed a motion to reconsider, which was later withdrawn. Is that what happened here?
Mr. Diamond: That is correct, your Honor.
Judge Kocoras further noted that the Ger-aci firm’s use of a motion to reconsider to toll the time to file an appeal was “a misuse of the process.” Judge Koeoras stated that the motion for reconsideration was filed without good faith. Finally, Judge Kocoras noted that the appeal over less than $200 was a waste of his time and “not good advertising” for the Geraci firm.
The Court further finds that Mr. Geraci’s service to his clients is poor. The cases before the Court indicate that it is not unusual for Mr. Geraci to delay the filing of a petition for four to six weeks. For example, the petition in Perry-Senters was signed on October 22, 1996, but not filed until December 2, 1996; Massey was signed on October 28, 1996, and filed on December 2, 1996; Minick was signed on October 14, 1996, and filed on December 2, 1996; Sams was signed on September 2, 1996, and filed on October 18, 1996; and Day was signed on September 6, 1996, and filed on October 18, 1996. The record does not reveal whether any of his clients were prejudiced by these delays. In bankruptcy, however, such delays can be costly to debtors. Mr. Geraci apparently wanted to file these petitions in bulk in order to save attorney time in attending the meetings of creditors. While this is not an unusual practice, one expects more than bargain basement service for the premium fee charged by Mr. Geraci.
Mr. Geraci stated that none .of his clients have ever complained about his attorney’s fees. However, as Judge Schmetterer explained to Mr. Geraci in In re Wyslak, 94 B.R. 540 (Bankr.N.D.Ill.1988), a debtor’s approval of a fee (or a Chapter 7 trustee’s failure to question it) provides no basis for arguing that a Bankruptcy Court should not hold a fee hearing or make a determination on fees. Judge Schmetterer stated that a Bankruptcy “Court has the authority and duty to inquire independently into fees of professionals in bankruptcy matters even where no objections are filed” under §§ 329 and 330, Bankruptcy Rules 2016 and 2017, and the relevant case law. 94 B.R. at 51. See, In re Richardson, 89 B.R. 716 (Bankr.N.D.Ill.1988).
Mr. Geraci testified that his fees are quoted up front and in writing to prospective clients. However, he admitted that several of his clients testified at their meetings of creditors that Mr. Geraci did not quote his fees over the phone.
Mr. Geraci argues that the Court cannot question the reasonableness of his fees in the absence of overreaching. While it is true that the prevention of overreaching by debt- or’s attorneys was one of the motivations behind the enactment of § 329, the statute itself does not require proof of overreaching in order to find fees unreasonable. In any event, there are signs of overreaching in several of these cases. Mr. Geraci has had a number of his clients sign form affidavits which contain false or misleading information. The form affidavit provides in part as follows: “I understand that most attorneys who do this kind of [consumer Chapter 7] work regularly work for the bill collectors, banks and creditors, and so does the U.S. Trustee who will examine my petition.” Mr. *594Geraci produced no evidence in support of this wild allegation. All of the evidence before the Court indicates that the attorneys who regularly do Chapter 7 work on behalf of debtors do little or no work for creditors. The allegation against the U.S. Trustee is so preposterous that it may be rejected without further comment. The form affidavit further states that the “U.S. Trustee and Bankruptcy Judges want to hold the attorneys’ fees of debtors’ attorneys at 1975 levels” and “this results in driving smart lawyers out of the debtor bankruptcy field.” The evidence produced at trial showed that there are still a number of highly qualified lawyers practicing in the consumer debtor field in the Springfield Division of the Central District of Illinois. Finally, Mr. Geraci did not produce any of his clients at the hearing to testify in court as to their opinions on his fees. Affidavits may serve a useful purpose for matters to be decided on a motion, but they are no substitute for live testimony at a hearing.
Mr. Geraci has alleged that the United States Trustee has initiated this proceeding “in a conspiracy to restrain competition and cover up the ‘no money down’ scandal in Central Illinois.” Mr. Geraci did not produce any evidence at trial to support these allegations. A conspiracy, of course, must by definition contain more than one party, but Mr. Geraci does not identify the other conspirators. Moreover, while working on a “no money down” basis is probably not a good business practice for a bankruptcy practitioner, it is not illegal or immoral. Indeed, installment payments are contemplated by § 329(a) which requires attorneys to “file with the court a statement of the compensation paid or agreed to be paid ...” (emphasis added). More important, this issue is a red herring which is irrelevant and immaterial to the issue before the Court, which is the reasonableness of Mr. Geraci’s fees.
Mr. Geraci estimated that the attorneys in his office spend about 10 hours on each Chapter 7 case. He based this estimate on the number of attorneys in his office, the number of Chapter 7 cases his office files, the number of hours each attorney in his office works in a given week, and the fact that they only do consumer bankruptcies. He did not submit an itemized statement of his fees in any of these cases. Mr. Geraci does not like hourly billing. He thinks that it is fraudulent and unethical. He alleges that “[i]t com-munizes labor, and is a product of Marxist thinking.” He states that “[ajnyone who reads anything in the area of Law Office Economics knows that ... [hjourly billing practices are fading, and more realistic methods of charging for services have been in favor for the last 10 years.” Mr. Geraci does not cite any cases in support of his lonely crusade against hourly billing. The most distinguished attorney to practice in the Central District of Illinois, Abraham Lincoln, is said to have remarked that “A lawyer’s time and advice are his stock in trade.” Lawyers in this District have been billing clients based on their time for years. In addition, the Seventh Circuit has endorsed the lodestar fee — the number of billable hours times reasonable hourly rates — as the proper method for calculating fees in bankruptcy cases. In re UNR Industries, Inc., 986 F.2d 207, 210 (7th Cir.1993). Mr. Geraci’s argument against hourly billing is rejected.
Over 3,000 bankruptcy cases are filed in this Division each year. As such, it would be impractical for the Court to conduct a fee hearing in every case. Prior to this time, this Court has never set any type of standard for attorney’s fees for services rendered in a Chapter 7 case. However, the increasing volume of Chapter 7 cases makes it necessary for the Court to set a point at which the Court will start examining fees in Chapter 7 cases. See, In re Chellino, et al., 209 B.R. 106 (Bankr.C.D.Ill.1996) (Fines, J.); In re Barger, 180 B.R. 326 (Bankr.S.D.Ga.1995). This level is determined after a consideration of the typical obligations undertaken by Chapter 7 attorneys, the time and effort devoted to a case, and the fees charged by bankruptcy lawyers in the District. At this point in time, fees in Chapter 7 cases in the Springfield Division of the Central District of Illinois will not be questioned by the Court if they do not exceed $600.
Mr. Geraci complains that there should not be a “ceiling” or “limit” to his fees. In fact, there is no such ceiling or cap on attorney’s fees. The Court recognizes that some cases require much more time, attention and work than other cases. In the event an attorney *595determines that $600 does not adequately compensate the attorney for his legal services, the attorney may petition the Court for additional compensation. Of course, the attorney shall be required to establish the reasonableness of all attorney’s fees from the beginning of the case pursuant to § 330. Thus, the $600 figure is not a cap on fees, but rather the point at which a Chapter 7 attorney must start showing the Court that the attorney is worth the money.
In the cases before the Court, Mr. Geraci has failed to produce any evidence to suggest that his services were worth more than $575, which is the highest fee testified to by a witness in these cases. Accordingly, Mr. Geraci is directed to disgorge all fees in excess of $575 in each of these cases and return these excessive funds to the case Trustee within 15 days of the entry of this Order. The Chapter 7 Trustee is directed to determine whether these funds constitute exempt property to be returned to the Debtors or nonexempt property of the estate which should be distributed to creditors.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492728/ | OPINION
WILLIAM V. ALTENBERGER, Chief Judge.
In each of these twenty-one Chapter 7 eases, the matter before the Court is how much should be awarded as attorney fees to the attorney representing the various debtors.
The starting point of the analysis is § 329 and § 330 of the Bankruptcy Code, 11 U.S.C. § 329 and § 330. Section 329, requiring dis*597closure by a debtor’s attorney, provides in pertinent part as follows:
§ 329. Debtor’s transactions with attorneys.
(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, ... for services rendered or to be rendered in contemplation of or in connection with the case by such attorney ...
(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive.
Section 330, setting forth the basis for allowing compensation, provides in pertinent part as follows:
§ 330. Compensation of officers.
(a)(1) After 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 ... professional person ...
(A) reasonable compensation for actual, necessary services rendered by the attorney ...; and
(B) reimbursement for actual, necessary expenses.
(2) The court may, ... award compensation that is less than the amount of compensation that is requested.
(3)(A) In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including—
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; and
(E)whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
The 1997 Collier pamphlet edition of the Bankruptcy Code contains the following editor’s note:
[Ed. Note: Section 224 of the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, rewrote section 330(a). In doing so, the 1994 Act added two subparagraphs numbered 330(a)(3)(A). It appears that the first reference to paragraph 330(a)(3)(A) is extraneous.]
The legislative history to § 329 provides in part as follows:
Payments to a debtor’s attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor’s attorney, and should be subject to careful scrutiny.
As to the legislative history of § 329, Collier states:
Under prior law, as under the Code, compensation of the attorney for the debtor was scrutinized more closely than the compensation of other officers and professional persons. The rationale for such scrutiny is clearly stated in the House Report that accompanied H.R. 8200. Payments to a debtor’s attorney provide “serious potential” for both “evasion of creditor protection provisions of the bankruptcy laws” and “overreaching by the debtor’s attorney”. Accordingly, section 329 is designed in recognition of “the temptation of a failing debtor to deal too liberally with his property in employing counsel to protect him in view of financial reverses and probable failure”.
3 Collier on Bankruptcy, ¶ 329. LH, p. 329-29 (15th Rev.Ed.1997).
Bankruptcy Rules 2016 and 2017 implement the provisions of § 329 and § 330 of the Bankruptcy Code. Bankruptcy Rule 2016(b) provides in pertinent part as follows:
*598(b) Disclosure of Compensation Paid, or Promised to Attorney for Debtor. Every attorney for a debtor, whether or not the attorney applies for compensation, shall file and transmit to the United States trustee within 15 days after the order for relief, or at another time as the court may direct, the statement required by § 329 of the Code ... A supplemental statement shall be filed and transmitted to the United States trustee within 15 days after any payment or agreement not previously disclosed.
Bankruptcy Rule 2017 provides in pertinent part as follows:
(a) Payment or Transfer to Attorney Before Order for Relief. [T]he court ... may determine whether any payment of money or any transfer of property by the debtor, made directly or indirectly and in contemplation of the filing of a petition under the Code by or against the debtor or before entry of the order for relief in an involuntary case, to an attorney for services rendered or to be rendered is excessive.
(b) Payment or Transfer to Attorney After Order for Relief. [T]he court ... may determine whether any payment of money or any transfer of property, or any agreement therefor, by the debtor to an attorney after entry of an order for relief in a case under the Code is excessive, ...
In Collier’s discussion of Bankruptcy Rule 2017, it states:
Section 60d [of the Bankruptcy Act] was enacted in recognition of the “the temptation of a failing debtor to deal too liberally with his property in employing counsel to protect him in view of financial reverses and probable failure”. In re Wood, 210 U.S. 246, 253 [28 S.Ct. 621, 52 L.Ed. 1046] (1908). This rule, like § 60d of the Act and § 329 of the Code, is premised on the need for and appropriateness of judicial scrutiny of arrangements between a debtor and his attorney to protect the creditors of the estate and the debtor against overreaching by an officer of the court who is in a peculiarly advantageous position to impose on both the creditors and his client.
9 Collier on Bankruptcy, App.2017[l] p.2017-12.
In determining whether a debtor’s attorney’s fees are reasonable, the District Court for the Central District of Illinois in In re Depco, Inc. No. 91-4103 (April 14, 1992) (J. McDade) directed this Court to apply the twelve factors cited in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974).
In In the Matter of First Colonial Corp. of America, 544 F.2d 1291 (5th Cir.1977), the court indicated that the determination of reasonable attorney’s fees involves a three-step process. The first step is for the bankruptcy judge to ascertain the nature and extent of the services supplied by the attorney. To this end, the attorney seeking compensation should file a statement which recites the number of hours worked and contains a description of how each of those hours was spent. The second step is to hold an eviden-tiary hearing if there are disputed issues of fact. The third step is for the Court to determine what is reasonable compensation, briefly explaining its findings and reasons upon which its award is based, including an indication of how each of the twelve factors, cited in Johnson, affected its decision. In applying these guidelines, the court in Colonial, indicated two additional considerations must be kept in mind. First, the strong policy of the Bankruptcy Code that the estate be administered as efficiently as possible, and second, there are a number of peculiarities of bankruptcy practice.
To meet the requirements of these Code Sections and Rules and the directions of the higher courts, this Court follows a four step process rather than a three step process. That additional step is taken at the beginning of the process to determine if the three steps directed by Colonial are necessary. Step one is strictly a review step. It is not an efficient use of an attorney’s time to require a detailed fee ápplication in a routine bankruptcy case. Nor is it an efficient use of this Court’s time to review every fee disclosure filed.1 Therefore, step one is for this *599Court to review all fee disclosures which exceed a certain dollar amount. In 1996 that amount was $800.00 per case, and in early 1997, it was raised to $900.00 per case. Any fee at or under that amount is deemed reasonable. Any fee over that amount is subject to further review.
Contrary to the attorney’s assertion, step one does not place a cap on attorney fees. Step one is merely a threshold point, which, if crossed, prompts a further review. Step two (step one in Colonial) involves requesting a detailed fee application. Step three (step two in Colonial) is for this Court to review the application for reasonableness. If the application appears reasonable, nothing more is done. If there is a question, the fee application is set for hearing, giving the attorney an opportunity to justify the fee being charged. In step four (step three in Colonial) this Court determines a reasonable fee applying the Johnson factors.
It is in this context that the issue of the reasonableness of the attorney’s fees being charged the Debtors in these twenty-one cases came before the Court. In four cases, in response to this Court’s request for an itemization of fees, the Debtors’ attorney filed a time itemization along with a memorandum in support of them.2 In nine cases the Debtors’ attorney merely filed a memorandum in support of his original fee disclosure without filing the itemization requested by this Court.3 In one case, in addition to the memorandum, the Debtors’ attorney included the affidavit of the Debtors that they were willing to pay the disclosed fees.4 In six cases the Debtors’ attorney filed the memorandum and a statement of basis of fees, without the requested itemization.5 In one case the Debtor’s attorney made similar filings to those in the six cases just described, with the statement of basis of fees being titled as a response.6 A hearing was held in these twenty-one cases.
As these twenty-one cases were proceeding to hearing, eleven more cases were filed by the same Debtors’ attorney. In some of these eases the Debtors’ attorney filed a pleading entitled “Time Itemization and Statement of Services Provided” or “Statement of Basis of Fees”, which did not itemize the services provided and no additional hearings were scheduled.7 In seven of these cases, the Debtors’ attorney also included the affidavit of the Debtors that they were willing to pay the disclosed fees.8
After the hearing, the attorney filed fifteen additional cases where the disclosed fee exceeded $900.00. Some of the petitions were accompanied by Debtor’s affidavits attesting to the voluntariness of the payment of fees. In each of these cases, the Court requested detailed fee applications, which were not filed.9
Returning to step two of the process (step one in Colonial), in four of the cases before this Court, where a hearing was held, the original application sets forth in somewhat detailed fashion, the last name of each attorney or clerk providing services, their re*600quested hourly rate, the total number of hours of services performed, a specific listing of dates, itemization and time of all services performed, and an itemization of costs. In the other seventeen cases where a hearing was held, and the eleven cases filed while the previous twenty-one were proceeding to hearing, no such information is supplied.
In twenty-one of the cases, a hearing was held and all interested parties were given an opportunity to present whatever evidence and arguments they wished to make. The Debtors’ attorney presented no evidence, but briefly argued his position that this Court should not review his fees for reasonableness.
By this Opinion, this Court will move to step four of the process (step three in Colonial) and determine a reasonable fee, applying the twelve Johnson factors and addressing the other considerations raised by the various documents filed by the attorney.
As to the four cases where an itemization was filed, there are two reasons why the requested fees should be reduced. First, they include clerk’s time. Clerk’s time is considered to be part of an attorney’s overhead and is to be recovered through his fee. Second, the attorneys are merely identified by their last names, there is no indication in the applications, or proof presented at the hearing as to their experience and qualifications, nor was there any indication in the applications, or proof presented at the hearing as to a comparable hourly rate for attorneys in the community with comparable experience and comparable qualifications, whether practicing in bankruptcy or other fields.
In cases where there is no proof to substantiate the claimed hourly rate, this Court, based on what it perceived was being charged in the community, had established at the time of the filing of these four cases the following as allowable hourly rates:
$175.00 per hour for senior partners.
$145.00 per hour for junior partners.
$120.00 per hour for senior associates.
$95.00 per hour for junior associates.
Unfortunately, due to the lack of proof, this Court does not know how to classify the various, and sometimes numerous attorneys, in the attorney’sxrffiee, who worked on each case. Howev.ei’, they appear to be younger, less experienced attorneys. So, this Court would classify them as senior associates and award compensation at the rate of $120.00 per hour, which is comparable to what other bankruptcy and non-bankruptcy attorneys of comparable age and experience charge.10
In these four cases, making adjustments for non-chargeable clerk’s time, and for reducing the hourly rates, the following fees should be allowed as reasonable:
CASE FEE ALLOWED AMOUNT TO BE RETURNED TO DEBTOR
MICHAELSON $648.00 $347.00
BELL $888.00 $ 7.00
MIXER $545.00 $305.00
DORNEY $562.00 $333.00
As to the remaining seventeen cases where a hearing was conducted, this Court cannot make a similar determination, as there is no itemization of time, nor any hourly rate stated. However, the Debtors in each of these cases did receive some benefits from the attorney’s efforts in filing their bankruptcy cases. The best method this Court is aware of to quantify the value of those benefits is to take an average based on the four cases alluded to above as they are similar. That average is $661.00. Therefore, in each of these other seventeen cases where a hearing was held the fee should be $661.00, with any excess being returned to the Debtors.
Applying the twelve factors set forth in Johnson, does not change the result in those twenty-one case's:
*6011. The time and labor required. Time and labor was expended. There is no indication it was not as set forth in the itemization filed in four of the cases and that it was required. In the other seventeen cases where no itemization was filed, as they are similar in nature to the four cases with an itemization, this Court would conclude the nature and amount of the work was the same and was required.
2. The novelty and difficulty of the questions. There were no novel or difficult legal issues presented in any of the twenty-one cases. The work was routine involving the preparation of petitions and schedules in uncomplicated consumer cases, with some reaffirmation agreements. Not a single contested or adversary matter was filed. In only one case, In re Willmert, No. 97-80179, was there a motion to lift the stay filed by the mortgagee and an agreed order was entered.
3. The skill required to perform the legal services properly. No great skill is required to prepare and file schedules, negotiate reaffirmation agreements, or handle telephone calls and inquiries generated by a bankruptcy filing. The attorney argues th'at his firm is unique and that his fees cannot be compared to other Central Illinois bankruptcy attorneys, because the services that he offers are far better than those offered by them. He suggests that if his clients are willing to pay a premium for those services, this Court should not interfere. As just indicated, there is nothing unique about the services provided, nor is there any proof that the attorney provided it in a manner better than provided by local attorneys. From this Court’s observations of all attorneys appearing before it, the attorney’s statement that he provides unique services far better than other attorneys is not only self-serving, but incorrect.
4. The preclusion of other employment by the attorney due to acceptance of the case. The inquiry associated with this factor is whether, in a time context, the acceptance of the representation of the Debtors involved such an intense effort as to preclude the availability of the attorney to represent other clients. Representation of one client always has some preelusionary effect on other clients. However, these cases were straightforward, and no evidence was presented to indicate that the representation of the Debtors was so intense the attorney had no time for other clients.
5. The customary fee. As previously noted these cases involved relatively small and simple consumer cases devoid of any novel or complex issues,- or any extensive litigation. In reviewing other fee disclosures for similar types of eases, this Court has observed a range as low as $195.00, some in the $300.00 range, and others at the $800.00 level. A fee in the cases now before this Court of $661.00 falls within that range.
6. Whether the fee is fixed or contingent. This factor will be discussed later in this Opinion.
7. Time limitations imposed by the client or the circumstances. This Court is not aware of any time limitations imposed by the Debtors or the circumstances of the cases. There is always a time consideration associated with any bankruptcy filing. But no evidence was presented to establish any unusual time constraints were present which would justify a fee based on this factor.
8. The amount involved and the results obtained. As previously noted, these are small uncomplicated Chapter 7 cases with no substantive or significant contested or adversary matters.
9. The experience, reputation and ability of the attorney. Neither the fee applications, nor the presentation at the hearing, set forth any specifics which this Court could use to determine the communities’ view of the attorneys’ experience, reputation and ability. Nor were any specifics presented of any scholarly publications written by them, or their participation in activities such as Continuing Legal Education seminars that would indicate they have been recognized by their peers as having exceptional experience, reputation or ability in the bankruptcy area, similar to several other attorneys who concentrate their practice in bankruptcy and regularly appear before this Court. Absent any evidence, an alternative source of information is the Martindale-Hubbell Law Di*602rectory rating. The attorney’s rating is not listed. The other attorneys in his office were not listed.11
10. The undesirability of the case. These Chapter 7 cases are routine in nature. There was nothing associated with them which made them inherently undesirable.
11. The nature and length of the professional relationship with the client. The attorney advertises as specializing in bankruptcy law. There was no proof the Debtors use the attorney over an extended period or for other matters.
12. Awards in similar cases. As previously noted, the fees allowed the attorney are within the range of comparable fees in similar Chapter 7 eases.
Before leaving these twenty-one cases, this Court will follow the dictates of Colonial and consider any peculiarities associated with these cases. The Debtors’ attorney has raised a variety of factors, which he contends should be considered in setting his fee. This Court will address the major ones, but not all of them.
At the hearing the Debtors’ attorney argued his fees should not be reviewed for reasonableness. If this Court had such a policy for him, it would have to have it for all attorneys appearing before it. Such a total abdication of the dictates of the Bankruptcy Code is completely unwarranted.
In the first four cases, the attorney applied an hourly rate of $185.00. The attorney states that although an hourly rate is quoted by the firm, bankruptcy clients are not charged hourly fees. Prior to signing a contract, the clients are quoted a flat fee and that fee is not increased. There are several problems with this approach. First, § 330(a)(3)(B) requires that “rates charged for such services” be considered in determining reasonableness. Second, even if a flat rate is charged, a reference to an hourly rate can help to determine if a flat rate ends up being reasonable when compared to what non-bankruptcy practitioners are charging utilizing hourly rates. Third, the attorney has not explained how the flat rate was determined. Fourth, there seems to be no consistency or rhyme or reason as to what the flat fee is. It seems to vary for similar cases.
The attorney offers an explanation in the pleading entitled “Motion to Consolidate for Purposes of this Motion and Response to ‘Notice regarding disclosure of attorneys’ fee’ ”. (In re Clinch, No 96-83650, Jan. 8, 1997, Doc. # 7-1). This explanation is also a part of some of the other documents he has filed, i.e., the “Time Itemization and Statement of Services Provided”. The attorney has identified several factors, which account for the variations in fees charged different Debtors by his firm. Among these factors are the type of assets; the amount of the debt and the number and identity of the creditors; the difficulty in dealing with the client; the income and expenses of the client; the cost of comparable services; and the length of relationship with the client and the likelihood of obtaining referrals. While a number of these factors elude an independent review by the Court, a review of the cases before the Court fails to disclose any rhyme or reason as to the flat fee charged. The fee varies for similar cases, both margin*603ally and significantly. While a substantial difference might reflect consideration of the factors identified by the attorney, slight differences do not, and cast doubt upon the attorney’s explanation. For instance in In re McMillan, No. 97-81969, the fee charged is $1,095 and in both In re Gibbs, Case No. 97-81963 and In re Jacobs, No. 97-80962, it is $1,100.00, a difference of $5.00. In In re Barna, No. 97-80753, the Debtor paid the attorney a fee of $1,495.00. In that case the Debtor entered into two reaffirmation agreements, one on a mobile home and another on an automobile. A second vehicle was surrendered. The Debtors also paid the attorney $1,495.00 in In re Powell, No. 97-81442. In that case, the statement of intention indicated the Debtors intended to reaffirm one debt, but no agreement has yet been filed. Though the Trustee has scheduled an auction sale of one parcel of real estate, the Debtors have not objected to the sale or otherwise participated in the proceedings. In other respects, there appears to be no difference in these two cases, where a higher fee was charged, than in the remaining cases, where fees from $895 to $1,100 were charged.
In some of the cases the Debtors have filed affidavits to the effect that they are willing to pay the amount charged and the attorney argues the market should control. Again, there are several problems with this approach. First, in our economic system market prices and client satisfaction are important factors. However, in bankruptcy they are not unfettered. Congress has seen fit to restrict or temper the market’s role in determining attorney fees in a bankruptcy ease. Section 330 sets forth a statutory basis for fees, and requires fees .to be reasonable. Market concepts are incorporated into § 330 in two ways. The factors listed in § 330 are not exclusive, leaving room for market considerations. Furthermore, § 330 brings market consideration into the determination by including a reference to customary compensation charged by comparably skilled non-bankruptcy attorneys. But, there was no proof presented at the hearing to substantiate the contention that the market has established customary fees for comparably skilled non-bankruptcy attorneys that are contrary to those being awarded by this Court.
Second, a major reason for § 330 is to prevent debtors from hiding assets through payments to attorneys. While there is absolutely no indication that is occurring in any of these cases, a debtor engaged in such activity would not hesitate to sign such an affidavit to conceal the activity.
Third, parts of the affidavit are clearly beyond the scope of most laymen’s knowledge about attorney fees. This Court seriously doubts many laymen would have formed an opinion that this Court’s policy “results in driving smart lawyers out of the debtor bankruptcy field”. It is an obvious self-serving statement inserted by the attorney.
This argument was rejected by the District Court in Geraci v. Hopper, 208 B.R. 907, 909 (C.D.Ill.1997), where the court stated:
[The attorney] argues that the market and not the judge should set the fees of debtors’ attorneys in a Chapter 7 case and relies on Matter of Continental Illinois Securities Litigation, 962 F.2d 566 (7th Cir.1992) as controlling this appeal. The reliance is misplaced. Continental is about as far removed from these no asset Chapter 7 eases as can be imagined. It was complex litigation involving a 45 million dollar settlement after years of preparation. But Continental was commercial litigation and the Seventh Circuit made a very helpful suggestion that the bankruptcy judge apparently applied here. Continental suggests that finding “testimony or statistics concerning the fee arrangements in commercial litigation comparable to the present suit” would be a proper basis for determining a reasonable fee. 962 F.2d at 572-73. That is exactly what Judge Fines did in these cases. He reviewed the fees charged in similar cases by competent attorneys, experienced in bankruptcy matters in the Central District, and found that the average fee for a no asset, chapter 7 ease was $550.
The attorney also contends that he has been singled out for special treatment in an attempt to hold down fees. The $800.00, now *604$900.00, figure is strictly a review standard. Once subject to review, the requested fee can be reduced if excessive or allowed where the attorneys show a higher fee is justified, which routinely occurs. The attorney is treated no differently than any other attorney who appears before this Court. The only thing different about this Court’s treatment of the attorney is that he has seen fit to challenge the review procedure, which works to set reasonable fees for bankruptcy cases, and in the process the attorney has conjured up the misconception that he is being singled out.
The last issue before the Court is whether to schedule additional hearings on fees in cases filed after the twenty-one cases were set for hearing. While this Court is aware that hearings are key to our judicial system, it does not believe that scheduling additional hearings will help to resolve the matter of determining reasonable attorney fees for the attorney in these other cases. In the eleven cases filed while a hearing was pending on the twenty-one cases and in the fifteen cases filed after the hearing, but before this Opinion was issued, the attorney was directed to file a fee itemization and did not do so. All that was filed was documents, argumentative in nature, comparable to what' was filed in seventeen of the twenty-one cases where there was a hearing. Nothing new has been filed in these later eases. The issues raised by these cases have been litigated before three different Bankruptcy Judges in the Central District of Illinois, a mandamus action filed in the District Court for the Central District of Illinois, and several appeals to the District Court and the Seventh Circuit Court of Appeals.
Therefore, with one adjustment, the fees for these later cases should be the same. The adjustment is that effective February 1, 1997, this Court raised the hourly rates it allows, absent proof of an applicable hourly rate from $175.00 to $200.00 an hour for senior partners, and from $120.00 to $130.00 an hour for senior associates. In those cases filed before February 1, 1997, the fee should be $661.00, and in those cases filed after that date, the fee should be $714.00.12
In conclusion, although given the opportunity at the hearing, rather than giving this Court concrete information, such as an hourly rate and itemization of services provided as required by Colonial and Johnson from which it could determine a reasonable fee, the attorney has resorted to asking this Court to abdicate its responsibilities under § 330 and give him special treatment, and in the process makes a mountain out of a molehill by alleging he has been singled out for unfair treatment.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
. In 1996 this Court had 3,991 cases filed. So far in 1997 filings are up by 24%.
. In re Michaelson, No. 96-83059; In re Bell, No. 967-83061; In re Mixer, No. 96-83607; In re Dorney, No. 96-83652.
. In re Clinch, No. 96-83650; In re Swords, No. 96-83651; In re Robertson, No. 96-83653; In re Hansen, No. 97-80176; In re Plotts, No. 97-80177; In re Bordner, No. 97-80178; In re Willmert, No. 97-80179; In re Buck, No. 97-80180; In re Davis, No. 97-80181.
. In re Fitzpatrick, No. 97-80183.
. In re Drummond, No. 97-80003; In re Fitzpatrick, No. 97-80004; In re Livingston, No. 97-80005; In re Smith, No. 97-80006; In re Hatpin, No. 97-80007; In re Jackson, No. 97-80008.
. In re Harris, No. 97-80182.
. In re Barnes, No. 97-81439; In re Powell, No. 97-81442; In re Alonso, No. 97-81125; In re Smith, No. 97-80754.
. In re Barna, No. 97-80753; In re Ross, No. 97-80751; In re Nance, No. 97-81437; In re Fishel, No. 97-81441; In re Franklin, No. 97-81126; In re Sallee, No. 97-80502; In re Michaelson, No. 97-80499.
. In re Gerber, No. 97-82475; In re Stahl, No. 97-82476; In re Smith, No. 97-82478; In re Romans, No. 97-82443; In re Pawson, No. 97-82444; In re Hardin, No. 97-82445; In re Johnson, No. 97-82446; In re Wheeler, No. 97-82447; In re Haneghan, No. 97-82448; In re Graves, 97-81961; In re Jacobs, 97-81962; In re Gibbs, 97-81963; In re Holloway, 97-81967; In re McMillan, 97-81969; In re Burlingame, 97-81970.
. This Court would also note that there are many other attorneys, who appear before it, who are older and more experienced and charge that amount or less.
. In one of the cases a fee contract is filed, which at the top lists several associates, some of whom worked on the four cases where itemized statements were filed. While not listed in Mar-tindale-Hubbell, they were listed in Sullivan's Law Directory. The following information was listed for those attorneys whose names appear on the itemized fee statements:
Name Date of Birth Date Admitted to Bar
Mario M. Arreola 1958 1988
Kevin W.Chern 1968 1993
Richard K. Gustafson II 1968 1993
Steven J. Diamond 1965 1993
Richard W. Chang 1969 1994
Rick G. Melendez 1967 1996
Kathrine M. McGrath 1954 1994
. This fee has been computed by taking the average time spent by the senior partner in the above four cases, or .125 hours, at the new rate of $200.00 per hour, for an average fee per case of $25.00. The remaining fee is computed by taking the average time spent by senior associates in the above four cases, or 5.3 hours, at the new rate of $130.00 per hour, for an average fee per case of $689.00. Adding those two amounts together, the fee allowed is $714.00. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492729/ | ORDER DENYING TRUSTEE’S MOTION FOR ADMINISTRATIVE EXPENSE
JAMES A. PUSATERI, Chief Judge.
This matter is before the Court on the case trustee’s “Motion for Allowance and Payment of Administrative Expense,” and an objection to the motion filed by a creditor, the Farmers and Merchants State Bank of Wakefield, Kansas (“the Bank”). Trustee Joseph I. Wittman represents himself. The Bank is represented by Gary H. Hanson of Stumbo, Hanson & Hendricks, LLP, of Topeka, Kansas. The Court has reviewed the relevant pleadings and heard argument, and is now ready to rule.
The facts are not in dispute. Before filing for bankruptcy, the debtors ran a farm. They had delivered certain livestock to a livestock commission company for sale on December 1, 1997. The Bank claimed to have perfected security interests in this and other personal property the debtors owned and to have valid mortgages on certain real property they owned. On December 1, the debtors filed a chapter 7 bankruptcy petition. With the agreement of the debtors and Mr. Wittman, then the interim trustee for the case, the Bank obtained an order allowing the sale to occur, with the proceeds to be delivered to the trustee. In seeking this relief, the Bank indicated that the debtors had already delivered the livestock to the commission company and that proceeding with the sale would eliminate the need to arrange for the livestock’s continued care and feeding. The livestock commission company remitted about $20,000 to the trustee from that sale. Mr. Wittman’s interim status ended when the creditors failed to elect a trustee at the meeting of creditors held pursuant to 11 U.S.C.A. 341(a). See 11 U.S.C.A §§ 701 & 702(d).
Toward the middle of December, without seeking the Court’s permission and apparently without informing the trustee of their intent, the debtors arranged for the same company to sell more of their livestock. The company remitted about $16,000 from this sale to the trustee.
At the end of December, the Bank filed a motion for stay relief, seeking permission to foreclose its security interests and mortgag*641es. The debtors objected, but the trustee did not. At a hearing on January 29, 1998, the debtors’ objections to the motion were resolved and stay relief was granted with the exceptions noted in the order ultimately filed on February 26. Sometime later, more of the debtors’ livestock was sold through the same commission company. Again, the company remitted the proceeds, about $10,000, to the trustee.
The trustee has a total of $46,549.97 in proceeds from these three sales, plus interest that has accrued since he received the money. On March 20, he filed his “Motion for Allowance and Payment of Administrative Expense,” seeking the maximum fee on that amount permitted by § 326 of the Bankruptcy Code, $5,405. He indicates he intends to dispose of the sale proceeds, pursuant to § 725, by giving it to the Bank, and contends the maximum fee is reasonable compensation — as required to be compensable under § 330 — for his services. Without expressly saying so, by indicating he intends to distribute the money to the Bank, he concedes that the Bank’s security interests in the property that was sold to produce the money were property perfected and are not avoidable. The Bank objects to an award of fees to the trustee in any amount out of its collateral.
In support of his application, the trustee submits that he has performed or will perform the following services for which he is entitled to compensation from the proceeds he has received from the sales of the Bank’s collateral: (A) he consented to the first sale of livestock; (B) he reviewed the debtors’ financial affairs in relation to the sale of livestock and the tax consequences to the estate of the sales; (C) he reviewed “FSA contracts” in reference to the interest of the estate, if any; (D) he may have to file tax returns on behalf of the estate; (E) he has reviewed and continues to review the tax consequences to the estate of an abandonment or other disposition of other property of the estate including real estate which has a low basis; (F) he appeared at hearings before the Court “in reference to the creditor’s motion for disposition of property from the sale of the livestock and other property interests,” apparently referring to the Bank’s “Motion for Relief from Stay and for Disposition of Property of the Estate”; and (G) he will perform miscellaneous trustee duties, including accounting to the Court, creditors, and the United States Trustee for all funds received during the administration of the case through semiannual reports to the U.S. Trustee and closing reports on the case. He then quotes a portion of the legislative history of § 326 that indicates the base on which the maximum allowable trustee fee is computed can include moneys a trustee turns over to a secured creditor. The trustee has submitted no itemized record of time he expended to collect or protect estate property that is the Bank’s collateral.
The Bank contends that the trustee has done virtually nothing to earn a fee from its collateral. It points out that the first livestock sale was arranged before the debtors filed for bankruptcy, and that the trustee merely allowed the sale to proceed. The second and third sales, the Court notes, took place without the trustee’s participation or knowledge, although the livestock commission company sent the proceeds to the trustee. The Bank contends that the trustee did little or nothing in connection with the three sales that benefitted either the Bank or the estate. It suggests the trustee is doing nothing more than turning property over to the Bank or abandoning property upon which the Bank has been allowed to foreclose.
DISCUSSION AND CONCLUSIONS
The trustee’s motion requires the application of several provisions of the Bankruptcy Code. Section 326(a) provides:
In a case under chapter 7 or 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee’s services, payable after the trustee renders such sendees, not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in *642interest, excluding the debtor, but including holders of secured claims.
The House Report about this provision, some of which the trustee quoted in his motion, explains in pertinent part:
This section is derived in part from section 48c of the Bankruptcy Act. It must be emphasized that this section does not authorize compensation of trustees. This section simply fixes the maximum compensation of a trustee. Proposed 11 U.S.C. 330 authorizes and fixes the standard of compensation. Under section 48e of current law, the maximum limits have tended to become mínimums in many cases. This section is not intended to be so interpreted. The limits in this section, together with the limitations found in section 330, are to be applied as outer limits, and not as grants or entitlements to the maximum fees specified.
It should be noted that the base on which the maximum fee is computed includes moneys turned over to secured creditors, to cover the situation where the trustee liquidates property subject to a lien and distributes the proceeds. It does not cover cases in which the trustee simply turns over the property to the secured creditor, nor where the trustee abandons the property and the secured creditor is permitted to foreclose. The provision is also subject to the rights of the secured creditor generally under proposed 11 U.S. [sic] 506, especially 506(c).
H.R. Rep. No. 95-595, at 327 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6283-84. The Senate Report explains the provision in nearly identical language. See S. Rep. No. 95-989, at 37-38 (1978), reprinted in 1978 U.S.C.C.AN. 5787, 5823-24- As amended in 1994, § 330 provides in pertinent part:
(a)(1) After 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.
(2) The court may, on its own motion or on the motion of the United States Trustee, the United States Trustee for the District or Region, the trustee for the estate, or any other party in interest, award compensation that is less than the amount of compensation that is requested.
(3) (A) In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including—
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or benefi-. cial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; and
(E) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
(4) (A) Except as provided in subpara-graph (B), the court shall not allow compensation for—
(i) unnecessary duplication of services; or
(ii) services that were not—
(I) reasonably likely to benefit the debtor’s estate; or
(II) necessary to the administration of the case.
Section 506(c) provides:
(c) The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses *643of preserving, or disposing of, such property the extent of any benefit to the holder of such claim.
With these provisions and legislative history in mind, the Court turns to consideration of the trustee’s motion.
While he was interim trustee, the trustee agreed to allow a sale to proceed that had been arranged before the debtors filed for bankruptcy. This undoubtedly benefitted the Bank — otherwise, the Bank would not have taken the time to make the request of the trustee and the Court. Since the first sale had already made him known to the livestock commission company so that it continued to send him the proceeds of sales of the debtors’ livestock, the trustee appears to have done little or nothing with respect to the second sale except receive the proceeds. The third sale appears to have occurred after the Bank obtained stay relief with no objection from the trustee. While the stay relief order did not technically terminate the bankruptcy estate’s ownership of the property, the Bank had been given permission to realize on the value of its collateral with an obligation to account to the estate only for any excess it might receive over the amount the debtors owed it, a possibility in theory, but one that did not occur. Essentially, the trustee actively approved one sale and passively received the proceeds from three sales. The first sale certainly occurred before the trustee had the opportunity to examine the Bank’s security agreements, financing statements, mortgages, and other loan documentation, and the second may have as well. The trustee’s failure to object to the Bank’s motion for stay relief demonstrates that the third sale occurred after he had satisfied himself that the Bank’s interests were properly perfected and not avoidable so that the Bank was entitled to foreclose its security interests in estate property.
The legislative history to § 326, quoted above, notes that the section sets the maximum amount a trustee can be compensated, but that § 330 authorizes compensation and specifies the standard for its allowance. The history further makes clear that the limits in § 326(a) are outer limits, not grants or- entitlements to the maximum fees specified, and warns against treating them as if they were the minimum fees allowable. The history states that the moneys that form the base of the fee computation include those turned over to secured creditors where the trustee has liquidated property subject to a hen and will distribute the proceeds, but does not include moneys generated from property that the trustee merely turns over to a secured creditor, or abandons or otherwise permits a secured creditor to foreclose on. Finally, the history indicates the trustee’s compensation from encumbered property is also subject to the limitations of § 506(c).
Essentially treating the money he has received as if his own efforts produced it all and asking the Court to treat the limits in § 326(a) as if they were grants or entitlements, the trustee seeks the maximum fee permitted under that provision without having provided the type of explanation and justification required by §§ 330 and 506(c). The motion contains insufficient detail to enable the Court to, determine whether the services the trustee says he has provided or will provide satisfy the requirements of § 330. Many of the services he describes seem to have nothing to do with “preserving, or disposing of’ the Bank’s collateral, as required by § 506(c) to charge those services against the proceeds of the collateral. Review of the bankruptcy estate’s tax situation and eventual filing of a tax return, review of the “FSA contracts,” and accounting for all money received during the case have no apparent connection to preserving or disposing of the Bank’s collateral. The trustee facilitated an early sale of collateral, which obviously benefitted the Bank; what work he had to do to facilitate that sale is less obvious. He received the proceeds from the second sale, but that sale was apparently not authorized by either the Bank or the trustee, and thus appears to have required the trustee to do little more than receive and deposit a check from the commission company, review what was sold, and possibly correspond with the Bank and the debtors by telephone or letter. The commission company sent the proceeds of the third sale to the trustee after the Bank had received, without objection from the trustee, stay relief to realize on its collateral. The trustee should not have had *644to do anything more with this money than ascertain its source and then send it on to the Bank. In sum, the trustee’s motion and argument have fallen well short of justifying his request to be paid $5,405 from the proceeds of the Bank’s collateral.
Based on the lack of substantiation for the fee requested, the trustee’s “Motion for Allowance and Payment of Administrative Expense” must be and it is hereby denied without prejudice.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492730/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW AS TO LATE NOTICE TO AMERICAN INSURANCE COMPANY (PHASE IV)
THOMAS E. BAYNES, Jr., Bankruptcy Judge.
THIS CAUSE came on to be heard upon a final evidentiary hearing concerning whether the Debtor gave reasonable notice of asbestos property damage claims to .American Insurance Company (American). The Court previously ruled on the question of Debtor’s reasonable notice to the vast majority of its excess insurance carriers in Phase IV of this adversary proceeding. Celotex Corp. v. AIU Insurance Co., 216 B.R. 867 (Bankr.M.D.Fla.1997)(Order on Defendants’ Rule 52(c) Motions for Judgment Regarding Bodily Injury and Property Damage Late Notice) (“Excess Coverage Opinion”). For reasons which will become apparent, the issue of reasonable notice by Celotex to American was separately tried. By reference, this Court now adopts its findings of facts set forth in the Excess Coverage Opinion unless specifically shown otherwise herein.
In this penultimate opinion dealing with Celotex’s insurance coverage, Ohio law has been designated by the parties as the choice of law. A further distinguishing characteristic from the previous insurance coverage litigation is the absence of the Debtor, Carey Canada, Inc., as a participant in this affray. There are several other distinctions from the Phase IV excess coverage litigation; namely, American provided primary coverage, albeit to Dana Corporation (Dana), from April 1, 1967, to February 18, 1969, for products manufactured by a subsidiary, Smith & Kan-zler Corporation (Smith & Kanzler), and Cel-otex asserts rights to coverage under the American policies as a purchaser of and successor in interest to Smith & Kanzler from Dana. Thus, the notice issue herein only relates to the asbestos property damage claims (Phase I)1 against Smith & Kanzler products and to the insurance coverage provided by American to Dana between April 1967 and February 1969.
OHIO LAW OF NOTICE
While the parties agree the choice of law as to reasonable notice to American is Ohio law, the Court comes to such jurisprudence with trepidation. It is difficult for any trial court to assemble all the nuances and procedures of any state’s law in which it has no intimate knowledge. It may be more so for bankruptcy courts, especially when the state law, such as Ohio, has specific jurisprudence as to how its judicial opinions are reviewed. “The syllabus of a Supreme Court opinion states the law of the ease. State v. Wilson (1979) 58 Ohio St.2d 52, 60, 388 N.E.2d 745. Any other words in an Ohio Supreme Court opinion are dicta, id., and not part of the Court’s decision. Haas v. State (1921) 103 Ohio St. 1, 7-8, 132 N.E. 158. Id. at syllabus.” Ormet Primary Aluminum Corp. v. Employers Insurance of Warsau, a Mutual Company, Case No. 95-103, Court of Common Pleas, Monroe County, Ohio, September 17, 1997 (as reported in Mealy’s Litigation Reporter, Vol. 11, No. 44, p. 12, September 23, 1997). These findings of facts and con-*647elusions of law are as specific as possible regarding Ohio law as stated in the syllabi of various court decisions. From time to time, however, this Court has indulged in dicta to ascertain the full weight of any pronouncement in a syllabus.
Normally, the insured will be the party giving any notice to the insurer because it has the duty to notify the insurance company of the occurrence or claim. Nonetheless, it is quite clear the Debtor Celotex would have, under Ohio law, a sufficient interest in the American policy coverage to be able to provide reasonable notice of Smith & Kanzler claims to American. See generally, Hunsicker v. Buckeye Union Casualty Co., 95 Ohio App. 241, 118 N.E.2d 922 (1953); Kincaid v. Smith, 167 F.Supp. 195 (N.D.Ohio 1958). Here, where Celotex is the notifying party, like an insured, it must comply with all terms and conditions of the insurance policy. See Spears v. Ritchey, 108 Ohio App. 358, 161 N.E.2d 516 (1958). The American policies material to the question of notice contain paragraphs 10 and 11 which set forth the conditions associated with notice.2 Paragraphs 10 and 11 state:
NOTICE OF ACCIDENT [OCCURRENCE].
When an accident [occurrence] occurs, written notice shall be given by and on behalf of the insured to the company or any of its authorized agents as soon as practicable. Such notice shall contain particulars sufficient to identify the insured and also reasonably obtain information respecting the time, place, and circumstances of the accident [occurrence], the names and addresses of the injured and of available witnesses.
NOTICE OF CLAIM OR SUIT.
If claim is made or suit is brought against the insured, the insured shall immediately forward to the company every demand, notice, summons, or other process received by him or his representative.
Under Ohio law, the legal standard for providing notice to an insurer is premised on the insured’s duty to notify the primary carrier of an occurrence or accident; here, as it relates to the asbestos property damage claims. West American Ins. Co. v. Hardin, 59 Ohio App.3d 71, 571 N.E.2d 449 (1989). Ohio courts have consistently found such notice is required by the policy as a condition precedent to insurance coverage. E.g., Kornhauser v. National Sur. Co., 114 Ohio St. 24, 150 N.E. 921 (1926); Heller v. Standard Accident Insurance Co., 118 Ohio St. 237, 160 N.E. 707 (1928); Krasny v. Metropolitan Life Ins. Co., 143 Ohio St. 284, 54 N.E.2d 952 (1944). Like Illinois law on Debtor’s notice to the excess carriers, which was construed in this Court’s Excess Coverage Opinion, Ohio law makes the notice requirement the sum and substance of the insurance contract, and the Debtor’s failure to provide such timely notice precludes coverage. American Employers Ins. Co. v. Metro Regional Transit Auth., 12 F.3d 591 (6th Cir.1993). The notice requirement is one of reasonableness, Travelers’ Ins. Co. v. Myers, 62 Ohio St. 529, 57 N.E. 458 (1900); Ruby, supra; Motorists Mut. Ins. Co. v. Speck, 59 Ohio App.2d 224, 393 N.E.2d 500 (1977); Patrick, supra, Note 2, and the Debtor, by accepting the insured’s (Dana) duty of providing notice, has the burden of establishing its due diligence in giving notice in order that it be characterized as reasonable. Heller v. Standard Acc. Ins. Co., 118 Ohio St. 237, 160 N.E. 707 (1928); Patrick, supra.
Of course, the importance of notice to the primary insurance carrier is expansive, as there are different duties between it and the excess carriers. Mainly, the duty to defend and investigate the occurrence or claim, which is placed upon the primary carrier, is distinct from that of the umbrella or excess carriers. The excess carriers normally do not expect they will receive notice of an *648occurrence unless the excess coverage will, in fact, be affected by such occurrence, whereas the primary carrier will always face immediate risk. See Hardin, supra.
In determining whether the Debtor exercised due diligence in giving notice to American, which would satisfy the reasonableness requirement, Ohio law emphasizes the facts and circumstances surrounding the notice process. See Employer’s Liability Assur. Corp. v. Roehm, 99 Ohio St. 343, 124 N.E. 223, aff'd 99 Ohio St. 350, 124 N.E. 225 (1919); American Employers, supra. This Court finds, under Ohio law, that a trier of facts, examining all circumstances related to the notice by the Debtor to American, would consider the same indicators adopted by this Court in its Excess Coverage Opinion. Celotex, supra, 216 B.R. at 873. Therefore, as part of these findings of facts and conclusions of law, the indicators expressed in its Excess Coverage Opinion are incorporated by reference, one of the foremost indicators being the sophistication of the insured, herein, the Debtor Celotex, as the party accepting the duty to give notice. The Court previously found Celotex, during the appropriate time period was one of the most sophisticated insureds in the history of insurance law.
A court, in determining due diligence as regards notice, should consider the timing of the notice in relation to the status of other ongoing claims or litigation. Another indicator would be the length of time between the insured’s knowledge of the occurrence and the notice given—more specifically, whether the notice has taken three months, eight months, or thirty-two months.3 Additionally, the Court recognizes that due diligence by Celotex in handling the claims, and its knowledge of how those claims might impact rights under the policies, are also parts of the timing contingency. Most assuredly, timing in this matter becomes the focal point in determining the reasonableness of notice. Ultimately, though, the reason for any delay in giving notice, and the presence of other insurance coverage for similar occurrences, constitute other indicators to be considered by this Court.
Lastly, under both Illinois and Ohio law, one of the prevailing questions associated with the issue of reasonable notice is the “prejudice to the insurer.” In American Employers, supra, Senior Circuit Judge Wellford commented upon what appears to be the two schools of thought regarding prejudice under Ohio law:
It remains unclear to me whether the re-buttable presumption of prejudice shifts the ultimate burden of showing prejudice from the insurer to the insured in Ohio. The controversy is fueled by an apparent ambiguity in Hardin. After the holding above-quoted, that the insured must prove prejudice, the court stated that prejudice to the insurer is presumed from unreasonable delay in giving the required notice of loss under the policy, and the burden rests upon the claimant to show absence of prejudice (citations omitted).
12 F.3d at 598.
The Court finds the evidence adduced in the Phase IV trial as to the excess carriers, together with the evidence in this trial concerning the Debtor’s delay in giving notice, the paucity of specific notices of claims, the amount of claims, the extent of litigation concerning those claims and insurance coverage, and the disputes with Dana, are sufficient to establish prejudice to American and to require the Debtor, under either school of thought, to demonstrate an absence of prejudice. Such evidence has not been adduced. See Ruby, supra; Owens-Corning, supra; Champion Spark Plug, supra.
FACTS ASSOCIATED WITH NOTICE
This Court also incorporates by reference the germane portion of its statement of chronological events associated with the han*649dling of asbestos property damage claims by Debtor from the Excess Coverage Opinion. In addition, the Court sets forth additional facts specifically associated with the relationship between Celotex and American as regards the asbestos building claims. As noted earlier in the Excess Coverage Opinion, this Court found the filing of the Evadale lawsuit made Celotex, for the first time, a defendant in an asbestos property damage claim.4 That asbestos property damage lawsuit began in April 1981 and at approximately that time, Celotex staff and attorneys were very concerned with what Evadale and one earlier lawsuit5 might portend to additional claims from the already numerous asbestos bodily injury claims filed against Celotex and other asbestos manufacturers.
Since 1972, Celotex had been investigating asbestos bodily injury claims, identifying its insurance policies, and determining its related insurance coverage. One year after the Evadale lawsuit was filed, further activities transpired concerning the filing of potential asbestos property damage claims. However, not until the summer of 1982 did Celotex locate the original stock purchase agreement between Dana and Celotex’s predecessor as to the purchase of Smith & Kanzler, which, admittedly, had been in its file since 1972. This agreement contained specific provisions including that, as of 1969, insurance for Smith & Kanzler was being canceled by Dana. Such a provision would lead one to believe there had been insurance coverage. Thereafter, Celotex made demands upon Dana for indemnification under specific provisions in the stock purchase agreement.6
Notwithstanding the existence of the Smith & Kanzler product, the liability which might arise from the Smith & Kanzler product, the various aspects of indemnification, and the insurance cancellation provision in the stock purchase agreement, Celotex appears to have made no attempt to acquire information concerning any insurance coverage for the Smith & Kanzler product from Dana or from Debtor’s long-standing insurance brokers, Rollins, Burdick and Hunter. Equally as interesting, from 1982 through 1985, Celotex became involved in various lawsuits with Dana in California and in Florida and, ultimately, Celotex was brought into an ongoing Ohio lawsuit between Dana, Fireman’s Fund, and American concerning various aspects of the stock purchase agreement and, most specifically, the indemnification by Dana to Celotex.
The evidence suggests it was not until the first half of 1985, when Celotex brought the California declaratory judgment action against Dana, that American had some idea Celotex was seeking insurance coverage for the Smith & Kanzler claims. It appears further the only notices that were given were in 1987 when two claims, the Chase Manhattan claim and the New York Plaza claim, were directly filed with American by Celotex. The Debtor’s contention it did not acquire the American policy until the Ohio litigation began provides no basis for the lack of notice under the criteria discussed herein.
Considering the indicators discussed earlier, the extensive evidence associated with the Debtor’s knowledge of the asbestos property damage claims and its excess insurance coverage, as noted in the Excess Coverage Opinion, and the facts presented in this sub-phase, the Court finds the Debtor did not give reasonable notice to American of the asbestos property damage claims. The Debtor, as found in Phase IV, in April 1983, *650knew asbestos property damage claims would impact on all excess insurance coverage post-1978. At that time, the Debtor knew or should have known there was primary insurance coverage for Smith & Kanzler claims prior to 1969. Given the significant sophistication of the Debtor as to insurance coverage matters, the Debtor failed to use due diligence in determining the scope and extent of any primary insurance coverage provided to Dana by American.
Notwithstanding the various Dana-related lawsuits as juxtaposed against the other issues related to asbestos property damage claims, Debtor, at a minimum, did not give notice to American until mid-1985. Such delay of at least two years was unreasonable considering the facts and circumstances associated with the asbestos property damage claims and the Debtor’s relationship with Dana. It may be a hard task for a third party, on behalf of an insured, to meet all the duties imposed on an insured and give notice under the terms and conditions of the policy. This Court, however, under the facts elicited, believes the Debtor had the ability to comply with the requirements of the American policy, as it knew in 1982 of the existence of the stock purchase agreement and had the ability to acquire from Dana the name of the insurance carrier covering Smith & Kanzler products. This Court finds it was reasonably possible for Celotex to give timely notice to American in April, 1983. Employers Liability, supra; Krasny, supra.
Considering these factors, the Court finds the Debtor’s delay in giving notice was prejudicial to the specific rights of American, as a primary carrier, to investigate the vast number of asbestos property damage claims and to seek to defend these claims.7 It is interesting to note Celotex’s actions regarding its lack of reasonable notice to its excess carriers are in accord with its activities herein in failing to determine which carrier covered Smith & Kanzler products and to provide that carrier with reasonable notice.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Celotex failed to give reasonable notice to American Insurance Company as provided in its policies issued to Dana Corporation. A separate Final Judgment shall be entered in accordance with the foregoing.
. Celotex Corp. v. AIU Insurance, et al., 196 B.R. 973 (Bankr.M.D.Fla.1996).
. Ohio courts have generally determined that where policies require notice be either "immediate” or "as soon as practicable,” such notice is interpreted to require the insured to give "notice within a reasonable period of time.” Patrick v. Auto-Owners Ins. Co., 5 Ohio App.3d 118, 449 N.E.2d 790 (1982); Ruby v. Midwestern Indem. Co., 40 Ohio St.3d 159, 532 N.E.2d 730 (1988); Owens-Corning Fiberglas Corp. v. Am. Centennial Ins. Co., 74 Ohio Misc.2d 183, 660 N.E.2d 770 (1995).
. A substantial number of Ohio opinions focus on what amount of time delay is considered unreasonable. E.g., Eureka Fire & Marine Ins. Co. v. Baldwin, 62 Ohio St. 368, 57 N.E. 57 (1900)(eight months); Travelers’ Ins. Co. v. Myers, 62 Ohio St. 529, 57 N.E. 458 (1900)(nine months); Kornhauser v. National Sur. Co., 114 Ohio St. 24, 150 N.E. 921 (1926)(six months); Heller, supra (five months); Champion Spark Plug Co. v. Fidelity & Cos. Co. of New York, 116 Ohio App.3d 258, 687 N.E.2d 785 (1996)(one and one-half years); Helman v. Hartford Fire Ins. Co., 105 Ohio App.3d 617, 664 N.E.2d 991 (1995)(two year delay).
. Evadale Independent School District v. United States Gypsum, et al, Civ. No. B-81-293-CA (E.D.Tex. Apr. 27, 1981).
. Cinnaminson, New Jersey Board of Education v. National Gypsum Co., No. L-49430-79 (N.J.Super. Ct., Law Div., May 19, 1980).
. This Court makes no determination as to whether Dana ever gave notice to American as regards any of the Smith & Kanzler asbestos property damage claims, nor does the Court make any determination as to whether or not there is indemnification between Dana and Celo-tex as to Smith & Kanzler claims. There is an ongoing dispute between Dana and Celotex over indemnification in the stock purchase agreement. Dana Corp. v. Fireman's Fund Ins. Co., 865 F.2d 257 (6th Cir.1988); Dana Corp. v. Fireman's Fund Ins. Co., 1997 WL 135591 (N.D.Ohio Feb. 10, 1997); Dana Corp. v. Fireman’s Fund Ins. Co., 1997 WL 135595 (N.D.Ohio Mar. 11, 1997); In re Celotex Corp., 204 B.R. 586 (Bankr.M.D.Fla.1996). The Sixth Circuit’s opinion provides a chronology of other litigation between the parties relating to these matters.
. This Court finds that the evidence does not establish any waiver by American of information or notice on their behalf which would preclude Debtor from giving timely notice. Liberty Sav. Bank, F.S.B. v. Lawyers Title Ins. Corp., 1990 WL 235470 (Ohio App. 12 Dist.1990). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492731/ | MEMORANDUM OPINION
ROBERT MCGUIRE, Chief Judge.
The Secretary of the United States Department of Health and Human Services (“HHS”) filed this motion to dismiss the above-styled adversary filed by AHN Home-care, LLC (“AHN”). By agreement of counsel, the motion was decided on the basis of the pleadings and briefs before the court. Following are the Court’s Findings of Fact and Conclusions of Law pursuant to Bankr.R. 7052.
In considering Defendant’s motion, the Court only considers the pleadings. 5A Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure: Civil 2d § 1356 at 298 (2d ed.1990); Mahone v. Addicks Utility Dist. of Harris Co., 836 F.2d 921, 935 (5th Cir.1988). Federal Rule of Civil Procedure 10(c) and Federal Rule of Bankruptcy Procedure 7010 define pleadings to include written documents which act as exhibits to pleadings. Accord Feder v. MacFadden Holdings, Inc., 698 F.Supp. 47, 50 (S.D.N.Y.1988).
I. Statutory and Regulatory Background
Part A of the Medicare Act, established by Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., in relevant part provides for payment on behalf of eligible beneficiaries for certain home health services furnished by home health agencies. 42 U.S.C. § 1395d. The Secretary of the United States Department of Health and Human Services (“HHS”) administers the Medicare Program and has delegated this function to the Health Care Financing Administration (“HCFA”), a component of HHS.
A home health agency that meets Medicare certification standards may enter into a provider agreement with HCFA, 42 U.S.C. § 1395ce, and be reimbursed for the reasonable cost of covered services, as determined under detailed statutory and regulatory criteria. 42 U.S.C. §§ 1395f(b), 1395h, 1395x(v); 42 C.F.R. § 413.1 et seq. HHS’s payment scheme pays providers periodically on an interim basis on estimates of the provider’s projected cost for the entire year. 42 C.F.R. § 413.64(b), (e). After interim payments are made, audits are conducted that may reveal any under- or overpayments made to providers. Such under- or overpay-ments are corrected through ongoing adjustments in subsequent Medicare reimbursements. 42 C.F.R. § 405.371(a)(2), 3413.64(e), (h)(7). HHS is allowed to adjust payments to providers as is necessary to properly balance payments to providers. 42 U.S.C. § 1395g(a). The review of the interim payments is conducted by a fiscal intermediary, generally a private insurance company. 42 C.F.R. § 413.20(b), 413.24(f).
Congress has provided an exclusive avenue for judicial review of reimbursement issues effecting providers. Upon an intermediary’s final determination as to the total amount of reimbursement due, a provider may request a hearing with respect to such determinations and obtain a decision from the Provider Reimbursement Review Board. (“PRRB”) 42 U.S.C. § 1395oo(a); 42 C.F.R. § 405.1835. The decision of the Review Board is final unless the HHS reverses, affirms, or modifies the PRRB decision on its own motion within sixty days of the decision. 42 U.S.C. § 1395aa(f)(l). Only after receiving a decision by the PRRB or HHS may the provider obtain judicial review of an adverse decision in a federal district court, 42 U.S.C. § 1395aa(f)(l), pursuant to the applicable provisions of the Administrative Procedure Act, 5 U.S.C. § 701 et seq. See also Homewood Prof'l Care Ctr., Ltd. v. Heckler, 764 F.2d 1242, 1248 (7th Cir.1985). Under Title 42 U.S.C. § 405(h) of the Social Security Act, made applicable to the Medicare Act by 42 U.S.C. § 1395Ü and 42 U.S.C. § 1395oo(f)(l), the findings and decision of HHS are binding and no decisions are reviewable except after administrative exhaustion and a final decision provided for in 42 U.S.C. § 405(g). Bodimetric Health Services, Inc. v. Aetna Life & Cas., 903 F.2d 480, 483 (7th Cir.1990) cert. denied, 498 U.S. 1012, 111 S.Ct. 579, 112 *806L.Ed.2d 584 (1990); Homewood, 764 F.2d at 1247, 1252; In re St. Johns Home Health Agency, Inc., 173 B.R. 238, 243 (Bankr.S.D.Fla.1994).
II. Factual Background
AHN participated in the Medicare program and received reimbursement for services provided to eligible beneficiaries since 1992 when it executed its provider agreement with the HCFA. During the latter part of 1996, AHN was subject to an audit and review. Based on a random sample of 100 claims filed by AHN with the fiscal intermediary Palmetto, HHS determined that 40% of AHN claims were not properly payable under the Medicare program.
In a letter dated April 15, 1997, Palmetto informed AHN that the review resulted in the determination of a $2,420,782 overpayment. Palmetto provided AHN with its administrative appeal rights and offered AHN the opportunity to repay the amount owed in one lump sum or to repay it over an extended period of time, if it could demonstrate that the payback would be made with non-Medicare funds. AHN was unable to do either, so Palmetto informed AHN of its intent to recover the overpayment by “recouping” the amount owed from current interim payments otherwise due AHN. Palmetto began recoupment in late November.
On December 3, 1997, AHN filed for protection under Chapter 11 of the Bankruptcy Code. Palmetto continued to attempt recoupment after the petition date, however, upon discovering its error, Palmetto refunded those monies recouped after the petition date. [HHS Motion to Dismiss, p. 7] The present adversary was filed a few days after the initial filing of the petition, seeking a temporary restraining order, the turnover of assets of the estate, and a declaratory judgment as to the amount of reimbursement AHN owes HHS. AHN further complains that HHS violated the stay. HHS responds that its attempted recoupment is not a stay violation under § 362.
On January 14, 1998, HHS filed this motion to dismiss. Upon filing of this motion, HHS discovered that AHN had ceased doing business as of December 31, 1997. [Ex. 1 to HHS Response.] The next day, on January 15, 1998, the government again began suspending payments to which the Debtor was otherwise entitled, placing an “administrative hold” on those interim payments it still had in its possession. On January 20, 1998, HCFA informed the Debtor that on February 9, 1998, they would recoup the money held in administrative hold and apply it to the debt AHN owed as a result of the overpayment. Between January 15, the first day of the “administrative hold,” and February 9, 1998, the day of the intended recoupment, Palmetto administratively held approximately $190,000 of payments for medical services that the Debtor provided for Medicare beneficiaries. On February 6, 1998, HHS contacted the Debtor’s attorney to inquire as to whether the Debtor would ask this court to stop the application of the funds on administrative hold to the overpayment. HHS contends that the Debtor’s attorney informed them that he would not ask the court to intervene. On February 9, 1998, Palmetto ceased the administrative hold and actually recouped said funds.
III. Pleadings of the Case and Motion to Dismiss
In this court’s view, AHN’s pleadings and prayer for relief raise two distinct and separate causes of action. First, AHN’s adversary complaint seeks a temporary restraining order, the turnover of assets of the estate, and a declaratory judgment as to the amount of reimbursement AHN owes HHS. The basis for each of these requests for relief originates from the dispute over how much money AHN was overpaid by HHS (“The Overpayment Dispute”). Second, AHN complains in its pleadings that HHS and Palmetto violated the automatic stay by attempting to recover the alleged overpayments (“Automatic Stay Violation”). While the violation of the automatic stay relates to the dispute about over-payments, the basis for that cause of action originates from the actions taken by HHS and Palmetto which occurred after AHN filed bankruptcy. These two causes of action will be dealt with separately.
HHS’s motion to dismiss argues three independent justifications for dismissal: 1) the controversy of the adversary is not yet ripe; *8072) the bankruptcy court lacks jurisdiction over the subject matter of this adversary; and 3) HHS may not be sued in this adversary since they have not waived sovereign immunity.
IY. Jurisdiction
A The Overpayment Dispute
HHS argues that because AHN is asking this court for a declaratory judgment to determine the amounts due and owing between the parties, such determination must be made pursuant to the Medicare Act, 42 U.S.C. § 1395 et seq., and the regulations promulgated thereunder. Pursuant to 42 U.S.C. § 405(h), the decision of the Secretary of the HHS is not subject to judicial review before all administrative remedies have been exhausted. Only after all forms of administrative review are exercised can the district court or bankruptcy court review the Secretaries’ determination.
AHN contends that this court has jurisdiction despite the provisions of § 405(h) because 28 U.S.C. § 1334 gives to the district courts, and thus the bankruptcy courts, original and exclusive jurisdiction of all cases under Title 11, exclusive jurisdiction over all property of the debtor of the estate, and original but not exclusive jurisdiction of all civil proceedings arising under Title 11, or arising in or related to eases under Title 11.
Section 1334 appears to grant jurisdiction to this court and § 405(h) appears to prohibit this court’s jurisdiction. The issue facing this court is whether the court has jurisdiction to determine amounts due at this time because this is a bankruptcy matter or whether it does not have jurisdiction because it is a Medicare dispute.
42 U.S.C. § 405(h), provides that:
[t]he findings and decision of the Secretary after a hearing shall be binding upon all individuals who were parties to such hearing. No findings of fact or decision of the Secretary shall be reviewed by any person, tribunal, or governmental agency except as herein provided. No action against the United States, the Secretary, or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under this subchapter.
42 U.S.C. § 405(h). (emphasis added).
AHN argues that while the third sentence of § 405(h) expressly bars actions under 28 U.S.C. § 1331 (federal questions jurisdiction) or § 1346 (United States as defendant) “to recover on any claim” arising under the Medicare Program, such a restriction does not apply to § 1334 actions. AHN argues that because § 1334 provides an independent grant of jurisdiction to the bankruptcy courts, this court has jurisdiction over this adversary. See In re University Medical Center, 973 F.2d 1065 (3rd Cir.1992); In re Town & Country Home Nursing Services, Inc., 963 F.2d 1146 (9th Cir.1991). When there is an independent grant of jurisdiction to the courts, it is not necessary or required for the parties to exhaust all available administrative remedies before judicial review can take place. Id. HHS counters that the absence of a reference to § 1334 in the language of § 405(h) does not mean that Congress intended to allow Medicare disputes to be resolved in the bankruptcy courts, but rather its omission was inadvertent, resulting from a poorly drafted technical amendment that intended no substantive change to the statute.
The most extensive and detailed analysis of the jurisdictional intersection of § 405(h) and § 1334 was conducted by the court in In re St. Mary Hospital, 123 B.R. 14 (E.D.Pa.1991). St. Mary involved a home health provider that filed bankruptcy once an audit by HHS revealed overpayments. After filing Chapter 11 relief, the trustee filed an counterclaim with the bankruptcy court seeking declaratory relief and turnover of property. HHS filed a motion to dismiss contending that St. Mary Hospital had not exhausted all of its administrative remedies as provided under the Medicare Act, thus such action in the bankruptcy court was precluded under § 405(h). The court turned to the legislative history behind § 405(h) and § 1334 and stated:
When enacted in 1939, section 405(h) barred all actions brought pursuant to 28 U.S.C. § 41, including the grant of bankruptcy jurisdiction to the district court un*808der section 41(19). See Social Security Act Amendments of 1989, Pub.L. No 379, § 205(h), 53 Stat. 1360, 1371 (1939); 42 U.S.C. § 405(h) (1982) (codification note). Certainly, if this suit had been brought then, it would have been barred. When section 41 was replaced with the current jurisdictional provisions, sections 1331 to 1348, 1350 to 1357, 1359, 1397, 2361, 2401 and 2401 of Title 28, the council for the Office of Law Revision recommended to Congress that it modify 405(h) to its present form. Congress adopted the proposed amendments in the Deficit Reduction Act of 1984, Subtitle D, Technical Corrections, using the following language: “section 205(h) [42 U.S.C. § 405(h) ] of such Act is amended by striking out ‘section 24 of the Judicial Code of the United States’ [codified as section 41 of Title 28] and inserting in lieu thereof ‘section 1331 or 1346 of title 28, United States Code,’.” Pub.L. No. 98-369, 98 Stat. 1162 § 2663(a)(4)(D). Congress also cautioned the courts not to interpret the “Technical Corrections” as substantive changes:
[T]he amendments made by section 2663 shall be effective on the date of the enactment of this Act; but none of such amendments shall be construed as or affecting any right, liability, status, or interpretation which existed (under the provisions of law involved) before that date.
Id. at § 2664(b) (emphasis added). As the court in Bodimetric Health Services v. Aetna Life & Casualty, 903 F.2d 480, 489 (7th Cir.1990), stated:
In this section Congress clearly expressed its intent not to alter the substantive scope of section 405(h). Because the previous version of section 405(h) precluded judicial review of diversity actions, so too must newly revised section 405(h) bar these actions. Any other interpretation of this section would contravene section 2664(b) by ‘changing or affecting [a] right, liability, status, or interpretation’ of section 405(h) that existed before the Technical Corrections were enacted.
Bankruptcy actions, like diversity actions, were barred under the prior codification of section 405(h) and remain so today.
St. Mary Hospital, 123 B.R. at 17. Accord St. Johns, 173 B.R. at 244; In re Upsher Laboratories, Inc., 135 B.R. 117, 119-120 (Bankr.W.D.Mo.1991); In re Home Comp Care, Inc., v. U.S. Dept. Of Health, 221 B.R. 202, (N.D.Ill.1998).
Such a reading of § 405(h) and § 1334 is fully consistent with the intent of Congress. As the court in St. Mary stated:
a broad reading of section 405(h) puts its interpretation in accord with Congress’ intent to permit the Secretary in Medicare disputes to develop the record and base decisions upon his unique expertise in the health care field. The misfortune that a provider is in bankruptcy when he has a reimbursement dispute with the Secretary should not upset the careful balance between administrative and judicial re-view____ [It] must be remembered that section 405(h) does not foreclose judicial review of administrative decisions, but merely postpones judicial review until the carefully prepared administrative system is given an opportunity to work.
St. Mary, 123 B.R. at 17. (Citing Weinberger v. Salfi, 422 U.S. 749, 95 S.Ct. 2457, 45 L.Ed.2d 522 (1975)).
The Ninth Circuit opinion in In re Town & Country Home Nursing Services, Inc., 963 F.2d 1146 (9th Cir.1992), disagreed with the analysis followed by St. Mary and other like eases. In Town & Country, the court’s decision primarily addressed questions as to the effect of § 106 of the Bankruptcy Code on waiver of sovereign immunity. Id. at 1149-1154. Only briefly did the court entertain questions as to the relationship between § 405(h) and § 1334. The Ninth Circuit looked summarily at the language of § 405(h) and stated that since § 1334 is not specifically mentioned as are §§ 1331 and 1346, there is no prohibition against a bankruptcy court exercising jurisdiction before all administrative remedies are exhausted. Id. at 1155. The court concluded that:
The rationale underlying section 1334’s broad jurisdictional grant over all matters conceivably having an effect on the bank*809ruptcy estate is clear. This section allows a single court to preside over all of the affairs of the estate, which promotes a “eongressional-endorsed objective: the efficient and expeditious resolution of all matters connected to the bankruptcy estate.” In re Fietz, 852 F.2d 455, 457 (9th Cir.1988) (citing H.R.Rep. No, 595, 95th Cong., 1st Sess. 43-48, reprinted in 1978 U.S.Code Cong. & Admin. News 5963, 6004-08). The language of section 1334(b) grants jurisdiction to the district courts, and therefore to the bankruptcy court, over civil proceedings related to bankruptcy and accords with “the intent of Congress to bring all bankruptcy related litigation within the umbrella of the district court, at least as an initial matter, irrespective of congressional statements to the contrary in the context of other specialized litigation.” 1 L. King, Collier on Bankruptcy, ¶ 3.01[l][c][ii], at 3-22 (15th ed.1991).
Id. at 1155.
While the Town & Country correctly describes the Congressional principles behind creating the bankruptcy courts as a forum where varied and multi-faceted disputes may be resolved in an expeditious fashion, the decision completely ignores the legislative history behind § 405(h). It also ignores the Congressional purpose behind the complex and balanced administrative review provided for under the Medicare Act as explained by St. Mary. In this court’s view, the better reading of § 405(h) and § 1334 holds that § 405(h) intends to have the administrative remedies exhausted before judicial review is taken by a bankruptcy court when the matter is one which “arises under” the Medicare Act. As stated by the St. Johns court, “The filing of a bankruptcy petition does not and should not create a shortcut to judicial review of administrative decisions otherwise subject to exhaustion requirements.” St. Johns, 173 B.R. at 243.
Such an interpretation of § 405(h) and § 1334 would also comport with the logic behind the Fifth Circuit decision in MCorp Financial, Inc. v. Board of Governors, 900 F.2d 852 (5th Cir.1990) aff'd in part, rev’d in part, Board of Governors v. MCorp Financial, 502 U.S. 32, 112 S.Ct. 459, 116 L.Ed.2d 358 (1991). In MCorp, the Fifth Circuit was confronted with a specialized banking statute that prohibited judicial interference with administrative proceedings, 12 U.S.C. § 1818(i), and the general grant of jurisdiction afforded to the bankruptcy courts under § 1334. It was argued that § 1334, which was enacted subsequent to § 1818(i), granted to the bankruptcy courts jurisdiction over the matter even though § 1818(i) seemed to preclude the involvement of the bankruptcy court because the legislative history of § 1334 explained the broad grant of bankruptcy jurisdiction conferred by § 1334. The Fifth Circuit disagreed, holding that such an interpretation would have the effect of “impliedly repealing” § 1818(i). An implied repeal of a statute is highly disfavored and will only be held to have occurred if there is a “positive repugnancy” between two statutory provisions. Id. at 855-856. The court concluded,
Absent some clear intention to the contrary, however, a specific statute will not be controlled by a general one regardless of the priority of enactment. Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437, 107 S.Ct. 2494, 96 L.Ed.2d 385 (1987). Congress revealed no intent to supersede the specific jurisdictional bar of § 1818(i) in the legislative history of the Bankruptcy Reform Act, nor in the recently enacted [FIRREA]. We decline to imply any affirmative powers to the bankruptcy court from Congress’ failure to act in this area.
Id. at 856.(citations omitted).
As in MCorp, the legislative history of § 1334 evidences no intention to make its general provisions override the specific provisions enumerated in § 405(h). Given the Fifth Circuit’s reasoning in MCorp, this court declines to follow Town and Country, but will follow instead the decisions of St. Mary Hospital, St. Johns Home Health Agency, Home Comp Care, and Bodimetric. Accordingly, this court finds that the cause of action and the requests for relief based on the alleged overpayments to AHN “arise under” the Medicare Act. Section 405(h) intended to preclude bankruptcy jurisdiction over matters “arising under” the 'Medicare Act until *810all administrative remedies had been exhausted. Since those remedies have not been exhausted, this court does not have jurisdiction to hear those matters or to determine the amounts due and owing between the parties.
B. Automatic Stay violation
The second cause of action presented by this adversary is based on AHN’s contention that HHS and Palmetto violated the automatic stay by attempting to recoup interim payments it had administratively held. Unlike the first cause of action, the court finds it has jurisdiction to adjudicate the alleged violation of the automatic stay. The basis for such a determination stems from the definition of “arising under” contained in § 405(h).
In In re University Medical Center, 973 F.2d 1065 (3rd Cir.1992), the Third Circuit avoided the implications of the § 405(h) bar when it found that an adversary action commenced by the debtors was not an action “arising under” the Medicare Act. In a set of circumstances similar to the instant case, University Medical Center (“UMC”) filed bankruptcy after HHS reported that UMC had been overpaid by $276,042. Id. at 1070. After UMC filed for Chapter 11 protection, HHS, through its intermediary Blue Cross, withheld interim payments in a potential violation of the automatic stay. Id. UMC responded by filing an adversary proceeding complaining that by demanding payment and withholding interim payments, HHS violated the automatic stay. Id. at 1071.
The Third Circuit determined that the key question was whether UMC’s claims actually “arise under” the Medicare statute, and thus fell under the prohibition of § 405(h). The-court stated:
The Supreme Court has construed the “claim arising under” language of section 405(h) broadly to encompass any claims in which “both the standing and the substantive basis for the presentation” of the claims is the Medicare Act. Heckler v. Ringer, 466 U.S. 602, 615, 104 S.Ct. 2013, 2022, 80 L.Ed.2d 622 (1984) (quoting Weinberger v. Salfi, 422 U.S. 749, 760-61, 95 S.Ct. 2457, 2464-65, 45 L.Ed.2d 522(1975)). * * * % * *
Due to the fact that its adversary proceeding was based on the contention that HHS violated the automatic stay provision of the bankruptcy Code, UMC maintains that its claims arose under the Bankruptcy Code, not the Medicare Act. Thus, the mandate of section 405(h) that the Medicare Act’s administrative review procedures be exhausted before judicial review is sought does not apply to this case.
We agree with UMC. Its challenge to the Secretary’s attempt to recover pre-petition overpayments through post-petition withholding is not inextricably intertwined with any dispute concerning the fiscal intermediaries reimbursement determinations.
University Medical Center, 973 F.2d at 1073. The University Medical Center court held that because it could determine whether HHS violated the automatic stay by withholding interim payments without determining the validity or amount of any overpayment, UMC’s adversary did not “arise under” the Medicare Act. Instead, the adversary’s automatic stay violation claim derived its standing and substantive basis from the Bankruptcy Code. As such, the § 405(h) prohibition did not apply.1
*811With respect to the cause of action based on the violation of the automatic stay, because it “arises under” the Bankruptcy Code and not the Medicare Act, this court has jurisdiction to adjudicate the dispute.
Y. Automatic Stay Violation
This court finds that the automatic stay has not been violated by HHS’ recoupment efforts. The Fifth Circuit has recognized that the right to recoupment exists in bankruptcy and that the exercise of the right of recoupment does not violate the automatic stay. Matter of Holford, 896 F.2d 176 (5th Cir.1990). The key requirement for the right of recoupment to exist, however, is that the amounts sought to be recouped must come from the same transaction. Id.; In re Heffeman Memorial Hospital District, 192 B.R. 228 (Bankr.S.D.Cal.1996); University Medical Center, 973 F.2d at 1079-80. Usually, in the bankruptcy context, recoupment has been applied where the relevant claims arise out of a single contract that “provides for advance payments based on estimates of what ultimately would be owed, subject to later correction.” University Medical Center, 973 F.2d at 1080. (citing In re B & L Oil Co., 782 F.2d 155, 157 (10th Cir.1986)).
The court in University Medical Center, however, held that Medicare payments made in 1985 did not arise out of the same transaction as Medicare payments made in 1988 and thus could not be the proper subject of re-coupment. The court held that “both debts must arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations.” Id. at 1081. Rejecting the arguments that the relationship between HHS and its care providers amount to one continuous transaction, the court held:
the ongoing relationship that exists between a Medicare provider and HHS is not sufficient to support the conclusion that Medicare overpayments made to UMC in 1985 arise from the same transaetion, for the purposes of equitable recoupment, as Medicare payments due UMC for services provided in 1988. The 1988 payments were independently determinable and were due for services completely distinct from those reimbursed through the 1985 payments. Further, the entire account reconciliation process established by the Medicare Act and regulations works on an annual basis.
Id. By finding that recoupments in 1988 for payments in 1985 did not meet the one transaction requirement, the court held that the actions of HHS violated the automatic stay.
Other courts have disagreed with the University Medical Center decision. In Heffernan, the court held that many recoupment cases where a single contract is found to meet the “one transaction” requirement often involve a contract providing for advance payments subject to later correction based on estimates of what ultimately would be owed. Heffernan, 192 B.R. at 231. (citing B & L Oil, 782 F.2d at 157; In re Yonkers, 22 B.R. 427, 433 (Bankr.S.D.N.Y.1982); Waldschmidt v. CBS, Inc. 14 B.R. 309 (M.D.Tenn.1981); In re Midwest Service and Supply Co., 44 B.R. 262 (D.Utah 1983); Lee v. Schweiker, 739 F.2d 870 (3rd Cir.1984)). In these cases, recoupment was allowed because the “claims arose from a single contract, thereby satisfying the “same transaction” requirement for recoupment.” Heffernan, 192 B.R. at 231. Regardless of the length of time between the payment and the repayment, “recoupment is justified in the single contract cases because ‘there is but one recovery due on a contract, and that recovery must be determined by taking into account mutual benefits and obligations of the contract.’ ” Id. (citing In re Holford, 896 F.2d 176, 178 (5th Cir.1990)).
The Heffeman court likened that ease to the Tenth Circuit opinion in B & L Oil. In B & L Oil, a division order gave Ashland Petroleum the right to purchase unspecified amounts of crude oil produced by the Debtor. Ashland overpaid in August of 1982 for oil produced and delivered in June of 1982. The *812Debtor filed for Chapter 11 relief in September 1982. Ashland thereafter withheld post-petition payments owed the debtor for post-petition oil production to recoup the overpayment of August 1982. As summarized by the Hejfeman court:
The Tenth Circuit had no difficulty holding that the oil division order was a single contract. Further, the court found that the month-to-month purchases of oil arose out of the same transaction for purposes of applying the recoupment doctrine in bankruptcy. In fact, the court reasoned that even where the obligations are easily separable and independently determinable (i.e. month-to-month deliveries and invoices for the same), overpayments made under a single contract are much like advance royalties to a writer or musician, or Medicare overpayments to a hospital. Accordingly, the Tenth Circuit found that the recoupment doctrine properly applied.
Heffernan, 192 B.R. at 231 (citations omitted). Accord, In re Harmon, 188 B.R. 421 (9th Cir. BAP 1995). See generally, U.S. v. Consumer Health Services of America, 108 F.3d 390, 395 (D.C.Cir.1997).
This court agrees with the holdings in Hejfeman and B & L Oil. The contract between AHN and HHS, despite the individual delivery of services and payment of costs, constitutes “one transaction” for purposes of recoupment. HHS, therefore, was entitled to recoup from AHN for the overpayments and did so without violating the automatic stay. As a result, the portion of the adversary relating to the automatic stay violations is dismissed.
YI. Conclusion
This court lacks jurisdiction to hear the cause of action relating to the determination of the amounts owed and due between AHN and HHS. St. Mary and St. Johns conclude that § 405(h) prohibits judicial review of controversies arising under the Medicare Act before the exhaustion of all administrative remedies. Since AHN still has administrative remedies it can exercise, this court’s consideration of that matter would be premature.
Likewise, the court also dismisses AHN’s claim for violation of the automatic stay. Because the Fifth Circuit has recognized that the right of recoupment is not subject to the stay provisions of § 362, HHS’ attempts to recoup the administratively held funds did not violate the automatic stay.
Because this disposes of all the matters contained in the pleadings, this case is dismissed. Given the resolution of the issues above, the issues of mootness and sovereign immunity raised by HHS’s response need not be addressed.
ORDER
For the reasons stated in the Memorandum Opinion, it is ordered that this adversary proceeding is dismissed.
. It is instructive to consider an important factual difference between University Medical Center, and the instant case. In University Medical Center, the adversary brought by UMC solely sought a determination that HHS had violated the automatic stay and damages resulting therefrom. The parties did not dispute the reimbursement determination made by the Secretary or the fiscal intermediary. Disputing those findings in the bankruptcy court would have triggered § 405(h). “In fact, the parties stipulated both to the amounts of the overpayments made to UMC and to the separate pursuit of any substantive dispute concerning these amounts through the normal administrative processes set forth in the Medicare statute.” Id. at 1073. In the instant case, not only is there not a stipulation as to the amount subject to reimbursement, but in the first cause of action AHN specifically asks this court for a declaratory judgment for the amounts due and owing to HHS. See also St. Johns, 173 B.R. at 245 (recognizing the jurisdictional implications of asking for a determination of a violation of the automatic stay versus asking for a determination as to the amount of overpayment.) By considering the causes of action separately, how*811ever, although we are required to dismiss the overpayments cause of action, we can consider on the merits the violation of the automatic stay cause of action. Once the cause of action asking for a determination as to the amount due and owing between the parties is dismissed, the cause of action seeking a damages as a result of the automatic stay remains, putting the instant case on all fours with University Medical Center. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492733/ | *916ORDER DENYING EMERGENCY MOTION FOR STAY OF JUDGMENT PENDING APPEAL AND MOTION FOR RECALL OR STAY OF MANDATE PENDING APPEAL
BOULDEN, Bankruptcy Judge.
The matter before the Court is the Appellants’ Emergency Motion for Stay of Judgment Pending Appeal (Stay Motion) and Motion for Recall or Stay of Mandate Pending Appeal (Reeall Motion) (collectively, the Motions). The Appellee opposes the Motions. The Appellants have filed an Application for Leave to File Reply to Appellee’s Objection to Appellants’ Emergency Motion (Application for Leave to Reply), together with a proposed reply. After review of the entire record in this case and the applicable law, which is discussed below, we conclude that the Application for Leave to Reply should be granted, but that the Motions should be denied.
On June 4, 1998, the Court filed an opinion affirming a judgment of the United States Bankruptcy Court for the Western District of Oklahoma in favor of the Appellee in the total amount of $146,282.00, plus costs and interest at the rate of 5.49% annually. On June 22, 1998, pursuant to 10th Cir. BAP L.R. 8016-3(a), the Court issued a mandate in this case. The mandate was received by the bankruptcy court on June 25,1998, and it was filed in the records of that court. On June 26, 1998, the Appellants filed their Motions, seeking to reeall or stay the .mandate and for a stay pending appeal. At the time the Motions were filed the Appellants had not yet filed a notice of appeal from this Court’s decision with the United States Court of Appeals for the Tenth Circuit, but they stated in their Motions that they intended to do so in accordance with the time limitations set forth in Fed. R.App. P. 4. On July 2, 1998, the Appellants filed a notice of appeal from this Court’s decision with the Tenth Circuit, and also filed the Application for Leave to Reply with this Court.1
The local rules of this Court provide that “[t]he mandate of the court must issue 7 days after the expiration of the time for filing a motion for rehearing unless such a motion is filed or the time is shortened or enlarged by order.” 10th Cir. BAP L.R. 8016-3(a).2 It follows that to stay the issuance of the mandate, one must file a motion to do so prior to its issuance under Rule 8016-3(a). See 10th Cir. BAP L.R. 8016-3(b) (governing motions for stay of mandate pending appeal).3
*917In the present case, it is impossible to stay the issuance of the mandate because it was properly issued by the Court under Rule 8016-3(a) prior to the filing of the Motions, and the mandate does not indicate that the Court intended to retain jurisdiction over the matter. See, e.g., United States v. Jacobson, 15 F.3d 19, 22 (2d Cir.1994) (appellate court may retain jurisdiction to insure compliance with its mandate). In light of this fact, the Court no longer has jurisdiction over this appeal, unless the mandate is recalled by the Court as requested by the Appellants. See, e.g., United States v. Salameh, 84 F.3d 47, 50-51 (2d Cir.1996) (the effect of the mandate is to remove a case from the jurisdiction of the appellate court, and jurisdiction may only be restored by recalling the mandate); United States v. Rivera, 844 F.2d 916, 920 (2d Cir.1988) (jurisdiction follows the mandate); Deering Milliken, Inc. v. Federal Trade Comm., 647 F.2d 1124, 1129 (D.C.Cir.1980) (appellate court retains jurisdiction until mandate is issued); 20 Moore’s Fed. P. §§ 341.02 & 341.12[2] (3rd ed.1997) (mandate returns jurisdiction to the trial court) (citing numerous eases) [hereinafter Moore’s Fed. P.]; see also James Barlow Family Ltd. Partnership v. Munson, 132 F.3d 1316 (10th Cir.1997) (the court treated a motion to clarify an order and opinion as a motion to recall the mandate because the mandate had been issued prior to the filing of the motion to clarify), cert. denied, — U.S. -, 118 S.Ct. 1364, 140 L.Ed.2d 513 (1998).
There is no rule of procedure governing recalling or vacating a mandate once it has been issued. Recently however, the Supreme Court stated that—
[T]he courts of appeals are recognized to have an inherent power to recall their mandates, subject to review for an abuse of discretion. In light of “the profound interests in repose” attaching to the mandate of a court of appeals, however, the power can be exercised only in extraordinary circumstances. The sparing use of the power demonstrates it is one of last resort, to be held in reserve against grave, unforeseen contingencies.
Calderon v. Thompson, — U.S.-,-, 118 S.Ct. 1489, 1498, 140 L.Ed.2d 728 (1998) (quoting 16 Charles A. Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice & Procedure § 3938, p. 712 (2d ed.1996)); see also Hawaii Housing Authority v. Midkiff, 463 U.S. 1323, 1324, 104 S.Ct. 7, 77 L.Ed.2d 1426 (1983) (Rehnquist, J., in chambers) (“Although recalling the mandate is an extraordinary remedy, I think it probably lies within the inherent power of the Court of Appeals.... ”). Prior to Calderon, the Tenth Circuit similarly held that—
In this circuit, as in all circuits that have addressed the issue, “an appellate court has the power to set aside at any time a mandate that was procured by fraud or act to prevent an injustice, or to preserve the integrity of the judicial process.” Although the rule is stated in broad terms, the appellate courts have emphasized that the power to recall or modify a mandate is limited and should be exercised only in extraordinary circumstances. The limited nature of this power is a reflection of the importance of finality: once the parties are afforded a full and fair opportunity to litigate, the controversy must come to an end and courts must be able to clear their dockets of decided cases.
Ute Indian Tribe v. Utah, 114 F.3d 1513, 1522 (10th Cir.1997), cert. denied, — U.S. -, 118 S.Ct. 1034, 140 L.Ed.2d 101 (1998) (quoting Coleman v. Turpen, 827 F.2d 667, 671 (10th Cir.1987)) (citations omitted); see Moore’s Fed. P. § 341.15[1] (citing numerous cases articulating this rule). The Tenth Circuit has also stated that it has “inherent authority to recall the mandate for the purpose of clarifying an ambiguous prior order of the court.” James Barlow, 132 F.3d at 1316; see Calderon, — U.S. at -, 118 S.Ct. at 1501 (recognizing that a party can have no interest in preserving a mandate not *918in accordance with the actual decision rendered by the court).
The ease at hand does not present any extraordinary circumstances that would justify recalling the mandate, nor have the Appellants asked the Court to clarify an ambiguous prior order. Rather, the Appellants request that the mandate be recalled so as restore the Court’s jurisdiction to allow it to enter a stay pending appeal under Fed. R. Bankr.P. 8017.4 Given the facts in this case, such a request does not merit recalling the mandate. Indeed, the Appellants are not without remedy as they may seek a stay pending appeal from the Tenth Circuit pursuant to Fed. R.App. P. 8.
Accordingly, it is HEREBY ORDERED that:
(1) The Application for Leave to Reply is GRANTED;
(2) The Recall Motion is DENIED; and
(3) The Stay Motion is DENIED.
.The fact that the Appellants filed the Stay Motion prior to the filing of a notice of appeal with the Tenth Circuit, does not make the Stay Motion invalid. Fed. R. Bankr.P. 8017 anticipates that motions for stay pending appeal may be filed prior the actual filing of an appeal. Fed. R. Bankr.P. 8017(b) ("If before the expiration of a stay entered pursuant to this subdivision there is an appeal to the court of appeals by the party who obtained the stay, the stay shall continue until final disposition by the court of appeals.”). There is a split of authority, which has not been addressed by the Tenth Circuit, as to whether a lower court has jurisdiction to consider a motion for stay once a notice of appeal to a circuit court of appeals has been filed. See In re One Westminister Co., 74 B.R. 37, 38 (D.Del.1987) (district court no longer had jurisdiction to issue a stay once the notice of appeal was filed); but see Miranne v. First Fin. Bank (In re Miranne), 852 F.2d 805, 806 (5th Cir.1988) (district court has jurisdiction to consider stay motion even after notice of appeal is filed); accord City of Olathe v. KAR Development Assocs. (In re KAR Development Assocs.), 182 B.R. 870, 872 (D.Kan.1995); In re Winslow, 123 B.R. 647, 647-48 n. 1 (D.Colo.1991). This issue is not before the Court as the Appellants had not filed a notice of appeal at the time that the Stay Motion was filed, and based on the ruling herein, we need not address this issue.
. Absent an order otherwise, a motion for rehearing must be filed within 10 after entry of the Court’s judgment. Fed. R. Bankr.P. 8015.
. The issuance of a mandate by a federal court of appeals, due to the absence of a motion for stay of the mandate under Fed.R.App. P. 41(b) or the denial of such a motion, does not defeat the right to petition the Supreme Court for writ of certio-rari. See United States v. Villamonte-Marquez, 462 U.S. 579, 581 n. 2, 103 S.Ct. 2573, 77 L.Ed.2d 22 (1983); Aetna Casualty & Sur. Co. v. Flowers, 330 U.S. 464, 467, 67 S.Ct. 798, 91 L.Ed. 1024 (1947); 17 Charles A. Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 4036 at 19 (2d ed.1996). Rather, the Supreme Court, not the lower appellate court, recalls and stays the mandate pending its disposition of the petition. See, e.g., Illinois Department of Corrections v. Flowers, 505 U.S. 1239, 113 S.Ct. 13, 120 L.Ed.2d 941 (1992); Fluent v. Salamanca Indian Lease Authority, 500 U.S. 902, 111 S.Ct. 1678, 114 L.Ed.2d 74 (1991); *917International Primate Protection League v. Administrators of Tulane Educational Fund, 499 U.S. 955, 111 S.Ct. 1575, 113 L.Ed.2d 641 (1991). Typically, the Court's order recalling and staying the mandate of a court of appeals provides that if the petition is denied the stay terminates automatically, but if the petition is granted the stay continues pending the judgment of the Court. See, e.g., Flowers, 113 S.Ct. at 13. Similarly, the Appellants failure to obtain a stay of the mandate under 10th Cir. BAP L.R. 8016-3(b) does not affect their ability to appeal.
. A stay of the mandate under 10th Cir.BAP L.R. 8016-3(b) is different than a stay pending appeal under Fed. R. Bankr.P. 8017. A stay of the mandate maintains an appellate court's jurisdiction over the case. But, it does not stay the operation and enforcement of the judgment appealed. See Deering Milliken, 647 F.2d at 1129 (recognizing this distinction); see also Hovey v. McDonald, 109 U.S. 150, 161, 3 S.Ct. 136, 27 L.Ed. 888 (1883) ("an appeal from a decree granting, refusing or dissolving an injunction does not disturb its operative effects” absent a stay pending appeal). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492734/ | ORDER
DENNIS D. O’BRIEN, Chief Judge.
This matter came before the Court on the Debtors’ Objection to the Claim of the Minnesota Department of Revenue. The Trustee joined in the Debtors’ Objection. Also before the Court is the Department of Revenue’s Motion to Dismiss or Convert. Appearances are as noted in the record. This ORDER is made based on the Federal and Local Rules of Bankruptcy Procedure.
*186I.
FACTS
On July 6, 1992, the Debtors filed for bankruptcy under Chapter 12. On December 29, 1992, the Debtors’ Chapter 12 plan was confirmed. On April 15, 1993, the Debtors filed their 1992 Minnesota income tax returns showing an amount owing of $12,-591.36. The tax resulted from the conveyance of real estate and farm machinery to secured creditors as part of their Chapter 12 plan. The Minnesota Department of Revenue did not seek to have this tax debt treated as an administrative expense during the Chapter 12 proceeding. The Debtors failed to pay any portion to the Department of Revenue during the pendency of the Chapter 12 case. The Debtors received their Chapter 12 discharge on June 10,1996.
On August 5, 1997, the Debtors filed for bankruptcy under Chapter 13. Their Chapter 13 plan was confirmed on September 23, 1997. On December 5,1997, the Department of Revenue timely filed a 11 U.S.C. § 1322(a)(2) priority claim in the amount of $16,634.81 based on the Debtors’ 1992 tax liability. The Department of Revenue asserts that its claim is for a 11 U.S.C. § 507(a)(8)(A)(i) tax; a tax measured by income for a pre-petition taxable year for which a return was due within three years before filing of the petition. The Department of Revenue argues that its claim is entitled to priority status because the period in which the Department of Revenue could collect was tolled during the Chapter 12 case; and, when factoring in the tolling period, the tax debt fell within the three year reach back period of 11 U.S.C. § 507(a)(8)(A)®.
The Debtors objected to the Department of Revenue’s proof of claim. They assert that during the Chapter 12 proceeding the Department of Revenue had remedies, such as objecting to the plan or seeking relief from the automatic stay; and, the failure to assert those remedies prohibits the tolling of the three year reach back period. The Trustee joins in the Debtors’ objection.
The Department of Revenue also filed a Motion to Covert or Dismiss the Chapter 13 case based on the Debtors lack of good faith in filing the Chapter 13 case after the Chapter 12, and the failure to provide for payment of its priority claim in the plan. The Debtors assert that the Department of Revenue should have raised the bad faith argument at the confirmation hearing and is not entitled to raise the issue at this time. Alternatively, the Debtors argue that the plan has been proposed in good faith and should not be dismissed or converted.
II.
DISCUSSION
A. TOLLING
11 U.S.C. § 1322 provides in part:
(a) The plan shall—
(2) provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to different treatment of such claim ...
The issue presented is whether the Department of Revenue’s claim is entitled to full payment as a priority under 11 U.S.C. § 1322(a)(2) by reason of being a tax described in 11 U.S.C. § 507(a)(8). In order for the claim to be entitled to priority, it is necessary to determine whether the three year reach back period of 11 U.S.C. § 507(a)(8)(A)® is tolled during a prior bankruptcy proceeding when the tax arose during the pendency of that bankruptcy proceeding. The Department of Revenue asserts that its claim for 1992 taxes is entitled to priority status because it was prohibited from collecting those taxes during the Chapter 12 case, thereby tolling the reach back period of 11 U.S.C. § 507(a)(8)(A)®. The Debtors argue that the period should not be tolled because the Department of Revenue failed to assert the rights and remedies it possessed during the Chapter 12 proceeding, such as objecting to the plan or seeking relief from the automatic stay.
11 U.S.C. § 507(a)(8)(A)® provides:
(a) The following expenses and claims have priority in the following order:
*187(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
The Bankruptcy Code does not contain any provisions which explicitly toll the three year reach back period of 11 U.S.C. § 507(a)(8)(A)(i). In re Waugh, 109 F.3d 489, 492 (8th Cir.1997). However, courts have found that the period is tolled during the pendency of a prior bankruptcy petition where the taxes arose pre-petition of the prior bankruptcy, based on 11 U.S.C. § 108(c) and 26 U.S.C. § 6503 of the Internal Revenue Code. In re Waugh, 109 F.3d 489 (8th Cir.1997); In re West, 5 F.3d 423, (9th Cir.1993); In re Montoya, 965 F.2d 554 (7th Cir.1992).
11 U.S.C. § 108(c) provides:
(c) Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.
26 U.S.C. § 6503 is entitled, “Suspension of running of period of limitation” and provides in relevant part:
(b) Assets of taxpayer in control or custody of court. — The period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States or of any State or of the District of Columbia, and for 6 months thereafter.
* * * * * *
(h) Cases under title 11 of the United States Code. — The running of the period of limitations provided in section 6501 or 6502 on the making of assessments or collection shall, in a case under title 11 of the United States Code, be suspended for the period during which the Secretary is prohibited by reason of such case from making the assessment or from collecting and—
(1) for assessment, 60 days thereafter, and
(2) for collection, 6 months thereafter.
Based on these statutory provisions, the general rule is that the three-year reach back period of 11 U.S.C. § 507(a)(8)(A)® is suspended during the time that the automatic stay prevented the taxing authority from collecting outstanding pre-petition tax debts.1 In re Waugh, 109 F.3d at 493. However, this case involves taxes that arose during the pendency of the prior bankruptcy case, not pre-petition to the prior bankruptcy. The issue then is the applicability of the general *188rule of Waugh to taxes arising during the pendency of the prior bankruptcy case.
1. The Waugh holding extends to post-petition taxes.
The Department of Revenue asserts that the Waugh rule should be extended to apply to post-petition taxes. The Debtors argue that Waugh does not apply as its holding is strictly limited to taxes arising pre-petition of a prior bankruptcy case.
Authority exists for the position that the Waugh holding also applies to toll the three-year reach back period of 11 U.S.C. § 507(a)(8)(A)(i) in cases involving post-petition taxes incurred during the pendency of the first bankruptcy case. In re Occhipinti, 80 A.F.T.R.2d 97-8324, 1997 WL 837627 (Bankr.E.D.Fla.1997), involved a situation where the Chapter 13 plan was confirmed and a discharge was subsequently entered. However, federal income taxes that came due during the pending Chapter 13 case were not paid. Three months after receiving their discharge, the debtors filed another Chapter 13 case. The issue was whether the taxes that came due during the prior Chapter 13 case were entitled to priority. But for application of the tolling rule during pendency of the earlier case, the tax debt would have been outside the three year priority period applicable to the later filing. The court held:
Although it is true that the cases upon which the government relies dealt with suspending the priority period for liabilities that were pre-petition in the prior case, their reasoning applies equally to a situation, such as this one, in which the liabilities in dispute were post-petition in the prior case.
In re Occhipinti, 80 A.F.T.R.2d 97-8324.
Essential to the holding was the fact that the automatic stay precluded the government from pursuing its collection activities during the pendency of the prior bankruptcy case. The court also found that even though the government “could have asserted these [post-petition] taxes in the prior bankruptcy case but did not do so constitutes no reason not to apply the rule represented by the weight of authorities.” In re Occhipinti, 80 A.F.T.R.2d 97-8324.
In re Cowen, 207 B.R. 207 (Bankr.E.D.Cal.1997), involved a situation where the debtors’ Chapter 13 case, which was dismissed, was followed by a second Chapter 13 ease approximately two years later. The taxes at issue were federal taxes which came due during the pendency of the first Chapter 13 case, but before its dismissal. The court held that because the Internal Revenue Service was prohibited from collecting the post-petition taxes by reason of the automatic stay in the earlier case, the reach back period of 11 U.S.C. § 507(a)(8)(A)(i) should be tolled. In re Cowen, 207 B.R. at 211. The court also found that the Internal Revenue Service had no obligation to seek relief from the stay to enforce its collections rights in the prior bankruptcy. In re Cowen, 207 B.R. at 210.
This Court agrees with the holding in both In re Occhipinti and In re Cowen that the Waugh holding extends to permit tolling for post-petition taxes arising during a prior bankruptcy case where collection is stayed by the automatic stay.
2. The Effect of the Automatic Stay.
As the cases illustrate, the turning point of the tolling analysis is whether the Department of Revenue was prohibited from collecting the post-petition taxes through the automatic stay of 11 U.S.C. § 362. § 362(c) provides that:
(c) Except as provided in subsections (d),
(e), and (f) of this section—
(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;
(2) the stay of any other act under subsection (a) of this section continues until the earliest of—
5{C í¡í 5}í $
(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of , this title, the time a discharge is granted or denied.
Property of the estate remained as such until the discharge was entered. While 11 U.S.C. § 1227(b) provides: “[e]xcept as oth*189erwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all the property of the estate in the debtor”, the order confirming the Chapter 12 plan provided otherwise. Paragraph three of the order confirming provides that “all non-exempt property of the estate shall remain property of the estate until the court orders dismissal or conversion of the case or discharge of the debtor.” The discharge was entered on June 10, 1996. Therefore, by virtue of the order confirming and § 362(c)(2)(C), the automatic stay remained in effect until June 10,1996.
The next issue is whether the automatic stay actually applied to prohibit the Department of Revenue from collecting the 1992 taxes. The post-petition taxes arose in connection with the sale of assets as part of the Chapter 12 plan. Clearly, such taxes were entitled to administrative expense status pursuant to 11 U.S.C. § 503(b)(1)(B).2 However, in order to be classified as an administrative expense, the party seeking the classification must make a motion pursuant to Local Rule 3002-2(b). The Department of Revenue made no such motion. Therefore, the claim should be treated as any other post-petition claim making it subject to the automatic stay during the pendency of the Chapter 12 proceeding. As the automatic stay was in place, the Waugh tolling rule applies, and the Department of Revenue’s claim is entitled to 11 U.S.C. § 1322(a)(2) priority.
B. MOTION TO DISMISS OR CONVERT
The Department of Revenue also made a motion to dismiss or convert the ease pursuant to 11 U.S.C. § 1307(c). 11 U.S.C. § 1307 sets out the basis on which a Chapter 13 ease can be dismissed or converted. It requires that dismissal or conversion be determined by what is in the best interests of creditors and the estate. The section also sets out situations constituting cause for dismissal or conversion, but the section is not meant to be exclusive. 11 U.S.C. § 1307(c)(6) allows for dismissal or conversion for a “material default by the debtor with respect to a term of a confirmed plan”.
This Chapter 13 plan was confirmed on September 23, 1997. It provided in paragraph 3 that: “[t]he trustee shall pay in full all claims entitled to priority under § 507 ...” The Debtors never listed the Department of Revenue’s claim as a priority. Because the Department of Revenue’s claim is entitled to priority in the amount of $16,-634.81, it must be paid in full under the plan.
The Debtors cannot pay the Department of Revenue’s claim in full. The Debtors’ Chapter 13 schedules list a total of $106,924.15 in liabilities. Only $23,612.00 is listed as secured and that is the mortgage on the Debtors homestead which was current at the time of the Chapter 13 filing. The remaining $83,312.15 of liabilities are classified by the Debtors as unsecured non-priority claims divided between two creditors: the Internal Revenue Service in the amount of $65,395.15; and, the Department of Revenue in the amount of $17,917.3 The claim of the Internal Revenue Service has since been classified as secured pursuant to Court order dated June 24, 1998. The Debtors’ Schedule J reveals monthly disposable income of only $33.99. Under the confirmed plan, the Debtors are paying $100 per month for a total of $3600. The confirmed plan will not pay the priority claim of the Department of Revenue in full; nor can the Debtors amend the plan to provide for payment in full. Therefore, it is in the best interests of creditors that this case be dismissed.
III.
DISPOSITION
Based on the foregoing analysis,
IT IS HEREBY ORDERED THAT:
*190(1) The Minnesota Department of Revenue has an allowed 11 U.S.C. § 1322(a)(2) priority claim in the amount of $16,634.81; and the objections to the claim are overruled.
(2) This case is hereby DISMISSED.
. At issue in this case is not 26 U.S.C. § 6503 of the Internal Revenue Code, but instead Minn. Stat. § 289A.41 entitled “Bankruptcy; suspension of time" which is similar to § 6503. It provides;
The running of the period during which a tax must be assessed or collection proceedings commenced is suspended during the period from the date of a filing of a petition in bankruptcy until 30 days after either notice to the commissioner of revenue that the bankruptcy proceedings have been closed or dismissed, or the automatic stay has been terminated or has expired, whichever occurs first. The suspension of the statute of limitations under this section applies to the person the petition in bankruptcy is filed against and other persons who may also be wholly or partially liable for the tax.
. 11 U.S.C. § 503(b)(1)(B) provides:
(b) After notice and a hearing, there shall be allowed administrative expenses...
(1)(B) any tax-
00 incurred by the estate, except a tax of a kind specified in section 507(a)(8).
. The Department of Revenue filed a claim in the amount of $16,634.81. Both the claims of the Internal Revenue Service and the Department of Revenue are entirely based on income tax liability incurred in 1992 that was not paid by the Debtors under their Chapter 12 plan. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492735/ | ORDER GRANTING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
STEVEN H. FRIEDMAN, Bankruptcy Judge.
This matter came before the Court on July 7, 1998, for consideration of the motion of SouthTrust Bank of Florida (“SouthTrust”) for summary judgment. The parties agree that there are no disputed issues of fact. Having considered the argument of counsel and for the reasons set forth below, the Court grants SouthTrust’s motion for summary judgment.
In January, 1996, the Debtor, Family Health Foods U.S.A., Inc. (the “Debtor”) filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. During the course of the proceeding, the Debtor made payments under a promissory note to the secured creditor, SouthTrust, in the amount of $9,569.43. In June, 1996, the ease was converted to a case under Chapter 7 and the Chapter 7 Trustee, Patricia Dzikowski (the “Trustee”) was appointed. The Trustee contends that these post-petition payments were improper as being made without court authorization and are avoidable pursuant to 11 U.S.C. § 549.
The Trustee argues that pursuant to Section 549, a creditor, secured or other*251wise, must obtain authorization from the Court to receive such payments post-petition or risk the forfeiture of money received to the Chapter 7 Trustee. Section 549 provides-
(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 case; 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.
Courts unequivocally agree that payments received through a Chapter 11 plan before a ease is converted are not recoverable as post-petition transfers. However, courts which have considered the avoidability of payments made before confirmation of a plan have been less clear and their reasoning has been varied. In a recent case, In re Michelle’s Hallmark Cards & Gifts, Inc., 219 B.R. 316 (Bankr.M.D.Fla.1998), Judge Proctor considered whether payments made post-petition to a creditor were recoverable. In that ease, the court first determined that the creditor was not properly perfected, and accordingly, that the Chapter 7 trustee had a superior interest in the property. The court concluded-
Because the trustee has priority over the defendant’s security interest, postpe-tition payments to the defendant are unauthorized under the Bankruptcy Code. Furthermore, the payments were not authorized by this Court because an order entitling the defendant to adequate protection was never issued.
Id. at 323. This statement is a bit unclear. It appears from the second sentence of the quote that even had the creditor’s interest been properly secured, the Court would have required an adequate protection order to be in effect before recognizing the propriety of post-petition payments. However, because the circumstances in that case are different than those sub judice, this Court reaches a different conclusion on the issue at hand.
This issue was squarely addressed in In re Ford, 61 B.R. 913 (Bankr.W.D.Wis.1986). In that case, like this one, the debtor continued to make payments to its secured creditor post-petition, without court authorization. The court concluded that because Section 1108 authorizes a debtor to continue to operate his business, he may continue to make payments to secured creditors. The Court notes that “[t]he use of funds by the debtor to keep current on his secured debt was, in the absence of any proof to the contrary, a proper exercise of the power to operate the business under section 1108.” See also Habinger, Inc. v. Metropolitan Cosmetic and Reconstructive Surgical Clinic, P.A., 124 B.R. 784, 786 (D.Minn.1990); In re Maun, 95 B.R. 94, 95 (Bankr.S.D.Ill.1989). This Court agrees with Ford, and determines that payments made in the ordinary course of a debtor’s business to a secured creditor after a Chapter 11 bankruptcy petition is filed and before a chapter 11 plan is confirmed are allowed by Section 1108 and are not avoidable post-petition transfers. Accordingly, it is
ORDERED that SouthTrust’s motion for summary judgment is granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492736/ | MEMORANDUM OF OPINION ON REAFFIRMATION AGREEMENT
JOHN C. AKARD, Bankruptcy Judge.
The Chase Manhattan Bank, USA (Bank) proposed a reaffirmation agreement to Randy Doyle Bain, one of the Debtors in the captioned case. The Bank requested that the court approve the reaffirmation agreement. The court finds that it cannot approve the reaffirmation agreement. Consequently, it must be denied.
FACTS
Randy Doyle Bain and Steffanie Marie Bain filed for relief under Chapter 7 of the Bankruptcy Code on March 9, 1998. At the discharge and reaffirmation hearing on July 29, 1998, a reaffirmation agreement between Mr. Bain and the Bank was presented to the court for consideration. The Bank requested that the court approve the reaffirmation agreement.
The reaffirmation agreement described Mr. Bain’s obligation to the Bank on a credit card in the amount of $388.00. It provided that if he paid the Bank $19.40, the credit card account would be reopened with a limit of $400.00. In effect, Mr. Bain would be paying $388.00 plus interest1 for $12.00 worth of credit. The agreement does not clearly state whether the $19.40 payment would be applied to interest, or to principal, or whether it is an additional charge being made by the Bank. The agreement further provides that if the Debtor does not timely rescind the agreement and does not pay the $19.40, that the Bank can sue him for the entire unpaid balance of the account.
Mr. Bain stated that he felt he needed a credit card because he traveled and wanted to use the credit card to make hotel and auto rental reservations. With only $12.00 available credit on the card, it is not likely those purposes could be achieved. The court advised Mr. Bain, as it does every debtor, that he could pay any bill he wished to pay. However, this court cannot find that it is in Mr. Bain’s best interest to pay $388.00 plus interest for $12.00 worth of credit.
CONCLUSION
Because Mr. Bain chose to reaffirm the obligation, his attorney approved the reaffirmation agreement. If the Bank had not asked for the court’s approval, the only thing the court could have done was to point out to Mr. Bain the folly of his choice. The Bank’s request for approval by the court placed the burden on the court to review the reaffirmation agreement. For the reasons stated, the court cannot approve it.2
*345ORDER ACCORDINGLY.3
. The interest is not disclosed, but interest on credit card accounts is typically between 18% and 22% per annum.
. In all likelihood, Mr. Bain will soon have several opportunities to get into debt to credit card companies. Attorneys advise the court that their Chapter 7 clients receive numerous credit card solicitations, including some before the discharge is granted. The court recently saw evidence that during the first two years of a five year Chapter 13 plan, the debtors received 53 credit card solicitations. These actions and frequent advertisements by various creditors indicate that the credit community no longer shuns persons who take bankruptcy, but rather actively solicits their business. The credit community has effectively removed the "stigma” of bankruptcy. Bankruptcy judges and most bankruptcy lawyers have always advocated that bankruptcy be a last resort for those in financial difficulty. By making post-bankruptcy credit readily available, the credit community is encouraging those with financial difficulty to take bankruptcy. The credit commu*345nity should not complain because its actions were successful and resulted in additional bankruptcy filings.
. This Memorandum shall constitute Findings of Fact and Conclusions of Law pursuant to Fed.R.Bankr.P. 7052 which is made applicable to Contested Matters by Fed.R.Bankr.P. 9014. This Memorandum will be published. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492737/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
PETER J. McNIFF, Bankruptcy Judge.
In this adversary proceeding, Robert and Linda Pascoe object to the amount of the claim filed by the United States Department of the Treasury for its agency the Internal Revenue Service (IRS). Pascoes allege that they owe no taxes, that the claim is erroneous, and that they had no liability to file 940 and 941 returns.
The IRS’ claim filed December 20, 1995, includes assessed income tax liability with penalties and interest for the tax years 1990 through 1992; estimated income tax liability with interest for the tax years 1993 and 1994; assessed Federal withholding tax liability for the fourth quarter of 1992 and the first three quarters of 1993; estimated withholding tax liability for the last quarter of 1993 through the third quarter of 1995; and one period of *576estimated Federal unemployment tax liability.
UNDISPUTED FACTS
This case arises out of a voluntary chapter 11 filed by Robert and Linda Pascoe on October 27, 1995. With the exception of a few unsecured creditors who have apparently been paid postpetition, the Internal Revenue Service is the only significant creditor. The debtors’ schedules were signed by Mr. Pas-coe “without prejudice.” How the debtor’s own voluntary case could prejudice him is puzzling.
In their statement of financial affairs the debtors list their previous years’■ income as “unknown.” The debtors file their monthly operating reports with the United States Trustee. These reports show that the debtors have income from the operation of their business. Mr. Pascoe signs the reports as “rights reserved,” or “Without Prejudice Under U.C.C. 1-207.”
With regard to the IRS claim, certain relevant events took place prior to the filing of the petition. The debtors did not file income tax returns for the tax years 1990 through 1995. On April 28, 1994, the IRS sent the Pascoes a Notice of Deficiency for income taxes due for tax years 1990 through 1992. The tax deficiencies set forth included penalties for failure to file returns and for failure to pay estimated taxes.
The Pascoes did not file a petition in the United States Tax Court, so the taxes were assessed on August 29, 1994. Next, the IRS recorded a tax lien with respect to the assessments for the income taxes due for 1990 through 1992. The Pascoes apparently took no action in response to the tax liens, and the IRS seized and sold property of the Pascoes. This pre-bankruptcy sale resulted in application of $28,502.42 against the total assessed taxes. The IRS amended its claim on June 13, 1996 to reflect the application of the proceeds.
Income Taxes
The IRS determined the income tax deficiencies by estimating the Pascoes’ income. The income estimates were derived from Bureau of Labor average budget statistics for the applicable years. The IRS then applied deductions based on the debtors’ self-employment status, the standard deduction and personal exemptions.
The Pascoes responded to the motion for summary judgment with affidavits and interrogatory answers. On the issue of the amount of the income taxes due, the debtors produced tax returns for the tax years 1990 through 1995, which they filed on August 6, 1996. These returns were signed under protest and with reservation of rights.
The Pascoes’ returns were filed after this court ordered the debtors to file returns on or before May 22, 1996. The debtors apparently filed the returns to prevent a dismissal of this case and their chapter 11 bankruptcy case.
Mr. Marvin Knopp, the accountant for the debtors in possession, prepared the returns. The amount of the income upon which the taxpayers’ returns are based is also calculated from Bureau of Labor statistics. The average budget compilations for similarly situated taxpayers were provided to Mr. Knopp by the IRS. However, the debtors claim more exemptions than the IRS allowed in its deficiency notices. Mr. Knopp stated by affidavit that he had no records upon which to calculate income, even after a search of the Pascoes’ residence.
The debtors also produced their untimely filed answers to the interrogatories propounded by the IRS. (These answers were over a month late and were served only after the IRS filed this motion). Mr. Pascoe signed the verification on the answers “under protest,” which may serve to nullify the verification. To the request for production of documents the debtors responded that they had no documents. To one question concerning records maintained by the Cheyenne Board of Public Utilities, they answered that they “haven’t a clue.”
The remainder of the statements in the affidavits of Mr. Knopp, Mr. Pascoe, and in the answers to interrogatories are general conclusory statements. No factual information is presented regarding the actual amount of the debtors’ income for the three *577tax years in question, nor the number proper exemptions which could be claimed. of
Employment Taxes
The employment taxes included in the proof of claim were assessed for the fourth quarter of 1992 through the third quarter of 1993. The remainder of the employment taxes allegedly due are estimated on the claim. The IRS first filed notices of federal tax liens on January 19, 1994 to secure the assessed, unpaid employment taxes.
The debtors operate a waste disposal company called The Privy Company. The IRS based the amount of the employment taxes on its assumption that the Privy Company had employees by reviewing records of disposals made by the Privy Company at the sanitary waste disposal site operated by the Board of Public Utilities. These records, for the years 1991 through 1994, are signed by a number of different persons on behalf of the Privy Company.
The debtors claim that they do not have, and have never had, employees subject to withholding and federal unemployment tax requirements. In order to show a genuine issue of material fact, the debtors provided their answers to interrogatories. In those, they list a number of “friends” and apparent family members who may have performed services for the Privy Company.
Even though not always legible, a review of the BOPU receipts clearly demonstrates that a number of persons who signed on behalf of the Privy Company are not listed by the Pascoes on their list of friends and family. Because of an untimely response to the IRS’s Requests for Admission, the debtors admit that these records are the BOPU’s disposal records for the Privy Company.
In their interrogatory responses, the Pas-eoes assert that they have insufficient knowledge to form an opinion as to the number of hours worked by the individuals who transported waste on behalf of the Privy Company to the BOPU. They also answered that any records to support their tax returns were in Mr. Knopp’s possession. Of course, Mr. Knopp stated that he had “insufficient records” to prepare accurate returns.
CONCLUSIONS OF LAW
The IRS moves for summary judgment on the complaint establishing the amount of the Pascoes’ unpaid tax liability. Necessarily, that motion includes the separate issues of the income tax liability for the tax years 1990 through 1992, for the unpaid employment taxes assessed through the third quarter of 1993, and on the issue of whether the Privy Company had employees subject to federal withholding tax through 1994.
This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B). The court has jurisdiction under 28 U.S.C. § 1334 and 11 U.S.C. § 505(a)(1). The court does not have jurisdiction over the Pascoes’ request for a tax refund pursuant to 11 U.S.C. § 505(a)(2)(B), which the debtors have conceded.
The court must grant summary judgment if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. In re Baum, 22 F.3d 1014, 1016 (10th Cir.1994); Fed.R.Civ.P. 56(c). A material fact is one that could affect the outcome of the litigation and requires a trial to resolve the differing versions of the truth. White v. I.R.S., 790 F.Supp. 1017, 1021 (D.Nev.1990). A genuine issue is one where the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Farthing v. City of Shawnee, Kan., 39 F.3d 1131, 1134 (10th Cir.1994). The court views the evidence in the light most favorable to the nonmoving party, but that party cannot rest on the mere allegations in its pleadings. Id.
In the complaint, the Pascoes allege that they have no tax liability and that the estimated taxes are erroneous. The law regarding tax liability determination is clear. A deficiency determination is presumptively correct, and the taxpayer bears the burden of coming forward with sufficient evidence to overcome the presumption. Erickson v. C.I.R., 937 F.2d 1548, 1551 (10th Cir.1991). The burden is on the taxpayer to show that the amount sought by the IRS is erroneous. In re Katz, 168 B.R. 781, 787 (Bankr.S.D.Fla.1994).
When the taxpayer fails to file a return, the IRS may reconstruct the taxpay*578er’s income through any reasonable method. United States v. Langert, 902 F.Supp. 999, 1002 (D.Minn.1995). In the absence of contrary evidence, the government’s assessments, if reasonable and logical, are sufficient to establish that the assessments are properly made. Page v. C.I.R., 58 F.3d 1342, 1347 (8th Cir.1995).
A taxpayer is required to maintain records to support his tax returns. 26 U.S.C. § 6001; Cracchiola v. C.I.R., 643 F.2d 1383, 1385 (9th Cir.1981) In the absence of such records, reliance on Bureau of Labor Statistics is a reasonable method to reconstruct the taxpayer’s income. Adams v. Commissioner, 43 T.C.M. 1203 (1982). Further, the taxpayer has the burden to establish a statutory right to specific deductions and to substantiate his eligibility to them. In re Katz, 168 B.R. at 789.
Application of the foregoing rules of law leads the court to conclude that the IRS assessments are sufficient to fix the amount of the 1990 through 1992 income taxes. The debtors have come forward with no evidence to support the income stated in their returns. Their accountant relied on IRS information and Bureau of Labor statistics to prepare the returns. The Pascoes have chosen to not maintain any evidence to support their returns. The returns were filed and signed under protest. There is no evidence to support different deductions or exemptions taken, and no one has records to the contrary. The court finds that the IRS assessment was reasonable.
The Pascoes state in their pleadings that a trial is necessary to establish the amount of their income. Yet, at the same time they seem to argue that even if they had income, they have no tax liability. The court concludes that a trial is not necessary as there is no evidence contrary to that forming the basis for the IRS deficiency assessment. The court will grant summary judgment to the IRS on the issue of the assessed income tax liability.
The court concludes that the IRS is also entitled to summary judgment on the issues of the amount of the assessed employment taxes. The court concludes that the Pascoes, doing business as the Privy Company, had employees during the tax quarters from 1991 through 1994, and that the plaintiffs have presented nothing sufficient to raise a genuine issue of fact. When presented with the disposal records of the BOPU signed on behalf of the debtors’ company, the debtors failed to present any evidence that these individuals were disposing of privy waste without compensation. Mr. Pascoe’s belief that he paid no wages is insufficient to raise an issue of fact in light of his failure to address or explain the signatures of the persons acting on behalf of the Privy Company, and the complete lack of records associated with the business.
The court will set an initial pretrial conference for the purpose of discussing, among other things, the remaining issues, i.e., the amount of the debtors’ taxes for the tax periods which are estimated on the IRS proof of claim; the status of the IRS audit of the debtors’ returns and assessment of those taxes; and what matters remain to be resolved in this court, if any. Any valuation issues regarding the IRS lien are more properly a subject for confirmation of a proposed chapter 11 plan.
CONCLUSION AND ORDER
For the foregoing reasons, it is
ORDERED that the defendant’s motion for summary judgment is granted on the issue of the amount of the plaintiffs’ income tax liability for the tax years 1990 through 1992 in the amount detailed in its proof of claim; and further
ORDERED that the defendant’s motion for summary judgment is granted on the issue of the amount of the Pascoes’ employment tax liability for the fourth quarter of 1992 and the first three quarters of 1993 in the amounts shown on its proof of claim; and further
ORDERED that the defendant is granted summary judgment on the issue of the court’s lack of jurisdiction to determine the Pascoes’ right to a tax refund; and finally
*579ORDERED that the issues regarding the valuation of the collateral securing the IRS secured claim is dismissed without prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492738/ | MEMORANDUM DECISION GRANTING MOTION TO DISMISS
BURTON R. LIFLAND, Bankruptcy Judge.
U.S. Home Corporation (“US Home”), moves to dismiss the complaint filed by a group of homeowners (the “Plaintiffs”) which seeks an order (a) determining that the Plaintiffs are not bound by this Court’s order confirming U.S. Home’s plan of reorganization and (b) permitting Plaintiffs to pursue prepetition claims against U.S. Home.
Background,
On April 15, 1991, U.S. Home, together with certain affiliated entities (collectively, the “Debtors”), filed petitions under chapter 11. In the course of the Debtors’ chapter 11 proceedings, by order dated October 22,1991 (the “Bar Order”), this court fixed December 23, 1991 (the “Bar Date”) as the last date by which all claims (with certain exceptions not relevant here) against the Debtors were to be filed. By order dated May 24, 1993 (the “Confirmation Order”) the Debtors’ reorganization plan was confirmed.
The Debtors are primarily builders of single family homes doing business in eleven states. From 1989 through 1991, U.S. Home developed and built, among other things, numerous townhomes in Country Place subdivision (“Country Place”) in Brazoria County, Texas which is in proximity to the Gulf of Mexico. The Plaintiffs are homeowners who reside in Country Place.
In June of 1995, the Country Place town-home owners association (the “Association”) attempted to buy windstorm insurance to cover their homes in Country Place because the insurance company which had previously provided its insurance policy had withdrawn from the Texas market. In the course of seeking to purchase such insurance with another company, the Association allegedly was required to produce certificates verifying that the buildings were in compliance with the building code requirements of the Texas Catastrophe Property Insurance Association (“CAT-POOL”). CAT-POOL was formed by a group of insurance companies along with the Texas State Board of Insurance because of the catastrophic, hurricane-related losses which have occurred along the Texas Gulf Coast. According to the Plaintiffs, the purpose of CAT-POOL was to insure that homes built in counties immediately bordering the Gulf of Mexico would be built in such a manner as to reasonably withstand hurricane-force winds and thus, be insurable, at a reasonable rate, against the risk of hurricanes and windstorms.
The Association hired a structural engineer, Howard Pieper, to conduct an inspection of the property in order to obtain the required certification. He subsequently determined that the homes were not built to CAT-POOL standards. According to an affidavit of Mr. Pieper, he had previously been hired by U.S. Home in March of 1991 to assure and certify that a home being built in the Country Place subdivision met the CAT-POOL standards. Mr. Pieper states that he did not find the construction met those stan*657dards and in April 1991, informed U.S. Home of the requirements necessary to meet such standards. In May 1991, Mr. Pieper also “prepared a simplified document for use by U.S. Home and its subcontractors.” See Pieper Aff.
On August 1996, Plaintiffs sent demand letters to U.S. Home apparently in accordance with the Texas Deceptive Trade Practices Act. U.S. Home responded that the Confirmation Order permanently enjoined litigation against U.S. Home based on pre-petition claims. Plaintiffs then commenced this action seeking an order determining that they are not bound by the Confirmation Order because they were not given formal notice of the bankruptcy proceeding.
In moving to dismiss the complaint, U.S. Home argues, first, that the CAT-POOL guidelines are voluntary and, therefore, the Plaintiffs have failed to state a claim upon which relief may be granted. Second, U.S. Home argues, as unknown creditors who received constructive notice by publication of the bankruptcy proceeding, the Plaintiffs’ claims are barred by the discharge provisions contained in the Confirmation Order, Plan and section 1141(d) of the Bankruptcy Code. It is undisputed that the claims at issue arose prior to confirmation of the Plan. All of the homes were built and sold by U.S. Home prior to the effective date of the Plan.
Discussion
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure (as made applicable herein pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy Procedure), all factual allegations must be taken as true and construed favorably to the plaintiff. See Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir.1996). A motion to dismiss for failure to state a claim can be granted only where it appears certain that no set of facts could be proven at trial which could entitle plaintiff to relief. See Conley, 355 U.S. at 45-46, 78 S.Ct. 99; see also Northrop v. Hoffman of Simsbury, Inc., 134 F.3d 41, 44 (2d Cir.1997).
The court’s function on a Rule 12(b)(6) motion is “not to weigh the evidence that might be presented at a trial, but merely to determine whether the complaint itself is legally sufficient.” Goldman, 754 F.2d at 1067. In light of this standard, the court “should not be swayed into granting the motion because the possibility of ultimate recovery is remote.” Kopec v. Coughlin, 922 F.2d 152, 155 (2d Cir.1991) (quoting Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, 748 F.2d 774, 779 (2d Cir.1984)); see also Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir.1995).
Discharge of Prepetition Claims
Ordinarily, an order confirming a reorganization plan operates to discharge all unsecured debts and liabilities, even those of tort victims who were unaware of the debt- or’s bankruptcy. See 11 U.S.C. §§ 1141 and 524 (1998); Brown v. Seaman Furniture Co., Inc., 171 B.R. 26, 27 (E.D.Pa.1994). Section 524(a) of the Bankruptcy Code provides that:
A discharge in a case under this title operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not dischargemf such debt is waived.
11 U.S.C. § 524(a)(2) (1994). In order to enforce the discharge injunction, a debtor must show that the debt was discharged under section 1141 of the Bankruptcy Code, which states:
Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan discharges the debtor from any debt that arose before the date of such confirmation, ... whether or not (i) a proof of the claim based on such debt is filed or deemed filed under 501 of this title; (ii) such claim allowed under section 502 of this title; (iii) or the holder of such claim has accepted the plan.
11 U.S.C. § 1141(d)(1). Once confirmed, the plan binds the debtor and all creditors, whether or not a creditor has accepted the plan. See 11 U.S.C. § 1141(a).
*658Discharge under the Bankruptcy Code, however, presumes that all creditors bound by the plan have been given notice sufficient to satisfy due process. See In re First Am. Health Care of Georgia, 220 B.R. 720, 723 (Bankr.S.D.Ga.1998). Whether a creditor received adequate notice depends on the facts and circumstances of each case. See In re Eagle Bus Mfg., Inc., 62 F.3d 730, 735 (5th Cir.1995). Due process is met if notice is “reasonably calculated to reach all interested parties, reasonably conveys all of the required information, and permits a reasonable amount of time for response.” Mullane v. Central Hanover Bank, 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950); First Am. Health Care of Georgia, 220 B.R. at 724. In Mullane, the Supreme Court held that “[a]n elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane, 339 U.S. at 313-14, 70 S.Ct. 652. Thus, if a creditor is not given reasonable notice of the bankruptcy proceeding and the relevant bar dates, its claim cannot be constitutionally discharged. See In re Longardner and Assocs., Inc., 855 F.2d 455, 465 (7th Cir.1988). What constitutes “reasonable notice,” however, varies according to the knowledge of the parties.
When a creditor is unknown to the debtor, publication notice of the claims bar date may satisfy the requirements of due process. See Mullane, 339 U.S. at 317-18, 70 S.Ct. 652. However, if a creditor is known to the debtor, notice by publication is not constitutionally reasonable, and actual notice of the relevant bar dates must be afforded to the creditor. See City of New York v. New York N.H. & H.R. Co., 344 U.S. 293, 296, 73 S.Ct. 299, 97 L.Ed, 333 (1953). The term “creditor” in bankruptcy law is sufficiently broad to include a potential creditor. See In re Chicago, Rock Island & Pacific Railroad Co., 788 F.2d 1280, 1283 (7th Cir.1986); In re S.N.A. Nut Co., 198 B.R. 541, 543 (Bankr.N.D.Ill.1996). Here, the central issue is whether the Plaintiffs were “known” or “unknown” claimants at the time of the Bar Order. As noted above, actual notice is necessary only as to known creditors while constructive notice is sufficient for unknown creditors. See New York, 344 U.S. at 296, 73 S.Ct. 299; In re Chicago, Milwaukee, St. Paul & Pacific R.R. Co., 974 F.2d 775, 788 (7th Cir.1992). Constructive notice can be satisfied through publication notice since “in the case of persons missing or unknown, employment of an indirect and even probably futile means of notification is all that the situation permits and creates no constitutional bar to a final decree foreclosing their rights.” Mullane, 339 U.S. at 317, 70 S.Ct. 652.
The Bar Order required the Debtors to notify all known claimants by mail and unknown claimants by publication of the Bar Date. In addition to publishing notices in the national editions of The New York Times, U.S.A Today and The Wall Street Journal, the Debtors published notice of the Bar Date in, among other regional papers and publications, the Dallas Morning News, the Austin American Statesman, the Amarillo Globe Times, the Houston Chronicle, the San Antonio Express News, the Fort Worth Star Telegram, the Lubbock Avalanche, the Harlengen Valley Star, the El Paso Herald Post, the Wichita Falls, the Midland/Odessa Group, and the Abilene Reporter. The Debtors’ publication notices were more than sufficient to satisfy due process requirements and hence, if the Plaintiffs’ were “unknown” creditors at the time of the Bar Order, their claims are now barred. See New York, 344 U.S. at 296, 73 S.Ct. 299 (in providing notice to unknown creditors, constructive notice of the bar claims date by publication satisfies the requirements of due process); Chemetron Corp. v. Jones, 72 F.3d 341, 348-49 (3d Cir.1995) (“Publication in national newspapers is regularly deemed sufficient notice to unknown creditors, especially where supplemented, as here, with notice in papers of general circulation in locations where the debtor is conducting business”), cert. denied, 517 U.S. 1137, 116 S.Ct. 1424, 134 L.Ed.2d 548 (1996). See, e.g., Brown v. Seaman Furniture Co., 171 B.R. 26 (E.D.Pa.1994) (holding publication in local and national editions of the New York Times sufficient notice to claimant in Pennsylvania); In re Chicago, *659Milwaukee, St. Paul & Pacific R.R. Co., 112 B.R. 920 (N.D.Ill.1990) (holding publication notice in the Wall Street Journal adequate under bankruptcy law); Wright v. Placid Oil Co., 107 B.R. 104 (N.D.Tex.1989) (holding publication in the Wall Street Journal sufficient notice to unknown creditor injured in Louisiana); In re Best Products Co., Inc., 140 B.R. 353, 358 (Bankr.S.D.N.Y.1992) (“It is impracticable ... to expect a debtor to publish notice in every newspaper a possible unknown creditor may read.”).
If, however, the Plaintiffs were “known” creditors at the time of the Bar Order and failed to receive actual notice, their claims may not be discharged. See Maya Construction, 78 F.3d 1395, 1399 (9th Cir.1996) (“Generally, if a known creditor is not given formal notice, he is not bound by an order discharging the bankruptcy’s [sic] obligations.”), cert. denied, — U.S. —, 117 S.Ct. 168, 136 L.Ed.2d 110 (1996).
Known versus Unknown
As characterized by the Supreme Court, a “known” creditor is one whose identity is either known or “reasonably ascertainable by the debtor.” Tulsa Professional Collection Serv., Inc. v. Pope, 485 U.S. 478, 490, 108 S.Ct. 1340, 99 L.Ed.2d 565 (1988). An “unknown” creditor is one whose “interests are either conjectural or future or, although they could be discovered upon investigation, do not in due course of business come to knowledge [of the debtor].” Mullane, 339 U.S. at 317, 70 S.Ct. 652.
A creditor’s identity is “reasonably ascertainable” if that creditor can be identified through “reasonably diligent efforts.” Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798 n. 4, 103 S.Ct. 2706, 77 L.Ed.2d 180 (1983). Reasonable diligence does not require “impracticable and extended searches ... in the name of due process.” Mullane, 339 U.S. at 317, 70 S.Ct. at 659. A debtor does not have a “duty to search out each conceivable or possible creditor and urge that person or entity to make a claim against it.” Charter Crude Oil Co. v. Petroleos Mexicanos (In re Charter Co.), 125 B.R. 650, 654 (M.D.Fla.1991). See also Trump Taj Mahal Assocs. v. O’Hara (In re Trump Taj Mahal Assocs.), 1993 WL 534494 (D.N.J. Dec. 13, 1993) (explaining that “those creditors who hold only conceivable, conjectural or speculative claims” are unknown).
Case law demonstrates that what is required is not a vast, open-ended investigation. See Chemetron Corp., 72 F.3d at 347. The requisite search instead focuses on the debtor’s own books and records. Efforts beyond a careful examination of these documents are generally not required. Only those claimants who are identifiable through a diligent search are “reasonably ascertainable” and hence “known” creditors. Chemetron Corp., 72 F.3d at 346-47. “Reasonable diligence in ferreting out known creditors will, of course, vary in different contexts and may depend on the nature of the property interest held by the debtor.” In re Drexel Burnham Lambert Group, Inc., 151 B.R. 674 (Bankr.S.D.N.Y.1993). What is reasonable depends on the particular facts of each case. “A debtor need not be omnipotent or clairvoyant. A debtor is obligated, however, to undertake more than a cursory review of its records and files to ascertain its known creditors.” Id. at 680-81 (citations omitted). See also In re Charter Co., 125 B.R. 650, 656 (M.D.Fla.1991) (“Even assuming that [the debtor] knew there was a possibility of a claim by [the claimant], [the debtor] was not required to give actual notice to creditors with merely conceivable, conjectural or speculative claims.”); In re Thomson McKinnon Sec. Inc., 130 B.R. 717 (Bankr.S.D.N.Y.1991). Although a debtor is obligated to ascertain reasonably the identity of its creditors by reviewing its own books and records, “a debtor is not required to search elsewhere for those who might have been injured.” Texaco Inc. v. Sanders (In re Texaco, Inc.), 182 B.R. 937, 955 (Bankr.S.D.N.Y.1995) (quoting In re Best Products Co., 140 B.R. at 358). See also In re Brooks Fashion Stores, Inc., 124 B.R. 436, 445 (Bankr.S.D.N.Y.) (“it is not the debtor’s duty to search out each conceivable or possible creditor and urge that person or entity to make a claim against it”). Debtors cannot be required to provide actual notice to anyone who potentially'could have been affected by their actions; such a requirement would completely vitiate the important goal of prompt and effectual administration and settlement of debtors’ estates. Chemetron Corp., 72 F.3d at 348.
*660Plaintiffs assert that they are not bound by the U.S. Home bankruptcy discharge because they were known contingent creditors who were not given formal notice of the chapter 11 proceeding. Plaintiffs argue that they were “known” creditors because U.S. Home knew that it sold homes to Plaintiffs that were not built in accordance with the CAT-POOL guidelines and knew that it had an obligation to disclose this information to potential buyers, but failed to do so. U.S. Home argues that there was no law in Texas that required U.S. Home to build in accordance with the voluntary guidelines of CAT-POOL, and no ease law, statute, rule or regulation or other legal authority for the proposition that a failure of a builder to construct a home in accordance with voluntary CAT-POOL guidelines is a breach of duty. Moreover, the property at issue was insured for several years and, according to an affidavit filed by U.S. Home, is still readily insurable whether or not the homes were built to CAT-POOL standards.
Given the pleadings and arguments presented to this court, there are no set of facts under which I could find the Plaintiffs were known creditors of U.S. Home before or at the time of confirmation. The Plaintiffs do not counter the crucial contention pled and affirmed by affidavit by U.S. Home, that there is no building code, standard or law which required U.S. Home to build according to CAT-POOL standards.1 Without the linchpin of a duty of U.S. Home to build in accordance with CAT-POOL standards, U.S. Home could not have been expected to discover any potential claim of the Plaintiffs prior to confirmation, particularly one so remote. It was not the duty of U.S. Home to search out “each conceivable or possible creditor.” See Texaco, 182 B.R. at 957. If the Plaintiffs were to be considered known ereditors at the time of the confirmation, the universe of creditors entitled to actual notice would defeat the purpose of title ll’s expedited and cost effective claims resolution process.
Given the facts presented to the court, it is absurd for Plaintiffs to attempt a demonstration at trial that they were “known” creditors, and thus should not be bound by the Confirmation Order and discharge provisions of the Plan and the Bankruptcy Code. A known creditor is one whose identity is either known or reasonably ascertainable. See Tulsa Professional Collection Serv., Inc. v. Pope, 485 U.S. 478, 490, 108 S.Ct. 1340, 99 L.Ed.2d 565 (1988). Plaintiffs’ interests, as presented, could not have been uncovered by U.S. Home without far-off conjecture. If Plaintiffs were considered known creditors requiring actual notice, U.S. Home would have been required to perform an impracticable and extended search thwarting one of the central purposes of a reorganization which is “to secure within a limited period the prompt and effectual administration of and settlement of the debtor’s estate.” See Chemetron, 72 F.3d at 346 (citing Katchen v. Landy, 382 U.S. 323, 328, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966)). Under all the facts and circumstances, including the voluntary nature of the CAT-POOL standards and that Plaintiffs had insurance at and post-confirmation, I find that the Plaintiffs were not known creditors of U.S. Home and that the Plaintiffs received constructive notice of the filing by publication. The motion to dismiss is granted.
It is so ordered.
. At oral argument counsel for the Plaintiffs for the first time alleged U.S. Home represented that the homes they sold to Plaintiffs met CAT-POOL standards. In none of Plaintiffs' papers does this specific allegation appear, not in their motion to reopen, complaint or motion in opposition to the motion to dismiss. While the Plaintiffs pled that U.S. Home represented that its homes were of " ‘top quality’ ” and met all building code requirements, see Complaint ¶ 6; Opposition Motion ¶ 2, nowhere was a specific representation as to the CAT-POOL standards pled or stated. On this 12(b)(6) motion, the unsupported, un-pled, self-serving allegation that U.S. Home made specific representations does not comport with even the minimal “fair notice” requirement of Federal Rule of Civil Procedure 8 which applies to these proceedings through Federal Rule of Bankruptcy Procedure 7008. See Fed.R.Civ .P. 8; Kelly v. Schmidberger, 806 F.2d 44, 46 (2d Cir.1986). See also Fed.R.Civ.P. 12(b). Plaintiffs’ Counsel’s unsubstantiated allegation cannot be given any weight in light of its delinquency and failure to request leave to amend the complaint. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492739/ | ORDER GRANTING MOTION TO WITHDRAW MOTION TO DISMISS
MARY DAVIES SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon a particularly egregious attempt to unfairly manipulate the Bankruptcy Code and Rules. This bankruptcy case was filed on April 14, 1998, by the filing of an incomplete chapter 13 petition. On June 15, 1998, the creditor Norma Hendrix filed a motion for relief from stay. Hearing was noticed, scheduled and set for July 7, 1997, a date within thirty days of the motion, as required by the Bankruptcy Code, 11 U.S.C. § 362. The debtor filed a response to the motion on June 19, 1998, which response indicates that the debtor was aware of the nature of the issues to be presented, including valuation of the property which is the subject of the motion.1
On July 7, 1998, at the 1:00 p.m. docket, the matter was called for hearing. The Court noted the appearances of counsel,2 and, before any other words were spoken, the debtor orally moved to voluntarily dismiss the chapter 13 case. See In re Gillion, 36 B.R. 901 (W.D.Ark.1983) (chapter 13 debtor has right to dismissal prior to conversion); cf. Graven v. Fink (In re Graven), 936 F.2d 378 (8th Cir.1991) (discussing chapter 13 *706debtor’s to voluntarily dismiss case absent fraud). At this juncture, the Court, in granting the motion, reminded the debtor’s attorney that, if the case was voluntarily dismissed while a motion for relief from stay was pending, the Bankruptcy Code specifically prohibited the filing of a subsequent case within 180 days of the dismissal. See 11 U.S.C. § 109(g). Counsel for the debtor stated, “Yes, your Honor.” The Court noted that the motion for relief from stay would be moot. Counsel for debtor again indicated understanding and assent, stepped aside from the lectern, and departed from the courtroom.
At 10:45 a.m. the next morning, July 8, 1998, the debtor filed a “Motion to Withdraw Motion to Dismiss and Reinstate Case,” indicating that the debtor voluntarily dismissed the case because of an inability to defend against the motion for relief and repeated defenses to the motion for relief. The debtor seeks to withdraw his dismissal because of the effect of section 109(g)(2) of the Bankruptcy Code, the effect of which he now asserts “was not Debtor’s intent.” The creditor filed a response on July 14, 1998, resisting the motion.
The machinations of this debtor constitute an ill-conceived and an ill-concealed manipulation of the Bankruptcy Code and Rules. The debtor was represented by experienced bankruptcy counsel who was aware of the general nature of the proceeding as well as the specific nature of the issues to be presented to the court, including the valuation of the subject property. Counsel was fully cognizant of the effect of a voluntary dismissal while a motion for relief was pending. Indeed, the Court expressly reminded the debtor at the hearing of the legal effect of a voluntary dismissal. However, the debt- or made no attempt at that juncture to withdraw the dismissal. Rather, the debtor waited until the next day to seek reinstatement. It is clear from debtor’s actions and the content of the motion, that the debtor intended to either immediately refile a bankruptcy case or withdraw the dismissal merely to thwart the creditor. The hearing had been scheduled, noticed, and, under the Bankruptcy Code, required to go forward as expeditiously as possible.3 The voluntary dismissal in the face of the motion for relief, combined with the withdrawal within hours after court was concluded for the day, is clearly a wilful attempt to defeat the Bankruptcy Code and frustrate the prosecution of the motion for relief from stay. Such tactics should not be permitted for to do so merely allows the debtor to gain a continuance neither requested nor granted. Further, because of the debtor’s procedural tactic, no hearing was held on the motion for relief from stay despite the creditor’s assembling of witnesses and preparation for the hearing.
The provisions of the Bankruptcy Code, however, have already provided for the creditor’s relief and obviate the necessity of this Court depriving other creditors of the opportunity to obtain payment of debts through a chapter 13 plan. Section 362(d) provides the authority for a party in interest to seek to obtain relief from stay. Section 362(e) provides in pertinent part:
Thirty days after a request under subsection (d) of this section for relief from the stay ... such stay is terminated with respect to the party in interest making such request, unless the court, after notice and a hearing orders such stay continued in effect pending the conclusion of, or as a result of, a final hearing and determination under subsection (d) of this section.
In the instant case, the motion for relief from stay was filed on June 15,1998. At the final hearing scheduled and timely called for final hearing on July 7, 1998, the Court made no determination that the stay should continue for any reason. By operation of law, on July *70715, 1998, the automatic stay terminated as to the moving party in interest and the property which is the subject of the motion for relief. Accordingly, the creditor Norma Hendrix, who claims to hold a perfected security interest in real property described in a judgment, mortgage and note is entitled to proceed to enforce her lien and judgment against the real property by any lawful means.
The debtor seeks to reinstate her bankruptcy case. Inasmuch as the creditor against whom the debtor’s tactics are directed has the relief she sought and will not be prejudiced by reinstatement of the bankruptcy case, it is
ORDERED that the debtor’s “Motion to Withdraw Motion to Dismiss and Reinstate Case,” filed on July 8, 1998, is GRANTED, with the caveat that the automatic stay is not in effect as to the creditor Norma Hendrix.
IT IS SO ORDERED.
. Since the Court did not issue a pretrial order directing exchange of exhibits, and the debtor filed no request or other discovery motion, the creditor was under no obligation to provide debt- or with a copy of the appraisal report prior to trial. Accordingly, the failure of the creditor to provide the appraisal report at an earlier time is not grounds for reinstatement of the case upon a voluntary dismissal. The burden of proof on the issue of equity is on the movant. 11 U.S.C. § 362(g)(1). Hence, proof of valuation would be required. Use of an expert appraiser and an appraisal should not be unexpected.
. Although the creditor’s response asserts that the debtor was present in the courtroom for the hearing, contradicting the debtor’s later, written assertion that he was too ill to attend the hearing, neither party indicated to the Court at the time of the hearing that the debtor was present in the courtroom. Accordingly, the record does not reveal whether the debtor was present and the Court does not take the debtor’s presence, or lack thereof, into account in determining the motion to withdraw.
. In the motion to reinstate, the debtor implies that he desired a continuance of the hearing on the motion for relief from stay. However, the debtor made no motion, oral or written, for a continuance. Rather, the motion merely alleges, without any support, that the debtor was ill and unable to attend the hearing. The time for the debtor to make a request for a continuance is before the hearing, and, certainly, before a voluntary dismissal of the case. The fact that the debtor makes the assertion that a continuance was necessary subsequent to the voluntary dismissal serves only to support the finding that this motion is made in an attempt to circumvent the provisions of the Bankruptcy Code. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492740/ | MEMORANDUM OPINION
JOHN T. LANEY, III, Bankruptcy Judge.
On May 21, 1998, the court held a hearing on the motion of the Georgia Self-Insurers & Guaranty Trust Fund (“Trust Fund”) for payment of administrative expenses and to pay workers’ compensation claims on a regular basis. At the conclusion of the' hearing, the court took the matter under advisement. After consideration of the applicable statutory law and case law, the court, for reasons indicated below, will approve partial payment of the administrative expenses requested. However, the court will not allow the payment of future claims for administrative expenses without receiving further court approval.
Facts
On December 12, 1996, Debtor, Suwannee Swifty Stores, Inc. (“Suwannee Swifty”) filed a petition for relief under Chapter 11 of the Bankruptcy Code (“Code”). Prior to filing for bankruptcy relief, with respect to workers’ compensation insurance, Suwannee Swifty was self-insured in accordance with Georgia law. See O.C.G.A. § 34-9-380 et seq. In order to participate as a self-insurer, Suwan-nee Swifty caused letters of credit to be issued by NationsBank N.A. (South) (“Nati-onsBank”) and The Citizens National Bank of Quitman (“Citizens Bank”) The letters of *836credit, which totaled $350,000, were issued in favor of the Trust Fund to operate as security for Suwannee Swifty’s workers’ compensation obligations.
On December 24, 1996, the court entered an order authorizing Suwannee Swifty to continue to be self-insured and to continue to pay any prepetition workers’ compensation claims. Additionally, on July 11, 1997, Su-wannee Swifty filed an adversary proceeding against the Trust Fund and NationsBank.1 Suwannee Swifty sought both preliminary and permanent injunctive relief as well as a temporary restraining order.
On July 18, 1997, the court entered a temporary restraining order (“TRO”) preventing the Trust Fund from drawing upon the letter of credit with NationsBank. The TRO was conditioned on Suwannee Swifty paying all prepetition and postpetition non controverted workers’ compensation claims as they arose as well as all administrative charges incurred for administering Suwannee Swifty’s workers’ compensation claims. If Suwannee Swifty failed to pay any claims as they became due, the TRO authorized the Trust Fund to submit notice of its intent to revoke Suwan-nee Swifty’s self-insured status and to draw upon the NationsBank letter of credit.
On July 9,1997, the court entered an order approving the joint motion of Suwannee Swifty and NationsBank to amend the letter of credit with NationsBank. The amendment extended the expiration date of the letter of credit to August 27, 1997. Moreover, on August 25, 1997, the court entered an order on a second joint motion of Suwan-nee Swifty and NationsBank to amend the letter of credit. This amendment further extended the expiration date of the letter of credit to November 25,1997.
The Trust Fund subsequently issued notice of its intent to revoke Suwannee Swifty’s self-insured status. No objections were made and the Trust Fund collected on both letters of credit. Since the Trust Fund revoked Suwannee Swifty’s self-insured status, the Trust Fund has regularly paid all of Suwannee Swifty’s unpaid workers’ compensation liabilities. Included in the payments the Trust Fund has made are amounts for at least four (4) postpetition injuries to Suwan-nee Swifty employees. Prior to Suwannee Swifty’s self-insured status being revoked, Suwannee Swifty paid $132,924.15 in prepetition workers’ compensation claims and $36,-978.29 in postpetition workers’ compensation claims.
On January 6, 1998, the Trust Fund filed two proofs of claim in this case. Proof of claim number 350 is in the amount of $88,-000.00, purported to be for an administrative expense claim for postpetition workers’ compensation claims. Proof of claim number 351 is in the amount of $611,000.00, purported to be an unsecured non priority claim for pre-petition workers’ compensation claims. Both claims are based upon what the Trust Fund predicts it will have to pay. At the time of the hearing, the Trust Fund had paid out a total of approximately $190,000 in both pre-petition and postpetition claims.
On April 23, 1998, the Trust Fund filed an application for payment of administrative expense and motion to compel debtor to pay postpetition workers’ compensation claims on an ongoing basis. In its motion, the Trust Fund asks the court to approve as an administrative expense $39,490.42. This represents the amount of payments the Trust Fund has made on postpetition workers’ compensation claims on behalf of Suwannee Swifty.
Moreover, the Trust Fund also asks in its motion for the court to approve future ongoing postpetition claims as administrative expense without the necessity of the Trust Fund having to file applications for the payments. The Trust Fund contends that it is undersecured with respect to the prepetition claims it has paid and it would be appropriate for the court to approve future administrative expense claims without court approval for each specific claim.
Suwannee Swifty objects to the Trust Fund’s motion.2 Suwannee Swifty contends that before the Trust Fund would be entitled to an administrative expense claim it should *837have to exhaust the letters of credit proceeds first. Furthermore, Suwannee Swifty disputes the propriety of part of the Trust Fund’s postpetition workers’ compensation claim.
Discussion
The court will first address whether the proceeds from the letters of credit secure the prepetition claims or the postpetition claims. Next, the court will address whether the Trust Fund is entitled to an immediate payment as an administrative expense for the amounts that it has expended for postpetition claims. Finally, the court will address whether the Trust Fund is entitled to payment of future amounts expended for postpe-tition claims on an ongoing basis without court approval.
Section 34-9-382 of the Official Code of Georgia Annotated (“O.C.G.A.”) establishes the Georgia Self-Insurers Guaranty Trust Fund. The Trust Fund requires all participants to maintain an acceptable form of security, such as an irrevocable letter of credit, in an amount not less than $100,-000.00. O.C.G.A. § 34—9—386(b)(2). The Trust Fund is authorized to seek reimbursement from a participant for any payments the Trust Fund makes on behalf of the participant. O.C.G.A. § 34-9-387(a). Moreover, the Trust Fund is authorized to use a participant’s security deposit to satisfy the participant’s workers’ compensations obligations. O.C.G.A. § 34-9-387(b).
As a result, Suwannee Swifty was required to maintain some form of security with the Trust Fund. Suwannee Swifty accomplished this by causing the letters of credit to be issued. The letters of credit operated as security for any obligations the Trust Fund paid on behalf of Suwannee Swifty.
The court notes that the letters of credit were issued prepetition. Moreover, the post-petition agreements approved by the court with respect to the letters of credit are extensions of the prepetition letters of credit, not newly issued postpetition letters of credit. Furthermore, the court points out that a creditor’s claim is determined as of the date the petition is filed. See 11 U.S.C. § 502(b).
The court finds that the letters of credits, and any proceeds thereof, should first secure the Trust Fund’s prepetition claim. The letters of credit were issued prepetition in accordance with Georgia law to secure the obligations of Suwannee Swifty. As a result, when Suwannee Swifty filed for bankruptcy relief, the letters of credit already existed to secure the Trust Fund’s claim. Accordingly, the court finds it appropriate to allocate the letters of credit proceeds as security for the prepetition claim.
The court will now address whether the Trust Fund is entitled to an immediate payment as an administrative expense claim for the amounts that the Trust Fund has expended on Suwannee Swifty’s postpetition workers’ compensation claims. The court finds that any payments the Trust Fund has made with respect to injuries that occurred prepetition are not entitled to administrative expense status. See In re Eli Witt Company, 213 B.R. 396, 399 (Bankr.M.D.Fla.1997); Buckner v. Westmoreland Coal Company (In re Westmoreland Coal Company), 213 B.R. 1, 14 (Bankr.D.Colo.1997); In re Lull Corporation, 162 B.R. 234, 241 (Bankr.D.Minn.1993); Grantham v. Eastern Marine, Inc., 93 B.R. 752, 754 (Bankr.N.D.Fla.1988); and In re Columbia Packing Company, 34 B.R. 403, 404 (Bankr.D.Mass.1983).
The court, however, finds that payments made on behalf of Suwannee Swifty employees for injuries that occurred postpetition are entitled to administrative expense status. See Potter v. CNA Insurance Companies (In re MEI Diversified, Inc.), 106 F.3d 829, 832 (8th Cir.1997); Industrial Commission of Arizona v. Solot (In re Sierra Pacific Broadcasters), 185 B.R. 575, 578 (9th Cir. BAP 1995); In re Eli Witt Company, 213 B.R. 396, 399 (Bankr.M.D.Fla.1997); and In re Pacesetter Designs, Inc., 114 B.R. 731, 735 (Bankr.D.Colo.1990).
Section 503 of the Code provides for the allowance of a claim as an administrative expense for amounts expended for “the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case.” 11 U.S.C. *838§ 503(b)(1)(A). The court finds that the payment of the postpetition workers’ compensation claims fall within § 503(b)(1)(A). Therefore, the Trust Fund is entitled to paid, as an administrative expense, for the amounts it has expended on behalf of Suwannee Swifty for postpetition injuries to employees.
In its motion, the Trust Fund sought approval of $39,490.42. At the hearing, Suwannee Swifty disputed the propriety of $13,-731.17 of the Trust Fund’s $39,490.42 claim. The parties agreed to continue the hearing with respect to the propriety of this payment to a later date should the court approve the postpetition amounts as administrative expense claims. Accordingly, at this time, the court will approve an administrative expense claim of $25,759.25 ($39,490.42 less $13,-731.17). The court will hold a hearing to determine the propriety of the disputed amounts.
Finally, the court will consider the Trust Fund’s request that it not have to seek court approval on an ongoing basis to receive administrative expense claims for amounts it pays out in the future. The prefatory language to § 503(b) of the Code requires a notice and hearing before the court can approve any administrative expense claims. As a result, the court does not think that it would be appropriate to allow future administrative expense claims without court approval and without notice and a hearing. Therefore, the court will deny the Trust Fund’s request for payment of future administrative expense claims on an ongoing basis without further court approval.
Conclusion
The court finds that the proceeds from the letters of credit issued as security for Suwan-nee Swifty’s self-insured status operate as security for the Trust Fund’s prepetition claim. The court will approve the immediate payment of an administrative expense claim of $25,759.25 to the Trust Fund. The court will hold a hearing on the propriety of the payments in dispute on Monday, September 28, 1998, at 2:00 p.m. in the Bankruptcy Courtroom, Room 309, 901 Front Avenue, One Arsenal Place, Columbus, Georgia. The court will deny the Trust Fund’s request for payment of future administrative expense claims without further court approval.
Finally, should the Trust Fund’s prepetition claim ultimately prove to be less than the letters of credit proceeds, the Trust Fund will be required to credit the additional funds to any administrative expense claims that Suwannee Swifty will have already paid. This, of course, could result in funds being returned to Debtor.
. Adversary proceeding 97-6021.
. The Creditor's Committee joined in Suwannee Swifty’s objection. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492741/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
This is a Chapter 7 liquidation case and the matter under consideration is the dis-chargeability of taxes that the United States of America (IRS) claims to be due and owing by the Plaintiffs/Debtors, Frank P. Macag-none and Santina Macagnone. The alleged liability of the Plaintiffs falls into the following two separate categories: (1) federal income taxes; and (2) a tax liability based upon 26 U.S.C. § 6672 for 100 percent assessment for nonpayment of payroll taxes against Plaintiff, Frank P. Macagnone.
The Plaintiffs commenced this adversary proceeding by filing a three-count Complaint against the United States of America/IRS. The Complaint was subsequently amended. In Count I of the Amended Complaint, the Debtors seek a determination of discharge-ability of unpaid federal income taxes due for the years 1980, 1983, 1984, and 1985 and a civil penalty claimed by the IRS for 1987.
In Count II, the Plaintiffs seek a determination of the legality and amount of any tax, penalty or addition of any claim by the IRS that the Court determines to be nondis-chargeable. The Plaintiffs seek a determination that an Installment Agreement that Frank Macagnone entered into with the IRS contains a “civil penalty” for the calendar year 1987 even though no taxes were due for that year. Mr. Macagnone further contends *214that he made payments of $4,400.00 per month pursuant to the Installment Agreement, in addition to applying his income tax refunds for the years 1993, 1995, and 1992. Mr. Macagnone contends that his discharge absolved him of any further liability, which is outside the liability agreed upon by the Installment Agreement.
In Count III, the Plaintiffs seek a determination of the nature and validity of a tax lien for the taxes due for 1980, 1983, 1984, 1985 and 1987 which was asserted by the IRS for the first time after the entry of the Debtors’ discharge. The Debtors received their discharge on March 11,1991.
On September 4, 1997, the IRS filed a motion for partial summary judgment with respect to the dischargeability of the Debtors’ federal income tax liabilities for 1980 and 1981 and the civil penalties assessed against Mr. Macagnone. On September 23, 1987, this Court entered an Order granting the IRS’ motion for summary judgment in part, determining that the Debtors’ assessed federal income tax liability for calendar years 1980 and 1981 are nondischargeable pursuant to 11 U.S.C. § 523(a)(1)(A) and 507(a)(8)(A)(iii).
In compliance with the Pre-trial Order, the parties exchanged the list of their witnesses and filed a schedule of documents which they intended to introduce in evidence. The Plaintiffs also filed a statement of undisputed facts. Both sides agreed that the only remaining issues are (1) the Plaintiffs’ income tax liability for the calendar year 1982; and (2) whether Mr. Macagnone was the “responsible person” within the meaning of 26 U.S.C.A § 6672, thus subject to the 100% assessment for nonpayment of trust fund taxes for the last quarter of 1986 and the first quarter of 1987. In due course, these remaining claims were set for final evidentia-ry hearing at which time the following relevant facts were established:
TAX LIABILITY OF THE RESPONSIBLE PERSON
26 U.S.C. § 6672
In the early 1980’s, Mr. Macagnone, a college graduate who had taken graduate courses in finance, was the president of an operating division of U.S. Homes, a large land development company. The scope of his position was to locate properties for possible development, develop the land and design the projects.
In 1982, Mr. Macagnone formed American Management Development Corporation (American Management). Mr. Macagnone, who furnished the initial capitalization by investing $200,000, became the president and was issued 50% of the stock in the newly formed corporation. Billy Ray Barnes (Mr. Barnes) was appointed vice-president and received fifty percent of the stock in the newly formed entity, even though he did not make a capital contribution. Rather, Mr. Barnes contributed his expertise in running the day to day operation of the construction business, securing the necessary licenses, dealing with subcontractors, handling construction draws, and dealing with invoices submitted by vendors and others. Both Mr. Macagnone and Mr. Barnes were designated signatories on the checking account of the corporation.
The controller of the corporation was one Judith McAllister. It appears that she wrote the payroll checks. Ms. McAlister was not called as a witness. Mr. Macagnone categorically denied that he wrote any payroll checks and testified that it was Mr. Barnes’ responsibility to do so. Mr. Barnes denied that he prepared construction draws or signed any payroll checks.
The financial downfall of a seemingly successful enterprise is attributable to a development project referred to as Tall Pines. Tall Pines was a joint venture of American Management and Sunrise Savings & Loan (Sunrise) which, like many other savings and loan association, was closed down by the Office of Thrift Supervision. In an attempt to obtain much needed financing, the Debtor tried to work with the Federal Asset Disposition Association (FATA) without success. American Management ultimately ceased operating and filed its Petition for Relief under Chapter 11 of the Bankruptcy Code on March 14, 1988. Having failed to achieve confirmation, American Management’s case was converted to Chapter 7 on January 3, 1989, and closed on May 1,1990.
*215The IRS presented the testimony of the IRS Revenue Officer who was assigned the task of collecting the unpaid taxes due from American Management. The Revenue Officer testified that it was his duty to determine who was the responsible person for the 100% assessment under 28 U.S.C. § 6672. The Revenue Officer testified that he had interviewed Mr. Macagnone in February 1988 at the IRS collection office located in St. Peters-burg, Florida. The Revenue Officer also testified that he recalls that Mr. Macagnone had admitted to liability.
The Revenue Officer testified that simultaneously with the interview, he had filled out IRS Form 4180 entitled “Report of Interview Held With Persons Relative To Recommendation of 100-Percent Penalty Assessment.” (Defendant’s Exh. 1). The information filled in by the Revenue Officer is that he interviewed Mr. Macagnone on February 4, 1998 and that Mr. Macagnone stated that he had been the president of American Management from the date of the commencement of the business in 1982 through 1988. The form also recites that Mr. Macagnone’s responsibilities were to act as “CEO” while Barnes was the construction manager; the Mr. Ma-cagnone and Barnes were the officers and directors during and after the periods of delinquency. The form also contains the entry that the business ceased operating in July 1987 due to insolvency caused by the source of the construction loans failing; that Mr. Macagnone first became aware that the tax liability was not paid as the liability accrued; that other obligations had been paid while attempting to secure financing; and that the payment of these other obligations were authorized by “Macagnone a/o Barnes.”
Although the Revenue Officer testified that he had prepared the Form simultaneously with the interview on February 4, 1988, in response to the printed form question, “What is the present status of the corporation?”, there is the written entry, “Chapter 11 Filed 3-14-88.” The Revenue Officer testified that he had added information to the Form after February 1988. Although the Report has a signature line both for the person interviewed and the interviewer, it bears no signature of either
There is no evidence in this record to show that the Debtor received any payment either by way of salary, bonus, commission or repayment of loans after the Sunrise funding dried up.
It is without dispute that the IRS sent to Frank P. Macagnone, Form 2749 Request For Payment for 100 Percent Penalty Assessment. (Defendant’s Exhibit 2). The assessment was in the amount of $55,107 .50, representing a penalty for the last quarter of 1986 and the first two quarters of 1987. The Penalty Assessment is undated and unsigned. It also indicates that a related assessment had been made against Mr. Barnes.
The Penalty Assessment was based on the Revenue Officer’s recommendation. The Revenue Officer filled out Form 4183 entitled, “Recommendation re 100-Percent Penalty Assessment,” stating,
Section 1. Persons against whom the 100-pereent penalty is being considered (list all potentially responsible persons)
1. Name, title, address, and basis for recommendation Frank P. Macag-none, President...
As CEO of AMD Inc. Mr. Macagnone admits liability for trust fund taxes.
He managed all financial affairs for the now-defunct corporation; he was signer on bank signature cards and routinely exercised this authority; he was aware of unpaid federal taxes. Willfulness and responsibility cannot be disputed.
2. Name, title, address and basis for recommendation Billy R. Barnes, VP...
As vice president Mr. Barnes functioned as construction manager, per Maeag-none’s Statement. He was the only other signer on corporate cheeking. He was aware of the federal tax liability and of his potential personal liability for withheld taxes; he does not dispute assertion of the penalty.
The Form was signed by the Revenue Officer on February 25, 1988 and by who appears to be his supervisor on April 4,1988.
*216While it is without dispute that Mr. Macag-none was a signatory on the bank account and that he did sign checks, the Debtor flatly denies that he admitted liability for the trust fund taxes. The Revenue Officer did not seek or receive or review any of the cancelled checks or the payroll records of American Management. The Revenue Officer never spoke with Judith McAllister. The determination by the IRS that the Debtor was the “responsible person” thus liable for the 100% penalty pursuant to 26 U.S.C. § 6672 was based solely on the Debtor being an officer, director and stockholder of American Management and on the alleged confession and admission by the Debtor claimed to have been made at the highly questionable interview embellished by the subjective, unsubstantiated opinion of the Revenue Officer.
26 U.S.C. § 6671 imposes a penalty for non-payment of what is commonly referred to as “trust fund taxes.” 26 U.S.C. § 6672(a) provides:
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 hable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 ... for any offense to which this section is applicable.
26 U.S.C. § 6672(a)(1944).
Obviously, the initial inquiry must be directed to the question whether or not the individual who sought to be assessed the 100% penalty was the “responsible person.” Although this phrase does not appear in the Internal Revenue Code, courts uniformly recognize the concept. See United States v. Rem, 38 F.3d 634, 642 (2d Cir.1994); Raba v. United States, 977 F.2d 941, 943 (5th Cir. 1992); Thomsen v. United States, 887 F.2d 12, 16 (1st Cir.1989); Gustin v. United States, 876 F.2d 485, 491-92 (5th Cir.1989). Courts have often expressed the principle that “responsibility is a matter of status, duty and authority, not knowledge.” George v. United States, 819 F.2d 1008 (11th Cir. 1987) quoting Mazo v. United States, 591 F.2d 1151, 1153 (5th Cir.1979). “Thus, a person may be a responsible person for purposes of the statute even though he does not know that withholding taxes have not been paid.” Barnett v. I.R.S., 988 F.2d 1449, 1454 (5th Cir.1993) citing Mazo, swpra at 1156. However, to impose the penalty the conduct must be a willful failure to collect and pay the taxes.
In the case of George, supra, the individual, a 50% shareholder, vice president and director of a corporation, failed to pay the trust fund monies withheld over to the IRS Based on these facts, the Court had no difficulty concluding that he was a responsible person. The fact that there was another 50% shareholder in the corporation did not detract from the debtor’s duty as an officer, director and shareholder to insure that the withheld taxes be paid to the government.
It should be noted that even if the individual is found to be a responsible person, it appears from the case law that willfulness is a crucial factor. The taxpayers prevailed on the issue of willfulness in Levy v. United States, 140 F.Supp. 834 (W.D.La.1956), and also in George, supra. In Levy, the court stated. “... the term ‘willfully’ has been interpreted to mean, correctly we think, ‘consciously,’ ‘intentionally,’ ‘deliberately,’ ‘voluntary as distinguished from accidental.’ ” Levy, Id. at 836 (citations omitted). The court concluded that mere negligence in failing to ascertain the facts is not enough to render the person liable for the penalty.
In the present instance it is clear that Mr. Macagnone was the principal in the corporation, a 50% stockholder and a director and applying the “responsible person” test, he might very well be determined to be a responsible person, see George, supra; Caterino v. United States, 794 F.2d 1, 6 (1st Cir.1986); Roth v. United States, 779 F.2d 1567, 1571 (11th Cir.1986). Mr. Macagnone held a corporate office, he had technical authority to disburse corporate funds, he owned stock in the corporation. It is clear that *217technically Mr. Maeagnone did actually oversee the financial affairs of American Management, although he claims not to have exercised it. He also as president did have, no doubt, the ability to hire and fire employees.
While the Revenue Officer’s report and recommendation is flawed in many respects, under the undisputed facts in this case the duty to assure that the payroll taxes are paid being a non-delegable duty, would clearly render the Debtor as the “responsible person” within the Statute.
This leaves for consideration the issue of willfulness.
This Court had occasion to consider the identical question in the case of In re Amici, 177 B.R. 386 (Bankr.M.D.Fla.1994), rev’d on other grounds, 197 B.R. 696 (M.D.Fla.1996). In Amici, the Court noted “a responsible person within the meaning of § 6672 includes an officer or employee of a corporation who is under a duty to collect, account for, or pay over the withheld tax.” Mazo v. United States, 591 F.2d 1151 (5th Cir.1979). “[Responsibility is a matter of status, duty and authority, not knowledge.” Id. at 1156. The courts have generally taken a broad view construing the term “responsible person.” Slodov v. United States, 436 U.S. 238, 246, 98 S.Ct. at 1778, 56 L.Ed.2d 251 (1978); Liddon v. United States, 448 F.2d 509 (5th Cir.1971). More specifically, the Eleventh Circuit in Thibodeau v. United States, 828 F.2d 1499 (11th Cir.1987), held that the “indicia of responsibility” includes: the holding of corporate office, control over financial affairs, the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees.
As noted earlier, the Debtor also denies having ever spoke to the Revenue Officer. The Statement is concluded with the comment, “willfulness and responsibility cannot be disputed.” This, of course, is not a fact, but the subjective, unsubstantiated viewpoint of the Revenue Officer. This record is devoid of any hard evidence to warrant the conclusion that the omission under consideration was willful or that it was a conscious decision knowingly not to pay the taxes.
The Eleventh Circuit Court of Appeals addressed this issue in In re Haas, 48 F.3d 1153 (11th Cir.1995). Haas involved a challenge to the dischargeability of the debtor’s income tax obligations. The Eleventh Circuit speaking through Judge Birch, held that the debtor’s knowing failure to pay the taxes, without more, did not constitute a “willful attempt in any manner to evade or defeat such tax” such as would warrant excepting tax liability from discharge. Id. at 1158. In Haas the debtor acknowledged that he was in debt to the IRS but elected to use his income to pay personal and business expenses rather than pay the taxes due. Under these facts the Bankruptcy Court, concluded that his failure to pay the taxes was not the result of willful conduct designed to evade or defeat his taxes under 11 U.S.C. § 523(a)(1)(C). Instead it was the result of mistaking the priority and importance of certain financial obligations.
In the present instance there is evidence that Mr. Maeagnone used corporate funds for his own personal use. There is also evidence that he took no salary, compensation or bonus during the relevant time. Considering the totality of the evidence in this record, this Court is satisfied that the failure of American Management was not due to the willful, conscious decision of this Debt- or. Although under the principles outlined earlier, he was a responsible person, the IRS failed to establish the second prong, willfulness, which is a condition for the assessment of the 100% penalty. Therefore, Mr. Macagnone is not subject to the 100% penalty assessment under 26 U.S.C. § 6672.
In light of the foregoing, it is unnecessary to determine or consider whether this obligation is within the exception to discharge of 11 U.S.C. § 523(a)(1)(C).
UNPAID TAX LIABILITY FOR TAX YEAR 1982
Clearly the unpaid income taxes for tax year 1982 are “stale” taxes. Thus, Mr. Maeagnone is protected by the general bankruptcy discharge unless this Court finds that he consented to an extension which, in turn, made the assessment for these taxes timely. The IRS has not been able to pro*218duce any documents indicating that the Debtor consented to an extension. Rather, the IRS presented into evidence an unexplained, unreadable computer printout and never presented testimony from a proper person competent to testify to the alleged missing document allegedly giving consent to the extension. The IRS relies solely on the fact that the Debtor did consent to an extension concerning 1980 and 1981. Thus, according to the IRS, Mr. Macagnone also consented for 1982.
Clearly, Section 523 of the Bankruptcy Code should be liberally construed in favor of the Debtor and strictly against one who seeks to establish the exception. In the present instance the most that could be said viewing the evidence in the most charitable way is that the evidence is in equilibrium.
A separate final judgment will be entered by this Court in accordance with the foregoing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492743/ | DECISION CONDITIONALLY GRANTING MOTION BY COMBANC HOLDINGS CORP. TO APPROVE STIPULATION OF SETTLEMENT AGREEMENT
DOROTHY EISENBERG, Bankruptcy Judge.
This matter is before the Court pursuant to an adversary proceeding filed by Com-Banc Holdings Corp. (“ComBanc”) against Edward and Rosalie Feldman (the “Debtors”) seeking to bar their discharge pursuant to 11 U.S.C. § 727(a)(4) and (a)(5). Com-Banc has filed a motion seeking approval of a stipulation of settlement between ComBanc and the Debtors. The Debtors have objected to the motion, claiming that ComBanc lacks standing to bring the adversary proceeding because it is not a creditor of the Debtors. According to a recent decision by the District Court for the District of Maryland, Magna Funding Corporation (“Magna”) is the true party in interest, with the requisite standing to have commenced this adversary proceeding. Based on the facts of this case, the Court finds that although Magna is the true party in interest, it is appropriate to permit Magna to substitute itself in place of Com-Banc, or to permit ratification by Magna of ComBanc’s actions in this adversary proceeding. Magna shall be granted ten days from the date of entry of an order in accordance with this decision to advise the Court of its intentions in this adversary proceeding.
BACKGROUND AND FACTS
1. In the Fall of 1995, the Resolution Trust Company (“RTC”) informed ComBanc that it was the successful bidder to purchase of portfolio of loan assets for approximately $3.3 million. The portfolio consisted of 113 commercial loans (the “Loan Assets”) with a face value of $12.9 million. ComBanc gave the RTC an earnest money deposit of $35,-056.06. Before the closing on the sale, Com-Banc sought financing for the purchase from Magna. Magna apparently declined, but expressed an interest in purchasing the Loan Assets for its own benefit. On December 14, 1995, Magna purchased the Loan Assets from the RTC. ComBanc agreed to service the loan portfolio on behalf of Magna for a fee.
2. Included among the Loan Assets was the loan made to Feldman Realty & Management Corporation (“FRMC”) and guaranteed by Edward and Rosalie Feldman, the Debtors in this case, in the original principal amount of $1,910,000 (the “Feldman Loan”). In January 1993, prior to Magna’s purchase of the Loan Assets, the RTC obtained a judgment against FRMC and the Debtors on the Feldman Loan in the amount of $2,588,-953 (the “Feldman Judgment”).
3. Magna received possession of the original loan notes for all 113 loans, and continues to be in possession of same, including the loan note relating to the Feldman Loan.
4. On August 15, 1996, ComBanc caused the RTC to assign the Feldman Judgment to ComBanc, rather than Magna.
5. In September 1996, Magna learned that ComBanc was holding itself out as the *299owner of the Loan Assets, including the Feldman Loan.
6. In December 1996, Magna sued Com-Banc in the Maryland Action for a declaratory judgment that Magna was the owner of the Loan Assets and, among other things, had converted certain of the loan assets.
7. On its claim for conversion, Magna made a specific reference to two particular loan assets, one of which is the Feldman Judgment.
8. With respect to the Feldman Judgment, Magna claimed that ComBane wrong-hilly converted the Feldman Judgment by accepting assignment of it from the RTC. Magna’s cause of action for conversion seeks damages against ComBane
9. On January 21, 1997, the Debtors filed a petition for relief under Chapter 7 of the Bankruptcy Code.
10. On February 28, 1997, ComBane filed a notice of appearance as a creditor in the bankruptcy proceeding based on the Feld-man Judgment. -
11. On March 26,1997, in connection with a motion by Magna in litigation between it and ComBane for partial summary judgment as to the request for an accounting, the District Court for the District of Maryland stated in its decision that Magna was the owner of the Loan Assets. The District Court also granted Magna’s motion for partial summary judgment for an accounting.
12. On August 28, 1997, ComBane filed an adversary proceeding against the Debtors seeking to bar the Debtors’ discharge under 11 U.S.C. Section 727(a)(4) and (5). The action was based on alleged discrepancies between the Debtors’ prepetition representations and the statements made in the Debtors’ bankruptcy schedules. In the complaint, ComBane alleged that it had standing to bring the action as a result of the RTC’s assignment of the Feldman Judgment to ComBane.
13. On September 30, 1997, in response to the complaint, the Debtors filed a motion to dismiss the adversary proceeding. At a hearing held on November 13, 1997, the Court denied the Debtors’ motion to dismiss the adversary proceeding and directed the Debtors to file an answer.
14. On November 25, 1997, the Debtors filed an answer to the complaint.
15. In January, 1998, the parties began discussing settlement of the adversary proceeding.
16. On January 16, 1998, counsel to the Debtors forwarded to ComBane’s counsel the final Settlement Agreement for signature. On January 19, 1998, the Settlement Agreement was returned to counsel to the Debtors, signed on behalf of ComBane, with a cover letter confirming the understanding of the parties that counsel to the Debtors would obtain the necessary signatures and submit the Settlement Agreement to the Court for approval.
17. Pursuant to the terms of the Settlement Agreement, the Debtor agreed to pay to ComBane $97,500 in full settlement of the adversary proceeding.
18. A copy of the fully executed Settlement Agreement was faxed to counsel to ComBane on February 6,1998.
19. On January 23, 1998, prior to the submission of the Settlement Agreement to this Court for approval, the Maryland District Court issued its memorandum decision in which it granted a motion by Magna for summary judgment on most of its claims against ComBane, including its claim for conversion of the Feldman Judgment. In the memorandum decision, the Maryland District Court reiterated that Magna was the lawful owner of the Loan Assets, and that Com-Bane’s insistence that a non-assignment clause in a contract between RTC and Com-Banc rendered the subsequent assignment of the Loan Assets to Magna ineffective lacked legal merit. (Maryland Decision, p. 7). On February 11, 1998, an order was entered based upon the Memorandum decision (the “Order”).
20. In connection with the conversion by ComBane of the Feldman Judgment, the Maryland District Court stated that “ComBane tortiously converted the Feldman judgment by accepting assignment without immediately endorsing or assigning it to Magna.” The Order further provides that “Magna’s motion *300for summary judgment on its claim for conversion of the [Feldman Judgment] is hereby GRANTED” and the Order includes a provision permanently enjoining ComBanc from taking any further actions regarding the Loan Assets.
21. On March 12,1998, in response to the Order, ComBanc submitted a letter to this Court advising the Court of the decision of the Maryland District Court. In the March 12 letter, ComBanc’s counsel stated that “based upon [the Maryland District Court] Order, neither ComBanc nor my firm will take any further action in the bankruptcy matter and in the adversary proceeding.” Counsel to ComBanc went on to state that counsel to Magna had been advised of this adversary proceeding and a request was made to have Magna substituted in for Com-Bane but counsel to Magna had not responded. Upon the Debtors’ receipt of the March 12 letter, the Debtors discontinued their efforts to seek approval of the settlement between the Debtors and ComBanc.
22. On March 30, 1998, the Court settled a Notice of Proposed Dismissal of the adversary proceeding and set an objection deadline of April 17,1998.
23. On April 15, 1998, the Maryland District Court so-ordered a stipulation between ComBanc and Magna (the “Magna Stipulation”) which states in part as follows:
2. The parties agree and acknowledge that, pursuant to the Order, Magna has no right, title or interest in the loan asset referred to in Paragraph 7 of the Order and regarding the Judgment entered against Feldman Realty and Management Corporation, Rosalie Feldman and Edward Feldman (the “Feldman Loan”).
3. Magna consents to ComBanc’s continuation of the proceedings in the United States Bankruptcy Court for the District of New York regarding the Feldman Loan.
4. Magna acknowledges that ComBanc’s prosecution of the debt owed pursuant to the Feldman Loan is not subject to the prohibitions set forth in Paragraphs 5 and 6 of the Order.
24. On April 16,1998, the Court received a copy of the Settlement Agreement and a cover letter from counsel to ComBanc explaining that the parties had entered into a settlement of the adversary proceeding, but the parties were delayed in presenting the Settlement Agreement to the Court because of a dispute which arose between ComBanc and Magna over the ownership of the Feld-man Judgment. According to ComBanc, the Magna Stipulation served to memorialize the understanding between the parties that Com-Banc held title to the Feldman Judgment at the time it appeared in this proceeding and continues to hold such title, subject to Mag-na’s claim for damages.
25. The Debtors have opposed entry of the Settlement Agreement, alleging that ComBanc was not a creditor of the Debtors as of the petition date and ComBanc will not hold title to the Feldman Judgment unless and until ComBanc satisfies the judgment issued by the Maryland District Court on the conversion claim. Therefore, ComBanc did not have standing to bring the action under Section 727 of the Bankruptcy Code and the adversary proceeding should be dismissed.
26. Magna has filed a Declaration dated June 29, 1998, in which counsel to Magna states that ComBanc has no right or claim to the proceeds of the Feldman Loan or judgment against FRMC and the Debtors and any payment thereon or related thereto must be paid to Magna, and the purpose of the Magna Stipulation was to clarify that Magna did not object to ComBanc pursuing its claim objecting to the Debtors’ discharge.
DISCUSSION
The two issues the Court must decide is whether ComBanc had standing to commence this adversary proceeding against the Debtors and, if ComBanc did not have standing, whether the adversary proceeding must be dismissed as a matter of law. To answer these questions, the Court turns to the relevant sections of the Bankruptcy Code. Pursuant to section 727(c)(1) of the Code, “[t]he trustee, a creditor, or the United States trustee may object to the granting of a discharge ...” Section 101(10) of the Code defines “creditor” as an “entity that has a claim against the debtor that arose at the time of *301or before the order for relief concerning the debtor.” “Claim” is defined as follows:
(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; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured....
As the Bankruptcy Code makes clear, a party commencing an adversary proceeding under section 727 of the Code must be a creditor of the debtor as of the petition date.
In this case, ComBane did obtain an assignment of the Feldman Judgment from RTC prior to the petition date. However, before the petition was filed, Magna had already commenced its action against Com-Banc seeking, inter alia, a judgment against ComBane for the conversion of the Feldman Judgment. Indeed, the Maryland District Court had stated in a decision granting partial summary judgment to Magna for an accounting that the loan assets belonged to Magna. However, the question of which party was entitled to the Loan Assets remained at issue in the Maryland ease, and was ultimately decided after Magna made another motion for summary judgment on the remainder of the counts. The second motion for summary judgment resulted in the decision by the Maryland District Court on January 23,1998. Therefore, at the time that the complaint was filed in the Bankruptcy Court, the rights of the parties in and to the Feld-man Judgment were unresolved and subject to a dispute before the Maryland District Court.
This dispute was resolved by the Maryland District Court in its decision of January 23, 1998. The finding by the District Court that ComBane converted the Feldman Judgment gives rise to the issue of whether the converted asset belonged to ComBane or Magna as of the petition date. Under Maryland state law, a wrongdoer who commits the tort of conversion becomes the owner of the asset converted, and is liable to the original owner in damages for the fair market value of the asset. Title to the asset passes to one who converts another’s property only after both the entry of a judgment upon an action for conversion and satisfaction of the judgment. See Staub v. Staub, 37 Md.App. 141, 144, 376 A.2d 1129, 1132 (1977); Hepburn v. Sewell, 5 H. & J. 211, 9 Am.Dec. 512 (1821). Since entry of a judgment against ComBane has yet to take place, let alone satisfaction of any judgment, Magna was as of the petition date, and continues to be, the lawful owner of the Feldman Judgment.
The Magna Stipulation does not change the fact that title to the Feldman Judgment vests in Magna. However, the Magna Stipulation clarifies that Magna did not object to ComBane pursuing this adversary proceeding in essence, acting on its behalf since any monetary judgment flowing from this adversary proceeding would either inure to the benefit of Magna directly, or ComBane would pay over the proceeds to Magna as part of the satisfaction of the judgment to be rendered against ComBane in the Maryland District Court action.
Given that hindsight revealed that ComBane lacked standing to bring the adversary proceeding, the Debtors urge the Court to dismiss the adversary proceeding in its entirety. However, such relief is not warranted in this case.
Bankruptcy Rule 7017, which makes rule 17(a) of the Federal Rules of Civil Procedure (“Fed.R.Civ.P.”) applicable in adversary proceedings, requires that an action be brought by the real party in interest. Rule 7017(a) provides in relevant part:
No action shall be dismissed on the grounds that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest; and such ratification, joinder or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.
*302Fed.R.Civ.P. Rule 17(a) was amended in 1966 to add the final sentence that substitution shall have the same effect as if the action had been originally commenced in the name of the true party in interest to bring the Rule in conformity with existing practice. In re Wilson Foods Corp., 45 B.R. 776, 778 (Bankr. W.D.Okla.1985). As indicated in the advisory committee notes to this rule “The provision should not be misunderstood or distorted. It is intended to prevent forfeiture when determination of the proper party to sue is difficult as when an understandable mistake has been made.” Fed.R.Civ.P. advisory committee note (1966 amendment). “The purpose of this ‘exception’ to the requirement that all actions be prosecuted in the name of the real party in interest is therefore not to create new substantive rights, but to avoid forfeiture in situations in which it is unclear at the time the action is filed who had the right to sue and it is subsequently determined that the right belonged to a party other than the party that instituted the action.” Del Re v. Prudential Lines, Inc., 669 F.2d 93 (2d Cir. 1982), cert. denied, 459 U.S. 836, 103 S.Ct. 81, 74 L.Ed.2d 77 (1982).
In this case, it was unclear at the time that the adversary proceeding was filed that Com-Banc did not have the right to commence the action under section 727 of the Bankruptcy Code. The Maryland District Court was not called on to decide the issue of ownership of the Feldman Judgment until the second motion for summary judgment was made by Magna in the Maryland action, on the eve of approval by this Court of the Settlement Agreement. The Court does not find that ComBanc’s actions in filing this adversary proceeding were inappropriate given the stage of the litigation taking place in the Maryland District Court.
Although Magna is the appropriate beneficiary of this adversary proceeding, both Magna and ComBane share an identity of interests in this action, which is to preserve the rights of the owner of the Feldman Judgment in the Debtors’ bankruptcy case. To decide otherwise would result in a windfall to the Debtors, at the expense of Magna. Therefore, the Court shall permit Magna to substitute itself in place of ComBane or to ratify the actions taken by ComBane in this adversary proceeding, including the entry of the Settlement Agreement with the Debtors. CONCLUSION
1. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(J).
2. Due to the outcome of the Maryland action, ComBane does not have standing to continue this adversary proceeding as Com-Bane is not a creditor of the Debtors.
3. ComBanc’s actions in this adversary proceeding shall be preserved for the benefit of Magna, as the true party in interest, pursuant to Bankruptcy Rule 7017(a). Magna shall advise the Court within ten days of entry of an order memorializing this decision as to whether Magna shall be substituted in place of ComBane or whether Magna wishes to ratify ComBanc’s actions in this adversary proceeding. In the event Magna chooses ratification, the Court shall approve the Stipulation of Settlement. To foreclose these options to Magna would result in an unfair forfeiture by Magna, given the state of confusion over which party was entitled to the Feldman-Judgment as of the date the adversary proceeding was commenced.
4. The Debtors’ request to dismiss the adversary proceeding is denied.
Settle an Order in accordance with this decision. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492744/ | MEMORANDUM OPINION ON LIEN STRIPPING CHAPTER 13 PLANS
HAROLD C. ABRAMSON, Bankruptcy Judge.
Came before the Court for hearing, confirmation of the debtors’ Chapter 13 plans and objections thereto by various secured creditors in the above styled eases. This memorandum opinion constitutes findings of fact and conclusions of law under Federal Rules of Bankruptcy Procedure 7052 and 9014. The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334 and 151, and the standing order of reference in this district. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (L) and (O).
I. Background
In this district, each court has a designated afternoon of the month on which it holds hearings on confirmation of Chapter 13 plans. On- these days, the procedure is as follows: a prehearing conference is held at the Office of the Standing Chapter 13 Trustee for the Northern District of Texas (“Trustee”) in the morning, at which time interested parties and/or the Trustee may indicate objections to the plans as proposed; the parties then bring those objections before the court in the afternoon.
The debtors in each of the above styled cases proposed plans that received objections from creditors to the following language that was stamped onto the face of each plan:
All Secured Creditors’ liens and tax liens will be released after the Value of their Allowed Secured Claim is paid through the plan. Car lenders will release title back to the Debtor after receiving the value of their Allowed Secured Claims.
The secured creditors’ position is that their liens should not be released until all of the plan payments have been made under the *363debtors' plans and the debtors have received a discharge. At the time of the hearing the Court took the matter under advisement and asked the parties to file briefs for their respective positions. The Court has conditionally confirmed the plans on an interim basis subject to its decision on this issue and has made similar orders on the plans that have come before it for confirmation since the matter was taken under advisement. This opinion therefore, addresses each of those debtors' cases.
II. Issue
The issue for the Court to determine is whether a Chapter 13 plan, which provides for the release of an undersecured creditor's lien upon full payment of its allowed secured claim, but prior to completion of the Chapter 13 plan and receipt of a discharge, may be confirmed over the creditor's objection.
III. Analysis
A Chapter 13 creditor's undersecured claim is bifurcated, under 11 U.S.C. § 506(a), into two claims: (1) a secured claim equal to the value of the collateral; and (2) an unsecured claim equal to the amount of the allowed claim that exceeds the value of the collateral.1 Bankruptcy Code § 1325 then permits the Court to confirm a plan over the objection of the holder of a secured claim if:
(i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim.2
However, § 1325(a)(5)(B) does not address the issue before the court, i.e. whether a debtor can require a creditor to release its lien against the collateral after the secured claim has been paid, but prior to completion of the Chapter 13 plan.3
The debtors cite to a line of cases that hold that a Chapter 13 plan may provide for the release of a creditor's lien upon payment of its allowed secured claim.4 Generally, these courts find comfort for their position in the language of 11 U.S.C. §~ 506(d) and 1322(b)(2). To that extent, they are only half right. In other words, to the extent that they rely on § 506(d) alone for their support, they are clearly wrong.5
A. 11 U.S.C. 506(d)
Section 506(d) states that:
To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless-
(1) such claim was disallowed oniy under section 502(b)(5) or 502(e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.6
*364The Supreme Court in Dewsnup, determined that § 506(d) does not void liens on the basis of whether they are secured or unsecured under § 506(a), but on the basis of whether the underlying claim is allowed or disallowed under § 502.7 In doing so, the Court found that the words must be read term-by-term.8 The Dewsnup court concentrated on the word “allowed” in § 506(d) and found that the subsection refers to any claim that is: (1) allowed under § 502 of the Code; and (2) secured by a lien.9 Therefore, as long as the claim is secured by a lien with recourse to the underlying collateral, and allowed under § 502, lien stripping is not available under § 506(d).10 This is consistent with the legislative history of section 506(d) indicating that hens generally pass through the bankruptcy unaffected.11
With this in mind, this Court disagrees with the view expressed by the court in Bank One, Chicago, NA v. Flowers when it said:
This court agrees with Creditor in that § 506(d) applies to Chapter 13 reorganizations and Chapter 7 liquidations with “equal force.” However, the court holds, in accordance with the majority of federal courts cited above, that § 506(d) has a different effect in Chapter 13 reorganizations than that mandated by the Supreme Court’s Dewsnup decision in Chapter 7 liquidations. That is, while § 506(d) is to be applied with “equal force” in relation to both Chapter 13 and Chapter 7 proceedings, it has a different effect in the two proceedings.12
For this proposition the court relied in part on a footnote in the Supreme Court’s decision in Dewsnup which said that “we express no opinion as to whether the words ‘allowed secured claim’ have a different meaning in other provisions of the Bankruptcy Code.”13 However, the text surrounding the footnote clearly sets out what the Supreme Court held in its opinion and what the Supreme Court meant by this statement, i.e., a lien fully allowed under § 502 cannot be stripped down by § 506(d) and the words “allowed secured claim” may take on different meanings in Code sections other than 506(d):
Therefore, we hold that § 506(d) does not allow petitioner to “strip down” respondents’ lien, because respondents’ claim is secured by a lien and has been fully allowed pursuant to § 502. Were we writing-on a clean slate, we might be inclined to agree with petitioner that the words “allowed secured claim” must take the same meaning in § 506(d) as in § 506(a). But, given the ambiguity in the text, we are not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected.14
This is not to say that hen stripping is not available in the context of a Chapter 13 case. As many of the cases cited by the debtors are quick to point out, “§ 1322(b)(2) clearly states that a chapter 13 plan ‘may modify the rights of holders of secured claims.’ ”15
B. 11 U.S.C. § 1322(b)(2)
Chapter 13 is designed to allow individual debtors with a limited amount of debts and *365income 16 to reorganize their debts and make payments to creditors over a period of time. As explained by the Supreme Court in No-belman:
Under Chapter 13 of the Bankruptcy Code, individual debtors may obtain adjustment of their indebtedness through a flexible repayment plan approved by a bankruptcy court. Section 1322 sets forth the elements of a confirmable Chapter 13 plan. The plan must provide, inter alia, for the submission of a portion of the debtor's future earnings and income to the control of a trustee and for supervised payments to creditors over a period not exceeding five years. See 11 U.S.C. §~ 1322(a)(1) and 1322(c). Section 1322(b)(2), the provision at issue here, allows modification of the rights of both secured and unsecured creditors, subject to special protection for creditors whose claims are secured only by a lien on the debtor's home.17
Section 1322(b) provides, in pertinent part:
(b) [Subject to certain other provisions of § 1322], the plan may-(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.18
Based on the language of the Supreme Court in Nobelman, and the unambiguous language of the statute, courts on both sides of the issue can agree that § 1322(b)(2)'s protection of the "rights" of secured creditors, therefore, extends only to the claims secured by property that is a debtor's principal residence, and permits the modification of the "rights" of other secured creditors and of unsecured creditors.19 However, since there is currently no clear directive from § 1322(b)(2), the question for this Court to decide is not whether a secured creditor's lien rights may be modified or extinguished in Chapter 13, but rather whether they may they be extinguished prior to a debtor's completion of his or her Chapter 13 plan and receipt of a discharge. The authorities are split on this issue.
C. Case Law On Release Of Lien
One line of cases holds that a creditor's lien can be extinguished pursuant to the debtor's plan upon payment of the creditor's secured claim. Those cases use the following two lines of reasoning: (1) the undersecured portion of the creditor's lien is void upon the payment of the allowed secured claim pursuant to 11 U.S.C. § 506(d); or (2) § 1322(b)(2) does not prevent such a modification to the creditor's lien rights, and any concern about the debtor dismissing his case after the creditor's lien is released, but prior to full payment under the plan, is outweighed by the policy of affording the debtor a fresh start.20 Another line of cases holds that a debtor may not obtain a release of a secured creditor's lien until he successfully completes the confirmed plan and receives a discharge.21
This Court takes the latter view. Section 1322(b)(2) does not stand in isolation apart from the rest of Chapter 13 or the Bankrupt*366cy Code. As explained by Judge Kishel, in Scheierl:
Chapter 13 is a collective proceeding, in which debtors can — and must — propose and effect a comprehensive solution to their difficulties with creditors. A Chapter 13 plan is appropriately termed a “new contract” running between the debtor and all of his creditors. Like any contract, this one embodies bilateral covenants and considerations. Those pertinent to the debt- or’s status are simply summarized: in return for the completed performance of a promise to make payments pursuant to the plan, the debtor receives the permanent benefit of an adjustment of pre-petition obligations, discharge of debts, and various ancillary remedies.... [T]his contract really has to await the debtor’s full performance before the benefit of any of his statutory remedies may become final, binding, and fully effectuated on the public record.
This principle is not explicitly articulated in the Bankruptcy Code and Rules, but its resonance is evidenced in two provisions. 11 U.S.C. § 1307(b) gives the debtor an unfettered right to obtain dismissal of his case at any time, on an ex parte basis and without a showing of cause. In the event of such a dismissal, 11 U.S.C. § 349(b) restores the full pre-petition status quo as to the debtor’s property rights, and his creditors’ competing claims against them. These provisions answer the question of whether a debtor’s effort in Chapter 13 has any final, binding effect on creditors’ rights if the debtor leaves bankruptcy before full performance under his plan. They certainly mean that a Chapter 13 case cannot bring about any permanent reordering of property and contract rights, partial or comprehensive, until the debtor meets a threshold requirement: entitlement to a discharge, by “completing] ... all payments under the plan” pursuant to 11 U.S.C. § 1328(a).22
Chapter 13 grants a debtor the most all-encompassing discharge available under the Code. No other Chapter allows a debtor to discharge, among other things, debts for fraud and willful and malicious torts.23 This generous discharge is intended by Congress as an incentive for debtors to complete performance under their plans.24 Unlike Chapter 11, where the debtor is granted a discharge upon confirmation of the plan, there is a catch — in Chapter 13 a debtor must wait until all plan payments are made to get a discharge, unless a hardship discharge is granted under § 1328(b).25 Thus, the debtor is required to complete the plan before receiving the benefit of the bargain. If a debt- or’s case is dismissed prior to completion of the plan payments and discharge, § 349(b) unravels the bankruptcy in an attempt by the Bankruptcy Code to leave the parties as it found them.26 Under this provision, upon dismissal of a debtor’s Chapter 13 bankruptcy case, the title to the property revests in the debtor and the secured interest in the property revests in the secured creditor.
This would not be feasible if secured creditors had to release their liens and turn over title to debtors prior to plan completion. *367For example, if secured car creditors27 are forced to turn over title to the debtor upon payment of the secured portion of their claim, then should the case later be dismissed by the debtor under § 1307(b), or by the court upon motion by a party in interest under 1307(c), the objective of § 349(b) (to leave the parties in their pre-bankruptcy postures) is thwarted because the secured car creditor is left with an unperfected security interest. To perfect its interest, the creditor would have to regain possession of the certificate of title.28 In order to do that, the creditor would have to (1) rely on the debtor to return the certificate of title upon dismissal of their Chapter 13 case; (2) come before the court after the ease has been dismissed (and possibly closed) and file an adversary proceeding to request that the debtor turn over the certificate so that the lien may be recorded; (3) or request some form of order from the court that could be recorded in the motor vehicle records if the debtor is not willing to return the certificate of title. Meanwhile, the “secured” creditor is not protected from a third party who may purchase the vehicle from the debtor after the lien is released, but before the lien is reinstated or re-perfected after dismissal. It is presumed that this Court would then be left in the position of deciding whether to make the third party turn over the ear to the secured creditor or pay-off the secured interest and look to the debtor for payment, or to tell the secured creditor that it may not get possession of the vehicle because of the prejudice to the third party.
Any of these possibilities is more prejudicial to the parties involved than allowing the secured creditor to retain its lien until the debtor makes all of the plan payments and receives a discharge. Should the need arise for the debtor to sell property secured by a hen prior to completion of the plan, he or she debtor may file a motion requesting to sell the property under 11 U.S.C. § 363. This may be handled on a case-by-ease basis, and does not present a severe hardship to the debtor.
IV. Conclusion
For the reasons stated above, this Court concludes that a secured creditor cannot be forced to release its security interest until all payments are made by the debtor under the plan and the debtor has received a discharge. This result is the least prejudicial to the parties involved, and makes the most sense in fight of the Supreme Court’s decisions and the overall framework of Chapter 13.
A separate order will be entered consistent with this decision.
. 11 U.S.C. § 506(a) provides in relevant part: An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property .. and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.
. U U.S.C. § 1325(a)(5)(B)(i) & (ii).
. This may soon change. Section 125 of the Bankruptcy Reform Act of 1998, as proposed by the House of Representatives, would amend 11 U.S.C. § 1325(a)(5)(B)(i) to read as follows:
(i) the plan provides that the holder of such claim retain the lien securing such claim until the earlier of payment of the underlying debt determined under nonbankruptcy law or discharge under section 1328, and that if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law.
HR. 3150, 105th Cong. § 125 (1998).
. See, e.g., Bank One, Chicago, NA v. Flowers, 183 B.R. 509 (N,D.Ill.1995); In re Nicewonger, 192 BR. 886 (Bankr.N.D.Ohio 1996); In re Hernandez, 175 B.R. 962 (N.D.Ill.1994); 7n re Wilson, 174 B.R. 215 (Barikr.S.D.Miss.1994); In re McDonough, 166 B.R. 9 (Bankr.D.Mass.1994); In re Cooke, 169 B.R. 662 (Bankr.W.D.Mo.1994); In re Schultz, 153 B.R. 170 (Bankr.S.D.Miss.1993) In re Lee, 156 B.R. 628 (Bankr.D.Minn.1993).
. See Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992).
. 11 U.S.C. § 506(d).
. Dewsnup v. Timm, 502 U.S. 410, 415-417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); See also 4 Collier on Bankruptcy ¶ 506.06[l][a] (Lawrence P. King ed., 15th ed. rev.1998) (this interpretation makes a great deal of sense because it is consistent with the legislative history, it is consistent with the exceptions set forth in 506(d)(1) and (2), and it allowed the Court to avoid a potential Fifth Amendment problem).
. Id.
. Id.
. Id.
. See 4 Collier on Bankruptcy ¶ 506.06[l][a] (Lawrence P. King ed., 15th ed. rev.1998) (citing H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 357 (1977); S.Rep No. 95-989, 95th Cong., 2d Sess. 68 (1978), U.S. Code Cong. & Admin.News 1978, p. 5787).
. Bank One, Chicago, NA v. Flowers, 183 B.R. 509, 514 (N.D.Ill.1995).
. Id. at 515 (citing Dewsnup v. Timm, 502 U.S. 410, 417 n. 3, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992)).
. Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) (footnote omitted).
. In re Nicewonger, 192 B.R. 886, 889 (Bankr. N.D.Ohio 1996).
. See 11 U.s.c. § 109(e).
. Nobelman v. American Sav. Bank, 508 U.S. 324, 327, 113 S.Ct. 2106, 2109, 124 L.Ed.2d 228 (1993).
. 11 U.S.C. § 1322(b)(2).
. See Bank One, Chicago, NA v. Flowers, 183 B.R. 509 (N.D.Ill.1995); In re Cooke, 169 B.R. 662 (Bankr.W.D.Mo.1994); In re McDonough, 166 B.R. 9 (Bankr.D.Mass.1994); In re Gibbons, 164 B.R. 717 (Bankr.D.N.H.1993); In re Holiday, 1993 WL 733165 (Bankr.S.D.Ga.1993).
. See, e.g., Bank One, Chicago, NA v. Flowers, 183 BR. 509 (N.D.Ill.1995); In re Nicewonger, 192 B.R. 886 (Bankr.N.D.Ohio 1996); In re Hernandez, 175 B.R. 962 (N.D.Ill.1994); In re Wilson, 174 B.R. 215 (Bankr.S.D.Miss.1994); In re McDonough, 166 B.R. 9 (Bankr.D.Mass.1994); In re Cooke, 169 B.R. 662 (Bankr.W.D.Mo.1994); In re Schultz, 153 BR. 170 (Bankr.S.D.Miss. 1993); In re Lee, 156 B.R. 628 (Bankr.D.Minn. 1993).
. See, e.g., In re Zakowski, 213 B.R. 1003 (Bankr.Wis.1997); In re Pruitt, 203 B.R. 134 (Bankr.N.D.Ind.1996); In re Scheierl, 176 B.R. 498 (Bankr.D.Minn.1995); In refordan, 164 B.R. 89 (Bankr.E.D.Mo.1994); In re Jones, 152 B.R. 155 (Bankr.E.D.Mich.1993); In re Gibbons, 164 B.R. 207 (Bankr.D.N.H.1993).
. In re Scheierl, 176 B.R. 498, 504-505 (Bankr. D.Minn.1995).
. See 11 U.S.C. §§ 1328(a) and 523(a).
. See Ravenot v. Rimgale (In re Rimgale), 669 F.2d 426 (7th Cir.1982); In re Terry, 630 F.2d 634, 635 (8th Cir. 1980);
. See 11 U.S.C. §§ 1141(d), 1328(a) and 1328(b).
. 11 U.S.C. § 349(b) provides:
(b) Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title— (1)reinstates—
(A) any proceeding or custodianship superseded under section 543 of this title;
(B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or preserved under section 510(c)(2), 522(i)(2), or 551 of this title; and
(C) any lien voided under section 506(d) of this title;
(2) vacates any order, judgment, or transfer ordered, under section 522(i)(l), 542, 550, or 553 of this title; and
(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.
. Most of the objecting creditors are secured car creditors.
. In Texas, to perfect a security interest in a motor vehicle, the lien must be recorded on the certificate of title. See Tex.Transp.Code Ann. § 501.111(a) (Vernon 1998); See also TexJBus. & Comm.Code Ann. §§ 9.302(c)(2) & (d) (Vernon 1991 & Supp.1998) (filing a financing statement is not necessary to perfect a security interest in property subject to Chapter 501 of Transportation Code). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492745/ | MEMORANDUM OPINION
DAVID P. MCDONALD, Bankruptcy Judge.
JURISDICTION
This Court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 1334, 151, and 157 and Local Rule 9.01 of the United States District Court for the Eastern District of Missouri. This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(B), which the Court may hear and determine.
PROCEDURAL BACKGROUND
1. Kenneth S. Powell, Debtor, filed a petition for relief under Chapter 11 of the Bankruptcy Code (11 U.S.C. §§ 101-1330) on October 13,1995.
2. On January 21,1998, Plaintiff, Suzanne S. Baum, filed an Adversary Complaint seeking specific performance of an alleged oral agreement to sell her claims against Debtor to Defendant, Ronald Roberts.1 Specifically, Baum alleged that from approximately May 27, 1997 through July 21, 1997, she and Roberts negotiated a sale of the claims she held against Powell, then valued at $367,166.54. Baum maintained that Roberts agreed to purchase her claims for $100,000.00. The parties, however, did not memorialize their agreement. Baum alleged that Roberts refused to close their deal on December 5,1997 and, instead, offered to pay $75,000.00 for her claims.
3. Roberts moved the Court to dismiss Baum’s adversary proceeding, arguing that the Court lacks subject matter jurisdiction (Motion 6). In a memorandum opinion entered May 15, 1998, the Court determined that, because the matters raised in Baum’s complaint were core matters, the Court possessed subject matter jurisdiction over this adversary proceeding. Therefore, the Court denied Roberts’s motion to dismiss (Motion 6).
4. Roberts filed a trial brief in which he asserts five arguments against the enforcement of the oral agreement into which Baum alleged the parties entered. First, Roberts argues the facts demonstrate that the parties did not reach an agreement regarding the sale of Baum’s claims. Second, Roberts maintains that, even if the parties negotiated an oral agreement of the sale of Baum’s claims against Powell, the agreement’s enforcement is barred by the Statute of Frauds. Roberts reasons that the Statute of Frauds requires the alleged agreement to be in writing because the agreement contemplated the transfer or sale of interests in real property. Further, Roberts maintains that an exception to the Statute of Frauds that permits the enforcement of an oral agreement for the transfer of an interest in real property when, one, a party has substantially complied with the agreement and, two, not enforcing the agreement would deny that party the benefit of the agreement, does not apply in this case because there is no clear and definite agreement for the Court to enforce. Third, Defendant argues that the Parol Evidence Rule bars evidence of the *414oral agreement Baum alleges because any agreement the parties may have had was reduced and incorporated into a contract they signed on December 5, 1997. Fourth, Roberts argues that the equitable remedy of specific performance Baum seeks is unavailable to her because she has “unclean hands” as a result of breaching a written agreement for the sale of her claims that the parties entered into on December 5, 1997. Finally, Roberts reasserts his argument that this Court lacks subject matter jurisdiction of Baum’s law suit.
5.Baum also filed a trial brief. In her brief, Baum argues that on July 21, 1997, Roberts agreed to purchase her claims against Powell for $100,000.00. This agreement, Baum asserts, was not contingent upon the execution of any documents and was breached on December 5,1997 when Roberts refused to pay $100,000.00 to her.
Baum also argues that because the Statute of Frauds in Missouri Revised Statutes § 432.010, which applies only to “land” and related interests, does not apply here where she maintains the claims she allegedly sold to Roberts were not interests in real property but claims against a bankrupt debtor. Baum acknowledges that the agreement she asks the Court to enforce would require her to transfer interests (debts and securities) that are, arguably, interests in land. She maintains, however, that such transfers would be “incidental” to the transfer of her claims against Debtor, the majority of which consists of a court judgment and, therefore, do not fall within the Statute of Frauds.
Alternatively, Baum argues that if the Statute of Frauds applies, the necessary written evidence of the parties’ agreement can be pieced together from the various written correspondences between the parties’ attorneys and other documents the parties have agreed to submit as exhibits.
Third, Baum maintains that if the Statute of Frauds applies, her agreement qualifies as a settlement agreement and, in Missouri, oral settlement agreements involving land are enforced as an exception to the Statute of Frauds. The premise to this argument is that Roberts and Powell work so closely and have commingled them financial dealings so much that Roberts’s efforts to purchase Baum’s claims can be considered to be a settlement of Baum’s rights against Powell.
Fourth, Baum argues that if the Statute of Frauds applies to the alleged oral agreement between her and Roberts, this Court may employ its equitable powers to enforce that agreement. Baum asserts that Missouri courts will invoke equity and enforce an oral agreement despite the Statute of Frauds when enforcing the oral agreement avoids injustice. In this case, Baum argues that equity favors enforcement of her agreement with Roberts because: she is a widow; Powell’s case has been pending for many years; her rights against Powell have been limited by the Bankruptcy Code, and Roberts “hoodwinked” her.
Baum offered the following three responses to Roberts’s contention that the Parol Evidence Rule bars evidence of the oral agreement she seeks to enforce:
(1) Baum argues that because Roberts has neither argued that the written agreement she signed to sell her claims against Powell to Roberts for $75,000.00 (the “$75,-000.00 agreement”) is binding, nor tendered the purchase price to her, that agreement cannot be the basis of a Parol Evidence Rule objection;
(2) Baum maintains that the $75,000.00 agreement is unenforceable as one she signed under duress and, therefore, cannot be the basis of a Parol Evidence Rule objection; and
(3) Baum argues that the $75,000.00 agreement cannot be the basis of a Parol Evidence Rule objection because Roberts defrauded her into signing it.
6. The Court held a hearing on this matter on May 18,1998.
7. At the conclusion of Plaintiffs case, Defendant moved the Court to grant it a judgment as a matter of law. The Court took Defendant’s motion under advisement.
FACTUAL BACKGROUND
Upon consideration of the testimony, evidence and argument of counsel, the Court makes the following findings of fact:
*4151. From 1991 through 1994, Plaintiff, Suzanne Baum, was the Mayor of Creve Coeur, Missouri. During the eight years preceding her mayoral term, Plaintiff held various positions in Creve Coeur’s government and operated a small business. Baum has two children, both of whom are now between twenty and thirty years old.
2. Defendant is a friend of Dr. Kenneth S. Powell. Roberts is a successful businessperson whose ventures include: owning and operating a nightclub; owning two liquor stores; organizing charter bus trips;investing in real estate, and managing between twenty and thirty pieces of real property.
3. During 1990 and 1991, Edwin J. Baum, Plaintiffs husband, loaned $170,000.00 to Dr. Powell for use in his investment company, Kenneth S. Powell Investment Corporation (“KSPIC”). Dr. Powell and his wife, Diane Powell, executed two promissory notes, one for $155,000.00 and one for $15,000.00, to evidence Baum’s loan. Between 1990 and 1993, Debtor, KSPIC, and at least one other entity with which Dr. Powell was affiliated, Aerial Investments Corporation, executed various promissory notes, stock pledges, guaranties, quit claim deeds in favor of Edwin J. Baum to provide Baum with security for the loans he had extended to the Powells.
4. In the Spring of 1993, Plaintiffs husband was diagnosed as having lung cancer. Soon thereafter and until Mr. Baum died in October of that year, the Baums unsuccessfully tided to collect from Debtor the money Mr. Baum had loaned to KSPIC.
5. Plaintiff sued to recover the money her husband had loaned the Powells. She won a judgment of $284,074.70 against Dr. Powell, Diane Powell, and KSPIC jointly and severally. By garnishing Mrs. Powell’s wages and Dr. Powell’s practice, Plaintiff collected a small portion of the judgment.
6. When Dr. Powell filed his bankruptcy petition, he owed Plaintiff more than $300,-000.00.
7. Approximately two years ago (shortly after Debtor filed his petition), Plaintiff relocated to Washington, District of Columbia. Initially, Plaintiff worked as a fundraiser for the American Institute for Cancer Research but in January of 1997, she resigned that position when she began pursuing a degree from Case Western Reserve University as a full-time, distant student.
8. Although living in Washington, Plaintiff regularly read documents filed in Debt- or’s case and the adversary complaints filed in conjunction with Debtor’s case. While reviewing these documents, Baum recognized that Roberts’s name appeared in various bankruptcy-related filings and, in May 1997, she contacted him to determine if he was interested in purchasing the claims she held against Debtor.
9. In May 1997, Roberts and Baum spoke on the phone. Baum told Roberts she had a large judgment against Debtor which, in part, was secured by seven pieces of real property located in Kinloch, Missouri (the “Kinloch properties”) plus the rights to develop those properties, and stock in Aerial Investments Corporation (“Aerial”) to sell.2 The parties agreed to let their attorneys, David Weiss for Baum and Charles Sindell for Roberts, try to negotiate a deal.
10. On May 30, 1997, after Weiss and Sindell spoke on the telephone, Weiss drafted a letter indicating that Plaintiff would transfer her rights against Debtor and her interest in the Kinloch properties and Aerial stock to Roberts for $208,139.00. Weiss noted that the offer to sell would be withdrawn on June 4,1997.
11. Sindell failed to respond to Weiss’s letter of May 30, 1997 and on June 6, 1997, Weiss extended “the date for responses and further action “ by one week.
12. Sindell, by letter dated June 18, 1997, informed Weiss that Roberts was “interested in pursuing this matter, but he w[ould] not *416agree to pay in excess of $100,000.00 for the interest that you [Weiss] have listed in your letter.” Sindell also wrote that “[m]y client’s offer is contingent upon the authority of the Powells to convey, pledge and/or lien these properties and also your client’s authority to transfer her interest in these assets free and clear of the two Powell bankruptcy matters.”
13. Weiss in a letter dated June 24,1997, informed Sindell that Baum would be in St. Louis during July and wanted to meet with Roberts and Sindell. The parties agreed to meet on July 21,1997.
14. On July 21, 1997, the parties and their attorneys met at Sindell’s office. The testimony offered at trial differed on what transpired at this meeting. Baum’s version of the meeting, is as follows, Roberts and Sindell were late for the meeting which angered Baum. After exchanging pleasantries, the parties discussed the sale of the Kinloch properties, Aerial stock, and other interests Baum was offering to sell. After lengthy discussions, the parties agreed that Baum would walk away from Debtor and never deal with him again by exchanging her interests for $100,000.00 cash. At the meeting’s conclusion, Baum and Roberts shook hands and joked that it was probably the first and last time they would do so. Before parting, Baum asked Roberts if he was sure they had a deal and he responded affirmatively. Baum left the meeting believing she and Roberts had an agreement regarding the sale of her interests.
Roberts’s recollection of the July 21 meeting differs from Baum’s memory of that meeting. Roberts testified that the parties and their attorneys discussed the sale of Baum’s interests but that any sale would be contingent upon numerous things, including the receipt of a letter from the Trustee appointed to administer Debtor’s cases3 stating that the bankruptcy estate did not claim an interest in the Kinloch properties and would not oppose the parties’ transaction. However, at one point during direct examination, Roberts, in response to a question from Plaintiffs attorney, agreed that he had offered to purchase Baum’s interests at the July 21 meeting for $100,000.00. Later during the direct examination, Roberts emphasized that although the parties talked about a sale of Baum’s interests for $100,000.00, he did not agree to purchase them for that amount. During cross examination, Roberts clarified that when he stated, during direct examination, that he offered to purchase Baum’s interests for $100,000.00 at the July 21 meeting, his offer was contingent upon conditions such as receiving a letter from the bankruptcy Trustee and determining that the Kinloch properties were titled to KSPIC.
Sindell also testified as to his recollection of what transpired at the July 21 meeting. According to Sindell, the parties discussed a variety of issues necessary to the proposed transaction including: the purchase price, the timing of the proposed transfer, and the documents necessary to effect such a transaction. Sindell voiced concerns he had with the deal, including but not limited to: whether Roberts could raise the funds necessary to close the deal, and the amount of time Roberts would need to raise the money to pay Baum. Sindell denied that the parties reached an agreement at the meeting. He testified that he left the meeting believing that the parties thought they might have a deal, but that Weiss was going to address some issues Sindell had raised in the meeting and Roberts had to be certain that he could raise the funds he would need to pay Baum. Summarizing what was accomplished at the meeting, Sindell said that Roberts agreed to put down $5,000.00 earnest money, and the parties agreed to address the concerns Sin-dell had raised and then to sign a written agreement. Sindell testified that he did not recall Baum and Roberts shaking hands with one another at the meeting’s conclusion.4
15.On July 28, 1997, Weiss sent Sindell a draft agreement for Sindell’s and Roberts’ consideration. In the letter that covered the facsimile, Weiss noted that he had written to Christopher Rausch, the attorney for the Trustee appointed in the two Powell bankruptcy cases, and provided him with “copies of the referenced documents” (presumably *417the deeds of trust, quit claim deeds, guarantees, stock pledges and assignments referenced in the draft agreement) so that Rausch or the Trustee may provide the parties with the Trustee’s position regarding the transfer of Baum’s interests to Roberts.
16. On July 31,1997, Sindell sent Weiss a letter via facsimile in which he expressed five “questions, comments and requests” he had after reviewing the draft agreement Weiss had faxed to him three days earlier. Among the concerns Sindell expressed was:
“5. Please acknowledge my understanding that none of the quit claim deeds or assignments [from KSPIC to Edwin J. Baum] have been recorded, and that as a result, the record of title shows the various parcels of real estate [i.e. the Kinloeh properties] owned by Kenneth S. Powell Investment and mortgaged via Deeds of Trust to Mr. Baum.”
Sindell further noted: “I would prefer having the Trustee’s letter prior to entry into the Agreement.”
17. Weiss replied to Sindell’s July 31 letter by a letter dated August 5, 1997, wherein Weiss answered various questions and suggested additional language be added to a written agreement to clarify one point. Weiss’s August 6 letter satisfied all the “questions, comments and requests” Sindell expressed in his July 31 letter except one. Specifically, Weiss’s letter did not satisfy Sin-dell’s desire for a letter from the bankruptcy Trustee, or the attorney for the bankruptcy Trustee, indicating approval of the proposed transaction. Also, although Weiss acknowledged that the quit claim deeds of the Kin-loch properties from KSPIC to Edwin Baum were not recorded, he did not question Sin-dell’s statement that the record of title would show that the properties were owned by KSPIC.
18. Sindell testified that after the July 21 meeting, other issues had “cropped up” in telephone conversations between him and Weiss. One such issue was whether some of the stock Baum would transfer to Roberts was exempt under the Securities Act. Also, a replacement certificate had to be issued for the Airport Industrial Redevelopment Corporation shares Baum would transfer to Roberts.
19. On September 24, 1997, Weiss sent Sindell a letter informing Sindell that the replacement certificate for the Airport Industrial Redevelopment Corporation shares had been issued. Weiss also stated that “the only thing I am aware of that we are waiting on is a letter from the Bankruptcy Trustee or the Trustee’s attorney advising that the sale and assignment of the debt and security instruments will not run afoul of either bankruptcy law or the orders issued in this case.”
20. On September 24, 1997, Rausch sent Weiss a facsimile letter dated September 23, 1997, in which he recited that he and the Trustee had discussed the parties’ proposed sale of debt and security agreements. Rausch indicated that the Trustee was not opposed to the “theory of the proposed sale.” However, Rausch also stated that, given the history of Dr. Powell’s bankruptcy case and the movement of funds between Powell and Roberts, the Trustee was concerned that Roberts “might, in fact be using estate assets to purchase” Baum’s claims. Therefore, Rausch continued, the Trustee would require “documentary assurance that the funds used to purchase [Baum’s] claim are not Estate funds” before he would “consent to the sale and give his blessing thereto.” Neither Roberts nor Sindell received a copy of Rausch’s letter or knew of it existence until March 1998.
21. In the fall of 1997, Sindell told Weiss he did not know if the deal would ever close and Weiss suggested that setting a “closing” would prompt the parties to act. Through a letter dated November 21, 1997, Weiss informed Sindell that he had decided to set a closing for December 5,1997.
22. Sindell testified that he and Roberts were concerned about how the Kinloeh properties that KSPIC transferred to Edwin Baum were titled and wanted to be certain that they were titled to either KSPIC or to Debtor. If the Kinloeh properties were not titled to Debtor or KSPIC, Roberts would have to foreclose on them to clear their titles.
23. In late November 1997, Sindell received letter reports summarizing the results *418of title searches of the Kinloch properties. The report for one property (the parcel commonly known as 5661 Mable Ave.) showed that an individual named Ann Barenberg was the last grantee of record. The report for a second property (the parcel commonly known as 8142 Granberry Dr.) showed that an entity named Wright Construction Company was the last grantee of record. The second property’s report also showed a quit claim deed from Blue Haven Redevelopment Corporation to Wright Construction Company and noted a pending quiet title action Dr. Powell brought against Ray Brennan. Two of the letter reports reflected judgments Magna Bank had obtained and abstracted against KSPIC. All the reports reflected the respective deeds of trust KSPIC granted to Edwin J. Baum.
24. On December 2, 1997, Weiss transmitted, via courier, a revised set of documents that he expected the parties would use at the December 5,1997 closing.
25. Because she would not attend the December 5 meeting, Baum executed an agreement on December 3, 1997, stating that she would transfer her interests against Debtor to Roberts for $100,000.00. Baum sent the agreement to Weiss with the expectation that Roberts would sign it on December 5, 1997.
26. Plaintiffs sole source of support as of December 5, 1997, was the income of $3,500.00 to $4,000.00 a month generated by her investments.5 As of December 5, 1997, Plaintiff was residing in an apartment in Washington, D.C., with a monthly rent of $2,500.00. From her income Plaintiff pays her tuition and, from time to time, extends financial assistance to her two grown children.
27. Roberts testified that, as of December 5, 1997, he knew Baum was a widow and that Dr. Powell had not paid Baum the money he owed her, but denied then knowing that she was extraordinarily anxious to sell her interests.
28. On December 5, 1997, Roberts, Sin-dell and Weiss met for the “closing.” Baum attended the “closing” via telephone. At the meeting, Roberts announced that he would not pay $100,000.00 for Baum’s interests. Roberts testified that he decided not to purchase Baum’s interests on either December 4th or 5th because he had not received the bankruptcy Trustee’s letter that he and Sin-dell had requested, and also because he and Sindell had discovered the clouds on the titles to the Kinloch properties. Baum became angry when she learned that Roberts would not pay $100,000.00 for her interests. Discussions ensued. At some times during the course of these discussions, Baum spoke over a speaker phone to Weiss, Roberts and Sindell, and at other times Roberts and Sin-dell left the meeting room and Baum spoke privately with Weiss.
Ultimately, Roberts offered to purchase Baum’s interests for $75,000.00. Roberts testified he believed a discounted sale price compensated him for both the uncertainty resulting from the possibility that the bankruptcy Trustee would challenge the transfer and the costs he would incur foreclosing on the Kinloch properties to remove the clouds from their titles. Sindell continued to counsel Roberts not to buy Baum’s interests without the Trustee’s letter.
Baum agreed to sell her interests for $75,-000.00. Via an exchange of facsimiles, the parties signed a handwritten agreement (ap*419parently drafted at the meeting) stating that Baum would execute and deliver to Roberts all the documents that had been prepared to close the contemplated sale of Baum’s interest in exchange for $75,000.00 to be paid on December 8, 1997 and the conference call ended.
Baum testified that she agreed to sell at the lower price because she felt pressured to do so. Baum felt emotional pressure to sell because she wanted to put her husband’s dealings with Dr. Powell behind her and “get on with her life.” Baum also perceived financial pressure to sell. She sensed that the principal which generates the income that supports her was being eroded by the expenses she was incurring to collect the debt the Powells owed to her; as Plaintiff phrased it, she wanted to “stop the attorney clock.”
After the conference call was terminated, Roberts and Sindell asked Weiss if Baum would enter into a confidentiality agreement regarding the sale. When Weiss called Baum to ask her whether she would sign a confidentiality agreement she told him she was uncertain whether she would perform her obligations under the new agreement.
29. On December 6, 1997, Baum decided that she had been taken advantage of when she agreed to sell her claims for $75,000.00 and decided she would not honor the agreement she had signed the previous day. She notified her attorney of her decision.
30. Neither party has asked the Court to determine whether the $75,000.00 agreement is enforceable.
DISCUSSION
The parties have raised many issues in their briefs and trial arguments but the Court will address only those necessary to the resolution of the case. The Plaintiffs adversary complaint seeks specific performance of the $100,000.00 oral agreement and does not seek any remedy in regard to the alleged $75,000.00 written agreement. The Defendant repeatedly reminded the Court that neither the Plaintiff nor the Defendant seeks specific performance of the alleged $75,000.00 written agreement. Therefore, this Court does not make any findings or conclusions of law as to the enforceability of the alleged $75,000.00 written agreement.
The threshold issue presented by this case is whether Baum and Roberts reached an agreement at the July 21, 1997 meeting and, if so, what the terms of that agreement were.6 After thoroughly reviewing the testimony presented at trial as well as the exhibits submitted into evidence, the Court has concluded that Baum and Roberts orally agreed to a sale of Baum’s interests to Roberts on July 21,1997 for $100,000.00.
The testimony and the letters the parties’ counsel authored both before and after July 21, 1997, however, convince the Court that the agreed sale of Baum’s interests was contingent upon numerous events: one, Robert’s receipt of a letter from the Trustee appointed to administer Powell’s bankruptcy cases stating that he would not contest the sale, and, two, confirmation that the Kinloch properties were titled to KSPIC and free of clouds upon the title. Neither of these conditions were met before the December 5, 1997 closing. The first contingency was not met because, although Baum and Weiss received a letter from the Trustee’s attorney, that letter was not provided to Roberts or Sindell until March 1998. Even if the Trustee’s letter was timely presented to the Defendant and his attorney, the letter did not satisfy the contingency since it qualified the Trustee’s approval and consent upon a showing that the purchase money was not coming from estate funds. The second contingency was not met because the title reports show that some of the Kinloch properties were not titled to KSPIC and there were clouds on the titles of others.
The two contingencies were.material to the parties’ agreement. Roberts would incur substantial costs to remove the clouds on the Kinloch properties’ titles if he proceeded with the oral contract. The possibility that *420the bankruptcy Trustee would challenge the transaction also changed the nature of the parties’ bargain by interjecting uncertainty and possible delay. Because the contingencies were not met, the Court cannot enforce the $100,000.00 oral contract through specific performance. The Plaintiffs request for specific performance of the $100,000.00 oral agreement is DENIED.7
. In describing the properties subject to the alleged agreement of sale, the complaint lists fewer than all the interests Plaintiff, through her husband, received from, or holds against. Debtor. On May 15, 1998, Plaintiff filed a motion to amend the complaint by interlineation to reflect that Plaintiff seeks specific performance of a sale of all the interests Plaintiff received from, or holds against, Debtor. Defendant did not object to Plaintiff’s motion to amend and the Court, at trial of this matter, granted Plaintiff’s motion.
. These properties were among the deeds of trust and quit claims that Powell and his investment corporation transferred to Edwin J. Baum. Baum assigned his rights to Plaintiff. The Court will refer only to the Kinloch properties and the Aerial stock as the collateral Plaintiff sought to sell to Defendant because, one, it is simpler than describing all the collateral Debtor and his investment corporation transferred to Edwin Baum and, two, Defendant testified these were the only interests in which he was interested.
. KSPIC has also filed a bankruptcy petition.
. David P. Weiss did not testify.
. The Plaintiff argued, in part, that she signed the $75,000 agreement under duress caused by the Defendant taking unfair advantage of her financial condition. She explained she was a widow with fixed assets and the Defendant lowered his offer to $75,000 because he knew of her alleged financial difficulty. With these statements the Plaintiff placed into evidence the issue of her financial circumstance. The Court permitted cross examination regarding her finances. Plaintiff asked not to testify publicly to her net worth. In a compromise reached at trial, the parties agreed that Baum would file her net worth under seal with the Court. Only the attorneys present at the hearing, Christopher Cox and Mayer Klein, and the Court were privy to the amount divulged. The attorneys were instructed not to reveal the Plaintiff’s net worth and were further instructed to omit the dollar amounts listed from further questioning of Plaintiff. The Defendant, by consent, was excluded from court only during this cross examination concerning Plaintiff’s net worth. For purposes of this decision, the Court recognizes only that Plaintiff's net worth is substantial. The Court finds Plaintiff's assertion that she was coerced into signing the $75,000 agreement due to her financial condition is without merit.
. The Court considers the threshold issue to be whether the parties reached an agreement and, therefore, entered into an oral contract because if they did not, there is no reason to consider the other issues the parties have raised such as: the application of the Statute of Frauds to the alleged agreement, the application of the Parol Evidence Rule to testimony of the alleged oral agreement.
. At the conclusion of the Plaintiff's case, the Court took under advisement the Defendant’s Motion For Judgment as a Matter of Law. In support of his motion, Defendant argued that he was entitled to judgment as a matter of law because Plaintiff had not set forth a prima facie case, in part, because her evidence of an oral agreement between the parties was barred by the Parol Evidence Rule and because even if her evidence established the existence of an oral contract, the Statute of Frauds barred that contract's enforcement based on the $75,000 written agreement. The Court's discussion and conclusion that the parties reached an oral agreement for the sale of Baum's interest to Roberts on July 21 sufficiently addresses Defendant's contention that Baum's evidence did not establish the existence of an oral contract. The fact that the Court ultimately concluded that the conditions precedent to the parties’ contract were not fulfilled renders a consideration of the Statute of Frauds superfluous. The Court, however, will briefly address Defendant’s argument that the Parol Evidence Rule bars consideration of Plaintiff's evidence of an oral contract.
The Parol Evidence Rule bars the admission of evidence of an oral agreement which would vary or contradict a subsequent written agreement. See Union Eletric Co. v. Fundways, Ltd., 886 S.W.2d 169, 170 (Mo.App.1994). In this case Roberts bases his Parol Evidence Rule argument on the writing the parties executed on December 5, 1997 in which Roberts agreed to purchase Baum’s interests for $75,000.00. Roberts argues that this writing embodies the parties’ entire agreement and therefore bars evidence of the prior oral agreement. This argument is based on the assumption that the $75,000 written agreement is in fact a written contract. The argument is inconsistent with, and ignores, the fact that the Defendant on numerous occasions throughout the trial, reminded the Court that the adversary complaint seeks only specific performance of the oral $100,000 agreement and neither he nor Baum had asked the Court to enforce the written $75,000 agreement. The Court has followed the Defendant’s request and has not determined whether the $75,000 written document is, or is not, a written contract. The Court will not speculate as to its own findings as if the issue of the $75,000 agreement was fully tried before the Court. Since the status of the $75,000 document is not determined, it cannot serve as a basis for the application of the Parol Evidence Rule in regard to the oral $100,000 contract, the enforceability of which is the only issue before this Court. The Court enters no findings or conclusions of law concerning the enforceability of the $75,000 written agreement. The Court will deny Roberts’s Motion for Judgment as a Matter of Law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492746/ | *496ORDER ON TRUSTEE’S OBJECTION TO DEBTOR’S CLAIM OF EXEMPTIONS
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for hearing upon the Trustee’s Objection to Debtor’s Claim of Exemptions. The Court reviewed the Motion, the record and heard argument of counsel and finds as follows:
The Debtor, Christine M. Kelsey, filed her voluntary Petition for relief under Chapter 7 of the Bankruptcy Code on May 6, 1998. Pursuant to Article X, Section 4(a)(2) and Florida Statute § 222.061, the Debtor claimed as exempt on Schedule C, clothing valued at $30.00, miscellaneous pictures and wall hangings valued at $10.00, furniture and household goods valued at $120.00 and a class action suit against Publix up to the value of $660.00.
Clearly, the class action suit is property of the estate under 11 U.S.C. § 641 and the Debtor is not claiming that the entire value of the suit is exempt. Rather, the Debtor claims an exemption of the value of the class action suit up to the amount of $660 and any value over and above $660 is nonexempt property of the estate. On June 12, 1998, the Trustee filed an Objection to Debtor’s Claim of Exemptions, objecting to the Debt- or’s claim of exemption of the class action suit.
The Trustee contends that the Debtor may not claim any portion of the value of the class action suit as part of the $1,000 personal property exemption provided by Article X, § 4(a)(2) of the Florida Constitution.
Article X, § 4(a)(2) of the Florida Constitution provides, in part, “There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon ... the following property owned by a natural person: ... (2) personal property to the value of one thousand dollars.” Fla. Const. Art. X, § 4(a)(2). Where as here, “... constitutional language is precise, its exact letter must be enforced and extrinsic guides to construction are not allowed to defeat the plain language.” See Florida League of Cities v. Smith, 607 So.2d 397, 400 (Fla.1992). The language “personal property to the value of one thousand dollars” is precise and contains no exclusion for general intangible personal property or dios-es in action. Thus, to the extent that the Debtor does not exceed the $1,000 limit, the Debtor may claim a portion of the value of the class action suit as exempt and the Trustee’s Objection should be overruled.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Trustee’s Objection to Debtor’s Claim of Exemption be, and the same is hereby overruled. The Debtor’s claim of exemption of the class action lawsuit against Publix to the value of $660.00 is hereby allowed. To the extent that the value of the class action lawsuit exceeds $660.00, the class action lawsuit is nonexempt property of the estate, subject to administration by the Trustee. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492747/ | ORDER ON OBJECTION TO DEBTOR’S CLAIM OF EXEMPTIONS BY FIFTH THIRD BANK OF FLORIDA (DOC. NO. 24)
ALEXANDER L. PASKAY, Chief Judge.
With the proliferation of state operated lotteries, it is not surprising that from time to time, consumer debtors learn, after they file their Petitions for Relief under the Bankruptcy Code, that they hit the jackpot, by having purchased the winning ticket prior to the commencement of the bankruptcy ease. It is equally not surprising that creditors and the trustees are anxious to get their share of the winnings and these attempts to do so are forcefully resisted by the debtor. The controversy over lottery winnings is usually presented in this State in the form of a challenge of the debtor’s right to claim the winnings as exempt based on Florida Statute 222.14 which exempts “the proceeds of annuity contracts issued to citizens or residents of this state, upon whatever form ...” Fla. Stat. 222.14. Since the winnings are not paid in one lump sum, but rather in annual installments, the winnings are claimed to be proceeds of an annuity. Based on this contention this Court is called upon to consider the true nature of the installment payments the Debtor is receiving as a result of holding a winning ticket in the Florida Lotto.
The facts relevant to the issue under consideration are without dispute and as they appear from the record are as follows:
Prior to the commencement of this case, Edwin R. Bruce (Debtor) purchased several lottery tickets in the weekly lottery run by the State of Florida. Subsequently, but also *506prepetition, the Debtor was informed that he was holding the winning ticket, entitling him to receive annual installment payments of $78,500.00 for twenty years.
Under the established policy of the Department of Lottery .of the State of Florida, the lottery fund is established from the sale of the lottery tickets. The monies collected from the sale of tickets are forwarded to the State Board of Administration which, in turn, invests the money in zero coupon bonds. The Board of Administration receives the funds annually from the redemption of the zero coupon bonds. It is without dispute that all payments to the winners are paid in this fashion. The State Board of Administration does not purchase annuity contracts and use the proceeds to pay lottery winners.
On March 10, 1998, the Debtor filed his Petition for Relief under Chapter 11 of the Bankruptcy Code. On Schedule C filed with the Petition, the Debtor claimed his lottery winnings exempt pursuant to Fla. Stat. § 222.14. The' Fifth Third Bank of Florida (the “Bank”), mindful of the holding of the Supreme Court in Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), timely challenged the Debtor’s claim of exemption. It should be noted that this is a Chapter 11 case and the exemption claim of an individual debtor is only relevant in the context of the confirmation process. This is so because one of the pre-conditions for confirmation of any plan of reorganization is that under the plan, all creditors whose rights are impaired will receive under the proposed plan not less than what they would receive in a Chapter 7 case. 11 U.S.C. § 1129(a)(7)(A)(ii).
It is the Debtor’s contention that based on the clear unambiguous language of the Statute, the installment payments to be received form the State Board of Administration during the next twenty years are annuity payments, exempt under Florida Statute 222.14 which provides,
... [T]he proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor ... of any creditor of the person who is the beneficiary of such annuity contract, unless the ... annuity contract was effected for the benefit of such creditor.
Based on this language, some courts have concluded that all installment payments in settlement of a claim of the debtor are deemed to be within the protection provided by Florida Statute 222.14. See In re Dixson, 153 B.R. 594 (Bankr.M.D.Fla.1993), reversed in part, vacated in part, 116 F.3d 491 (11th Cir.1997) (Table No. 96-2391). The Bankruptcy Court in Dixson relied on In re McCollam, 612 So.2d 572 (Fla.1993), which did not involve a lottery winning but the settlement of a wrongful death action. In McCollam, supra., the debtor was specifically named as the beneficiary of an-annuity contract established pursuant to the settlement.
In the case of In re Pizzi, 153 B.R. 357 (Bankr.S.D.Fla.1993), the debtor was the winner of the Connecticut lottery and, just like the Debtor in the present instance, received the winnings in annual installments. The exemption claim of the debtor was rejected by the Bankruptcy Court, which concluded that the annuity contract named the Sate of Connecticut as the policy owner and beneficiary of the annuity. Since the State of Connecticut cannot be the citizen or. resident of Florida, the annuity contract and its proceeds were held to be nonexempt. The Court noted the McCollam decision of the Supreme Court of Florida, but distinguished McCollam because in McCollam the Debtor was named the beneficiary of an actual annuity contract.
In In re Conner, 172 B.R. 119 (Bankr. M.D.Fla.1994), the same court which allowed the exemption of the income stream to a lottery winner as payment under an annuity contract, rejected the exemption claim because the parties to the agreement did not intend for the settlement agreement to be an annuity. The Court agreed with the Pizzi Court, which held that there must be an actual annuity contract before the payments may be exempt pursuant to Florida Statute 222.14.
The Eleventh Circuit Court of Appeals had an occasion to revisit the issue in In re *507Solomon, 95 F.3d 1076 (11th Cir.1996), stating that McCollam required the existence of an actual annuity contract before a series of payments may be exempt under Florida Statute 222.14. According to Solomon, the mere fact that the payoff, which the debtor was to receive under a pre-petition settlement agreement pursuant to which the insurer made a periodic series of payments was not sufficient to transform the settlement agreement into an annuity contract.
Based on the holdings, of McCollam, supra and Solomon, supra, it is evident that the periodic payments that the Debtor is to receive do not fall within the exemption provided for by Fla. Stat. 222.14. Both McCollam and Solomon require an actual annuity contract before the periodic payments fall within the exemption. In the present instance, the evidence leaves no doubt that no annuity contract was ever purchased by the State naming the Debtor as the owner or the beneficiary of the annuity contract. As noted earlier, the funds used to pay off the holders of winning tickets are paid by the Player Accounting Services from funds obtained by the Lottery Administration through cashing in the zero coupons obtained from the bonds purchased by the Administration with funds generated by the ticket sales.
For these reasons, this Court is satisfied that the Debtor’s right to receive the periodic payments from the Lottery Administration are not exempt. The installment payments are part of the Debtor’s estate subject to administration and must be taken into consideration when the Debtor’s Plan is presented for confirmation. In the event the Debtor is unable to obtain confirmation and the Chapter 11 case is converted to a Chapter 7 case, the installment payments representing the award based on the winning ticket purchased by the Debtor shall be subject to administration by the Trustee. To the extent the Debtor already received post-petition payments from the Lottery Administration the same may be subject to a turnover proceeding by the Trustee.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Objection to Debtor’s claim of exemptions filed by the Bank be, and the same is hereby sustained. The Debtor’s claim of exemption of the lottery proceeds due to the Debtor by the State of Florida is hereby disallowed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492749/ | MEMORANDUM OPINION
JAMES G. MIXON, Bankruptcy Judge.
On October 26, 1994, John E. Oldner (“Debtor”) filed a voluntary petition for relief under the provisions of Chapter 7 of the United States Bankruptcy Code. Richard L. Ramsay was appointed Trustee.
The Trustee commenced this action against Sunmark Contract Staffing, Inc. (“Sunmark”). The Complaint seeks a judgment against Sunmark in the sum of $104,-000.001 for a purported pre-petition transfer that the Trustee alleges was constructively fraudulent pursuant to 11 U.S.C. § 548(a)(2)(A)(B) and Ark.Code Ann. § 4-59-204 and 205. After a trial on the merits, the matter was taken under advisement.
The proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H), and the Court has jurisdiction to enter a final judgment in this case. The following shall constitute the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
I.
FACTS
In June 1994, John Oldner (“Debtor”) and his wife, Brenda Oldner, sold a tract of real property located adjacent to Interstate 30 near Little Rock, Arkansas, to Oldner and Associates, Inc. d/b/a Delta Moulding and Bill R. Oldner and Margaret Oldner. The total purchase price was $502,000.00 and net cash proceeds of $128,158.88 were paid to the Debtor and Oldner and Associates, Inc.
The cash proceeds of $128,158.88 were deposited into the Debtor’s personal account at Twin City Bank in North Little Rock on June 28,1994. On June 29,1994, the Debtor wrote two checks in the sum of $100,000.00 *700and $14,000.00 respectively on his personal account payable to Arkansas Business Association (“ABA”), a closely held corporation owned by the Debtor. The transfers from the Debtor to ABA cleared the Debtor’s account June 29 and 30. The Debtor testified that both checks represented loans to ABA, and the check for $100,000.00 contained a notation “loan” on its face. On June 29, 1994, ABA transferred $104,674.67 to Sun-mark in payment of a debt for payroll services performed by Sunmark for ABA.2
Thereafter, on October 26, 1994, the Debt- or filed his bankruptcy petition. The Debtor testified that at the time of the transfers in June 1994, he was “probably” solvent, but between that time and the date the petition was filed he became insolvent. On the petition date he listed liabilities of $3.2 million and assets of $2.06 million. He scheduled $399,391.80 as an account receivable from ABA and testified that was the total amount he had transferred to the company with the expectation that he would recoup his investment over the long term.
II
THE ARGUMENT
The Trustee argues that the transfers from the Debtor to ABA that cleared the Debtor’s account on June 29 and June 30, 1994, should be ignored and the transfer from ABA to Sunmark that cleared ABA’s account on July 1, 1994, should be construed as a transfer by the Debtor for purposes of 11 U.S.C. § 648 and Ark.Code Ann. § 4-59-204. When the transfer is viewed in this fashion, the Trustee argues, the Debtor did not receive reasonably equivalent value for the transfer, and the transfer may be avoided as constructively fraudulent because the services performed by Sunmark were for the benefit of ABA and not the Debtor. The Trustee does not disagree that Sunmark performed payroll services for ABA worth $104,-674.67.
Further, although the Trustee’s Complaint prays for a money judgment against Sun-mark for the amount of the alleged fraudulent transfer in the sum of $104,674.07, the Trustee argued at trial that he only seeks a determination that the transfer to Sunmark was a transfer by the Debtor and that it was an exchange for less than reasonably equivalent value while the Debtor was insolvent.
Sunmark disputes all of the Trustee’s allegations and raises several affirmative defenses. However, it is not necessary to discuss the various defenses because the Trustee has failed to establish that a fraudulent conveyance occurred.
Ill
DISCUSSION
Among the elements the Trustee must prove to prevail on his constructive fraud claim is that the Debtor transferred property for which he did not receive reasonably equivalent value. 11 U.S.C. § 548(a)(2)(A) & (B) (1994); Ark.Code Ann. § 4-59-204(a)(2)(i) & (ii) (Michie 1996); Ark. Code Ann. § 4-59-205(a) (Michie 1996).
Here the Trustee does not attack the first transfer; that is, the loan from the Debtor to ABA, as constructively or actually fraudulent. A loan establishes a debtor-creditor relationship in which the debtor owes the creditor a debt or obligation to repay, and the creditor retains a chose in action or right of action to recover on the debt or money owed. Gregory v. Colvin, 235 Ark. 1007, 1008, 363 S.W.2d 539, 540 (1963); Smead & Powell v. Chandler & Co., 71 Ark. 505, 76 S.W. 1066, 1068 (1903). The undisputed evidence is that the transfer from the Debtor to ABA was a loan from the sole shareholder to his closely held corporation, generally an unremarkable event.
The Trustee argues that the second transfer, that is, the transfer from ABA to Sun-mark, was constructively fraudulent. To establish that the transfer was not made for *701reasonably equivalent value, the Trustee relies in part on 11 U.S.C. § 550, which provides:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
In a tortured construction of section 550, the Trustee asserts that the statute permits a disregard of the corporate fiction of ABA for purposes of determining who is the trans-feror under section 548, but not for purposes of considering who received the reasonably equivalent value. Apparently the Trustee arrives at his conclusion because of case law limiting the effect of 11 U.S.C. § 550.
Courts have observed that a literal application of section 550(a) would occasionally countenance recovery against persons innocent of wrongdoing, such as agents acting in good faith. Nordberg v. Societe Generale (In re Chase & Sanborn Corp.), 848 F.2d 1196, 1201 (11th Cir.1988); Bumgardner v. Ross (In re Ste. Jam-Marie, Inc.), 151 B.R. 984, 988 (Bankr.S.D.Fla.1993) (citing In re Fabric Buys of Jericho, Inc., 33 B.R. 334 (Bankr. S.D.N.Y.1983)). Therefore, courts limit the circumstances under which recovery from the initial transferee is permitted pursuant to section 550(a).
One such court-imposed limit is that an initial transferee is only liable under section 550 if the transferee has dominion and control over the property received. Malloy v. Citizens Bank (In re First Security Mortgage Co.), 33 F.3d 42, 44 (10th Cir. 1994); Security First Nat'l Bank v. Brunson (In re Coutee), 984 F.2d 138, 140-41 (5th Cir.1993); Ragsdale v. South Fulton Machine Works, Inc. (In re Whiteacre Sunbelt, Inc.), 200 B.R. 422, 425 (Bankr.N.D.Ga.1996) (initial transferee must be able to put the transferred money to his own purposes, such as paying a debt). The Eighth Circuit has adopted the dominion and control standard. Luker v. Reeves (In re Reeves), 65 F.3d 670, 676 (8th Cir.1995). A test of dominion and control over the transfer of money is whether “an entity ... is in essence free to invest the whole [amount] in lottery tickets and uranium stocks.” Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 894 (7th Cir.1988).
However, contrary to the Trustee’s argument, cases construing section 550 do not hold that the initial transfer did not occur; the cases merely hold that recovery against the initial transferee would be inappropriate under certain circumstances. Luker v. Reeves (In re Reeves) 65 F.3d 670, 676 (8th Cir.1995). Section 550 does not provide a basis to set aside the corporate fiction of a closely held corporation, and no court has held that it does. The transfer to ABA was a loan, and the transfer from ABA was in payment of a debt for valuable services rendered to ABA. No constructively fraudulent transfer occurred under the facts of this case.
Therefore, for the reasons stated the Trustee’s Complaint is dismissed.
IT IS SO ORDERED.
. The actual amount of the transfer was $104,-674.67.
. The check from ABA to Sunmark was dated June 28, 1994, the day before ABA actually received the money from the Debtor. The check payable to Sunmark cleared ABA’s account July 1, 1994.
The contract for the payroll services was between Sunmark and John Oldner Enterprises, Inc. John Oldner Enterprises, Inc. is a holding company owned by the Debtor, but its relationship to ABA is not shown by the record. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492751/ | MEMORANDUM OPINION
DAVID P. McDONALD, Bankruptcy Judge.
JURISDICTION
This Court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 1334, 151, 157 and Local Rule 29 of the United States District Court for the Eastern District of Missouri. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(L), which the Court may hear and determine.
PROCEDURAL BACKGROUND
1. On May 13, 1997, Brian K. Gilsinn and his wife, Kathryn E. Gilsinn, filed a petition seeking to relief under Chapter 13 of the Bankruptcy Code (11 U.S.C. §§ 101-1330) and a Chapter 13 plan.
2. Among their personal property, Debtors listed interests in three vehicles; a 1994 Dodge Shadow, a 1990 Mercury Cougar and a 1988 Chevrolet Blazer. Debtors did not list an interest in a 1994 Chevrolet Cavalier Convertible on their schedules.
3. Among the unsecured debts on Debtors’ schedules is listed a $19,000.00 obligation to Magna described as “5/95, car loan deficiency after repossession.”
4. Magna Bank, N.A. (Magna), filed an objection to Debtors’ plan. In its Objection Magna alleged that Debtor Brian Gilsinn and Diversified Maintenance Corp. (Diversified) owe it $16,262.46. Magna further alleges that the debt Gilsinn and Diversified owe it is secured by a perfected security interest in a 1994 Chevrolet Cavalier Convertible titled to “Diversified Maintenance Corp (sic) Gilsinn B.” Magna also states in its Objection that two individuals have advised it that Debtor possesses the 1994 Cavalier. Magna offers two grounds for its Objection. First, Magna maintains Debtor filed his plan in bad faith because he did not list Magna’s claim among his secured claims and he failed to list an interest in the 1994 Cavalier among his personal property. Second, Magna asserts that because Debtors listed interest in three vehicles other that the 1994 Cavalier, two of the four vehicles are luxuries not necessary to Debtors’ reorganization. Magna asked the Court to deny confirmation of Debtors’ plan or, in the alternative, to require Brian Gilsinn to locate the 1994 Cavalier and deliver it to Magna.
5. Magna also moved the Court for relief from the automatic stay so that it might locate and liquidate the 1994 Cavalier.
6. The Court held a hearing on Magna’s Objection and Motion for Relief on July 31, 1997. At the hearing’s conclusion, the Court granted Magna’s Motion for Relief so that it might locate and foreclose on the 1994 Cavalier. The Court took under advisement Mag-na’s Objection to Confirmation.
FACTUAL BACKGROUND
Brian Gilsinn (Debtor or Gilsinn) was the only witness to testify at the July 31 hearing. From his testimony and the record as a whole, the Court makes the following factual findings:
1. Gilsinn and two friends, David Reker and Kristin Reker, were joint, venturers in and the only shareholders of Diversified.
2. Gilsinn served as Diversified’s president and the Rekers were corporate officers. As Diversified’s president, Gilsinn was empowered to enter into contracts on the corporation’s behalf; Gilsinn estimated he employed this power on approximately twenty occasions. Of the twenty contracts he entered, five were for the purchase of vehicles to be used in Diversified’s operations.
3. In August of 1994, Gilsinn purchased a 1994 Chevrolet Cavalier for Diversified.
*7124. To purchase the 1994 Cavalier, Gilsinn executed a Retail Installment Contract and Security Agreement which he signed both in his individual capacity and as Diversified’s president. Upon their execution, the contract and security agreement were assigned to Magna.
5. Gilsinn admitted that his name, “Gil-sinn B” appears on the 1994 Cavalier’s title but explained that he thought the car was titled that way because, to his understanding, he had been required to guarantee Diversified’s obligation.
6. Gilsinn testified that the sales agreements and titles for all the vehicles he purchased as president of Diversified were structured like those for the 1994 Cavalier.
7. The 1994 Cavalier was used by Diversified’s sales force to make sales calls. Diversified maintained the vehicle and, Debtor believes, procured insurance for it.
8. Debtor did not possess keys to the 1994 Cavalier. He rode in the ear only once and could not drive it because it was not modified to accommodate his physical condition. Mr. Gilsinn appeared in court seated in a wheel chair. He cannot now nor could he ever drive the 1994 Cavalier.
9. From August 1994 through November 1995, Diversified used and paid for the 1994 Cavalier.
10. During 1995, relations between Debt- or and the Rekers deteriorated and in November 1995 Debtor left Diversified’s employment. When he left Diversified, Gilsinn left the 1994 Cavalier with Diversified.
11. In January 1996, Gilsinn began receiving late payment notices indicating that Diversified was not making payments on the 1994 Cavalier. After receiving the notices, Debtor called Magna and, knowing that Diversified had dissolved by January 1996, drove past the residences of the Rekers and Curtis Schmidt, a former Diversified employee, looking for the 1994 Cavalier.
12. Between February 1996 and January or February of 1997, Gilsinn spoke with many recovery companies about the 1994 Cavalier.
13. Gilsinn did not report the car stolen because he believed that doing so could expose him to liability should the party possessing the car be entitled to do so.1 Because the car was titled to Diversified as well as to him, Gilsinn believed someone could be in rightful possession of the vehicle without his knowledge.2
14. Schmidt and the Rekers told Magna that Gilsinn either had the 1994 Cavalier or had given it to his daughter to take to California.
15. To date the 1994 Cavalier has not been located.
DISCUSSION
Two other bankruptcy courts have confronted facts similar to those in the case at bar and the Court finds their insights to be instructive and applicable to Gilsinn’s case. See In re Gabor, 155 B.R. 391 (Bankr. W.D.W.Va.1993); In re Elliott, 64 B.R. 429 (Bankr.W.D.Mo.1986). In In re Gabor, the debtor’s wife left him and took the couple’s automobile with her. 155 B.R. at 392. To purchase the vehicle, Gabor and his wife had cosigned on a loan from General Motors Acceptance Corporation (GMAC). GMAC filed a proof of claim for a secured claim against Gabor’s bankruptcy estate. Id. Gabor objected to GMAC’s claim. Id. The Bankruptcy Court for the Western District of West Virginia concluded that under Washington law,3 GMAC’s security interest in the car survived but that it could not have a secured claim in Gabor’s bankruptcy because its collateral was missing. Id. at 393. The court pointed out that, even if GMAC had a secured claim in Gabor’s bankruptcy the value of the secured portion of that claim, under section 506 of the Code, was zero.
*713The Gabor court drew heavily from the reasoning expressed in In re Elliott. In re Elliott involved a debtor who, with her former fiance, purchased an engagement ring set on credit from Hurst. 64 B.R. at 430. Hurst perfected its security interest. Id. Elliott’s fiance “disappeared” and took the ring set with him. Id. When Elliott filed bankruptcy, Hurst contended it had a secured claim against Elliott’s estate and that the value of that claim was equal to the value of the fair market value of the engagement ring set. Id. The Elliott court disagreed. Id. at 430-31. Regarding Hurst’s first contention, that it held a secured claim, the court found that under Kansas law,4 Hurst’s security interest continued in the ring set despite the fact that Elliott had involuntarily disposed of it. Id. at 430. The court distinguished between Hurst’s having a security interest in the ring set and Hurst having a secured claim in Elliott’s bankruptcy. Id. The Elliott court reasoned that “[b]y definition, ‘secured claim’ [as used in bankruptcy] requires availability of collateral to secure the creditor’s right to payment” and because the ring set was missing Hurst could not have a secured claim based upon it in Elliott’s bankruptcy. Id.
Alternatively, the Elliott court held that, even if it had allowed Hurst’s secured claim that claim would have been valued at zero under section 506(a) of the Code. Id. The court equated the missing rings to property that had been destroyed or stolen. Id. at 431. Finding that Hurst’s secured claim was dependant upon the value of the estate’s interest in the rings and having concluded that the estate’s interest in destroyed or stolen property would have no value, the Elliott court determined that Hurst’s interest in the ring set was of no value. Id.
The version of the Uniform Commercial Code (UCC) provision governing a secured party’s rights upon disposition of its collateral in effect in Missouri uses language very much like that in the Kansas and Washington statutes applied respectively in In re Elliott and In re Gabor. Compare Mo.Rev. Stat. § 400.9-306(2) (1994) with K.S.A. 84-9-306(2) and Wash. Rev.Code Ann. § 62A.9-306(2) (West 1993). The parties did not cite and the Court has not found any cases holding that the current version of UCC section 306(2) in effect in Missouri should be applied any differently than the versions in effect in Kansas and Washington. Missouri’s version provides that “a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party ...” and does not require that the disposition have been made voluntarily by the debt- or. See Mo.Rev.Stat. § 400.9-306(2)(c) (1994). Hence, the Court, like the Gabor and Elliott courts, concludes that Magna continues to have a security interest in the missing automobile.
However, the Court also agrees with the conclusion of the Elliott and Gabor courts that a party holding a security interest in property which the debtor cannot produce is not a secured creditor in the debtor’s bankruptcy. Here, the Court is convinced that Gilsinn does not have the 1994 Cavalier. The Court is also convinced that Debtor utilized his best efforts to locate the car; he looked for it himself and he assisted the asset relocation companies in their attempts to locate the car. Because the car cannot be produced, Magna may not be treated as a secured creditor in Gilsinn’s bankruptcy. As the Elliott court noted, “[a] claim paid the amount it would receive if secured, but without access to the underlying collateral, [is] simply ... an unsecured claim paid on a priority basis outside the statutory priority scheme.” 64 B.R. at 430. Finally, the Court distinguishes this ease from those where debtors have hidden estate assets, been less than forthright with the court or failed to offer their best efforts to locate missing collateral.
. At the July 31 hearing on this matter, Gilsinn indicated that he would report the 1994 Cavalier as stolen so that an insurance claim could be filed for Magna’s ultimate benefit.
. Debtor is not an attorney and testified that police officers told him of the possible consequences of reporting the car stolen. By January 1996, Diversified had ceased operating.
.The Gabor court determined that because the debtor and his wife had made their contract in Washington that state's law governed the contract. 155 B.R. at 393.
. The Elliott court applied Kansas law because the parties made their contract in Kansas. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492752/ | MEMORANDUM OPINION
DAVID P. MeDONALD, Bankruptcy Judge.
JURISDICTION
This Court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 1334, 151, and 157 and Local Rule 9.01 of the United States District Court for the Eastern District of Missouri. This is a “core proceeding” pursuant to 28 U.S.C. §§ 157(b)(2)(A),(B),(K) and (0), which the Court may hear and determine.
PROCEDURAL BACKGROUND
1.Debtor, Betty Darlean Mohr, filed a petition seeking relief under Chapter 7 of the Bankruptcy Code (11 U.S.C. §§ 101-1330) on October 16, 1997. Among the assets Debtor listed on her schedules was 198 acres of land (Property) located in Lincoln County, Missouri with a value of $268,000.00 and secured claims against it totaling $78,611.00. In the Schedule G Debtor filed with her Petition she indicated that, in 1991, she (as lessor) and Wendel Bourgeois (as lessee) executed a “Lease to own” 200 acres of real property (Lease). A copy of the Lease was attached to the filing and will be discussed more thoroughly in the Factual Background portion of this Memorandum Opinion.
2. Fredrich J. Cruse, Trustee, filed a Motion to Reject Lease (designated Motion 6 by the Court) on November 17, 1997. The Trustee sought to reject the Lease between Debtor and Bourgeois because, he alleged, it created a cloud on the title to the Property and, therefore, hindered his ability to create an estate for Mohr’s unsecured creditors. In his Motion to Reject Lease, Trustee recognized that Bourgeois also holds an Irrevocable Option to Purchase (Option) the land subject to the Lease. Trustee, however, maintained the Option was independent of the Lease and, therefore, irrelevant to the issue of lease rejection.
3. On November 26, 1997, Bourgeois filed an Objection to Trustee’s Motion to Reject Lease. Bourgeois maintained that under the Lease, he holds an estate in land of which Trustee cannot divest him. Similarly, Bourgeois argued that, under the Option, he holds an estate in land of which Trustee cannot divest him. Bourgeois also asserted that Trustee was bound by the terms of the Option and that upon tender of the Option price, Trustee would be obligated to deliver him title to the Property. Lastly, Bourgeois asserted that the Property had appreciated since he purchased the Option. Because Trustee’s allegations had harmed him, Bourgeois sought damages of $100,000.00 from Trustee.
4. Also on November 17, 1997, Trustee filed a Complaint For Preliminary Injunction With Motion For Temporary Restraining Order. The Court assigned the adversary case number 97-2852-293 to this proceeding. In his Complaint For Preliminary Injunction With Motion For Temporary Restraining Order, Trustee alleged that Debtor had attempted to renegotiate the payment terms of the Lease so that payments would be made to Bourgeois every month, instead of annually as provided in the Lease. Trustee argued that the Lease was property of the estate and that immediate and irreparable harm *724would occur to the estate if Debtor or her attorney renegotiated the lease’s payment terms.
5. On November 24, 1997, the Court granted Trustee’s request for a Temporary Restraining Order barring Debtor or her attorney from renegotiating the payment terms of the Lease. Trial of Trustee’s Complaint, to the extent that it sought a Permanent Injunction, was set for January 26, 1998. The Trial was continued indefinitely pending the Court’s decision on a settlement Trustee and Bourgeois reached. That settlement is more fully discussed below.
6. On December 17, 1997, Trustee commenced a second adversary proceeding by filing a Complaint To Determine Trustee’s Interest In Real Estate. The Court numbered this proceeding 97-2853-293. Trustee alleged that Debtor and Bourgeois had entered into the Lease and that the Lease appears to pay Debtor no more than fair market value for the use of the Property. Trustee further alleged that the Option Debtor granted to Bourgeois creates a cloud on the Property’s title because it conflicts with the Lease. Trustee also alleged that the property subject to the Option had been valued at $265,000.00 in a Chapter 12 Bankruptcy Debtor and her now-deceased husband previously filed, and because the consideration Bourgeois exchanged for the Option was inadequate, Trustee could void the granting of the Option. Trustee also acknowledged the existence of secured claims against the leased and optioned Property and asked the Court to determine the extent of those liens. In conclusion, Trustee stated his belief that Debtor’s interest in the property subject to the Lease “is sufficient to pay all scheduled unsecured creditors in full with interest and allow funds for the Debtor.”
7. On January 8, 1998, Bourgeois filed an Answer to Trustee’s Complaint to Determine Trustee’s Interest in Real Estate. Bourgeois admitted entering into the Lease and Option, but denied that the payments under the Lease were for no more than the land’s fair rental value. Bourgeois also denied Trustee’s allegation that insufficient consideration was given for the Option, and that Trustee, therefore, could void the granting of the Option. Bourgeois also denied that the Option conflicted with the Lease to create a cloud on the Property’s title and that Debtor’s interest in the real estate exceeded the amount necessary to pay all her unsecured creditors in full.
8. Equitable Life Assurance Society of the United States (Equitable) filed an answer to Trustee’s Complaint to Determine Trustee’s Interest in Real Estate on January 30, 1998. Equitable alleged that through the Plan in the Chapter 12 bankruptcy Debtor previously filed, it held two secured claims against the Property it maintained Debtor had sold to Bourgeois. Equitable argued that the execution of the Lease and Option effected a sale of the property securing its claim. In further answer, Equitable alleged that under section 506(b) of the Bankruptcy Code, its attorney’s fees and expenses are secured by the value of the leased and optioned pi’operty in excess of the amount of the secured claims against that property.
9. On February 5, 1998, Trustee filed a Notice of Hearing on Trustee’s Motion For Approval of Compromise and Settlement (Motion 13). In the Notice, Trustee described a settlement he had reached with Bourgeois resolving the estate’s allegations concerning the Lease and Option. Under the terms of the proposed Settlement,
a. Bourgeois would pay $10,000.00 to the estate, representing the present value of Debtor’s interest in the payments he had not yet made under the Lease,
b. Bourgeois would pay $71,000.00 to Trustee to satisfy what Trustee and Bourgeois maintained was the extent of Equitable’s secured interest in the property subject to the Lease and Option (Trustee would pay Equitable this sum before April 15,1998),
c. Trustee would convey the Property (currently subject to the Lease and Option) to Bourgeois in fee simple absolute.
The proposed Settlement was conditioned upon the Court finding that Equitable’s “allowed secured claim” was less than or equal to $80,000.00.
*72510. On February 18, 1998, Trustee and Bourgeois filed a Joint Motion to Establish Amount Due Equitable For Its Allowed Secured Claim and To Establish Procedure For Tender (Motion 14). The Joint Motion asked the Court to determine the extent of Equitable’s interest in the property subject to the Lease, Option and Settlement. The Joint Motion recited that on April 15,1998, Equitable would be owed a balloon payment on its mortgage against the Property and that a failure to make this payment would adversely affect Bourgeois’s Option to Purchase. The Joint Motion also asked the Court to order Equitable to provide Trustee with the amount that Trustee will have to tender under the Settlement to satisfy Equitable’s secured claim, including attorney’s fees.
11. Equitable filed a Response and Objection to Trustee’s Motion For Approval of Compromise and Settlement. Equitable objected to the proposed Settlement because:
a. it does not adequately protect Equitable’s interest; and
b. the sale of Property contemplated in the Settlement does not comply with section 363(f) of the Bankruptcy Code.
In support of its contention that the Settlement does not adequately protect its interest, Equitable reasserts its argument that the Property secures, not only the $71,000.00 debt the Settlement proposes paying to Equitable, but another claim that became secured by the Property when, as Equitable maintains, Debtor sold the Property to Bourgeois. Because the proposed Settlement does not pay this additional claim, Equitable concludes that the Settlement does not adequately protect its interest.
12. On February 23, 1998, the Court held a hearing to consider: Trustee’s Complaint to Determine Trustee’s Interest in Real Estate; Motion to Reject Lease (Motion 6); Trustee’s Complaint for a Permanent Injunction (Adv. No. 97-2852-293); Trustee’s Complaint To Determine Trustee’s Interest In Real Estate (Adv. No. 97-2853-293); Trustee’s Motion For Approval of Compromise and Settlement (Motion 13); and the Joint Motion to Establish Amount Due Equitable For Its Allowed Secured Claim and To Establish Procedure For Tender (Motion 14).
FACTUAL BACKGROUND
Upon consideration of the testimony, evidence and argument of counsel, the Court makes the following findings of fact:
1. In 1987, Debtor and her husband filed a petition for relief under Chapter 12 of the Bankruptcy Code.
2. When the Mohrs filed their Chapter 12 petition, Equitable held a claim for $232,-139.72 against them that was partially secured by a lien on 386 acres of their land.1 Equitable’s claim was based upon a promissory note and a deed of trust, each of which was dated May 1,1979.
3. The Mohrs proposed a Chapter 12 plan of reorganization (Plan) that treated Equitable’s claim in three ways.
First, the Mohrs transferred 187 acres of land to Equitable in exchange for an $87,-000.00 reduction in Equitable’s $232,139.72' claim.
Second, Equitable was recognized as having “an allowed secured claim in the sum of $98,000.00. The claim is secured by a tract of land consisting of approximately 200 acres.” The land securing the $98,000.00 claim is the land that was ultimately the subject of the Lease and Option each of which have been referred to above and each of which will be described below. The Plan provided that, on April 15, 1988, the Mohrs would pay Equitable interest from January 1, 1988 to April 15, 1988 at a rate of 10 percent based upon a principal of $98,000.00. The Mohrs also would pay Equitable 3 percent of the $98,000.00 principal amount ($2,940.00) on April 15, 1988. Then, the Plan provided, the Mohrs would repay the remaining 97 percent of the $98,000.00 ($95,060.00) principal on a twenty-year amortization schedule, interest at a rate of 10 percent a year. The repayment schedule contemplated the Mohrs making annual payments to Equitable due every April 15 through 1998 when a balloon *726payment of the balance would come due. At the February 23, 1998 hearing, the parties agreed that the balance owed on Equitable’s “allowed secured claim”, was $65,327.22 plus interest at a rate of 10 percent since April 16, 1997.
Third, the Plan treated the remaining balance of Equitable’s prepetition claim as unsecured. Over the life of the Plan, Equitable was to be paid 33.7 percent of its unsecured claim. A contingency in the Plan, however, provided that “in the event of a sale or refinancing by the debtors of the real property securing Equitable’s [allowed secured] claim on or before April 15, 1998, or in the event of a default by the debtors in any payment due Equitable on or before such date, the lien of Equitable on the real property [that secures Equitable’s allowed secured claim] shall secure the entire balance due on Equitable’s unsecured claim.” At the February 23, 1998 hearing, the parties agreed that the balance not paid on Equitable’s “unsecured” claim under Plan was $43,433.88.
4. The Court confirmed the Mohrs’ Chapter 12 Plan on January 27,1988.
5. On January 16, 1991, Debtor leased the Property that, under the Chapter 12 Plan secured Equitable’s allowed secured claim, to Bourgeois for a term of fifteen years. The Court has referred to this lease above as “Lease.” The Lease provides that Bourgeois will pay $24,811.78 a year to Kahoka State Bank (KSB) beginning on April 1, 1992 and ending on April 15, 2006. From the payments it receives from Bourgeois, KSB is to pay the amount owed to each of the three creditors, namely, Equitable, Commeree-Al-legiant National Bank (Commerce), and Farmers Home Administration (FmHA) who held claims secured by the leased property when the Lease was executed. Debtor testified that the $24,811.78 lease payment was determined by totaling the annual payments she owed to Equitable, Commerce, and FmHA and adding to that sum the approximately $2,300.00 of tax liability Debtor would incur by recognizing the lease payments as income.
The Lease also provides that Bourgeois, as additional rent, will pay the real estate taxes for the Property and carry casualty or liability insurance on it. Debtor can cancel the Lease only if Bourgeois fails to make a lease payment. Upon 90 days written notice, Bourgeois may cancel the Lease at any anniversary of its execution.
7. On the same day they executed the Lease, January 16, 1991, Debtor and Bourgeois executed an Irrevocable Purchase Option Agreement. This agreement is the Option to which the Court has previously referred. Under the terms of the Option, Debtor granted Bourgeois the option to purchase, for $500.00, the Property securing Equitable’s allowed secured claim. The Option can be exercised only between April 15, 2006 and May 1, 2006. To purchase the Option, Bourgeois paid Debtor $500.00 on January 16, 1991 and an additional $49,-000.00 on April 16, 1991.
8. In 1991, Bourgeois paid Commerce the balance owed on its deed of trust. Bourgeois testified that he and Debtor orally agreed to modify the Lease to reduce his annual payment by the amount due to Commerce each year, namely, $8,865.51. After the reduction in payments, Bourgeois’s annual rent owed under the Lease became $15,946.27.2
9. Canceled checks admitted into evidence and the testimony elicited to explain them demonstrate that, as of the date of the hearing, Bourgeois had paid approximately $235,005.14 under the terms of the Lease and Option.
DISCUSSION
The resolution of the various motions and adversary proceedings noted in the caption of this case is controlled by the Court’s determination of whether the $43,433.88 “unsecured” claim Equitable received under the Chapter 12 Plan is secured or unsecured by the Property which is subject to the Lease, Option and, now, the Settlement (Property). The Trustee, Bourgeois and Equitable each asserted their positions on this issue at the February 23,1998 hearing.
*727Equitable asserted two similar arguments in support of its position that the $43,438.88 “unsecured” claim became secured under the terms of the Chapter 12 Plan when Bourgeois and Debtor executed the Lease and Option. First, Equitable argued that the simultaneous execution of the Lease and Option constituted a contract for deed. Equitable referred the Court to Long v. Smith, 776 S.W.2d 409, 413 (Mo.App.1989), which describes the attributes of a contract for deed. Equitable then asked the Court to adopt the reasoning of Capitol Federal Savings and Loan Assoc. v. Glenwood Manor, Inc., 235 Kan. 935, 686 P.2d 853 (1984), and find that the execution of a contract for deed triggers a “due on sale clause” like that in the Chapter 12 Plan which causes Equitable’s $43,-433.88 “unsecured” interest to become secured upon the sale or refinancing of the Property, or upon the Mohr’s default of payments under the Plan. Equitable further maintained that the Property secured, not only its $43,433.88 claim, but also the attorney’s fees it has incurred in protecting this interest.
Second, Equitable argued that the simultaneous execution of the Lease and Option was a disguised sale of the Property. Equitable asked the Court to look through the form of the Lease and Option and recognize that Debtor and Bourgeois effected a sale of the Property when they executed the Lease and Option. Equitable maintained that the disguised sale triggered the clause in the Chapter 12 Plan causing its $43,433.88 “unsecured” claim to become secured by the Property. Again, Equitable also argued that the Property secured, not only its $43,433.88 claim, but also the attorney’s fees it has incurred in protecting this interest.
The Trustee and Bourgeois rejected Equitable’s theory that the Chapter 12 Plan’s “due on sale” clause was triggered when Debtor and Bourgeois executed the Lease and the Option. Trustee and Bourgeois also rejected the argument that the Lease and Option effected a disguised sale of the Property. Bourgeois testified that there were circumstances under which he would not exercise the Option and his counsel emphasized, that unlike a sale, Bourgeois was not obligated to own the Property under the terms of the Lease and Option. Trustee and Bourgeois maintained that the Lease and Option are legitimate methods of conveying property interests in Missouri and do not merge together to effect a sale of the Property. Trustee and Bourgeois also argued that, even if the Lease and Option are considered to be a contract for deed, the Chapter 12 provision providing for the “resecuring” of Equitable’s $43,433.88 claim was not triggered so and that claim remains unsecured. They maintained that the Chapter 12 Plan’s “due on sale” clause, which refers only to a sale of the Property, is too narrow to be triggered by Debtor entering into a contract for deed.
The Court agrees with the Trustee and Bourgeois that Debtor did not sell the Property to Bourgeois. The Court rejects both of Equitable’s arguments and finds that the Lease and Option did not effect either a disguised sale or a contract for deed. The Lease and Option are legitimate tools through which interests in real property are conveyed. The fact that an entity leases a piece of property and also purchases an option to purchase that same property does not mean that it has purchased that property. The trial testimony demonstrated significant differences between the interest held by a leaseholder who also possesses an option to purchase the leased property, and a purchaser who holds clear title to property. Among those differences are that a holder of a lease and option cannot be sued to exercise his option, in contrast, a purchaser who executes a deed of sale or contract for deed may be sued to specifically perform the contract. Another difference is that the holder of a lease and option, unlike one who holds legal or equitable title to property, does not possess an interest that can be insured by a title insurance company.
Because the Court has concluded that Equitable’s $43,433.88 interest is not secured, the attorney’s fees expended attempting to prove that the $43,433.88 interest was secured are not secured by the Property.
This Court should approve a settlement when it is fair, equitable and in the best interests of the estate. Martin v. Cox (In re *728Martin), 212 B.R. 316, 318 (8th Cir. BAP 1997). It is not necessary for approval, that a settlement be the best result possible for the estate. Id. The Settlement Trustee and Bourgeois have reached provides that Trustee will convey full title to the Property to Bourgeois in exchange for $10,000.00. Although the Debtor valued the Property at $268,000.00 in 1991, she leased that Property and conveyed an irrevocable option to purchase that land. When she filed her petition, Debtor’s only interests in the Property were:
1. the right to receive approximately $2,300.00 a year under the lease through the year 2006; and
2. the right to own the Property after May 1, 2006 if Bourgeois decides not to exercise the Option; or
3. the right to receive $500.00 sometime between April 16, 2006 and May 1, 2006 if Bourgeois exercises his Option.
In essence, the Settlement, from the estate’s point of view, consolidates the stream of rent payments and the $500.00 option purchase price into a lump sum payable on or before April 15, 1998. Notice of the proposed Settlement was sent to all of Debtor’s creditors, and none of them objected to its fairness. Considering all the facts and circumstances, the . Court finds that the Settlement is reasonable and should be approved.
At the February 23, 1998 hearing, Equitable argued that the Settlement really proposed a sale per section 363(f) of the Bankruptcy Code and objected to it on the ground that its interests were not adequately protected. Equitable’s argument that its interest in the Property was not adequately protected, however, was premised upon its contention that the Property secured the $43,433.88 claim it was granted in the Chapter 12 Plan. Because the Court has concluded that the $43,433.88 claim Equitable received in the Chapter 12 Plan is not secured by the Property, there is no interest secured by the Property that is neither satisfied through the Settlement (Equitable’s “allowed secured claim”) or assumed by Bourgeois (the obligation to FmHA). Therefore, section 363(f) has no application to the transaction contemplated by the Settlement because the Property is not being sold free and clear of an interest.
As the Court has recounted above, Equitable also argued that its $43,433.88 claim, if not secured by the Property, is at least an unsecured claim against Debtor’s Chapter 7 estate. The Court disagrees. The Chapter 12 Plan provided that, subject to the “due on sale” condition, Equitable’s $43,433.88 claim would be treated as an unsecured claim and be paid approximately 33 percent of its value. Equitable did not argue that the Chapter 12 Plan was not fulfilled and a search of the Court’s records indicates that the Mohrs were granted a discharge on September 16, 1991. Equitable’s unsecured claim for $43,433.88, to the extent that it was not paid through the Plan was discharged and cannot now be asserted as an unsecured claim against Debtor’s Chapter 7 estate.
. At one point in the Chapter 12 Plan, it is stated that Equitable's claim is secured by a lien against 377 acres and at another point it is stated that Equitable’s claim is secured by a lien against 386 acres. The Deed of Trust, however, states that it covers 386 acres. .
. The Court observes that the $2,313.83 Debtor received under the Lease, purportedly to pay the income tax liability she incurred by recognizing the Lease payments as income, was not reduced. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492753/ | MEMORANDUM OPINION
DAVID P. McDONALD, Bankruptcy Judge.
JURISDICTION
This Court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 1384, 151, and 157 and Local Rule 9.01 of the United States District Court for the Eastern District of Missouri. This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(F), which the Court may hear and determine.
PROCEDURAL BACKGROUND
1. On September 25, 1995, Ed Jefferson Contracting, Inc., filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code (11 U.S.C. §§ 101-1330).
2. The Court approved Debtor’s Second Amended Plan and Disclosure Statement on November 1, 1996. Article 6.7 of that plan gives the Official Unsecured Creditors’ Committee for the bankruptcy estate (Committee) the power to prosecute all preferential transfer causes of action.
3. On September 23,1997, the Committee filed this adversary complaint seeking to avoid, as preferences under section 547 of the Bankruptcy Code, two payments totaling $16,533.36 made to Ford Motor Company (Ford).
4. On November 6, 1995, Ford filed an Answer to the Committee’s Adversary Complaint in which it denied both that Debtor was insolvent when it made the challenged transfers and that Ford received more as a result of the challenged transfers than it would have received if the debt owed to it had been paid through Debtor’s Chapter 11 plan of reorganization.
5. The Committee filed a Motion for Summary Judgment (Motion 9) on January 27, 1998. The Committee filed a Memorandum in support of its Motion in which it argues that the payments to Ford were preferences that the trustee may avoid under section 547 of the Bankruptcy Code.
6. In support of its Motion, the Committee filed the affidavit of Scott Greenberg, the Committee’s attorney. Greenberg attested that the estate currently has $175,000.00 of cash and $64,900.00 due to it from settlements, in addition to a $43,000.00 judgment, although the judgment may not be collectible. Additionally, Greenberg swore that the allowed priority claims against the estate total $642,079.23 and that the estate has not paid all of its administrative expenses.
7. The parties agreed to submit the case to the Court on cross motions for summary judgment.
8. Defendant filed a Response to Plaintiffs Motion for Summary Judgment in which it admitted: that Debtor made payments to it during the preference period; that such payments were on account of an antecedent debt; that Debtor was presumed to be insolvent at the time of the transfers; and that, based upon the assertions made in Greenberg’s affidavit, the payments enabled it to receive more than it would have received had the payments not been made and had Ford been paid under the provisions of the Bankruptcy Code. Ford asserted that the payments the Committee seeks to avoid, although late under the terms of the parties’ agreement, were made in the ordinary course of business, as defined in section 547(c)(2) of the Bankruptcy Code, and are, therefore, not avoidable.
9. On March 5, 1998, Defendant filed a Motion for Summary Judgment supported by a Memorandum.
10. In support of its Motion for Summary Judgment, Ford submitted three affidavits of Laura Shishkoff, the Customer Services Supervisor for Ford’s commercial-lending office in Chicago. She attested to the validity of the documents Ford submitted to the Court including the lease it and Debtor entered into, supplements to the lease, and a comput*743er printout documenting the payments Debt- or made under the lease. Shishkoff characterized the timeliness of Debtor’s payments as irregular and attested that “it is customary and common in the industry for commercial lessors to work with a delinquent lessee and accept late payments rather then to terminate a lease altogether.” Shishkoff also swore that Ford did not “employ any unusual or extraordinary means to collect the payments now challenged to be preferential.” Shishkoff did not state the basis upon which she concluded that “it is customary and common in the industry for commercial lessors to work with a delinquent lessee and accept late payments rather than terminate a lease altogether.” Shishkoff did not attest that she has worked at other commercial leasing companies, attended seminars or industry meetings where methods of dealing with delinquent lessees would have been discussed, or otherwise explained how she learned the manner in which others in the industry handle delinquent lessees.
11. The Committee filed a Response to Defendant’s Motion for Summary Judgment on March 16, 1998. The Committee claims the challenged payments were not made in the ordinary course of business. The Committee points to the fact that, before the preference period, the average payment delay between Debtor and Ford was fifty-six days1 and that the challenged payments were, respectively, made twenty-three and forty-one days late. The Committee argues that the thirty-three-day and fifteen-day differences are significant and prove that the challenged payments were not made in the ordinary course of business. The Committee also contends that Ford pressured Debtor to make the challenged payments and offers this suspected pressure as an explanation of why Debtor made the challenged payments much sooner than it had been accustomed to making lease payments to Ford.
FACTUAL BACKGROUND
Upon consideration of the entire record, the Court makes the following findings of fact:
1. Debtor and Ford entered into a lease and its supplements on September 2, 1993 (Lease) under which Ford agreed to lease to Debtor five heavy trucks.
2. Debtor made twenty-one payments to Ford before the preference payment.2 These payments were often made late. The parties’ pre-preference period history is summarized in the following chart:
Date Due Date Paid Days Late
10/01/93 September 1993 0
11/01/93 11/19/93 18
12/01/93 02/08/94 69
01/01/94 02/16/94 46
02/01/94 02/16/94 15
03/01/94 05/16/94 77
04/01/94 05/31/94 60
05/01/94 07/06/94 66
06/01/94 08/16/94 76
07/01/94 08/19/94 49
08/01/94 10/07/94 67
09/01/94 10/07/94 36
10/01/94 03/13/95 163
11/01/94 03/15/95 132
12/01/94 03/30/95 119
01/01/95 03/30/95 88
02/01/95 03/30/95 57
03/01/95 03/30/95 29
04/01/95 03/30/95 29
05/01/95 05/01/95 O'
06/01/95 06/06/96 5
3. On average, Debtor’s monthly lease payments to Ford during the pre-preference period were made 57.19 days late.
4. On July 19, 1995, Debtor transferred, via cheek, $8,243.60 to Ford (Payment 1) and *744on September 8, 1995, Debtor transferred, via cheek, $8,289.76 to Ford (Payment 2).
5. Payment One represented Debtor’s monthly payment under the Lease due on July 1, 1995, and as such was received twenty-three days late.
6. Payment Two represented Debtor’s monthly payment under the Lease due on September 1, 1995, and as such was received forty-one days late.
7. Payment Two included a late fee of $46.16.
DISCUSSION
Pursuant to section 547(b) of the Bankruptcy Code, a bankruptcy trustee may avoid any transfer of property in which the debtor had an interest, provided that transfer meets the section’s statutory definition of a preferential transfer.3 Section 547(c), however, creates certain exceptions to the avoiding powers granted to the trustee in subsection (b). One such exception, the “ordinary course of business” defense, is found in section 547(c)(2).
In its Response to Plaintiffs Motion for Summary Judgment, Ford conceded that the two transfers the Committee seeks now to avoid were preferences within subsection 547(b). Ford, however, asserts that because the payments were made in the ordinary course of business they are excepted from the trustee’s avoiding powers (being utilized by the Committee by subsection 547(e)). To the extent that Ford did not intend to concede that the challenged transfers were statutory preferences, the Court finds that the transfers meet section 547(b)’s elements for an avoidable preference. The two transfers were made to Ford within ninety days of the filing of Debtor’s bankruptcy and were made on account of an antecedent debt. Debtor made the two transfers while it was insolvent.4 The administrative and priority claims against Debtor’s bankruptcy estate exceed the available assets; therefore, receipt of the challenged transfers enabled Ford to receive more than it would have if: Debtor’s case was one under Chapter 7, they had not been made, and Ford were paid under the provisions of Title 11.
Having concluded that the payments were preferences, the Court must examine whether Ford proved that the challenged payments were made in the ordinary course of business, as that term is used in section 547(c).
To establish an ordinary course of business defense to an alleged preference, a preference-action defendant must establish three statutory elements by a preponderance of the evidence. See 11 U.S.C. 547(g). Specifically, the defendant asserting that a challenged transfer was made in the ordinary course of business must prove:
1. that the debtor incurred the underlying debt in the ordinary course of business of the debtor and the transferee, 11 U.S.C. § 547(c)(2)(A);
2. that the debtor made the challenged transfer in the ordinary course of business or financial affairs of the debtor and the transferee, 11 U.S.C. § 547(c)(2)(B); and
3. that the challenged payment was made according to ordinary business terms, 11 U.S.C. § 547(c)(2)(C).
*745The Committee has not argued that the debt underlying the allegedly preferential transfers (i.e. the Lease and its supplements) was not incurred in the ordinary course of Debtor’s or Ford’s business. Although there was little evidence submitted on this element, it is reasonable to accept that Debtor, a contractor, routinely used heavy-duty trucks in its business and that leasing those vehicles was a viable option. Similarly, the Court recognizes that leasing heavy-duty trucks was a regular part of Ford’s business. Because the Committee has not argued that the Lease and its supplements were entered into outside the ordinary course of Debtor’s and Ford’s businesses and because the parties’ respective businesses encompass the leasing of heavy-duty trucks, the Court finds that the first element of the statutory ordinary course of business defense has been satisfied.
The second element of section 547(c)(2) is its “subjective” component and requires proof that the challenged payment is ordinary in relation to other business dealings between the debtor and creditor. Official Plan Comm. v. Expeditors Int’l of Washington, Inc. (In re Gateway Pacific Carp.), 214 B.R. 870, 873 (8th Cir. BAP 1997). This requires the preference-action defendant to demonstrate some consistency between the allegedly preferential payment and other business transactions between it and the debtor. Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir.1991). There is, however, no precise legal test for determining whether a challenged payment was ordinary in relation to other business dealings between the debtor and creditor and resolution of this question requires the court to engage in a “peculiarly factual analysis.” Id. quoting In re Fulghum Construction Carp., 872 F.2d 739, 743 (6th Cir.1989).
The pattern of payment during the pre-preference period in this case is totally erratic or, to borrow a phrase from the Eighth Circuit, “irregular.” See Jones v. United Sav. and Loan Ass’n (In re U.S.A. Inns of Eureka Springs, Arkansas, Inc.), 9 F.3d 680, 685 (8th Cir.1993) (Describing debtor’s payments to preference action defendant as “irregular as to both time and amount”). In some instances Debtor made the monthly payments to Ford on time and in other cases, Debtor was as many as 163 days late in making payment. The average delay in payment during the pre-preference period was 57.19 days. Examining the payment history submitted by Ford, the Court notes that Debtor was particularly late in making its monthly payments to Ford for the last three months of 1994: the October payment was made 163 days late; the November payment was made 132 days late; and the December payment was made 119 days late. But for the last three months of 1994, the average delay in Debtor’s payments to Ford would be 43.72 days. Review of Debtor’s payment history with Ford also shows that during the last four months of the pre-preference period, Debtor paid Ford, on average, only 15.75 days late. The Court does not place particular significance on these short periods in which Debtor was either very late or relatively prompt in making payments under the Lease but, rather, mentions them, at this point, to illustrate the erratic nature of Debt- or’s history.
Although irregular, the Debtor’s pre-pref-erence period history of payments establishes that it routinely paid Ford late and that Ford accepted late payments. Determining that Debtor routinely made late payments to Ford during the pre-preference period, however, does not end the Court’s inquiry under the 11 U.S.C. § 547(c)(2)(B), for it must also determine that there is “some consistency” between the payment pattern during the pre-preference period and the transfers alleged to be preferential. See Lovett, 931 F.2d at 498. See also Official Plan Committee ex rel. Estate of Valley Steel Products Co. v. Whitewood Transportation Inc. (In re Valley Steel Products Co.), 166 B.R. 1006, 1010 (Bankr.E.D.Mo. 1993). Payment One which was made forty-one days after it was due clearly is within the pattern established by Debtor and Ford’s pre-preference period dealings. The forty-one-day delay was well within the range of zero to 163 days in which the parties had operated and was only sixteen days from the average delay in payment during the pre-preference period. The Court finds *746that Payment One was made in the ordinary course of dealing between Ford and Debtor.
Payment Two, made twenty-three days late requires closer examination for two reasons. One reason Payment Two requires more rigorous scrutiny is because it was made much sooner than the average payment during the pre-preference period. The second reason Payment Two requires closer examination is that it included a $46.16 late fee. Although Payment Two was made thirty-four days earlier than the average delay between Debtor and Ford during the pre-preference period, like Payment One, it was made well within the range of late payments made during the pre-preference period. Moreover, Payment Two, although thirty-four days early when compared to the average payment during the pre-preference period, was eight days later than the average payment delay of the final four monthly payments made during the pre-preference period. The Court concludes that Ford has demonstrated some similarity between Payment Two and the payments Debtor made to Ford during the pre-preference period. See Lovett, 931 F.2d at 497 (“[T]he cornerstone of [ § 547(c)(2)(B)] is that the creditor needs [to] demonstrate some consistency with other business transactions between the debtor and the creditor.”). See also In re Valley Steel Products Co., 166 B.R. at 1010 (17 day difference between delay in payment of allegedly preferential payment and next-longest delay in debtor’s payment history was found to be not significant); and Official Plan Committee ex. rel. Estate of Valley Steel Products Co. v. Zamzow Mfg. Inc. (In re Valley Steel Products Co.), 166 B.R 1001 (Bankr.E.D.Mo.1993) (late payment made 14 days later than latest payment between debtor and preference action defendant during pre-preference period did not significantly deviate from established payment pattern).
The Committee maintains that the $46.16 late fee pulls Payment Two out of the ordinary course of dealing between Debtor and Ford. To support its assertion, the Committee argues that during the pre-pref-erence period Ford imposed a late fee only once and that, even then, the late fee was ultimately waived. The Court agrees with Ford that the late fee Ford required on Payment Two was de minimis in comparison to the $8,243.60 payment owed and, therefore does not pull Payment Two out of the ordinary course of dealing between Debtor and Ford.5
The Committee has argued that Payment Two (and Payment One) were made earlier than the average payment during the pre-preference period because Ford employed undue pressure to obtain payment. The Court rejects the Committee’s unsubstantiated charge. The mere fact that the two challenged payments were made sooner than the average payment does not establish that Ford utilized undue pressure to obtain these payments. This is especially true in light of the facts that Shishkoff attested that no undue pressure was employed and that the monthly payments Debtor made during the final four months of the pre-preference period were made much sooner than the average payment was that preceded them. The two challenged payments continued the Debtor’s trend, established during the final four months of the pre-preference period, of paying Ford sooner than it had previously paid Ford. Without holding what evidence would be sufficient to establish that Ford had employed undue pressure to extract the challenged payments from Debtor, the Court notes that the Committee did not present evidence that Ford threatened to repossess the trucks it had leased to Debtor or take other action if Debtor did not pay more promptly than it had previously. The Court finds that both Payment One and Payment Two were made in the ordinary course of business between Debtor and Ford.
The third element a defendant must prove to establish an ordinary course of business defense is that the challenged payment, or alleged preference, was made according to “ordinary business terms.” 11 U.S.C. *747§ 547(c)(2)(C). In the Memorandum it filed in support of its Motion for Summary Judgment, Ford cites Jones v. United Sav. and Loan Ass’n (In re U.S.A. Inns of Eureka Springs, Arkansas, Inc.), 9 F.3d 680, 685 (8th Cir.1993) for the proposition that uncon-troverted testimony from an officer of a preference-action defendant that the practice between the parties conformed to the industry practice suffices to prove the third element of the ordinary course of business defense. This Court had previously interpreted In re U.S.A Inns of Eureka Springs, Arkansas, Inc. in a manner similar to the interpretation given that case by Ford. See Official Plan Committee ex rel. Estate of Valley Steel Products Co. v. Champion Distribution Servs. (In re Valley Steel Products Co.), 166 B.R. 1012, 1015 (Bankr.E.D.Mo.1993) (reading In re U.S.A. Inns of Eureka Springs, Arkansas, Inc. as holding that “the uncontro-verted testimony of the defendant’s president, chairman of the board and chief executive officer stating that it was common for savings and loan institutions to try to work with delinquent customers so long as the lender received some payment sufficed to carry the burden subsection (C) placed upon the defendant.”); see also In re Valley Steel Products Co., 166 B.R. at 1004. This, however, contrasts with the District Court for the Eastern District of Missouri’s understanding of In re U.S.A Inns of Eureka Springs Arkansas, Inc. See Central Hardware Co., Inc. v. Walker-Willimas Lumber Co. (In re Spirit Holding Co.), 214 B.R. 891, 900 (E.D.Mo.1997).
The In re U.S.A. Inns of Eureka Springs, Arkansas, Inc. case involved allegations that payments the debtor made to a savings and loan institution under a promissory note it had assumed were preferential. 9 F.3d at 680. During the time before the preference period, the debtor had made payments to the preference-action defendant that were “irregular as to both time and amount, and were never in the amount of the full monthly installment.” Id. at 681. The preference-action defendant offered the testimony of J.C. Benage, the Chairman of its Board, its President, and its Chief Executive Officer, to prove that its receipt of late payments from the debtor conformed to “ordinary business terms.” Id. at 685. Benage, as recounted by the Eighth Circuit, “testified that it is regular practice in the savings and loan industry to work with delinquent customers as long as some type of payment is forthcoming, and that the Office of Thrift Supervision directed United [the preference-action defendant] to work with delinquent customers in a manner that conformed with industry wide standards.” Id. Further, Benage testified that debtor’s payments could be considered ordinary, given the circumstances, and that “United was encouraged and directed by regulatory authorities to work with customers [during] the ‘so-called real estate crisis that [was] going on across the country.’ ” Id. The Eighth Circuit found “that Benage’s testimony was sufficient to satisfy United’s burden of proving industry-wide practice dealing with real estate trouble loans.” Id. at 685.
In In re Spirit Holding Co., Central Hardware, a subsidiary of the debtor that operated a retail hardware chain, sent a check to Walker-Williams, a lumber wholesaler, as payment for inventory received. 214 B.R. at 894. After receiving the check, Walker-Williams telephoned Central Hardware because Central Hardware’s parent company, Spirit Holding Co., had recently filed bankruptcy. Id. Central Hardware volunteered to replace the check it had issued to Walker-Williams with a wire transfer. Id. The bankruptcy court found that the replacement of the check with a wire transfer during the ninety days before filing was not an avoidable transfer. Id. at 896. The bankruptcy court reasoned that a change in the method of payment, in and of itself, does not take a transaction outside the ordinary course of business. Id. In reaching its conclusion that the replacement nature of the wire transfer did not take it out of the ordinary course of business, the bankruptcy court placed great weight on the facts that the debtor had initiated the substitution and that Walker-Williams had not employed undue pressure in collecting the debt. Id. The district court held that the bankruptcy court had clearly erred in concluding that the substitution of the wire transfer for the check was within the ordinary course of business of the debtor and the creditor. Id. at 898.
*748Alternatively, the district court held that Walker-Williams had failed to prove that the allegedly preferential wire transfer was made according to ordinary business terms. Id. at 899. The district court noted “that ‘ordinary business terms’ refer 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).” Id. quoting In re Tolona Pizza Products Corp., 3 F.3d 1029, 1033 (7th Cir.1993). Then, the court examined the only evidence in the record concerning “ordinary business terms,” the affidavit of John Gindville, Walker-Williams’s Secretary, Treasurer, and Chief Financial Officer. 214 B.R. at 899. Specifically, the district court observed that Gindville attested he had worked for Walker-Williams for five years and that he knew the general payment terms of Walker-Williams’s competitors from speaking with Walker-Williams’s employees, customers and employees of Walker-Williams’s competitors. Id. at 900. Additionally, Gindville attested that he obtained a familiarity with credit and collection practices within the wholesale lumber industry from his membership in the Building Materials Manufacturers Credit group of the National Association of Credit Management. Lastly, Gindville stated, in his affidavit, that Walker-Williams had previously deviated from its standard payment procedures with other customers and that such a practice was acceptable within the wholesale lumber industry. Id.
After reviewing Gindville’s affidavit, the In re Spirit Holding Co. court concluded that it did not establish that replacing a previously issued check with a wire transfer was an ordinary practice within the wholesale lumber industry. Id. at 901. The district court noted both deficiencies in Gindville’s base of knowledge and omissions from his affidavit. Regarding Gindville’s knowledge of the industry and its payment practices, the court pointed out that when he attested to the industry’s practices, Gindville had worked in the wholesale lumber industry for “only a few years” and had not worked for any of Walker-Williams’s competitors. Id. Later, the court suggested Gindville could have provided a base for his alleged familiarity with the industry’s collection practices by attesting to having learned of the standards at industry seminars or workshops. Id. In addition to criticizing Gindville’s base of knowledge, the district court took exception with the statements in his affidavit, suggesting that, even if he had a knowledge of the industry’s collection and payment standards, his affidavit did not set forth enough information for the court to conclude that the alleged preference conformed to those standards. For example, the district court observed, Gindville’s affidavit did not state that stopping payment on a check and replacing it with a wire transfer was in the ordinary course of business or a common occurrence for either Walker-Williams or those of its unnamed competitors with whose collection practices Gindville claimed to be familiar. Id. The district court also criticized Gind-ville’s affidavit for not specifically mentioning with which of Walker-Williams’s competitors’ practices Gindville was knowledgeable. Id. The district court concluded that Walker-Williams’s “vague, generalized evidence is not the type that courts have found sufficient to meet the burden of establishing § 547(c)(2)(C).” Id. In contrast to Gind-ville’s affidavit, the district court pointed to the affidavit submitted in In re U. S.A. Inns of Eureka Springs Arkansas, Inc. which it characterized as “specific, first-hand knowledge testimony.” Id.
In the case at bar, Ford has offered only Shishkoffs affidavits as evidence that the challenged transfers and their late acceptance were accomplished according to ordinary business terms. Although the fact that she is a supervisor suggests a special competence and knowledge of the commercial truck leasing industry, Shishkoff does not attest to the length of time she has worked within the commercial truck leasing industry or how she is familiar with payment and collection practices within the commercial truck leasing industry. Like Gindville’s affidavit, Shishkoffs affidavit fails to state how she learned what is ordinary in the industry. Shishkoff does not attest that she has attended seminars, *749workshops or worked with industry associations that have developed standard practices.
The Court concludes, however, that Ford has met its burden of proving that Debtor’s late payments and Ford’s acceptance of them was within the ordinary business terms of the commercial-truck-leasing industry. The Court bases its conclusion on the fact that Shishkoffs affidavit is as complete and detailed as the affidavit the Eighth Circuit found to be satisfactory to prove “ordinary business terms” in In re U.S.A. Inns of Eureka Springs Arkansas, Inc.
Having found that Ford has established the elements of an ordinary course of business defense, the Court will grant its Motion for Summary Judgement and deny the Committee’s Motion for Summary Judgment on its Complaint to Avoid Preferential Transfers.
. Using data provided by Ford, the Court calculates an average delay during the pre-preference period of 57.19 days.
. In its memorandum supporting its motion for summary judgment, Defendant stated that there was a twenty-two payment, pre-preference period, history between it and Debtor. In detailing this history, Ford chronicled only twenty-one payments between it and Debtor. The Committee filed a response to Ford's motion for sum-maty judgment and did not take issue with the payment history Ford detailed. Ford also filed an exhibit (Exhibit D) that detailed Debtor's payment history under the Lease and supplements thereto. Exhibit D, an internal document of Ford's Commercial Lending Services Department, is not easily deciphered. The Court, therefore, will accept the twenty-one payment as accurate.
. Section 547(b) provides:(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5)that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
. Neither party presented evidence of Debtor's solvency during the ninety days before it filed its bankruptcy petition, but a debtor is presumed to have been insolvent during that period. See 11 U.S.C. § 547(f).
. Even if the Court were to agree with the Committee that Ford’s assessment of a late fee against Debtor was not in the ordinary course of dealing between Debtor and Ford, the better course would be to declare only the late fee to be avoidable, not the rest of the payment which would otherwise be ordinary as between the parties. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492754/ | TERRY L. MYERS, Bankruptcy Judge.
This matter is before the Court on the ex parte Application of the Chapter 7 Trustee for approval of the employment of attorneys Carolyn Justh and Sue Flammia as counsel for the Trustee and the estate. 11 U.S.C. § 327(a); Fed.R.Bankr.P. 2014.
Initially it is noted that the Application and the supporting statements of proposed counsel under Rule 2014 were not served on the Debtor or his attorney as required by Local Bankruptcy Rule 2014.1(b)(2). That alone is sufficient basis to deny the requested relief, at least until such time as the problems with notice and service have been remedied.
However, another serious issue is presented. The Application reflects that attorney Flammia represented a creditor of the Debt- or (his ex-wife) in state court litigation, and that she continues to represent this creditor as against the Debtor. The Application also discloses that attorney Justh represented the ex-wife as a creditor in this bankruptcy proceeding. In fact, Justh appeared for the creditor at the § 341(a) meeting of creditors, according to the Trustee’s minutes of that meeting.
Debtor’s Schedule F lists only two unsecured creditors, the ex-wife with a $338,000 judgment, and the U.S. Attorney for the Eastern District of Washington __with a claim of approximately $12,800. The only other creditors scheduled are the I.R.S. and the Idaho Tax Commission, both listed on Schedule D with claims totalling over $500,000.
The Application states that Flammia and Justh “represent no other entity in connection with this case, are disinterested as that term is defined in 11 U.S.C. § 101(14) and represent or hold no interest adverse to the interest of the estate with respect to the *786matters on which they are to be employed, with the exception of the following....”
What follows is a terse disclosure of the other representation of the ex-wife.1
The verified statements of Flammia and Justh filed under Rule 2014 do not themselves disclose the prior and/or continuing representation of the Debtor’s largest scheduled unsecured creditor. Instead, they refer to the Application, to wit: “I state that other than as stated in the Petition, I have no connection with the above-named debtor, no connection with the creditors of the estate, or any party in interest ” (Emphasis added). This is not a form of disclosure to be encouraged.
It is true that § 327(c) does not make disqualification mandatory simply because the proposed professional represented a creditor. However, in the circumstances of this ease, it would be improper to approve the requested employment on the basis of what has been submitted. The absence of service and notice to the Debtor and his attorney, the nature and extent of the representation of the creditor by the Trustee’s proposed attorneys, and the need under § 327(c) for the Court to make a finding regarding the absence of an actual conflict of interest, all necessitate an actual hearing.
The Application will be and is hereby DENIED, without prejudice to renewal. If renewed, the Application shall be set for actual hearing on notice to the Debtor, his counsel, the U.S. Trustee and all other creditors and parties in interest.
. The disclosure is that Flammia represented the Debtor’s ex-wife in the divorce proceeding and that she is "continuing to represent" the ex-wife. It also states that Justh represented the ex-wife's interest in this bankruptcy case, but also reveals that she plans to assert an objection to discharge-ability of the ex-wife s claim. Thus, the attorneys disclose their past representation, as well as their intent to continue to represent the creditor, apparently simultaneously with their proposed representation of the trustee. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492755/ | ORDER ON MOTION TO COMPEL TURNOVER OF PROCEEDS TO THE IRS
PETER J. McNIFF, Chief Judge.
THIS MATTER is before the court on the motion of the United States for an order requiring the chapter 13 trustee, Sharon A. Dunivent, to turn over proceeds in her possession to the Internal Revenue Service (IRS). The debtor, Mary DeAnn Larsen objected. Mrs. Dunivent seeks direction on proper distribution of the funds in question.
On June 24, 1997, the court held a hearing on the motion and on Mrs. Larsen’s motion to strike, in which she alleged that the IRS could not have the matter heard except as an adversary proceeding. At the hearing, that motion was withdrawn. The court has considered the applicable law, the testimony and other evidence and, being fully advised, is prepared to rule.
This court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. The matter is a core proceeding pursuant to § 157(b)(2)(A) & (0).
The facts are not disputed. In 1989, Leslie and DeAnn Larsen filed a chapter 7 petition in this court. They were represented by Mr. Frank Andrews. During 1989, the Lar-sens sold stock which created a federal income tax liability on the capital gains. They did not elect to file a short year tax return for 1989. Consequently, the tax debt was not a claim against the chapter 7 estate, and the Larsens were left after discharge with a large tax liability.
In both 1990 and 1992, the IRS filed a notice of tax lien, securing the. taxes with basically all of the Larsens’ property. Lar-sens filed this chapter 13 case on January 27, 1994, creating a dispute concerning what property secured the IRS claim.
Also in January 1994, Larsens filed a state court action against Mr. Andrews alleging two claims for relief, attorney malpractice (sounding in negligence and other torts) and breach of contract. The Larsens claimed damages arising fi’om Mr. Andrews’ alleged omissions to provide proper tax and bankruptcy advice.
The IRS and the Larsens reached an agreement in this chapter 13 case which determined the extent of the secured IRS claim. The order approving the agreement (Agreed Order) was entered on October 26, 1994 and states in relevant part:
[T]he defendant (IRS) shall have a lien in the following property to the extent the debtor (sic) had any interest therein on the date of filing the chapter 13 petition and the debtor (sic) shall treat such secured claim by providing the payment thereof outside the plan from any proceeds realized thereon: ...
B. Any net recovery on the debtors’ suit against their former counsel for alleged malpractice related to damages accrued up to the date of filing the chapter 13 petition herein.
Mrs. Larsen states here that between May 17, 1994 and January 1995, Mr. Andrews retaliated against the Larsens because they had filed the malpractice action. This retaliatory conduct allegedly consisted of actions to encourage and aid the prosecution of Mr. Larsen for securities or bankruptcy fraud. The record is unclear as to the specific counts of the subsequent indictment.
On March 30, 1995, Larsens amended the complaint against Mr. Andrews to include a claim for breach of fiduciary duty. The claim alleged malicious and retaliatory conduct and the disclosure of information pertaining to the Larsens’ (chapter 7) bankruptcy case, without the clients’ permission and to their detriment. The complaint does not state any specific damage amounts relating to any of the claims for relief.
On November 5, 1995, Mr. Larsen died. Mrs. Larsen continued as a debtor in this case. On November 29, 1995, Mrs. Larsen on behalf of herself and the probate estate responded to Mr. Andrews’ motion for sum*814mary judgment on the breach of fiduciary duty claim. The response describes the factual basis for the claim, including a November 9, 1992 (pre-chapter 13) letter which contained “a not-so-veiled threat” and May 1994 communications with federal authorities which allegedly caused a subsequent indictment of Mr. Larsen.
In February 1996, Mrs. Larsen settled the state court action against Mr. Andrews. The Settlement Agreement and Release (Settlement Agreement) states in relevant part:
The parties agree that payments made pursuant to this agreement are attributable to, and paid in settlement of, Plaintiffs’ claim for Breach of Fiduciary Duty only, and not for any other claim,
and
except as otherwise stated herein, Mary DeAnn Larsen ... do RELEASE AND FOREVER DISCHARGE Frank M. Andrews, Jr. ... from any and all claims, actions and damages which arose or could have arisen from the breach of fiduciary duty or any other claim which was asserted, was attempted to be asserted or could have been asserted against them ... in Civil Action Number 28038, currently pending before the District Court for the Ninth Judicial District of the state of Wyoming.
On November 11, 1996, after the probate court approved the settlement, a Stipulation of Dismissal With Prejudice was filed. The parties agreed that “plaintiffs’ First Amended and Supplemental Complaint, and this entire ease, can and should be dismissed with prejudice for the reason that the parties have compromised and settled all of their disputes and differences.” Mrs. Larsen received $91,-000, payable in structured payments.
The payments made from the settlement were transmitted from the clerk of court in Fremont County to the chapter 13 trustee to satisfy Mrs. Larsen’s chapter 13 plan payments. The IRS, believing the money was settlement proceeds encumbered by the IRS lien pursuant to the October 26, 1994 tax claim settlement, filed this motion.
Mrs. Larsen contends that the funds were paid to settle the breach of fiduciary duty claim only. She argues that Mr. Andrews’ alleged misconduct giving rise to that claim and the consequent damages occurred after the chapter 13 case was filed, and therefore, the IRS lien does not attach to the funds.
Conclusions
This dispute involves the interpretation of the relevant documents to establish whether the settlement proceeds from the malpractice action are encumbered by the IRS lien. The IRS argues that the language of the documents is clear and unambiguous, and that the funds were paid in consideration of the settlement of the prepetition claims for relief against Mr. Andrews.
The debtor presented testimony that explained and elaborated on the language of the documents and that explained the nature and timing of the breach of fiduciary duty claim. She contends: that the first two claims were difficult to prove and hence, valueless; that the breach of fiduciary duty claim was the only claim settled; and that the damages from that claim arose after the chapter 13 case was filed.
The law of Wyoming governs the interpretation of the Settlement Agreement between Mrs. Larsen and Mr. Andrews. A release is contractual in nature and is scrutinized in accordance with traditional standards for construing contracts. M & A Construction Corp. v. Akzo Nobel Coatings, Inc., 936 P.2d 451, 456 (Wyo.1997). A release discharges another from an existing or asserted duty, claim or obligation, and bars recovery thereon. Kelliher v. Herman, 701 P.2d 1157, 1159 (Wyo.1985).
The purpose of interpreting the release in this case is to determine the intent of the parties, i.e., what claims were settled and for what was the consideration of $91,000 paid. If a contract is in writing and is clear and unambiguous, the intention is to be secured from the words of the contract. The contract as a whole should be considered with each part being read in light of all other parts. Amoco Production Co. v. Stauffer Chemical Co. Of Wyoming, 612 P.2d 463, 467 (Wyo.1980).
*815Although there is some inconsistency between the two previously quoted provisions of the Settlement Agreement, the contract, taken as a whole, is not ambiguous. In exchange for $91,000 made by specific cash payments, Mrs. Larsen released Mr. Andrews from all claims in the state court lawsuit, not just the claim for breach of fiduciary duty. The intent of both parties was to settle the entire dispute, the consideration for which was cash from Mr. Andrews and a release from Mrs. Larsen.
This analysis is supported by the language contained in the stipulation of dismissal with prejudice. In that document, all parties including Mrs. Larsen agreed that the “entire case” could be dismissed with prejudice “for the reason that the parties have compromised and settled all of their disputes and differences.”
To the contrary, Mrs. Larsen now argues that the statement in the Settlement Agreement limiting the settlement to the fiduciary duty claim sets forth the entire intent of the parties. The court disagrees. That statement, included at the obvious request of Mrs. Larsen, was not necessary to effectuate what the parties intended. Mrs. Larsen can characterize the settlement as a single claim resolution, but the purpose and intent of the document was otherwise.
Nor does Mrs. Larsen’s characterization of the settlement affect the result intended and clearly expressed in two separate documents. Certainly, the limiting sentence in the Settlement Agreement creates no binding obligation on the part of either party to the contract, and cannot create a binding obligation on the non-party, IRS.
In further support of her position, Mrs. Larsen provided testimony to show that the malpractice and contract claims were separate from the breach of fiduciary duty claim. Mrs. Larsen argues that the conduct supporting the breach of fiduciary duty claim occurred only after the chapter IB case was filed.
The Larsens’ lawsuit against Mr. Andrews was based on alternative theories of recovery. While these theories of recovery are conceptually distinct, legal malpractice is a generic term for on contract, breach of fiduciary duty, or negligence. Kilpatrick v. Wiley, Rein & Fielding, 909 P.2d 1283, 1289 (Utah App.1996); cert. denied, 919 P.2d 1208 (Utah 1996). These alternative theories are subsumed by the malpractice claim. Peterson v. Scorsine, 898 P.2d 382, 383 (Wyo.1995).
The entire case was premised on legal malpractice arising out of Mr. Andrews’ representation of the Larsens, including representation during the chapter 7 case. The culmination of the Larsens’ lawsuit had its genesis in the chapter 7 bankruptcy case, and the activity occurring therein and related thereto. Mr. Andrews’ alleged violations of the standards of professional conduct were based on information obtained before this chapter 13 case was filed. If the three claims were not related, the breach of fiduciary duty claim could not even have been brought in the same action.
Since no findings were made in the state court action, one can only speculate as to precisely when in the continuum the damages began to accrue. Even if the first two claims for relief were difficult to prove, the settling parties did not separately quantify the proceeds relative to each claim. Mrs. Larsen’s counsel testified here that neither he nor the Larsens specifically calculated the actual damages relating to each separate claim. Furthermore, the doctrine of res judicata now bars such a calculation.
Other evidence admitted here shows that Mr. Andrews’ counsel thought the breach of fiduciary duty claim meritless. Without addressing the merits of that claim, it is as plausible that damages began to accrue when Mr. Andrews sent the letter to the Larsens as it is to assume the damages accrued strictly after the indictment. The court concludes that the alleged damages on the breach of fiduciary duty claim arose at least in part “up to the date of filing the (chapter 13) petition.”
Conclusion
The court concludes that the consideration paid through settlement of the state court malpractice action was proceeds relating to the entire case, including claims for damages existing on the date of filing the chapter 13 petition. Pursuant to the settlement and *816Agreed Order with the IRS, those funds are collateral of the IRS. ■
Accordingly, the motion of the Internal Revenue Service is granted and the standing chapter 13 trustee is hereby ORDERED to forthwith turn over to the Internal Revenue Service, or its agent, the funds received from the Clerk of the Ninth Judicial District Court for the State of Wyoming paid in case no. 94-20052 and through Probate No. 8932. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492756/ | ORDER ON DEBTOR’S MOTION FOR SUMMARY JUDGMENT ON DEBTOR’S OBJECTION TO CLAIM OF YOUNG RADIATOR, INC.
THOMAS E. BAYNES, Jr., Bankruptcy Judge.
THIS CAUSE came on for consideration upon the Debtor’s Motion for Summary Judgment as regards the claim of Young Radiator, Inc., Claim No. 6034. The Court, upon considering the Motion, affidavits and memoranda, together with the record, and considering the law regarding granting motions for summary judgment, finds there are no issues of material fact set forth herein. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (holding the standard of proof in summary judgment rulings is the same as it would be at trial); Celotex v. Catrett, 477 U.S. 317, 323-35, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (discussing the appropriate burden of proof and types of evidence to use in summary judgment decisions); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (detailing the elements of summary judgment analysis). Further, pursuant to this Court’s decision in In re Celotex, 152 B.R. 667 (Bankr.M.D.Fla.1993), the Court finds it has jurisdiction and that the matters herein under consideration are core.
Twenty-six years ago, the claimant, Young Radiator, Inc. (Young Radiator), constructed a new plant. By 1975, after a few minor problems, the Debtor’s roofing system was accepted and Debtor issued a repair service agreement. In 1978, Celotex- was called upon to compensate claimant for leaks in its roof. Celotex agreed to the repairs and although they were made pursuant to the agreement, the roof continued to leak. Additional repairs were debated in 1980 and 1981, but thereafter communications between the parties ceased. Ultimately, Young Radiator expended approximately $11,000 on the roof between 1980 and 1984 and filed suit against the Debtor in January 1986.
*850In April 1988, the United States District Court for the Eastern District of Wisconsin granted Celotex’s Motion for Summary Judgment holding the six-year statute of limitations had run on the tort claims. As to the warranty claims, the Motion for Summary Judgment was granted because of the lack of privity between Celotex and Young Radiator in that, prior to installation, Celotex had sold the roofing system which was placed on Young Radiator’s building to an installer/general contractor. As to the breach of service agreement claim, the Court found there was no breach of agreement by Celotex and, similarly, the Motion for Summary Judgment was granted as to that cause of action.
In 1989, the Seventh Circuit Court of Appeals affirmed the District Court’s ruling as to the contract claims, but reversed the Court’s ruling regarding expiration of the statute of limitations and remanded the tort claims back to the District Court. Young Radiator Co. v. Celotex Corp., 881 F.2d 1408, 1409 (7th Cir.1989). On October 12, 1990, Celotex filed a voluntary petition for relief under Chapter 11. Thereafter, the parties took no further action to resolve the questions in the United States District Court but, instead, Young Radiator filed a proof of claim in the bankruptcy ease. The parties followed the claims resolution procedures established by this Court’s standing orders in the case. Ultimately, an Objection to Claim was filed by the Debtor to Young Radiator’s claim and, subsequently, a Motion for Summary Judgment on its Objection.
Young Radiator’s damages are specified in its proof of claim, which include, exclusive of interest and costs, the following:
1. Cost of Roof Replacement $411,291.00
2. Inspection and Consulting Fees for
New Roof 19,000.00
3. Disbursements to Carlsen Racine
Roofing 15,830.00
4. Young Radiator Company Maintenance 1,295.54
5. Schranz Roofing - Repairs 47,911.00
6. Damages Resulting from 2/14/81
Incident:
—Andrae Electric 1,823.00
—Young Maintenance 3,504.36
7. Damages Resulting from 1/24/84
Incident:
—Andrae Electric 292.00
—Electrical Systems 210.00
—Production Downtime 2,448.70
8. Damages Resulting from 4/4/84 In-
cident:
—Electrical Systems. 289.30
—Production Downtime 561.27
9. Inspee, Inc.: Infrared Scan 2,510.00
10. Administrative Time 25,000.00
11. Miscellaneous: Photos 175.00
TOTAL: $532,141.17
The gravamen of the Debtor’s Motion for Summary Judgment is that any damages claimed by Young Radiator are not allowable under Wisconsin’s Economic Loss Rule (Rule). Young Radiator does not dispute application of Wisconsin law but, rather, argues the Rule is inapplicable due to the “other property” exception; or, alternatively, the Rule cannot be applied retroactively in this case.
The Rule, while being recognized by the Wisconsin Supreme Court in Sunnyslope Grading, Inc. v. Miller, Bradford and Risberg, Inc., 148 Wis.2d 910, 437 N.W.2d 213 (Wis.1989), has been much discussed. See. e.g., Seibel v. A.O. Smith Corp., 1998 WL 315067 (W.D.Wis.1998); Daanen and Janssen, Inc. v. Cedarapids, Inc., 216 Wis.2d 394, 573 N.W.2d 842 (Wis.1998); Raytheon Co. v. McGraw-Edison Co., Inc., 979 F.Supp. 858 (E.D.Wis.1997); Stoughton Trailers, Inc. v. Henkel Corp., 965 F.Supp. 1227 (W.D.Wis. 1997); Hap’s Aerial Enterprises, Inc. v. General Aviation Corp., 173 Wis.2d 459, 496 N.W.2d 680 (Wis.App.1992); D’Huyvetter v. A.O. Smith Harvestore Products, 164 Wis.2d 306, 475 N.W.2d 587 (Wis.App.1991); Northridge Co. v. W.R. Grace and Co., 162 Wis.2d 918, 471 N.W.2d 179 (Wis.1991); Miller v. U.S. Steel Corp., 902 F.2d 573 (7th Cir.1990); Tony Spychalla Farms, Inc. v. Hopkins Agr. Chemical Co., 151 Wis.2d 431, 444 N.W.2d 743 (Wis.App.1989); see generally McCarty, 66 Mar.Wis.Law 20, Recovery of Economic Losses in Torts (March 1993). Although, this opinion will not restate all the policy and theory of Wisconsin’s Rule which has been articulated so well by other courts, a few benchmarks are appropriate.
THE ECONOMIC LOSS RULE
The Sunnyslope case dealt with the classic fact pattern associated with the Rule. *851Defective components of a backhoe caused injury to the backhoe itself. The Wisconsin Supreme Court stated: “We hold that a commercial purchaser of a product cannot recover solely economic losses from the manufacturer under negligence or strict liability theories, particularly, as here, where the warranty given by the manufacturer specifically precludes the recovery of such damages.” 148 Wis.2d at 920, 437 N.W.2d at 217-18.
That Court’s Northridge decision, supra, several years later restated its holding in Sunnyslope, but in NoHhridge the facts were the obverse — the asbestos product was not defective and there was injury to products other than the product itself. Under those circumstances, the Court found the Rule did not support dismissal of the complaint: “The plaintiffs do not appear to assert in their tort counts in the complaint that the Monokote [the asbestos-containing product] itself was inferior in quality or did not work for its intended purpose, the essence of a claim for economic loss.” 162 Wis.2d at 936, 471 N.W.2d at 186.
The Supreme Court of Wisconsin, in Daanen and Janssen, Inc., supra, responded to the Seventh Circuit’s certified question concerning the Rule and the requirements of privity. In that case, like Sunnyslope, the plaintiff had brought an action against the manufacturer of equipment, alleging the manufacturer’s negligence and strict liability for economic loss due to a defect in a component. The Wisconsin Supreme Court reiterated that a commercial purchaser was not capable of recovering from a manufacturer any damages in tort that were solely based on economic losses, even though there was no privity of contract between the parties. In its general discussion of the Rule, the Court stated “the economic loss doctrine, however, does not bar a commercial purchaser’s claims based on personal injury or damage to property other than the product, or economic loss claims that are alleged in combination with noneeonomic losses. In short, economic loss is damage to a product itself or monetary loss caused by the defective product, which does not cause a personal injury or damage to other property.” 216 Wis.2d at 397, 573 N.W.2d at 845 (citations omitted).
This Court is called upon to decide whether the damages claimed by Young Radiator fall within the context of the Sunnyslope and Daanen and Janssen, Inc. decisions or within the context of the Northridge opinion. Fortunately, the Wisconsin courts have given us some guidelines.1
ANALYSIS
According to the Supreme Court of Wisconsin in Northridge, this Court must determine whether Young Radiator has “alleged a tort claim for physical harm to property (property other than the allegedly defective product itself) or whether the losses complained of by the plaintiffs are only recoverable under a theory of contract.” 162 Wis.2d at 931, 471 N.W.2d at 184.
Within the Northridge decision, the Supreme Court made certain declarative statements which lead to the following analytical guidelines:
1. If the claimant’s damages are incurred in the removal or replacement of a roof, it is the kind of damages “associated with defects in the product itself and considered economic losses.” Id.
2. If the claimant asserts the product itself was inferior, not fit for an intended purpose, defective, or did not function as intended or expected, the claim sounds in contract law. Id.
3. If the claimant’s losses arose from the defective product, economic loss is an apparent claim. Id.
4. When claimant’s damages are for injury to the product itself, once again the Rule is implicated. Id.
*8525. Where the product itself is defective, reasonably expected damages that flow from the defect are damages under contract law. Id.
Therefore, the “damage to other property” exception would not apply in a situation where there was a defective product, damages to that product, and damages reasonably anticipated from the product’s defect. The Northridge Court determined the damages and expenses incurred to remove or replace the asbestos, and any loss of value to the property due to the presence of the asbestos, were typical damages associated with defective products which would not be recoverable in tort. Id.
There is no doubt Young Radiator’s claim is predicated on the defect of the Celotex roofing system. All of the cited Wisconsin state and federal court decisions where defective products were claimed have utilized similar guidelines and determined the Rule would prevent recovery in tort. The Wisconsin Supreme Court in Daanen and Janssen, Inc., quoted Northridge, stating:
[Ejconomic loss is generally defined as damages resulting from inadequate value because the product “is inferior and does not work for the general purposes for which it was manufactured and sold.” 162 Wis.2d 918, 925-26, 471 N.W.2d 179 (1991). It includes both direct economic loss and consequential economic loss. See, Stoughton Trailers, 965 F.Supp. at 1281; Northridge Co., 162 Wis.2d at 926, 471 N.W.2d 179; see also, 1 James J. White and Robert S. Summers, Handbook of Law Under the Uniform Commercial Code §§ 11-5, 11-6 (4th Ed.1995). The former is a loss in the value of the product itself; the latter is all other economic losses attributable to the product defect. See, Swanson, The Citadel Survives a Naval Bombardment: A Policy Analysis of the Economic Loss Doctrine, 12 Tul.Mar.L.J. 135, 140 (1987).
In this case, the Court finds each of the items set forth in Young Radiator’s claim deals with the defective roofing system of the Debtor and the damages that would be expected to flow from such defect. This Court finds that Celotex, through its Motion for Summary Judgment and the evidence in support thereof, has met its initial burden of proof whereupon the burden shifted to Young Radiator to establish the Rule did not apply or that some exception existed. The Court finds no evidence which would entitle Young Radiator to a ruling that the itemized damages set forth in their proof of claim are “damages to other property” so as to except such from being barred by the Rule as articulated by the Wisconsin courts.
RETROACTIVITY
In most instances, any court, especially one alien to the organic law of the State of Wisconsin, would not tread up the slippery slope of retroactivity of judicial decisions. Young Radiator supports its position that the Rule is inapplicable by referring this Court solely to Colby v. Columbia County, 202 Wis.2d 342, 550 N.W.2d 124 (Wis.1996). There, the Court was faced with the issue of the state’s statute of limitations and interpretation of various statutes dealing with same. That Court stated:
This court’s decision to apply a judicial holding prospectively is a question of policy and involves balancing the equities peculiar to a particular case or rule so as to mitigate hardships that may occur in the retroactive application of new rules. Bell v. County of Milwaukee, 134 Wis.2d 25, 31, 396 N.W.2d 328 (1986). Sunbursting has been applied to developments within the common law as well as changes in the way that courts interpret statutes. See Fair-child, Limitation of New Judge-Made Law to Prospective Effect Only: “Again Prospective Effect Only: Prospective Overruling” or “Sunbursting”, 51 Marq.L.Rev. 254 (1967-68). Retroactive operation has been denied where the purpose of the new ruling cannot be served by retroactivity, and where retroactivity would tend to thrust an excessive burden on the administration of justice. Fitzgerald v. Meissner & Hicks, Inc., 38 Wis.2d 571, 576, 157 N.W.2d 595 (1968). In tort cases, this court is concerned that courts would have to relitigate cases already disposed of by previous litigation or settlements.
202 Wis.2d at 364, 550 N.W.2d at 133.
In order to deal with the Colby rationale, notwithstanding we are not dealing with a *853statute, there would have to be a determination that Sunnyslope was establishing a new principle of law causing Young Radiator a hardship. This Court determines that Sun-nyslope did not create a new principle of Wisconsin law. First, on a pragmatic note, in Sunnyslope, decided in March 1989, the Wisconsin Supreme Court applied the Rule to claims which arose in 1977. Second, while its earlier decision of City of La Crosse v. Schubert, Schroeder & Associates, Inc., 72 Wis.2d 38, 240 N.W.2d 124 (1976) had allowed damages to the product itself as a loss based on a strict liability cause of action and in tort, that case did not deal with a warranty situation as in Sunnyslope. There is nothing in Sunnyslope which would suggest it was overruling the La Crosse decision. Instead, it suggested cases used by the La Crosse Court supported the conclusion in Sunnys-lope as to the Rule. Third, the Sunnyslope decision, 148 Wis.2d at 920, 437 N.W.2d at 218, recognizes that prior decisions of the Seventh Circuit correctly identified the fact that Wisconsin law would preclude recovery of economic loss damages for a defective product. E.g., Twin Disc, Inc. v. Big Bud Tractor, Inc., 772 F.2d 1329 (7th Cir.1985); Wisconsin Power and Light Co. v. Westinghouse Electric Corp., 830 F.2d 1405 (7th Cir. 1987). Indeed, in Northridge, the Supreme Court of Wisconsin acknowledges Sunnys-lope had its basis in the Seventh Circuit’s opinions. 162 Wis.2d at 928, fn. 6, 471 N.W.2d at 183, fn. 6.
Accordingly, it is
ORDERED, ADJUDGED, AND DECREED Debtor’s Motion for Summary Judgment be, and the same is hereby, granted. It is further
ORDERED, ADJUDGED, AND DECREED Debtor’s Objection to Young Radiator’s claim is sustained and Claim No. 6034 is hereby disallowed.
. Although the Seventh Circuit has recently commented on the Rule in Rodman Industries, Inc., v. G & S Mill, Inc., 145 F.3d 940, 945 (7th Cir.1998), this Court is uncertain of its characterization as to how the "other property” exception operates. It is this Court's belief it would originally operate where the property (i.e„ subject of the warranty or the commercial sale) was not damaged. Northridge’s facts speak to this position. Rodman may suggest otherwise. Nonetheless, Rodman supports this Court’s findings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492757/ | OPINION
WILLIAM V. ALTENBERGER, Chief Judge.
Before the Court is the petition filed by Louis E. Olivero (OLIVERO), to authorize disbursement of personal injury settlement funds.
Prior to filing his Chapter 7 petition, the Debtor, James F. Petry (DEBTOR), hired OLIVERO to represent him in a suit for personal injuries against the Sudden Stop Saloon, Inc. and Lisa Parker. Though the DEBTOR did not list the suit on his schedule of personal property, he disclosed the personal injury settlement in his schedule of exempt property and claimed the full amount of $13,500 as exempt. The Chapter 7 Trustee objected, asserting that the DEBTOR’S claim of exemption should be limited to $7,500, and the DEBTOR filed an amended claim of exemption in that amount. Among the unsecured creditors listed by the DEBTOR is St. Margaret’s Hospital for services rendered to the DEBTOR in the amount of $7,444.45.
OLIVERO filed a petition to authorize the disbursement of the proceeds from the settlement of the personal injury suit. From the $20,000 settlement, OLIVERO sought attorney’s fees in the amount of $6,666.66 and costs of $2,259.50. OLIVERO suggested that the DEBTOR was entitled to be paid his exemption of $7,500 and sought direction from the Court as to the distribution of the remaining sum. Accounts Management Incorporated (ACCOUNTS MANAGEMENT), as assignee of St. Margaret’s Hospital, filed a response to the petition, claiming that it was entitled to payment of $6,666.66, or 1/3 of the settlement proceeds, pursuant to the Illinois Hospital Lien Act, 770 ILCS 35/1 et seq.
A hearing was held on the petition at which time this Court authorized the pay*900ment of OLIVE RO’s fees and costs and directed OLIVERO to hold the balance of the settlement proceeds of $11,073.84, pending resolution of the lien claim of ACCOUNTS MANAGEMENT.
ACCOUNTS MANAGEMENT argues that it holds a valid lien claim under the Hospital Lien Act, as assignee of St. Margaret’s Hospital, and that its lien trumps the DEBTOR’S claim of exemption under U.S. District Judge Michael Mihm’s decision in In re Stoner, No. 97-4002 (Unpublished, May-30, 1997). ACCOUNTS MANAGEMENT contends there is nothing in the statute which prohibits a hospital from assigning a claim. Copies of the statutory notices and mailing receipts for certified mail have been submitted to the Court. The DEBTOR claims that the lien provided under the statute is personal to the hospital and that the language of the statute does not provide for assignment of the lien. Even if the lien is assignable, the DEBTOR contends that it must be first perfected by the hospital.
Because this Court is bound by Judge Mihm’s decision in In re Stoner, supra, the only issue to be decided is whether ACCOUNTS MANAGEMENT holds a perfected lien in the settlement proceeds. Neither side has submitted any authority on this issue. Section 1 of the Hospital Lien Act provides:
[E]very hospital rendering service in the treatment, care, and maintenance, of an injured person shall have a lien upon all claims and causes of action of the injured person for the amount of its reasonable charges up to the date of payment of damages.
No judgment, award, settlement or compromise secured by or on behalf of an injured person shall be satisfied without the injured person or his or her authorized representative first giving the hospital that rendered the service in the treatment, care, and maintenance of the injured person notice of the judgment, award, settlement, or compromise. The hospital shall have a period of 30 calendar days to perfect and satisfy its lien. The notice shall be in writing and served upon the hospital’s registered agent, or, in the event of a hospital operated entirely by a unit of local government, upon the individual or entity authorized to receive service pursuant to Section 2-211 of the Code of Civil Procedure.
Provided, however, that the total amount of all liens under this Act shall not exceed one-third of the verdict, judgment, award, settlement, or compromise secured by or on behalf of the injured person on his or her claim or right of action, and provided further, that the lien shall in addition include a notice in writing containing the name and address of the injured person, the date of the injury, the name and address of the hospital, and the name of the party alleged to be liable to make compensation to the injured person for the injuries received. The lien notice shall be served on both the injured person and the party against whom such claim or right of action exists.
Service shall be made by registered or certified mail or in person.
770 ILCS 35/1. Because this section of the Act neither includes language permitting or prohibiting assignment of the lien, this Court will consider the Act as a whole and the effect of this section on other sections of the Act.
An important provision of the Act is contained in §§ 3 and 4, which imposes upon the hospital a duty to make certain disclosures, and if the hospital fails to do so, the lien is forfeited. Section 3 of the Act provides:
Any party to a cause pending in a court against whom a claim shall be therein asserted for damages resulting from such injuries shall, upon request in writing, be permitted to examine the records of such hospital in reference to such treatment, care and maintenance of such injured person. Any hospital claiming a lien under this Act shall, within 10 days of being so requested in writing by any such party, furnish to such party, or file with the clerk of the court in which the cause is pending, a written statement of the nature and extent of the injuries sustained by and the treatment given to or furnished for such injured person by such hospital and the history, if any, as given by the injured *901person, insofar as shown by the records of the hospital as to the manner in which such injuries were received.
770 ILCS 35/3. Section 4 of the Act provides:
Should any hospital fail or refuse to give or file a written statement in conformity with and as required by Section 3 hereof after being so requested in writing in conformity with Section 3 hereof, the hen of such hospital shah immediately become null and void.
770 ILCS 35/4. Given this disclosure requirement of the Act, permitting the hen to be assigned to an entity who would not share the duty of producing the records would render §§ 3 and 4 meaningless and take the teeth out of the disclosure requirements. While this Court cannot say that such requirements are a critical component of the Act, it notes that such a provision is also contained in other statutes which grant hens to health care providers, including the Physicians Lien Act, 770 ILCS 80/0.01, the Dentists Lien Act, 770 ILCS 20/0.01, Home Health Agency Lien Act, 770 ILCS 25/1, Clinical Psychologists Lien Act, 770 ILCS 10/0.01, Physical Therapist Lien Act, 770 ILCS 75/1, Emergency Medical Services Personnel Lien Act, 770 ILCS 22/1, and Optometrists Lien Act, 770 ILCS 72/1.
Another section of the Act to consider is the provision for enforcement of the hen, which provides:
On petition filed by the injured person or hospital, the circuit court shall, on written notice to all interested adverse parties, adjudicate the rights of all interested parties and enforce their hens: Provided, that nothing herein contained shall affect the priority of any attorney’s hen under “An Act creating attorney’s lien and for enforcement of same”, filed June 16, 1909, as amended.
770 ILCS 35/5. Again, the language of the statute is narrow and does not, by its terms, permit an assignee of a hen to petition for the hen’s enforcement.
The foregoing analysis of other sections of the Act, which weighs against the hen’s as-signability, is buttressed by other provisions of Illinois law. Other hen statutes contain specific provisions governing assignabihty. For instance, § 8 of the Illinois Mechanics Lien Act, governing the assignment of hens or claims for hens, provides:
All hens or claims for hen which may arise or accrue under the terms of this act shah be assignable, and proceedings to enforce such hens or claims for hen may be maintained by and in the name of the assignee, who shall have as full and complete power to enforce the same as if such proceedings were taken under the provisions of this act by and in the name of the hen claimant.
770 ILCS 60/8. Likewise, § 20 of the Illinois Oil and Gas Lien Act, governing assignment of hens and actions, provides:
[A]ll claims for hens and likewise all actions to recover therefor under this Act shall be assignable so as to vest in the assignee all rights and remedies herein given subject to all defenses thereto that might be raised if such assignment had not been made. Where a statement of lien has been filed as herein provided such assignment shah be made by a separate instrument in writing, which shall be recorded in the Recorder’s Office where the claim was filed.
770 ILCS 70/20. Moreover, unlike the language of the Hospital Lien Act, which provides that the “hospital ... shall have a hen ...”,§ 3 of the Self-Service Storage Facility Act provides that “[t]he owner of a self-service storage facility and his heirs, executors, administrators, successors, and assigns have a hen _” 770 ILCS 95/3. Finally, from this Court’s own research it notes that in other jurisdictions statutes creating hens for health care providers contain specific provisions authorizing the assignment of such hens. See Ark.Code Ann. § 18-46-108 (Mi-chie 1987) (Arkansas Medical, Nursing, Hospital, and Ambulance Service Lien Act); Colo.Rev.Stat.Ann. § 38-27-105 (West 1997) (Hospital Liens).
From the foregoing analysis, this Court concludes that a hospital may not assign its hen under the Act and therefore, ACCOUNTS MANAGEMENT does not hold a vahd hen against the settlement proceeds.
*902This Opinion is to serve as findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
ORDER
For the reasons stated in an OPINION filed this day, IT IS HEREBY ORDERED that:
1. The lien held by ACCOUNTS MANAGEMENT, as assignee of St. Margaret’s Hospital, is declared to be INVALID;
2. LOUIS E. OLIVERO is directed to pay to JAMES PETRY, the DEBTOR, the sum of $7,500.00 in satisfaction of his claim of exemption; and
3. LOUIS E. OLIVERO is directed to pay over the balance of the settlement proceeds to CHARLES E. COVEY, as TRUSTEE. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492758/ | WM. THURMOND BISHOP, Bankruptcy Judge.
THIS MATTER came before me for trial on August 27, 1997, in Charleston, South Carolina. This action was begun by the filing of a Complaint by John F. Curry (the “Trustee”), Trustee for the Chapter 11 Bankruptcy Estate of Robert R. Knoth, on October 30, 1996, against John Wojcik (“Mr. Wojcik”) and the subsequent filing of an Amended Complaint by the Trustee against Mr. Wojcik, Wojo Enterprises, Inc. (“Wojo”), Truck Trailer and Equipment Sales (“TTES”) and Jack Dorman (“Mr. Dorman”). Present at the trial were the Trustee, represented by Rose Duggan Manos, Esquire, Mr. Wojcik, represented by W. Alex Dallis, Jr., Esquire, who was also represented Wojo, Mr. Dorman, represented by Thomas R. Goldstein, Esquire, and Harold Dukes (“Mr. Dukes”), an officer of TTES, who was not represented by an attorney. Testimony was presented by the Trustee, Mr. Dorman, Mr. Wojcik and Mr. Dukes. Additionally numerous exhibits were placed into evidence. The gravamen of the complaint is the demand by the Trustee for return to the Bankruptcy Estate of one (1) 1984 Mercedes 500 SEC automobile having vehicle identification number WDB1070461A000384 (the “Vehicle”).
It appeal’s to the satisfaction of this Court, through the testimony and exhibits presented at trial, that certain facts have been established and this Court makes certain findings of fact as a result. Such findings are as follows:
1) The Vehicle was titled in the name of and possessed by Robert R. Knoth, the bank-rapt (the “Bankrupt”), prior to September, 1995.
2) Sometime prior to September 1, 1995, the Bankrupt transferred possession of the Vehicle to Mr. Dorman for purposes of repairing the Vehicle.
3) Without approval from this Court, the Bankrupt transferred possession of the Vehicle and attempted to transfer title as well to TTES by a bill of sale dated September 1, 1995.
4) TTES then transferred possession of the Vehicle and attempted to transfer title as well to Wojo by a bill of sale dated September 14,1995.
5) Wojo paid $10,000.00 for the Vehicle at the time it received the Vehicle.
6) Neither Mr. Wojcik nor Wojo knew of the bankruptcy of Robert R. Knoth in September, 1995.
7) The transfer of the Vehicle from TTES to Wojo was an arm’s length transaction.
8) There was no collusion between Wojo or Mr. Wojcik and any other party to defraud the Bankruptcy Estate.
9) Wojo took possession of the Vehicle in good faith.
10) Possession of the Vehicle has been retained by Wojo since September, 1995.
*11911) Mr. Wojcik has never been in possession of the Vehicle, except as a licensee, agent or employee of Wojo.
12) The Vehicle was used by Mr. Wojeik’s wife as an officer of Wojo and was being held for resale.
13) The Trustee registered title to the Vehicle with the South Carolina Department of Public Safety (the “Department”) in July, 1996, and the Department issued a certificate of title to the Trustee on July 19, 1996.
14) Wojo registered title to the Vehicle with the Department in September, 1996, and the Department issued a certificate of title to Wojo on September 24,1996.
15) At the time Wojo registered title to the Vehicle with the Department and the Department issued a certificate of title to Wojo, Wojo knew of the bankruptcy.
The Trustee seeks to avoid the transfer of the Vehicle pursuant to 11 U.S.C. Section 549(e). As noted in the findings of fact set forth above, there is no question that the transfer was without court approval and under such section the transfer may be avoided. The problem the Trustee faces is that liability for recovery of the Vehicle or its value is limited under 11 U.S.C. Section 550. Under Paragraph (b) of such section the trustee may not recover either the Vehicle or its value from any transferee from the initial transferee who “takes for value ... in good faith, and without knowledge of the voidability of the transfer avoided.” The question presented in this action is whether Wojo falls within the class of transferee’s protected by such section.
The Trustee argues that for purposes of this section of the Bankruptcy Code a transfer did not occur until title was registered by Wojo and, at such time, Wojo knew of the bankruptcy. Wojo, however, argues that a transfer occurred at the time possession was changed from the bankrupt to TTES and again at the time possession was changed to Wojo. There is no question that, if transfers for purposes of Section 550 occurred as argued by Wojo, Wojo is a subsequent transferee, who took for value in good faith without knowledge of the voidability of the transfer. Similarly, however, if the only transfer for purposes of Section 550 were the transfer of title by Wojo, then Wojo may not be protected by this section, since Wojo knew at such later date of the bankruptcy.
The general provisions of the Bankruptcy Code include definitions of various terms and one such defined term is “transfer.” Under 11 U.S.C. Section 101(50) 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.” On numerous occasions courts have had an opportunity to review this section of the code and have determined that transfers of possession fall within its meaning. A case on point is Nicola v. Sigarms, Inc. (In re Omaha Midwest Wholesale Distributors, Inc.), 94 B.R. 160 (Bankr.D.Neb.1988). In that case possession of certain goods were transferred from the bankrupt to a third party after the filing of the petition, but before the order for relief was issued. The goods were not received by the third party until some time after they were shipped by the bankrupt. In interpreting 11 U.S.C. Section 549, the section relied upon by the Trustee in this action, the court held that a transfer occurred within the meaning of such section when the goods were shipped by the bankrupt, even though title might not have been relinquished until later. “As discussed in both the House and Senate Reports on the reform Act of 1978, under the definition of ‘transfer’ in 11 U.S.C. [Section] 101 (a transfer is a disposition of an interest in property), 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.” (Id. at 163, emphasis added). There is no provision in either 11 U.S.C. Section 549 or 11 U.S.C. Section 550 which limits the term “transfer” to some other meaning than that provided in 11 U.S.C. Section 101(50). A transfer of possession is a transfer within the meaning of 11 U.S.C. Section 550. A similar conclusion was reached by the Court in Goldstein v. Beeler, (In re Rose), 25 B.R. 744 (Bankr.E.D.Mo.1982), wherein the court stated, “[t]he word ‘transfer’ has been construed broadly under *120the Act and has been defined to include every method of disposing of or parting with property or its possession.” (Id. at 746).
The Trustee argues that under South Carolina law title was not transferred until application for a certificate of title was made by Wojo in September, 1996. The Trustee cites the case of Anderson v. South Carolina National Bank (In re McWhorter), 37 B.R. 742 (Bankr.D.S.C.1984) as confirming that transfer of title is not effective until South Carolina Code sections dealing with title registration are in compliance. S.C.Code Ann. Section 56-19-360 (1976) provides that except as between the parties, a transfer of title by an owner is “not effective” until the registration provisions of such statute are in compliance, unless the vehicle is held by a dealer for resale pursuant to S.C.Code Ann. Section 56-19-370 (Supp.1996). The Trustee argues that the Vehicle was driven by Mr. Wojcik’s wife and thus the Trustee deems that the provisions of S.C.Code Ann. Section 56-19-370 (Supp.1996) were not in compliance. Mr. Wojcik, testified at trial, however, that his wife was an officer of Wojo and the Vehicle was indeed held for resale. No contradictory testimony or evidence was presented. Thus it appears that the provisions of the South Carolina Code were indeed in compliance and title in fact did transfer upon execution of the bills of sale. It is not necessary, however, to reach such a conclusion, since the issue facing this Court is not whether or not title was transferred, but simply whether or not any “transfer” as defined in the Bankruptcy Code has occurred. In Anderson, supra the court did indeed find that an application made to transfer registration pursuant to S.C.Code Ann. Section 56-19-360 (1976) was a transfer within the meaning of the Bankruptcy Code, but such ruling does not in any way limit the possibility of other factual events as meeting the broad definition of “transfer” provided in 11 U.S.C. Section 101(50). Both Nicola, supra, and Goldstein, supra, clearly show that transfers of mere possession are sufficient to constitute transfers within the meaning of 11 U.S.C. Section 550. Since the Bankruptcy Code clearly includes transfers of mere possession within the definition and since there is no question that possession was transferred once to TTES and later to Wojo, any argument regarding title is simply not relevant.
This Court determines as a matter of law that transfers of possession only are considered transfers within the meaning of 11 U.S.C. Section 550. Thus this Court reaches the following conclusions of law:
1) TTES was either the initial transferee from the Bankrupt or the immediate transferee from such initial transferee.
2) Wojo was an immediate or mediate transferee of the initial transferee in good faith for value without knowledge of the bankruptcy.
3) Neither Mr. Dorman nor Mr. Wojcik was a transferee of the Vehicle.
4) Under 11 U.S.C. Section 550(b)(1) the Trustee may not recover either the Vehicle or its value from Mr. Dorman, Wojo or Mr. Wojcik.
The Trustee has brought a claim against TTES and it does appear from the testimony presented at trial that TTES was the initial transferee from the Bankrupt. Section 550 provides no protection to TTES as it does to Wojo, but at trial it appeared that service upon TTES was defective. Thus should the Trustee determine to pursue TTES, it will be necessary for service to be completed before this Court can take up such matter.
NOW, THEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the demand for return of the Vehicle or its value made by the Trustee against Wojo and Mr. Wojcik is denied and as to such defendants this action is dismissed with prejudice.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the motion of Mr. Dorman for dismissal of the action against him or in the alternative for directed verdict is granted and as to Mr. Dorman this action is dismissed with prejudice.
AND IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492759/ | MEMORANDUM OF DECISION
JIM D. PAPPAS, Chief Judge.
BACKGROUND
In state court, Insulation Distributors, Inc. (“ Plaintiff’) sued Charles Waters individually, BVW Inc., d/b/a Waters Building Supply, and Waters Insulation Supply Company (collectively “Defendants”) alleging that Defendants failed to pay Plaintiff for $17,672.05 worth of construction materials. Defendants filed a Third Party Complaint against L.D. Fitzgerald (“Trustee”), the Chapter 7 bankruptcy trustee for Waters Asbestos and Supply Company (“Debtor”), alleging that he, on behalf of the bankruptcy estate, is responsible for some .or all of Plaintiffs charges. Trustee,caused the removal of the state court action to this Court. The matter is before the Court on Plaintiffs Motion to Remand. Following a hearing on July 29, 1998, the matter was taken under advisement.
FACTS
Defendant Charles Waters was a principal of Debtor. Debtor filed for relief under Chapter 7 on June 8, 1995. At some time thereafter, Waters formed a new corporation, BVW, Inc. (“BVW”), to carry on a substantially similar business as that in which Debt- or had engaged prior to its bankruptcy. BVW operates under the trade name Waters Building Supply. From April to August of 1996, Plaintiff allegedly provided construction materials to Waters Insulation and Supply, which materials had been ordered by BVW. Plaintiff was not paid for these materials. On January 22,1998, Plaintiff filed the state court action to recover from Defendants. Defendants then filed a Third Party Complaint against Trustee, alleging that Trustee had agreed to reimburse them for the materials purchased from Plaintiff, such agreement being made in order to complete jobs of Debtor. To the extent there was such an agreement, Plaintiff asserts it occu*198pies a third party beneficiary status, and it also seeks payment from Trustee.
DISCUSSION
Under the Federal removal statute, an action in state court may be removed to bankruptcy court if jurisdiction exists under 28 U.S.C. § 1334. 28 U.S.C. § 1452(a). Once removal to bankruptcy court is completed, the court may remand the action on any equitable ground. 28 U.S.C. § 1452(b).
Does this Court have subject matter jurisdiction? Under Section 1334, the district court has jurisdiction over “actions arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). A proceeding “arises under” Title 11 when the cause of action is created or decided by a provision of Title 11. In re Harris Pine Mills, 44 F.3d 1431, 1435 (9th Cir.1995). The meaning of “arising in” is not as clear, but seems to refer to those matters that arise only in a bankruptcy case. In other words, “arising in” proceedings are not based on any right created by Title 11, but, nevertheless, would have no existence outside of the bankruptcy. Id. (citing In re Wood, 825 F.2d 90, 96-97 (5th Cir.1987) (footnote omitted)).
An action is “related to” when “the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” Fietz v. Great Western Savings (In re Fietz), 852 F.2d 455, 457, 11 U.S.C. § 503(a) authorizes an entity to file a request for payment of an administrative expense with this Court. 11 U.S.C. § 503(b)(1)(A) allows as an administrative expense “the actual, necessary costs and expenses of preserving the estate....” If the allegations of the third party complaint are proven, clearly any charges Trustee agreed to pay in connection with completion of Debtor’s unfinished projects would qualify for administrative expense status, and be payable as such from the bankruptcy estate. (9th Cir.l988)(quoting Pacor, Inc., v. Higgins, 743 F.2d 984, 994 (3rd Cir.1984)).
While Plaintiffs original action is based upon the account agreement between Plaintiff and Defendants, and therefore state law, the parties’ claims against Trustee may be seen as arising under Title 11. Defendants, as Third Party Plaintiffs, are seeking to establish the liability of Trustee and the bankruptcy estate for Plaintiffs charges. The basis of the Third Party Complaint is an alleged agreement between Defendants and Trustee, in which Trustee, on behalf of the bankruptcy estate, agreed to reimburse Defendants for material purchased from Plaintiff used to complete existing jobs of Debtor. In effect, Defendants assert what amounts to an administrative priority claim under Section 503 of the Bankruptcy Code for the cost of the materials purchased by Defendants. As such, whether Defendants are entitled to allowance of their claim against Trustee will be governed by the provisions of Title 11. Jurisdiction therefore exists under Section 1334(b), this is a “core proceeding”, and this Court may hear, determine, and enter appropriate final orders and judgments in the action. 28 U.S.C. § 157(b)(1) and (b)(2)(A),(O).
Does an equitable ground exist justifying remand to state court? Equitable grounds include: (1) strength of the connection between the state case and the bankruptcy case; (2) duplication of judicial resources in two forums; (3) whether the outcome significantly impacts the bankruptcy case; (4) expertise of the particular court; (5) comity considerations; and (6) whether the involuntarily removed party would be prejudiced by a decision not to remand. Idaho First National Bank v. Bliss Valley Foods, Inc. (In re Bliss Valley Foods, Inc.), 88 I.B.C.R. 292, 296; see also Rowe v. Sea Products, Inc. (In re Talon Holdings, Inc.), 221 B.R. 214, 219 (Bankr.N.D.Ill.1998) and SBKC Service Corporation v. 1111 Prospect Partners, L.P. (In re 1111 Prospect Partners, L.P.), 204 B.R. 222, 225 (Bankr.D.Kan.1996). In this case, the connection between the state case and the bankruptcy case is a strong one since it is asserted that liability for Plaintiffs charges ultimately rests with the bankruptcy estate. The outcome of the proceeding could significantly impact the administration of the bankruptcy estate. The bankruptcy court’s expertise in matters dealing with the bank*199ruptcy estate also suggests that the case not be remanded. This Court,in its supervisory role, has an inherent interest in any suit against a trustee for liability on behalf a bankruptcy estate. Finally, since this Court can promptly and capably decide Plaintiffs claims against Defendants, no prejudice will result to Plaintiff or Defendants if the proceeding is not remanded to state court. While there is no question that the state court is a proper forum to decide the liability between Plaintiff and Defendants, once Trustee was brought into the proceeding, this Court became the most appropriate forum to determine the issues, especially those related to the bankruptcy estate and its trustee.
CONCLUSION
For these reasons, Plaintiffs Motion to Remand will be denied by separate order. The action will be scheduled for a pretrial conference upon notice by the Clerk. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492760/ | ORDER
TOM R. CORNISH, Bankruptcy Judge.
On the 13th day of August, 1997, the Motion to Modify Automatic Stay filed by the United States of America, on behalf of the Internal Revenue Service (“IRS”) and Objection by the Debtors came on for hearing. Counsel appearing were Cheryl Triplett for the IRS and Catherine Doud for the Debtors. At the hearing, the parties agreed to submit this matter to the Court on the briefs filed.
After a review of the above-referenced pleadings, this Court does hereby enter the following findings and conclusions in conformity with Rule 7052, Fed.R.Bankr.P., in this core proceeding:
The Debtors filed this bankruptcy petition seeking relief on December 12,1996. At that time, one Debtor’s case was set on the Tax Court calendar for January 27, 1997. That action was stayed by the filing of the bankruptcy petition. The Tax Court also stayed a proceeding against both Debtors. The Debtors’ Chapter 13 ease was conditionally dismissed; however, the Debtors were allowed ten (10) days to convert the case. The IRS filed a Status Report with the Tax Court. About that time, the two Tax Court cases were placed on the Tax Court’s calendar on October 27, 1997. On May 15, 1997, the Debtors filed a Motion to Convert their case to Chapter 11. The eases have now been stricken from the October 27, 1997 docket.
The IRS now seeks relief from the stay to continue with the proceedings in Tax Court. The Court has found a case which is very similar to the case at bar. In Universal Life Church, Inc. v. Internal Revenue Service (In re Universal Life Church), 127 B.R. 453, 454 (E.D.Cal.1991), aff'd. 965 F.2d 777 (9th Cir. 1992), the debtor filed a petition in Tax Court seeking a redetermination of income tax deficiencies. Immediately prior to the trial, the debtor filed a Chapter 11 petition. Id. The debtor then filed an adversary proceeding requesting a determination of the tax liability. Id. The Court modified the automatic stay to permit the Tax Court “to finish what it had nearly completed. That forum has special expertise in deciding difficult and complex tax issues.” Id. at 455. The Court further noted that the parties were within weeks of trying the case when the debtor filed bankruptcy. Id. The Court also noted that there was no question that the Tax Court could most effectively assess the debt- or’s liability in the shortest amount of time. Id. Therefore, the Court found that, in the interest of judicial economy, the case should be returned to the Tax Court. Id.
The facts in Universal Life Church are essentially the same as in the case. Just weeks before trial in the Tax Court case, the Debtors filed their Chapter 11 petition. This case is ready for trial. This Court agrees that the Tax Court is the proper forum for the tax liability to be determined.
IT IS THEREFORE ORDERED that the Motion to Modify Automatic Stay is granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494784/ | DECISION ON MOTION TO APPROVE SETTLEMENT
ROBERT E. GRANT, Chief Judge.
When the debtor filed his petition for relief under Chapter 7 of the United States Bankruptcy Code he was the owner of property that had previously been used as a gas station in Portland, Indiana. The underground tanks on the property had leaked and, as a consequence, the debtor was involved in litigation with a previous owner, Jay Petroleum, over the responsibility for cleaning up the property and remediating the environmental damage. Both the contaminated property and the claims against Jay Petroleum became property of the bankruptcy estate when the debtor filed bankruptcy. 11 U.S.C. § 541(a).
The trustee has negotiated a settlement of the environmental litigation. Under the terms of the settlement, Jay Petroleum will be responsible for cleaning up the property to the extent that the Indiana Department of Environmental Management issues a no further action letter. In return for access to the property, Jay Petroleum will pay the estate a lump sum of $20,000, together with additional payments of $500 per month and $12,000 per year until the cleanup has been completed. The trustee has filed a motion to approve the settlement and access agreement. Both the debtor and its environmental expert and co-plaintiff in the state court litigation, HydroTech, (who refer to themselves as the Environmental Plaintiffs) have objected and the matter is before the court following trial of the issues raised by the trustee’s motion and those objections.
While private parties may settle their disputes on any terms which may be mutually satisfactory, that is not the case *288in bankruptcy proceedings. In re Chicago Rapid Transit, 196 F.2d 484, 490 (7th Cir. 1952). Where a settlement affects the assets of a bankruptcy estate or their distribution, the settlement must be approved by the bankruptcy court. Doing so is a matter committed to the court’s discretion. In re Doctors Hospital of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir.2007). The court should canvas the issues, familiarize itself with the attendant facts and circumstances, and “make a[n] ‘informed and independent judgment’ about the settlement,” In re American Reserve Corp., 841 F.2d 159, 162 (7th Cir.1987), deciding “whether [it] is in the best interests of the estate.” Matter of Energy Cooperative, Inc., 886 F.2d 921, 927 (7th Cir.1989). As the proponent of the settlement, the trustee bears the burden of proving that it is. In re Bell & Beckwith, 93 B.R. 569, 574 (Bankr.N.D.Ohio 1988).
In undertaking its review, the court does not substitute its own judgment for that of the trustee.1 In re Martin, 212 B.R. 316, 319 (8th Cir. BAP 1988). Instead, it should determine whether the trustee adequately investigated the matter and made an informed decision when choosing between the available alternatives, see, In re Del Grosso, 106 B.R. 165, 168-69 (Bankr.N.D.Ill.1989); if so, the court should then decide whether the settlement’s terms “fall within the reasonable range of litigation possibilities.” Energy Co-op., 886 F.2d at 929 (quoting In re New York, N.H. & H.R. Co., 632 F.2d 955 (2nd Cir.1980)). If they do, the settlement should be approved. Only if the proposed settlement falls below the lowest point in the range of those possibilities should the court withhold its approval. Energy Coop., 886 F.2d at 929 (quoting In re W.T. Grant, Co., 699 F.2d 599, 608 (2nd Cir. 1983)).
The debtor and HydroTech do not mention this standard or attempt to apply it in their opposition to the trustee’s motion. Their argument is that, rather than settling, the trustee should simply abandon both the real estate and the associated environmental claims. So, instead of focusing upon what the trustee is getting for the compromise, and whether that consideration falls below the low end in the reasonable range of litigation possibilities, they advocate for a result in which the estate would get nothing. Under the proposed settlement, the estate will have money in its coffers and property that currently has a negative value because of its environmental contamination would be cleaned up, perhaps becoming marketable. The objectors’ preferred alternative is that the trustee should simply abandon everything and be left with nothing at all. In choosing between these alternatives&emdash;mon-ey in the bank versus an empty sack&emdash;it is relatively easy to see where the best interests of the bankruptcy estate lie.
The objectors’ arguments regarding abandonment take several different forms. All of them overlook the Supreme Court’s decision in Midlantic Nat. Bank v. New Jersey Dept. of Environmental Protection, 474 U.S. 494, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986). There the Coui-t held that a bankruptcy trustee’s ability to abandon environmentally contaminated property is not *289unrestricted; instead, if it has the resources to do so, the trustee has some type of obligation to protect the public from the dangers the property presents, even if doing so yields no benefit to the estate. Midlantic Nat. Bank, 474 U.S. at 497-500, 507, 106 S.Ct. at 757-758, 762. See also, Matter of Environmental Waste Control, Inc., 125 B.R. 546, 550 (N.D.Ind.1991). In light of these limitations, the trustee’s decision to settle the environmental litigation in a way that not only provides for the clean-up of the contaminated property but also contributes money to the bankruptcy estate is completely consistent with the obligations imposed by Midlantic.
The debtor and HydroTech make a number of arguments either as to why the property has already been abandoned or why the trustee is obligated to do so. None of them have any merit. The first is that the debtor claimed the property as exempt, and when that exemption was not objected to within the time required, the contaminated property was excluded from the bankruptcy estate. As an initial matter this argument misconstrues the effect of a claimed exemption. A successful exemption does not really remove property from the bankruptcy estate.2 Instead, it allocates the value of the property in which the exemption was claimed between the debtor and the bankruptcy estate. In re Bartlett, 326 B.R. 436, 440-41 (Bankr.N.D.Ind.2005) (“the primary purpose of exemptions is to allocate property (or the value of property) between the debtor and the estate”). See also, Schwab v. Reilly, - U.S. -, 130 S.Ct. 2652, 2657, 177 L.Ed.2d 234 (2010) (trustee may sell exempted property to recover value in excess of claimed exemption). To the extent of the claimed exemption, the value of the exempted property is available only to the debtor and is not liable for the claims of most creditors. 11 U.S.C. § 522(c). Yet, the property in which the exemption was claimed remains property of the estate and, if it has value in excess of the claimed exemption, it may be sold by the trustee so that its excess value can be made available for creditors. Schwab, - U.S. -, 130 S.Ct. 2652; In re Salzer, 180 B.R. 523, 529-30 (Bankr.N.D.Ind.1993). See also, In re Hyman, 967 F.2d 1316 (9th Cir.1992). More than just claiming an exemption is required before the property in which the exemption was claimed passes out of the bankruptcy estate or is insulated from administration by the trustee.3 Salzer, 180 B.R. at 529. (“If a debtor wants to completely insulate property in which it has *290claimed an exemption from administration by the bankruptcy trustee, it should file a motion to abandon the asset.”).
Objectors are not only wrong about the effect of a claimed exemption, they are also wrong about the exemption that the debtor has claimed in this case. Exemptions in bankruptcy are not automatic. They exist only as a result of an affirmative declaration by the debtor. See, 11 U.S.C. § 522; Fed. R. Bankr.P. Rule 4003(a). The debtor makes this declaration on Schedule C&emdash;Property Claimed as Exempt&emdash;where it is to describe the property, specify the legal basis for the exemption, state the value of the claimed exemption and the value of the property in which the exemption is being claimed. As for the property in question, the debtor’s Schedule C, filed on March 4, 2011, states as follows:
Property: Shop at 611 S. Meridian, Portland, Ind.
Law providing exemption: I.C. 34-55-10-2(c)(2)
Value of claimed exemption: 0.00
Current value of property: 25,000
The objectors argue that when the trustee did not object to this claim within the time required, it had the effect of completely exempting the entire property, leaving nothing for the trustee. The argument is based upon their interpretation of I.C. 34-55-10-2(c)(2), which is Indiana’s exemption for nonresidential real estate and tangible property. This particular sub-paragraph reads: “Other real estate or tangible personal property of eight thousand dollars ($8,000).” Because the statute does not say something like “interest in,” they claim this particular Indiana exemption applies to the real estate itself and operates to exempt the entire property so long as it is worth no more than $8,000.4 This argument is wrong both as a matter of statutory construction and federal bankruptcy law.
Basic principles of statutory construction require that words be read in context; not in isolation, divorced from the context in which they appear. Roberts v. Sea-Land Services, Inc., - U.S. -, 132 S.Ct. 1350, 1357, 182 L.Ed.2d 341 (2012) (quoting Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 809, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989); U.S. v. Webber, 536 F.3d 584, 593-94 (7th Cir. 2008); Hatcher v. State, 762 N.E.2d 170, 172 (Ind.Ct.App.2002)). The objectors’ argument ignores this elementary rule. The title of the section in which the claimed exemption appears is: “Amount of Exemption.” I.C. 34-55-10-2 (LexisNexis 2012). Paragraph (b) then states: “The amount of each exemption under subsection (c) applies until_” I.C. 34-55-10-2(b). The exemption in question then appears in sub-section (c). Furthermore, when the Indiana legislature wanted to provide an exemption for property itself it knew how to do so. See e.g., I.C. 34-55-10-2(c)(4) (professionally prescribed health aids). When read in context, it is clear that I.C. 34-55-10-2(c)(2) allows the debt- or to exempt $8,000 worth of non-residential real estate and tangible personal property; not any items of such property whose value does not exceed that amount.5
*291The objectors’ argument is also foreclosed by the Supreme Court’s decision in Schwab v. Reilly, - U.S. -, 130 S.Ct. 2652, 2666-67, 177 L.Ed.2d 234 (2010). There the Court determined that the amount of a claimed exemption is determined by the “value of claimed exemption” placed on Schedule C and not by creative arguments based on other information. See also, Matter of Sherbahn, 170 B.R. 137, 140 (Bankr.N.D.Ind.1994) (“the extent of [an] exemption is determined by the value claimed exempt which the debtor places in its schedule of exemptions.”); N.D. Ind. L.B.R. B^003-l(b). In Schwab, the argument was that by valuing property in an amount equal to the claimed exemption the debtor actually exempted a much greater amount when the property turned out to be worth more than expected. Here the argument is that the exemption the debtor claimed actually operates to shelter far more than the value of the claimed exemption placed on Schedule C. In both cases, however, the essence of the argument is the same: The debtor can say one thing about the value of its claimed exemption on Schedule C and then argue for a higher value later should it wish to do so. As in Schwab, the trustee was entitled to rely upon the value of the claimed exemption on Schedule C, and was not required to object in order to preserve the estate’s right to retain any value in excess of that amount. Schwab, - U.S. at -, 130 S.Ct. at 2669. In this case the debtor’s claimed exemption for the real estate is $0.00. While that may very well be the equivalent of no exemption whatsoever, see, In re Berryhill, 254 B.R. 242 (Bankr. N.D.Ind.2000); Swaim v. Eleven, 1:04-cv-00033, 2004 WL 3550144 (D.N.D.Ind.2004), the debtor has not claimed the entire value of the property as exempt.6
Objectors also argue that, through the doctrines of waiver and promissory estoppel, the trustee has either already abandoned the environmental claims or is obligated to do so. The argument is based upon correspondence between the state court and the parties concerning the pending environmental litigation and how best to proceed given the debtor’s bankruptcy and the various issues the bankruptcy generated. On July 29, 2011 (at a time when the settlement negotiations did not appear to be particularly productive) the trustee sent a letter to counsel for the parties in the state court litigation, copied to the judge, which objectors claim “made the unconditional commitment to ‘fil[e] a motion with the Bankruptcy Court to abandon the estate’s interest in the lawsuit.’ ” Post-Hearing Brief of the Environmental Plaintiffs, p. 22, filed Feb. 27, 2012.7 Based on this letter, the state court can-celled a hearing set for August 1st and the environmental plaintiffs did not seek a rul*292ing from the state court as to the debtor’s continued role in the action. Id.
Objectors contend that the trustee’s statement concerning abandonment was the intentional relinquishment of a known right and they cite Hoseman v. Weinschneider, 322 F.3d 468, 475 (7th Cir.2003), for the proposition that “ ‘[Bankruptcy trustees regularly make use of releases and waivers,’ which are binding even though they ‘do not always amount to “abandonment” of estate property.’ ” Post-Hearing Brief of the Environmental Plaintiffs, pp. 22-23. Although it may contain the word “waiver,” Hoseman had nothing to do with the equitable doctrine objectors attempt to use to bind the trustee. The court’s comment was made in the context of deciding whether a particular cause of action remained property of the estate or was encompassed by a release and covenant not to sue executed between the trustee and the debtor as part of a settlement which had been approved by the bankruptcy court. See, Hoseman, 322 F.3d at 474-75. Objectors have taken one sentence in the decision entirely out of context to make it appear as though the circuit said something much different than it did. What follows is a fuller recitation of what the court had to say:
Because the release and covenant not to sue executed by the Trustee were part of a compromise settlement entered into by the trustee with bankruptcy court approval under Rule 9019 of the Bankruptcy Code, compliance with the formal abandonment procedures was not necessary in this situation. In addition, bankruptcy trustees regularly make use of releases and waivers in administering bankruptcy estates, and such decisions do not always amount to ‘abandonment’ of estate property. Rather, the giving of a release in exchange for some action by the debtor (in this case, the turning over of one million dollars worth of property), as part of a generally beneficial compromise settlement, may be the most efficient and fair means of administering the estate. In any event, compliance with the Bankruptcy Code’s abandonment provisions is meant to ensure the fair treatment of creditors, see, Morlan v. Universal Guar. Life Ins. Co., 298 F.3d 609, 618 (7th Cir.2002), and we believe those interests have been adequately protected here.
In addition, the compromise settlement between the trustee and [the debtor] was submitted to and approved by the bankruptcy court, after proper notice to [the debtor’s] creditors and opportunity for a hearing on any objections.... Hoseman, 322 F.3d at 474-75.
There is a vast difference between a formal release executed in connection with a settlement approved by the court after notice to creditors and a single sentence in a letter between counsel concerning the anticipated administration of the estate. When even the formal, court approved, abandonment of property may be revoked in light of subsequent information, Matter of Lintz West Side Lumber, Inc., 655 F.2d 786, 789-90 (7th Cir.1981), the trustee’s statement that he anticipated filing a motion to abandon is not a waiver of other options and does not bind the trustee to pursuing only abandonment.
Objectors’ promissory estoppel argument is similarly unavailing. The argument is that the trustee made a promise to file a motion for abandonment and, because they acted upon it in connection with cancelling an upcoming hearing, he is now bound to follow that course of action. This argument is not supported by a single bankruptcy decision that used the doctrine of promissory estoppel to force a trustee to administer the estate in a particular way. *293Given that so many of the things trustees do require court approval, often after notice to creditors, the lack of authority is not surprising, and the only decision the court has discovered discussing the doctrine’s applicability to trustees and the administration of the estate suggests that it is suspect. In re Office Products of America, Inc. 136 B.R. 675, 687 (Bankr.W.D.Tx. 1992) (doctrine of promissory estoppel did not require trustee to employ counsel). Nonetheless, assuming that it can be used, the facts of this case do not warrant its application.
There are several requirements for promissory estoppel. First and foremost, however, there must be a promise, the enforcement of which is the only way to avoid injustice. See, Brown v. Branch, 758 N.E.2d 48, 52 (Ind.2001); Security Bank & Trust Co. v. Bogard, 494 N.E.2d 965, 968 (Ind.Ct.App.1986). See also, Tyler v. Trustees of Purdue University, 834 F.Supp.2d 830, 847 (N.D.Ind.2011). Neither of those requirements has been satisfied here. “[T]he mere expression of an intention is not a promise. Thus, where A says, T am going to sell my house. I want $70,000 for it,’ he has made a mere statement of intention and not a promise.” Security Bank & Trust, 494 N.E.2d at 969 (the statement “I’ll take this to the loan committee” was an expression of intent, not a promise). In just the same way, the trustee’s statement, “I will be filing a motion ... to abandon,” was an expression of intent, not a promise. Yet, even if it could be construed as a promise, enforcing it and requiring the trustee to abandon property would create an injustice, not avoid one, because it would deprive the estate of an asset without any notice to creditors.
Objectors advance several arguments that do not revolve around abandonment. The first of them is that the motion should be denied because the settlement will not generate any money for creditors. This is an argument that can only be made by ignoring the legal standard governing the matter before the court. The proper inquiry is whether the settlement is in the best interests of the estate, Energy Co-op., 886 F.2d at 927-in other words, will the estate be better off because of it?&emdash;not necessarily whether it will produce a distribution to creditors. It is entirely possible that the estate as a whole can be better off because of a proposed settlement'&emdash;it can end up with more than it otherwise would and that more can then be used to pay costs of administration that would otherwise go unpaid&emdash;even when a particular settlement will not yield anything for creditors, and it is the interests of the estate, not the distribution to creditors, that is to be the focus of the court’s inquiry.8 Furthermore, at least to some extent, the objectors are complaining about a self-inflicted wound. One of the reasons the administration of this estate has become more costly than it would otherwise be is because of their opposition to the trustee. They cannot be allowed to oppose the trustee’s efforts to administer the estate and then use the very costs that opposition created as a way to justify their objection.
In another argument that focuses upon something other than the interests of estate, objectors claim that because the Department of Environmental Management wants the debtor to clean-up the proper*294ty&emdash;not recover payment of the costs of doing so&emdash;the debtor has non-dischargea-ble obligations which prevent the trustee from settling.9 To the extent this is the argument, it seems that the goal of the settlement is to fulfill whatever remediat-ing obligations IDEM thinks the debtor may have. Based upon the testimony presented at trial, IDEM’s satisfaction with the results of a clean-up and any conditions it may impose are a function of the condition of the property, not the identity of the owner. So whether the clean-up is performed by the debtor, by the trustee, or by Jay Petroleum, does not matter. IDEM’s standards for determining whether it has been satisfactorily completed will be the same. As a result, through the settlement, Jay Petroleum will satisfy the debtor’s obligation to IDEM for cleaning up the property. See, Ohio v. Kovacs, 469 U.S. 274, 284 n. 12, 105 S.Ct. 705, 710-11 n. 12, 83 L.Ed.2d 649 (1985).
To the extent the non-dischargeable liability argument arises out of the debtor’s anticipated post-petition ownership of the property, Ohio v. Kovacs, 469 U.S. at 285, 105 S.Ct. at 711, those concerns are a bit speculative. The debtor may not end up owning the property after the bankruptcy is over. Once the clean-up has been completed, it is entirely possible that the trustee might sell the property to a third party, in which event the debtor would have nothing further to do with it. Yet, even if the property does go back to the debtor, it is difficult to see how any post-petition obligations he may have as a result of the settlement will be any different from what they would be if the property is abandoned. To begin with, the plans for the clean-up that the trustee and Jay Petroleum are working with are the same ones that the debtor and HydroTech submitted to IDEM, and which IDEM approved, prior to the petition. Second, whether or not IDEM will be satisfied with the job and what subsequent conditions it might impose after it is completed depend upon the property, not the identity of the owner. In light of this, it is difficult to see how the debtor’s post-petition obligations because of the property will be any different because of the settlement.10
As a final argument in opposition to the settlement, the objectors claim that the debtor assigned the first $35,000 in payments to HydroTech. The assignment applied to “(a) the amount of any deductible under the ELTF program (currently $35,000) and (b) any amount that is specifically designated, pursuant to a judgment of the Court or pursuant to a written settlement agreement, as the costs of Hy-*295droTech’s work.” Ex. 18, ¶ 3. The money the trustee is to receive under the settlement does not appear to fall within the scope of this assignment. The trustee is being paid for granting Jay Petroleum access to the property during the time it takes to complete the clean-up. This is more in the nature of rent for the future occupancy of the property than it is compensation for past events and expenses. Furthermore, there are the trustee’s avoiding powers to consider, see, 11 U.S.C. § 544, and it is not at all certain that such an unrecorded, unperfected interest would trump the interests of the trustee. Finally, we do not know how long the clean-up will take. If it takes more than a year, the amount the trustee receives will exceed the $35,000 HydroTech claims has been assigned to it ($20,000 + ($500 x 12) + $12,000 = $38,000).
The proposed settlement and access agreement is in the best interests of the bankruptcy estate. The objections filed by the debtor and HydroTech are overruled and the trustee’s motion to approve that agreement will be granted. An order doing so will be entered.
. The court is not deciding what the terms of any settlement should be. The decision to settle, and on what basis, has already been made. What the court is actually doing is reviewing the propriety of the decision to settle the matter on the terms proposed. Matter of Big Horn Land & Cattle Co. LLC., 2010 Bankr.Lexis 1088 *3 (Bankr.N.D.Ind.2010). That review is binary. Either the court approves the settlement or it does not. It does not change the settlement’s terms, redefine or condition them in some way. In re Trism, Inc., 282 B.R. 662, 667-68 (8th Cir. BAP 2002).
. Under the former Bankruptcy Act, exempt property did not become property of the bankruptcy estate. See, S Collier on Bankruptcy ¶ 541.LH(3)(c) (16th ed.). Since old habits die hard, some still use that kind of terminology when speaking of exempt property: that it is not property of the estate. But that is not an accurate description of how things actually work under the current Bankruptcy Code where even exempt property becomes property of the estate, 11 U.S.C. § 541(a), is to be delivered to the trustee, 11 U.S.C. § 542(a), and may potentially be sold under § 363.
. If property has no unencumbered value in excess of a claimed exemption, that would provide a basis for the trustee to abandon it or for someone to ask that the trustee be compelled to do so, based upon the proposition that, after deducting the amount due on account of any liens and the debtor’s claimed exemption, the property "is of inconsequential value and benefit to the estate.” 11 U.S.C. § 554(a), (b). See also, In re Indian Palms Assoc. Ltd., 61 F.3d 197, 206-07 (3rd Cir.1995); Matter of Sutton, 904 F.2d 327, 329 (5th Cir.1990); In re Szymanski, 344 B.R. 891, 896 (Bankr.N.D.Ind.2006); In re Martin, 350 B.R. 812, 817 (Bankr.N.D.Ind.2006). Nonetheless, both those alternatives require an additional step and notice to creditors before abandonment occurs. 11 U.S.C. § 554(a), (b). See also, Fed. R. Bankr. P. Rule 6007; N.D. Ind. L.B.R. B-2002-2.
. "The exemption applies to the 'real estate' itself, not just a ‘financial interest.' To be eligible for the exemption, the real estate may not have a value of more than $8,000, but again, it is the property itself that is exempt so long as it does not exceed this value.” Post-Hearing Brief of Environmental Plaintiffs, pp. 17-18, filed Feb. 27, 2012.
. Since both non-residential real estate and tangible personal property are treated together under the statute, if the objectors’ argument is correct&emdash;that any non-residential real *291estate worth less than $8,000 is completely exempt&emdash;the same principle would also apply to tangible personal property. That would easily allow someone to shelter a limitless amount of property from creditors, as well as providing a boon to precious metals dealers. One could simply put their assets in gold and silver coins, and so long as no single coin was worth more than $8,000 the entire lot would be exempt. Such an absurd result counsels against objectors' interpretation.
. If a debtor wants to claim the entire value of an asset, or the asset itself, as exempt, it should clearly say so on Schedule C by listing the exempt value as "full fair market value" or "100% of FMV.” Schwab,- U.S. at -, 130 S.Ct. at 2668. See also, N.D. Ind. L.B.R. B-4003-l(b) (state the claimed exemption as "all”).
. After reciting the lack of progress in bringing the state court litigation to a conclusion, the trustee's precise statement was: "Accordingly, I will be filing a motion with the Bankruptcy Court to abandon the estate’s interest in the lawsuit." Exhibit 9.
. One reason for this is that the actual distribution to creditors cannot be known until the end of the case, when all the available assets have been liquidated, the costs of administration determined and claims allowed. This case has not yet reached that stage. Nonetheless, for the purposes of this decision the court accepts the proposition that, because of the costs of administration, there will be no distribution to creditors.
. The non-dischargeability of environmental liability may not be as clear as the objectors contend. The Supreme Court addressed the issue in Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985) and that decision can be read to stand for the proposition that if compliance with an obligation to clean-up contaminated property requires the debtor to spend money&emdash;as opposed to doing the job itself-the obligation is dischargeable. U.S. v. Whizco, Inc. 841 F.2d 147, 151 (6th Cir.1988). But see, In re Torwico Electronics, Inc., 8 F.3d 146 (3rd Cir.1993); In re Chateaugay, 944 F.2d 997 (2nd Cir.1991). That would certainly seem to be the case here because no one is suggesting that the debtor can "do-it-yourself" where cleaning up the property is concerned.
. There is also a public policy aspect to the objectors’ argument that needs to be considered. If it would be correct that the debtor's potential non-dischargeable responsibility for contaminated property precludes settlement, then no settlement of environmental claims in an individual case would ever be possible. Mid-Atlantic would prevent abandonment and fears about nondischargeability would prevent settlement. The only remaining option would be litigation. A proposition the natural consequence of which is to condemn the parties to litigation has little to recommend it. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494785/ | ORDER DENYING DEFENDANT’S MOTIONS FOR SUMMARY JUDGMENT, GRANTING PLAINTIFFS’ CROSS-MOTIONS FOR SUMMARY JUDGMENT, AND AVOIDING AS FRAUDULENT CONVEYANCES THE PRE-PETITION TRANSFERS OF THE PLAINTIFFS’ PROPERTIES VIA TAX LIEN FORECLOSURE
PAMELA PEPPER, Chief Judge.
Findings of Fact
KEVIN C. WILLIAMS
1.On April 1, 2011, Kevin C. Williams filed a petition for relief under Chapter 13 of the Bankruptcy Code. (See bankruptcy court docket for case no. 11-24658, docket no. 1.)
2. On the schedules filed on April 19, 2011, Kevin Williams indicated that he owned property at 3202 North Sherman Boulevard, Milwaukee, WI. He valued his interest in that property at $100,000, and indicated that he owed $25,000 on it. (See bankruptcy court docket for case no. 11-24658, docket no. 14, Schedule A.)
3. On July 20, 2011, Kevin Williams filed an adversary complaint against the City of Milwaukee City Clerk. The complaint alleged that the property on Sherman Boulevard had been transferred to the City of Milwaukee within one year prior to the filing of the bankruptcy petition, and that this transfer constituted a fraudulent transfer in violation of § 548 of the Bankruptcy Code. (See bankruptcy court docket for adversary case no. 11-2527, docket no. 1.)
4. On November 14, 2011, defendant City of Milwaukee filed a motion for summary judgment in the adversary proceeding. (See bankruptcy court docket for adversary ease no. 11-2527, docket no. 9.)
5. Filed with the motion for summary judgment was an affidavit by Kerry R. Urban, Special Assistant to the Milwaukee County Treasurer. The affidavit stated that the City had foreclosed on the Sherman Boulevard property, pursuant to the State of Wisconsin’s tax foreclosure procedure, because Williams had owed delinquent taxes totaling $14,518.51 for the tax years 2007 and 2008. (See bankruptcy court docket for adversary case no. 11-2527, docket no. 9, Exhibit 6.)
6. Also filed with the motion for summary judgment was Kevin Williams’ 2007 City of Milwaukee Combined Property Tax *310Bill, showing a total assessed value for the Sherman Boulevard property of $190,400, and a total estimated fair market value of $206,300. (See bankruptcy court docket for adversary case no. 11-2527, docket no. 9, Exhibit 12.)
7. Kevin Williams filed a cross-motion for summary judgment on February 21, 2012. (See bankruptcy court docket for adversary case no. 11-2527, docket no. 18.) Williams also filed a supporting brief. {Id. at docket no. 19.) The City filed its reply on March 12, 2012. {Id. at docket no. 20.)
8. The parties presented oral argument on April 2, 2012. {Id. at docket no. 25 (audio recording).) At that hearing, counsel for the plaintiffs presented the Court' and counsel with copies of Murphy v. Town of Harrison (In re Murphy), 331 B.R. 107 (Bankr.S.D.N.Y.2005). The City asked for an opportunity to respond, and the Court allowed the parties to present supplemental briefs. Id. The City filed its supplemental brief on April 16, 2012. {Id. at docket no. 22.) Kevin Williams filed his letter brief on April 20, 2012. {Id. at docket no. 23.)
JUDSON W. AND THERESE M. CAMPBELL
9. On May 19, 2011, Judson W. and Therese M. Campbell filed a petition for relief under Chapter 13 of the Bankruptcy Code. (See bankruptcy court docket for case no. 11-28144, docket no. 1.)
10. On the schedules filed on June 23, 2011, the Campbells indicated that they owned property at 4893 North 66th Street, Milwaukee, WI. They valued their interest in that property at $88,500, and indicated that they owed $13,406.76 on it. (See bankruptcy court docket for case no. 11-28144, docket no. 15, Schedule A.)
11. On August 3, 2011, the Campbells filed an adversary complaint against City of Milwaukee. The complaint alleged that the property on North 66th Street had been transferred to the City of Milwaukee in the year prior to the filing of the bankruptcy petition, and that this transfer constituted a fraudulent transfer in violation of § 548 of the Bankruptcy Code. (See bankruptcy court docket for adversary case no. 11-2561, docket no. 1.)
12. On November 14, 2011, defendant City of Milwaukee filed a motion for summary judgment in the adversary proceeding. (See bankruptcy court docket for adversary case no. 11-2561, docket no. 9.)
13. Filed with the motion for summary judgment was an affidavit by Kerry R. Urban, Special Assistant to the Milwaukee County Treasurer. The affidavit stated that the City had foreclosed on the North 66th Street property, pursuant to the State of Wisconsin’s tax foreclosure procedure, because the Campbells had owed delinquent taxes totaling $8,121.35 for the tax years 2006, 2007 and 2008. (See bankruptcy court docket for adversary case no. 11-2561, docket no. 9, Exhibit 6.)
14. Also filed with the motion for summary judgment was the Campbells’ 2006 City of Milwaukee Combined Property Tax Bill, showing a total assessed value for the North 66th Street property of $109,500, and a total estimated fair market value of $115,900. (See bankruptcy court docket for adversary case no. 11-2561, docket no. 9, Exhibit 11.)
15. The Campbells filed a cross-motion for summary judgment on February 21, 2012. (See bankruptcy court docket for adversary case no. 11-2561, docket no. 19.) The Campbells also filed a supporting brief. {Id. at docket no. 20.) The City filed its reply on March 12, 2012. {Id. at docket no. 21.)
16. The parties presented oral argument on April 2, 2012. {Id. at docket no. 27 (audio recording).) At that hearing, *311counsel for the plaintiffs presented the Court and counsel with copies of Murphy v. Town of Harrison (In re Murphy), 331 B.R. 107 (Bankr.S.D.N.Y.2005). The City asked for an opportunity to respond, and the Court allowed the parties to present supplemental briefs. Id. The City filed its supplemental brief on April 16, 2012. (Id. at docket no. 24.) The Campbells filed their letter brief on April 20, 2012. (Id. at docket no. 25.)
RITA GILLESPIE
17. On July 18, 2011, Rita Gillespie filed a petition for relief under Chapter 13 of the Bankruptcy Code. (See bankruptcy court docket for case no. 11-31185, docket no. 1.)
18. On the schedules filed on August 12, 2011, Gillespie indicated that she owned property at 2979 North Palmer Street, Milwaukee, WI. She valued her interest in that property at $60,000, and indicated that she owed $16,915.77 on it. (See bankruptcy court docket for case no. 11-31185, docket no. 11, Schedule A.)
19. On August 15, 2011, Gillespie filed an adversary complaint against City of Milwaukee. The complaint alleged that the property on North Palmer Street had been transferred to the City of Milwaukee within ninety days prior to the filing of the bankruptcy petition, and that this transfer constituted a fraudulent transfer in violation of § 548 of the Bankruptcy Code. (See bankruptcy court docket for adversary case no. 11-2597, docket no. 1.)
20. On November 14, 2011, defendant City of Milwaukee filed a motion for summary judgment in the adversary proceeding. (See bankruptcy court docket for adversary case no. 11-2597, docket no. 6.)
21. Filed with the motion for summary judgment was an affidavit by Kerry R. Urban, Special Assistant to the Milwaukee County Treasurer. The affidavit stated that the City had foreclosed on the North Palmer Street property, pursuant to the State of Wisconsin’s tax foreclosure procedure, because Gillespie had owed delinquent taxes totaling $12,070.77 for the tax years 2007, 2008 and 2009. (See bankruptcy court docket for adversary case no. 11-2597, docket no. 6, Exhibit 4.)
22. Also filed with the motion for summary judgment was Gillespie’s 2007 City of Milwaukee Combined Property Tax Bill, showing a total assessed value for the North Palmer Street property of $75,800, and a total estimated fair market value of $82,100. (See bankruptcy court docket for adversary case no. 11-2597, docket no. 6, Exhibit 11.)
23. Gillespie filed a cross-motion for summary judgment on February 21, 2012. (See bankruptcy court docket for adversary case no. 11-2597, docket no. 15.) Gillespie also filed a supporting brief. (Id. at docket no. 16.) The City filed its reply on March 12, 2012. (Id. at docket no. 17.)
24. The parties presented oral argument on April 2, 2012. (Id. at docket no. 21 (audio recording).) At that hearing, counsel for the plaintiffs presented the Court and counsel with copies of Murphy v. Town of Harrison (In re Murphy), 331 B.R. 107 (Bankr.S.D.N.Y.2005). The City asked for an opportunity to respond, and the Court allowed the parties to present supplemental briefs. Id. The City filed its supplemental brief on April 16, 2012. (Id. at docket no. 19.) Rita Gillespie filed her letter brief on April 20, 2012. (Id. at docket no. 20.)
FACTS APPLICABLE TO ALL PLAINTIFFS
25. In its briefs, and at oral argument, the City described in detail the extended process it uses — required by Wis. Stat. § 75.521 — in reaching a final foreclosure judgment. (City of Milwaukee’s brief in *312support of its motion for summary judgement, pages 3 through 6, and attached exhibits — Williams docket no. 19; Campbell docket no. 20; Gillespie docket no. 16; audio recording of April 2, 2012 oral argument, Williams docket no. 25, Campbell docket no. 27, Gillespie docket no. 21.)
26. The City utilizes a “pre-foreclo-sure” process — six notices to the homeowner warning of the delinquency and the consequences of failure to cure, then referral of the homeowner to an outside collection counsel, then preparation of the foreclosure documents and filing of the foreclosure petition. The homeowner may redeem at any time up to a specified “final redemption date” — a date at least eight weeks from the date of first publication of the notice and petition for foreclosure. (Notice is by publication.) By this point, the property will have been delinquent for some two years. If the homeowner doesn’t find out about the foreclosure proceedings, or appear to contest the foreclosure proceedings, the City obtains a judgment of foreclosure. (If the homeowner objects, a judicial officer resolves the objection.) Within ninety days of the entry of the foreclosure judgment, the homeowner may petition the Milwaukee Common Council to reopen and vacate the foreclosure judgment, and to allow the homeowner to redeem. The City asserts that it keeps homeowners informed at every step of this process, providing the homeowner with numerous written notices and copies of documents. The City ceases to send these notices and documents if the homeowner files for bankruptcy relief. Id.
27. At oral argument, the plaintiffs did not dispute the City’s claim that the tax lien foreclosure proceedings that it uses provides due process to homeowners. (Audio recording of April 2, 2012 oral argument, Williams docket no. 25, Campbell docket no. 27, Gillespie docket no. 21.) Conclusions of Law
1. Fed. R. Bankr.P. 7056 states that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” See also, Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
2. Title 11, United States Code, § 548(a)(1)(B) states as follows:
The trustee may avoid any transfer ... of an interest of the debtor in property ... 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-received less than a reasonably equivalent value in exchange for such transfer or obligation; and ... (I) was insolvent on the date that such transfer was made ... or became insolvent as a result of such transfer....
3. To establish a fraudulent transfer/conveyance under § 548(a)(1)(B), the trustee must prove:
... (1) a transfer of the debtor’s property or interest therein; (2) made within two years of the filing of the bankruptcy petition; (3) for which the debtor received less than a reasonably equivalent value in exchange for the transfer; and (4) ... the debtor was insolvent when the transfer was made or he was rendered insolvent thereby....
In re Eckert, 388 B.R. 813, 831 (Bankr. N.D.Ill.2008) (citations omitted), affirmed sub nom, Grochocinski v. Schlossberg, 402 B.R. 825 (N.D.Ill.2009).
4. The parties agree that the facts of the cases establish three of the four ele*313ments of a § 548(a)(1)(B) cause of action— the debtors’ properties were transferred to the City; they were transferred within two years prior to the petition dates; and the debtors either were insolvent at the times of the transfers, or were rendered insolvent by the transfers. (City of Milwaukee’s brief in support of its motion for summary judgement, page 8 — Williams docket no. 19; Campbell docket no. 20; Gillespie docket no. 16.) The parties have asked the Court to decide the question of whether the debtors received less than a reasonably equivalent value for the conveyances. Id.
5. The Bankruptcy Code does not define the term “reasonably equivalent value.” Eckert, 388 B.R. at 835. In the Seventh Circuit, a court must determine “the value of what was transferred and compare that value to the value the debtor received.” Id., citing Barber v. Golden Seed Co., 129 F.3d 382, 387 (7th Cir.1997).
6. Determining “reasonably equivalent value” is a two-step process— first, the court must determine whether the debtor received value, and second, the court must determine whether the value the debtor received was reasonably equivalent to the value he gave up. Id.
7. Equivalent value is determined as of the time of the transfer. Id., citing Baldi v. Lynch (In re McCook Metals, LLC), 319 B.R. 570, 589 (N.D.Ill.2005).
8. Factors which a court must consider in determining whether a debtor received reasonably equivalent value include “(1) whether the value of what was transferred is equal to the value of what was received; (2) the fair market value of what was transferred and received; (3) whether the transaction took place at arm’s length; and (4) the good faith of the transferee.” Id., citing Barber v. Golden Seed Co., 129 F.3d at 387; Grigsby v. Carmell (In re Apex Auto. Warehouse, L.P.), 238 B.R. 758, 773 (Bankr.N.D.Ill. 1999).
9. The trustee bears the burden of proof on whether the debtor received reasonably equivalent value. Id., citing Barber, 129 F.3d at 387.
10. Section 548(d)(2)(A) of the Bankruptcy Code defines “value” as “property, or satisfaction or securing of a present or antecedent debt of the debtor.”
11. In BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994), the United States Supreme Court held in the context of a mortgage foreclosure sale that using fair market value as the “benchmark against which determination of reasonably equivalent value [was] to be measured” was “not consistent with the text of the Bankruptcy Code.” BFP v. Resolution Trust Corp., 511 U.S. 531, 536-37, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). This was, the Court stated, because, among other things, the concept of fair market value “has no applicability in the forced-sale context.” Id. at 537, 114 S.Ct. 1757.
12. The BFP Court concluded “that a fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure law have been complied with.” Id. at 545, 114 S.Ct. 1757.
13. The BFP Court clarified, however: “We emphasize that our opinion today covers only mortgage foreclosures of real estate. The considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.” Id. at 537 n. 3, 114 S.Ct. 1757.
14. The City cited numerous cases which, it argued, extended the BFP reasoning to support the conclusion that the *314amount owed for delinquent taxes constituted “reasonably equivalent value.” Most of those cases, however, involved foreclosure processes which had included sales or auctions — in other words, they involved processes in which the market had operated, giving the deciding courts a basis for determining “reasonably equivalent value.”
15. In In re Murray, 276 B.R. 869 (Bankr.N.D.Ill.2002), the county had sold the property to the movant in a foreclosure sale pre-petition. Id. at 871. The Murray ease did not involve a § 548(a)(1)(B) cause of action; it involved the county’s filing of a motion for relief from stay filed after the Chapter 13 debtor failed to redeem during the post-sale redemption period. Id. at 871-72. In opposing the motion for relief from stay, however, the debtor argued that he might have a potential § 548 claim for avoiding the tax sale. The Murray court noted that the purchaser had purchased only the delinquent taxes, not the underlying title to the property, and looked to the BFP decision in responding that “a non-collusive and regularly conducted foreclosure sale could not be challenged [under § 548] as a fraudulent conveyance.” Id. at 878, citing BFP v. Resolution Trust Corp., 511 U.S. at 534, 114 S.Ct. at 1760. So while the City is correct that the Murray court stated, “By analogy, BFP logically applies to tax sales,” id., the City ignores the fact that the Murray court extended the BFP reasoning to finding that properly-conducted tax sales did not constitute fraudulent conveyances. It did not make any findings on whether a foreclosure procedure that did not include a sale might constitute a fraudulent conveyance.
16. Similarly, in Kojima v. Grandote Int’l Ltd. Liability Co. (In re Grandote Country Club Co., Ltd.), 252 F.3d 1146 (10th Cir.2001), the Tenth Circuit held that a transfer resulting from a tax sale did not constitute a fraudulent transfer. The (Brandóte court conceded that “courts have not been unanimous in extending BFP to the tax sale context, with [the Tenth Circuit’s] Bankruptcy Appellate Panel among those refusing to apply BFP to a transfer made by a tax sale.” Id. at 1152, citing Sherman v. Rose (In re Sherman), 223 B.R. 555, 558-59 (10th Cir. BAP 1998). But in the following sentence, the Grandote court stated, “Nevertheless, the decisive factor in determining whether a transfer pursuant to a tax sale constitutes ‘reasonably equivalent value’ is a state’s procedure for tax sales, in particular, statutes requiring that tax sales take place publicly under a competitive bidding process.” Id. The Grandote court specifically referenced the Bankruptcy Appellate Court’s refusal “to extend BFP to a tax sale conducted under Wyoming statutes that ‘do not permit a public sale with competitive bidding.’ ” Id.
17. In Washington v. County of King William (In re Washington), 232 B.R. 340 (Bankr.E.D.Va.1999), the court stated that “[t]he principal issue before this court is whether the standards for reasonably equivalent value developed by the Supreme Court in BFP should be extended to judicial tax sales.” Id. at 343. While the Washington court concluded that the tax sale of the debtor’s property did not constitute a fraudulent conveyance under § 548, like the courts discussed above, it made that determination in a sale context.
18. The other cases the City cited — In re Samaniego, 224 B.R. 154 (Bankr. E.D.Wash.1998); Russell-Polk v. Bradley (In re Russell-Polk), 200 B.R. 218 (Bankr. E.D.Mo.1996); Golden v. Mercer County Tax Claim Bureau (In re Golden), 190 B.R. 52 (Bankr.W.D.Pa.1995); Hollar v. Myers (In re Hollar), 184 B.R. 243 (Bankr. M.D.N.C.1995); Lord v. Neumann (In re Lord), 179 B.R. 429 (Bankr.E.D.Pa.1995); Comis v. Bromka (In re Comis), 181 B.R. *315145 (Bankr.N.D.N.Y.1994); and McGrath v. Simon (In re McGrath), 170 B.R. 78 (Bankr.D.N.J.1994) — all involved debtors attacking the transfers of their properties via tax sales. None involved a non-sale foreclosure proceeding.
19. In footnote 4 on page 11 of its brief, the City indicates that there are several cases which reached the opposite result, but implicitly dismisses these holdings because, in those cases, “the particular state foreclosure proceedings involved ... were deficient in some respect and/or failed to provide requisite due process or other protections to debtors.” (See City’s brief in support of motion for summary judgment, page 11 n. 4, Williams, 11-2527, docket no. 9; Campbell, 11-2561, docket no. 9; Gillespie, 11-2597, docket no. 6.) Because the plaintiffs did not dispute that the State of Wisconsin’s strict foreclosure procedure under Wis. Stat. § 75.521 complied with due process requirements, the City seems to argue, these cases do not apply.
20. One of the cases the City cites is Sherman v. Rose (In re Sherman), 223 B.R. 555 (10th Cir. BAP 1998), the case in which the Tenth Circuit found that the transfer was fraudulent because “the Wyoming tax sale statutes do not permit a public sale with competitive bidding.” Id. at 559. The court stated that
there is a significant difference between the circumstances of this case and those surrounding the previously cited bankruptcy court decisions that have upheld the applicability of the BFP rule to tax sales. Even if BFP were held to be applicable to tax sales, here the transfer of the real property to the appellee would still be avoidable, for the Wyoming tax sale statutes do not have the protections as do the Wyoming foreclosure sale statutes, as discussed in Russell-Polk, Golden, Hollar, Lord, and McGrath, cited above.
Id. at 559. That case seems to support the 'plaintiffs’ position, not the City’s.
21. In Chorches v. Fleet Mortgage Corp., et al., (In re Fitzgerald), 255 B.R. 807 (Bankr.D.Conn.2000), the Connecticut court considered a tax sale statute that provided for a “strict foreclosure” proceeding — one that did not involve a sale. The court concluded,
Guided by the foregoing analysis of the evidentiary value of a strict foreclosure under Connecticut law, this court stands by its original conclusion in Fitzgerald I that a Connecticut strict foreclosure has an insufficient evidentiary value to trigger the BFP conclusive presumption of ‘reasonably equivalent value’ under Bankruptcy Code § 548(a)(1)(B).
Id. at 814.
22. The only case the City cites in which a court found that a transfer of property by means of a tax foreclosure proceeding that did not involve a sale was not a fraudulent transfer was Talbot v. Federal Home Loan Mtg. Corp. (In re Talbot), 254 B.R. 63 (Bankr.D.Conn.2000). The Talbot court opined that BFP “was not predicated on a theory that a competitive bidding process provides the most accurate indication of the market forces that define a property’s value.” Id. at 69. Rather, the court reasoned, “the Court held that the states, not the market, were entitled to define the ‘value’ of the property in the mortgage foreclosure context.” Id. In reaching this conclusion, the Talbot court did not rely on any other cases.
23. The Fitzgerald court disagreed with the Talbot analysis. (See Chorches v. Fleet Mortgage Corp., et al., (In re Fitzgerald), 255 B.R. 807, 814 (Bankr.D.Conn. 2000).) After going over, in painstaking detail, the ways in which Connecticut’s strict foreclosure statute failed to provide *316any evidentiary basis for a finding of “reasonably equivalent value,” the Fitzgerald court stated, “For the foregoing reason, the court respectfully disagrees with Talbot v. Federal Home Loan Mortgage Corp. (In re Talbot), 254 B.R. 63 (Bankr.D.Conn. 2000).”
24. This Court, too, respectfully disagrees with the Talbot analysis. While the Bankruptcy Code does not define the concept of “reasonably equivalent value,” one can infer from those three words that a determination of “reasonably equivalent value” requires a court to try to figure out what the “value” of the property being transferred might be. Value, of course, is a relative concept — what is worth a king’s ransom to one person is valueless to another. What is highly valued in one circumstance has little value in another. One need only look to the currency markets to know that the “value” of a particular currency depends on the health of its home country’s economy, the health of the global economy, the political environment, and numerous other facts. So, too, the value of a piece of property depends on many factors.
25. This Court reads the Supreme Court’s decision in BFP to articulate this relative concept of value. The BFP decision points out that “value” must be different in the context of a “forced” sale — a mortgage foreclosure sale, or a tax foreclosure sale — than in the context of a “voluntary” sale — one with willing buyers and a willing seller. This seems an obvious point — a voluntary seller is often in a position to hold out for a higher sale price, thus causing willing buyers to competitively bid. That competition is reduced in cases where the buyer, while willing, has a strong incentive to move the property quickly, and the buyers, while willing, are aware that the seller’s motivation favors speed over obtaining the highest sale price. The decision acknowledges that, while a property might be worth $100,000 in a “voluntary” sale, a property being sold at a mortgage foreclosure auction isn’t involved in a “voluntary” sale, and thus the “value” assigned it by the market in which it is being sold will necessarily be less.
26. This Court does not read BFP to hold that any value which a forced seller chooses to assign a property constitutes “reasonably equivalent value” for the purposes of § 548(a)(1)(B). For example, if a mortgage lender chose to auction a foreclosed 3-bedroom house in good condition with an assessed value of $110,000, and chose a starting bid price of $2.00, and the competitive bidding resulted in a final sale price of $250, it would fly in the face of reason to conclude that the “reasonable equivalent value” of that three-bedroom house was $250. Certainly, as the BFP court held, the “reasonably equivalent value” of that house wouldn’t necessarily be the $110,000 assessed value, or even the value that the homeowner could have obtained if she’d sold the house in a voluntary sale. But what the Supreme Court said, in this Court’s opinion, is that “reasonably equivalent value” is not the same thing as “best possible value to be obtained through a voluntary sale.” That does not equate to a conclusion that “reasonably equivalent value” is whatever the foreclosing entity says it is.
27. At the April 2, 2012 oral argument on the summary judgment motions, the plaintiffs brought to the Court’s and the City’s attention Murphy v. Town of Harrison (In re Murphy), 331 B.R. 107 (Bankr. N.D.N.Y.2005). The Murphy court held that a transfer pursuant to New York’s strict tax foreclosure process constituted a fraudulent transfer. Id. at 120-121. In its supplemental brief, the City argues that Murphy was wrongly decided; this Court disagrees.
*31728. In reaching its conclusion, the Murphy court stated what this Court has tried to articulate above:
Certainly, New York State has a strong interest in assuring 12 that its citizens meet their tax obligations and to enforce those obligations when they remain unmet. However, that interest cannot overcome Congress’ policy choice that reasonably equivalent value must be obtained for a transfer of a debtor’s property in the bankruptcy context, where the rights of other creditors are prejudiced. Unlike a mortgage foreclosure and sale, such as in BFP, there is not the essential state interest of assuring security in title following a public sale. Here, a taxing authority seeks to enforce its liens not by public sale but instead by seizing title to the Property. Although the Supreme Court in BFP recognized that the value obtained in a foreclosure sale may be significantly less than would be obtained if the property were sold under normal circumstances (willing seller, willing buyer), the holding in BFP does not support the conclusion that a forfeiture of property is, as a matter of law, for reasonably equivalent value under Section 548 when there are no market forces at work at all.
Id. at 120.
29. In this Court’s view, therefore, the case law overwhelmingly supports the plaintiffs’ counter-motions for summary judgment, and defeats the City’s motions. Only one of the numerous cases the City cited found that a transfer pursuant to a “strict” (non-sale) foreclosure statute did not constitute a fraudulent transfer, and that one decision was squarely rejected, in a well-reasoned opinion, by a sister court. In contrast, the remaining cases find no fraudulent transfers where the transfers involved a sale procedure, but find fraudulent transfers in cases where no sale was involved. The Court finds the reasoning of the majority of cases to be highly persuasive.
30.The City also raises several policy arguments in support of its position. It argues, for example, that the Bankruptcy Code treats tax debt differently than it treats other types of debts, and asserts that this fact constitutes circumstantial evidence that tax foreclosure transfers should be treated differently than other transfers in the fraudulent conveyance context. The Court agrees that the Code treats tax debt differently — Section 507(a)(8), for example, accords priority status to certain tax claims. Section 511 provides that in the bankruptcy context, taxing authorities may collect interest on their claims at a special rate not available to other creditors. The Court does not agree, however, that these provisions lead to the conclusion that Congress intended to somehow exempt taxing authorities from the “reasonably equivalent value” element of a § 548 fraudulent conveyance claim, or to apply a different definition of “reasonably equivalent value” for taxing authorities.
31. As the Murphy court succinctly stated, “The Bankruptcy Code affords taxing authorities no exception, and a taxing authority is bound by the Bankruptcy Code to the same extent as any other creditor.” In re Murphy, 331 B.R. at 120-121, citing United States v. Whiting Pools, Inc., 462 U.S. 198, 209, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). While the City dismisses this finding as the Murphy court “brushing off’ the Bankruptcy Code’s special treatment of taxing authorities, the Murphy court’s next sentence belies that argument. The court went on to state, “As the Supreme Court held [in Whiting Pools ], ‘Congress carefully considered the effect of the new Bankruptcy Code on tax collection ... and decided to provide pro*318tection to tax collectors, such as the IRS, through grants of enhanced priorities for unsecured tax claims ... and by the non-discharge of tax liabilities.’ ” Id. at 121.
32. In other words, Congress could have made clear that it wanted to exempt taxing authorities from the “reasonably equivalent value” analysis, or subject them to a different analysis. It did not do so.
33. The City argues that if this Court were to conclude that “strict” foreclosures that take place within two years of the petition date constitute fraudulent conveyances, it would be ignoring the BFP court’s statement that equating fair market value to “reasonably equivalent value” would negatively effect the “essential state interest” in the security of mortgage titles, putting all property purchased at a foreclosure sale “under a federally created black cloud.” BFP v. Resolution Trust Corp., 511 U.S. at 544, 114 S.Ct. at 1764-65.
34. This argument ignores the fact that the BFP court was dealing with a context in which there had been some market forces at play — the forces at play in a mortgage foreclosure sale — which provided evidence of how a particular market would value that property. Further, it ignores the fact that a finding that a “strict foreclosure” constitutes a fraudulent transfer would not deprive the state of its interest in collecting its tax debts. As the Murphy court stated, “There is no dispute that the [taxing authority] has the right to enforce its lien and to collect on the debt- or’s tax obligation, and it would be able to do so in the context of debtor’s bankruptcy case. [The taxing authority] is not denied its very important interest in securing payment of outstanding tax obligations by reason of avoidance of the transfer to the extent necessary to protect other creditors.” In re Murphy, 331 B.R. at 121.
35. The Murphy court’s reference to the Bankruptcy Code’s requirement that courts must consider the impact of a pre-petition transfer on all creditors leads to a discussion of another of the City’s arguments. The City points to the Murphy court’s statement that “[c]ourts have consistently held that an avoidance action can only be pursued if there is some benefit to creditors and may not be pursued if it would only benefit the debtor.” Id. at 122, citing, e.g., Wellman v. Wellman, 933 F.2d 215, 218 (4th Cir.), cert. denied, 502 U.S. 925, 112 S.Ct. 339, 116 L.Ed.2d 279 (1991). The City speculates in footnote 2 of its post-argument brief that the Murphy decision likely was based on the fact that “the ‘fraudulent transfer’ avoidance ordered in that case was carefully limited to the amount necessary to satisfy creditors’ claims against the bankruptcy estate and that the remaining surplus funds were sufficiently large to satisfy the debtor’s tax arrearages to the taxing jurisdiction.... ”
36. It is true that the Murphy court made reference to the fact that “[t]here is no dispute that the recovery of any avoidance would benefit the estate in this case.” Id. The City assumes, however, that (a) the Murphy court would have reached a different conclusion had the parties disputed the benefits of any recovery to the estate, and (b) that there would be no benefits to the estate in the cases at bar if the Court were to order those conveyances avoided. There is nothing before the Court to support either one of those assumptions.
37. The Court has no way of knowing what the Murphy court would have done had the parties disputed the value the avoidance would bring to the estate. Perhaps, if the parties had agreed that the avoidance action would’ve produced no benefit for the estate, the court would have dismissed the case under Fed. R. Bankr.P. 7012. That, however, is speculation — this *319Court cannot know what might have happened under other circumstances.
38. Nor is there any evidence that the estates in these cases would not benefit from the avoidance actions. The City argues that because the debtors/plaintiffs, rather than the Chapter 13 standing trustees, are bringing these avoidance actions, it must be the case that the trustees have concluded that the actions would recover no benefits for the estates. This assumption is, in the Court’s view, faulty. This is not the first time that the Court has seen a trustee defer to a debtor in pursuing an avoidance action. In this district, there are two standing Chapter 13 trustees. The two trustees’ offices employ, combined, six lawyers. Those six lawyers must administer all of the Chapter 13 cases filed in the Eastern District of Wisconsin. In contrast, there are dozens of Chapter 13 debtors’ attorneys who practice in the Eastern District. If the trustee has a debtor’s attorney who is willing to spend the time and effort to litigate an action, it is not surprising that the trustee would defer to that attorney to conserve time and resources.
39. Further, the City’s argument ignores the fact that two of the three transfers involved rental properties — income-producing properties. Both plaintiff Williams’ property and plaintiff Gillespie’s property were rentals. If the transfers of those properties are avoided, there is an opportunity for revenue for the estates.
40. Of all of the City’s policy arguments, however, the one it emphasized most at every juncture — its original briefs, its reply briefs, oral argument, and its post-argument briefs — was a pragmatic argument. The City states in its post-argument brief that,
Were this Court to rule in Debtors’ favor, thus permitting property owners who have failed to pay their property taxes, often for many years, to regain their properties more than two years after those taxes have become overdue and delinquent simply by alleging post-judgment ‘fraudulent transfer’ under 11 U.S.C. § 548, the City would be deprived of its ability to effectively utilize Wis. Stat. § 75.521. This would overturn a status quo that has operated successfully since 1948 for the City and for a comparable period in much of the State of Wisconsin.
(See City’s post-argument letter brief at page 8, Williams, 11-2527, docket no. 22; Campbell, 11-2561, docket no. 24; Gillespie, 11-2597, docket no. 19.)
41. The City argues that if the Court finds in the debtors’ favor, it will have no choice but to either use the “tax deed” process provided in Wis. Stat. §§ 75.12-25.14, “a summary administrative process in the nature of a strict foreclosure ... [which] includes no judicial supervision or involvement and affords far less due process to a debtor than is afforded by Wis. Stat. § 75.521 (which makes it vulnerable to attack on constitutional due process grounds),” or to use the Wisconsin mortgage foreclosure process (Wis. Stat. Chapter 846). The City argues that the mortgage foreclosure process is too unwieldy, because currently taxing authorities are able to commence and prosecute tax lien foreclosures in larger urban areas “on a mass basis against large numbers of tax-delinquent parcels of real estate,” where as mortgage foreclosure proceedings “must be commenced and prosecuted against properties eligible for mortgage foreclosure on an individual basis.” Such individual prosecutions, the City argues, would be “prohibitively expensive.”
42. The City asserts,
It was precisely these considerations that led Wisconsin in 1947 to adopt Wis. Stat. § 75.521, an efficient and effective *320method of in rem tax foreclosure that was intended to: (a) encourage the full and timely payment of real estate taxes and thereby discourage tax delinquency; (b) afford ample due process to tax debtors and be invulnerable from due process and other forms of constitutional attack; and (e) be suitable for use in larger urban and suburban areas where the volume of tax foreclosures impel the employment of mass proceedings against large groups of tax-delinquent parcels as opposed to individual case proceedings against specific parcels.
The City concludes by stating that “[t]his Court should defer to the sound judgment of the Wisconsin Legislature in enacting Wis. Stat. 75.521, which has admirably promoted the stability of local government finances throughout the State of Wisconsin by affording an efficient mechanism for in rem foreclosure of tax liens while protecting the due process rights of tax-delinquent property owners.” Id. at 8-9.
43. This Court takes very seriously the suggestion that its ruling could dismantle an entire state’s property tax collection procedure. It also takes very seriously the suggestion that its ruling could be read as a gesture of disrespect toward the legislative branch of Wisconsin’s government. But while it takes those suggestions very seriously, the Court disagrees that its ruling would work either of those results.
44. The Murphy court was faced with a similar argument — that its ruling would dismantle the State of New York’s property tax collection procedure. The Murphy court replied to that argument as follows: “Although the result here impinges on a state regulatory scheme, it does so only to the extent that the scheme conflicts with the clear dictates of the Bankruptcy Code. The state’s interest in enforcing its unpaid tax obligations is recognized by the Bankruptcy Code and, in fact, given higher priority than other creditors’ interests.” In re Murphy, 331 B.R. at 122.
45. This reasoning applies equally in the current cases. By ruling that a “strict foreclosure” pursuant to Wis. Stat. § 75.521 constitutes a fraudulent transfer, the Court is not invalidating Wis. Stat. § 75.521. It is holding that, in the context of a bankruptcy proceeding, such a transfer is subject to a § 548 “reasonably equivalent value” analysis. Taxing authorities in Wisconsin, including the City, have available several tools which could allow them to continue to use the § 75.521 “strict foreclosure” procedure, while defending against a homeowner/debtor’s § 548 claim in the event that the homeowner files for bankruptcy.
46. First, taxing authorities could do what the plaintiffs claim the City had been doing up until about a year or so ago. The plaintiffs argue that in the past, when a homeowner with a tax foreclosure judgment against him filed for bankruptcy, the City would, of its own volition, return title to the debtor and allow the debtor to try to redeem the property through the Chapter 13 process. (This is what the defendants here propose to try to do.) When asked why the City had discontinued this (apparently informal) procedure, the attorneys for the City responded, “Whether such a past practice existed has no bearing upon whether the City is legally compelled to adhere to it.” (See City’s post-argument brief at page 2, Williams, 11-2527, docket no. 22; Campbell, 11-2561, docket no. 24; Gillespie, 11-2597, docket no. 19.)
47. The Court agrees that neither the City nor any other taxing authority is, as far as the Court knows, “legally compelled” to return title to a Chapter 13 debtor and allow the debtor to redeem in a potential fraudulent transfer context. The *321Court notes only that this might be one alternative that would allow taxing authorities to continue to use the “strict foreclosure process,” while avoiding fraudulent transfer litigation in the bankruptcy context.
48. Second, holding that, in these three cases, the transfers violated § 548(a)(1)(B) does not mean that every tax-lien foreclosure transfer, even if conducted via the “strict foreclosure” process, will constitute a fraudulent conveyance. Transfers that do not occur within the two-year period prior to the bankruptcy petition date are not fraudulent transfers. True, the taxing authority has no idea, when it makes the transfer, whether the homeowner eventually will file for bankruptcy relief, or when. It must assume that some homeowners may so file. But it is highly unlikely that everyone whose home is foreclosed due to tax liens will stampede the bankruptcy court just to avoid the transfer — bankruptcy is a long, intrusive and expensive process, and the consequences for abusing the system when one is not eligible for relief are serious ones.
49. Similarly, if the homeowner was not insolvent at the time of the transfer, or was not rendered insolvent by the transfer, there is no fraudulent transfer.
50. As this decision discusses, transfers made for “reasonably equivalent value” are not fraudulent transfers. Depending on the amount the homeowner owed in delinquent taxes, and the value — whether assessed, fair market, or forced-sale — of the property, some transfers that result from tax lien foreclosures may very well be for “reasonably equivalent value.”
51. In short, taxing authorities are free to litigate every element of a fraudulent transfer claim when a debtor chooses to bring one. This is another option available to taxing authorities, whereby they can continue to use the “strict foreclosure” procedure but defend against fraudulent transfer claims.
52. The City argues that, instead of using the above tools (or others that probably exist), a ruling against it in these cases will force taxing authorities to resort to either of two other procedures provided by Wisconsin law — the “tax deed” procedure or the mortgage foreclosure procedure.
53. The City argues that the “tax deed” procedure involves few due process safeguards (no judicial oversight, for example), and is vulnerable to constitutional attack. This Court is not familiar with the tax deed procedure, and in any event has no occasion to review or consider its constitutionality. The Court notes, however, that if it finds that the Wis. Stat. § 75.521 “strict foreclosure” procedure does not suffice for determining “reasonably equivalent value,” and if the “tax deed” procedure, like “strict foreclosure,” involves no competitive bidding procedure, then using that procedure will not assist taxing authorities in defending fraudulent transfer claims in bankruptcy court.
54. The City argues that the mortgage foreclosure procedure is too cumbersome and expensive to be effective, particularly in large urban/suburban areas which involve mass quantities of tax foreclosures. The Court does not know whether the mortgage foreclosure procedures are unworkable in a tax lien foreclosure context. If they are, however, that is not, in itself, a basis for ignoring the fact that under the overwhelming majority of case law, a transfer pursuant to a “strict foreclosure” proceeding that does not involve competitive bidding does not suffice for a determination of “reasonably equivalent value” pursuant to § 548(a)(1)(B).
Conclusion
55. The parties argued, and the Court agrees, that these adversary cases raise no *322genuine issue of material fact. The sole question for the Court to decide is the legal question of whether a “strict foreclosure” tax lien foreclosure proceeding that does not involve any competitively-bid sale procedure suffices to establish “reasonably equivalent value” for the purposes of § 548(a)(1)(B). Thus, the Court agrees that these cases are appropriate for resolution by summary judgment.
55. The case law overwhelmingly supports the conclusion that a tax foreclosure procedure which does not include some competitive sale process is not sufficient to establish “reasonably equivalent value” for purposes of 11 U.S.C. § 548(a)(1)(B).
56. The policy arguments posited by the City do not persuade the Court to the contrary.
57. Reduced to its basic premise, the City’s argument asks the Court to conclude that each of the properties transferred in these cases had a value “reasonably equivalent” to the amount the particular property’s owner owed in delinquent taxes.
58. The Court cannot conclude, either for the legal reasons outlined above or for common sense reasons, that:
* Kevin Williams’ property, with a value as assessed by the City near the time of transfer of $190,400 and a total estimated fair market value of $206,300, had a “reasonably equivalent value” of $14,518 — less than 8% of the City’s assessed value;
* The Campbells’ property, with a value as assessed by the City near the time of transfer of $109,500 and a total estimated fair market value of $115,900, had a “reasonably equivalent value” of $8,121.35 — less than 8% of the City’s assessed value; or
* Rita Gillespie’s property, with a value as assessed by the City near the time of transfer of $75,800 and a total estimated fair market value of $82,100, had a “reasonably equivalent value” of $12,070.77 — less than 16% of the City’s assessed value.
WHEREFORE, the Court hereby DENIES defendant City of Milwaukee’s motions for summary judgment in the three above-captioned cases. The Court further GRANTS the motions for summary judgment filed by plaintiffs Kevin C. Williams, Judson W. and Therese M. Campbell, and Rita Gillespie, and ORDERS that the transfers of the parcels of real property described in the complaints are avoided, and that the defendant must return title to those properties to the above-named plaintiffs, and allow them to attempt to redeem the properties via their Chapter 13 plans.
An order of judgment will follow. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494786/ | ORDER
BEN BARRY, Bankruptcy Judge.
This is a case about reaffirmation agreements; specifically, a reaffirmation agreement entered into between the debtors and Wells Fargo Bank, N.A. [Wells Fargo] that was filed with the Court over three years ago. After Wells Fargo attempted to collect the reaffirmed debt, the debtors reviewed the reaffirmation agreement they had voluntarily entered into to determine whether it complied with 11 U.S.C. § 524(c), the reaffirmation provisions of the bankruptcy code. On November 14, 2011, the debtors filed their Complaint Seeking Injunctive Relief Declaring Reaffirmation Agreement Null and Void and Seeking Damages For Violation of the Discharge Injunction. On December 14, 2011, Wells Fargo filed its answer. The Court heard the case on April 18, 2012, and then allowed both parties until May 15, 2012, to file simultaneous post-trial briefs. After considering the evidence presented and the parties’ briefs, the Court denies the relief requested by the debtors.
Jurisdiction
The Court has jurisdiction over this matter under 28 U.S.C. § 1334 and 28 U.S.C. § 157, and it is a core proceeding under 28 U.S.C. § 157(b)(2)(0). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
History
The debtors filed their chapter 7 voluntary petition on May 30, 2008, and included in their schedules a debt owed to Wells Fargo in the amount of $50,000, secured by a second mortgage on their residence located in Springdale, Arkansas. On their Statement of Intention, the debtors stated their intention to reaffirm the debt to Wells Fargo pursuant to § 524(c). On August 20, 2008, Wells Fargo filed an executed reaffirmation agreement on Official Form 240A relating to the subject debt; the reaffirmation agreement was signed by both debtors on July 21, 2008, the debtors’ counsel at the time on August 4, 2008, and a representative of Wells Fargo on August 20, 2008. The debtors received their discharge on September 15, 2008, approximately one month later.
According to the debtors’ complaint and Wells Fargo’s answer to the complaint, Wells Fargo brought suit against the debtors in state court in May 2010 for a money judgment on the debt allegedly owed to Wells Fargo.1 The debtors failed to respond to the suit and the state court entered a default judgment against the debtors and in favor of Wells Fargo in the approximate amount of $53,000 in September 2010. A corrected default judgment was entered in the state court in April 2011, and in July 2011 Wells Fargo initiated a Writ of Garnishment to garnish the wages of both debtors to enforce the default judgment. Present counsel for the debtors moved to reopen the debtors’ bankruptcy case in September 2011 and filed this adversary proceeding in November 2011.
Debtors’ Arguments
The debtors presented three arguments related to the reaffirmation agreement. Their first argument is that the reaffirmation agreement between the debtors and *325Wells Fargo is legally deficient. The debtors’ counsel succinctly presented what he believed to be the legal deficiencies during his closing argument. Specifically, the debtors argue that the reaffirmation agreement fails to comply with the following sections of the bankruptcy code:
1. § 524(k)(3)(C)(ii), which relates to disclosure of the total amount of debt being reaffirmed;
2. § 524(k)(3)(E)(i), which relates to the disclosure of interest rates;
3. § 524(k)(3)(F), which relates to variable rate transactions; and
4. § 524(k)(3)(H), which relates to repayment amounts and repayment schedules.
Additionally, the debtors believe that the reaffirmation agreement contains a high level of ambiguity.
The debtors’ second argument is that the reaffirmation agreement is deceptive as to Martha Gomez because the agreement does not disclose on its face that Martha Gomez was being asked to reaffirm “an unsecured loan.” According to the debtors, “Wells Fargo would have known that preparing the Agreement in this manner would cause an unsecured debtor to reasonably believe that the loan was secured by her property.”
Finally, the debtors argue that because the reaffirmation agreement fails to meet the requirements of § 524(c), it is without effect and the underlying debt was properly discharged. As a result, the post-discharge collection activity by Wells Fargo is a violation of the discharge injunction under § 524(a).
Findings of Fact and Conclusions of Law
Deficient Reaffirmation Agreement
The reaffirmation agreement that was filed with the Court and is the subject matter of this lawsuit was presented on the official form promulgated by the Administrative Office of the United States Courts — Form 240A — Reaffirmation Agreement (1/07). In April 2010, the Administrative Office promulgated an additional official reaffirmation agreement form. The new form is titled Form B240A; the original form, which was used by Wells Fargo, is now titled Form 240A/B ALT. The original form strictly complies with the provisions of § 524(c)(2) and (k); the new form only generally complies with the provisions of § 524(c)(2) and (k) but appears to be written to make it easier to understand. The introduction in 2010 of the new Official Form B240A belies an argument that the statutory requirements for disclosure under § 524(k) are to be strictly construed. According to a leading bankruptcy treatise, “[ijndeed, the Reaffirmation Form promulgated by the Administrative Office of the United States Courts deviates somewhat from the language in the statute. Presumably, a creditor properly using this form would face little risk of litigation.” 4 Collier on Bankruptcy ¶ 524.04[1], at 524-44-45 (16th ed.)(2011).2
*326The debtors’ primary argument with regard to the reaffirmation agreement is that the agreement is legally deficient and, therefore, not binding on the debtors. The four deficiencies in the agreement enumerated specifically by the debtors’ counsel related to § 524(k)(3)(C), (E), (F), and (H), which the Court will address below.
§ 524(k) (3) (C)(ii)
Under this subsection, the debtors argue that Wells Fargo was required to disclose separately the amount of debt being reaffirmed and the total fees and costs being reaffirmed in the reaffirmation agreement. Section 524(k)(3)(C) relates to the total amount of debt being reaffirmed and states:
(3) The disclosure statement required under this paragraph shall consist of the following:
(C) The “Amount Reaffirmed,” using that term, which shall be—
(i) the total amount of debt that the debtor agrees to reaffirm by entering into an agreement of the kind specified in subsection (c), and
(ii) the total of any fees and costs accrued as of the date of the disclosure statement, related to such total amount.
11 U.S.C. § 524(k)(3)(C). According to this subsection, the “Amount Reaffirmed” includes the total amount of debt the debt- or agrees to reaffirm and the total of any fees and costs as of the date of the reaffirmation agreement. The statute does not include a requirement that the amount of debt and the fees and costs be segregated. The next subsection, § 524(k)(3)(D), requires two additional statements, the first of which is “The amount of debt you have agreed to reaffirm.” The Wells Fargo reaffirmation agreement consists of a completed Official Form 240A (now Form 240A/B ALT). The phrase “Amount Reaffirmed” appears on the first page in bold-ed, underlined, and capitalized letters, and is followed by the required phrase: “The amount of debt you have agreed to reaffirm,” and lists the amount of $50,964.84. Beneath that line, in bolded and italicized lettering, appears the phrase: “The amount of debt you have agreed to reaffirm includes all fees and costs (if any) that have accrued as of the date of this disclosure.” The statute requires no more and the Court finds that Wells Fargo complied with the requirements of § 524(k)(3)(C).
§ 524(k) (3) (E)(i)
Under this subsection, the debtors argue that the interest rate disclosed on the reaffirmation agreement must be disclosed in a specific manner with a clear distinction between Annual Percentage *327Rate and simple interest. In relation to this argument, the debtors argue that the loan consists primarily of a fixed rate advance, not an open end credit plan, and that the wrong disclosure was provided. Section 524(k)(3)(E)(i) relates to the disclosure of interest rates in the agreement and states:
(3) The disclosure statement required under this paragraph shall consist of the following:
(E) The “Annual Percentage Rate”, using that term, which shall be disclosed as—
(i) if, at the time the petition is filed, the debt is an extension of credit under an open end credit plan, as the terms “credit” and “open end credit plan” are defined in section 103 of the Truth in Lending Act, then—
(I) the annual percentage rate determined under paragraphs (5) and (6) of section 127(b) of the Truth in Lending Act, as applicable, as disclosed to the debtor in the most recent periodic statement prior to entering into an agreement of the kind specified in subsection (c) or, if no such periodic statement has been given to the debtor during the prior 6 months, the annual percentage rate as it would have been so disclosed at the time the disclosure statement is given to the debtor, or to the extent this annual percentage rate is not readily available or not applicable, then
(II) the simple interest rate applicable to the amount reaffirmed as of the date the disclosure statement is given to the debtor, or if different simple interest rates apply to different balances, the simple interest rate applicable to each such balance, identifying the amount of each such balance included in the amount reaffirmed, or
(III)if the entity making the disclosure elects, to disclose the annual percentage rate under subclause (I) and the simple interest rate under subclause (II);
11 U.S.C. § 524(k)(3)(E)(i). Wells Fargo testified that the SmartFit Home Equity Account Agreement entered into by the debtors was an open end credit plan consisting of two components — the primary loan on which the note was written (the account ending in 1998) and a sub-account containing a fixed-rate advance (the account ending in 1001). Because the debt is an extension of credit under the account ending in 1998 and is an open end line of credit, subsection 524(k)(3)(E)(i) applies. Under this subsection, the creditor is allowed to disclose the annual percentage rate of the reaffirmed debt either under subclause (I), subclause (II), or as a combination of both. Proceeding under sub-clause (I), Wells Fargo disclosed the annual percentage rate of the open end credit plan (the primary loan) as 7.87%. Wells Fargo then disclosed the simple interest rate of the fixed-rate advance account under subclause (II) as 11.00% and restated the annual percentage rate of the primary loan. These interest rates are the same rates that were disclosed on the May 31, 2008 statement the debtors received approximately one month prior to executing the reaffirmation agreement. (Defs.’ Ex. 1.) Because the interest rate of the primary account and the sub-account were each disclosed, as required by the code, the Court finds that Wells Fargo complied with the requirements of § 524(k)(3)(E).
§ 524(k)(3)(F)
Under this subsection, the debtors argue that because the debt includes a variable rate and a fixed rate, the statement re*328quired under § 524(k)(3)(F) is ambiguous. Section 524(k)(3)(F) concerns variable rate transactions and states:
(3) The disclosure statement required under this paragraph shall consist of the following:
(F) If the underlying debt transaction was disclosed as a variable rate transaction on the most recent disclosure given under the Truth in Lending Act, by stating “The interest rate on your loan may be a variable interest rate which changes from time to time, so that the annual percentage rate disclosed here may be higher or lower.”
11 U.S.C. § 524(k)(3)(F). On page three of the Wells Fargo reaffirmation agreement, the following statement appears:
c. If the underlying debt transaction was disclosed as a variable rate transaction on the most recent disclosure given under the Truth in Lending Act:
The interest rate on your loan may be a variable interest rate which changes from time to time, so that the annual percentage rate disclosed here may be higher or lower.
As explained above, the underlying debt transaction between Wells Fargo and the debtors consisted of a variable rate open end credit plan that included a sub-account with a fixed rate advance. Because there is no difference in the statement that appears on Wells Fargo’s reaffirmation agreement and what is required under the code, the Court finds that Wells Fargo complied with the requirements of § 524(k)(3)(F).
§ 524(k)(3)(H)
Finally, under this subsection, the debtors argue that Wells Fargo was required to use one of three optional statements and disclose the amount of the monthly payment. Section 524(k)(3)(H) relates to repayment schedules and amounts and states:
(3) The disclosure statement required under this paragraph shall consist of the following:
(H) At the election of the creditor, a statement of the repayment schedule using 1 or a combination of the following—
(i) by making the statement: ‘Your first payment in the amount of $_is due on _ but the future payment amount may be different. Consult your reaffirmation agreement or credit agreement, as applicable’, and stating the amount of the first payment and the due date of that payment in the places provided;
(ii) by making the statement: ‘Your payment schedule will be:’, and describing the repayment schedule with the number, amount, and due dates or period of payments scheduled to repay the debts reaffirmed to the extent then known by the disclosing party; or
(iii) by describing the debtor’s repayment obligations with reasonable specificity to the extent then known by the disclosing party.
11 U.S.C. § 524(k)(3)(H). As stated in the statute, subsection 524(k)(3)(H) is optional “at the election of the creditor.” In fact, the Official Form used by Wells Fargo contains the following statement in italics: “Optional — At the election of the creditor, a repayment schedule using one or a combination of the following may be provided.” The Official Form then sets forth three options separated individually by the word “or.” The first option is the following statement: “Your first payment in the amount of $_is due on_ (date) but the future payment amount may be differ*329ent. Consult your reaffirmation agreement or credit agreement, as applicable.” This statement comports with the first option under subsection 524(k)(3)(H). The second option is the statement: “Your payment schedule will be: — (number) payments in the amount of $_each, payable (monthly, annually, weekly, etc.) on the _(day) of each_ (week, month, etc.), unless altered later by mutual agreement in writing.” This statement comports with the second option under subsection 524(k)(3)(H). Finally, the third option allows for a “reasonably specific description of the debtor’s repayment obligations to the extent known by the creditor or creditor’s representative.” This statement comports with the third option under subsection 524(k)(3)(H).
Wells Fargo opted to include a reasonably specific description of the debtors’ repayment obligations in its reaffirmation agreement, the third option described above. It stated specifically, under the heading Repayment Schedule, the following requirements:
The Debtor(s) agrees to pay Creditor the sum of $50,964.84, plus interest thereon computed from 05/30/2008 on Account Number xxxx071998 & xxxx071001. The interest rate on Account Number xxxx071998 as of the date of this Reaffirmation Agreement is 7.87% per annum. The interest rate, however, on Account Number xxxx071998 shall vary according to the terms set forth in the Debtor(s)’ loan or line of credit agreement. The amount of the Debtor(s)’ minimum monthly payment shall be calculated according to the terms set forth in the Debtor(s)’ loan or line of credit agreement and shall be applied to interest only. The Debtor(s)’ first monthly payment shall be due on 06/20/2008 and continuing on the same day of each succeeding month thereafter until 26-JUN-47 when the entire outstanding principal balance, plus interest, on Account Number xxx071998 shall be due and payable in full.
The interest rate on Account Number xxxx071001 as of the date of this Reaffirmation Agreement is 11.00% per an-num. The amount of the Debtor(s)’ minimum monthly payment shall be calculated according to the terms set forth in the Debtor(s)’ loan or line of credit agreement and shall be applied to interest only. The Debtor(s)’ first monthly payment shall be due on 06/20/2008 and continuing on the same day of each succeeding month thereafter until 20-July-14 when the entire outstanding principal balance, plus interest, on Account Number xxxx071001 shall be due and payable in full.
Even though the disclosure of a repayment schedule appears to be optional under the code, Wells Fargo included a specific description of the debtors’ obligations in its reaffirmation agreement, referring directly to the debtors’ loans or line of credit agreements. The Court is not aware of a specific requirement in the code that the creditor disclose the amount of each monthly payment, although that is typically included in reaffirmation agreements.3 Accordingly, the Court finds that Wells Fargo complied with the optional requirements of § 524(k)(3)(H).
Related to this subsection, the debtors also argue that without the disclo*330sure of a monthly payment, it would have been difficult for the Court to determine whether there was a presumption of an undue hardship as defined by the code. Hence, the debtors argue that the Court should have held a hearing to determine whether the reaffirmation should have been approved. See 11 U.S.C. § 524(k)(3)(J)(i)(6). However, the Court believes that the attorney certification stating that the agreement does not impose an undue hardship resolves that issue. Without an undue hardship, court review is not required and may not even be allowed. There is no provision in the code that permits a court to scrutinize a reaffirmation agreement when the debtors are represented by counsel and there is not a presumption of undue hardship. Bay Federal Credit Union v. Ong (In re Ong), 461 B.R. 559, 563 (9th Cir. BAP 2011). Without an undue hardship, the reaffirmation agreement is effective upon filing if the other provisions of § 524(c) are met. Id. at 562 (holding that once the requirements of § 524(c) are met, the agreement is effective and enforceable upon filing, unless there is a presumption of undue hardship).
Based on the above findings, the Court concludes as a matter of law that the reaffirmation agreement that is the subject of the debtors’ adversary proceeding complies with the statutory requirements of § 524(c) and (k) and the Court denies any relief under this claim.
Deceptive Reaffirmation Agreement
The debtors’ second argument is that the reaffirmation agreement was deceptive as to Martha Gomez because she was being asked to reaffirm “an unsecured loan.” As stated earlier, the reaffirmation agreement that was filed with the Court was the official form promulgated by the Administrative Office of the United States Courts. This particular form includes all of the required provisions under § 524(c) and (k), including the required certification by the debtors’ counsel that
(A) such agreement represents a fully informed and voluntary agreement by the debtor;
(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal effect and consequences of—
(i) an agreement of the kind specified in this subsection; and
(ii) any default under such an agreement;
11 U.S.C. § 524(c)(3). This certification by the debtors’ counsel negates the debtors’ argument that the reaffirmation agreement was deceptive as to Martha Gomez. Neither debtor was under an obligation to enter into the voluntary reaffirmation agreement and, according to their counsel’s certification, they were advised of the legal effect of the reaffirmation agreement. Even though the deed to the subject property reflected only Marcelo Gomez as the Grantee, Martha Gomez was obligated on the debt that is the subject of the reaffirmation agreement and chose to reaffirm that obligation.4
*331Marcelo Gomez testified that he and Martha Gomez entered into the reaffirmation agreement because they wanted to keep the real property, which was their home. There was no allegation that Martha Gomez was coerced into signing the reaffirmation agreement or that the debtors’ counsel acted improperly with regard to the reaffirmation agreement. See In re Ong, 461 B.R. at 563 (stating that the only time a court should concern itself with an attorney-certified reaffirmation agreement when there is no presumption of undue hardship is when there has been a Rule 9011 violation by the attorney). Accordingly, the Court finds that because Martha Gomez was represented by counsel when she entered into the agreement, the debtors’ argument that the reaffirmation agreement was deceptive as to Martha Gomez fails and the Court denies any relief under this claim.
Violation of Discharge Injunction
The debtors’ third argument is that Wells Fargo violated the discharge injunction under § 524(a). This argument is premised upon the reaffirmation agreement being invalid because it failed to meet the requirements of § 524(c). Based on the Court’s earlier conclusion that the reaffirmation agreement complies with § 524(c) as a matter of law, the debtors’ third argument is moot and the Court denies any relief under this claim.
Conclusion
For the reasons stated above, the Court concludes as a matter of law that the reaffirmation agreement between Wells Fargo and the debtors that was filed in this case on August 20, 2008, complied with the requirements of § 524(c) and is a valid reaffirmation agreement. Accordingly, the debtors’ Complaint Seeking Injunctive Relief Declaring Reaffirmation Agreement Null and Void and Seeking Damages For Violation of the Discharge Injunction is denied.
IT IS SO ORDERED
. Neither party introduced the state court complaint, answer, default judgment, or corrected default judgment. However, the factual allegations contained in the debtors' complaint are not in dispute and are recited here.
. The debtors reference five cases in their post-trial brief for the proposition that reaffirmation agreements must be construed strictly to preserve the debtors' fresh start. All of the cases reference § 524(c), which states that a reaffirmation agreement "is enforceable only to any extent enforceable under applicable nonbankruptcy law ... only if ...” the six provisions listed in the subsection are adhered to. 11 U.S.C. § 524(c) (emphasis added). However, only one of the cases cited references § 524(c)(2), the provision that requires subsection 524(k) disclosures to be made in the reaffirmation agreement.
Four of the five cases refer generally to § 524(c) and (d), and only one of those was decided after the Administrative Office published the new official form reaffirmation agreement that generally — not strictly — complies with the disclosures required under § 524(k). That case, a recent decision out of *326Iowa, did not address the disclosure requirement under § 524(c)(2) and (k); rather, it discussed a court’s authority to approve a reaffirmation agreement that was entered into after the debtors received their discharge. In re McKeever, No. 11-04187-als7, 2012 WL 1302621 (Bankr.S.D.Iowa April 16, 2012). The requirement for execution prior to discharge appears under § 524(c)(1). Because the court found that the debtors did not make their agreement prior to their discharge, the court held that the parties did not comply with § 524(c)(1) and the reaffirmation agreement was not valid.
The one case that addresses the disclosures required under § 524(c)(2) and (k) focuses on the lack of disclosures provided for in the parties’ reaffirmation agreement, not the quality of those disclosures. See In re Lee, 356 B.R. 177 (Bankr.N.D.W.Va.2006). Even though the parties in that case each agreed to the reaffirmation of the debt, the court held that the reaffirmation agreements that were filed with the court were “pervasively defective'' and lacked many of the required disclosures. Id. at 181.
. In this instance, prior to entering into the reaffirmation agreement, the debtors authorized Wells Fargo to continue sending the debtors monthly statements for both accounts. (Defs.’ Ex. 4.) The statements included the interest rates and the amount of the current payment and the debtors received a statement approximately one month prior to executing the reaffirmation agreement. (Defs.’ Ex. 1.)
. The warranty deed that transferred the real property to Marcelo Gomez identified Marcelo Gomez as a married person. Likewise, the mortgage that secured the reaffirmed obligation also identified Marcelo Gomez as a married person. Martha Gomez executed the mortgage to Wells Fargo with a notation following her signature that she was "signing as nonvested spouse,” apparently recognizing her interest in the property as Marcelo Gomez's spouse. Finally, and of particular relevance to the reaffirmation agreement before the Court, the SmartFit Home Equity Account Agreement indicates clearly on the first page that the borrowers are Marcelo Gomez and Martha M. Gomez, obligating both debtors on *331the note. This Agreement is the subject of the reaffirmation agreement and is the debt obligation that the debtors reaffirmed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492761/ | *277
ORDER SUSTAINING OBJECTION TO CLAIM
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on August 26, 1998, on the Debtor’s and Chrysler Financial Corporation’s (Chrysler) Objections to the Claims of GE Capital Auto Financial Services (GE Capital), Claim Nos. 68 and 78. On February 19, 1998, GE Capital filed a secured proof of claim (Claim No. 68) in the amount of $618,604. On March 2, 1998 it amended its proof of claim by providing documentary proof in support of its claim (Claim No. 78). As security, GE Capital claims an interest in approximately 32 vehicles which the Debtor sold and failed to remit the sale proceeds to GE Capital. It is agreed that none of the vehicles in question are in the Debtor’s possession and that the proceeds from the sale of these vehicles are not traceable.1 The Debtor and Chrysler object to the claims, arguing that GE Capital is not a secured creditor, since the alleged collateral is not property of the estate.
We agree with the objectors that the answer to this question lies in Section 606(a) of the Code, entitled “Determination of Secured Status,” which provides:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property....
11 U.S.C. § 506(a) (emphasis added). Because the estate has no interest in the vehicles in question, it necessarily follows that GE Capital is not a secured creditor of this Debtor. Additionally, because the proceeds from these vehicles are not traceable or identifiable as estate property, there is nothing in the estate to which GE Capital’s security interest may attach. Accordingly, for the reasons argued by Chrysler and the Debtor in their Objections, GE Capital’s claims are allowed as unsecured claims against the Debtor in the amount of $518,604.2 Because GE Capital did not assert a priority claim, we will not entertain arguments on its behalf that it may be entitled to some type of “equitable priority lien” on account of the Debtor’s pre-petition misdeeds.
Enter judgment consistent with this Order.
. All but two vehicles in question were sold pre-petition by the Debtor. The two vehicles sold post-petition are the subject of separate adversary proceedings and the sale proceeds have been segregated pending the outcome of that litigation. This Order is not intended to affect that litigation or GE Capital’s claim to those proceeds.
. It is unclear whether this amount includes the proceeds at issue in the pending adversary proceeding concerning the two vehicles transferred post-petition. If GE Capital’s claim includes those amounts, and if it prevails in that litigation, this claim will be reduced by the amount of such recovery. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492763/ | OPINION
JOHN E. RYAN, Bankruptcy Judge.
I. INTRODUCTION
On February 23, 1998, the chapter 7 trustee, Heidi K. Leanders (“Trustee”), filed a *480complaint objecting to Ismail Yassai’s (“Debtor”) discharge under Bankruptcy Code (the “Code”)1 § 727. In connection with her discovery efforts, Trustee served subpoenas (the “Third-Party Subpoenas”) on three banks seeking deposition testimony and financial information pertaining to Debtor, his brother Jafar Yassai, and various business entities in which Debtor allegedly has an interest, including Lantech Group, Inc.
On June 18, 1998, Jafar Yassai and Lan-tech Group, Inc. (collectively, “Movants”) filed a motion seeking to quash the Third-Party Subpoenas, or in the alternative, seeking protective orders (the “Motion”). After a hearing on July 9, 1998, I took the matter under submission.
On July 30, 1998, I ruled from the bench denying the Motion and Trustee’s request for attorney’s fees incurred in opposing the request for protective orders. On August 5, 1998, the order (the “Order”) denying the Motion and the request for attorney’s fees was entered. This opinion contains findings of facts and conclusions of law consistent with my rulings from the bench on July 30, 1998.
II.JURISDICTION
This court has jurisdiction over this case pursuant to 28 U.S.C. § 157(b)(1) (bankruptcy courts may hear cases arising under title 11) and 28 U.S.C. § 1334(b) (district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11). This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J). Venue is proper in this court pursuant to 28 U.S.C. § 1409(a).
III.STATEMENT OF FACTS
On November 17, 1997, Debtor filed a voluntary chapter 7 petition. On February 23, 1998, Trustee filed the complaint (the “Complaint”) objecting to Debtor’s discharge pursuant to Code §§ 727(a)(2), (a)(3), (a)(4), and (a)(5).
On May 20, 1998, Trustee served the Third-Party Subpoenas on Sanwa Bank California (Rosemead, CA), Sanwa Bank California (Mission Viejo, CA), and Citizens Business Bank (Claremont, CA) (collectively, the “Banks”). The Third-Party Subpoenas required depositions and production of documents relating to the financial affairs of Debtor, Debtor’s brother Jafar Yassai (with whom Debtor engaged in various prepetition business transactions), and property or entities in which Debtor had an interest prepetition.2
On June 18, 1998, Movants filed the Motion. On June 29, 1998, Trustee filed an opposition (the “Opposition”) to the Motion. On July 7, 1998, Debtor filed a reply (the “Reply”) to the Opposition. After a hearing on July 9, 1998, I took the matter under submission.
On July 30, 1998, I ruled from the bench and denied the Motion and request for attorney’s fees. On August 5, 1998, the Order was entered. This opinion reflects my findings of facts and conclusions of law consistent with my ruling from the bench on July 30, 1998.
IV.DISCUSSION
A. The Motion to Quash.
1. Movants Lack Standing To Bring The Motion Pursuant to Federal Rule of Civil Procedure 45(c)(S)(A).
The Motion to Quash is brought under Federal Rule of Civil Procedure (“FRCP”) 45(c)(3)(A)(iii) and (iv),3 which provides in pertinent part that “[o]n, timely motion, the court by which a subpoena was issued shall quash or modify the subpoena if it ... (iii) requires disclosure of privileged or *481other protected matter and no exception or waiver applies, or (iv) subjects a person to undue burden.” Fed.R.Civ.P. 45(c)(3)(A). Subparagraph (c)(3)(A), however, does not specify whether persons who are not subject to the subpoena and are not parties to the action, such as Movants, have standing to bring forth such a motion. Furthermore, neither the Ninth Circuit nor any other circuit court has addressed whether a non-party has standing to move to quash or modify a subpoena which is not directed at them under FRCP 45(c).
Movants assert that a person has standing to bring a motion to quash a subpoena served on another person pursuant to FRCP 45 if the subpoena infringes on the movant’s legitimate interests. However, the legitimate interests test is inapplicable. The test has only been applied in criminal proceedings where the FRCP do not apply. See United States v. Raineri, 670 F.2d 702, 712 (7th Cir.1982); United States v. Tomison, 969 F.Supp. 587, 592 n. 12, 596 (E.D.Cal.1997).
It is by now a “ ‘familiar canon of statutory construction that the starting point for interpreting a statute is the language of the statute itself.’” O’Hara v. Teamsters Union Local, 151 F.3d 1152, 1160 (9th Cir.1998) (quoting Continental Cablevision, Inc. v. Poll, 124 F.3d 1044, 1048 (9th Cir.1997) (citations omitted)). When a court looks to the language of a statute to interpret its meaning, the court “ ‘derive[s] meaning from the context, and this requires reading the relevant statutory provisions as a whole.’ ” Pension Benefit Guar. Corp. v. Carter & Tillery Enterprises, 133 F.3d 1183, 1186 (9th Cir.1998) (quoting Carpenters Health and Welfare Trust Funds for Cal. v. Robertson (In re Rufener Constr., Inc.), 53 F.3d 1064, 1067 (9th Cir.1995)).
Movants bring the Motion only under FRCP 45(c)(3)(A). Subparagraph (c)(3)(A) permits a court to quash or modify the subpoena upon the showing that one of the four requirements listed at FRCP 45(c)(3)(A)(i)-(iv) is met. FRCP 45(c)(3)(B) also grants a court the authority to modify or quash a subpoena if one of three requirements listed at FRCP 45(c)(3)(B)(i)-(iii) is met. However, FRCP 45(c)(3)(B), unlike FRCP 45(c)(3)(A), expressly permits the court to quash or modify a subpoena “to protect a person subject to or affected by the subpoena.” Fed.R.Civ.P. 45(c)(3)(B) (emphasis added). FRCP 45(c)(3)(A) does not similarly extend the scope of the court’s power to grant a motion to quash or modify to parties who are merely “affected by,” but not “subject to” the subpoena. The Supreme Court has held that where particular language is included “‘in one section of a statute but omitt[ed] in another section of the same Act,’ ” it is generally presumed the inclusion and exclusion was “intentional ] and purposeful ]....” Brown v. Gardner, 513 U.S. 115, 120, 115 S.Ct. 552, 130 L.Ed.2d 462 (1994) (quoting Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983) (citations and internal quotation marks omitted)). If the drafters of the FRCP had intended FRCP 45(c)(3)(A) to apply to parties who are not directly subject to the subpoena, they would have so stated.
Additionally, in construing the statute section in its entirety, the Ninth Circuit has instructed that I can consider “the title of the section in which the relevant language appears.” Hanford Downwinders Coalition, Inc. v. Dowdle, 71 F.3d 1469, 1475 (9th Cir.1995) (citing Greyhound Corp. v. United States, 495 F.2d 863, 868 (9th Cir.1974); Oregon Pub. Util. Comm’n v. I.C.C., 979 F.2d 778, 780 (9th Cir.1992); United States v. Cha, 837 F.2d 392, 394 (9th Cir.1988)). The Ninth Circuit has noted that statutory titles “can be very useful tool[s]” in resolving the ambiguity of statutes. Greyhound Corp., 495 F.2d at 868 (citation omitted). See also Oregon Pub. Util. Comm’n, 979 F.2d at 780 (noting that although section title may not control the plain meaning of a statute, the title may “aid in contriving ambiguities in [a] statute.”); Cha, 837 F.2d at 394.
Here, the title of FRCP 45(c) is “Protection of Persons Subject to Subpoenas.” This suggests that FRCP 45(c) is designed primarily to protect persons from subpoenas that are served upon them. Indeed, FRCP 45(c)(1) and (e)(2) both only pertain to the party issuing the subpoena and the rights of the person subject to the subpoena. FRCP 45(c)(1) imposes a duty upon the party or *482attorney issuing the subpoena to take reasonable steps to avoid imposing an undue burden or expense on a person subject to the subpoena. FRCP 45(c)(2) outlines the procedures by which a person who is commanded to produce may object to the subpoena. Where the drafters intended that the scope of FRCP 45(c) should be broader, they have done so explicitly by providing the court the power to quash or modify subpoenas to protect a person subject to or affected by the subpoena, as in FRCP 45(c)(3)(B).
Nevertheless, Movants urge the court to look to Broadcort Capital Corp. v. Flagler Secs., Inc., 149 F.R.D. 626, 628 (D.Col.1993), for guidance on this issue. Factually, the Broadcort case is similar. In Broadcort, the movant was a non-party who was not subject to the subpoena. The movant sought to quash or modify the subpoena directed at another non-party. The party who issued the subpoena argued that the movant lacked standing under FRCP 45(c)(3)(A). Id. The court held that the movant had standing on grounds of privilege and the breadth of the subpoena. Id. at 628-29.
However, I am reluctant to rely upon Broadcort because the court did not support its holding with an analysis of the language of FRCP 45(c). Rather, the judge relied on the Advisory Committee Note to this section, which states: “Subparagraph (c)(3)(A)(iv) requires the court to protect all persons from undue burden imposed by the use of the subpoena power.” Fed.R.CivP. 45(c) advisory committee’s note. With that, the court concluded that a “court has the power and duty to examine all appropriate issues dealing with persons affected by [a] subpoena. ...” Broadcort, 149 F.R.D. at 628 (emphasis added).
In my view, this is an impermissible expansion of FRCP 45(c)(3)(A)(iv) because it equates, without further explanation, the term “a person,” as stated in FRCP 45(c)(3)(A)(iv), with “all persons,” irregardless of whether they were served with a subpoena. When read in context, the Advisory Committee Note states that the purpose of FRCP 45(c)(3) is to protect a witness from misuse of the subpoena power. Fed.R.Civ.P. 45(c) advisory committee’s note. When discussing FRCP 45(c)(3)(A), the Advisory Committee Note continually refers to protection of the “witness,” rather than “all persons.” Id. However, for the sake of thoroughness, I will consider the Motion on its merits.
2. Even if Movants Have Standing, Mov-ants Have No Privilege to Assert.
FRCP 45(c)(3)(A)(iii) authorizes the court to quash or modify the subpoena if it requires disclosure of privileged or other protected matter. Movants have not demonstrated that the information sought by Trustee is entitled to such protection. Movants claim that the subpoenas infringe upon their right to protect private financial information under the California Constitution, Article I, § 1, which sets forth a general right to privacy. Cal. Const., art. I, § 1. However, Trustee is correct that federal law governs this dispute and does not recognize such privilege or protection.
Federal Rule of Evidence (“FRE”) 1101 provides that the rule of evidentiary privilege of the FRE applies to all stages of proceedings before bankruptcy judges.4 Fed.R.Evtd. 1101(a) & (c). Under the FRE, “evidentiary privileges in federal question cases are governed by federal common law.” Dole v. Milonas, 889 F.2d 885, 889 n. 6 (9th Cir.1989) (citing United States v. Zolin, 491 U.S. 554, 109 S.Ct. 2619, 105 L.Ed.2d 469 (1989); see also United States v. Hodge and Zweig, 548 F.2d 1347, 1352-53 (9th Cir. 1977)); Religious Tech. Ctr. v. Wollersheim, 971 F.2d 364, 367 (9th Cir.1992) (holding that in federal question cases, the law of privilege is governed by federal common law). Federal question jurisdiction extends in those cases to which “a well pleaded complaint establishes ... ‘that federal law creates fa] cause of action....’” Easton v. Crossland Mortgage Corp., 114 F.3d 979, 982 (9th Cir.1997) *483(quoting Franchise Tax Bd. v. Construction Laborers Vacation Trust, 468 U.S. 1, 27-28, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983)). See also Crandal v. Ball, Ball, and Brosamer, Inc., 99 F.3d 907, 909 (9th Cir.1996) (holding that “[f]ederal question jurisdiction exists for ‘civil actions arising under’ federal statutes”) (citing 28 U.S.C. § 1331).
Here, Trustee brought forth four causes of action, all of which are created by federal law. Trustee filed the Complaint seeking to deny Debtor a discharge under Code §§ 727(a)(2), (a)(3), (a)(4) & (a)(5). Therefore, federal law applies as to whether or not Movants can assert a privilege under FRCP 45(c)(3)(A).
The Ninth Circuit has stated that it knew “of no authority which recognizes a privilege for communications between bank and depositor” and “deeline[d] to create such a privilege_” Harris v. United States, 413 F.2d 316, 319 (9th Cir.1969). In subsequent cases, courts have uniformly held that the “banker depositor privilege was not recognized at common law” and “does not exist in the Federal Courts.” Delozier v. First Nat’l Bank of Gatlinburg, 109 F.R.D. 161, 163 (E.D.Tenn.1986) (citing United States v. Prevatt, 526 F.2d 400, 402 (5th Cir.1976); Harris v. United States, 413 F.2d 316, 317 (9th Cir.1969)); Stark v. Connally, 347 F.Supp. 1242, 1248 (N.D.Cal.1972), modified on other grounds, 416 U.S. 21, 94 S.Ct. 1494, 39 L.Ed.2d 812 (1974); Rosenblatt v.orthiuest Airlines, Inc., 54 F.R.D. 21, 23 (S.D.N.Y.1971); Societe Internationale v. McGranery, 111 F.Supp. 435, 443 (D.D.C.1953). See also Sneirson v. Chemical Bank, 108 F.R.D. 159, 162 (D.Del.1985) (holding that a claim of privilege to bank records “pursuant to federal public policy [was] without merit”); United States v. First Nat’l Bank, 1978 WL 4535, at *1 (N.D.Ga. July 24, 1978); Young v. United States Dep’t of Justice, 882 F.2d 633, 642 (2nd Cir.1989) (stating in dictum that “courts have not recognized a banker-client testimonial privilege”).
In addition, whatever right to privacy Movants may have in the information sought pursuant to the subpoenas is insufficient to prevent discovery of that information. The Ninth Circuit has stated that “[t]he cases hold that depositors have no rights in the records of their bank, and that the records may be subpoenaed over the objection of the depositor, notwithstanding the fact that the records concern the account of the depositor” and declined to limit the holding of these eases. Harris, 413 F.2d at 318 (citations omitted). Additionally, assuming that a state constitution creates “a right to privacy in financial records, such state privilege[ ] do[es] not preclude discovery” of bank records “in a federal court suit.” Sneirson, 108 F.R.D. at 162 (citing Wm. T. Thompson Co. v. General Nutrition Corp., 671 F.2d 100, 103-04 (3d Cir.1982)).
Movant cites Ceramic Corp. of Am. v. Inka Maritime Corp. Inc., 163 F.R.D. 584, 588 (C.D.Cal.1995) to support the proposition that federal cases have recognized that “financial privacy should be protected if possible.” The court in Ceramic partially granted a motion to quash a subpoena seeking discovery of employment records to the extent that it pertained to “family, health, or financial matters[.]” Ceramic, 163 F.R.D. at 588-89.
This case is inapplicable. The court in Ceramic took into account state law as a “matter of comity” only because state law did “not conflict with federal interest ...” in the discovery of employment records. Id. In contrast, the courts have declined to prevent discovery of information despite assertions of the privacy of bank records by the bank client. See Stark, 347 F.Supp. at 1248; Rosenblatt, 54 F.R.D. at 23-24; First Nat’l Bank, 1978 WL 4535, at *1.
Accordingly, because Movants assert no privilege or privacy interest in the information sought pursuant to the subpoenas recognizable under federal law, the request to quash is denied.
3. Movants Also Fail to Demonstrate That The Third-Party Subpoenas Impose An Undue Burden.
Even if Movants have standing to move to quash on grounds of undue burden, Movants have failed to demonstrate that the subpoenas impose an undue burden on them.
A party moving to quash on' the grounds of undue burden pursuant to FRCP *48445(c)(3)(A)(iv) bears the burden of proof. See Williams v. City of Dallas, 178 F.R.D. 103, 109 (N.D.Tx.1998) (citing Linder v. Department of Defense, 133 F.3d 17, 24 (D.C.Cir.1998)) (Linder holding that [t]he “burden of proving that a subpoena is oppressive is on the party moving to quash[ ]”) (other citations omitted); see also Vitale v. McAtee, 170 F.R.D. 404, 407 (E.D.Pa.1997); Concord Boat Corp. v. Brunswick Corp., 169 F.R.D. 44, 48 (S.D.N.Y.1996) (holding that “ ‘the burden of persuasion in a motion to quash a subpoena ... is borne by the movant’ ”) (citations omitted).
The burden is a heavy one. See Williams, 178 F.R.D. at 109 (citations omitted); see also Northrop, 751 F.2d at 403. Movant must meet the burden “of establishing that compliance with the subpoena would be ‘unreasonable and oppressive.’ ” Williams, 178 F.R.D. at 109 (citations omitted). Common examples of undue burden include: “untimely service, inability to appear, inability to produce requested documents or things, failure to identify items requested, or excessive costs.” In re County of Orange, 208 B.R. 117, 120 (Bankr.S.D.N.Y.1997) (quoting Moore’s Federal Practice § 45.04[3][b] (other citations omitted)).
Here, Movants presented no evidence pertaining to the time, cost, or inconvenience entailed in responding to the Third-Party Subpoenas. Consequently, Movants have failed to meet their burden in demonstrating an undue burden.
B. Movants Do Not Have Standing To Move For A Protective Order Under FRCP 26(c).
FRCP 26(e) provides:
Upon motion by a party or by the person from whom discovery is sought, and for good cause shown, the court in which the action is pending ... may make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense ....
Fed.R.Civ.P. 26(c) (emphasis added).
Unlike FRCP 45(c)(3)(A), FRCP 26 specifies upon whose motion a court may grant relief. The language of FRCP 26(c) is expressly limited to parties or the person from whom the discovery is sought. See SEC v. Tucker, 130 F.R.D. 461, 462 (S.D.Fla. 1990) (holding that a third party could not move for a protective order under FRCP 26(c) because discovery was not sought from the movant, the movant was not a party to the action, and the movant did not carry its burden to intervene).
Here, discovery is not sought from Mov-ants; Movants are not parties to this action; and Movants have not moved to intervene in this action. Consequently, Movants lack standing to move for a protective order under FRCP 26(c).
C. The Request for Fees and Costs Under FRCP 37(a)(4) is Denied.
Both parties request costs and attorney’s fees pursuant to FRCP 26(c) and 37(a)(4). FRBP 7026 encompasses FRCP 26, see Fed.R.Bankr.P. 7026, and provides that “[t]he provisions of Rule 37(a)(4) apply to the award of expenses incurred in relation to [a] motion” for a protective order. Fed.R.Crv.P. 26(c). FRCP 37(a)(4), made applicable by FRBP 7037, see Fed.R.Bankr.P. 7037, provides that if the motion is denied, the court
shall, after affording an opportunity to be heard, require the moving party or the attorney filing the motion or both of them to pay the party or deponent who opposed the motion the reasonable expenses incurred in opposing the motion, including attorney’s fees, unless the motion was substantially justified or that other circumstances make an award of expenses unjust.
Fed.R.Civ.P. 37(a)(4).
The Supreme Court has held that an action is “substantially justified” under FRCP 37 if it is a response to a “genuine dispute,” or “if. reasonable people could differ as to [the appropriateness of the contested action][.]” Pierce v. Underwood, 487 U.S. 552, 565, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988) (citations omitted) (alteration in original). In the same vein, the Ninth Circuit has held that “[a] request for discovery is ‘substantially justified’ under the rule if reasonable people *485could differ as to whether the party requested must comply.” Reygo Pac. Corp. v. Johnston Pump Co., 680 F.2d 647, 649 (9th Cir. 1982).
Here, although I find that Movants lack standing to bring the motion for protective orders, I note that there is no controlling Ninth Circuit authority on point that discusses standing under FRCP 26(c). Accordingly, as reasonable people could differ as to the interpretation of FRCP 26(e), Trustee’s request for fees and costs under FRCP 37(a)(4) is denied.
V. CONCLUSION
When read in the context of FRCP 45(c), I find that Movants, who are not subject to the Third-Party Subpoenas, lack standing to bring forth the Motion under FRCP 45(e)(3)(A).
However, even assuming that Movants have standing, Movants have no privilege to assert under FRCP 45(c)(3)(A)(iii) because federal courts have consistently rejected a banker-depositor privilege. Additionally, Movants have not demonstrated an undue burden under FRCP 45(c)(3)(A)(iv).
Movants lack standing to bring forth a request for protective orders under FRCP 26(c) as this rule is directed at parties or persons from whom discovery is sought. In addition, both parties’ request for fees and costs under FRCP 26 and 37(a)(4) is denied because the request for protective orders was substantially justified.
Separate findings of fact and conclusions of law with respect to this ruling are unnecessary. This opinion shall constitute my findings of fact and conclusions of law.
. The Code is set forth in 11 U.S.C. §§ 101-1330 (1998).
. The Banks filed separate objections to the scope of the Third-Party Subpoenas. However, the Banks are not parties to the instant Motion and, consequently, the propriety of those objections are not before this court.
.FRCP 45 is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure ("FRBP”) 9016. See Fed.R.Bankr.P. 9016.
. FRE 1101(a) provides that "[t]hese rules apply ... to United States bankruptcy judges and United States magistrate judges, in the actions, cases, and proceedings and the extent hereinafter set forth.... ” Fed.R.Evid. 1101(a). FRE 1101(c) sets forth that "[t]he rule with respect to privileges applies at all stages of all actions, cases, and proceedings.” Fed.R.Evid. 1101(c). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492764/ | FINDINGS OF FACTS AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This case is before the Court upon Dennis and Mary Kemper’s (“Debtors”) Motion to Avoid Lien and Liberty National Bank’s (“LNB”) Motion for Relief from Stay. After a hearing on August 26, 1998, and upon the evidence presented, the Court enters the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
1. In September 1994, Debtors executed and delivered a lien interest in their homestead to secure a personal guarantee for a loan made by LNB to Grau-Kemper Enterprises, Inc. (the Debtors’ corporation).
2. On April 17, 1998, Debtors filed a voluntary petition under Chapter 7 of the Bankruptcy Code. *
3. On May 1, 1998, LNB filed a Motion for Relief from Stay to pursue its lien rights on Debtors’ homestead property.
4. Debtors subsequently filed a Motion for Order to Avoid Lien on Exempt Property in order to have LNB’s lien on their homestead removed under 11 U.S.C. § 522(f).
CONCLUSIONS OF LAW
Pursuant to 11 U.S.C. § 522(f), a debtor may avoid certain liens on exempt property. Section 522(f)(1) provides, in relevant part:
the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section if such lien is—
(A) a judicial lien,....
(B) a nonpossessory, nonpurchase-mon-ey security interest in any—
(i) household furnishings, household goods ... that are held primarily for the personal, family, or household use of the debtor or a dependent.
11 U.S.C § 522(f)(1) (1997). Thus, this statute allows a debtor the to avoid either a judicial lien, or a nonpossessory, nonpurchase-money security interest in household goods, if the debtor has an interest in the property subject to the lien and if lien impairs the debtor’s exemption.
In their Motion to Avoid Lien, Debtors argue that their discharge, which they received on August 7, 1998, extinguished LNB’s lien.1 However, under § 522(c) property remains liable for a debt secured by a lien that is not avoided under § 522(f). 11 U.S.C. § 522(c)(2)(A)(i) (1997); Lellock v. Prudential Ins., 811 F.2d 186, 188 (3rd Cir.1987); Chandler Bank of Lyons v. Ray, 804 F.2d 577, 579 (10th Cir.1986); Bouchelle v. Southeast Bank of Perry, 98 B.R. 81, 82 (Bankr.M.D.Fla.1989); In re Weathers, 15 B.R. 945, 949 (Bankr.D.Kan.1981). The legislative comments which accompany § 522(c) provide: “The bankruptcy discharge will not prevent enforcement of valid liens. The rule of Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886) [6 S.Ct. 917, 29 L.Ed. 1004], is accepted with respect to the enforcement of valid liens on nonexempt property as well as on exempt property.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 361 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 76 (1978), reprinted in 1978 U.S.C.C.A.N 5862, 6317. Thus, LNB’s lien on Debtors’ homestead property remains in effect unless it can be avoided.
Debtors further argue that should the Court fail to avoid LNB’s lien, the Debtors’ rehabilitation will be frustrated. While the purpose behind § 522(f)(1) is to give debtors a fresh start, the Debtors must prove that § 522(f)(1) applies to LNB’s lien in order for the Court to avoid the lien. A *507lien will be avoided under § 522(f) when there is a judicial lien (not subject to one of the exceptions provided in this subsection), or when there is a nonpossessory, nonpurchase-money security interest in household goods, goods used in debtor’s trade; or professionally prescribed health aids for the debtor or a dependent of the debtor. 11 U.S.C. § 522(f)(1) (1997). Section 522(f)(1)(A) only allows a debtor to avoid judicial hens, and § 522(f)(1)(B) only allows a debtor to avoid liens on property that is specified in that subsection. In re Villa, 74 B.R. 497, 499 (Bankr.D.Mont.1987). The Court cannot avoid a hen that is not described in § 522(f)(1), even if such a hen would frustrate the Debtors’ rehabilitation.
Although Debtors did not specifically address whether LNB’s hen on Debtors’ homestead property could be avoided pursuant to § 522(f)(1), the Court will consider the issue. In September 1994, Debtors granted LNB the hen interest that is the subject of the current motions. The Debtors executed this hen as a personal guarantee on a loan between LNB and Debtors’ business. Since Debtors gave the hen voluntarily, the lien must be classified as a consensual hen.
Section 522(f)(1)(A) only provides a debtor with the power to avoid judicial hens “to the extent that such hen impairs an exemption to which the debtor would have been entitled under subsection (b) of this section”. 11 U.S.C. § 522(f)(1)(A) (1997). A judicial hen is defined by the Code as “a hen obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding”. 11 U.S.C. § 101(36) (1997). In order for a debtor to avoid a hen pursuant to § 522(f)(1), a debtor must show that the hen is a judicial hen that fixed on an interest of the debtor in property and impairs the debt- or’s exemption. In re Wilbur, 217 B.R. 314, 316 (Bankr.M.D.Fla.1998). Consensual hens are not judicial hens, and thus cannot be avoided pursuant to § 522(f)(1). In re Gelletich, 167 B.R. 370, 380 (Bankr.E.D.Pa.1994) (citing In re Aikens 87 B.R. 350, 353 (Bankr.E.D.Pa.1988)). LNB holds a consensual hen on Debtors’ homestead, and, therefore, Debtors cannot meet the requirements of § 522(f)(1)(A). Consequently, the Court finds that Debtors may not avoid LNB’s hen under § 522(f)(1)(A).
Debtors’ main argument is that they may avoid LNB’s hen pursuant to § 522(f)(1)(B) because LNB’s hen is a nonpossessory, nonpurchase-money security interest. Section 522(f)(1)(B) allows Debtors to avoid any nonpossessory, nonpurchasemoney security interest in property described in that subsection. In order for the Court to determine that § 522(f)(1)(B) applies to the debtors’ property, this Court would have to conclude that Congress intended to include homestead property in the property protected by part (i) of this subsection. The property described in part (i), however, does not include real property. 11 U.S.C. § 522(f)(l)(B)(i) (1997). Only personal property is described in part (i), including “household goods ... that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor”. 11 U.S.C. § 522(f)(l)(B)(i) (1997).
Homestead property is not a household good as described in § 522(f)(l)(B)(i). Courts tend to hold that liens on homesteads and other real property are not avoidable under § 522(f)(l)(B)(i). See In re Clark, 217 B.R. 177, 180 (Bankr.E.D.Va.1998) (holding consensual security interest in real estate cannot be avoided under § 522(f)); In re Coonse, 108 B.R. 661, 662 (Bankr.S.D.Ill.1989) (nonpossessory, nonpurchase-money security interest on mobile home used as debtor’s residence could not be avoided as a household good under § 522(f)(1)(B)(i)); In re Snyder, 67 B.R. 872, 875 (Bankr.W.D.Pa.1986) (mobile home was not a household good under § 522(f)(1)(B)(i)); In re Bova, 44 B.R. 938, 939 (Bankr.E.D.Pa.1984) (holding nonpossessory, nonpprchase-money security interests on property used as a residence, a mobile home, were not avoidable under § 522(f)(1)(B)). But see In re Dipalma, 24 B.R. 385, 390 (Bankr.D.Mass.1982) (debtor’s residence, a mobile home, was a household good under § 522(f)(l)(B)(i) even though such a right is not conferred on debtors whose residence is considered real property); In re Goad, 161 B.R. 161, 163 (Bankr.W.D.Va.1993) (lien on debtors’ residence, a mobile home, avoided pursuant to *508§ 522(f)(1)(B)(i)). This Court finds that a homestead cannot be classified as a household good under § 522(f)(l)(B)(i), and therefore, Debtors may not avoid LNB’s lien under § 522(f)(l)(B)(i).
CONCLUSION
For the reasons stated above, the Court concludes that LNB’s lien on Debtors’ homestead property is a consensual lien, and that homestead property is not included under the avoiding powers of § 522(f)(1)(B)(i). Therefore, Debtors may not avoid LNB’s lien on their homestead property, and LNB’s Motion for Relief from Stay is granted. Separate Orders will be entered in accordance with these Findings of Fact and Conclusions of Law.
. Debtors also spend a significant amount of time arguing that the property in question is the debtors’ homestead. However, since LNB concedes that the property is homestead property, the Court will not address this issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492765/ | MEMORANDUM OF DECISION
JAMES B. HAINES, Jr., Chief Judge.
This memorandum of decision addresses the debtors’ objections to the secured claim of KeyBank. For the reasons set forth below, the objection is sustained in part and denied in part.
Background
KeyBank filed a timely proof of claim in this Chapter 13 case. The debtors objected to KeyBank’s claim. Following asset sales and collection of insurance proceeds available on account of a fire loss, it became apparent that the Chapter 13 estate would contain sufficient funds to pay all claims, including those of KeyBank.
On May 6, 1998, the court convened hearings to address, among other things, a motion to dismiss filed by the Chapter 13 trustee and the debtors’ motion seeking authorization for distribution of the insurance proceeds. Following extensive off-the-ree-ord discussions about the timing and extent of payments which might be made to Key-Bank in satisfaction of its secured claim, I entered an order intended to effect an expedited procedure for resolving any and all disputes about the amount of the KeyBank claim so that the funds held by the Chapter 13 trustee could be disbursed to KeyBank and to all creditors quickly. In pertinent part, that order provided as follows:
KeyBank shall, as soon as practicable, provide the debtor with a full accounting of its claim, consistent with representations on the record, showing principal, interest, fees, charges, penalties and professional fees due and owing, together with a per diem. The debtor shall have 10 days following receipt of Key’s accounting to file with this court an amended objection to any part of Key’s claim. If no amended objection to the Key claim is made within the 10 days following receipt of Key’s accounting, the Chapter 13 trustee shall forthwith disburse to Key the amount of its claim and prior to the disbursement to any other creditor or the holder of any other claim as against the estate. To the extent the debtor’s amended objection demonstrates that portions of the Key claim are not contested, the trustee shall disburse such uncontested portions to Key on Key’s request. This disbursement shall not waive the rights of any party pursuant to 11 U.S.C. § 506(c).
Order of May 6,1998, ¶ 4.
In the course of the May 6,1998, hearings, I read the substance of the order into the record and inquired of debtors’ counsel what more was needed by way of an accounting for the KeyBank claim. After explaining the debtors’ desire to complete disbursements as quickly as possible (thereby enabling the debtors to collect any surplus that might exist), debtors’ counsel explained in detail the information the debtors required by way of an accounting. In response, the bank’s counsel stated that he “doubt[ed] very much” that there would be “any problem” with providing the information sought by the debtors. As to that information he was “sure we can get it all” and that the bank could produce it, in all likelihood, “extremely promptly.”
The KeyBank accounting was not forthcoming within a reasonable time after the May 6 hearing. On July 20, 1998, after repeated attempts to elicit the accounting from the bank, debtors’ counsel asked that a hearing be set for September 10, 1998, to consider debtors’ claim objection. The request expressly, indicated that the bank had not yet served or filed its amended claim, which was to include the accounting discussed at the May 6 hearing.
Hearings convened on September 10,1998. As of that date the bank had yet to provide the detailed information that it had promised to deliver in May. In the course of the hearing the debtors restated their objection to appraisal fees, environmental survey fees, attorneys’ fees, and interest components of the bank’s claim. Debtors’ counsel, without previously having filed a motion to compel the bank to provide its accounting pursuant to the May 6 order, asked the court peremptorily to disallow those components of the bank’s *513claim. I declined to do so, but ordered the bank to submit any further documentation in support of its claims within five days and provided the debtors five days thereafter to respond. The parties have complied with that directive and, having reviewed their submissions, my determinations are as follows:
1. Appraisal and Environmental Survey
The debtors’ objections to the bank’s claim for the costs of an environmental survey and an appraisal, each obtained at the bank’s request in the course of foreclosure, is overruled. The charges for such services are clearly within the parameters of the loan agreement. The circumstances of the case and character of the real estate upon which the bank sought to foreclose made it entirely reasonable for the bank to have obtained them. The fact that the debtor disagreed with the results of the appraisal, and that subsequent events have verified the accuracy of the debtors’ view, are not a sufficient basis to disallow the appraisal charges.
2. Interest and Late Charges
The documentation for KeyBank’s secured claim, including that provided before and after the September 10, 1998, hearing, demonstrate the accuracy of KeyBank’s interest calculations and the applications of payments to accrued interest, late charges, and principal. There is nothing in the record to indicate that the interest and late charges imposed are unreasonable or at variance with the debtors’ contractual relationship with the bank. However, the fact that interest and charges have accrued for as long as they have is due, at least in recent months, to the bank’s unreasonable delay in providing an accounting so that these issues could be resolved and funds could be disbursed.
In the course of the May 6, 1998, hearings, the bank’s counsel repeatedly stated that it would be “no problem” for the bank to provide an accounting for its claim. Yet, at the September 10, 1998, hearing, the bank’s counsel protested that the information that the debtors sought was something that had seldom, if ever, been requested in the many years he had represented the bank and that the provide it would be an onerous and time consuming task. I reject those contentions as disingenuous. They are completely at odds with the representations made on the record in the course of the May 6, 1998, hearing. What is more, notwithstanding counsel’s protests, the information was provided within five days of the September 10, 1998, hearings.
Accordingly, the debtors’ objection to the KeyBank claim is sustained as to all interest and late charges which have accrued since May 11, 1998, five days after the May 6, 1998, hearing.
3.Counsel Fees
KeyBank seeks $10,500.00 in counsel fees. As an overseeured creditor, it is entitled to reasonable attorneys’ fees because they are provided for under the loan agreement. See 11 U.S.C. § 506(b); In re Kalian, 178 B.R. 308 (Bankr.D.R.I.1995).
Again, inconsistent with the representations made at the May 6, 1998, hearing, the bank’s counsel did not produce an itemized statement of services and charges rendered to the bank on the debtors’ account until the September 10, 1998, hearing. After the hearing, he filed an affidavit elaborating on the information set forth in the itemization.
I will not allow the entire amount of the bank’s claim for legal fees and expenses for two reasons. First, the documentation leaves it uncertain whether the bank has incurred $10,500.00 in bona fide fees. Second, I do not consider that the bank is entitled to fees it incurred after early May 1998.
1. Rates Charged. Attorney Haenn’s itemization shows that he charges the bank at the rate of $135.00 per hour and that he charges the bank $60.00 per hour for paralegal time. However, I am concerned that Exhibit B to counsel’s affidavit shows that, for purposes of the state court foreclosure proceeding against the Frasers, he sought imposition of attorneys’ fees and charges based on a $160.00 per hour constructive rate for counsel time and a $65.00 *514per hour constructive rate for paralegal time.1
As a consequence of the possibility that a disparity between actual rates and constructive rates may be embodied in the bank’s assertion that it is entitled to $10,500.00 for counsel fees under its secured claim, I have reviewed Attorney Haenn’s actual billing records contained in Exhibit E to his affidavit. They disclose that, through May 8, 1998, his bill for legal services totaled $8,611.50 and expenses billed to KeyBank totaled $1,108.81, for a total of $9,720.31. I will limit the bank’s recovery of legal fees and expenses to amounts it has been charged. It may take no more.
2. Reasonableness of KeyBank’s Legal Fees. The debtor has challenged Key-Bank’s right to any post-petition fees on account of the bank’s counsel’s asserted obstructionism and unreasonableness. In the course of the September 10, 1998, hearing, I specifically invited debtors’ counsel to provide support for those conclusory assertions and expected that some further evidence of them would accompany the debtors’ final submissions. Those submissions did not deliver on that score.
Based upon my knowledge of the history of this ease and a review of the itemized statement for services leads me to conclude that, although the case has been contentious and the parties have not always been cooperative and reasonable with one another, those general complaints have not inflated the bank’s legal fees to the point of unreasonableness. However, for the same reasons as those set forth above regarding interest and late charge accruals, I will not approve any attorneys’ fees for services rendered after May 11, 1998.
Accordingly, the debtors’ objection to the legal fees component of KeyBank’s secured claim is sustained in part. The bank is allowed the total amount of $9,720.31 for legal services and expenses, representing bank counsel’s actual charges for work performed before May 11,1998.
8. Lingering Concerns. As a final matter, I must emphasize once again that I strongly disapprove of KeyBank’s practice of authorizing its attorney to seek court assessment of legal fees and expenses against debtors, in this court or in any other court proceeding (including state court foreclosure actions), at rates other than those it is actually charged for those services. Doing so is abusive to debtors, inflating bank claims unreasonably, potentially diminishing distributions available to junior creditors in bankruptcy and potentially enlarging post-foreclosure deficiency judgments in state court. As a consequence, I will provide a copy of this memorandum to the Chief Judge of the Superior Court for the State of Maine and to the Chief Judge of the District Court for the State of Maine with a cover letter suggesting that they scrutinize carefully KeyBank’s claims for legal fees in connection with any proceedings brought before them or other judges in their courts.
CONCLUSION
For the reasons set forth above, Key-Bank’s secured claim is allowed to the extent of outstanding principal, in the amount of $28,395.19; interest and late charges as accrued through May 11, 1998, only; appraisal costs of $2,500.00 and environmental survey costs of $1,255.00; and legal fees and expenses in the total amount of $9,720.31. Upon confirming the precise amount of accrued interest and late charges payable in consultation with KeyBank’s counsel and debtors’ counsel, the Chapter 13 trustee is *515authorized to disburse funds in satisfaction of KeyBank’s secured claim and, thereafter, to complete disbursements to parties-in-interest according to the dictates of the Bankruptcy Code.
. Although the practice of charging one rate to the client, but seeking another rate imposed by the court under an attorneys’ fees clause in a loan agreement is ethically suspect, it has been disclosed, although not expressly, in paragraph eight of counsel's affidavit. The affidavit states:
The actual billing records which I maintain for the Fraser obligations are attached hereto as Exhibit E. My agreement with KeyBank, not the subject of any written fee agreement applicable to this particular file, is that I do not charge my client for photocopies (other than substantial projects), fax charges, or toll calls. However, with the consent of KeyBank in all proceedings in which legal fees are receoverable [sic] I request that the respective court award fees at an hourly rate more reasonably proximate to the hourly rates charged by counsel with comparable experience. Affidavit of Michael S. Haenn, Esq., dated September 15, 1998, at ¶ 8 (emphasis supplied). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492766/ | MEMORANDUM OPINION
MARK W. VAUGHN, Bankruptcy Judge.
The Court has before it the Plaintiffs’ (Thomas & Birgit Sims) motion for summary judgment on their complaint objecting to the *531Defendants’/Debtors’ (John and Althea Garland) claim of a homestead exemption on property located on North Road in Deerfield, New Hampshire, and seeking this Court’s imposition of a constructive trust in the amount of $42,000. The Debtors/Defendants counterclaim seeking the avoidance of an attachment of $175,000 as preferential and the payment of reasonable rent. At a pretrial hearing held on November 20, 1997, the rent issue was never mentioned nor was it included as an issue in the Defendant’s pretrial statement. The Court finds that this counterclaim for reasonable rent has been waived and denies the same. The Court has, by its previous orders, denied the Debtors’ claimed homestead exemption in the North Road property and avoided the Plaintiffs’ attachment in the amount of $175,000 as being preferential. For the reasons stated below, the motion for summary judgment is denied on the imposition of a constructive trust.
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
The Plaintiffs are judgment creditors of the Defendants in the amount of $173,645.46 by virtue of a judgment of the Rockingham County Superior Court issued on June 16, 1996. That litigation concerned the real property known as 126 North Road, Deer-field, New Hampshire, and the Defendants’ wrongful failure to honor an agreement to allow the Plaintiffs to purchase that property. The superior court, in its eighteen page opinion, found for the Plaintiffs against the Defendants on the grounds of (1) negligent and/or intentional interference with advantageous contractual relationship; (2) bad faith; (3) intentional infliction of emotional distress; and (4) enhanced damages.
On the count for the negligent and/or intentional interference with advantageous contractual relationships, the court awarded money damages of $42,000 to the Plaintiffs, that amount being the loss of the benefit of their bargain, i.e., the difference between the purchase price under the agreement of $90,-000 and the then fair market value of the property of $132,000. It is this $42,000 that the Plaintiffs allege is subject to a constructive trust in their favor. Early in the state litigation, the Plaintiffs obtained an attachment for $50,000, which is not contested.
The Plaintiffs had also filed a petition for specific performance and other relief in the Rockingham County Superior Court on or about April 7, 1994, which they subsequently withdrew. That petition sought specific performance and the imposition of a constructive trust. At the invitation of the Court,' the Plaintiffs filed a motion to determine the extent of its lien arguing that, if the Court imposed a constructive trust in the amount of $42,000, that $42,000 would not be property of the estate, and the Plaintiffs would have an attachment of $50,000 over and above the $42,000 constructive trust. During the course of this Chapter 13 proceeding, the real property in question has been sold, and the Chapter 13 trustee is holding the proceeds subject to the claims of the Plaintiffs herein. The parties have filed an agreed list of exhibits and the documents referred to below are all part of that agreed list.
DISCUSSION
The Court finds that the Plaintiffs are barred from now seeking the imposition of a constructive trust by the doctrine of res judicata or claim preclusion. This defense has clearly been raised by the Defendants in their answer to the original complaint as well as their objection to the motion for summary judgment. There is no question that prior judgments may preclude later litigation both as to matters that have actually been litigated and decided and as to matters that have never been litigated or decided. 18 CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE § 4406-15 (1st ed.1981). The Court will look to New Hampshire law to see if the doctrine of res judicata is applicable to this litigation.
*532The doctrine of res judicata, “spurred by considerations of judicial economy and a policy of certainty and finality in our legal system,” has been established to avoid repetitive litigation. Eastern Marine Const. Corp. v. First Southern Leasing, 129 N.H. at 273, 525 A.2d at 711 (quoting Bricker v. Crane, 118 N.H. 249, 252, 387 A.2d 321, 323 (1978)). “The essence of the doctrine is that ‘a final judgment by a court of competent jurisdiction is conclusive upon the parties in a subsequent litigation involving the same cause of action.’ ” Id. at 273, 525 A.2d at 711-12 (quoting Bricker v. Crane, 118 N.H. at 252-53, 387 A.2d at 323, itself quoting Concrete Constructors, Inc. v. The Manchester Bank, 117 N.H. 670, 672, 377 A.2d 612, 614 (1977)). The term “cause of action" means the right to recover and refers to all theories on which relief could be claimed arising out of the same factual transaction in question. Id. at 275, 525 A.2d at 712. Generally, once a party has exercised the right to recover based upon a particular factual transaction, that party is barred from seeking further recovery, even though the type of remedy or theory of relief may be different. Id.; see University of N.H. v. April, 115 N.H. 576, 578, 347 A.2d 446,449 (1975).
Radkay v. Confalone, 133 N.H. 294, 297, 575 A.2d 355 (1990).
There is no question that the relief now sought, the imposition of a constructive trust, arises out of the same factual transaction as the superior court action at law. In fact, the Plaintiffs had filed such a petition in the superior court and then withdrew it. There is no question in reviewing the petition in equity and the action at law that they both were based on the same factual transaction. Indeed, the facts found by the superior court as stated in its opinion clearly resemble the allegations in the petition in equity. The Plaintiffs, for whatever reason, elected to pursue the action at law and have been awarded damages. The constructive trust is clearly a theory arising out of the same factual transaction and could have been pursued in the superior court. Having elected not to do so, the Court finds that the Plaintiffs are now barred in raising this issue by the doctrine of res judicata. The Court, having denied the imposition of a constructive trust, does not have to reach the issue of the extent of the lien. It is uncontested that the Plaintiffs have a valid attachment against the proceeds in the amount of $50,000.
With this decision, all matters raised by the complaint and counterclaim have been decided.. A final judgment will issue granting the Plaintiffs’ objection to the Debtors’ homestead claim on the North Road property, denying the Plaintiffs’ claim for the imposition of a constructive trust, granting the Defendants’ counterclaim avoiding the $175,-000 attachment and denying the Defendants’ counterclaim for reasonable rent.
This opinion constitutes the Court’s findings and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate final judgment consistent with this opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492768/ | ORDER
WM. THURMOND BISHOP, Bankruptcy Judge.
This matter came before the Court upon the Reply to Trustee’s Objection to Claim, filed by Ashleytowne Village I. The Debtors also filed a Reply to the Objection to Claim, asking the Court to uphold the Trustee’s objection and disallow the proof of claim. The Trustee objected to the claim on the grounds that the claim represented a post petition obligation that should be paid by the Debtors and not paid pursuant to the previously confirmed Chapter 13 Plan. The Debtors asserted that the claim constituted a lien against their personal residence that would be paid outside the Chapter 13 Plan. Debtors also asserted that the claim did not constitute an administrative expense pursuant to 11 U.S.C. § 503(b)(1). Debtors contend that § 1305 is the appropriate basis for determining the allowability of the post petition claim.
FINDINGS OF FACT
Debtors filed a Chapter 13 Petition on September 12, 1994. Ashleytowne Village was properly included on the mailing list and received Notice of the Commencement of the case on or about September 28, 1994, along with a proof of claim form. A representative of creditor contacted Debtors’ attorney regarding the ongoing payment of regime fees that were owed by the Debtors shortly after the filing of the case. On May 26, 1995, a motion to allow claims was filed; Creditor did not file a claim.
On March 14, 1997, an Order was entered modifying the automatic stay as to Fleet Mortgage, the holder of the first mortgage on the residence. Subsequent thereto, the Debtors vacated the property. Fleet Mortgage has resumed its foreclosure on the property. On April 28, 1997, Creditor filed its unsecured proof of claim, asserting entitlement to priority status for unpaid regime fees that had accrued since the filing of the Chapter 13 case. Creditor has not filed a motion to modify the automatic stay to proceed in State court to enforce its lien rights in the property. Nor has Creditor filed any motion seeking leave of the Court to file a late claim.
CONCLUSIONS OF LAW
At the outset, this Court must determine whether Creditor has a valid claim as defined by 11 U.S.C. § 101(5). Pursuant to § 101(5), a claim includes any right to payment, whether or not liquidated as of the time of filing the case. Two distinct theories have arisen in interpreting claims for regime fees. The first line of eases holds that the claim for regime fees arises from a prepetition agreement between Debtors and creditors because of Debtors’ ownership of *602the underlying real property. The Debtors do not have the ability to separate their ownership of the real property from the obligation to pay the regime fees. In other words, the obligation for the’ regime fees arises from their ownership of the property; once the Debtors ownership of the real property is extinguished, then Debtors owe no further obligation. Accordingly, any obligation owed to creditor would be a prepetition debt since the obligation relates to a pre-petition agreement, and would be subject to discharge. See Affeldt v. Westbrooke Condominium Ass’n, 164 B.R. 628 (Bkrtcy.D.Minn.1994) and Matter of Garcia, 168 B.R. 320 (Bkrtcy.E.D.Mich.1993).
The second line of case, supported by the Fourth Circuit, has held, in the context of a Chapter 7 case, that post-petition regime fees are post-petition obligations that are not subject to discharge. In re Rosenfeld, 23 F.3d 833 (4th Cir.1994). The Rosenfeld court also declined to hold that the regime obligation was in the nature of an executory contract since the obligation is inseparable from the ownership interest in the real property. The obligation does not arise from a pre-petition obligation, but rather, from post-petition ownership of the real property. See In re Gonzalo, 169 B.R. 13, (Bkrtcy.E.D.N.Y.1994).
Pursuant to South Carolina law, Creditor has a statutory lien for any regime fees. Creditor holds a Master Deed, recorded in the RMC office in Charleston County, that'provides for the assessment of regime fees and identifies the General Common Elements of the property, of which Debtors hold a percentage interest. The modification of the automatic stay by Fleet Mortgage to proceed with its foreclosure entitles Creditor to participate in the foreclosure of its interest in the property which includes its lien rights for unpaid assessments.
Creditor holds a post-petition claim secured by a lien in the real property. Since the automatic stay has been modified to release the real property from the Bankruptcy estate, the lien of creditor should no longer be recognized by the Bankruptcy court and creditor should be entitled to a deficiency claim, if any exists after the completion of the foreclosure. The next step in the analysis is to determine the character of that unsecured claim and whether the claim is allowable given the fact that the claim was not timely filed.
Creditor argues that its unsecured claim is entitled to priority status pursuant to § 503(a)(1)(A) because its claim represents a necessary cost of preserving the estate. However, Creditor has failed to explain the reasons for the tardy filing of its claim and has ignored the strictures of § 503(a) which requires a creditor to timely file a request for allowance of an administrative claim. Further, creditor has failed to proffer any cause for the tardiness of its claim which is explicitly required by § 503(a).
The Chapter 13 case was filed on September 12, 1994; no dispute exists that Creditor received timely notice of the filing of the case. Creditor has asserted that it failed to pursue collection of its claim until April, 1997, because such collection was not cost effective. Creditor also admitted its entitlement to a secured claim. Essentially, Creditor waited until the stay was modified by the mortgage holder to file its claim and is now taking the position that, while it holds a secured claim, the cost to pursue that claim is not cost effective. Creditor seeks to parlay its delay in exercising its rights against the property into an administrative claim. The Court is not persuaded that the reason for the delay in Creditor exercising its rights constitutes cause for allowing an untimely claim.
Even if cause existed for tardily filing the claim pursuant to § 503(a), the allowance of creditor’s claim is governed by § 1305(a)(2) which specifically deals with post-petition claims for property or services necessary for the Debtors’ performance under a Chapter 13 plan. Accordingly, although § 503(b) addresses property and services necessary for preserving the estate, the provision is not applicable at this juncture in this Chapter 13 case. The majority of the case law that interprets § 1305 revolves around whether the claim is necessary for the performance of a debtor under their Plan. See In re Leavell, 190 B.R. 536 (Bkrtcy.E.D.Va.1995) and In re Smith, 179 B.R. 437 (Bkrtcy.E.D.Pa.1996). *603No dispute exists that the purpose of the regime fees was to maintain the Debtors’ personal residence, thus ensuring that the Debtors had a place to live while performing under the terms of the their Chapter IB Plan.
The dispute centers on whether the claim should be allowed given the fact that Creditor failed to file its claim until twenty eight (28) months after receiving notice of the commencement of the Chapter 13 ease. Pursuant to § 1305(c), a post petition claim “... shall be disallowed if the holder of such claim knew or should have known that prior approval by the trustee of the debtor’s incurring the obligation was practicable and was not obtained.” In this case, Creditor had knowledge that the Chapter 13 case had been filed, and received a proof of claim form along with the Notice of the Commencement of the case. Despite having actual notice and a proof of claim form, creditor chose to ignore its remedies under the Bankruptcy laws to file a proof of claim or obtain relief from the automatic stay. The essence of § 1305(c) is to prevent such an occurrence which results in diminishing the monies available for distribution to creditors who timely filed their claims upon receiving notice of the filing of the case.
CONCLUSION
Based on the foregoing, the Court finds that Creditor holds a claim that is not allowable pursuant to § 1305(e). Creditor’s delay in exercising its rights to file a claim until twenty eight (28) months after the filing of the Chapter 13 case precludes the allowance of the claim at this late juncture in the case and would impair the rights of other creditors. Creditor should have known that prior approval by the Trustee was necessary and failed to obtain such approval. Creditor has remedies available pursuant to its lien rights in the real property and is free to pursue those remedies.
ACCORDINGLY, IT IS ORDERED that the unsecured priority claim of Ashleytowne Village I is disallowed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492770/ | MEMORANDUM OPINION AND ORDER, ORDER GRANTING SUMMARY JUDGEMENT IN FAVOR OF TRUSTEE AND AGAINST LAKE OZARK CONSTRUCTION INDUSTRIES, INC.
BARRY S. SCHERMER, Bankruptcy Judge.
INTRODUCTION
The Chapter 11 trustee’s motion for summary judgement challenges the validity of *680mechanic’s lien asserted against Debtor’s real property. The Court concludes that the mechanic’s liens asserted by Lake Ozark Construction Industries, Inc. against the Debtor’s real estate fail as a matter of law.
JURISDICTION
This Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and Rule 9.01(B) of the Local Rules of the United States District Court for the Eastern District of Missouri. This is a core proceeding which the Court may hear and enter appropriate judgements pursuant to 28 U.S.C. § 157(b)(2)(E).
STATEMENT OF FACTS1
1. North Port Associates, Inc. (the “Debt- or”) is a Missouri corporation incorporated on June 30, 1988 and administratively dissolved on June 10,1993.
2. The plaintiff, Peter D. Kerth (the “Trustee”) was approved as trustee of Debt- or pursuant to 11 U.S.C. § 11042 by order dated September 8,1995 and filed September 11,1995.
3. Lake Ozark Construction Industries, Inc. (“LOCI”) is a Missouri Corporation in good standing engaged in construction work in and around Miller County, Missouri. LOCI is generally engaged in the business of site development and infrastructure work.
4. Debtor owned approximately sixty (60) acres of property along Lake of the Ozarks, Miller County, Missouri (the “Property”) and an additional 1,100 acres along the Osage River in Miller County, Missouri (the “Golf Course Property”).
5. In 1988, Debtor began development of a residential resort community on the Property which would include condominiums, a marina office and retail (sometime referred to as the Lakeside Development/Proj ect). Debtor began a development on the Golf Course Property including a golf course and clubhouse (sometimes referred to as the Riverside Development).
6. Debtor filed a petition under chapter 11 of the Bankruptcy Code on December 30, 1993.
7. On July 19, 1996, this Court signed an Order Authorizing Auction (the “Auction Order”) which authorized the Trustee to sell at auction certain assets of the Debtor including real property, a boat dock and miscellaneous personal property.
8. An auction of the property was conducted on July 20, 1996. The successful bidders paid a deposit equal to 25% of the bid price. With the exception of the personal property, all sales were completed by September 30,1996.
9. Robert W. Carrón was Debtor’s president from 1989 to late 1995.
10. North Port Construction, Inc. (“North Port Construction”) is a corporation. Richard Robertson is the President and sole owner of North Port Construction. There is no common ownership between the Debtor and North Port Construction.
11. Robert Noel Kline is an officer of Everett Holding Company. LOCI is a wholly-owned subsidiary of Everett Holding Company.
COMMENCEMENT OF WORK/CONTRACTS
12. Beginning in December 1988, LOCI began performing construction work and providing supplies to the lakeside portion of the Project.
*68113. According to Robert Kline, LOCI’s work, beginning in 1988, consisted first of clearing timber from a portion of the Property. Other work performed during 1989 through 1991 on the Property was in connection with condominium development.
14. Construction work and provision of supplies and was initially done pursuant to an open account with the Debtor.
15. After LOCI began work on the project in December 1988, the Debtor discovered that certain land necessary for the development was owned by LOCI. LOCI agreed to transfer the Property to Debtor at its cost and to reinvest the proceeds of that sale into the project in exchange for a commitment from the Debtor to retain LOCI as heavy contractor on all the development and infrastructure work for the Lakeside and Riverside projects that LOCI wanted to do.
16. LOCI and Debtor reduced this understanding to writing and entered into a written agreement dated November 8, 1989, designated the “Master Agreement.” Paragraph 2 of the Master Agreement specifically provides:
Project Site Preparation and Infrastructure Agreement. As a condition to LOCI’s transfer of the LOCI parcel, Northport hereby agrees that it will contract solely with LOCI, or affiliates of LOCI designated by LOCI for all site preparation and infrastructure work needed on the Project or any phase thereof, including but not limited to all excavation, grading, earth moving, road and parking lot construction and paving, supply of raw material and sand, rock, cement, supply of ready mix concrete and any other site preparation or infrastructure work which LOCI desires to handle; ... LOCI hereby agrees that all such contracts shall contain reasonable cost provisions, not excessive based on the type of service and prevailing community standard. Northport hereby agrees that it will not engage, and it will cause any other entity, owner or developer of the Project or any phase thereof not to engage, any contractor other than LOCI for the performance of the site preparation and infrastructure work on the Project which LOCI has been granted pursuant to this Section 2.
17. At the time the Master Agreement was executed, specific plans for the Project had not been drawn.
18. LOCI specifically alleges that its contracts) were with the Debtor. In the Original Mechanic’s Lien and in the Supplemental Mechanics Lien (see paragraphs 21 and 27), LOCI asserts that it “began working upon the Northport at the Lake Project ... at the instance and request of Northport” (and) “claimant and Northport then entered into an agreement in November of 1989 providing for claimant to do work for Northport upon the Northport at the Lake Project.”
19. LOCI’s Exhibit A to both the Original Mechanic’s Liens and the Supplemental Mechanic’s Lien (see paragraphs 21 and 27) described its arrangement with the Debtor as follows:
Early on in the development Northport entered into an Agreement dated November 8, 1989 (the “Master Agreement”), with LOCI, under which Northport agreed that it would: contract solely with LOCI ... for all site preparation and infrastructure work needed on the Project or any phase thereof ...
... Pursuant to and in accordance with the provisions of the Master Agreement and implementing agreements, LOCI has performed work and labor and furnished materials on the Project. LOCI has performed further work and labor and has furnished materials as directed by North-port either directly or through its agents, including but no necessarily limited to Northport Construction, Inc.
20. LOCI initially submitted invoices to Debtor for work performed on the Lakeside Development. LOCI later submitted invoices for work on the property to North Port Construction. When North Port Construction would not pay the invoices submitted, Debtor executed a promissory note for the outstanding balance and assumed responsibility for payment of the invoices submitted to North Port Construction but not paid.
*682
THE ORIGINAL MECHANIC’S LIEN
21. On August 23, 1991, LOCI filed a Statement of Mechanic’s Lien (the “Original Mechanic’s Lien”) in the office of the Circuit Clerk of Miller County recorded at Book P, page 230 et seq. in the aggregate amount of $75,151.20, including interest.
22. LOCI continued to perform work on the Project, even after filing the Original Mechanic’s Lien and its first lawsuit; specifically, beginning in July, 1991 and allegedly continuing through August 15, 1992, LOCI worked on the development.
23. The title work by Cliffside Title as of January 10, 1990 shows Debtor as owner of all of the property covered by the Original Mechanic’s Lien.
24. LOCI filed suit to enforce the Original Mechanic’s Lien through an action to foreclose on September 19, 1991. This case is styled Lake Ozark Construction Industries, Inc. v. North Port Associates, Inc. case no. CV591-155CC, in the Circuit court of Miller County, Missouri.
25. This case was appealed to the Missouri Court of Appeals. Western District, who issued an opinion on June 1,1993.
26. On October 22, 1993, the Circuit Court of Miller County entered an Order and Judgement incorporating the mandate of the Court of Appeals.
THE SUPPLEMENTAL MECHANICS LIEN
27. On February 4, 1993, LOCI filed a First Supplemental Statement of Mechanic’s Liens in the office of the Circuit Clerk of Miller County recorded at Book Q, page 227 (the “Supplemental Mechanic’s Lien”) in the principal amount of $86,849.54 plus simple interest in the amount of $12,883.42, for a total amount claimed of $99,732.96, plus simple interest at the statutory rate of 9% after November 30,1992 against real properties in Miller Count, Missouri. LOCI alleges that the last day of work covered by the Supplemental Mechanic’s Lien was August 15, 1992.3
28. The Supplemental Mechanic’s Lien states: “The date of the furnishing of the first item of labor, equipment, material, supplies, services, machinery and tools by claimant was in December of 1988 and the date that the last time thereof was furnished and performed by Claimant was August 15, 1992.”
29. LOCI filed a Petition on August 2, 1993 to foreclose on the Supplemental Mechanic’s Lien in a case styled Lake Ozark Construction Industries, Inc. v. North Port Associates, Inc. et al., case no. CV593235CC, in the Circuit Court of Miller County, Missouri. The case is still pending and LOCI has requested that it be consolidated with the lawsuit to enforce the Original Mechanic’s Lien.
NOTICE TO OWNER
30. In response to Great Southern Bank’s4 interrogatories, LOCI stated that it gave notice to the Debtor with each invoice and each delivery ticket, but no particular invoice ticket or delivery tickets are specified by date. In response to the Request for Production of Documents requesting copies of any Notice to Owner relied upon by LOCI, LOCI faxed to Trustee’s counsel on May 8, 1997 a copy of two “Quarry Tickets” dated January 4 and 5 1989, and numbered 14-100026 and 14-100047, respectively. Neither ticket is signed by “customer” and the location of delivery is not stated.
TRUSTEES BASIS FOR SUMMARY JUDGEMENT
Trustee seeks to defeat the mechanic’s liens asserted by LOCI. Trustee identifies and analyzes four independent (4) theories, each sufficient to defeat the lien as a matter of law:
(1) LOCI did not plead that it gave the statutory notice required by § 429.012 Mo. Rev.Stat. in either the lawsuit to enforce the *683Original Mechanic’s Lien or the lawsuit to enforce the Supplemental Mechanic’s Lien;
(2) The statutory notice was not given and delivered as required by § 429.012 Mo.Rev. Stat. in either the lawsuit to enforce the Original Mechanic’s Lien or the lawsuit to enforce the Supplemental Mechanic’s Lien;
(3) The labor and material covered by the single mechanic’s lien over multiple lots was not done under one contract; and
(4) The mechanic’s lien, in its separate components, was untimely filed.
For the reasons discussed below, the Court concludes that the evidence establishes that LOCI did not plead nor did it give and deliver proper notice as required by § 429.012 Mo.Rev.Stat. Accordingly, LOCI’s mechanic’s liens fail as a matter of law. Because the determinations as to these issues are dispositive of the case, the Court need not examine issues (3) and (4) and expressly reserves judgement on these issues.
DISCUSSION
I. Summary Judgement
Summary judgement is appropriate when “the pleading, depositions, answers to interrogatories, and admissions on file together with any affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgement as a matter of law.” Fed.R.Bankr.P. 7056(c). Facts must be viewed in the light most favorable to the nonmoving party, who must be given the benefit of all reasonable inferences that may be made from the facts disclosed in the record. Raschick v. Prudent Supply, Inc., 830 F.2d 1497, 1499 (8th Cir.1987), cert. denied, 485 U.S. 935, 108 S.Ct. 1111, 99 L.Ed.2d 272 (1988); Laws v. United Missouri Bank of Kansas City N.A., 188 B.R. 263 (W.D.Mo.1995).
A party seeking summary judgement bears the initial burden of demonstrating to the court that an essential element of the nonmoving party’s case is lacking. Celotex v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The burden then shifts to the nonmoving party to come forward with sufficient evidence to demonstrate that there is a factual controversy as to that element, or to explain why such evidence is currently not available. Id; Fed.R.Civ.P. 56(e). If the nonmoving party fails to so respond, summary judgement, if appropriate, shall be entered against such party. Id. The nonmoving party must come forward with sufficient evidence to allow a reasonable jury to find in its favor. Id.
II. Pleading of Statutory Notice
Trustee argues that LOCI failed to plead the requisite statutory notice to the Debtor both in the lawsuit to enforce the Original Mechanic’s Lien5 and in the lawsuit to enforce the Supplemental Mechanic’s Lien.6 LOCI responds that its First Amended Petition in its lawsuit to enforce the first Original Mechanic’s Lien 7 sufficiently pleads the notice required by § 429.012 Mo.Rev. Stat. in paragraph 90. The relevant portion of paragraph 90 of that First Amended Petition states:
On or about August 23, 1991, LOCI filed a Mechanic’s Lien in the Office of the Miller County Circuit Clerk and ex-officio Recorder which was recorded in Book P at Page 230 in that office (the “Lakeside Mechanic’s Lien”). Prior to filing the Lakeside Mechanic’s Lien, LOCI gave more than ten days notice to NP Associates and Thompson that it would file the lien ... *684(emphasis added). Similarly, LOCI points to a similar paragraph 24 in its Second Amended Petition in the lawsuit to enforce the Supplemental Mechanic’s Lien which states:
On or about August 23, 1991, LOCI filed a Mechanic’s Lien in the Office of the Miller County Circuit Clerk and ex-officio Recorder which was recorded in Book P at Page 230 in that office (the “Original Lakeside Mechanic’s Lien”). Though it was not required by law to do so, prior to filing the Original Lakeside Mechanic’s Lien LOCI gave more than ten days notice to NP Associates and Thompson that it would file the said lien.
(emphasis added). LOCI contends that these paragraphs, although not specifically referencing § 429.012 Mo.Rev.Stat., satisfy its notice requirements. Trustee argues that the notice referred to in these paragraphs is not the § 429.012 notice but the 10 day advance notice of an intent to file a mechanic’s lien for completed work and material required under § 429.100 Mo.Rev.Stat. The Court agrees with the Trustee.
“A mechanic’s lien is a creature of statute and the party seeking its enforcement must plead and prove the statutory elements before a hen can be granted.” Financial Design Consultants, Inc. v. McCarver, 712 S.W.2d 738, 740 (Mo.App.1986); Kenny’s Tile and Floor Covering, Inc. v. Curry, 681 S.W.2d 461, 472 (Mo.App.1984). Section 429.012.1 provides as follows:
Every original contractor, who shall do or perform any work or labor upon, or furnish any material ... for any building, erection or improvements upon land ... under or by virtue of any contract ... shah provide to the person with whom the contract is made or to the Owner If There Is No Contract,8 prior to receiving payment in any form of any kind from such person, (a) either at the time of the execution of the contract, (b) when the materials are delivered, (c) when the work is commenced, or (d) delivered with the first invoice, a written notice ...
Subsection 2 provides: “Compliance with subsection 1 of this section shall be a condition precedent to the creation, existence or validity of any mechanic’s lien in favor of such original contract.” The written notice required by § 429.012 Mo.Rev.Stat. requires contractors to notify owners that failure to pay those supplying materials or service may result in the filing of a mechanic’s lien.9
Pleading and proof of such notice “is a condition precedent to the creation, existence or validity of such lien.” McCarver, 712 S.W.2d at 740; Curry, 681 S.W.2d at 472. The parties do not dispute the application of Missouri mechanic’s lien law nor the effect of failing to prove a statutory element. The only issue in controversy with regard to pleading notice is whether LOCI sufficiently plead notice in its lawsuit to enforce the Original Mechanic’s Lien and in the lawsuit to enforce the Supplemental Mechanic’s Lien.
The Court concludes that LOCI did not plead notice in either lawsuit sufficient to satisfy the requirements of § 429.012 Mo. Rev.Stat. Paragraphs 90 and 24, reprinted above, refer to the ten (10) day advance notice of intent to file a mechanic’s lien action required by § 429.100 Mo.Rev.Stat.10 In any event, paragraphs 90 and 24 do not contain any notice to an owner that a failure to pay for materials and services could result in a *685mechanic’s lien being filed. The excerpted paragraphs reprinted above are the only factual evidence LOCI offers to rebut the Trustee’s arguments that it failed to give proper § 429.012 notice. Accordingly, the Court concludes that LOCI failed to plead notice as required by § 429.012 Mo.Rev.Stat. and its mechanic’s lien actions fails as a matter of iaw.
III. Actual Notice
Trustee further argues that insufficient evidence exists to prove the § 429.012 statutory notice was timely given and delivered to the Debtor.11 LOCI contends it gave the statutorily required notice in a delivery ticket on January 4, 1989. This delivery ticket, it asserts, represented the first delivery of material to the project by LOCI and it was delivered to the Debtor. LOCI submits affidavits of Robert Kline and David Van-Hooser both of which state that the first delivery of materials by LOCI to Debtor occurred on January 4, 1989; that delivery ticket no. 14-100026 contains the notice to owner required by § 429.012 Mo.Rev.Stat., and that the delivery ticket was delivered to an agent or employee of Debtor at the time the material was delivered to Debtor.
In addition to pleading the § 429.012 notice, a party claiming a mechanic’s lien must prove that such notice was given and delivered to the owner on one of the statutorily defined times. Kenny’s Tile and Floor Covering, Inc. v. Curry, 681 S.W.2d 461, 471 (Mo.App.1984); Financial Design Consultants, Inc. v. McCarver, 712 S.W.2d 738, 740 (Mo.App.1986). This is also a determinative element as if notice is not given, or if it is untimely, then “[a]s a matter of law ... the lien could not be created.” American Fence Company of the Midwest v. Summers, 719 S.W.2d 496, 498 (Mo.App.1986). Through its response and supporting affidavits, LOCI has narrowed the inquiry as to whether notice was given when the materials were first delivered. On the record, the Court concludes that LOCI failed to give and deliver notice when the materials were first delivered.
Section 429.012 Mo.Rev.Stat. provides that notice shall be provided, prior to receiving payment in any form of any kind from such person:
(a) either at the time of the execution of the contract,
(b) when the materials are delivered,
(c) when the work is commenced, or
(d) delivered with the first invoice, a written notice ...
Neither affidavit submitted by LOCI avers that the § 429.012 Mo.Rev.Stat. notice was given to the Debtor prior to Debtor’s first payment to LOCI. As such, the affidavits alone fail to rebut the Trustee’s contention that notice was insufficient. Delivery ticket 14-10002612 clearly contains the § 429.012 notice in bold print. However, the ticket is unsigned.
Additionally, each affidavit states “[T]he first delivery of materials by LOCI to North Port Associates, Inc. occurred on January 4, 1989.” However, these statements conflict with the positions and concessions taken and made by LOCI throughout this litigation. First, the Joint Stipulation of Fact signed by counsel for the parties and filed May 13,1997 states in paragraph 5: “LOCI began performing construction work and providing supplies to the lakeside development of the North Port Project in December of 1988.” LOCI stated in pleadings: “The date of the furnishing of the first item of labor, equipment, material, supplies, services, machinery and tools by [LOCI] was in December of 1988 ...” in both the lawsuit to enforce the Original Mechanic’s Lien and the lawsuit to enforce the. Supplemental Mechanic’s Lien. *686The Court considers such inconsistencies material and concludes that LOCI did not raise an issue of material fact on the issue of § 429.012 Mo.Rev.Stat. notice being timely given and delivered to the Debtor.
Having found that the mechanic’s liens asserted by LOCI fail as a matter of law for failing to plead and timely deliver the statutory notice, the Court need not address Trustee’s remaining attacks on the validity of the mechanic’s liens.
CONCLUSION
For these reasons, the mechanics liens asserted by LOCI are unenforceable, and Trustee’s Motion for Summary Judgement against Defendant Lake Ozark Construction Industries, Inc. is GRANTED in favor of the Trustee and against Lake Ozark Construction Industries, Inc.
. This Statement of Facts is compiled from a Joint Stipulations of Facts filled May 13, 1997 between the Trustee, Lake Ozark Construction, Industries, Inc. ("LOCI”), and Great Southern Bank. The facts particular to defendant LOCI were supplemented in a Statement of Undisputed Facts contained in Plaintiff's Motion for Summary Judgement and Suggestions in Support. However, many of the "undisputed” facts set out in Plaintiff's Motion were, in fact, disputed and/or amended by LOCI in its Suggestions in Opposition to Plaintiff's Motion. The facts in this Memorandum Opinion and Order shall be restated from these three (3) documents to the extent necessary to resolve the issues sub judice. This Statement of Facts should not be construed as a final and complete finding on all relevant facts between Trustee and LOCI.
. The Bankruptcy Code is 11 U.S.C. §§ 101-1330. All future references are to title 11 unless otherwise indicated.
. LOCI admits that it alleged this, but it now claims that the last day of work covered by the Supplemental Mechanic’s Lien was actually August 14, 1992. See paragraph 30, page 5 of Defendant Lake Ozark Construction Industries’ Suggestions in Opposition to Plaintiff's Motion for Summary Judgement.
. See paragraphs 21-26, Statement of Facts.
. See paragraphs 27-29, Statement of Facts.
. The Statement of Mechanic's Lien was filed on August 23, 1991, and the lawsuit to enforce it was filed September 19, 1991. However, Trustee's Exhibit 1 is the Second Amended Petition to enforce the Original Mechanic’s Lien filed in the Circuit Court of Miller County on September 30, 1991. In response to the lack of notice pleading argument, LOCI alleges that the First Amended Petition filed September 19, 1991 (LOCI Exhibit 4) contains the relevant pleading provision. Having decided that the First Amended Petition's paragraph 90 does not plead § 429.012 Mo.Rev. Stat. notice as a matter of law, the Court need not inquire whether any other pleadings satisfy such requirement since it is LOCI's burden to come forward with evidence sufficient to rebut the Trustee. Celotex v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Fed.R.Civ.P. 56(e).
. Great Southern Bank is a defendant in the present action and a consensual lienholder.
. The portion in double underline was added by legislation in 1992.
. The "boilerplate” disclosure language in § 429.012 states: NOTICE TO OWNER — FAILURE OF THIS CONTRACTOR TO PAY THOSE PERSONS SUPPLYING MATERIAL OR SERVICES TO COMPLETE THIS CONTRACT CAN RESULT IN THE FILING OF A MECHANIC’S LIEN ON THE PROPERTY WHICH IS THE SUBJECT OF THIS CONTRACT PURSUANT TO CHAPTER 429, RSMO. TO AVOID THIS RESULT YOU MAY ASK THIS CONTRACTOR FOR “LIEN WAIVERS” FROM ALL PERSONS SUPPLYING MATERIAL OR SERVICES FOR THE WORK DESCRIBED IN THIS CONTRACT. FAILURE TO SECURE LIEN WAIVERS MAY RESULT IN YOUR PAYING FOR THE LABOR AND MATERIAL TWICE.
.Section 429.100 — Notification by subcontractors and other — provides: "Every person except the original contractor, who may wish to avail himself of the benefit of the provisions [of this Act], shall give ten days’ notice before the filing of the lien, as herein required, to the owner, owners or agents, or either of them, that he holds a claim against the building or improvement, setting forth the amount and from whom the same is due.”
. Specifically, the Trustee challenges each prong of the timing requirements. First, he argues that notice was not given at the execution of the contract since work began in December 1988 with no written agreement. Additionally, the November 9, 1989 Master Agreement does not contain notice. Next, Trustee argues that LOCI has neither produced or referred to any notice given when materials were first delivered or work first commenced in December 1988. Finally, Trustee argues that LOCI has not produced or referred to the first invoice which, LOCI alleges, contains the notice. Plaintiff's Motion for Summary Judgement Against Defendant LOCI and Suggestions in Support at 15-16.
. Trustee's Exhibit 8, page 2. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492771/ | MEMORANDUM OPINION
STOHR, District Judge.
This matter is before the Court on an appeal by defendant Lake Ozark Construction, Inc. (“LOCI”) from a final order issued July 9, 1997 by the United States Bankruptcy Court for the Eastern District of Missouri. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 158(a).
The instant case arises out of construction work performed and materials supplied by LOCI for North Port Associates, Inc. (“North Port”), the debtor. North Port was the owner of approximately 60 acres of property along the Lake of the Ozarks and 1,100 acres along the Osage River, both in Miller County, Missouri. In 1988, North Port began development of a residential resort community. Also in 1988, the parties agree that LOCI began providing construction services to North Port in connection with the development. The parties dispute whether materials were provided by LOCI in 1988.
Subsequently, in 1991, LOCI filed a statement of mechanic’s lien with the Circuit Clerk of Miller County in the amount of $75,151.20. Thereafter, LOCI continued work on the project. LOCI then filed a petition in Miller County to enforce the mechanic’s lien. In 1993, LOCI filed a first supplemental statement of mechanic’s lien with the Circuit Clerk of Miller County in the amount of $99,732.96 plus simple interest. LOCI then filed another petition in Miller County, this time to enforce the first supplemental statement of mechanic’s lien.
In December of 1993, North Port filed for Chapter 11 bankruptcy. Pursuant to a bankruptcy court order, an auction was held and North Port’s property was sold. The instant adversary proceeding was initiated by Peter D. Kerth, trustee for North Port, in an attempt to sort out competing claims to the proceeds of the sale. The Trustee then filed a motion for summary judgment against LOCI alleging that neither of the mechanic’s liens filed by LOCI were valid or enforceable. The bankruptcy court found that the liens failed as a matter of law and issued summary judgment in favor of the Trustee on July 9, 1997. The bankruptcy court subsequently denied LOCI’s motion for reconsideration. LOCI filed this appeal. On appeal, the Court reviews the bankruptcy court’s grant of summary judgment de novo to determine whether the moving party was entitled to judgment as a matter of law. In re Lauer, 98 F.3d 378, 382 (8th Cir.1996); citing In re Euerle Farms, Inc., 861 F.2d 1089,1090 (8th Cir.1988).
The first issue on appeal, as framed by appellant LOCI is:
Whether the Bankruptcy Court erred in finding that Lake Ozark Construction Industries, Inc. failed to give proper statutory notice as required by § 429.012 R.S.Mo.
Appellant’s Brief, at v. Concerning a contractor’s notice of mechanic’s lien, § 429.012 R.S.Mo. provides in pertinent part:
1. Every original contractor ... shall provide to the person with whom the contract is made or to the owner if there is no contract, prior to receiving payment in any form ... (a) either at the time of the *688execution of the contract, (b) when the materials are delivered, (c) when the work is commenced, or (d) delivered with first invoice, a written notice which shall include [boiler plate language]....
2. Compliance with subsection 1 of this section shall be a condition precedent to the creation, existence or validity of any mechanic’s lien in favor of such original contractor.
“By its unambiguous terms, these sections require all original contractors to provide a specific notice to the person with whom the contract for work is made before suit can be brought.” Gauzy Excavating & Grading Co. v. Kersten Homes, Inc., 934 S.W.2d 303, 304 (Mo. banc 1996). Accordingly, “courts have demanded strict compliance with the notice provision and have been reluctant to allow exceptions ...” Id.
The record contains no reference to North Port’s first payment to LOCI. The bankruptcy judge found that LOCI’s affidavits failed to aver that notice was given to North Port prior to the first payment and therefore, for that reason alone, LOCI failed to rebut the Trustee’s allegations that notice was insufficient. See July 9,1997 Order Granting Summary Judgment, 14. LOCI presents two affidavits in support of its contention that it gave North Port the statutorily required notice with the first delivery of materials in the form of a delivery ticket. The affidavits of Robert Kline and David Vanhooser attest:
That the first delivery of materials by LOCI to North Port Associates, Inc. occurred on January 4,1989.
That delivery ticket No. 14-100026 contains the “notice to owner” notice required by Section 429.012 R.S.Mo.
That delivery ticket No. 14-100026 was delivered to an agent or employee of North Port Associates, Inc. at the time the material was delivered to North Port Associates, Inc.
See LOCI’s Mem. in Opp. to Trustee’s Mtn. for Summary Judgment, Exhs. 1-2. The Trustee argues that the affidavits merely assert legal conclusions without supporting facts and are insufficient to rebut his assertion that notice was not given. The bankruptcy judge noted that the delivery ticket which was alleged to have contained the notice was unsigned by North Port despite a place on the ticket designated for customer signature. Additionally, the bankruptcy judge pointed out inconsistencies between the aforementioned affidavits and both the parties’ joint stipulation of facts and the petitions filed by LOCI to enforce the original mechanic’s lien and the supplemental mechanic’s lien. Specifically, the stipulation and the petitions state that LOCI began performing construction work and providing supplies for the North Port project in December 1988, whereas the affidavits aver that the first delivery of materials occurred on January 4, 1989. The bankruptcy court considered the inconsistency to be material and found that LOCI failed to raise an issue of material fact on whether notice had been given and delivered.
The Court finds that there is insufficient information in the record upon which to support judgment as a matter of law on this issue. Section 429.012 requires that notice must be given prior any payment to the contractor. Here, the Court cannot evaluate whether the notice was properly given, because nothing in the record demonstrates when North Port made its first payment. Accordingly, the Court cannot conclusively determine whether LOCI’s alleged notice fails as a matter of law. Additionally, LOCI argues that whether the notice was given is question of fact. See Sentinel Woodtreating, Inc. v. Cascade Development Corp., 599 S.W.2d 268, 271 (Mo.App.1980). Moreover, the fact question is material in the instant case because the giving of notice is a condition precedent to establishing an enforceable mechanic’s lien. LOCI contends that the affidavits of Robert Kline and David Vanhooser are sufficient to create a material fact issue on whether notice was timely given, therefore precluding the entry of summary judgment on this ground. The Court agrees. While earlier inconsistencies in the date of the first delivery of materials exist, the Court concludes that the affidavits of Robert Kline and David Vanhooser are sufficient to create a material fact question on the issue of notice which precludes the entry of summary judgment on that basis. Nevertheless, because of *689the Court’s disposition of LOCI’s second issue on appeal, the Court will affirm the entry of summary judgment on other grounds.
The second issue on appeal, as framed by LOCI is:
Whether the bankruptcy court erred in finding that Lake Ozark Construction Industries, Inc. failed to sufficiently plead that statutory notice had been given in the pleadings filed in the Circuit Court of Miller County, Missouri.
Appellant’s Brief, at v. Again, the Court reviews the bankruptcy court’s grant of summary judgment de novo. “A mechanic’s lien is a creature of statute ...” Financial Design Consultants v. McCarver, 712 S.W.2d 738, 740 (Mo.App.1986). However, in addition to the statutory requirements for a valid mechanic’s lien, Missouri case law has imposed an additional requirement. Specifically, the party seeking to enforce a mechanic’s lien “must plead and prove the statutory elements before a lien can be granted.” Id., citing Kenny’s Tile & Floor Covering Inc. v. Curry, 681 S.W.2d 461 (Mo.App.1984).
The bankruptcy court found that LOCI did not plead sufficient notice under § 429.012 R.S.Mo. in either of its petitions to enforce the mechanic’s liens. In LOCI’s first petition, the following language appears:
Prior to filing the Lakeside Mechanic’s Lien LOCI gave more than ten days notice to NP Associates and Thompson that it would file the lien.
See LOCI’s Mem. in Opp. to Trustee’s Mtn. for Summary Judgment, Exh. 4, ¶ 90. Similar language appears in LOCI’s second amended petition in the lawsuit to enforce the supplemental mechanic’s hen:
Though it was not required by law to do so, prior to filing the Original Lakeside Mechanic’s Lien LOCI gave more than ten days notice to NP Associates and Thompson that it would file the said hen.
See id. at Exh. 5, ¶24. The bankruptcy judge agreed with the trustee’s argument that the notice referred to in the above-quoted language is not the notice required to be given by original contractors pursuant to § 429.012 R.S.Mo., but is instead the ten day notice which is required to be given by subcontractors. See § 429.100 R.S.Mo. Accordingly, the bankruptcy judge concluded that LOCI’s mechanic’s hens failed as a matter of law for LOCI’s failure to plead § 429.012 notice as required by Missouri case law.
On appeal, LOCI argues that in McCarver and Curry, the original contractors had failed to plead notice in any form. It is LOCI’s contention that the case law only requires that the original contractor plead notice generally in order to satisfy the pleading requirement, and therefore the language contained in its petitions is sufficient. The Court concurs with the findings of the bankruptcy judge that the above allegations are insufficient to plead the type of notice contemplated by § 429.012 R.S.Mo. The McCar-ver and Curry cases provide that pleading and proof of notice are conditions precedent to the creation of a valid hen. Here, the allegations that LOCI provided more than ten days notice “though it was not required by law to do so” do not suffice to plead the giving of the notice owed to an owner by an original contractor under § 429.012 R.S.Mo. Accordingly, the Court affirms the bankruptcy court’s grant of summary judgment in favor of the Trustee and against LOCI on the ground that LOCI failed to properly plead notice of its liens.
In conclusion, the Court finds that a material fact issue precludes summary judgment on the basis that LOCI failed to give the notice required by § 429.012 R.S.Mo. Nevertheless, the Court affirms the bankruptcy court’s grant of summary judgment on the basis that LOCI failed to plead the giving of the required notice in its actions to enforce the mechanic’s liens.
JUDGMENT
IT IS HEREBY ORDERED, ADJUDGED and DECREED that the July 9, 1997 order of the bankruptcy court granting summary judgment in favor of the Trustee and against Lake Ozark Construction Industries, Inc. is affirmed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492772/ | MEMORANDUM OF DECISION
JIM D. PAPPAS, Chief Judge.
Plaintiff and Defendant each move for summary judgment in this adversary proceeding. No hearing was requested, nor is one required for the Court to dispose of the motions.
Facts
The facts are, in large part, stipulated. Some time prior to March 7, 1997, Debtor Matt Psalto purchased a 1995 Polaris snowmobile in Wyoming. No certificate of title was issued for the snowmobile at the time of purchase, nor has one since been issued. At the time of purchase, Debtor resided in Idaho Falls, and he brought the snowmobile to Idaho.
On March 7,1997, Debtor borrowed money from Defendant, and granted it a security interest in the snowmobile to secure the loan. Defendant attempted to perfect its security interest by filing a UCC-1 financing statement with the Idaho Secretary of State.
On November 26, 1997, Debtor filed a bankruptcy petition under Chapter 7. Plaintiff is the trustee in that bankruptcy case. Debtor surrendered the snowmobile to Plaintiff. Plaintiff filed this action to avoid Defendant’s security interest in the snowmobile.
Disposition of Issues
Plaintiff argues that Defendant’s lien is not properly perfected under Idaho law, and is therefore avoidable under a trustee’s hypothetical lien creditor status bestowed by the “strong-arm” provisions of the Bankruptcy Code. 11 U.S.C. § 544(a). Defendant disagrees. The Court concludes Plaintiff is correct.
In most instances, the Uniform Commercial Code allows perfection of a creditor’s security interest in goods by the filing of a financing statement with the Secretary of State. Idaho Code § 28-9-302(1). One important exception to this general rule applies to property subject to Title 5 of Title 49 of the Idaho Code, the Idaho motor vehicle title statutes. Idaho Code § 28-9-302(3)(b). For motor vehicles, issuance of a certificate of title and the notation of the creditor’s lien on that certificate is the exclusive method of perfection. Idaho Code § 49-510(1).
Beginning in 1991, certain “off road vehicles”, including snowmobiles, have been covered by the motor vehicle title laws. Idaho Code § 49-501. Since that time, certificates of title have been issued for snowmobiles, and a security interest must be perfected by notation on the title certificate to the snowmobile to be effective. Where a lien on a debtor’s motor vehicle is not properly perfected, it may be avoided by the Chapter 7 bankruptcy trustee. Fitzgerald v. Bauer Pontiac-Cadillac-Buick-GMC, Inc., (In re Nedrow), 95 I.B.C.R. 198, 199; Fitzgerald v. Norwest Financial Idaho, Inc., (In re Keller), 95 I.B.C.R. 164, 165.
Defendant argues that since there was no title certificate ever issued on Debtor’s snowmobile, it was excused from this perfection requirement. Defendant’s argument, however, simply ignores the law. Idaho Code § 49-504(2) provides a procedure for issuance of a title certificate for a covered vehiclé *755purchased elsewhere and then brought into this State. Moreover, Idaho Code § 49-510 places the burden of securing the issuance of a certificate squarely on the lien creditor:
No lien or encumbrance on any vehicle ... shall be perfected ... until the holder of the lien or encumbrance has complied with the requirements of section 49-504, Idaho Code, and has filed the properly completed title application and all required supporting documents with [the Idaho Department of Transportation] or an agent of the department.
(Emphasis added).
Defendant failed to insure that a proper certificate of title to the snowmobile was issued and that it’s lien was noted on that certificate, all as required by the Idaho statutes. Defendant’s security interest, therefore, is avoidable by Plaintiff under 11 U.S.C. § 544(a).1 A separate order and judgment will be issued.
. Because the Court concludes Defendant's security interest was not properly perfected, and is therefore avoidable, the Court need not address Plaintiff's arguments that Defendant's documents are inadequate to create an enforceable security interest in the snowmobile. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492773/ | MEMORANDUM OF DECISION and ORDER
TERRY L. MYERS, Bankruptcy Judge.
First Security Bank obtained, under § 362(e) of the Code, an Order Terminating the Automatic Stay as it applied to the Bank’s collateral, a 1991 Geo Metro. The matter is presently before the Court upon the Debtor’s Motion for Relief from that Order.
The record reflects that the Debtor’s Chapter 13 plan, among other things, proposed periodic payments to the Bank through the Trustee in satisfaction of the Bank’s allowed secured claim on the subject vehicle. The Debtor’s first plan proposed an allowed secured value of $1,000.00 on the vehicle, to which the Bank objected alleging a $3,130.00 value. The amended plan which was ultimately confirmed by the Court’s order of March 3, 1998 established a $2,742.00 value.
There does not appear to be a dispute over whether or not the Debtor has made the payments as required by the plan. However, on July 27, 1998, First Security filed a Motion for Relief from Stay under Section 362(d) alleging that the Debtor was in default of her obligation to keep the vehicle insured. The Motion of the Bank contained an explicit notice, required by Local Bankruptcy Rule 4001.2, advising that the stay would automatically terminate under § 362(e) in thirty-three days absent the Debtor’s response, in accord with Local Bankruptcy Rule, and the entry of an order continuing the stay in effect as a result of or pending a final hearing on the motion. The record further establishes that the Motion for Relief from Stay was properly served on the Debtor, the Debtor’s attorney and the Trustee.
No response to the Motion from Debtor’s attorney appears of record. An Order was entered under § 362(e) based on this lack of response. That Order was entered on September 1 and mailed to the debtor, all counsel and the Trustee on that date.
On September 15, Debtor filed a Motion for relief from the Order terminating the stay under Fed.R.Bank.P. 9024. The Debt- or’s motion was supported by the Affidavit of her counsel.
That Affidavit asserts that, upon review of the Bank’s Motion, the Debtor’s attorney determined that the only issue involved -was whether or not the vehicle was insured. It further recites that Debtor’s attorney faxed the Bank a document believed to prove the fact of insurance coverage. It does not appear from the record that Debtor’s counsel sent the Bank’s attorney this asserted proof of coverage.
It is undisputed that the Debtor’s attorney filed no response to the Motion for Relief from Stay or otherwise informed the Bank’s attorney of the results of his investigation on the insurance issue. Nevertheless, Debtor’s attorney asserts in the Affidavit that, once he sent the Bank the fax regarding the insurance, he “understood that took care of the matter.” The basis of this “understanding” does not appear from the record.
Rule 9024 incorporates, inter alia, Federal Rule of Civil Procedure 60(b)(1) which allows for relief from an order on the grounds of “mistake, inadvertence, surprise or excusable neglect”. Such a motion must be made within one year of the subject order and therefore the Motion is timely.
*758Rule 60(b) is remedial in nature and must be liberally applied. In re Smith, 1995 WL 241398 at *3 (Bankr.D.Idaho 1995). However, not even “a liberal interpretation of ‘excusable neglect’ will excuse every error or omission in the conduct of litigation.” Id. at *4 (citation omitted).
The record, including the submissions of Debtor’s counsel, does not establish either “mistake” or “excusable” neglect. Section 362(e) of the Code and Local Bankruptcy Rule 4001.2 are sufficiently clear. If a motion is properly filed and served, the automatic stay of § 362(a) will terminate in the absence of an order entered by the Court, upon an objection of the party resisting the stay and hearing, continuing the stay in effect. If no response is filed, relief is essentially automatic.
This Court, like all bankruptcy courts, is faced with a rapidly increasing volume of eases and, consequently, a burgeoning number of § 362(d) stay relief motions. Many pass through without objection or hearing. The “automatic” feature of § 362(e) is critical to the functioning of the bankruptcy system. The Court is loathe to interfere with its proper operation.
It was appropriate for the Debtor’s counsel to investigate the insurance issue and determine that, at least from the Debtor’s point of view, there was no lapse in coverage. But this alone was not enough; the Bank’s motion still had to be addressed. Debtor’s counsel could have (1) filed an objection to the Bank’s Motion asserting the basis upon which it was believed the Motion lacked merit; (2) contacted counsel for the Bank and asked that the Motion be withdrawn; (3) copied the Bank’s attorney with the communication made directly to the Bank’s officer;1 (4) or communicated informally with the Bank’s counsel in order to resolve this entire matter outside the formal litigation process. The Court notes that both counsel for the Bank and counsel for the Debtor are experienced bankruptcy practitioners and have worked cooperatively with one another in literally hundreds of situations, including other claims in this very same ease.
Debtor’s counsel could reasonably have thought here that he had solved the underlying factual issue. Unfortunately, the process he utilized did not solve the underlying legal issue. Only minimal efforts were needed to insure that an order would not be entered granting the Bank’s Motion on § 362(e) grounds. Even the Debtor’s attorney must admit that there was no way for the Bank’s counsel to realize that the issue had been resolved, unless one assumes that the Bank officer, upon receiving the fax, would advise her counsel. However, it is just as easy to assume that the Bank officer would surmise that the Debtor’s attorney had directly communicated with the Bank’s counsel and contemporaneously advised him.
Based upon the foregoing, the Court finds that there is no mistake or excusable neglect sufficient under Rule 60(b)(1) to justify entry of an order reversing or modifying the stay relief previously obtained by the Bank under § 362(e). If the Debtor is correct that there are no outstanding defaults under the loan documents, it would be hard to see how the Bank could proceed to enforce its security interest under applicable nonbankruptcy law. Nevertheless, if there is a default, the Bank will not need to once again come to this Court for relief from stay.
The Debtor’s Motion for Relief from the § 362(e) Order is DENIED.
. It is questionable practice for the Debtor's attorney to here have communicated directly with the Bank without at the very least contemporaneously advising the Bank's attorney of the communication. In some cases, such direct communication with an opposing party is an ethical issue. See Rule 4.2, Idaho Rules of Professional Conduct. In this case, it is at a minimum a practical problem which has clearly given rise to the difficulties now faced by the Debtor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492776/ | RULING
SAM, Chief Judge.
This matter is before the court to determine whether appellants are entitled to a jury trial pursuant to 28 U.S.C.A. § 1480(a) and applicable Utah law. Pursuant to Fed. R.Bankr.P. 8003 and 28 U.S.C.A. § 158(d)(2), the issue is presented to the court on interlocutory appeal from the bankruptcy court’s October 20, 1997 order striking appellants’ request for a jury trial. The appeal has been consolidated with defendants’ Fourth Motion to Withdraw the Reference.
While the argument before the bankruptcy court focused on whether the appellants/defendants were entitled to a jury trial based on a Seventh Amendment analysis, appellants did not raise or brief that issue before this court. Instead, appellants rely exclusively on them interpretation of § 1480(a) and its application to them case. Hence, as argued by the Trustee/appellee, appellants have either abandoned or waived the Seventh Amendment arguments and must rely exclusively on 28 U.S.C.A. § 1480(a). See Brief of Appellees at 12. See also Appellants’ Reply Brief at 2 (“The dispositive issue in this appeal is whether section 1480 is still the law.”).
The factual and procedural history, while relevant, is not determinative of the issue presented to the court. Hence, the court will not restate the presentation of the facts contained in the parties’ briefs but will proceed directly to address the question of law presented for consideration — whether appellants are entitled to a jury trial in the adversary proceeding, and therefore, whether the bankruptcy court erred in striking appellants’ jury trial demand. Deciding whether Appellants are entitled to a jury trial in the adversary proceeding requires the court to rule on one, highly technical, but discreet bankruptcy issue — whether 28 U.S.C.A. § 1480(a) was repealed by the enactment of the 1984 Bankruptcy Amendments and Federal Judgeship Act (“BAFJA”).
While appellants make a good faith argument, supported by a reasonable reading of the case law and commentators which recognize the confusion created by the Congressional oversight which possibly left two statutes in place where there should only be one, the better reasoned cases support appellees’ position. Appellees demonstrate in their brief that § 1480 was repealed by the 1984 amendments comprising the BAFJA which included a new jury trial provision — § 1411. The analytical structure the court finds most logical and persuasive is the chronological approach which supports the conclusion that § 1480 was repealed and the only rights to a jury trial in bankruptcy courts are governed by traditional Seventh Amendment analysis or § 1411. This chronological approach is explained well in Jacobs v. O’Bannon, 49 B.R. 763 (1985).
If there is no constitutional right to trial by jury in the case at bar, one must determine whether there is a statutory right. There are two statutes to consider: 28 U.S.C.A. §§ 1480 and 1411. Unfortunately, they provide no guidance because § 1411(a) does not apply and § 1480(a) has been repealed.
28 U.S.C.A. § 1480 was enacted as part of the Bankruptcy Reform Act of 1978. The text was as follows:
“Section 1480. Jury Trials. *122“(a) Except as provided in sub-section (b) of this section, this chapter and Title 11 do not affect any right to trial by jury, in a case under Title 11 or in a proceeding arising under Title 11 or arising in or related to a case under Title 11, that is provided by any statute in effect on September 30,1979.
“(b) The bankruptcy court may order the issues arising under § 303 of Title 11 to be tried without a jury.”
Section 402(b) of the Bankruptcy Reform Act (after all amendments except the Bankruptcy Amendments and Federal Judgeship Act of 1984) provided that § 1480 was to become effective on June 28, 1984. [citation omitted] The insoluble problem arises under the Bankruptcy Amendments and Federal Judgeship Act of 1984, which was signed by the President on July 10, 1984. Section 113 of that Act amended § 402(b) of the Bankruptcy Reform Act to provide that Title II and its amendments to Title 28 of the United States Code (which includes § 1480) “shall not be effective.” - This amendment was effective retroactive to June 27,1984. [citation omitted]
However, in direct conflict with § 113, § 121(a) of the Bankruptcy Amendments and Federal Judgeship Act of 1984 provides that Title II of the Bankruptcy Reform Act and its amendments to Title 28 of the United States Code become effective on the date of enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984, i.e., July 10,1984. There is no completely satisfactory way to reconcile this conflict.
A strictly chronological interpretation would produce the following result: but for the retroactive amendment in the Bankruptcy Amendments and Federal Judgeship Act of 1984, § 1480 was in effect from June 28 to July 9. On July 10, 1984, but retroactive to June 27, 1984, the effective date of § 1480 was amended to delete the date “June 28, 1984” and to insert in its place the phrase “shall not be effective.” Also on July 10, but not retroactive, § 121(a) of the Bankruptcy Amendments and Federal Judgeship Act of 1984 purported to amend the statute further by substituting “July 10, 1984” for “June 28, 1984”; however, because of the retroactive effect of § 113, the date “June 28, 1984” was no longer in the statute, and, therefore, the July 10 date could not be substituted. [citation omitted] Therefore, if one adopts a chronological application of the effective date provisions of the Bankruptcy Amendments and Federal Judgeship Act, § 113 of that Act effectively repealed § 1480. [citation omitted]
There is a second line of reasoning that supports the conclusion that § 1480 v?as retroactively repealed: if given literal effect, § 121(a) would reenact the entire jurisdictional scheme of the Bankruptcy Reform Act of 1978, which jurisdictional scheme has been determined by the United States Supreme Court to be unconstitutional. [citation omitted] But this could not have been intended, because a principal purpose of the Bankruptcy Amendments and Federal Judgeship Act of 1984 was to replace that statutory scheme, and to substitute the scheme enacted by the Bankruptcy Amendments and Federal Judgeship Act of 1984. Surely a drafting glitch must be interpreted as not effective at least to the extent that it would reenact the problems that the statute was intended to cure.
Those intent on unveiling the mysteries of the apparent conflict between §§113 and 121(a) of the Bankruptcy Amendments and Federal Judgeship Act of 1984 will find careful analysis of statutory language to be futile; the apparent inconsistency is an actual, irreconcilable, internal contradiction. Congress simply made a mistake when it enacted § 121(a). [citation omitted] Fortunately, as demonstrated above, there is a method of reaching the same conclusion through more traditional legal analysis than simply rejecting an obvious error, [citation omitted]
Id. at 766-767.
The Tenth Circuit has also adopted this approach. See Pursifull v. Eakin, 814 F.2d 1501 n. 1 (10th Cir.1987) (applying the same chronological approach detailed in Jacobs, the Tenth Circuit concludes that “the amend-*123merit provided for by § 121(a) did not apply to § 402(b), and § 402(b) was left with the “shall not be effective” language. As a result of this final amendment to § 402(b), the amendments made by title II of the 1978 Act which relied on § 402(b) for their effective date will not become effective.” Hence, 1480 never became effective, and/or was repealed by the BAFJA.). The Supreme Court has also noted that “§ 1480 was apparently repealed by the 1984 Amendments.” Granfi-nanciera, S.A. v. Nordberg, 492 U.S. 33 n. 3, 109 S.Ct. 2782,106 L.Ed.2d 26 (1989).
While the court recognizes appellants’ good faith attempt to convince the court that § 1480 is still in effect and provides them a right to a jury trial, the court will not endorse the tortured factual analysis required to distinguish the above-cited cases. Accordingly, appellants’ appeal and fourth motion to withdraw the reference are denied. Appellants have no right to a jury trial for the claims at issue.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492778/ | SUPPLEMENTAL OPINION
DAVID A. SCHOLL, Chief Judge.
The seemingly modest purpose of the instant decision is to fix the fees due to LABRUM & DOAK, LLP (“the Debtor”), from the cases completed by the remaining defendants (“the Defendants”) in this adversary proceeding (“the Proceeding”) against whom we have already entered a declaratory judgment regarding the Debtor’s rights to a quantum meruit recovery in a previous decision of August 14, 1998, reported at 225 B.R. 93, 1998 WL 516145, at *10-*18 (“Labrum II”). The Defendants are JOHN R. BROWN, ESQUIRE; PATRICK GIBBONS, ESQUIRE; MICHAEL T. MeDON-NELL, ESQUIRE; DANIEL RYAN, ESQUIRE; and their law firm, RYAN BROWN McDonnell berger & gibbons (“the Firm”).
In Labrum II we required the Debtor to designate these completed cases handled by the Defendants regarding which it intended to present further evidence in order to liquidate its claims by September 4, 1998. We further scheduled a supplemental trial on September 16, 1998, to receive further evidence in support of these claims and a claim for a referral fee by Defendant WILLIAM LONGO, ESQUIRE (“Longo”). Id. at *18. The Debtor proceeded to timely designate the Williams, Bielun, Keller, Burke, Saracino, Maguire, and Fertal cases as the sources of its present claims. See id. at *15-*16.
On September 2, 1998, the Debtor also filed motion seeking discovery of the Firm’s time records in all of its former cases handled by the Firm. After a hearing on this motion of September 9, 1998, we entered an order requiring the Firm to answer that discovery as to only the seven designated cases by September 11, 1998. In light of a colloquy at the hearing relating to discovery from potential expert witnesses, our September 9 order further provided that the parties were to submit expert witness disclosures to the other simultaneously.
On September 14, 1998, the Debtor moved to continue the September 16, 1998, trial for 30 days because it had not yet obtained the expert which we had indicated in Labrum II, at *15, might be necessary to sustain its claims. That motion was promptly denied, because we believed that we had provided the Debtor with a carefully-timed dispensation in giving it an opportunity to present further evidence to support its claims. Compare In re Brown, 1998 WL 140889 (Bankr. E.D.Pa. March 24, 1998) (time structures established in sua sponte order allowing a party to present further evidence were strictly construed).
Nevertheless, on September 16, 1998, neither Defendants Brown nor McDonnell who, as the Defendants’ attorneys who were principally responsible for the seven designated cases at issue with the Firm and were obviously necessary witnesses, failed to appear at the trial. Nor did any other witnesses, including any expert on the behalf of the Debt- or, because it had not yet obtained such an expert. The explanation of Brown and McDonnell for not appearing was that they had not been subpoenaed until September 14; the subpoenas were not properly served on them; and they were presently involved in trials in forums outside of Philadelphia.
It seemed to us that Brown and McDonnell should have assumed that their presence was required on September 16 ever since we entered our order of August 14. We therefore continued the entire trial until September 23,1998, when Brown was available, thus effectively giving the Debtor a further opportunity to retain an expert. The parties ultimately agreed that a videotaped deposition of McDonnell would be taken on Sunday, September 20,1998, and lodged with the court in lieu of his testimony.
On or about September 16,1998, the Debt- or engaged as its expert C. George Milner, Esquire, a solo practitioner with a broad-based practice since 1965 who rents office space from the Debtor’s counsel. Applications were filed by the Debtor on September 18, 1998, to retain Milner and to present his testimony by videotape due to his having a *165prior engagement on September 23. The Defendants answered these applications by seeking to preclude Milner's testimony and to require his attendance at trial. On September 21, 1998, we entered an Order denying the request to present videotaped testimony, nevertheless allowing Milner to be called as a witness, and reiterating the directive of our September 9 order that any expert witness disclosures were to be exchanged simultaneously.
Brown appeared on September 23 and his lengthy testimony consumed much of that day. The court scheduled Mimer's testimony for September 25, 1998. The Defendants reiterated their objection to his testimony, contending that they were inadequately prepared to cross-examine Milner and/or rebut his testimony with an expert of their own because certain expert witness disclosures provided unilaterally to them by the Debtor on September 21, in the absence of their providing any disclosures or commitment not to call an expert, did not fully comply with Federal Rule of Civil Procedure ("F.R.Civ. P.") 26(a)(2). The Defendants did not indicate whether they actually intended to call any expert witness in rebuttal, and therefore they provided no expert witness disclosures to the Debtors simultaneously with those of the Debtor's or otherwise.
After considering the Defendants' contentions, we stated, at the commencement of the September 25 proceedings, that, if they so desired, we would continue the Defendants' cross-examination and/or presentation of expert rebuttal testimony to either October 7, 1998, or October 9, 1998, thereby curing the Defendants' claims of lack of sufficient prior notice to prepare for Milner's testimony. Compare Brown, supra. In response to this offer, the Defendants opted to cross-examine Milner directly after his testimony and not to call any rebuttal witnesses. Therefore, at the close of that hearing, we directed the parties to submit supplemental briefs by October 2, 1998 (the Debtor), and October 9, 1998 (the Defendants).
The Defendants prefaced their brief with an extended discussion protesting our allowing the supplemental hearing to take place, on several grounds, which merit brief discussion. One argument~ is that because the Debtor defended a writ of mandamus pending in the Third Circuit Court of Appeals on the Defendants' unsuccessful jury demand, see Labru,m II, supra, at *2, by stating, on July 13, 1998, that this trial, conducted from June 8 to June 11, 1998, was over, they should be judicially estopped from now participating in this supplement to the June trial.
This argument might have some appeal if (1) the pleadings filed in the mandamus proceedings had been made part of the record in the Proceeding; and (2) it had been proven that the Debtor made contrary aver-ments in the mandamus pleadings while knowing full well that the instant record would be supplemented, or that it intended to request such relief. That is because, in Ryan Operations, G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 361 (3d Cir.1996), the court established that judicial estoppel
entails a two-part inquiry: (1) is [the party charged with estoppel's] present position inconsistent with a position it [previously] asserted ... and (2) if so, did [the party charged] assert either or both of the inconsistent positions in bad faith-i.e., with intent to play fast and loose with the court. Only if both prongs are satisfied is judicial estoppel an appropriate remedy.
The second part of the judicial estop-pel "inquiry" requires that the party charged know that its alleged inconsistent statements are in fact inconsistent. See, e.g., In re LaBrum & Doak, LLP, 1998 WL 404301, at *3 (Bankr.E.D.Pa. July 15, 1998) (denying a motion to dismiss another proceeding in this case which had been initiated at the request of the Defendants). Here, however, the supplemental trial of September 1998 in the Proceeding was provided for sua sponte by this court. No request for any such disposition was made by the Debtor, as the Defendants note elsewhere in their brief in arguing that the Debtor meant to rest its case in June. Therefore, if the Debtor made the statement attributed to it in the course of the mandamus proceeding in July 1998, it had no reason to know or even expect that this court would allow the record to be supplemented. As a result, in no sense was it or could it be *166established that, in making such a statement, the Debtor intended to “play fast and loose” ■with this court or the Court of Appeals. Consequently, the judicial estoppel argument must fail.
Apart from erroneously implicating the Debtor in effectively reopening the record to accept further testimony before liquidating its fee claims, the Defendant vigorously protested this court’s action in doing so, citing Compass Technology, Inc. v. Tseng Laboratories, Inc., 71 F.3d 1125, 1130-31 (3d Cir. 1995); and EEOC v. Westinghouse Electric Corp., 925 F.2d 619, 631 (3d Cir.1991). However, neither of these cases present a situation where a trial court was found to have improperly reopened the record of a trial prior to rendering a final decision. In Compass Technology the appellate court held that the trial court abused its discretion by not reopening the record to allow an important witness to testify. 71 F.3d at 1130-31. Westinghouse involved the issue of whether a record should be reopened on remand after a final discussion had been rendered by the trial court which was reversed on appeal. 925 F.2d at 627-31.
This court thusly restated the law applicable to reopening of a record by a trial court prior to its rendering a final decision somewhat comprehensively in In re Orfa Corp. of America (Del.), 115 B.R. 799, 806-07 (Bankr. E.D.Pa.1990):
A motion to reopen a case is addressed to the sound equitable discretion of the trial court. See Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 330-31, 91 S.Ct. 795, 802-03, 28 L.Ed.2d 77 (1971); Brown v. Wright, ..., 588 F.2d [708,] at 709-10; [ (9th Cir.1978) ]; Rochez Bros. v. Rhoades, 527 F.2d 891, 894-95 & n. 6 (3d Cir.1975); 6A J. MOORE, [FEDERAL PRACTICE], ¶ 59.04[13], at 59-33 to 59-38 [(2d ed.1989)]; and 75 AM. JUR.2d 243-44 (1974). In exercising its discretion on such a motion, a court must weigh “the interest of fairness and substantial justice,” 6A J. MOORE, supra, ¶ 59.04[13], at 59-35, the burdens placed upon the parties and their witnesses, undue prejudice resulting from granting or denying the motion, and whether granting or denying the motion would facilitate judicial economy. Rochez Bros., supra, 527 F.2d at 894 n. 6.
A court may act sua sponte in reopening the record. See Students of California School for the Blind v. Honig, 736 F.2d 538, 548, reh’g en banc denied, 745 F.2d 582 (9th Cir.1984). Where significant post-trial developments have occurred, denial of such a motion may be an abuse of discretion. See F. v. F., 358 A.2d 714, 716 (Del.1976).
It is established in this Circuit that a trial court properly exercises its discretion when it sua sponte reopens a record
for the purpose of satisfying its own judgment and conscience as to the important question of damages, ... to arrive at a correct conclusion in this important matter.
J.W. Paxson Co. v. Board of Chosen Freeholders of Cumberland Co., 201 F. 656, 661 (3d Cir.1912). Accord, e.g., Honig, supra, 736 F.2d at 548-49; and Reserve Plan, Inc. v. Arthur Murray, Inc. 38 F.R.D. 23, 35 (W.D.Mo.1965), vacated on other grounds, 364 F.2d 28 (8th Cir.1966). Cf. Rochez Bros., supra, 527 F.2d at 894-95 & n. 6; and Joy Technologies, Inc. v. Flakt, Inc., 901 F.Supp. 180, 181-83 (D.Del.1995) (orders reopening records were responsive to motions of a party).
The burden of an additional day and a half of trial were minimal. Any prejudice to the Defendants was overcome by allowing their witness-attorneys to expound at length on their own particular view-points, as Brown did, and by allowing the Defendants a substantial period of time to frame a rebuttal, a right which they eschewed. We believe that the interests of fairness and substantial justice have been served by this directive because the LaBrum II decision was essentially one of first impression on the issue of liability, and we are committed to deciding this matter fairly and equitably on a full record. We found that, although the record made in June was not without probative evidence on the issue of the precise sums due to the Debtor and we could have rendered a decision awarding the Debtor more or less fees than we ultimately do on its basis, the *167evidence was not as clear as it might have been. See Labrum II, at *15-*16. We did not wish to render any aspect of our decision on the basis of guesswork if this could be avoided.
Before turning to the only relevant issue of the measurement of the fees due to the Debt- or, the Defendants launch a few other misguided missiles calculated to eliminate the Debtor’s claims in their entirety. At the outset the Defendants attempt to justify the equities of their general intransigence in this matter by describing themselves as victims of the selfish destruction of the Debtor by their former colleagues, John Salmon, Peter Neeson, and Stephen Springer. Since Nee-son became, somewhat reluctantly, the Debt- or’s dissolution partner, the Proceeding is characterized by the Defendants as an attack by the guilty against the innocent.
It is perhaps easy for lawyers, who must often advocate for their clients, to fall into this pattern in analyzing unfortunate circumstances which have innocently befallen them. However, we must observe that this is an involuntary bankruptcy case which was initiated not by Neeson, et al, but by six former partners of the Debtor whose names have not surfaced as sided with any party in this litigation. See In re LaBrum & Doak, LLP, 222 B.R. 749, 752 (Bankr.E.D.Pa.1998) (“LaBrum I ”). Moreover, Salmon, Neeson, and Springer are among the targets of two other major adversary proceedings arising out of this case, id at 753, they will in all probability be called to answer for any wrongdoings on their parts.
More significantly, the beneficiary of this litigation will be the Debtor’s estate. Distribution of the assets of this estate may extend to general creditors, but is unlikely to extend to any partners. Thus, in no sense do the potential wrongdoings of others justify the Defendants’ defense in the face of law against them on the particular issue of the Firm’s liabilities in the Proceeding.
Turning finally to the merits, the Defendants persist in inapt generalizations, such as an assertion that the Debtor, by basically allowing the new firms of its former attorneys to handle eases and matters previously handled by these attorneys as employees of the Debtor, abandoned its clients and/or “wrongfully” withdrew from the cases or matters previously handled by the Debtor. We do not consider the Debtor’s procedures for reassigning its cases to have been irresponsible to clients. Nor, by assigning these matters to parties best able to eliminate their own potential liability, does the debtor appear to be chargeable with taking unfair advantage of its former employees. Rather, it is the best way we can conceive for handling the perhaps untimely but nevertheless very real death of the Debtor, which creates potential liability for its partners. We note that, if the hands of any parties are unclean in this affair, it is irresponsible to wipe them off on the shirts of the Debtor’s creditors.
The Defendants attack Milner’s testimony as a whole as procedurally and substantively deficient. The procedural deficiency arises from his failure to produce a pre-testimonial report, pursuant to F.R.Civ.P. 26(a). We reiterate our observation at page 166-67 supra that any prejudice to the Defendants was more than cured by our offer to allow the Defendants two weeks to prepare cross-examination and rebuttal evidence, especially since Milner was introduced to this case only about a week before he testified. We perceive the Defendants’ failure to take advantage of this offer not as a courtesy to the court or an unprecedented gesture towards the end of preserving estate assets, but as a recognition that the substance of his testimony could not be rebutted.
The attack on substance appears to us to represent an attempt to attribute talismanic significance to a “ten-factor test” in deciding is legal, quantum meruit claim applied by Magistrate Judge Rueter in Paid v. Horton, 1996 WL 297572, at *8 (E.D.Pa. May 22, 1996), and referenced in LaBrum II, at *14-*15. The Defendants seem to argue that, unless the Debtor was able to prove every one of these ten factors, it could not successfully assert a quantum meruit claim against them for its share of fees. Since Milner did not acknowledge this ten-factor test, nor consider many of its elements in formulating his opinions, he is labeled as incompetent.
*168However, although this ten-factor was referenced in Labrum II, we did not mean to imply that this test applied here to any significant degree. In no sense did we mean to imply that all ten factors had to be proven in any or all of the cases at issue to justify an award to the Debtor.
The Paul factors applied very nicely to resolution of the case before Magistrate Rueter, a suit by an attorney whom his client perceived as not only not helpful but as obstructive in achieving his ends. 1996 WL 297572, at *3-*6. In support of this test, Paul cites Mulholland v. Kerns, 822 F.Supp. 1161-1169 (E.D.Pa.1993); and In re Trust Estate of LaRocca, 431 Pa. 542, 546, 246 A.2d 337, 339 (1968). Mulholland involved a suit by an attorney discharged because of his client’s perception that he was abrasive to other parties and overly concerned about recovery of his fee. 822 F.Supp. at 1165-66. LaRocca involved a fee petition against an estate trust, in which the client disputed the amount of the fee relative to the size of the estate. 431 Pa. at 545-46, 246 A.2d at 339.
Disputes similar to these at issue in Paul, Mulholland, and LaRocca, i.e., claim of attorneys for fees larger than dissatisfied clients are willing to pay, have been resolved, under Pennsylvania law, with the application of much simpler tests than the ten-part Paul test, e.g., the four factors considered by Judge Fox of this court in In re Smith, 76 B.R. 426, 431 (Bankr.E.D.Pa.1987). Cf. Annot., Circumstances Under Which Attorney Retains Right to Compensation Notwithstanding Voluntary Withdrawal from Case, 53 A.L.R.5th 287, 305 (1998) (a three-factor test is synthesized from a review of all American jurisdictions). No multi-factor test at all was put to use in the other principal authority cited in the Defendants’ prior brief, Agresta v. Sambor, 1994 WL 70347 (E.D.Pa. March 1, 1994).
The instant Proceeding involves a dispute quite distinct from those at issue in the foregoing cases and commentary. As far as we can tell, each of the clients involved in the instant cases regarding which the Debtor’s share of the fees in dispute received competent service and is not disputing either the quality of service nor the fee charged. The sole issue presented is how these fees should be divided among the various entities who worked on them. While the ten factors recited in Paul and the lesser number cited by other authorities are somewhat relevant to this determination, they are not relevant to a very significant degree. Nothing stated in Labrum II was meant to suggest to the contrary. We merely expressed our view that some additional evidence, focusing on the issue of the proper allocation of the fees in question, would be helpful to us in quantifying the share of fees and costs due to the Debtor in the relevant cases.
The testimony of Milner was very helpful to the court in several respects. While Mil-ner did not purport to provide a micro-analysis of the cases similar to the intense detail appearing in Brown’s testimony, he was able to present a clear and logical macro-analysis of the general issue of referrals in contingent-fee cases which we found very helpful in framing our judgment order. In substance, we deduce that Milner testified in support of the following principles applicable to the Philadelphia legal community:
1. The typical contingency fee is one-third of the net amount recovered by the client, after deducting costs advanced, which are always paid first to the party which advanced them, from the client’s gross recovery.
2. It is presumed that a referral fee of one-third of the fee recovered, plus all costs expended by the referring party, is to be paid to the referring party simply for making a referral, without an expectation or consideration that the referring party has actually performed any useful services on behalf of the client.
3. If the referring party has in fact performed useful services in the case, the fee generated will be prorated between the referring party and the party to whom the referral is made, although the latter party generally is entitled to retain at least half of the fee, particularly if the matter goes to trial.
4. Only one referral fee of one-third of the fee recovered is payable per case. Secondary referrals generally receive only a part of the one-sixth portion of the fee remaining *169after one-third is allocated to the primary-referring party and one-half is allocated to the party receiving the case.
These are, in many respects, entirely different principles from the factors cited in Paul, Mulholland, and Smith. The factors enunciated in those cases came into play in applying these principles only in making the assessments of the usefulness of the referring party’s services in those cases involving the third and possibly the fourth principles of the four which we have deduced from Mil-ner’s testimony.
In this regard, we note that only Brown and McDonnell provided qualitative testimony regarding these services. To the extent that the credibility of these parties is an issue, we find them credible on the whole, but definitely inclined to denigrate the work of others or even their own work while at the Debtor to an excessive degree.
Although the four principles cited above are obviously subject to modification by specific agreements between the parties, their overall, residual validity is supported by numerous other aspects of the record in addition to Milner’s testimony. First, we note that attorneys Longo and Bernard were deemed entitled to one-third referral fees in the Saraeino and Bielun eases, respectfully, even by the Defendants, although no testimony regarding useful services performed by either of them in these cases was adduced. The form contingency-fee agreement prepared by Brown for the Debtor was consistent with these principles, see Labrum II, at *13, as were the terms of the agreement which Ryan negotiated with Edwin F. McCoy, Esquire, when McCoy left the Debt- or in 1995. Id. at *6. There is no evidence which we can recall to the contrary. We therefore totally disagree with the Defendants’ contentions that Milner’s testimony is unsupported or lacking necessary foundation in the record.
The observation that, in other contexts, e.g., the circumstances of Longo and Bernard and the negotiation of the McCoy agreement, the Defendants were parties to payments of referral fees reveals the contrived, makeweight nature of the Defendants’ brief invocation of the Pennsylvania Rule of Professional Conduct (“R.P.C.”) 1.5 bar to fee-sharing as a principle in their favor. As the Comment to the Rule indicates, in referencing a “division of fee_ most-often ... used when the fee is contingent and the division is between a referring lawyer and a trial specialist,”
Paragraph (e) permits the lawyers to divide a fee if the total fee is not illegal or excessive and the client is advised and does not object. It does not require disclosure to the client of the share that each lawyer is to receive.
Since the fee divisions directed hereinafter are in contingent fee cases, and do not increase the total fees which the respective clients agreed to pay, the total fee is clearly not illegal or excessive, per the Comment’s interpretation of R.P.C. 1.5(e). We therefore will proceed to quantify the fees properly due to the Debtor in each of the seven eases at issue.
Williams involved an elderly woman who asserted a medical malpractice claim. She was a client of the Debtor for about three years on whose case the Debtor expended $9504.95 in costs and 528.5 hours. A short time after taking over the file, McDonnell of the Firm, having expended $5812.39 in costs and 358.6 hours, and after one day of trial, settled the ease for $135,000. Milner testified that the Debtor was entitled to one-third of the fee on account of the referral; the Firm was entitled to at least half of the fee, particularly because a trial was commenced; and that the remaining one-sixth should be apportioned according to the hours expected. Crediting McDonnell’s testimony that much of the Debtor’s services were not useful, we will allot the Debtor only about one-third of the total time spent, raising it share of the total fee to 40 percent. Our calculation (all figures rounded to nearest dollar) is as follows:
Gross Recovery $135,000
Costs—Debtor $ 9,504.95
Firm $ 5,812.39
Net Recovery $119,683
Total Fee $ 39,894
Debtor’s Fee $ 15,958
Debtor’s Recovery $ 25,463
*170Keller involved a products-liability case in which the client’s fingertip was severed by an allegedly defective saw. The Debtor expended 567 hours and $9,244.57 in costs. The Firm expended $1013.55 in costs and 76.1 hours of time. This matter was settled by the Firm prior to trial for $70,000. Brown testified, however, that much of the Debtor’s early work was non-productive and that the case had been rescued from a non-suit by the intervention of Perry Bechtle, a respected retired member of the Debtor who was never associated with the Firm. Milner testified that the entire fee should be divided in half, which proposal we accept, since the time dedicated by the Debtor, albeit that much of it was not useful, greatly exceeded that expended by the Firm. Our calculation of the Debtor’s share of the fees and costs is therefore as follows:
Gross Recovery $70,000
Costs
Debtor $ 9,244.57
Firm $ 1,013.55
Net Recovery $59,742
Total Fee $19,914
Debtor’s Fee $ 9,957
Debtor’s Recovery $19,200
Burke involved a devout Catholic couple. The husband was injured while working at a church bingo hall. While a clients of the Debtor, the Burkes insisted in pursuing a malpractice claim, which was found to lack merit. Near to the time of the dissolution of the Debtor and the running of limitations as to the church, Brown finally convinced the clients to at least file and attempt to raise a claim against the church, which they did with great reluctance. The matter against the church was settled for $144,000. The Debtor expended 201.9 hours and $870.34 in costs. The Firm utilized 47.5 hours and $519.43 in costs. Milner testified that, in light of the Debtor’s pursuit of a “dry hole” in the malpractice claim, it should receive only the one-third referral fee. This result seems logical, and is effected in the following calculation:
Gross Recovery $144,000
Costs
Debtor $ 870.34
Firm $ 519.43
Net Recovery $142,610
Total Fee $ 47,527
Debtor’s Fee $ 15,842
Debtor’s Recovery $ 16,712
Maguire involved an elderly woman who, after imbibing in alcoholic beverages, fell on a restaurant sidewalk. The Debtor expended 653 hours and $11,336.92 in costs. The Firm expended only 70.4 hours and $390.71 in costs, but McDonnell testified that much of the expenditures by the Debtor were wasted, some on an expert whose adverse reputation rendered him useless. The case was settled for $65,000. Milner suggested dividing the fees equally, in deference to McDonnell’s testimony. In further deference to this testimony and to offset possibly useless expenses, we will reduce the Debtor’s share of the fees to 40 percent. Our calculations are hence as follows: (A three-factor test is synthesized from a review of all American jurisdictions).
Total Recovery $65,000
Costs
Debtor $11,336.92
Firm $ 390.71
Net Recovery $53,272
Total Fee $17,757
Debtor’s Fee $ 7,103
Debtor Recovery $18,440
Fertal involved yet another elderly woman who was injured in a fall, on this occasion at a shopping center. The Debtor expended $439.47 in costs and 143.6 hours on this ease. The Firm contributed $1500.42 in costs and 83.5 hours of services. The case was settled for $45,000. Milner suggested dividing the fees equally. This resolution seems justified under these facts. Our caleu-*171lation of the amount due to the Debtor is therefore as follows:
Total Recovery $45,000
Costs
Debtor 439.57
Firm 1,500.42
Net Recovery $43,060
Total Fee $14,353
Debtor’s Fee $ 7,176
Debtor’s Recovery $ 7,616
The largest total recoveries were effected in the Bielun and Saracino cases, but the Debtor’s share of the fees in both cases are adversely affected by the presence of prior referral attorneys who are entitled to the respective primary referral fees. Bielun was a medical malpractice action seeking to recover for injuries suffered by the client during physical therapy. Bernard, who was never associated with the Debtor, has already been deemed entitled to a one-third referral fee from the Firm even though he brought the case to the Debtor just before a trial poised for nonsuit. The Debtor expended 322 hours of time and $5,842.85 in costs. The Firm devoted 581.8 hours and $35,387.51 in expenses. In an arbitration trial of the matter, the client was awarded over $3 million, although only $1 million covered by insurance was paid. Milner highly commended the Firm’s result and stated that, since the Firm tried the case, only a referral fee was recoverable by the Debtor. However, since the primary referral source was Bernard, the Debtor’s recovery was only as a secondary source and hence to just a portion of one-sixth of the fee after according the Debtor half the fee for trying the case and one-third to Bernard. In these circumstances, we will allow the Debtor to recover only five percent of the fee. Our calculations therefore are as follows:
Total Recovery
Costs
Debtor $ 5,842.85
Firm $ 35,387.51
Net Recovery $ 958,770
Total Fee1 $ 319,590
Debtor’s Fee $ 16,479
Debtor’s Recovery $ 22,322
The final matter involved Saracino, a medical malpractice claimant. This is the matter in which Longo, a former associate of the Debtor, has a now-agreed right to a one-third primary referral fee. The Debtor devoted 901.2 hours and $15,901.27 in costs to this case. The Firm committed 317 hours and $17,009.53 in costs. The case was settled for $190,000 on the second day of trial. Milner again opined that the Debtor was only entitled to its costs and a portion of the one-sixth share of the fee remaining after the Firm’s one-half and Longo’s one-third were deducted. Although Brown attempted to deflate even his own considerable work on this case while at the Debtor as pursuing the “dry hole” of an intentional infliction of emotional distress claim by the client’s daughter, we will nevertheless value of the Debtor’s claim at no less than eight percent of the fee. The calculation of the fees due to the Debtor and Longo out of this case are therefore computed as follows:
Gross Recovery $190,000
Costs
Debtor $15,901.27
Firm $17,009.53
Net Recovery $158,089
Total Fee $52,696
Longo’s Fee apparently $17,565, but he claims only $17,078.672
Debtor’s Fee $4,216
*172Debtor’s Recovery $20,117
As a result of the foregoing calculations, we conclude that the total fees to which the Debtor is entitled in these seven cases are as follows:
Williams $ 25,463
Keller 19,200
Burke 16,712
Maguire 18,440
Fertal 7,616
Bielun 21,818
Saracino 20,117
GRAND TOTAL $129,366
We will enter an Order awarding this sum to the Debtor and the $17,078.67 claimed by Longo to him.
. The Firm discloses Bernard’s referral fee as $166,666 rather than the $109,863.33 which appears due under the normal calculation of this figure. Apparently, there was some particular agreement with Bernard regarding the figure due to him. We are not inclined to allow this fact, obscure as it is, to alter our analysis.
. This figure is set forth in a Motion for clarification of our Labnim II order filed by Longo on October 16, 1998. We cannot explain the discrepancy, but doubt that Longo would understate the amount actually due to him. We thought our Labrum II order makes clear that we would liquidate Longo’s claim in an order after the *172September hearings. We will do so in our accompanying order, mooting Longo’s motion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492779/ | ORDER/MEMORAND UM
David A. SCHOLL, Chief Judge.
AND NOW, this 21st day of October, 1998, upon consideration of the Debtor’s Motion for Order Setting Deadline for Taxing Authorities to Examine Debtor’s 1997 Short Year Tax Returns (“the Motion”), and a *173hearing of October 15, 1998, at which only the Internal Revenue Service (“the IRS”) appeared to contest same, it is hereby ORDERED AND DECREED as follows:
1. The Motion is granted in part.
2. The New York State Department of Taxation and Finance (“NYSDTF”) shall have 60 days from the date of this Order to notify Andrew Schwartz, Trustee, and the Debtor that the Debtor’s short-year income tax returns for the period January 1, 1997 to August 14, 1997 (“the Returns”), have been selected for examination.
3. If the Returns are selected for examination by the NYSDTF pursuant to paragraph 2 above, the NYSDTF shall have 180 days from the date of this Order to complete such examination or such additional time as this Court, for cause, may permit.
4. If the NYSDTF does not request an examination within the time period set forth in paragraph 2 above or complete an examination within the time period set forth in paragraph 3 above, the Debtor’s tax liability for the period covered by the Returns shall be conclusively determined to be the respective amounts set forth in the tax returns for said time period previously filed by the Debt- or prior to the filing of the Motion.
The Motion arises in an asset Chapter 7 case which featured a dispute between the Debtor and his now ex-wife’s attorneys, now settled, which was reported at 218 B.R. 740. It purports to be based upon 11 U.S.C. § 505, which provides as follows:
§ 505. Determination of tax liability
(a)(1) Except as provided in paragraph (2) of this subsection, the 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.
(2) The court may not so determine—
(A) the amount or legality of a tax, fine, penalty, or addition to tax if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement. of the case under this title; or
(B) any right of the estate to a tax refund, before the earlier of—
(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claims; or
(ii) a determination by such governmental unit of such request.
(b) A trustee may request a determination of any unpaid liability of the estate for any tax incurred during the administration of the case by submitting a tax return for such tax and a request for such a determination to the governmental unit charged with responsibility for collection or determination of such tax. Unless such return is fraudulent, or contains a material misrepresentation, the trustee, the debtor, and any successor to the debtor are discharged from any liability for such tax—
(1) upon payment of the tax shown on such return, if—
(A) such governmental unit does not notify the trustee, within 60 days after such request, that such return has been selected for examination; or
(B) such governmental unit does not complete such an examination and notify the trustee of any tax due, within 180 days after such request or within such additional time as the court, for cause, permits;
(2) upon payment of the tax determined by the court, after notice and a hearing, after completion by such governmental unit of such examination; or
(3) upon payment of the tax determined by such governmental unit to be due.
(c) Notwithstanding section 362 of this title, after determination by the court of a tax under this section, the governmental unit charged with responsibility for collection of such tax may assess such tax against the estate, the debtor, or a successor to the debtor, as the case may be, subject to any otherwise applicable law.
*174The pertinent facts are that the Debtor filed requests for large refunds from the IRS and the NYSDTF. The refunds were paid to the Trustee, who will proceed to distribute same to the Debtor’s creditors. The Debtor fears that the IRS or the NYSDTF may review his returns within the normal statutory periods to do, represented be three years in the case of the IRS. If such a review ultimately results in a determination that the refunds were erroneously excessive, it was represented that the Debtor may be obligated to repay the refunds, even though his creditors, and not the Debtor himself, will have received the benefit of the refunds.
In order to correct this perceived inequity, the Debtor requests that we shorten the normal statutory periods to review his returns to 60 days from the date of this order, in which time the Trustee will presumably not have made a distribution, and the refunds, if found erroneous, can be recovered from the Trustee rather than repaid by the Debtor.
The NYSDTF did not respond to the Motion. We will therefore enter an order against it. We note that this order is valid only if the NYSDTF was properly served pursuant to Federal Rule of Bankruptcy Procedure 7004(b)(6). Cf. In re Green, 89 B.R. 466, 469 (Bankr.E.D.Pa.1988) (failure to properly service the IRS renders an order entered against it void).
The IRS did appear and contested the Motion, arguing principally that this court lacked jurisdiction to decide the Motion because, even under the debtor-friendly holding of In re Schmidt, 205 B.R. 394, 397 (Bankr. N.D.Ill.1997), there was no “actual controversy” presently at issue permitting § 505(a) to be invoked. Cf. In re LaBrum & Book, LLP, 222 B.R. 749, 753, 755 (Bankr.E.D.Pa.1998) (28 U.S.C. § 1334(b) is the statutory limit on jurisdiction of a matter based upon § 505(a)).
The difficulty which we have with the Debtor’s position is probably not properly framed as jurisdictional. It is simply that the Debtor, without authority to do so, is attempting to alter the taxing authorities’ statutory rights. While § 505(b) permits such an alternative for the purposes of settling a debtor’s tax liability during a reorganization, that Code section provides for no such relief as to refunds. Since express statutory authority appears necessary to create such rights as to liabilities, the absence of a statutory reference to tax refunds appears to us to foreclose such rights. We do not think the contingency that the Debtor could be hable for repayment of an erroneously-allowed refund is a circumstance which merits relief which we deem both statutorily unauthorized and quite extraordinary.
For this reason, the relief sought is denied against the IRS. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492780/ | ORDER
WM. THURMOND BISHOP, Bankruptcy Judge.
Before the court is plaintiffs motion for summary judgment regarding a pending adversary action to have a West Virginia judgment, now indexed in South Carolina, declared non-dischargeable.
This motion was heard on February 4, 1998, and is based solely on the application of the doctrine of collateral estoppel to foreclose relitigation of issues in this adversary which have actually been litigated in this earlier West Virginia action.
Principles of collateral estoppel or issue preclusion apply in dischargeability proceedings in bankruptcy and federal courts must as a matter of full faith and credit apply the forum state’s law of collateral estoppel when the courts of the state from which the judgment emerged would do so.- Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Todd v. Societe BIC, 9 F.3d 1216 (7th Cir.1993).
The threshold question regarding this motion is whether in West Virginia a default judgment can be the foundation for the application of the doctrine of collateral estoppel. The judgment at issue here originated in West Virginia and is a default judgment resulting from discovery abuses.
This court is of the belief that plaintiffs analysis of Christian v. Sizemore, 185 W.Va. 409, 407 S.E.2d 715 (1991) is misplaced as this case indicates that West Virginia is one of those states which still applies the principle of collateral estoppel as set forth in the Restatement of Judgments which is that default judgments have no collateral estoppel effect. Restatement (Second) of Judgments § 27(e) 1982.
The plaintiff reads West Virginia law to afford collateral estoppel when an individual had the prior opportunity to litigate his or her claim and the defendant had this opportunity in this case. However, the plain*178tiff is only partially correct. Under West Virginia law, the requirement for collateral estoppel is three fold: there must be a judgment rendered on the merits; there must be an issue which has been actually litigated; there must be a scenario in which the entity against whom collateral estoppel is asserted has had a prior opportunity to have its claim litigated. These requirements are conjunctive not disjunctive.
The plaintiff fails to show that this action was actually litigated. The law in West Virginia is as set forth in Christian and holds that default judgments cannot be afforded collateral estoppel because these judgments have not been actually litigated. 407 S.E.2d 715. Collateral estoppel is not applicable in the case before this court.
Now, therefore, it is
ORDERED that the plaintiffs motion for summary judgment is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492781/ | ORDER RE F.R.B.P.2019— 16 CLAIMANTS
BURTON PERLMAN, Bankruptcy Judge.
Sixteen identical motions entitled Motion to Compel Distribution from Reorganized Debtors Pursuant to Confirmed Plan of Reorganization, were filed in this court on behalf of 16 claimants: Robin L. Berger, Clyde R. Butler, Diane Daniels, Barbara Hatke, Thomas G. Herendeen, Jr., Christina M. *190Whitmarsh, Ida M. Rowlett, Catherine Sartor, Henrietta T. Schoonmaker, Lisa Schwarz, Barry L. Seldin and Michael S. Seldin, Walter Sichel, Lillian Tillman, Edward Tomao, and David B. Zenoff (“the Sixteen”). An attorney of the Cincinnati Bar, Hanlin Bavely, filed each of the motions. Thereafter, a telephone status conference was held by the court, after which Pretrial Order (August 25, 1997), was issued. A subject dealt with in that Order was the sufficiency of the F.R.B.P.2019 statement which had been filed by counsel. The Order directed that an amended F.R.B.P.2019 statement should be filed. Supplemental Statement under Bankruptcy Rule 2019 then was filed August 28, 1997. That Statement was filed by two attorneys, E. Hanlin Bavely and Michael A. Bickford. In the Statement, Bick-ford disclosed that he is a shareholder of American Property Locators, Inc. (“APL”). The Statement also discloses, and attaches, a written agreement between APL and each of the Sixteen. In each agreement, APL undertakes to pursue the claim of each of the Sixteen in exchange for a certain percentage of the recovery. The amount provided for each of the Sixteen is not uniform, ranging from 25% to 50%. The Statement also includes the representation that there is no written agreement between the attorneys filing the motions and the Sixteen.
Reorganized debtors then filed a memorandum on September 16, 1997, contending that the Supplemental 2019 Statement shows that the contracts between the Sixteen and APL violates state law for several reasons, including that the interest taken by APL exceeds statutorily imposed limits of the states. Additionally, reorganized debtors assert that it is improper for Bickford to represent the Sixteen because he has an ownership interest in APL, and this violates the Disciplinary Rules applicable in this court. A hearing was then held October 14, 1997, on the continuing F.R.B.P.2019 objections. On that date, the court then issued Second Pretrial Order Re 16 Motions to Compel Distribution (Seldin et al). The Second Pretrial Order stated that the court reserved decision on the F.R.B.P.2019 issue, and directed the parties to proceed with preparation for trial on the issues between them. The parties subsequently provided the court with letter status reports regarding discovery in the matter. We deal now with the reservations noted by reorganized debtors as to the adequacy of the Supplemental Statement under Bankruptcy Rule 2019.
LBR 2090-2 provides that “The Code of Professional Responsibility adopted by the Ohio Supreme Court ... applies in this court ...”. A responsibility which we may not shirk is to make certain that there is compliance with the Disciplinary Rules. Reorganized debtors assert that Bickford’s position is violative of D.R. 5-103. That Rule provides:
(A) [Champerty]. A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client, except that he may:
(1) Acquire a lien granted by law to secure his fee or expenses.
(2) Contract with a client for a reasonable contingent fee in a civil case.
Reorganized debtors call our attention to authority to the effect that an attorney is subject to discipline when he owns by assignment a proprietary interest in a claim filed by him. We observe also that while a Reply was filed to the memorandum of reorganized debtors regarding the Supplemental Statement under B.R.2019, it offers no help to the court in regard to the ethical question presented by the reorganized debtors.
After giving the matter due consideration, we hold that Bickford’s appearance as an attorney in the case is not barred by D.R. 5-103. That Rule itself contains an exception for a contingent fee. Of course, Bickford does not himself have a contingent fee arrangement with the Sixteen. Instead, what amounts to a contingent fee arrangement is entered into between APL and each of the Sixteen. Bickford’s interest is as an equity holder in APL. It follows that whatever interest Bickford has is based on a contingent fee arrangement, and it is for this reason that we can perceive no ethical violation on Bickford’s part.
Reorganized debtors argue extensively that the contracts between the Sixteen and APL are illegal, piincipally because, accord*191ing to reorganized debtors, the percentage interest held by APL is beyond state law limits. APL responds that the contracts are not governed by state law.
We hold the objection by reorganized debtors on this score to be without merit. We perceive no basis by which reorganized debtors have standing to raise the question about the arrangement entered into by the parties to the contracts.
In connection with these objections, counsel for reorganized debtors have called our attention to In re Taylor, 220 B.R. 854, 1998 Bankr. LEXIS 19 (Bankr.E.D.Pa.1998). In that case, APL entered into an arrangement with a Chapter 13 debtor whose case had been closed, leaving some funds deposited in court to which the debtor had a claim. APL and the debtor had entered into a contract pursuant to which APL was to receive 50% of any recovery. The debtor in that case challenged the right of APL to receive the contract amount. The court agreed with the debtor, and reduced the amount to be taken by APL to 10% of the recovery. The case is obviously distinguishable from that before us because the debtor had clear standing, having an economic interest in how the recovered funds were to be distributed. That is not the case here, for there is no perceptible interest which the reorganized debtors can assert in how any recovery is distributed as between the Sixteen and APL.
The objections of reorganized debtors to the Supplemental Statement under Bankruptcy Rule 2019 are overruled.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494789/ | *369ORDER
MICHAEL E. ROMERO, Bankruptcy Judge.
The above adversary proceedings concern the Plaintiffs’ problems with a home they purchased from an entity alleged to have been represented or controlled by the Defendants. The Plaintiffs obtained an agreement for the construction of a new home or the purchase of a replacement home, but the construction or replacement did not take place. The Plaintiffs now seek findings the debts owed to them by the Defendants are nondischargeable.
BACKGROUND FACTS
Debtors Robert and Annelle Golba (the “Golbas”) filed their voluntary Chapter 7 petition on April 28, 2009. Debtor Greg Rollison (“Rollison”) filed his voluntary Chapter 7 petition on August 27, 2009. Plaintiffs Kelvin and Holly Knaub (the “Knaubs”) filed Adversary No. 09-1551 against the Golbas and several related entities on September 11, 2009, and filed Adversary No. 10-1476 against Rollison on July 1, 2010. Annelle Golba was dismissed as a party defendant from Adversary No. 09-1551 on October 20, 2010.
The two adversary proceedings were consolidated for purposes of trial on November 24, 2010. On December 26, 2010, the Court issued an amended order regarding consolidation, indicating the adversary cases would proceed in parallel, but not be substantively consolidated. On June 28, 2011, the Court ordered the dis-chargeability claims of the two adversary cases would be heard first, with the damages portion, if necessary, to be heard at a later time.1 The dischargeability claims proceeded to trial, and the Court permitted post-trial briefing.
A. Procedural Background of Adversary Cases
1. Adversary No. 09-1551 MER (Golba)
The Knaubs’ Complaint against Golba alleges they purchased a home from an entity known as Gemm Homes (“Gemm”) on May 1, 2003. Thereafter, the home evidenced drywall cracking and other problems. The Knaubs had testing done in 2006 which revealed the foundation had been laid improperly, causing the structure to settle. According to the Complaint, Robert Golba (“Golba”) worked in sales and - marketing for Gemm beginning in 2005. After the testing in 2006, Golba and other defendants negotiated with the Plaintiffs on behalf of Gemm, and offered to construct a new home if the property was reconveyed to Gemm.
The Knaubs further allege that in February 2007, Golba formed Avalon Homes (“Avalon”), of which he owned 90%. The name at the office of Gemm was changed to Avalon Homes, and Avalon assumed the contract between the Knaubs and Gemm. The Knaubs and Avalon entered into a verbal agreement under which Avalon would construct a new home for the Plaintiffs on a different lot in the same subdivision, following which the Knaubs would convey the defective property to Avalon. However, Avalon did not complete the purchase of the new lot.
According to the Complaint, Gemm transferred all its assets and liabilities to Avalon for no consideration, and Golba and others represented that Gemm’s principal, *370Rollison, and Gemm had no connection to or interest in Avalon. However, the Knaubs allege Avalon was partly owned by Rollison’s son, and Avalon made payments to Rollison, rather than using its revenue for business purposes such as completing the Knaubs’ new home. They further allege Avalon Homes was just a continuation of Gemm, and Avalon Homes and any related entities were set up to hinder and delay creditors and use the assets of Gemm for Golba’s and Rollison’s personal benefit.
The Complaint contains the following claims for relief: 1) for damages caused by fraudulent representations and false pretenses under 11 U.S.C. § 523(a)(2)(A),2 based on Golba’s misrepresentation that Gemm and Rollison were not involved in Avalon; 2) for damages caused by actual fraud under § 523(a)(2)(A), based on Gol-ba’s and Rollison’s alleged conspiracy fraudulently to convey the assets of Gemm to the Avalon entities; and 3) for damages caused by breach of fiduciary duty under § 523(a)(4), alleging Gemm was an insolvent company which owed a fiduciary duty to its creditors, and alleging Golba participated in transferring Gemm’s assets to Avalon for no consideration.
On October 20, 2010, the Court entered an Order granting in part and denying in part the Defendants’ Motion to Dismiss. The Court granted the motion to dismiss Annelle Golba as a party defendant, granted the motion to dismiss the third claim for relief under § 523(a)(4), but denied the motion to dismiss the first and second claims for relief under § 523(a)(2)(A).
Golba’s Answer denies he committed fraud, and raises the following affirmative defenses: 1) waiver, laches, estoppel, unclean hands, release, statute of frauds, and statute of limitations; 2) failure to mitigate; 3) collateral estoppel; and 4) failure to state a claim.
2. Adversary No. 10-1476 MER (Rollison)
The Knaubs’ Complaint against Rollison states Rollison was a principal of Gemm, and was personally involved in the construction of the Knaubs’ defective home. CDS Engineering allegedly designed the foundation of the home, but the foundation was not built according to the engineering specifications, and Rollison and Gemm did not arrange for a proper inspection. After the Knaubs discovered cracks in the drywall, they were assured by representatives of Gemm such cracks were not a concern. The Knaubs continued to have problems, but Gemm and Rollison did not address them. Gemm and Rollison eventually had CDS Engineering perform an analysis, and CDS discovered the foundation had not been laid on stable ground. Thereafter Gemm, Golba, and Rollison negotiated with the Knaubs and offered to construct a new home for them.
According to the Complaint, during these negotiations, Avalon was formed by Golba in Wyoming on February 14, 2007, at a time when Gemm was insolvent. Rol-lison’s son Miles owned a portion of Avalon until July 25, 2007. In addition to allegations concerning the verbal agreement that Avalon would complete a new home for the Knaubs, the Complaint states after the creation of Avalon, all employees of Gemm became employees of Avalon, all assets of Gemm became assets of Avalon, and the transfers of Gemm’s assets were for no consideration. Rollison was involved in establishing Avalon, and encouraged vendors *371of supplies and subcontractors to conduct business with Avalon. Gemm ceased operating in the spring of 2007.
The Complaint alleges Rollison was involved in the daily affairs of Avalon even though he and Golba represented to creditors that Rollison and Gemm had no connection to Avalon, including making such statements in sworn affidavits. However, shortly after Avalon was formed, Gemm transferred over $100,000 in assets to Avalon, and Avalon used the money to open an account at Bank of Choice in Ft. Collins. This Bank of Choice account was used to pay personal expenses of Rollison, including expenses of Miles Rollison in Europe. The Avalon funds were also paid to an entity known as Golba Real Estate. The Complaint alleges instead of paying Rollison for services to Avalon, Avalon paid funds to Rollison’s wife, Marcie, to conceal the money from creditors. In addition, payments were made to Golba, who transferred funds to Rollison to conceal funds from creditors. Many payments to Rollison were made while the Avalon Homes account was negative, or the payments caused the account to become negative.
Although Golba stated in an affidavit he was not involved with Gemm, and although the manager of Gemm was Vanguard Holdings, Gemm and Vanguard guaranteed construction loans for Avalon, and Golba and Rollison signed the guaranties for Gemm and Vanguard as members of Vanguard. Further, although Golba claimed none of the managers or owners of Gemm were managers or owners of Avalon, Rollison signed contracts wherein he represented he was a manager of Avalon, and Rollison and Golba represented themselves as partners of Avalon. Therefore, the Complaint alleges, Avalon was a continuation of Gemm, used by Golba and Rollison to shield assets from creditors and they used Gemm assets for their personal benefit.
On June 5, 2008, Golba formed Avalon Homes of the West, LLC, alleged to be a continuation of Gemm and Avalon. Real property belonging to Avalon which once belonged to Gemm was transferred to Avalon Homes of the West for no consideration.
The Knaubs allege they have fulfilled their obligations under their agreements with Gemm/Avalon. They further allege the cost to repair their original property is $184,816.
Similar to the Complaint against Golba, the Complaint against Rollison contains the following claims for relief: 1) false pretenses and false representation under § 523(a)(2)(A); 2) actual fraud under § 523(a)(2)(A); and 3) breach of fiduciary duty under § 523(a)(4).
Rollison’s Answer denies the existence of false pretenses, actual fraud, or breach of fiduciary duty. It does not state any affirmative defenses.
B. Evidence at Trial
1. Cameron’s Testimony
Jeremy Cameron (“Cameron”), an employee of Gemm and the “contact person” for the Knaubs, testified he performed warranty work on the Knaubs’ home in the summer of 2006 at Rollison’s direction, including patching drywall and epoxying the crack in the foundation. At the end of 2006, Cameron and Gemm concluded they could not fix the settling problems, and he, Rollison, and Golba met with the Knaubs to discuss the proposal to build them a new home. Rollison made the decision to offer the new home. He directed Cameron to draw up blueprints for it, and directed Golba to find a lot in the subdivision that would work for the new home.
*372Cameron also described a meeting he attended at the end of 2006 in which “it was determined that the company was going to change names, change companies and we were going to proceed forward as Avalon Homes.” He stated Rollison, Gol-ba, and Neil Ackerman were at the meeting, and the company change was made because Gemm was having difficulty paying its subcontractors. Cameron stated Avalon would be in the business of constructing new homes in Colorado and Wyoming, the same as Gemm had been, and asserted Rollison made the day-to-day decisions for Avalon Homes. Cameron did not know who owned Avalon, but stated the company finished some of Gemm’s unfinished projects and started some of its own.
2. Yaromy’s Testimony
Tamara Yaromy, the bookkeeper for Gemm and later Avalon, testified although she was told Miles Rollison and Golba were the principals of Avalon, she believed Rollison really ran Avalon. She stated Golba was involved in sales and marketing, as he had been with Gemm. As Rollison and Golba instructed her, she informed creditors of Gemm they needed to contact Rollison directly.
In her examination of bank records from Gemm and Avalon, she noted Gemm transferred funds to several Avalon bank accounts, including an account at Bank of Choice.3 She further noted Rollison paid personal expenses from Avalon’s Bank of Choice account, and instructed her not to question the payments.4 By contrast, she stated Golba never took any money from Avalon accounts that was not his earned compensation or reimbursement. Moreover, she stated Golba often put money into Avalon accounts to cover expenses Avalon could not meet.
3. Holly Knaub’s Testimony
Holly Knaub testified she and her husband still live in the home with the foundation problems, and have since 2003, when they purchased it from the builder, Gemm.5 She stated the Knaubs themselves looked at the property, but made no mention of a separate evaluation by a building inspector.
The Knaubs purchased the home for $259,000, and shortly thereafter made claims under the home’s warranty, because they started noticing such things as cracks in walls, stairs separating from the walls, and windows which were not shutting properly. Sometime in 2005, after numerous telephone calls with Gemm representatives, Cameron, then a Gemm employee, started working on repairs. However, the repairs did not last. Eventually CDS Engineering tested the soil around the home and found the home’s foundation was laid on fill, rather than on natural soil as called for by the original engineering specifications. By December 2006, Cameron told her nothing further could be done in the nature of repairs, and Mrs. Knaub began contacting Rollison.
According to Mrs. Knaub, Rollison did not set up meetings regarding the issues with the home until after the Knaubs had *373hired an attorney.6 Then, several conversations occurred, sometimes by telephone and sometimes in person, involving Golba, Rollison, engineers, and others. Mrs. Knaub stated after conversations with Rol-lison, the Knaubs were left with the impression their house would be bought back from them, and a new house constructed. She believed Golba was involved in the conversations due to his anticipated role in remarketing the house. According to Mrs. Knaub, Golba felt the home could be repaired and resold.
In April or May, 2007, after the Knaubs’ attorney sent Rollison a letter requesting action on their complaints, the Knaubs met with Rollison at Avalon’s office. Mrs. Knaub believed the business had transformed from Gemm to Avalon. She stated Rollison showed them a big spreadsheet of a subdivision he was developing near Avalon’s office in Loveland. Specifically, she recalled Rollison speaking for approximately forty-five minutes, indicating he was acquiring a large parcel of land right around his office, and showing the Knaubs a large drawing of the plan for the roads, the lots and the houses, which indicated the development’s proximity to the new Wal-Mart in Loveland. Rollison stated this development would be built up quickly because of the access to shopping and to the foothills. She further remembered remodeling taking place in the Avalon office. From this presentation, she obtained the impression Rollison was capable of buying the Knaubs’ home and building them a new one.
She stated Cameron attended the meeting, although Golba did not attend, and the decision was made that “they” (apparently Avalon) would build the Knaubs a new house on the lot of their choice and would buy the first house back. Mrs. Knaub also recalled Rollison indicating he understood how upset the Knaubs were with the house, comparing it to being dissatisfied with a defective vehicle.
Thereafter, Mrs. Knaub stated, Cameron drew up a floorplan for the proposed new house. Mrs. Knaub stated the Knaubs met with Cameron regarding the plans three or four times, and sometimes Rollison was in attendance. Rollison continued to state he was going the make the Knaubs happy and see the project though to the end.
At around the same time, the Knaubs contacted Golba and had several meetings with him regarding an offer on the lot they had chosen for the new home. Rollison, instructed the Knaubs to use Golba as their contact from that point on with respect to progress on the new home. The Knaubs believed a contract to purchase had been placed on the building lot they chose, because an “under contract” sign was placed on the lot in May of 2007. Mrs. Knaub further stated they believed the new home process was progressing because Golba told them financing was being obtained and the matter was moving forward. Therefore, around May of 2007, they discontinued their attorney’s representation.
According to Mrs. Knaub, the plans for the new home were completed in late May or early June 2007, and Rollison told them the new home would probably be finished in September 2007. Shortly thereafter, however, Golba informed the Knaubs that Rollison was having trouble obtaining financing to retain the building lot.
Eventually, Golba told them the financing could not be obtained, and offered to show them existing homes for sale, in the same subdivision, which could be traded for their current home. He showed them *374two properties, and they selected one for the proposed trade. However, Golba later informed them financing was again a problem, and asked the Knaubs if they cared where the financing came from. Finally, at the end of the summer of 2007, according to Mrs. Knaub, Golba told the Knaubs they (apparently Avalon) could not do anything to help them and the Knaubs should retain counsel.
4. Golba’s Testimony
Golba stated he started working with Gemm exclusively in 2006, performing sales and marketing. He believed Rollison was the principal of Gemm.7 According to Golba, Gemm stopped doing business because it was in trouble with creditors. He testified Avalon was formed in February 2007.8 He believed the market for new homes was good in Laramie, Wyoming, and believed an ownership interest in Avalon would give him an opportunity to get into the building portion of the business. Initially, Golba owned 10% of Avalon and Rollison’s son, Miles Rollison, owned 90%. He acknowledged Rollison was running the construction activities of Avalon, although he did not own Avalon. Golba further stated Miles Rollison left the business after four or five months, and Golba acquired the remaining interest in Avalon.
Golba first contacted the Knaubs in late 2006 to assess the problems they were having with their home. He admitted to being present for at least one of the meetings the Knaubs had with Rollison and Cameron. He further stated Rollison took his advice that the Knaubs would not be happy with a solution short of repurchasing their house and building a new one.
He conceded Gemm ceased operating by April 2007, and noted neither Rollison nor Gemm had any money. He agreed funds were transferred from Gemm to Avalon to finish Gemm homes that had been started. He believed Avalon was formed because of Gemm’s problems with creditors. Although he knew Gemm had no money at the time he and Rollison met with the Knaubs to discuss the proposed new home, he believed Rollison still had credit personally to enable him to perform on the new home.
Golba acknowledged Avalon began working with the Knaubs on their new home around the time of the parties’ April 2007 meeting, and he arranged for Rollison to put the building lot under contract. He believed the lot was under contract to Gemm. He admitted at the time the lot contract was being arranged, he knew Gemm was in financial trouble, but continued to believe Rollison had other resources. Eventually, he contacted the Knaubs and told them there was financing trouble with the lot. By the end of the summer of 2007, he informed them they were on their own, as Rollison could not obtain financing. He did not remember showing the Knaubs possible replacement homes.
Golba conceded he knew the Knaubs were relying on Gemm and later Avalon to address the issues with their home and build them a new home, and acknowledged at the time he was working with the Knaubs, he was receiving compensation from Gemm or Avalon. However, he stated he was told by Rollison the financing *375would work out for the Knaubs’ new home, and he so informed the Knaubs.
He believed Rollison’s statements that Rollison had other lines of credit and financial resources other than Gemm to draw on to finance the Knaubs’ home. He testified he did not discover until approximately the summer of 2008 there were no additional resources to support financing. However, he testified Rollison was not authorized to enter into a contract as a manager of Avalon, and when Golba discovered Rollison had done so, he changed the contract to reflect himself as the manager.9
Golba further acknowledged Avalon paid for Miles Rollison’s trip to Europe after Miles left the company. He believed there might have been some compensation owing to Miles which was paid by covering the trip expenses.
5. Rollison’s Testimony
Rollison testified he was the president and manager of Gemm and Vanguard Holdings. Rollison was aware, by the spring of 2007, of the Knaubs’ frustration with their home, and sent Golba to meet with the Knaubs and perform a marketing analysis on their home. Rollison supported the idea of buying their home back and building them a new home, and stated a lot for that purpose was placed under contract. He asserted the reason the replacement home never got built was because his lines of credit at several banks all collapsed at the same time.
He acknowledged he was having financial difficulty in December of 2006, but stated he believed the trouble was only with certain lines of credit at certain banks. He explained he had several projects in process, and several lines of credit with different banks. He felt optimistic some of the banks would continue to work with him. However, by the time Avalon was formed in the spring of 2007, he recognized he was in significant financial trouble.
He admitted he attended the meeting of subcontractors and employees of Gemm during which he encouraged them to work for Avalon and described what they could expect. He contradicted Golba’s testimony that he worked “in the field” for Avalon. Rather, he stated another person did that, while he was working on other interests.
However, he also testified he was overwhelmed, in the spring of 2007, with trying to keep Avalon together, and that the problems with the Knaubs’ home would have been a relatively small issue to him. He admitted he met with them in his office and described construction he planned in the Loveland area, stating he is prone to optimism and “forward projection.” He did not recall the conversation described by Mrs. Knaub wherein he was supposed to have shown the Knaubs maps of the planned subdivision, but admitted such maps were in his office.
According to Rollison, Avalon was formed to take over Gemm’s contracts and finish Gemm’s projects. He stated Gemm’s difficulties had made vendors reluctant to do business with him, and he believed the Gemm projects should be completed. Further, he stated he wished to tend to other business besides Gemm.
Rollison conceded Gemm transferred money to Avalon, and admitted his son Miles may have made some of the transfers. He stated the money that was being transferred from Gemm to Avalon was not Gemm’s reserves, but rather consisted of construction loan proceeds on loans he had obtained. Rollison stated he had no own*376ership interest in Avalon, and admitted he was wrong to sign a contract as a manager of Avalon. He stated it was Golba’s company. However, he conceded Avalon paid him from time to time, and he had a debit card from Avalon which he used to pay personal expenses at times.
Rollison stated he did not set money aside for the construction of the Knaubs’ new home. However, he believed he still had resources, such as some banks in Canada who were willing to lend, at the time the agreement was reached to build the home. He admitted that at the time he failed to obtain financing to rebuild the Knaubs’ home, all the funds indicated on Plaintiffs’ Exhibit 17 had been transferred to Avalon from Gemm, giving Avalon approximately $465,000. He denied he planned to transfer the funds from Gemm to Avalon so he could keep a portion of them, rather than using them for projects such as the Knaubs’ home, although his deposition testimony, used for impeachment, indicated he needed the money at the time. However, he asserted he could not have used the $465,000 for the Knaubs’ project, because those funds, like other funds transferred to Avalon, were loan proceeds for yet-to-be-completed projects.10
In the spring of 2007, according to Rolli-son, he intended to go forward the best he could, although he knew he was in trouble on certain lines of credit. He continued to believe he could solve the Knaubs’ problem, because he believed he still had access to lines of credit in excess of $20 million, while construction of a new home for the Knaubs would cost approximately $250,000. He conceded he may have been over-optimistic in continuing to believe he could make his business work “until the bitter end.” When asked whether he transferred funds from Gemm to Avalon so he could make sure he had an income stream coming from Avalon because he could get no more money out of Gemm, he stated: “That is not true. That never really even crossed my mind. That was the least of my worries.”
DISCUSSION
A. Section 523(a)(2) Claims (Golba and Rollison)
To prove a debt nondischargeable under § 523(a)(2)(A) for false pretenses, false representation, or actual fraud, a creditor must show the following four elements: “[t]he debtor made a false representation; the debtor made the representation with the intent to deceive the creditor; the creditor relied on the representation; the creditor’s reliance was [justifiable]; and the debtor’s representation caused the creditor to sustain a loss.”11
*377The testimony of Cameron, Golba, and Rollison indicates Rollison had at least one meeting with the Knaubs, in Avalon’s Loveland office, during which Rollison made representations he had a number of projects in process, and described his future plans for expanding his business. The Court finds such representations gave the impression Avalon was prosperous and had the ability to complete the Knaubs’ replacement home. Moreover, the evidence of Cameron, Yaromy, and Knaub, as well as that of Rollison himself, shows Rollison represented Gemm and Avalon were one and the same or that Avalon was continuing Gemm’s business. In addition, this evidence demonstrates Rollison represented he was to some degree in control of Avalon, and able to promise Avalon would finish the Knaubs’ home.
In addition, at the time the meeting was taking place, Rollison’s testimony indicated he knew or should have known of his serious financial concerns and of the likelihood he could not complete the Knaub’s home or other projects, despite his “optimism.” He was experienced in the business, and had encouraged the formation of Avalon at least in part to take over projects Gemm was unable to complete because of financial difficulties, so his optimism was neither well-founded nor credible.
The Court further notes although the evidence presented at trial does not provide a basis for finding the corporate veils of either Gemm or Avalon should be pierced in this instance, and, indeed, this issue was not argued by the parties, enough evidence exists as to Rollison’s personal representations as to his ability to complete the project, either through Gemm or Avalon, to find debt arising from Rollison’s individual misrepresentations to be nondischargeable. Specifically, the testimony of Cameron, Yaromy, and Golba, as well as Mrs. Knaub, demonstrates Rollison held himself out as a controlling person for Gemm, Avalon, and perhaps other entities capable of funding the project, although it appears Rollison’s ownership interest, through Vanguard Holdings, was limited to Gemm. Moreover, as shown by the testimony of Golba, Rollison caused Golba to believe, and to inform the Knaubs, that Rollison had several sources of financing other than Gemm. Most importantly, at the meeting with the Knaubs held at the Avalon office in Loveland, Rollison represented to the Knaubs he possessed the financial wherewithal, based on his plans for other subdivisions, to complete their replacement home. During this meeting, according to Mrs. Knaub’s testimony, Rol-lison gave the impression he was in charge of many projects, including projects being handled by Avalon, contributing to the Knaubs’ reliance on his representations. Therefore, no matter the degree of Rolli-son’s actual control of the various entities (Gemm. Avalon, Vanguard, or others), he nonetheless represented he controlled sufficient funding, by himself or through other entities, to complete the Knaub’s new home.
Accordingly, the Court finds Rol-lison made false representations as to his ability to perform on his agreement to build the Knaubs a replacement house, knowing such representations to be false, with the intent to deceive the Knaubs into believing such performance would take place. In addition, Mrs. Knaub’s testimony indicates the Knaubs justifiably relied on the representations, because their previous experience had shown willingness by Gemm or Avalon, at least following an *378attorney’s letter, to attempt to fix their home’s problems, and later to offer them a replacement home. Further, the Knaubs suffered damages, in an amount to be determined in the future, arising from problems with a defective home. Thus, as to Rollison, the Knaub’s debt is nondis-chargeable under § 523(a)(2)(A).
The § 523(a)(2)(A) evidence as to Golba is more problematic. While it is true he represented to the Knaubs a replacement house would be built for them, and while he may have known or should have made it his business to know more about Rollison’s financial affairs, his testimony indicates he believed Rollison had other financial resources not tied to Gemm and Gemm’s financial difficulties. Further, it appears he either did not attend or at least did not participate actively in the meeting with the Knaubs at the Loveland office. Mrs. Knaub’s testimony indicates she believed Rollison was controlling the business of both Gemm and Avalon, and saw Golba as a sales and marketing person who would re-market the Knaubs’ defective home.
In addition, while Golba initially pursued the replacement house with the Knaubs, he later admitted to them financing had not come through for either the replacement home lot, nor for an existing home to be offered in trade. He even advised the Knaubs to obtain counsel.
Thus, representations by Golba were not shown, by a preponderance of the evidence, to be intended to deceive the Knaubs. Further, Mrs. Knaubs’ testimony reflected they relied on his statements, as a messenger for Rollison, that a replacement home would be provided, but based their decision to go forward with the deal, and therefore to create any debt owing to them, on Rollison’s representations, not Golba’s representations. Any reliance they placed on Golba’s representations, therefore, would not be justifiable with respect to creating the debt, and would not lead to the incurring of damages based on Golba’s representations. Accordingly, the § 523(a)(2)(A) claim against Golba must fail due to lack of showing an intent to deceive, lack of justifiable reliance and lack of ability to show damages.
B. Section 523(a)(4) Claim (Rollison Only)
Section 523(a)(4) provides an individual debtor is not discharged from any debt for defalcation while acting in a fiduciary capacity.12 Federal law limits the application of § 523(a)(4) to express and technical trusts, and debts alleged to be nondischargeable must arise from breach of trust obligations imposed by law, separate and distinct from any breach of contract.13 To establish an exception to discharge under § 523(a)(4) a creditor must demonstrate the following: 1) a fiduciary relationship existed between the debtor and the creditor, and 2) the debt owed to the creditor is attributable to the fraud or defalcation committed by the debtor in the course of the fiduciary relationship.14 Generally, under § 523(a)(4), defalcation can be defined as “a fiduciary-debtor’s failure to account for funds that have been *379entrusted to it due to any breach of a fiduciary duty, whether intentional, willful, reckless, or negligent. Further, the fiduciary-debtor is charged with knowledge of the law and its duties.”15
As explained in Young, the existence of a fiduciary relationship under § 523(a)(4) is determined by federal law, although state law is relevant to the inquiry.16 Moreover, such a relationship generally exists only if money or property on which the relevant debt was based was entrusted to the debtor.17
In this case, Gemm’s or Avalon’s insolvency would create a fiduciary duty to the creditors of those entities. Rollison’s use of Gemm’s or Avalon’s funds for personal purposes while Gemm or Avalon was insolvent would be improper in such a circumstance. However, the problem with expanding this improper practice to create an exception to discharge under § 523(a)(4) is the Knaubs have not shown they entrusted any money to Rollison. Thus, there was nothing entrusted to him against which he could commit defalcation by failing to use Gemm or Avalon funds to remit the entrusted money or to use the entrusted money for a specific purpose designated by the Knaubs. Moreover, there was nothing entrusted to him for which he could be required to make an accounting. It should be noted that en-trustment of funds to Gemm or Avalon, which has not been shown, is different from the Knaubs’ incurring of expenses or other possible damages as a result of relying on Rollison’s misrepresentations, as discussed above. Here, in the absence of a down payment or other funds entrusted to Rollison, Gemm, or Avalon, the Knaubs’ § 523(a)(4) claim against Rollison must fail.
CONCLUSION
For the reasons stated above,
IT IS ORDERED the debt of Rollison to the Plaintiffs is hereby found to be nondischargeable under 11 U.S.C. § 523(a)(A). The Court will set a hearing on damages by separate order, after which a final judgment may enter on that claim.
IT IS FURTHER ORDERED that the Plaintiffs’ claims against Golba under 11 U.S.C. § 523(a)(2)(A) and against Rollison under 11 U.S.C. § 523(a)(4) are hereby denied and dismissed.
. See Minutes of Proceeding of Status Conference held June 28, 2011 (Docket No. 51), and Order and Notice of Trial issued June 30, 2011 (Docket No. 53). This procedure was suggested by and agreed to by counsel for the Plaintiffs and the Defendant in each adversary proceeding.
. Unless otherwise noted, all future statutory references in the text are to Title 11 of the United States Code.
. Specifically, she identified a cashier's check from Gemm's account to Avalon’s Bank of Choice account in the amount of $137,130.01. See Knaubs’ Exhibit 48. She also identified transfers from Gemm to Avalon totaling approximately $469,000, which she stated were loan proceeds for loans to Gemm on projects Gemm had not finished, but were finished by Avalon. The total transfers from Gemm to Avalon were $648,977.00. See Knaubs' Exhibits 16 and 17.
. See Knaubs' Exhibits 19 and 50.
. See Knaubs' Exhibit 1.
. See Knaubs’ Exhibit 32.
. He noted Vanguard Holdings was an entity controlled by Rollison, which could have had an ownership interest in other properties, and could have been the parent company of Gemm. Golba never received money from Vanguard Holdings, nor did he participate in its management.
. See Knaubs' Exhibit 34.
. See Knaubs’ Exhibit 43.
. In addition, according to the Complaint, and not disputed by the parties, in June 2008, Golba formed another Avalon entity, Avalon Homes of the West, LLC ("Avalon West”). Avalon West was alleged by the Knaubs to be a “continuation” of both Gemm and Avalon. However, Golba did not testify about Avalon West at trial, and Rollison indicated he did not know if it was a continuation of Gemm and Avalon.
. Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 789 (10th Cir.2009) (internal quotation marks omitted) (quoting Fowler Brothers v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996)). See also United States v. Turner (In re Turner), 179 B.R. 273, 278 (Bankr.D.Colo.1995). The Riebesell Court went on to cite the Supreme Court's opinion in Field v. Mans to clarify the proper standard for the fourth element was "justifiable reliance,” not "reasonable reliance”:
The fourth element of the § 523(a)(2)(A) test requires the creditor's reliance to be "reasonable.” The appropriate standard is not "reasonableness” in the sense of whether an objectively reasonable person would have relied upon the debtor's false representations. Rather, the inquiry is whether *377the actual creditor’s reliance was "justifiable” from a subjective standpoint.
Id., at 791-792 (citing Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995)).
. See generally, Fowler & Peth, Inc. v. Regan (Regan), 477 F.3d 1209 (10th Cir.2007); Young, 91 F.3d at 1371; Antlers Roof-Truss & Builders Supply v. Storie (In re Storie), 216 B.R. 283, 286 (10th Cir. BAP 1997); In re Currin, 55 B.R. 928, 932 (Bankr.D.Colo.1985).
. Young, 91 F.3d at 1371; Allen v. Romero (In re Romero), 535 F.2d 618, 621 (10th Cir.197f6).
. Storie, 216 B.R. at 286; Cundy v. Woods (In re Woods), 284 B.R. 282, 288 (D.Colo.2001).
. Storie, 216 B.R. at 288; see also Currin, 55 B.R. at 935 (defalcation is more encompassing than either embezzlement or misappropriation); see generally, 4 Collier on Bankruptcy, ¶ 523.10 (15th ed. 2004) (defalcation refers to a failure to produce funds entrusted to a fiduciary and applied to conduct that does not necessarily reach the level of fraud, embezzlement, or misappropriation).
. Regan, 477 F.3d at 1211 n. 1; Young, 91 F.3d at 1371. Under Colorado law, when a corporation becomes insolvent, its directors and officers have a duty to the corporation's creditors. Alexander v. Anstine, 152 P.3d 497, 502 (Colo.2007) (citing Crowley v. Green, 148 Colo. 142, 147-48, 365 P.2d 230 (1961)). However, "[although the duty is often spoken of as a fiduciary one, it does not encompass the full scope of the fiduciary duties owed by officers and directors to shareholders but instead only requires directors and officers to avoid favoring their own interests over creditors’ claims.” Colborne Corp. v. Weinstein, - P.3d -, 2010 WL 185416 at *5 (Colo. App. January 21, 2010), cert. granted in part by Weinstein v. Colborne Corp., 2010 WL 3213046 (Colo. Aug. 16, 2010).
. Woods, 284 B.R. at 289. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494790/ | ORDER DISMISSING CHAPTER 11 CASES
ELIZABETH E. BROWN, Bankruptcy Judge.
THIS MATTER comes before the Court on the United States Trustee’s Motion to Convert or Dismiss Chapter 11 Case Under 11 U.S.C. § 1112(b)(4) (the “Motion”) and the Debtors’ Objection. Following an evidentiary hearing on this matter, the Court hereby FINDS and CONCLUDES that cause exists to dismiss these cases due to the Debtors’ repeated failures to file timely and accurate monthly operating reports with the U.S. Trustee (“UST”).
I. Background
Debtor Matthew Ray Whetten is the founder and sole owner of Debtor Ray’s Collision, Inc. (“RCI”). RCI is a Colorado corporation that provides automotive repair, towing, tire and other related automotive services in Castle Rock, Colorado. Both Debtors filed Chapter 11 petitions on March 8, 2011, and have been functioning as debtors-in-possession for the last fifteen months. RCI filed an amended petition on May 20, 2011, designating itself as a “small business debtor” pursuant to 11 U.S.C. § lOUSID).1 Small business debtors are required to file a plan of reorganization within the first 300 days of the case pursuant to § 1121(e)(2). RCI did not meet this deadline. It was not until the eve of the hearing on the UST’s Motion that Mr. Whetten filed a Joint Plan of Reorganization and Disclosure Statement on March 5, 2012.
*382Both Debtors have also been consistently late in filing monthly operating reports and in paying quarterly fees to the UST. Based on these deficiencies, the UST filed its Motion, seeking conversion or dismissal of Debtors’ cases. At the evidentiary hearing, the UST asserted additional grounds as cause for dismissal, including the untimeliness of Debtors’ plan and disclosure statement, continuing loss or diminution of Debtors’ estates, and the absence of a reasonable likelihood of rehabilitation. Debtors object to conversion or dismissal, arguing they are now current on all reporting requirements and quarterly fees, and have proposed a viable plan of reorganization.
II. Discussion
Section 1112(b) governs the conversion or dismissal of Chapter 11 cases. That section contains sixteen examples of “cause” to convert or dismiss a case. 11 U.S.C. § 1112(b)(4). The list is illustrative, not exhaustive. Courts may find cause for other equitable reasons. See In re FRGR Managing Member LLC, 419 B.R. 576, 582-83 (Bankr.S.D.N.Y.2009). The movant bears the burden of establishing cause by a preponderance of the evidence. In re ARS Analytical, LLC, 433 B.R. 848, 861 (Bankr.D.N.M.2010). If cause is established, § 1112 provides that the Court shall convert or dismiss, unless there are “unusual circumstances” that establish that such relief is not in the best interests of creditors and the estate. 11 U.S.C. §§ 1112(b)(1), (b)(2). Thus, once cause is demonstrated, the burden shifts to the opposing party to prove “unusual circumstances.” In re Dr. R.C. Samanta Roy Inst. of Science Tech. Inc., 2011 WL 2350095, at *3 (3d Cir. June 15, 2011).
The UST asserts cause exists under § 1112(b)(4)(F) due to an “unexcused failure to satisfy timely any filing or reporting requirement established by [the Bankruptcy Code] or by any rule applicable to a case under [Chapter 11],” and § 1112(b)(4)(H) for failure to “timely ... provide information or attend meetings reasonably requested by the United States trustee.” 11 U.S.C. §§ 1112(b)(4)(F), (4)(H). A debtor-in-possession is required to perform the duties of a trustee specified in § 704(a)(8), which mandates the filing of periodic operating reports and summaries and such other information as the UST or court requires if the business of the debtor is authorized to be operated. 11 U.S.C. §§ 704(a)(8), 1106(a)(1). The UST is charged with supervising the administration of Chapter 11 cases, including a debt- or’s performance of its statutory and fiduciary responsibilities. 28 U.S.C. § 586(a)(3). To perform this role, the UST has adopted reporting requirements embodied in its guidelines, which a debtor-in-possession is required to fulfill. The UST guidelines for this district require a debtor-in-possession to file a monthly report within twenty-one days after the end of the month covered by the report.2 These reports must include basic financial information, such as a statement of accounts receivable and payable, payments to professionals, and postpetition taxes payable. In addition, a debtor must provide, at least every six months, a periodic financial report for any entity in which the debtor holds a substantial or controlling interest. Fed. R. Bank. P. 2015.3.
In this case, the UST presented evidence that both Debtors failed to file *383timely, accurate monthly reports, and that Mr. Whetten failed to file timely periodic reports for an entity he owns called 8898 Burning Ridge, LLC. Specifically, the evidence showed that RCI failed to file any monthly reports until six months into the case, when RCI filed five months worth of the monthly reports at one time on August 5, 2011. After that initial bulk filing, there was another gap of four months, when RCI filed another batch of monthly reports on December 2, 2011. On that same day, Whetten filed his first nine months worth of monthly reports. After another two-month gap in filing, both Debtors filed yet another batch of catch-up monthly reports on February 8, 2012. Debtors’ monthly reports for January 2012 were timely filed. Mr. Whetten filed his periodic reports for the Burning Ridge entity in a similar, tardy fashion.
Not only were the monthly reports not filed on time, but they were not filed in a complete and accurate manner. The bankruptcy analyst for the UST’s office who dealt with Debtors’ cases testified that the monthly reports Debtors filed in 2011 were extremely deficient. They did not contain accounts payable and receivable information, a schedule of payments to professionals and postpetition taxes payable, or bank account reconciliations. The UST’s office contacted Debtors’ counsel by email and by phone regarding these deficiencies and to request other necessary information, but received no response for weeks. It was not until February 2012, after the UST had filed a certificate of contested matter in regard to this Motion to Dismiss and nearly one year into these cases, before the Debtors attempted to fully meet their reporting requirements. The Debtors’ failure to provide timely, accurate information prevented the UST from effectively monitoring Debtors’ cases and ensuring Debtors’ compliance with the Code.
Debtors did not dispute the UST’s version of events. Mr. Whetten’s only excuse was that he was busy running RCI’s business. The Court believes that Mr. Whet-ten has been extremely busy. He testified that he has been working approximately 15 hours per day, because he eliminated certain staff positions and absorbed that work himself. Nevertheless, this “excuse” is unavailing. Every debtor-in-possession faces the weighty duties of running a business and meeting the fiduciary obligations imposed by the Code. To allow a debtor to sidestep these duties simply because he is “busy” would render the Code’s reporting requirements a nullity.
Mr. Whetten also stressed that RCI has now hired an accountant to assist in completing the monthly reports and insists that all future monthly reports will be timely and accurate. However, the Court granted the Debtors’ motion to employ an accountant on July 6, 2011, but Debtors still failed to file timely, accurate monthly reports for another six months. Nor does the fact that the Debtors eventually filed their reports cure this problem. The late filing of catch-up monthly reports does not “satisfactorily explain or excuse failure to satisfy [a debtor’s] duties as a chapter 11 debtor.” In re Landmark Atlantic Hess Farm, LLC, 448 B.R. 707, 716-17 (Bankr.D.Md.2011). Filing catch-up reports is akin to locking the barn doors after the horses have already gotten out.
Monthly reports and the financial disclosures contained within them “are the life-blood of the Chapter 11 process” and are more than “mere busy work.” Matter of Berryhill, 127 B.R. 427, 433 (Bankr.N.D.Ind.1991). Without these reports, the UST and creditors cannot determine when a debtor is incurring additional losses, is rendered administratively insolvent, or is transferring assets without authorization. *384The reporting requirements provide the primary means for monitoring the debtor’s compliance with the Code’s requirements and they serve as a litmus test for a debtor’s ability to reorganize. Thus, noncompliance is not a “mere technicality.” In re Ronald Kern & Sons, 2002 WL 1628908, at *1 (W.D.N.Y. June 11, 2002). “[H]abitual non-compliance ... calls in to question a debtor’s ability to effectively reorganize.” In re Tucker, 411 B.R. 530, 535 (Bankr.S.D.Ga.2009) (quoting In re 210 West Liberty Holdings, LLC, 2009 WL 1522047, at *7 (Bankr.N.D.W.Va. May 29, 2009)). If a debtor does not fulfill this basic obligation during the Chapter 11 case, when it knows it will have to come before the court on any number of occasions, how can the creditors have any confidence that the debtor will timely and accurately report its income and make the required distributions under its plan, when the court and the UST are no longer monitoring the case? Consequently, the “importance of [filing] ... monthly report[s] cannot be over-emphasized.” In re Myers, 2005 WL 1324019, at *2 (10th Cir. BAP May 25, 2005). A debtor ignores this basic duty at its own peril.
These Debtors are not the first Chapter 11 debtors in this district to ignore their reporting duties. In fact, many small business debtors are guilty of the same omissions. But the negligence of these Debtors is more egregious than most cases and it compels this Court to finally send a message that flagrant disregard of a debt- or-in-possession’s reporting duties may by itself constitute sufficient “cause” for dismissal or conversion under §§ 1112(b)(4)(F) & (H).3 See Matter of Berryhill, 127 B.R. at 433; In re Myers, 2005 WL 1324019, at *2.
Since the UST established that “cause” exists, the burden then shifted to the Debtors to establish “unusual circumstances” demonstrating that conversion or dismissal is not in the best interests of creditors and the estates. See In re Dr. R.C. Samanta Roy Inst. Of Science Tech. Inc., 2011 WL 2350095, at *3 (3d Cir. June 15, 2011). The Code does not define “unusual circumstances,” but the term contemplates “conditions that are not common in chapter 11 cases.” In re Prods. Int’l Co., 395 B.R. 101, 109 (Bankr.D.Ariz.2008). The reporting requirements apply in every case and it is likely the management of every debtor-in-possession would like to rely on being “too busy” running the company to comply with these Code requirements.
In addition, the statute itself sets forth a four-part test that the party opposing dismissal or conversion must establish. Section 1112(b)(2) requires the objecting party to show a reasonable likelihood that (1) a plan will be confirmed within a reasonable time, (2) the “cause” established includes grounds other than continuing loss or diminution to the estate, (3) there exists a reasonable justification for the act or omission constituting cause, and (4) the act or omission will be cured within a reasonable time. 7 Collier on Bankruptcy ¶ 1112.05[2] (Alan N. Resnick and Henry J. Sommer, eds., 16th ed.). The UST requested dismissal on several additional grounds, including the UST’s allegation that the Debtors were experiencing continuing losses and the proposed plan was not feasible. At the time of the March hearing, the last filed monthly reports for the Debtors were the January 2012 reports. Based on the available reports, the UST established that the Debtor had been incurring losses post-petition. Although it is not proper for the *385Court to consider subsequent events and must confine its ruling to the evidence presented at trial, the Court notes that the monthly reports filed after the hearing for the months of February through April show positive cash flow. For this and other reasons, the Court has elected to confine its ruling to the lack of compliance with the reporting requirements. Since the Court is limiting its ruling to the reporting deficiencies, the Debtors arguably could satisfy at least the second and fourth prongs of this four-part test for “unusual circumstances,” but they cannot satisfy the third element. They have not established a reasonable justification for failing to file timely and accurate monthly reports.
This brings the Court to its final decision as to the proper remedy. Section 1112 requires the Court to determine whether dismissal or conversion is in the best interests of creditors and the estates. Unfortunately, courts are rarely given any evidence to aid in making this decision, which makes it difficult to render specific findings. The most that courts usually receive is a statement from interested parties as to their preferences. E.g., In re Great Am. Pyramid Joint Venture, 144 B.R. 780, 793 (Bankr.W.D.Tenn.1992) (considering views of the various parties in interest in determining whether to convert or dismiss). The only party to weigh in on the choice in the present cases was the UST. His office believes that dismissal is better for the creditors. The Court has no reason to doubt this assertion. It does not appear that a Chapter 7 trustee would have anything to distribute to the unsecured creditors. In the Debtors’ joint disclosure statement, they indicated that there would be no unencumbered assets for distribution to unsecured creditors in a Chapter 7 case. Certainly, the secured creditors are able to liquidate their collateral outside of bankruptcy. No party has indicated that there are potential avoidance actions through which a trustee might realize significant recovery for the estates. The appointment of a Chapter 7 trustee would cause the estates to incur additional administrative expenses. Given these facts, the Court finds that the Debtors’ cases are not appropriate for conversion and it is in the best interests of creditors and the estates to dismiss these cases.
III. Conclusion
For the reasons stated, the Court hereby GRANTS the United States Trustee’s Motion to Dismiss. Both cases are hereby DISMISSED.
. Unless otherwise specified, all references to “Code," “Section," and "§ ” are to Title 11, United States Code.
. U.S. Department of Justice, Office of the United States Trustee, Districts of Colorado and Wyoming, Operating Guidelines and Reporting Requirements of the Untied States Trustee For Chapter 11 Debtors In Possession and Chapter 11 Trustees, available at http:// www.justice.gov/us1/rl9/denver/chapterll. htm.
. The Court notes that the UST raised other grounds for dismissal or conversion, but given the Court's ruling on this issue, it is not necessary to address the other grounds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492812/ | ORDER OF DISMISSAL
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
THIS MATTER came on for hearing on the Court’s Order to Appear and Show Cause. There has been no written response by the debtor as to why this ease should not be dismissed. The United States Trustee appeared and stated that he had no opposition to the dismissal.
The record reflects that this case was filed as a Chapter 7 case on July 24, 1998. The debtor has scheduled total nonpriority claims totaling $69,071.32. No priority claims are scheduled, and the schedule of secured claims reflects two claims which appear to be fully secured. The comparison of schedules “I” and “J” reflects that the debtor has monthly take home pay of $3,426.20 with monthly expenses of $2,430.0. On the face of these schedules, the debtor appears to have $996.20 in disposable monthly income which would be available to pay the creditors. This sum would be sufficient in a Chapter 13 case to pay close to fifty (50%) percent of the claims of + all scheduled unsecured creditors. The granting of Chapter 7 relief in this case would constitute substantial abuse, mandating a dismissal of this case under 11 U.S.C. § 707(b); see United States Trustee v. Harris, 960 F.2d 74, 77 (8th Cir.1992) (the ability to fund a Chapter 13 plan may be a sufficient reason to dismiss a Chapter 7 petition for substantial abuse).
Debtor’s counsel appeared at the hearing and advised the court that the debtor had moved to New Jersey around the time of the filing of this petition and that his income and expenses were different from those listed in Schedules I and J. However, this case has been pending since July 24,1998. The order initiating this § 707(b) proceeding was issued on September 22, 1998. The debtor has made no effort to amend his schedules I and J nor has he presented any evidence of changed circumstances other than his counsel’s arguments at the hearing. This is not sufficient to overcome the information pro*902vided under penalty of perjury in his schedules. Accordingly, it is
ORDERED AND ADJUDGED that debt- or’s case is hereby dismissed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492813/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This ease is before the Court upon Order of Remand entered by the United States District Court for the Middle District of Florida, Jacksonville Division, entered on May 6, 1998, to determine whether certain preference payments were made in the ordinary course of the Debtor’s business in accordance with § 547(c)(2). After a trial on September 15, 1998, the Court enters the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACTS:1
1. Defendant owns a radio station in Jacksonville, Florida. (Tr. at 9.) Debtor advertised with Defendant’s radio station from 1991 to 1996.
2. Although the payment terms of Defendant’s invoices to the Debtor contained payment terms of “thirty days net,” the debtor consistently paid its invoices between 90 and 120 days. (Tr. at 9-10; Def.Ex. 1.) Defendant’s other customers usually paid between sixty and ninety days (Tr. at 9.)
3. In the spring of 1995, Debtor decided to increase its advertising on Defendant’s station, using a theme of liquidation. (Tr. at 10-11.) At debtor’s suggestion, Defendant agreed to extend Debtor’s advertising credit, provided the Debtor did not allow any of the invoices to become outstanding past 90 days. (Tr. at 11-12.) This policy was reduced to writing on April 3, 1995. (Def.Ex. 2; Tr. at 12, 24.)
4. Under the parties’ arrangement, the Defendant’s business manager would telephone the Debtor at the beginning of each month and relate the amount that was in the 90-day aging category. Debtor, at its discretion, would then divide that amount into installments and issue a series of post-dated checks in like amounts. Defendant would pick up the checks and deposit them as they matured. (Tr. at 11-12.)
5. For four months following the agreement, Debtor carried outstanding invoices past 120 days. (Tr. at 19-20.) After August 1995, Debtor did not carry a balance past 120 days. (Tr. at 19-20; Def.Ex. 3.)
6. Following the implementation of this procedure, Debtor forwarded to Defendant multiple series of post-dated checks for past-due invoices. In June 1995, Defendant received two checks for $2,000 each, which were applied against invoice 9511 for February 1995 and invoice 9791 for April 1995. (Tr. at 18.) In July, 1995 Defendant received two checks for $3,900 each which were ap*904plied to April invoice 9791. (Tr. at 18.) In August 1995, Defendant received one check for $2,478, and one check for $2,006.25 which were applied to invoices 10181 and 10129 for May 1995. (Tr. at 18.) In September 1995, Defendant received two checks for $3,203.81, and one check for $3,203.83, which were applied to invoice 10339 for June 1995. In October, 1995 Defendant received three checks of $3,327.18 each, which were applied to invoice 10535 of July, 1995.
7. On February 23, 1996 Debtor filed for relief under Chapter 7 of the Bankruptcy Code, and Plaintiff was appointed as trustee. (Case Doc. 1.)
8. Plaintiff alleges that within 90 days prior to its bankruptcy filing, Debtor transferred to Defendant the following series of checks, totaling $27,435:
Series A
Check No. Amount Date
28752 $3,600.00 11/28/95
28753 $3,600.00 12/05/95
28754 $3,600.00 12/06/95
28755 $3,675.50 12/18/95
Series B
Check No. Amount Date
29277 $3,240.00 01/10/96
29278 $3,240.00 01/16/96
29279 $3,240.00 01/22/96
29280 $3,240.00 01/30/96
(Doc. 1.)
10.The checks in Series A were applied to invoice 10713 of August, 1995. (Tr. at 14.) The checks in Series B were applied to invoice 107359,10884, and 10885 of September, 1995. (Tr. at 15.)
11. At trial, Defendant stipulated that all the elements required to establish a preference under 11 U.S.C. § 547(b) had been met, but argued that the transfers were protected from the Plaintiffs avoidance powers by the ordinary course of business exception of 11 U.S.C. § 547(c)(2).
12. This Court held that the payments were protected under the ordinary course of business exception of § 547(c)(2) and entered Judgment for the Defendant on January 15, 1997. (Doc. 16.) In so finding, the Court construed all sections of § 547(c)(2) subjectively, focusing on the specific business relationship of the parties rather than industry practices.
13. Plaintiff filed a Notice of Appeal from the Judgment and the proceeding eventually came before the Honorable Harvey E. Schlesinger, United States District Judge, Middle District of Florida, Jacksonville Division (Case No. 97-158-Civ-J-20.)
14. Judge Schlesinger reversed and remanded the Judgment entered by this Court for reconsideration and further proceedings (as appropriate), in light of the Eleventh Circuit’s decision in Miller v. Florida Mining and Materials (In re A.W. & Assoc., Inc.), 136 F.3d 1439 (11th Cir.1998). (Doc. 21.) In In re A.W. & Associates, Inc., the court found that pursuant to § 547(c)(2)(C) bankruptcy courts are required to examine industry standards.
15. Therefore, the sole issue currently be-. fore the Court is whether Defendant has met its burden of proof on ordinary business terms under § 547(c)(2)(C).
CONCLUSIONS OF LAW
Plaintiff asserts that the procedure utilized by Debtor and Defendant to pay delinquent bills was so idiosyncratic as to exclude it from ordinary business terms. Plaintiff argues that not only the age of the debts paid, but the method of payment by post-dated checks was unusual for the industry. Plaintiff points out that this Court, in its prior Findings of Fact and Conclusions of Law found the procedure to be “unique” and “unusual”.
Defendant asserts that the timing of the payments made by Debtor to Defendant was within the standards and practices in the radio advertising industry. Defendant introduced evidence that sixteen of its radio stations accept the vast majority of its payments between sixty and ninety days from the date of issuance of the invoice.2 Defendant also *905argues that the method of payment (postdated installment checks) was not “idiosyncratic”. Defendant asserts that the method of payment was cemented in long before the Debtor filed bankruptcy.
In A.W. & Assoc. the Eleventh Circuit Court of Appeals endorsed the reasoning of the Seventh Circuit Court of Appeals as set forth in In Matter of Tolona Pizza Products Corp., 3 F.3d 1029 (7th Cir.1993):
‘[OJrdinary 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.
A.W. & Assoc., 136 F.3d at 1443.
Plaintiff argues that because in its previous Findings of Facts and Conclusions of Law, (Doc. 15), this Court found the situation between the Defendant and the Debtor to be “unique” and “unusual”, this Court must now find the relationship so idiosyncratic that it falls outside the scope of § 547(c)(2)(C).
The Court must attempt to glean a precise definition of industry standards from A.W. Assoc., which is unfortunately difficult to do given the short shrift given the issue in the opinion. However, the Court looks to the eases relied on by AW. Assoc. for guidance.
Not only does the Eleventh Circuit approve of the decision in Tolona, but it also cites approvingly to In re Molded Acoustical Prods., 18 F.3d 217 (3d Cir.1994). A.W. Assoc. paraphrases a holding in Molded Acoustical parenthetically, signifying its acceptance of the theory applied by the Third Circuit Court of Appeals in Molded Acoustical (“range of permissible deviation from industry standards determined by extent to which the relationship between the parties is ‘cemented’ ”). A.W. Assoc., 136 F.3d at 1443.
The court in Molded Acoustical had to determine whether the pattern of the debt- or’s payments to its preference creditor had changed during the debtor’s period of insolvency. As here, the sole issue before the Court was the interpretation of § 547(c)(2)(C). The court began its analysis by looking to the legislative history of § 547(c)(2), which revealed that “ ‘[t]he purpose of the exception is to leave undisturbed normal financing relations, because it 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.’ ” Molded Acoustical, 18 F.3d at 223 (citing J.P. Fyfe, 891 F.2d at 70). The court noted its approval of the decision in Tolona, however it embellished the Seventh Circuit’s “idiosyncratic” test. Id. at 220. The ultimate holding in Molded Acoustical evolved through the court’s analysis of the purpose of the preference provisions as well as the importance of encouraging creditors to extend credit to their long-term customers when those customers begin to have financial difficulties. Id. at 224-25. This analysis led the court to the following conclusion:
[T]he more cemented (as measured by its duration) the pre-insolvency relationship between the debtor and the creditor, the more the creditor will be allowed to vary its credit terms from the industry norm yet remain within the safe harbor of § 547(c)(2). The likelihood of unfair overreaching by a creditor (to the disadvantage of other creditors) is reduced if the parties sustained the same relationship for a substantial time frame prior to the debtor’s insolvency.
Id. at 225.
The court acknowledged that its approach in some ways resembled that of subsections (a) and (b) of § 547. Id. at 225. However, the court also made sure to point out that even where there is a longstanding relationship, the credit terms may so grossly depart from industry standards that they would be considered unusual. Id. at 226.
The United States Court of Appeals for the Fourth Circuit has also adopted Molded Acousticals’ embellished Tolona approach to § 547(c)(2)(C). Contra Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30 (2d Cir.1996). In Advo-System, Inc. v. Maxway Corp., 37 F.3d 1044 (4th Cir.1994), the *906court characterized the Molded Acoustical interpretation of subsection (c) as a “sliding-scale window”. Id. at 1049. The court stressed the importance of the history between the debtor and the creditor prior to the preference period. Id. at 1049. The importance of the lack of any long-term debt- or-creditor relationship was also noted, the court finding that an established relationship at least creates a baseline to which the preference period credit terms can be compared. Id. The court ultimately concluded that it would follow the approach set forth in Tolona as further embellished by Molded Acoustical, and also agreed that a gross departure from the industry norm would not suffice even in the presence of an established relationship. Id. at 1050.
This Court agrees with the Third and Fourth Circuits that the more established the debtor’s relationship with a creditor, the more the parties will be permitted to deviate from industry standards. The Court finds that this approach will protect the unusual business relationship between a creditor and its established customers, as well as promote the purpose of the preference section. See Advo-System, 37 F.3d at 1050; Molded Acoustical, 18 F.3d at 225. Remaining creditors are not injured if the parties were simply continuing a long-standing practice of debt collection. Advo-System, 37 F.3d 1044 at 1050; Molded Acoustical, 18 F.3d at 225. In the absence of over-reaching by a creditor who has an established business relationship with the debtor, the purpose of the preference section, i.e. the equal treatment of creditors, is fulfilled. Tolona, 3 F.3d at 1032 (“[One] ... function of the subsection is to allay the concerns of creditors that one or more of their number may have worked out a special deal with the debtor, before the preference period, designed to put that creditor ahead of the other in the event of bankruptcy.”).
The Court must now determine whether the Debtor and Defendant’s practices fall within the sliding scale window of § 547(c)(2)(C) so as to be considered within industry standards. The Court must therefore answer the following questions:
1.What is the industry standard?
2. Does the practice between the parties meet that standard?
3. If so, § 547(c)(2)(C) has been satisfied;
4. If not, look to the history of the parties’ relationship and credit practices.
5. If the relationship and practice are not established, the practice falls outside industry standards and fails the test under § 547(c)(2)(C).
6. If the relationship and practice are long-standing and are not gross departures from the industry norm, § 547(c)(2)(C) has been satisfied.
Although Defendant’s invoices required payment in thirty days, Weatherby testified that most customers pay within 60 to ninety days, with other customers paying later than ninety days. Larry Garrett also testified that the “window” is 90 days. (Pl.Ex. 1A at 16, lines 15-17.) The Court finds this evidence sufficient to establish an industry norm of payment within the sixty to ninety-day time period.
The practice between the Debtor and Defendant obviously does not meet this standard. The Debtor carried invoices up to and even past 120 days. Therefore the Court must now examine the history of the parties’ credit practices.
Debtor first began advertising with Defendant’s radio station in 1991. Larry Garrett testified that “[Debtor] has been a long term and strong advertising account on our radio station.... In 1993, 1994, and 1995, as an account, [Debtor] would have been one of our top ten billing accounts on the radio station.” (Pl.Ex. 1A at 9, lines 18-25.) The Debtor began its practice of paying amounts within the ninety-day aging category by a series of post-dated checks in April, 1995, some ten months prior to filing bankruptcy. Garrett testified that there were occasions in 1992 and 1993 that involved temporary payment schedules with the Debtor, but nothing permanent as in 1995. (Pl.Ex. 1A at 23, lines 20-24.)
The Court finds that the Debtor and Defendant had a long-standing, established relationship long before the Debtor’s “slide into bankruptcy”, (quote). Therefore, the Defen*907dant is allowed some leeway from the industry standard of payment within sixty to ninety days. The Court believes that given the relationship between the parties, the late payments made by Debtor to Defendant fall within the sliding scale window of industry standards pursuant to § 547(e)(2)(C). The Debtor was one of Defendant’s valuable customers; long before the Debtor filed for bankruptcy the Defendant attempted to work with the Debtor in order to help it stay in business. There was no overreaching here on behalf of Defendant, rather a legitimate attempt at maintaining a profitable relationship with a long-term customer.
The Court’s inquiry is not at an end, however. Not only did the Debtor pay its invoices untimely, but it used a series of postdated checks to pay its debt in order to keep its invoices within the 120 day mark. Is this method of payment an industry norm?
Testimony from both Weatherford and Garrett establish that this method of payment was not the norm. Weatherford testified that it did not happen on a regular basis and was not ordinary. He also testified that although he had doné it in the past it had been with a client with a lot of history. Garrett testified that he had no other accounts in which the regular course was to pick up a series of postdated cheeks. (Pl.Ex. 1A at 18, lines 13-16).
The Court has previously determined that the parties had an established relationship as well as an established credit practice. Therefore, so long as the practice is not so idiosyncratic as to fall outside the broad range of industry standards, it falls within the sliding-scale window of the industry norm.
The Court holds that the practice between the Debtor and Defendant of issuing a series of post-dated checks is not so idiosyncratic as to fall outside the broad range of industry standards. The relationship between the parties was cemented, therefore the range of permissible deviation from industry standards is much greater than it otherwise would be. See Molded Acoustical,
The subject credit practices between Debt- or and Defendant began 10 months prior to the filing date. This is not a case in which a Defendant approached the Debtor in order to harass the Debtor and to obtain more favorable terms than another creditor within the preference period. The Court concludes that Defendant legitimately attempted to cooperate with a long-standing customer. The purpose behind the preference section would therefore be defeated were the Court to find the transactions between the Debtor and Defendant outside industry standards.
CONCLUSION
The Defendant has proven beyond a preponderance of the evidence that the payments made by the Debtor to the Defendant within the preference period were made in accordance with industry standards. The Defendant has therefore met its burden under each subsection of § 547(a)(2) and the Court holds that the preference period payments qualify as payments made within the ordinary course of business which may not be avoided by the trustee. A separate judgment will be entered in accordance with these Findings of Fact and Conclusions of Law.
. The Court adopts the Findings of Fact as enumerated in its initial decision Grant v. Renda Broadcasting Corp. (In re L. Bee Furniture, Co., Inc.), 204 B.R. 804 (Bankr.M.D.Fla.1997).
. It would have been preferable for the parties to submit independent evidence of companies other than those owned by Renda. However, given the *905evidence presented, the Court will precede on the facts before it. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492814/ | MEMORANDUM OPINION
JACK CADDELL, Bankruptcy Judge.
On September 23, 1998, this matter came before the Court for summary judgment filed *2by Mr. Fontes on his complaint to determine the dischargeability of tax liability owed to the United States for tax years 1987, 1988, 1989, and 1990.1 The debtor moved for summary judgment on the ground that he incurred the subject tax liability more than three years before the filing date of the above styled petition, and that the debt is dischargeable pursuant to 11 U.S.C. § 523(a)(1)(A). The United States raised the defense that the taxes debtor alleges to be dischargeable are excepted from discharge pursuant to the statutory tolling provisions under § 108(c) of the Bankruptcy Code. Alternatively, the United States argued that the subject taxes are excepted from discharge pursuant to the equitable tolling provisions available through 11 U.S.C. § 105.
Mr. Fontes’ tax liability shall be excepted from the discharge provisions of § 523(a)(1)(A) only if (1) the three year look back period in § 507(a)(8)(A)(i) is tolled by § 108(c) for the periods during which Mr. Fontes was a debtor in his prior bankruptcies; or (2) if the Court exercises its § 105 equitable powers to enlarge the three-year look back period. Based on the current law in the Northern District of Alabama2 and Eleventh Circuit precedent3, the Court finds that statutory tolling is inappropriate in this matter. The Court will, however, consider the defense of equitable tolling and the government’s equitable arguments for extending the look back period in § 507(a)(8)(A)(i) at trial. Although the principle of equitable tolling cannot be “asserted to create a right nor to give a cause of action,” it can be used as a defense “to prevent loss otherwise inescapable and to preserve rights already required ...” Nolan v. United States (In re Nolan), 205 B.R. 885, 887 (Bankr.M.D.Tenn.1997) (quoting Chattanooga v. Louisville & Nashville R.R. Co., 298 F.Supp. 1 (E.D.Tenn. 1969)); In re Pastula, 203 B.R. 941, 948 (Bankr.E.D.Mich.1997).
The look back period prescribed in § 507(a)(8)(A) is not a statute of limitations that fixes the maximum period during which an action can be brought or right enforced, but, is a substantive element of the cause of action under § 523(a)(1)(A) that can only “be supplied by a court applying equitable principles only upon proof of substantial debtor misconduct.” Id. This burden of proof cannot be sustained on summary judgment evidence, but must be fully developed and by an “examination of the facts and the relative positions of the parties ... in the exercise of the court’s equitable power.” Quenzer v. United States (In re Quenzer), 19 F.3d 163, 165 (5th Cir.1993). At trial, the government must establish sufficient evidence of the debtor’s inequitable misconduct to justify the enlargement of the time period for the nondischargeability of taxes in § 507(a)(8)(A) and the denial of the debtor’s fresh start. In re Macko, 193 B.R. 72, 75-76 (Bankr. M.D.Fla.1996) (finding IRS must produce evidence of inequity to invoke the remedy of equitable tolling). To sustain this burden, the government should be prepared to offer specific evidence of the relative equities of the parties and be prepared to address the following questions recently proposed by one commentator:
Is there any misconduct on the part of the debtor? Was the IRS or the state agency diligent in attempting to collect the tax? Did the IRS file a motion to lift the stay in *3the prior case to protect its claim? Did the IRS make any objection to the distribution scheme in the prior plan? Did the IRS move to convert the prior case? Did the IRS protect its claim when the discharge or dismissal order was entered in the prior case? Did the IRS make any collection efforts at all during the time open to it? How much collection time was available to the IRS after the end of the first case? Was the debtor’s tax delinquency account even referred back to the Collections Division after the prior case was completed or dismissed? What notices, demand letters, liens, or levies were sent by the IRS to the debtor? What are the circumstances that cause the second filing? Is the second filing a good faith filing? Have the circumstances of the debtor changed since the first filing?
Walter B. Thurmond, Is there really any “Equity in the Discharge of Tax Claims, ” in Norton BANKRUPTCY Law Advisor, Sept. 1998, Issue No. 9, at 7-8.
Based upon the foregoing, the Court finds that the motion for summary judgment shall be kept in abeyance and heard again with the trial scheduled in this matter.
A separate order will be entered consistent with this opinion
MEMORANDUM ORDER
In conformity with and pursuant to the memorandum opinion of the Court contemporaneously entered herewith and for reasons set forth therein,
It is ORDERED, ADJUDGED AND DECREED that:
1. The United States’ equitable arguments cannot be resolved on summary judgment and will be continued for trial.
2. The trial in this matter currently scheduled for November 16, 1998, is continued to December 8,1998, at 9:00 o’clock p.m. at the Seybourn H. Lynne Federal Courthouse, Cain Street Entrance — 3rd Floor Courtroom in Decatur, Alabama.
. In its answer, the United States alleges that the plaintiff is indebted to the IRS for the taxable years 1986, 1987, 1988, 1989, and 1990, and an employment tax liability for the period ended December 31, 1992.
. See Turner v. United States (In re Turner), 182 B.R. 317 (Bankr.N.D.Ala.1995) (J. Cohen), adhered to on reconsideration, 195 B.R. 476 (Bankr.N.D.Ala.1996), ajf d In re Turner, - CV - (N.D.Ala.1997) (holding that the time periods in § 507(a)(8)(A) are statutory elements of the cause of action in § 523(a)(1) and are not automatically enlarged or tolled by a prior bankruptcy case). The issue of statutory tolling is also currently pending before the Eleventh Circuit in the case of In re Morgan, No. l:97-CV-604-JEC (N.D.Ga. Jan. 23, 1998).
.See Burns v. United States (In re Burns), 887 F.2d 1541 (11th Cir.1989), in which the Eleventh Circuit warned that courts must look to the plain language of a statute and where such language is unambiguous, enforce the statute without reference to legislative history. Under the plain language of 108(c), the suspensions provided therein only apply when created by applicable non-bankruptcy law, and is, therefore, not applicable by its own terms to § 523(a)(1). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492815/ | ORDER OF COURT
M. BRUCE McCULLOUGH, Bankruptcy Judge.
AND NOW, this 30th day of December, 1998, upon consideration of (a) movants’ motion (i) for relief from the automatic stay so that movants may proceed with their pending garnishment action against the above-captioned debtor and National Builders and Acceptance Corporation (NBAC) in the Pennsylvania Court of Common Pleas, Allegheny County (# GD94-15714), and (ii) requesting that this Court abstain from adjudicating issues regarding the ownership of stock in Penn West Associates, Inc. (Penn West), which stock is presently possessed by NBAC, (b) the responses to movants’ motion by the instant debtor and NBAC, and (c) the various exhibits attached to the parties’ pleadings, including, in particular, the October 13, 1998 Memorandum Opinion and Order of Court by Common Pleas Court Judge Richard G. Zeleznik (Movants’ Ex. C); and subsequent to notice and a hearing on December 22, 1998, it is hereby ORDERED, ADJUDGED, AND DECREED that:
1. This Court, pursuant to application of the Rooker-Feldman doctrine, lacks subject matter jurisdiction to determine whether (a) NBAC possesses a first priority security interest, or any security interest for that matter, in the Penn West stock, or (b) movants pos*165sess an attaehmenVgarnishment lien in the Penn West stock. The Rooker-Feldman doctrine operates to preclude this Court from entertaining the aforementioned issues because (a) Judge Zeleznik, in his October 13,1998 Memorandum Opinion and Order of Court, determined that (i) NBAC does not possess a security interest in the Penn West stock, and (ii) NBAC, as garnishee, must surrender said stock to mov-ants, as garnishors, (b) this Court, in order to grant the relief ultimately sought by NBAC and the debtor (i.e., that NBAC has a first priority security interest in the Penn West stock and movants lack any property interest in said stock), would necessarily have to effectively reverse or void Judge Ze-leznik’s prior decision, (c) Judge Zelez-nik’s decision, even though it has yet to be reduced to a formal docketed judgment, is nevertheless an adjudication on the merits of those issues presented before him, and (d) this Court, as well as any other federal court other than the United States Supreme Court, is precluded from disturbing a decision on the merits rendered by a state court regardless of whether said decision has yet been reduced to a formal docketed judgment. See District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 478, 103 S.Ct. 1303, 1313, 75 L.Ed.2d 206 (1983) (federal court could not disturb a prior state court decision “[although ‘no entry was placed by the Clerk in the file, on a docket, or in a judgment roll ’ ”); Charchenko v. City of Stillwater, 47 F.3d 981, 983 n. 1 (8th Cir.1995) (“Rooker-Feldman is broader than claim and issue preclusion because it does not depend on a final judgment on the merits”); Doctor’s Associates, Inc. v. Distajo, 107 F.3d 126, 138 (2nd Cir.1997) (inferior federal courts are barred from reviewing not only final decisions of state courts but also interlocutory orders of such courts as well); In re Audre, Inc., 216 B.R. 19, 28-29 (9th Cir. BAP 1997) (Rooker-Feldman doctrine applies even though the judgment was not considered “final” under California law because of a pending appeal).1
2. Movants’ motion for relief from the automatic stay is GRANTED so that the litigation regarding movants’ aforementioned garnishment action may proceed to completion in the Pennsylvania state courts, including, inter alia, (a) a disposition by Judge Zeleznik of any post-trial motions raised by NBAC or the debtor, (b) a reduction to formal judgment by Judge Zeleznik of his October 13, 1998 decision or any subsequent decision,2 and (c) any subsequent *166appeal of a judgment rendered by Judge Zeleznik. Because the Court, pursuant to the Rooker-Feldman doctrine, lacks subject matter jurisdiction over the issues set forth in paragraph 1 herein, movants’ request that this Court abstain from resolving said issues shall be DENIED AS MOOT.
3. In the event that Judge Zeleznik’s October 13, 1998 decision stands as it presently exists, movants possess a property interest in the Penn West stock in the form of either:
(a) a first priority attachment/garnishment lien, at a minimum, which lien (i) would have been perfected as of the date upon which movants served their writ of attachment execution (ie., garnishment writ) upon NBAC (ie., apparently some time in or around April 1997), see In re J. Robert Pierson, Inc., 36 B.R. 853, 854-55 (Bankr.E.D.Pa.1984), aff'd, 44 B.R. 556 (E.D.Pa.1984); Schreiber v. Kellogg, 194 B.R. 559, 568 (E.D.Pa.1996), aff'd in part, rev’d in part, 124 F.3d 188 (3rd Cir.1997); In re Boylan, 65 F.Supp. 105, 108 (E.D.Pa.1946), aff'd, 157 F.2d 518 (3rd Cir.1946), and (ii) could not, given the date of said perfection, then be avoided pursuant to either 11 U.S.C. §§ 544(a) or 547(b); or
(b) complete ownership of said stock, at a maximum, given that Judge Zeleznik issued his opinion and order in favor of movants and against NBAC prior to the November 18,1998 commencement of the above-captioned bankruptcy case; in the event that movants own the entire equitable interest in the stock, then said stock would not constitute property of the instant bankruptcy estate.
However, this Court need not, and thus will not, resolve at this time the precise nature of movants’ property interest in the Penn West stock. Instead, the Court will defer resolution of the nature of said property interest until the state court litigation regarding movants’ aforementioned garnishment action is completed.
4. Although relief from the automatic stay is granted to movants at this time, such relief is only granted for the sole purpose of completing the state court litigation regarding movants’ aforementioned garnishment action. Consequently, even if movants ultimately are successful at the state court level in their garnishment action, they may nevertheless not proceed to execute upon the Penn West stock until they receive, from this Court, further relief from the automatic stay imposed by the instant bankruptcy case.
IN SUMMARY, movants’ motion for relief from the automatic stay is GRANTED for the sole purpose of completing the state court litigation regarding movants’ aforementioned garnishment action, and movants’ abstention request shall be DENIED AS MOOT.
. Because the Rooker-Feldman doctrine operates to preclude this Court from disturbing the holdings in Judge Zeleznik's October 13, 1998 opinion and order, the Court need not address whether said decision by Judge Zeleznik is "final" such that it must be accorded res judicata or collateral estoppel effect in this Court with respect to the issues surrounding NBAC’s security interest and movants’ garnishment lien.
. The Court points out that a post-petition reduction to formal judgment of a state court order entered pre-petition does not even constitute a violation of the automatic stay because (a) in Pennsylvania, the mere entry of a judgment upon a state court docket by the state court prothono-tary is a purely ministerial act, see Lansdowne by Lansdowne v. G.C. Murphy, 358 Pa.Super. 448, 517 A.2d 1318, 1321 (Pa.Super.1986); Gotwalt v. Dellinger, 395 Pa.Super. 439, 577 A.2d 623, 625 (Pa.Super.1990), and (b) performance of a purely ministerial act post-petition will not constitute a continuation of a judicial action or proceeding against a debtor in violation of 11 U.S.C. § 362(a). See, e.g., In re Soares, 107 F.3d 969, 973-74 (1st Cir.1997); Chase Manhattan Bank v. Celotex Corporation, 852 F.Supp. 226, 227 (S.D.N.Y.1994); In re Knightsbridge Development Co., 884 F.2d 145, 148 (4th Cir.1989); Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527-28 (2nd Cir.1994); In re Papatones, 143 F.3d 623, 626 (1st Cir.1998); Bonilla v. Trebol Motors Corp., 150 F.3d 77, 86 (1st Cir.1998). Therefore, movants, with respect to Judge Zeleznik's October 13, 1998 decision, could have safely sought and obtained a formal judgment from Judge Ze-leznik post-petition without even obtaining stay relief from this Court. That being the case, if movants ultimately succeed on the post-trial motions that NBAC has raised before Judge Zelez-nik, it is entirely proper and permissible for movants to receive at that time a formal judgment in their favor, even absent a grant of stay relief by this Court. Nevertheless, the Court has granted to movants such stay relief. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492816/ | OPINION DENYING THE UNITED STATES OF AMERICA’S CLAIM OF SET-OFF
WALTER SHAPERO, Bankruptcy Judge.
Introduction
This matter is before the Court for the determination of whether Federal Unemployment Tax Act (“FUTA”) tax refunds owed by the Internal Revenue Service (“IRS”) to the Debtor should be paid to the bankruptcy estate or whether these amounts can be set-off against tax liabilities owed currently by the Debtor to the IRS (which are currently somewhere in the neighborhood of $474,000) under the Chapter 11 plan. Debtor has liquidated all assets and distributed all remaining estate funds under the Plan, with the exception of the IRS’s claim. All other secured and unsecured creditors have been paid in full compliance under the plan, and the only other outstanding claims (besides *403the IRS’s) are: (1) Debtor’s attorney’s fees of approximately $50,000; and (2) Debtor’s accountant’s fees of approximately $30,000. This Court determines that the IRS does not have the right of set-off and, therefore, must disburse the FUTA tax refunds and any statutory interest earned, on those refunds to the Debtor.
Background and Facts
The relevant facts are as follows:
1. The Debtor filed its Chapter 11 bankruptcy petition on July 1,1988.
2. On September 13, 1990, the Debtor paid the FUTA taxes owed for 1989.
3. On November 5, 1991, the Debtor paid the FUTA taxes owed for 1987.
4. On March 31, 1992, the Debtor paid its Michigan unemployment taxes, which was the event that triggered the FUTA tax refunds. Under this law, Debtor is entitled to a credit towards its FUTA tax liability for payments paid for state unemployment taxes, and because the FUTA tax liability was paid before the state unemployment taxes, a FUTA tax refund was in order.
5. By an order dated August 17, 1994, this Court found that the Debtor was entitled to FUTA tax refunds for the years 1987 and 1989 (having found the 1988 refunds to be barred on statute of limitations grounds). The amounts were $54,538.28 and $35,699.87, respectively. (That same order found that the IRS preserved the right to collect tax penalties and interest owed by Debtor on the 1987 FUTA taxes paid in 1991.)
6. By Opinion and Order dated July 24, 1995, this Court denied the Debtor’s petition for abatement of penalties in relation to the approximate $474,000 tax liability claim and affirmed the Debtor’s liability therefor.
7. By Opinion dated December 14, 1995, this Court granted the Debtor’s motion to equitably suboi-dinate those same tax penalty claims in relation to the approximate $474,-000 tax liability claim.
8. On December 22,1995, the IRS appealed this Court’s subordination decision.
9. On July 7, 1996, the Eastern District Court of Michigan remanded the case back to this Court for further review in light of a recently decided United States Supreme Court case, United States v. Noland, 517 U.S. 535, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996). The Supreme Court in Noland reversed In re First Truck Lines, 48 F.3d 210 (6th Cir.1995), the case relied upon by this Court in its December 14, 1995, decision equitably subordinating the IRS’s claim.
10. On January 22, 1997, this Court reversed its previous opinion granting the Debtor’s motion for equitable subordination in light of Noland, thus denying subordination.
11. On January 30,1997, the Debtor appealed the January 22, 1997, opinion and order denying equitable subordination.
12. On October 28, 1997, the Eastern District Court of Michigan affirmed this Court’s January 22, 1997, decision denying subordination. That decision was not further appealed.
Law and Discussion
The nature and practical meaning of this dispute apparently is that if the FUTA tax refunds are required to be paid to the bankruptcy estate (i.e., the set-off is denied) they will then be available to pay the indicated professional or other such fees or administrative expenses, which presumably have a higher payment priority than the IRS’s $474,000 claim. If the set-off is allowed, then such funds will not be available to pay those fees and expenses.
The first determination to be made is what is required to have a right of set-off in a bankruptcy case. That is provided for in 11 U.S.C. § 553(a), which states, in relevant part:
(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case....
*404Thus, § 553(a) explicitly requires that the mutual debts owed by the Debtor to the Creditor and vice versa have arisen pre-petition. (What is provided for elsewhere in that section or in 362 and 363 is not relevant to the issue.)
When did the FUTA tax refunds owed to Debtor by the IRS arise? This Court recognizes the general principle that the right to a tax refund will exist pre-petition when the Debtor has overpaid its taxes pre-petition. Walat Farms, Inc. v. United States (In re Walat Farms), 69 B.R. 529, 531 (Bankr.E.D.Mich.1987). In this case, the Debtor did not pay the FUTA tax liability for 1987 and 1989 until November 5, 1991, and September 13, 1990, respectively, well after the July 1, 1988, petition filing date. Moreover, on March 31,1992, the Debtor paid its Michigan unemployment taxes, which, ultimately, was the event that triggered the FUTA tax refunds. See I.R.C. § 3302(a). Under I.R.C. § 3302(a), the Debtor is entitled to a credit towards its FUTA tax liability for payments paid for state unemployment taxes, and since the FUTA tax liability was paid before the state unemployment taxes, a refund was then in order. Thus, the FUTA tax liability owed for 1987 and 1989 was paid (overpaid in effect) on November 5, 1991, and September 13, 1990, respectively, and the refund arose thereafter on March 31, 1992, which dates are all after the petition date. Logically analyzed, there can be only three determining facts or events which bear on when the refunds in question “arose”. They are: (1) the years for which the FUTA taxes pertained; or (2) the years in which (or dates on which) the FUTA taxes were actually paid; or (3) the dates on which the Michigan unemployment taxes were paid, giving rise to the right to a refund. In the ease of the 1987 FUTA tax, the latter two dates occurred post-petition; and in the case of the 1989 FUTA tax, all three dates occurred post-petition. In this Court’s view, it is the date that the Michigan unemployment tax was paid, that is the event which first triggered the right to receive a refund of the FUTA taxes previously paid; and, thus, it is the date on which it can be properly said the refund “arose.” Therefore, it is quite clear under almost any view, that the rights to the 1987 and 1989 refunds “arose” post-petition in both cases.
The $474,000 tax claim clearly arose pre-petition and, indeed, there is no argument on that point.
Accordingly, under § 553(a), no right to set-off exists, and the FUTA refunds must be paid to the trustee.
If there can be no agreement as to the amounts required to be paid, the amounts can be determined by the Court upon appropriate application. In that connection, the Court notes (but does not rule) that: (1) the preservation of the right of the IRS to collect tax penalties and interest on the 1987 FUTA taxes paid in 1991, if properly exercised or exercisable in some amount, might conceivably affect the amount of the refund due Debtor; and (2) to the extent the administrative fees and expenses are, or turn out to be, less than the amount of the refunds payable to Debtor, the difference would presumably be payable either to the IRS on its $474,000 claim, or, to some other creditor(s) with greater priority than the IRS.
This Court finds it unnecessary to decide the Debtor’s second claim that the IRS waived its right of set-off as this Court has determined that the IRS does not have the right of set-off in this case.
Conclusion
For the foregoing reasons, this Court concludes that the IRS must disburse to the Debtor its 1987 and 1989 FUTA tax refunds, together with such interest, if any, as may be provided for in the Internal Revenue Code. This Court will enter an appropriate order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492817/ | DECISION AND ORDER
RICHARD L. SPEER, Chief Judge.
This cause comes before the Court upon Plaintiffs Motion for Summary Judgment. A movant will prevail on a motion for 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 a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986), Fed. R.Civ.P. 56(e), Fed.R.Bankr.P. 7056. In order to prevail, the movant must demonstrate all elements of the cause of action. R.E. Cruise, Inc. v. Bruggeman, 508 F.2d 415, 416 (6th Cir.1975). Thereafter, the opposing party must set forth specific facts showing there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2511, 91 L.Edüd 202 (1986). Inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). See also In re Bell, 181 B.R. 311 (Bankr.N.D.Ohio 1995).
In its Motion, Plaintiff explains that Defendant purchased a certain drill on August 7, 1996, and financed the purchase through Plaintiff. Defendant gave Plaintiff a security interest in the drill, but subsequently sold it for cash without notifying Plaintiff, *406or paying Plaintiff the value of its security interest. Plaintiff therefore contends that Defendant willfully and maliciously converted the collateral, and therefore Defendant’s debt should be found nondischargeable pursuant to § 523(a)(6) of the Bankruptcy Code.
In his Response to Plaintiffs Motion for Summary Judgment, Defendant does not argue or offer any evidence that he did not willfully and maliciously convert Plaintiffs collateral. Rather, Defendant only argues that Plaintiff appears to have sought a recovery for the value of the collateral from the entity to whom it was sold, and that Plaintiff should not recover twice. Defendant also offered a copy of a couple checks with which he made payments to Plaintiff, and argues that Summary Judgment should be denied, because without a full accounting, it is impossible to determine the balance owed.
In its Reply, Plaintiff agrees that it should not be allowed a double recovery. Plaintiff acknowledges that it has received Twelve Thousand Dollars ($12,000.00) from the entity to whom Defendant sold the collateral, as a settlement. Therefore, Plaintiff contends that it is still owed One Thousand Eight Hundred Dollars ($1,800.00).
This Court finds that Plaintiff has met its burden upon summary judgment to show a lack of a genuine issue of material fact. Plaintiff has offered the Affidavits of A1 Richardson, who is Litigation Administrator for a company that administers Plaintiffs loan contracts. Along with the affidavit is a copy of the contract which Defendant signed. Plaintiff has also offered the Affidavit of Plaintiffs counsel, who recounts Defendant’s testimony at the 341 hearing that Defendant sold the collateral for cash. Indeed, Defendant does argue that he did not willfully and maliciously convert the collateral. Defendant does argue that Plaintiff has not proven the balance of the account. However, in the Affidavit of AI Richardson, Mr. Richardson stated that the balance owed on the account as of the petition date was Twelve Thousand Seven Hundred Eighty-five and 83/100 Dollars ($12,785.83). This Court finds this evidence sufficient in this case, and Defendant has offered none to the contrary. If Defendant wanted additional information, he could have requested it through discovery. Subtracting this amount from the amount Plaintiff has already received on the account, the balance is presently Seven Hundred Eighty-five and 83/100 Dollars ($785.83), which this Court finds to be nondischargeable.
Accordingly, it is
ORDERED that the Motion for Summary Judgment of Plaintiff Deere & Company be, and is hereby, GRANTED, and that the debt of Defendant Henry A. DeLong to Plaintiff Deere & Company is hereby determined to be NONDISCHARGEABLE in the amount of Seven Hundred Eighty-five and 83/100 Dollars ($785.83). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492818/ | DECISION AND ORDER
RICHARD L. SPEER, Chief Judge.
Pursuant to Defendant’s Motion to Consolidate Case, this adversary proceeding has been consolidated with Deere & Company v. DeLong, Case No. 97-3264, a related adversary proceeding. This cause comes before the Court upon Plaintiffs Motion for Summary Judgment.
A movant will prevail on a motion for 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 a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986), Fed. R.Civ.P. 56(c), Fed.R.Bankr.P. 7056. In order to prevail, the movant must demonstrate all elements of the cause of action. R.E. Cruise, Inc. v. Bruggeman, 508 F.2d 415, 416 (6th Cir.1975). Thereafter, the opposing party must set forth specific facts showing there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). Inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). See also In re Bell, 181 B.R. 311 (Bankr.N.D.Ohio 1995).
The facts of this case concern Defendant’s disposition of collateral in which Defendant gave Deere & Company (hereafter “Deere”) a security interest. In the related adversary proceeding, Deere prays that the debt be found nondisehargeable pursuant to § 523(a)(6) of the Bankruptcy Code, contending that Defendant willfully and maliciously converted three items of collateral. The Plaintiff in this adversary proceeding was the purchaser to whom Defendant sold of one of these items of collateral, a John Deere tractor. Deere has also pursued recovery against Plaintiff in state court, and the parties have settled the matter for the amount of Thirty Thousand Dollars ($30,-000.00). Plaintiff now contends that it is subrogated to Deere’s right to assert a claim against Defendant to the extent of its payment to Deere, and that this debt should likewise be found nondisehargeable. Plaintiff has offered his own affidavit to substantiate the facts alleged.
In its responses in both adversary proceedings Defendant has not argued that this debt is should be found to be dischargeable, and has offered no evidence to refute the evidence submitted by Plaintiff on this issue. Rather, Defendant’s primary concern is that he not be liable twice on the same debt. That is, Defendant does not want to be in a position where both Deere and Plaintiff are seeking the recovery of this same debt. In the related adversary proceeding, Deere has stated that it agrees that it should not be allowed to recover twice on the this debt, and has reduced its demand by the amount recov*408ered from Plaintiff. In the related adversary proceeding, this Court found that the debt is nondischargeable, but has reduced Deere’s recovery by the amount it received from the Plaintiff herein.
This Court agrees that Plaintiff is subro-gated to Deere’s claim in the amount of Thirty Thousand Dollars ($30,000,00). See In re Routson, 160 B.R. 595, 604 (Bankr.D.Minn.1993). Further, for the reasons stated in its Decision and Order in the related adversary proceeding, this Court finds that the debt to Plaintiff is nondischargeable.
Accordingly, it is
ORDERED that Motion for 'Summary Judgment of Keith Reitzel be, and is hereby, GRANTED, and that the debt of Defendant Allen Lynn DeLong to Plaintiff Keith Reitzel is hereby determined to be NONDIS-CHARGEABLE in the amount of Thirty Thousand Dollars ($30,000.00). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492819/ | *416MEMORANDUM DECISION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW PERTAINING TO PROOF OF CLAIM NO. 78 OF LUIS VELTZE IN B-E HOLDINGS, INC. AND PROOF OF CLAIM NO. 360 OF LUIS VELTZE IN BUCYRUS-ERIE COMPANY
RUSSELL A. EISENBERG, Bankruptcy Judge.
A. FACTUAL BACKGROUND1
On October 30, 1985, Luis Veltze was shafted, literally. While in a mine in Chile, Luis Veltze received a phone call from his employer informing him that after 15 years of service for Bucyrus,2 his employment was immediately terminated. Veltze, a United States citizen, was born in Bolivia and came to the United States to complete his education. He was hired in 1970 by Bucyrus as an engineer. Veltze began to have personal differences with a future president of Bucy-rus and, as a result of the discord, was transferred in 1982 to Lima, Peru, as a condition for retaining his job. Approximately three years after moving his family and personal belongings to Peru, the person with whom Veltze had personal differences became president of Bucyrus, and Veltze’s tenure with the firm ended.
On June 80,1986, Veltze commenced litigation against Bucyrus in the 17th Civil Court in Lima, Peru, and a default judgment in that action was entered against Bucyrus on March 20,1992. Bucyrus appealed the Peruvian judgment without success;' it was declared affirmed and final in December 1994. On April 25, 1991, Veltze commenced litigation against Bucyrus in the Circuit Court of Milwaukee County in Milwaukee, Wisconsin. The case was removed by Bucyrus on May 20, 1991, to the United States District Court for the Eastern District of Wisconsin.3 A jury trial was held before the Honorable Myron L. Gordon, and judgment based on the special verdict of the jury was entered against Bucyrus in the Eastern District of Wisconsin on August 27, 1992.4 Bucyrus unsuccessfully appealed the jury award to the United States Court of Appeals for the Seventh Circuit which affirmed the District Court’s decision. The judgment was subsequently paid by Bucyrus, and a satisfaction was filed with the District Court on December 6, 1993. As of the date of this trial, the Peruvian judgment has not been satisfied.
On February 18, 1994, B-E Holdings, Inc. and Bucyrus-Erie, Inc. each filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code. The debtors’ Second Amended Joint Plan of Reorganization was confirmed on December 2, 1994. The plan of reorganization generally provides that creditors receive 100% of their allowed claims. On October 13, 1994, Veltze filed Proof of Claim No. 78 in B-E Holdings, Inc. and Proof of Claim No. 360 in Bucyrus-Erie Company. The proofs of claim are identical. (Ex. 58; Ex. 59). The bases for the claims include services performed, wages, salaries, compensation, and wrongful discharge. The proofs of claim further indicate that the debt was incurred on November 1, 1985, that a court judgment was obtained on March 20, 1992, and that the claim is an unsecured, nonpriority claim in the sum $489,000 plus interest. On December 5, 1994, the debtors’ filed an objection to the proofs of claim filed by Veltze on the basis that the claim asserted had already been paid in full. (Ex. 37A). *417The issues before this court are whether and in what amount to allow Veltze’s two proofs of claim.
B. JURISDICTION
This court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Order of Reference of the United States District Court for the Eastern District of Wisconsin dated July 10, 1984. Venue rests pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). As a result, this court may enter an appropriate order subject to review under 28 U.S.C. § 158. Due and sufficient notice of this trial was given to all necessary persons and parties. The trial commenced on December 9, 1998, and concluded on December 11, 1998. Veltze was present at the trial and was represented by Attorney Robert Hankel of O’Connor & Willems S.C. and Attorney Michael Dubis of Michael F. Dubis S.C. Bucyrus was represented by Attorney Patrick Howell of Whyte Hirschboeek Dudek S.C.
C. BURDEN OF PROOF
A proof of claim properly filed in a bankruptcy proceeding constitutes prima facie evidence of the validity and amount of the claim. Fed.R.Bank.P. 3001(f); 11 U.S.C. § 502(a). The burden of going forward then shifts to the party objecting to the claim to produce evidence sufficient to negate the prima facie validity. In re Allegheny Int'l, Inc., 954 F.2d 167, 173-74 (3rd Cir.1992). The ultimate burden of persuasion, however, remains on the claimant to prove the validity of the claim by a preponderance of the evidence. Id. See also In re Tesmetges, 87 B.R. 263, 270 (Bankr.E.D.N.Y.1988).
The parties stipulated at trial that Proof of Claim No. 78 of Luis Veltze in B-E Holdings, Inc. and Proof of Claim No. 360 of Luis Veltze in Bucyrus-Erie Company were timely filed, and that objections to the proofs of claim were timely filed. (R. at 18-19). The parties then proceeded with the trial on the mutual understanding that the above stipulation shifted the burden back to the Veltze as the claimant seeking to have his claim allowed. Id. Based on the findings of fact and conclusions of law discussed below, this court holds that to the extent indicated in this decision, Luis Veltze met his burden to prove the validity of his.claims by a preponderance of the evidence.
D.THE PERUVIAN JUDGMENT AND PROPER SERVICE
Veltze’s proofs of claim are based substantially on the Peruvian default judgment entered against Bucyrus on March 20, 1992. Bucyrus agrees with Veltze that there is a final Peruvian judgment. (R. at 216). The Supreme Court of the United States observed in Hilton v. Guyot, 159 U.S. 113, 202-03, 16 S.Ct. 139, 158, 40 L.Ed. 95 (1895):
“We are satisfied that where there has been opportunity for a full and fair trial abroad before a court of competent jurisdiction, conducting the trial upon regular proceedings, after due citation or voluntary appearance of the defendant, and under a system of jurisprudence likely to secure an impartial administration of justice ..., and there is nothing to show either prejudice in the court, or in the system of laws under which it was sitting, or fraud in procuring the judgment, or any other special reason why the comity of this nation should not allow it full effect, the merits of the ease should not, in an action brought in this country upon the judgment, be tried afresh, as on a new trial or an appeal, upon the mere assertion of the party that the judgment was erroneous in law or fact.”
Bucyrus contests the validity and enforceability of the Peruvian judgment only on the basis that the Peruvian complaint was never properly served on Bucyrus. (Bucyrus Trial Statement at 5-6). The Seventh Circuit Court of Appeals has held that while recognition of foreign judgments is a matter of comity, the United States will not enforce a judgment obtained without the bare minimum requirements of notice. Ma v. Continental Bank N.A., 905 F.2d 1073 (7th Cir.1990). The notice given must be “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Central Hanover Bank & Trust Co., 339 U.S. *418306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). Therefore, before the Peruvian judgment can be valid and enforceable as a matter of comity, this court must determine whether Bucy-rus received sufficient notice of the Peruvian litigation so as to meet the basic due process notions of fair play and substantial justice.
For several years Veltze attempted on numerous occasions and using various methods to comply with the Peruvian legal service requirements.5 The complaint was initially served in 1986 at the address of Bucyrus’ alleged legal representative in Peru and was then returned to the court by the alleged legal representative on the basis that the address used was not that of Bucyrus. (R. at 28). The next attempts at notification of the action were in 1987 and 1988 with 5 different publications in the official newspaper of the Peruvian government. (R. at 33; R. at 150). Finally, requisitorial letters through the Peruvian Consulate were used to serve notice of the Peruvian litigation on Bucyrus. (Ex. 131-138; R. at 150). At least eight different citations were sent from the Consul General of Peru in Chicago, Illinois, to Bucyrus in South Milwaukee, Wisconsin. (Ex. 131-138).
Bucyrus had substantial notice of the Peruvian litigation significantly prior to the en- _ tering of the default judgment in 1992. Dr. Rey,6 testified that he was informed by a Bucyrus attorney in 1986, the year the Peruvian action was commenced, that “they [Bucyrus] were in interested in some legal action initiated by Mr. Veltze in Peru.” (R. at 280). Lynne Day, the current corporate legal coordinator for Bucyrus International, Inc., testified that Bucyrus had knowledge of legal proceedings in Peru in 1989. (R. at 268). Bucyrus itself submitted as exhibits in this trial numerous citations sent from the Consul General of Peru in Chicago to Bucyrus in Wisconsin notifying it of the Peruvian litigation. (Ex. 131-38). These citations have been date stamped by the Bucyrus law department as received in various months starting in 1989 and continuing until 1991. Id.
Furthermore, this court is impressed with the extensive efforts the Peruvian courts made to ensure that Bucyrus had full and fair notice of the litigation. The Peruvian Superior Court ruled on July 10, 1987, that there was not sufficient proof that the entity originally served with the complaint was in fact Bucyrus’ legal representative. (Ex. 10). Later in the same year, the Peruvian court ordered that notification should be attempted through the official newspaper of the Peruvian government. (Ex. 11; R. at 33). In April of 1988, the Peruvian court remained unsatisfied that proper service had been made on Bucyrus and ordered that requisitorial letters be used for notification. Dr. Rey testified that it is a recognized procedure in Peru that when a defendant is not domiciled in Peru, the plaintiff may make notification of the action with requisitorial letters through the Peruvian Consul in the country where the defendant resides. (R. at 299).
This court is not an appellate court in the Peruvian legal system nor may it be used as such. For whatever reason, Bucyrus did not defend itself it in the Peruvian litigation prior to the time the default judgment was entered. In 1993 Bucyrus finally appeared in the case and unsuccessfully attempted to appeal the Peruvian judgment. (Ex. 32; Ex. 33; R. at 309-14, 409). Bucyrus’ opportunity to contest proper service was at the time of appeal. Furthermore, Dr. Rey testified that under Peruvian law a judgment that is no longer appealable but has not yet been paid may still be objected to, including on the grounds that there has been a lack of due process. (Ex. 314-16). Therefore, it appeal’s that Bucyrus has had the option to argue the notification issue in Peru at any time during the past five years, even though *419the initial appeal was rejected, and the judgment had become final. Bucyrus has not done so. This court cannot now be called upon to substitute its judgment for that of a Peruvian court regarding compliance with Peruvian service laws simply because this is the forum that Bucyrus would prefer.
Based upon the foregoing, this court finds that Bucyrus received at least the bare minimum requirements of notice regarding the Peruvian litigation so as to comport with traditional standards of due process. Accordingly, this court holds that the Peruvian judgment is valid and enforceable as a matter of comity.
E. THE WISCONSIN JUDGMENT AND DUPLICATION
Approximately five months after the default judgment was entered in Peru, a jury sitting in the United States District Court for the Eastern District of Wisconsin determined in a special verdict that Veltze was not -terminated from his employment "with Bucyrus for misconduct prejudicial to Bucyrus, awarded him $24,906.00 for relocation expenses,7 $151,950 for consequential damages, and $7,071.39 for out-of-pocket business-related expenses.8 (Ex. 109). Judgment was entered accordingly (“Wisconsin judgment”). After an unsuccessful appeal to the Seventh Circuit Court of Appeals, Bucyrus satisfied the judgment.
Bucyrus argues as an affirmative defense to Veltze’s claims that the Peruvian judgment is duplicative of the satisfied Wisconsin judgment, and because the “law abhors du-plicative recoveries,” Veltze should not be entitled to any further recovery. (R. at 4-5, 480). Veltze responds that the Peruvian judgment is not duplicative, because even though both lawsuits stem from his termination of employment with Bucyrus, the remedy sought in Wisconsin (a state which uses common law) is based on contract, and the remedy sought in Peru (a nation which uses a civil code) is based on tort and involves Peruvian “social benefits” which are not available in Wisconsin. (R. at 7). This court must therefore determine whether the Peruvian judgment grants relief which is duplica-tive of the Wisconsin judgment satisfied by Bucyrus.
The Peruvian judgment awards $87,000 for “lucro cesante” and 1,000 new soles for damages, plus legal interest and court costs. (Ex. 29; R. at 38, 415-17). Bucyrus contends that “lucro cesante” is equivalent to “loss of profits” and amounts to nothing more than lost wages and consequential damages. (Bucyrus Reply Brief at 3). Veltze argues that “lucro cesante” is translated literally into “cessation of income” or “cessation of profits.” (R. at 57; Veltze Answering Brief at 4). According to Veltze, “lucro cesante” includes neither consequential damages, lost wages, nor moving expenses but instead refers to Peruvian “social benefits.” (R. at 193, 433).
Under the Civil Code of Peru, employees earn rights to special “social benefits” which include protection when terminated from employment without proper notice and just cause. (R. at 184-85). “Social benefits” differ from lost wages in that “social benefits” are earned for services performed prior to the termination while lost wages have not yet been earned at the time of termination; they would have been earned but for the termination. (R. at 193-94). The sanction for an employer in the event they improperly terminate an employee who has worked in Peru for three years is the equivalent of twelve months of the employee’s salary. (R. at 185-86, 222, 397-401). Such a sanction applies even if the employee gains employment elsewhere immediately after the termination. (R. at 194-95, 222-23, 398).
This court finds that the $87,000 portion of the Peruvian judgment is a tort award for “social benefits” under the Peruvian Civil Code and is not duplicative of the Wisconsin judgment. There is no double recovery under the unique facts in this case because the Peruvian judgment compensates Veltze based on a Peruvian civil law cause of action which is not recognized under the common law of Wisconsin. The remedies sought in *420the Wisconsin litigation were based solely on breach of contract, while the Peruvian complaint includes Peruvian Civil Code tort remedies. (Ex. 1; Ex. 106). Furthermore, the Peruvian courts specifically used a Peruvian Civil Code tort statute,9 rather than a contract statute, to determine the interest applicable to the Peruvian judgment. (Ex. 51; R. at 232). It is much more than merely a simple coincidence that the $87,000 award in the Peruvian judgment is equal to the “social benefits” sanction amount under Peruvian law of twelve months of Veltze’s salary.10 (R. at 399-401). Even Bucyrus’ own Peruvian appellate briefs repeatedly state that the Peruvian litigation is based on indemnification for “beneficios sociales” or “social benefits.” (Ex. 32; Ex. 44; Ex. 48).
Again, this court is not an appellate court in the Peruvian legal system. Bucyrus has never raised the duplication issue in Peru nor has it filed a motion in Peru to have the Peruvian judgment declared satisfied. Bucy-rus did file a motion in the District Court in the Eastern District of Wisconsin seeking an order declaring the Peruvian judgment satisfied. (Ex. 34A; R. at 44). On March 15, 1994, Judge Gordon denied the motion on several grounds, including on the basis “that the proper forum for Bucyrus-Erie to challenge the enforceability of the Peruvian judgment is in the Peruvian court which entered that judgment ...” (Ex. 34A at 6). Furthermore, the Peruvian litigation, the Peruvian judgment, and the concern over duplication were never raised by Bucyrus during the Wisconsin jury trial, in the motions Bucyrus filed directly after the trial to obtain relief from the verdict, nor on appeal to the Seventh Circuit. (R. at 43-44). This court cannot allow its limited jurisdiction to be manipulated into forum-shopping by the Bucyrus.
Accordingly, the $87,000 portion of the Peruvian judgment is allowed. Due to the fact that legal interest was specifically awarded in the Peruvian judgment, appropriate pre-petition interest computed by the Peruvian court on the $87,000 is also allowed. (Ex. 29; R. at 38). Using the tables which were completed by an expert appointed by the Peruvian Court specifically to calculate interest on Veltze’s Peravian judgment, the total principal and interest through January 31, 1994,11 on the $87,000 award is $213,-040.99.12
As to the second award in the Peruvian judgment, Veltze concedes that the 1,000 new soles is a recovery for consequential damages. (R. at 433). Accordingly, this court finds that the 1,000 new soles is duplicative of the consequential damages awarded in the Wisconsin judgment and is, therefore, disallowed.
F. UNCLEAN HANDS AND VIOLATION OF THE AUTOMATIC STAY
As a second affirmative defense to Veltzels claims, Bucyrus alleges that Veltze has “unclean hands” due to automatic stay violations and should accordingly be denied all relief.13 (Bucyrus Trial Brief at 10). Veltze admits that he has to some degree violated the *421automatic stay but apologetically argues that he did so without understanding its meaning. (R. at 474-77). A determination must therefore be made as to the appropriate applicable sanction for the violation.
This court agrees with Attorney Dubis when he stated at trial that “the automatic stay is the backbone of the bankruptcy courts” and that “without the automatic stay ... it’s like having laws without any enforcement ability.” (R. at 474). Congress was aware of the importance of the automatic stay and provided for sanctions when a violation of the stay occurred. 11 U.S.C. § 362(h) provides for actual damages, including costs and attorney’s fees, as well as punitive damages in appropriate circumstances.
There is no doubt that Veltze’s requests to the Peruvian court for interest and cost calculations were a violation of the automatic stay. Veltze never executed on the Peruvian judgment nor seized any of Bucy-rus’ property, however. (R. at 112, 192, 411, 434). This court finds Veltze’s testimony credible when he stated that he was not fully aware of the meaning of the automatic stay until spring of 1998 when Attorney Howell advised him thereof. (R. at 54, 113-14, 434-35). Neither Bucyrus nor Dr. Rey informed the Peruvian court that proceeding with interest or cost calculations in Peru would be a violation of the automatic stay. In fact, no motion appears to have ever been brought in Peru, the District Court for the Eastern District of Wisconsin, or even in the Bucyrus bankruptcy eases for sanctions for the violation of the automatic stay or to prevent additional violations of the stay. Given these facts, this court finds that punitive damages would be inappropriate in this case.
As to actual damages, Bucyrus undoubtedly incurred costs and fees in responding to Veltze’s requests to the Peruvian court for interest and cost calculations. Bucyrus did not, however, quantify its damages for the court. Since this court has neither general nor specific figures with which a sanction amount may be computed, the appropriate and most equitable solution is to equate Bucyrus’ damages to the costs Veltze was awarded in the Peruvian judgment. See In re Longardner & Assoc., Inc., 855 F.2d 455, 462 (7th Cir.1988). Accordingly, as a sanction for violation of the automatic stay, the element of Veltze’s claims pertaining to the Peruvian awarded courts costs shall be disallowed.
G. INCORRECT PROOF OF CLAIM
Both parties have raised the issue that Veltze’s proofs of claim were incorrect and overstated. This practice, although not uncommon among creditors, should not be encouraged. Based on the unique facts in this case, however, this court finds the overstatement to be minimal and not significantly prejudicial to Bucyrus so as to warrant sanctions. Bucyrus was not misled or surprised by the amount claimed by Veltze. Prior to the trial, Veltze had already conceded that the final figure was somewhat exaggerated. (R. at 465-67). Furthermore, the proofs of claim did not rely solely on the Peruvian judgment. Veltze lists additional bases for the claims including services performed, wages, salaries, compensation, and wrongful discharge. (Ex. 58; Ex. 59). In calculating his claim, Veltze added both estimated compounded interest (which is frequent in Peru) and post-petition interest to the judgment amount. He additionally included his approximated Peruvian attorney’s fees, attorney’s fees for future representation in the bankruptcy proceedings, and costs. (R. at 465-67). The sum of these figures appears to be reasonably close to the total amount Veltze listed on his proofs of claim, thereby making sanctions inappropriate in this case.
H. CONCLUSION
Based on all of the above findings of fact and conclusion of law, Proof of Claim No. 78 of Luis Veltze in B-E Holdings, Inc. shall be allowed in the sum of $213,040.99 and Proof of Claim No. 360 of Luis Veltze in Bucyrus-Erie Company shall be allowed in the sum of $213,040.99. Although the claim shall be allowed in each case, because the cases are jointly administered and there is only one debt, there shall be only one recovery in the total sum of $213,040.99.
This decision shall constitute findings of fact and conclusions of law pursuant to Fed. *422R.Bankr.P. 7052 and Fed.R.Civ.P. 52. A separate order consistent with this decision shall be signed on this date.
. The following facts are based on the record and the documents filed by the parties. The factual background is generally uncontested.
. At the commencement of trial, the parties agreed that the term "Bucyrus” would refer to both the pre-bankruptcy entities, B-E Holdings, Inc. and Bucyrus-Erie Company, as well as the reorganized debtor, Bucyrus International, Inc. (R. at 13-14).
. Case No. 91-C-0523
. On November 2, 1992, the judgment was nominally amended as to the award amount.
. Due to the fact that many of the documents in this case are in the Spanish language and that the English language translations, when available, are generally neither official nor complete, the court must rely heavily on the testimony and credibility of the witnesses at the trial.
. Dr. Jacobo Rey Elmore, a legal practitioner for over forty-five years in Peru, was called by Bucy-rus as a witness, by Veltze as an adverse witness, and recognized by this court as an expert in Peruvian law. Dr. Rey represented Bucyrus in the Veltze matter after the Peruvian judgment and continues to represent Bucyrus in Peru as of the date of this trial.
. This figure appears was stipulated to by the parties. (Ex. 109).
. This figure was later reduced to $4,979.00. (Ex. 112).
. Article 1985 of the Civil Code of Peru allows tort recoveries to accrue interest from the date of termination. (Ex. 51).
. Veltze's monthly salary in 1985 after working for three years in Peru was $7,250.00. (R. at 399-401).
. January 31, 1994, is chosen so as to assure that no post-petition interest is included in the amount. As previously stated, the petitions in bankruptcy were filed on February 18, 1994. (R. at 234).
. The court is aware that the allowed interest is relatively large compared with the principal sum. Dr. Rey, Bucyrus’ own witness, confirmed in his testimony, however, that $213,040.99 is the correct total sum of principal and interest through January 31, 1994. (R. at 234-35). Neither party has questioned the accuracy of the tables which were received into evidence as Exhibit No. 53 and have been used to determine the applicable interest.
.In pleadings filed with the court, Bucyrus has made reference to further "unclean hands” allegations against Veltze such as "inequitable conduct.” Bucyrus has also put forward additional affirmative defenses and issues of law including "equitable estoppel” and "judicial estoppel" in its filed documents. While this court is aware of the plethora of defenses and issues raised at various times by Bucyrus, at trial there was a significant lack of argument, testimony, and evidence presented thereon. Accordingly, this court shall address only those defenses and issues which were pursued at trial and are in any way dispositive of Veltze’s claims. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492820/ | VOTOLATO, Chief Judge.
The Chapter 7 trustee, Hans López-Stubbe, appeals a December 17, 1996 Judgment of the Bankruptcy Court for the District of Puerto Rico, denying the Trustee’s Motion for Summary Judgment and dismissing his crossclaim against Milton J. Rúa, et al. In said order the Bankruptcy Judge ruled that the crossclaim was barred by: (1) the applicable statute of limitations; and (2) the doctrine of transactional res judicata. On December 26, 1996, the Trustee filed a timely motion to alter or amend the Judgment, which was denied on February 12, 1997, and he also seeks appellate review of that order. For the reasons discussed below, we reverse as to both orders, and remand.
This appeal is timely filed, see Fed. R. Bankr.P. 8002(b), and the Bankruptcy Appellate Panel has jurisdiction pursuant to 28 U.S.C. § 158. The “clearly erroneous” standard is applied in reviewing the bankruptcy court’s findings of fact, and conclusions of law are reviewed de novo. See Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco Int’l, Inc.), 132 F.3d 104, 107-108 (1st Cir.1997); Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir.1994); In re SPM Mfg. Corp., 984 F.2d 1305, 1310-11 (1st Cir.1993).
BACKGROUND
The travel of this case consumes volumes of files, spans over a decade of litigation with numerous appeals and remands, and has severely tested the endurance of a very patient Bankruptcy Judge. The stage for this ease was first set in May 1975, when Bowery Savings Bank entered into a mortgage servicing agreement with Lincoln Financial Mortgage Corporation, and later in 1983, when Milton J. Rúa purchased 100% of the outstanding shares of Lincoln. Later that year, Rúa formed Colonial Mortgage Bankers Corporation and named himself president and a director of Colonial. Colonial succeeded to the interests of Lincoln and continued to do business with Bowery under the Colonial name. Pursuant to its mortgage servicing arrangement, Colonial collected mortgage payments and deposited them in its corporate account at Banco Popular de Puerto Rico. Thereafter, the funds would be transferred to accounts at Banco Financiero de Puerto Rico and Banco Santander de Puerto Rico “in trust” for Bowery, and Colonial would make disbursements to Bowery in accordance with the mortgage servicing agreement.
Sometime in 1986 Colonial began to withdraw and use funds from the Bowery trust accounts in violation of the mortgage servicing agreement. Bowery first learned of these misdeeds in December 1987, when six checks totaling $324,403 drawn by Colonial to the order of Bowery were returned for insufficient funds. When confronted, Rúa admitted using over a million dollars from the Bowery trust accounts to pay personal debts, Colonial debts, and to cover a Colonial loan which was in default.
On December 22,1987, Bowery filed suit in the United States District Court for the District of Puerto Rico against Colonial, Milton Rúa, his spouse and their conjugal partnership (the “Rúa Defendants”), and several banks, alleging inter alia breach of the mortgage servicing agreement. Eight days later, on December 30, 1987, Colonial filed for relief under Chapter 11 of the Bankruptcy Code, and on February 2, 1988, by consent, Hans López Stubbe was appointed Chapter 11 Trustee. In 1991, the ease was converted to Chapter 7 and Lopez Stubbe was appointed Chapter 7 Trustee.
THE LITIGATION
A. Colonial I:
Within three months of his appointment as Chapter 11 Trustee, on May 11, 1988, Lopez Stubbe commenced Adversary Proceeding No. 88-0060 in the bankruptcy court against the Rúa Defendants, seeking:
*518(1) turnover of cash advances made by Colonial to Rúa, totaling $186,116, and listed in Colonial’s books and records as outstanding debt;
(2) an order directing the Rúa Defendants to provide an accounting of all property belonging to Colonial and received by them since March 1,1984;
(3) an injunction restraining the Rúa Defendants from encumbering or selling their real estate and furnishings at 4 Cerezo Street, San Patricio, Guaynabo, Puerto Rico; and
(4) an injunction restraining the Rúa Defendants from disposing of any assets without prior Court approval.
On May 13, 1988, the bankruptcy court held an emergency hearing on the Trustee’s request for a temporary restraining order and entered an order enjoining the Rúa Defendants from alienating or in any way disposing of or encumbering their personal residence at 4 Cerezo Street, San Patricio, Guaynabo, Puerto Rico. On September 15, 1988, the bankruptcy court held the preliminary healing and, finding no credible evidence that the Rúa Defendants were attempting to dispose of their property, denied the request for an injunction.
The bankruptcy court heard the matter on the merits on December 14, 1988, and on April 12, 1989, filed its opinion, containing, inter alia, as findings that:
1. The debtor, Colonial, made numerous and substantial advances to Rúa;
2. Colonial paid monies to banks on account of debts of Rúa;
3. Colonial paid off Rúa’s second mortgage on his personal residence;
4. Rúa caused Colonial to make payments of $47,000 to remodel his personal residence;
5. Rúa caused Colonial to make payments, through debits on its operating account, on loans of Rúa;
6. Rúa received checks from Colonial drawn from origination accounts established for disbursement of mortgage loan closmg proceeds; and
7.Colonial paid $58,152.16 on one of Rúa’s loans during the last quarters of 1986 and 1987.
Stubbe v. Rua (In re Colonial Mortgage Bankers Corp.), BK No. 87-03026, A.P. No. 88-0060, slip op. at 3-9 (Bankr.D.P.R. April 12, 1989).
Based on these findings the bankruptcy court concluded that there was ample evidence of commingling of funds and property by the Rúa Defendants, and granted the Trustee’s request for an accounting. The court went on to explain that the objective of the accounting was to uncover what other injuries may have been inflicted upon Colonial, and so far creatively concealed from the view of the Trustee. The court also stated:
Mr. Milton J. Rúa, Jr., as president of the debtor corporation, may be liable to Colonial for any deficiencies as a result of these activities, inasmuch as an officer of the corporation, he owed the debtor a duty of using reasonable care to ascertain that the balance in the bank accounts were sufficient to cover any transactions.... To such effects an accounting is needed.
Mr. Milton J. Rúa, Jr. has not accounted for his transactions as President of Colonial to the appointed trustee. Mr. Milton J. Rúa, Jr. breached his fiduciary duties as a corporate officer toward his corporation prior to the filing of the bankruptcy petition by making self-dealing transactions and commingling his personal funds and assets with those of the debtor corporation. In order to determine the extent of the self-dealing transactions made by Mr. Milton J. Rúa, Jr. and the value of the assets of the debtor corporation as of the date of the filing, an accounting is required. There may be other remedies available to the trustee to get this information, such as an examination of debtor’s president under Bankruptcy Rule 2004. However, we find that the discovery methods or a Bankruptcy Rule 2004 examination of Mr. Milton J. Rúa, Jr. may not be sufficient to afford the relief the trustee is entitled to.
Stubbe v. Rúa (In re Colonial Mortgage Bankers Corp.), BK No. 87-03026, A.P. No. 88-0060, slip op. at 13-14 (Bankr.D.P.R. *519April 12, 1989) (emphasis added) (citations omitted).
Reversing its September order denying in-junctive relief and granting a permanent injunction, the bankruptcy court also said:
Based upon the evidence presented, we find that the debtor’s estate may be directly affected by the outcome of the accounting requested by the trustee herein. In view of the fact that one of the purposes of the accounting is to separate the commingled funds and assets of the defendants from the ones of the estate, this Court now finds that there are grounds for the issuance of an injunction against the defendants herein to enjoin them from transferring any personal assets until the accounting is performed.
Stubbe v. Rúa (In re Colonial Mortgage Bankers Corp.), BK No. 87-03026, A.P. No. 88-0060, slip op. at 16-17 (Bankr.D.P.R. April 12, 1989) (emphasis added). The Rúa Defendants were also directed to turn over “any information, books, records or property regarding the financial affairs of the debtor corporation” to the Trustee. Id. at 18. Both the district court and the First Circuit Court of Appeals affirmed this decision in all respects. See Stubbe v. Rúa (In re Colonial Mortgage Bankers Corp.) 128 B.R. 21 (D.P.R.1991), aff'd, 971 F.2d 744 (1st Cir. 1992).
B. Colonial II:
On March 10, 1988, immediately after his appointment (and prior to commencing A.P. 88-0060), the Trustee entered his appearance on behalf of Colonial in Bowery’s action pending in the district court, was substituted as Colonial’s successor in interest, and moved to dismiss counts two and five.1 One month later Bowery moved for and was given leave to amend the complaint, and on January 31, 1989, Bowery again amended its complaint and moved for summary judgment. On February 8, 1990, the Trustee filed cross-claims against the Rúa Defendants and the defendant banks, as well as a counterclaim against Bowery. In his crossclaims the Trustee alleges waste, mismanagement, misuse of customer accounts and deposits, breach of fiduciary duties, self dealing, conspiracy, and securities law violations, and requests treble damages pursuant to 18 U.S.C. § 1961, et seq. In the counterclaim the Trustee alleges that Bowery breached its obligation to negotiate in good faith.
Written arguments on the summary judgment motion volleyed back and forth between the parties for almost two years, culminating in the filing of a 162 page “Proposed PreTrial Order.” On October 31, 1991, the district court entered its opinion and order on Bowery’s summary judgment motion, as follows:
(1) Bowery’s Motion for Summary Judgment against Colonial and Rúa is granted (the Rúa Defendants and Colonial were found to have breached the mortgage servicing agreement);
(2) the Trustee’s counterclaim against Bowery is dismissed for failure to state a cause of action;
(3) the Trustee’s erossclaims against the banks are likewise dismissed; and
(4) the Trustee’s crossclaims against the Rúa Defendants are remanded to the Bankruptcy Court for trial.
C. The Remanded Litigation — Colonial III:
On December 23, 1993, Adversary Proceeding No. 93-0284 was opened in the bankruptcy court, consisting of the remanded erossclaims of the Trustee against the Rúa Defendants originally filed in C.A. No. 87-1874.2
Two years later, on December 1, 1995, the Trustee moved for summary judgment in the amount of $7,368,645 in A.P. No. 93-0284, relying on the decisions of the bankruptcy court, district court and First Circuit Court *520of Appeals in Colonial /,3 the district court holding in Colonial II,4 and Mr. Rúa’s criminal conviction.5
On September 25, 1996, the bankruptcy court denied the Trustee’s motion for summary judgment and dismissed the tort claims brought under Article 1802 of the Puerto Rico Civil Code6 as being barred by the one year statute of limitations, see 31 P.R. Laws § 5298.7 Specifically, the court found that the Trustee had notice of the Rúa Defendants’ alleged tortious conduct as early as May 24, 1988 — the date of the Puerto Rico Commissioner of Financial Institutions’ report detailing the extensive diversion of Colonial funds by Rúa. Given this time frame, the court held that when the Trustee commenced A.P. No. 93-0284 on December 23, 1993, the tort claims had lapsed. Additionally, the court ruled that the Trustee’s RICO claims under 18 U.S.C. § 1962(c) were likewise barred, based on transactional res judi-cata, since those claims could (and should) have been raised by the Trustee in Colonial I (A.P. No. 88-0060). On December 26,1997, the Trastee filed a motion to alter or amend the bankruptcy court’s September 25, 1996 order of dismissal,8 and that motion was denied on February 12, 1997.
On appeal, the Trustee argues that the bankruptcy court misapplied the commencement of the limitations period for A.P. No. 93-0284, since these claims were originally filed as crossclaims in the district court (Colonial II). Therefore, the Trustee argues, the crossclaims relate back to the filing of the original Bowery complaint in the district court — December 22,1987.
On reconsideration, the Bankruptcy Judge did not address this argument, but relied instead on his earlier ruling that “ ‘[t]he 1802 claim, were it not barred by the statute of limitations, would also be barred by the transactional res judicata doctrine.’ ” Bowery Sav. Bank v. Colonial Mortgage Bankers Corp. (In re Colonial Mortgage Bankers Corp.) BK No. 87-03026, A.P. No. 93-0284, slip op. at 2 (Bankr.D.P.R. February 12, 1997). The court deemed the tort claims barred on the ground of transactional res judicata, based on the finding that the cause of action stemmed from the common nucleus of operative facts contained in Colonial I. See Bowery Sav. Bank v. Colonial Mortgage Bankers Corp. (In re Colonial Mortgage Bankers Corp.) BK No. 87-03026, A.P. No. 93-0284, slip op. at 14 (Bankr.D.P.R. September 25, 1996). The Trustee appeals both the December 17, 1996 Judgment and February 12,1997 Opinion and Order.
DISCUSSION
A. Transactional Res Judicata
Appellant Trustee argues that the Bankruptcy Judge erred in applying the doctrine of transactional res judicata to bar the litigation of the RICO and Puerto Rico tort claims, as there was neither identicality of causes of action, nor a final judgment on the merits.9
*521The federal law of res judicata governs when reviewing the preclusive effect of a prior federal court judgment on a subsequent action brought in federal court. Apparel Art Int’l Inc. v. Amertex Enters., 48 F.3d 576, 582 (1st Cir.1995) (citing In re El San Juan Hotel. Corp., 841 F.2d 6, 9 (1st Cir.1988) (other citations omitted)). In dealing with this issue, the First Circuit utilizes a three-part test. “For a claim to be precluded, the following elements must be present: 1) a final judgment on the merits in an earlier suit; 2) sufficient identicality between the causes of action asserted in the earlier and later suits; and 3) sufficient identicality between the parties in the two suits.” Apparel Art, 48 F.3d at 583 (other citations omitted). Stated more succinctly, “[ojnly where two separate suits involve sufficiently identical causes of action does a judgment in an earlier action preclude litigation of claims in a subsequent action.” Id.
To assess whether causes of action raised in separate suits are sufficiently identical, a transactional approach is used. “If the facts form a common nucleus that is identifiable as a transaction or series of related transactions, then those facts represent one cause of action.” Apparel Art, 48 F.3d at 584. If, however, the claims advanced in the second action are separate and distinct from the earlier proceeding, i.e., if they rest on a different factual basis, then res judicata will not apply. Id., see also, Landrigan v. City of Warwick, 628 F.2d 736, 741 (1st Cir.1980).
Three factors have been highlighted as probative of whether claims derive from the same nucleus of operative facts:
1) [wjhether the facts are related in time, space, origin or motivation;
2) whether the facts form a convenient trial unit; and
8) whether treating the facts as a unit conforms to the parties’ expectations.
Apparel Art, 48 F.3d at 584; see also, Manego v. Orleans Board of Trade, 773 F.2d 1, 5 (1st Cir.1985) cert. denied, 475 U.S. 1084, 106 S.Ct. 1466, 89 L.Ed.2d 722 (1986) (citing Restatement (Second) of Judgments § 24 (1982)).
Moreover, the nature of the injury should be considered in delineating the parameters of the common nucleus of operative facts. Apparel Art, 48 F.3d at 584. Indeed, “the focus of a ‘transactional’ analysis is not whether a second claim could have been brought in a prior suit, but whether the underlying facts of both transactions were the same or substantially similar.” Manego, 773 F.2d at 6.
Turning to the present appeal we must determine whether, as a matter of law, the factual basis for each claim in Colonial I (A.P. No. 88-0060) is substantially identical to those in Colonial III (A.P. No. 93-0284).
In Colonial I, the Bankruptcy Judge made detailed findings that Milton Rúa used the corporation as his personal piggy bank, taking numerous and substantial advances to pay personal debts, such as the cost of remodeling his personal residence, the payoff of his second mortgage, and hefty payments on numerous personal loans. The facts as found by the Bankruptcy Judge, and which are fully supported by the record, disclosed a most inappropriate debtor-creditor relationship between Colonial and Rúa, requiring the Trustee to seek an accounting “to unravel the tangled mess.” Based on its findings of extensive and improper intermingling of funds and property, the court ordered an accounting “to determine the extent of the self-dealing transactions made by Mr. Milton J. Rúa, Jr. and the value of the assets of the debtor corporation as of the date of the filing.” Stubbe v. Rúa (In re Colonial Mortgage Bankers Corp.), BK No. 87-03026, A.P. No. 88-0060, slip op. at 14 (Bankr.D.P.R. April 12,1989).
Clearly then, the factual basis for the claim of an accounting and turnover of the books and records in Colonial I was Rúa’s blatant use of Colonial as his alter ego and personal bank account. But the extent of Rúa’s self-dealing was unknown to the Trustee, and that is what gave rise to the need for an accounting and turnover of the books and records, to “untangle the mess.” The Trustee also' sought turnover of an undisputed receivable listed in Colonial’s bankruptcy petition as a debt owed by Rúa. The injunctive relief was granted to maintain the status quo *522and to prevent Rúa from alienating assets which potentially would satisfy any future judgment obtained by the Trustee.
The factual basis in Colonial III (which are the remanded cross-claims first arising in Colonial II) is founded upon Rúa’s self-dealing and misuse of Colonial assets. The Trustee alleges that Rúa committed waste and mismanagement by failing to utilize sound business practices, causing Colonial’s insolvency. He also alleges that Rúa engaged in a check kiting scheme, shifting and commingling various loan servicing accounts and trust funds to mask Colonial’s insolvency. He also alleges that by using Colonial’s money for his own benefit, Rúa breached his fiduciary duty to Colonial.
While the facts in Colonial I appear to be related in time, space and origin to Colonial III, we view the litigation in Colonial 7 as a necessary but separate prerequisite to get to Colonial III, and it appears that when rendering its decision in Colonial I the bankruptcy court was of a similar understanding. The Bankruptcy Judge articulated that the purpose of the injunction was to preserve the status quo while the Trustee sorted through the books and records to ascertain who owed what to whom. From there, the court pointed out that Rúa might be subject to further liability as the details of his self-dealing were uncovered through the accounting. “Mr. Milton J. Rúa, Jr., as president of the debtor corporation, may be liable to Colonial for any deficiencies as a result of these activities. ...” Stubbe v. Rúa (In re Colonial Mortgage Bankers Corp.), BK No. 87-03026, A.P. No. 88-0060, slip op. at 14 (Bankr.D.P.R. April 12, 1989). On appeal, the district court echoed these sentiments: “Given the history of Rúa’s fund juggling, it is only reasonable that the [bankruptcy] court would seek to keep a close eye on the transfers of assets until after the accounting can determine whose assets they actually are.” Colonial Mortgage, 128 B.R. at 24.
In finding a sufficient identicality between the two actions and applying the doctrine of transactional res judicata in Colonial III, the Bankruptcy Judge stated that “[t]he trustee’s claim under RICO, in spite of the difference in nature from the prior claim, stems from Mr. Rúa’s check kiting scheme as detailed in our facts, above. It was this very same scheme by Rúa that gave rise to Colonial I and Colonial II.” Exhibit 1, Opinion and Order dated 9/25/96, p. 13, Appellant’s Appendix, Volume 1. For the following reasons, we must disagree with the Bankruptcy Judge’s conclusion on this pivotal issue.
Colonial I was filed by the Trustee within sixty days of his appointment as trustee. In his three and one-half page Complaint, the Trustee alleged that: (1) According to the schedules of assets and liabilities filed in the bankruptcy case, Rúa owed the estate $186,-116; (2) Rúa had used and was still using property of the estate for his own benefit; and (3) Rúa was disposing of estate assets to thwart payment of creditor’s claims. See Complaint, Appellant’s Exhibit 15. The narrow objective of the Trustee in this Complaint was to obtain short term, emergency relief (i.e., an injunction to preserve the status quo and an accounting of property and any proceeds received from property sold or transferred). See id. He was also requesting turnover of an undisputed sum listed in Colonial’s bankruptcy schedules due and owing from Rúa.10 Id. The Trustee never alleged the existence of a check kiting scheme in that action, and we do not agree that such a scheme “gave rise” to Colonial I. See id. The bankruptcy court, in discussing the existence of a check kiting scheme when granting the request for an accounting and injunctive relief, went further than required, but this should not preclude the Trustee from litigating that issue in a subsequent action. While the factual basis underpinning Colonial III may include the check kiting scheme, the RICO and tort claims were not defined until after the accounting was rendered as ordered in Colonial I, and after the discovery in Colonial II was completed. See Manego, 773 F.2d at 6 (“if information is not reasonably discoverable, res judicata will not apply”).
Furthermore, it is the conclusion of the panel that the facts do not form a convenient trial unit. The Trustee needed the accounting from Colonial I to determine the extent of the self-dealing and damage done to Colo*523nial before proceeding with Colonial III. Additionally, part of the reason for filing Colonial I early on was to preserve the status quo while the Trustee continued his investigation.
In applying the third factor, i.e., “whether treating the facts as a unit conforms to the parties’ expectations,” Apparel Art, 48 F.3d at 584, it is clear that treating the turnover, accounting, and injunction action, and the RICO and tort claims all as one unit would not conform to the parties’ expectations. The only reasonable expectation of the parties in 1988 was that Colonial I was intended to maintain the status quo and to provide the Trustee with more comprehensive information to ferret out other claims, and that is exactly what happened.
Moreover, an important exception to the res judicata doctrine arises when “[t]he court in an earlier action expressly reserves the litigant’s right to bring those claims in a later action.” Apparel Art, 48 F.3d at 586. While the bankruptcy judge’s language in Colonial I, supra at page 522, certainly alludes to the reservation of rights for future litigation, albeit not as explicitly as it might have been, it captures the essence of what the parties (and the bankruptcy court, we believe) understood to be the factual basis for the Trustee’s claims.
Finally, the facts found in Colonial I, which help define the contours of the common nucleus of operative facts, include the Trustee’s inability to obtain information from Rúa, and the preservation of the status quo to prevent further damage to the estate. The injury in Colonial III is the specific loss of funds to Colonial (and the estate) through Rúa’s self-dealing and dishonest management of the corporation. The different (and contrasting) emphasis of the bankruptcy court’s findings between Colonial I and Colonial III requires the conclusion that the claims in Colonial I are separate and distinct from those raised in Colonial III, and do not derive from a common nucleus of operative facts.
For these reasons we hold as a matter of law that Trustee’s crossclaim, subsequently remanded to the bankruptcy court and embodied in A.P. No. 93-0284 is not barred by the doctrine of transactional res judicata.
B. Prescription
The Trustee’s tort claims are founded upon Puerto Rico law, 31 L.P.R.A. § 5141. As such, the limitations period on such actions is set by 31 L.P.R.A. § 5298 which states:
The following prescribe in one (1) year:
(2) Actions to demand civil liability for grave insults or calumny, and for obligations arising from the fault or negligence mentioned in section 5141 of this title, from the time the aggrieved person had knowledge thereof.
The bankruptcy court found that May 1988— the date of the Puerto Rico Commissioner of Financial Institutions’ report — was the date that the cause of action accrued, triggering the limitations period. Neither party has quarreled with this finding on appeal. The court went on to state that because the Trustee did not “file” Adversary Proceeding 93-0284 until December 23, 1993, more than one year after the claims accrued, these claims were barred by the one year statute of limitations.
We must respectfully disagree with the Bankruptcy Judge’s conclusion that the Trustee did not initiate the claims in question until December 23, 1993. It is the Panel’s conclusion that these tort claims were first advanced in the Trustee’s “Crossclaims and Counterclaims” which were filed in the district court in Colonial II, on February 8, 1990. The Trustee contends here that the crossclaims relate back to the original filing date of the Bowery Complaint commencing Colonial II — December 22, 1987. But we need not decide that issue, as it was waived by Rúa’s failure to affirmatively plead it in his April 18, 1990 Answer and in the Proposed Pre-Trial Order filed in the district court action in November 1990. First Circuit law is that affirmative defenses under F'ed.R.Civ.P. 8(c) generally are waived if not asserted in the original pleadings. See Badway v. United States, 367 F.2d 22, (1st Cir.1966); Federal Deposit Ins. Corp. v. Ramirez-Rivera, 869 F.2d 624, 626 (1st Cir.1989).
On April 18, 1990, Rúa answered the Trustee’s cross-claims, asserting several af*524firmative defenses, but said not a word about the statute of limitations. See Appellant’s Exhibit 25, Answer to Cross Claim. Furthermore, on November 9, 1990, the parties filed a Proposed Pre-Trial Order in Colonial II, and nowhere in that 152 page document did Rúa raise the issue of prescription. See Appellant’s Exhibit 26, Proposed Pre-Trial Order. Thus, based on the controlling authority in this Circuit, we conclude that the defense of statute of limitations was waived by Rúa in 1990.
While the Trustee has presented additional arguments on matters raised in the summary judgment papers, these issues were not decided by the bankruptcy judge,11 and we decline the Trustee’s invitation to rule on them now. Rather, this issue is also remanded to the bankruptcy court for consideration.
For the foregoing reasons, the December 17, 1996 Judgment and the February 12, 1997 order of the bankruptcy court are REVERSED, and REMANDED to the bankruptcy court for further proceedings consistent with this order.
. The Trustee's motion to dismiss was denied on September 1, 1988.
. These are the crossclaims remanded by the district court in the October 31, 1991 summary judgment decision. The record is silent as to what transpired with respect to the crossclaims in the intervening two years.
. Stubbe v. Rúa (In re Colonial Mortgage Bankers Corp.), BK No. 87-03026, A.P. No. 88-0060 (Bankr.D.P.R. April 12, 1989); Stubbe v. Rúa (In re Colonial Mortgage Bankers Corp.) 128 B.R. 21 (D.P.R.1991), aff'd, 971 F.2d 744 (1st Cir.1992).
. The Bowery Sav. Bank v. Colonial Mortgage Bankers Corp., et al, CA No. RLA 87-1874(JAF) (D.P.R. October 31, 1991).
. Rúa pleaded guilty to charges of mail fraud and bank fraud, see United States v. Milton Juan Rúa Cabrer, CR No. 92-32(JAF) (D.P.R. February 19, 1992).
. This statute provides that "a person who by an act • or omission causes damage to another through fault or negligence shall be obligated to repair the damage so done.” 31 P.R. Laws § 5141.
. While the Opinion and Order is dated September 25, 1996, Judgment did not enter until December 17, 1996.
. The Motion to alter or amend the judgment was originally filed on November 7, 1996, and renewed on December 26, 1996.
. The Trustee argues that because Colonial I was on appeal when the RICO and tort claims were filed in Colonial II, there was no final judgment in the earlier suit (Colonial I), precluding the application of res judicata. This argument fails because "in the federal courts the general rule has long been recognized that while appeal with proper supersedeas stays execution of the judgment, it does not — until and unless reversed— detract from its decisiveness and finality.” Huron Holding Corp. v. Lincoln Mine Operating Co., 312 U.S. 183, 184, 61 S.Ct. 513, 85 L.Ed. 725 (1941).
. In fact, Rúa never disputed that he was indebted to Colonial. His only defense was that he should be allowed to apply principles of set off to this obligation.
. Specifically, the Rúa Defendants argue that the Trustee's RICO claims were not pleaded with sufficient specificity and detail, requiring their dismissal. The Trustee responds that the pleadings, combined with the 152 page Pre-Trial Order filed in the district court, adequately notified the Rúa Defendants of the RICO claims. Additionally, the Trustee contends that summary judgment should be awarded in his favor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492821/ | OPINION AND ORDER
JOHN J. THOMAS, Bankruptcy Judge.
Introduction
The Trustee, William Schwab, is managing 35 properties with 53 rental units pursuant to an Order authorizing the Trustee to operate a business. (Transcript of 5/8/97 at 5 and 7 (Doc. # 119).) During the course of his administration, Schwab utilized his support staff to perform services theretofore done for the Debtor by a property manager and a secretary. (Transcript of 5/8/97 at 11 (Doe. # 119).) He has identified these individuals as “paraprofessionals” and is now seeking an allowance for their services to date measured by an hourly rate which includes a component for overhead.
The United States Trustee objects to this allowance arguing that Schwab is attempting to enlarge the statutory fee cap set out in 11 U.S.C. § 326.
After a review of the various dynamics at issue, I will allow the Trustee to be reimbursed for his actual expenses in paying an employee or independent contractor for services specifically rendered to the estate, and I will deny the Trustee the ability to recover a “paraprofessional’s” designated hourly rate.
Facts
The case of Louis J. Balli was initiated as a chapter 13 filing on July 29, 1996. On October 8, 1996, the case' converted to chapter seven and William Schwab was appointed as Trustee shortly thereafter. Subsequently, Mr. Schwab was appointed general counsel to the Trustee pursuant to the provisions of 11 U.S.C. § 327(d). As indicated, Schwab requested and received permission to maintain the Debtor’s properties as an operating-trustee. In furtherance of that operation, Schwab utilized four non-lawyer staff members from his law office, which he has billed to the estate at a rate lower than he would charge if they were assisting him as a lawyer rather than a trustee. In estimating the billing rate for employee time, Schwab “added my total employee expenses, occupancy expenses, insurance, communication which would be postage, telephone that’s not compensated, that’s not reimbursed, accounting services, interest, and my computer system and library, and divided that by the total number of possible hours that all my employees worked.” (Transcript of 5/8/97 at 16 (Doc. # 119).) The Trustee computes the expense of those individuals, including himself, at $29.99 per hour. (Transcript of 5/8/97 at 23 (Doc. # 119).) Schwab actually paid his employees at the rate of $8.00 to $14.50 per hour plus benefits. (Transcript of 5/8/97 at 73, 74 (Doc. # 119).)
Coincidentally, he estimated the value of those services at $30.00 per hour by telephoning property management companies in the locale. (Transcript of 5/8/97 at 15 (Doc. # 119).)
Discussion
The United States Trustee takes the position that the paraprofessional’s hourly rate must be included in the § 326 fee cap. This is founded on the interaction of two sections of the Bankruptcy Code that have been read to limit the panel trustee’s compensation to a fixed percentage including fees charged by the trustee’s paraprofessional. The argument begins with § 326(a) which provides that compensation of a trustee under § 330, for a trustee’s services, is capped at a specific percentage of gross dis*548bursements.1 Keeping in mind this limitation, § 330(a)(1) appears to provide that an award to the trustee for reasonable compensation for services rendered by the trustee, should include any paraprofessional person employed by the trustee, subject to § 326.2
The majority of courts that have studied this issue, have concluded that the award to the trustee, including the compensation for services rendered by the paraprofessional employed by the trustee, is limited by § 326. In re Jenkins, 130 F.3d 1335 (9th Cir.1997); Clements v. United States Bankruptcy Court (In re Asher), 171 B.R. 690, 691 (D.Colo.1994); In re Santangelo & Co., 156 B.R. 62, 64 (Bankr.D.Colo.1993); In re Stewart, 151 B.R. 255, 259-60 (Bankr.C.D.Cal.1993); In re Hagan, 145 B.R. 515, 517 (Bankr.E.D.Va.1992); In re Berglund Constr. Co., 142 B.R. 947, 949 (Bankr.E.D.Wash.1992); In re Lanier Spa, Inc., 99 B.R. 490, 491 (Bankr.N.D.Ga.1989); In re Prairie Cent. Ry., 87 B.R. 952, 959 (Bankr.N.D.Ill.1988).
On the other hand, several courts have determined that the limitation in § 326 affects only the trustee’s actual services for which allowance is sought, and not other items such as paraprofessional services. These courts suggest that, even if the trustee delegates responsibilities that would otherwise be performed by the trustee, those efforts are not, in fact, the services rendered by the trustee and should not be credited against the limits set forth in § 326. In re Abraham, 163 B.R. 772, 788 (Bankr.W.D.Tex.1994); In re Orthopaedic Tech., Inc., 97 B.R. 596, 599 (Bankr.D.Colo.1989); Cavazos v. Simmons, 90 B.R. 234, 240-41 (N.D.Tex.1988).
Section 330 of the Bankruptcy Code specifically provides for an award to the professional, including a trustee, the components of which are: (1) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney; (2) reasonable compensation for actual, necessary services rendered by any paraprofessional person employed by any such person; and (3) reimbursement for actual, necessary expenses.
I will observe that Congress has specifically empowered courts to award compensation for a paraprofessional’s time, as would occur in non-bankruptcy cases, because, conversely, to disallow such an award would encourage professionals to perform work themselves that could easily be handled by a professional at a lower rate.3 The recognition that a paraprofessional working side-by-side with a professional can reduce ultimate fees is certainly a phenomena noted by our Circuit. In re Busy Beaver Bldg. Ctrs., 19 F.3d 833, 851 (3rd Cir.1994).
Secondly, the statute appears to distinguish between compensation for services rendered by a paraprofessional and reimbursement for actual expenses of the trustee and others. It has been said that when a court awards a fee for reasonable services, it measures the fee against the market, inclusive of whatever overhead and profit is a component of such rate. In re Peoples Sav. & Inv., Inc., 103 B.R. 264, 275 (Bankr.E.D.Okla.1989). Actual expenses, in contrast, are incurred rather than allocated. 3 Lawrence P. King, Collier on Bankruptcy ¶ 330.05[1] at 330-61 (15th ed. rev.1997).
*549As indicated, the principal objection of the United States Trustee to Schwab’s interim fee application as operating trustee is Schwab’s apparent attempt to collect the paraprofessional’s hourly rate without affecting the trustee’s fee cap set forth in § 326.
My review of the statute supports the United States Trustee’s position.
A reading of §§ 326 and 330 compels the conclusion that any allowance of fees attributed to a paraprofessional’s hourly rate, when added to the trustee’s fees cannot exceed the § 326 cap. Congress, either intentionally, or accidentally, limited the compensation of a trustee for trustee services to a fixed amount based on a sliding percentage of gross disbursements. Congress then, in § 326, included a paraprofessional’s compensation as an element of those same “trustee services.”
This conclusion leads to a certain irony. As previously indicated, Congress inserted the “paraprofessional” language to conserve the estate and in recognition of certain contemporary realities of bankruptcy administration, i.e., the rising use of assistants by professionals. In utilizing the language it chose, a result, quite inapposite, has occurred. A trustee would be discouraged to hire a paraprofessional to assist him or her if the expense of such retention would reduce his or her net award. Of course, a trustee’s duties do not diminish by this decision. The trustee remains under a mandate to perform many of the laundry list of responsibilities set forth in 11 U.S.C. § 7044. Under my reading of the statute, the use of assistants to aid in that task, if treated as paraprofessionals, could likely erase whatever trustee’s commissions there were in the majority of cases.5 The conclusion follows that a trustee, rather than risk his or her commission, is encouraged to neglect to pursue his or her responsibility. At least one court has attempted to ameliorate this unfortunate result by suggesting that, if employment of a paraprofessional is a necessity, i.e., presumably, where the trustee could not physically perform the task without aid, then such employment could be compensated under § 330(a)(1)(B) as a “necessary expense” separate from the § 326 cap. Matter of Gribbon, 181 B.R. 179 (Bankr.D.N.J.1995).
Most judges agree that trustees are inadequately compensated. American Bankruptcy Institute, American Bankruptcy Institute National Report on Professional Compensation in Bankruptcy Cases § 10.2 at 209 (G.R. Warner rep.1991). Unlike judges and United States Trustees, private trustees have been incorporated into the system of bankruptcy administration without the security of guaranteed salaries and benefits. Indeed, with only the assurance of the pittance represented by the $60.00 allotment provided by *550§ 330(b), they undertake the roles of bookkeeper, caretaker, investigator, enforcer, reporter and litigant, to name just a few.
The combined weight of their solemn responsibilities and the importance of fairly compensating the trustee for such endeavors provides sufficient cause for me to reexamine the statute to determine whether an interpretation, alternative to In re Jenkins, 130 F.3d 1335 (9th Cir.1997) but consistent with legislative intent, is possible. In doing so, I draw the parties’ focus on the statute’s use of the terms “professional” and “paraprofessional.” Neither of those terms is defined in the Bankruptcy Code. “A fundamental canon of statutory construction is that, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning.” Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 314, 62 L.Ed.2d 199 (1979). In Black’s Law Dictionary, professional is defined as “[o]ne engaged in one of learned professions or in an occupation requiring a high level of training and proficiency.” Paraprofessionals are identified as “[o]ne who assists a professional person though not a member of the profession himself; e.g. a paralegal (q.v.) who assists a lawyer.” Black’s Law Dictionary 1210 and 1112 (6th ed.1990). See also, United States Trustee v. Boldt (In re Jenkins), 188 B.R. 416, 419 (9th Cir. BAP 1995). If these definitions control their usage in the Bankruptcy Code, the paraprofessional must assist a “professional” who presumably must be serving the estate. Unquestionably, entities appointed pursuant to an application under § 327 are professionals. While a trustee may apply for permission to be appointed a professional under § 327(d), the trustee’s election as trustee under § 702 or § 1104 or the interim trustee’s succession as trustee under § 704(d) or an appointment under § 1104(d), does not automatically endow such trustee with the expertise that would qualify a trustee as a professional as that term has been heretofore defined. That the trustee need not be a professional is supported by the fact that the United States Trustee’s guidelines for the appointment of a panel trustee require no special qualifications beyond a college degree and a minimum of 20 semester-hours of business-related courses. 28 C.F.R. 58.4 Code of Federal Regulations: Title 28 — Judicial Administration; Chapter I — Department of Justice; Part 58 — Regulations Relating to the Bankruptcy Reform Acts of 1978 and 1994; 58.4 Qualifications for Appointment as Standing Trustee and Fiduciary Standards.
The conclusion of this exercise suggests that an individual, while acting as a nonprofessional trustee, is not capable of employing a “paraprofessional” in furtherance of those duties identified under § 704. This is not to say that the trustee cannot retain assistants. Nevertheless, should the trustee require the expertise that only a professional can offer, the Code quite clearly requires advance court approval. 11 U.S.C. § 327.6
By defining a paraprofessional as I have, the trustee, while retaining the ability to hire administrative and nonadministrative assistants under § 330(a)(2), would be unable to directly engage individuals who should be supervised by professionals appointed under § 327. The statute, however, does not prohibit the reimbursement for the actual and necessary expenses incurred by a trustee in hiring assistants to perform discrete services for the estate.
*551In this case, each of the Trustee’s assistants, or whatever he chooses to call them, performed specific services inuring to the estate at a measurable expense to the Trustee identified as $8.00 to $14.50 per hour.7 Since I do not regard these individuals as paraprofessionals when performing these services for the trustee, nothing in the Code bars the trustee from being reimbursed these amounts without affecting the § 326 cap.
Throughout this opinion, it must be remembered that § 326(a) provides not an entitlement, but a cap on a trustee’s compensation. H.R.Rep. No. 595, 95th Cong., 1st Sess. 327 (1977); see S.Rep. No. 989, 95th Cong., 2d Sess. 37-38 (1978). Before the court may award an allowance, the court must consider the trustee’s time spent on the case, the trustee’s rates, the benefit to the estate, the complexity of services, and the fees charged for similar nonbankruptcy services. 11 U.S.C. § 330(a)(3). Congressional willingness to reimburse the trustee for the expenses of his or her assistants at a lower rate than would be paid the trustee to perform those same services to the estate works an economic benefit to the estate. Nevertheless, the Code retains the fee cap to encourage the trustee to be “result-oriented” thereby increasing the ultimate benefit to the estate. See, generally, Christine Jagde & Mamie Stathatos, Professional Fees in Bankruptcy: Percentage-of-the-recovery Methods — A “Solvent” Response for Bankruptcy Proceedings?, 1 Am.Bankr.Inst. L.Rev. 471 (1993).
I am satisfied that the Trustee’s requests for interim compensation filed January 9, 1997 and February 26,1997 should be considered primarily as a request for reimbursement of expenses. Based on the facts set forth in the Applications, I can authorize reimbursement to Schwab for payment to his support staff in the following amounts:
Melissa M. Solt 57.55 hours @ $14.50/hr.$834.47
Kathy A. Goldberg 19.20 hours @ $12.50/hr.$240.00
Nathan A. Scherer 49.00 hours @ $11.00/hr.$539.00
Pamela J. Brown 4.20 hours @ $8.00/hr.$ 33.60
These expenditures totaling $1,647.07, together with miscellaneous costs of $303.00, can be reimbursed to the Trustee from the estate without affecting the fee cap set forth in 11 U.S.C. § 326.
Moreover, at the time of the hearing on this application the Trustee testified that he had spent 15.4 hours administering the case and he was requesting an interim allowance for that time at an hourly rate of $30.00 which would be credited against the fee cap provided by § 326. This request is not opposed by the United States Trustee. (Transcript of 5/8/97 at 80 (Doc. # 119).) Since this request is well within the percentage cap that would be applicable should it be applied to the fund of $32,675.04 in the Trustee’s possession at the time of the request, the Court will authorize an interim allowance in the amount of $462.00 to the Trustee, subject, of course, to reconsideration at the time of the final fee award. Shareholders v. Sound Radio, Inc., 109 F.3d 873 n. 3 (3rd Cir.1997). This allowance is over and above my earlier authorization providing for reimbursement to the Trustee.
My Order is attached.
ORDER
For the reasons set forth in the attached Opinion, the Trustee is awarded an interim allowance of $462.00. Furthermore, the Trustee is authorized to reimburse himself the sum of $1,950.07.
.In a case under chapter 7 or 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee's ■ services, payable after the trustee renders such services, not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debt- or, but including holders of secured claims.
11 U.S.C.A. § 326(a) (Emphasis ours.)
. After 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.
II U.S.C. § 330
. H.R. No. 595, 95th Cong., 2d Sess. 330 (1978), U.S.Code Cong. & Admin.News pp. 5963, 6286.
. § 704. Duties of trustee
The trustee shall—
(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;
(2) be accountable for all properly received;
(3) ensure that the debtor shall perform his intention as specified in section 521 (2)(B) of this title;
(4) investigate the financial affairs of the debtor;
(5) if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper;
(6) if advisable, oppose the discharge of the debtor;
(7) unless the court orders otherwise, furnish such information concerning the estate and the estate's administration as is requested by a party in interest;
(8) if the business of the debtor is authorized to be operated, file with the court, with the United States trustee, and with any governmental unit charged with responsibility for collection or determination of any tax arising out of such operation, periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as the United States trustee or the court requires; and
(9)make a final report and file a final account of the administration of the estate with the court and with the United States trustee.
11 U.S.C.A. § 704
. It has been estimated that 97% of all chapter seven cases in 1997 were no asset cases. Statistics Division, Administrative Office of the United States Courts, Report G Bankruptcy Cases Terminated Under Chapter & by District, Office and Bankruptcy During the 12 Month Period Ending December 31, 1997 (on file with the Statistics Division). No commissions are payable to a trustee in those cases, but they are entitled to the fixed sum of $60 after performance of their services. 11 U.S.C. § 303(b).
. Such approval is seen as necessary so “that the court may know the type of individual who is engaged in the proceeding, their integrity their experience in connection with work of this type, as well as their competency concerning the same.” In re Hydrocarbon Chemicals, Inc., 411 F.2d 203, 205 (3rd Cir.) (in banc), cert. denied, 396 U.S. 823, 90 S.Ct. 66, 24 L.Ed.2d 74 (1969). As was mentioned in Matter of Arkansas Co. Inc., provisions in the Code requiring advance approval was designed by Congress "to eliminate the abuses and detrimental practices that had been found to prevail under the Bankruptcy Act. Among such practices was the cronyism of the 'bankruptcy ring’ and attorney control of bankruptcy cases. In fact, the House Report noted that ‘[i]n practice ... the bankruptcy system operates more for the benefit of attorneys than for the benefit of creditors.’ H.R. No. 595, 95th Cong., 2d Sess. 92, reprinted in 1978 U.S.Code Cong. & Ad. News 5787, 5963, 6053.” Matter of Arkansas Co., 798 F.2d 645, 649 (3rd Cir.1986). In addition, "prior court approval serves to preserve the bankrupt estate by preventing unnecessary professional excursions.” In re Philadelphia Mortgage Trust, 930 F.2d 306, 309 (3rd Cir.1991).
. Melissa M. Solt is employed at $14.50 per hour. Kathy A. Goldberg is employed at $12.50 per hour. Nathan A. Scherer is employed at $ 11.00 per hour. Pamela J. Brown is employed at $8.00 to $9.00 per hour. (Transcript of 5/8/97 at 73-74 (Doc. #119).) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492822/ | ORDER ALLOWING INTERIM COMPENSATION
WM. THURMOND BISHOP, Bankruptcy Judge.
This proceeding comes before the court on November 4, 1998, on the application of Nelson Mullins Riley & Scarborough, L.L.P. (NMRS) for interim compensation as general counsel for the chapter 11 debtor NKI, Inc. 11 U.S.C. § 331. NMRS filed the application on October 13, 1998; Notice of the application has been provided to all parties in interest in the case. The United States Trustee (the UST) filed a timely objection to the application on October 28,1998.
The court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334 and Local Civil Rule 83.X.01 DSC. This matter is a core proceeding. 28 U.S.C. § 157(b)(2)(A).
The application shows that five attorneys and two paralegals at NMRS worked on this case during the period covered by the application. The application indicates that both business and bankruptcy attorneys have *585worked on the case for NMRS. The UST’s objection relates only to the hourly rates charged by two bankruptcy attorneys based in NMRS’s Columbia, South Carolina office and one bankruptcy attorney in the firm’s Atlanta, Georgia office. The rates billed for bankruptcy attorneys by NMRS are:
Richard B. Herzog, Jr. $250/hr. (Atlanta, GA)
George B. Cauthen $205/hr. (Columbia, SC)
Frank B.B. Knowlton $195/hr. (Columbia, SC)
Michael T. Reynolds $165/hr. (Atlanta, GA)
Title 11 U.S.C. § 330(a)(3)(A) requires the court to consider several factors when awarding “reasonable” compensation to bankruptcy professionals.1 Among the factors which the court must consider is “whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than case under this title.”2 The UST argues that the hourly rates sought by some of the applicant’s attorneys in this case exceed this amount. The UST has recommended that the court award NMRS compensation based upon the following rates for bankruptcy counsel:
Richard B. Herzog, Jr. $250/hr. (Atlanta, GA) 3
George B. Cauthen $175/hr. (Columbia, SC)
Frank B.B. Knowlton $150/hr. (Columbia, SC)
Michael T. Reynolds $125/hr. (Atlanta, GA)
If the court granted compensation at the hourly rates suggested by the UST, NMRS’s compensation would be reduced by $6,773.50. This reduction would lower the total amount of fees and expenses requested from $49,-542.91 to $42,769.41.
Paragraph 10 of the fee application states that the hourly rates sought by all of the NMRS professionals in this case are “their normal hourly rates.” This paragraph also states that “this District does not entertain [the applicant’s] normal, customary rates.” NMRS is correct in asserting that the rates billed to the debtor for work by the applicant’s bankruptcy attorneys are higher than the rates ordinarily awarded in this court for bankruptcy services by comparably skilled professionals doing similar work. Generally, the “top rate” approved in this court on a regular basis for an experienced chapter 11 debtor’s attorney certified as a specialist in bankruptcy is $175 per hour.
The issue presented by the parties to this proceeding could be best stated as:
Are the hourly rates sought by NMRS bankruptcy attorneys reasonable based on the customary compensation charged by comparably-skilled praetioners in non-title 11 cases?4
The court cannot properly apply the “comparably skilled practitioners” factor in § 330(a)(3)(E) without considering what rates are supported in the marketplace for comparably skilled practitioners. If the rates charged by NMRS’s bankruptcy attorneys exceed those which comparably skilled attorneys command for similar non-title 11 work, the court should reduce the hourly rates to those which are supported by the marketplace. A bankruptcy professional should not be permitted to charge a bankruptcy estate a rate higher than that supported in a non-title 11 context. Stated differently, a bankruptcy estate should not have *586to pay-more than a non-title 11 client would pay for similar work by a comparably-skilled practitioner.5
The court in its “marketplace” analysis must also take into account the multitiered rate structure which many attorneys have. Many attorneys, including those at NMRS, charge different clients different hourly rates. This tiered rate structure results from such factors as competition for clients among law firms, a client’s willingness to pay a particular rate, the complexity of the matter being handled, and the risk to the professional of non-payment. The UST argues and this court agrees that a bankruptcy estate should not pay the highest rate in a multi-tiered rate structure unless those factors which support the rate in a non-title 11 context are also present in the title 11 case.6
NMRS submitted a memorandum of law on the issue of hourly rates. NMRS, with the consent of the UST, also submitted affidavits by several bankruptcy practitioners in this district well known to the court and to the UST regarding the reasonableness of the $205 hourly rate charged by Mr. Cauthen. Only one of these affidavits other than that of Mr. Cauthen states that the affiant charges an amount equal to or exceeding the $205 hourly rate for similar non-title 11 work. The remainder of the affidavits either do not state what rates the affiants charge or state that the affiants charge a rate less than $205 per hour.7
The court concludes that NMRS "has proved by a preponderance of the evidence that attorneys comparably skilled to Mr. Cauthen receive the $205 hourly rate for similar work in a non-title 11 context. The court also concludes that NMRS has partially met its burden of proof as to the hourly rates for Messrs. Knowlton and Reynolds. Accordingly, the rate for Mr. Knowlton shall be reduced to $175, and the rate for Mr. Reynolds shall be reduced to $145.
Based on the representations of parties in interest, and after careful consideration of the application, this court finds that $44,-147.50 is reasonable compensation to be paid at this time for the services rendered by NMRS up to and including September 25, 1998, and that $2,776.91 is reasonable reimbursement for costs incurred by NMRS to this date.
The amount is authorized by the court on the representations made to the court in the fee applications and attachments filed with this court and may be reduced or increased if such representations prove incorrect prior to the closing of the case.
The debtor is authorized to issue payment in the total sum of $46,924.41 to NMRS. Any pre-petition retainer paid to the firm may be applied toward the payment of this amount.
AND IT IS SO ORDERED.
. Further reference to 11 U.S.C. § 101 et. seq., will be by section number only.
. Section 330(a)(3)(E) codifies one of the twelve factors adopted by the Fifth Circuit in the seminal attorney's fee case of Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974). 3 Collier on Bankruptcy, § 330.04[6], 15 ed rev. (1998). The Fourth Circuit adopted the Johnson-factors test in Barber v. Kimbrell's, Inc., 577 F.2d 216 (4th Cir.1978).
. The UST conceded that this court recognizes that due to market differences the hourly rates of bankruptcy attorneys practicing in Atlanta, Georgia, Charlotte, North Carolina, and Los Angeles, California are generally higher than the rates of bankruptcy professionals based in this district. The UST did not object to the hourly rate charged by Mr. Herzog who is based in Atlanta. The UST conceded that Mr. Herzog regularly charges this race in his Atlanta-based bankruptcy practice. The UST, however did object to the hourly rate charged by Mr. Reynolds ($165), also based in Atlanta, on the basis that the rate seemed excessive for an Atlanta bankruptcy associated admitted to the bar for three years. The court notes that the UST has consistently recommended to this court that out-of-state professionals practicing in this court receive their normal hourly rates as approved by the bankruptcy courts in their home districts.
.Many other factors can be involved in a determination of reasonable compensation under § 330(a) (e.g., the necessity of the services rendered, the benefit to the estate, the results obtained, etc.). These issues were not raised by the UST in this case.
. NMRS argues that the United States District Court for the District of South Carolina regularly approves hourly rates for non-bankruptcy attorneys which exceed those charged by the firm in this case. The firm contends that if an attorney with comparable skills in another specialty receives a particular hourly rate, then a bankruptcy attorney having comparable skills (as measured by years of experience and equivalent skills) should be able to charge this rate for bankruptcy work. The court understands this proposition. But if this proposition is totally correct, similarly skilled attorneys would charge the same hourly rate regardless of their area of practice and location. The marketplace indicates otherwise.
. The following example illustrates the problem posed by a multi-tiered rate structure. Problem: If a bankruptcy attorney has 100 clients, and charges 95 clients $175 per hour and 5 clients $200 per hour for the same work, what rate should a bankruptcy estate pay? Answer: the same rate that a client would be charged in a non-title 11 context if the factors which justify the rate in a non-title 11 context are present in the bankruptcy case.
.Presumably, the marketplace for these comparably-skilled attorneys does not support a $205 hourly rate for similar non-title 11 work. Several of the affidavits focus on either the affiant’s opinion of Mr. Cauthen's bankruptcy expertise or the affiant’s apparent dissatisfaction with the top hourly rate approved by this court. The court accords little weight to what these attorneys think Mr. Cauthen should receive or what they hope he will receive. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492823/ | MEMORANDUM DECISION RE: MOTION FOR SUMMARY JUDGMENT
JAMES M. MARLAR, Bankruptcy Judge.
Two Motions for Summary Judgment have been filed and argued. The State of Arizona (ADOR) filed one such Motion, and the debtors filed the other. The state was represented at oral argument by Tracey S. Essig and Lisa Perry Banen; the debtors were represented by Eileen Hollowell. After considering oral argument, reviewing the law and the facts, the court now rules.
JURISDICTION
This court has jurisdiction. 28 U.S.C. §§ 157; 1334. This is a core proceeding. 28 U.S.C. § 157(b)(2)(B); (I). Because neither side has raised a genuine question of material fact, and because the court finds none, the ease can be disposed of by summary judgment.
PROCEDURAL FACTS
1. The debtors filed a chapter 7 ease on August 19,1996.
2. On July 28, 1997, the debtors filed a Complaint against the ADOR and the Internal Revenue Service (IRS), seeking the discharge of income taxes for certain tax years. The debtors and the IRS apparently reached an accord, as the claims against the IRS were dismissed on April 13, 1998. (Dkt.13).
3. The State of Arizona (ADOR) had assessed taxes for the years 1977-1982 for $2,352,088.22, plus interest. (Complaint at para. 16).
4. The State answered, admitting that the taxes in question became due more than three (3) years before the filing of the bankruptcy petition, and further admitting that the reruns were filed more than two years before the filing. However, the State denies that the “assessment” was made more than 240 days prior to the filing. (Answer at para. 5).
5. On May 7, 1998, ADOR filed a Motion for Summary Judgment, a statement of facts, and an affidavit of John Re-herman.
6. The debtor responded, attaching the affidavit of David L. Hams, and filed a cross-motion for summary judgment.
7. The state replied and responded.
*7428. The debtor replied on July 20,1998.
9. Oral argument took place October 21, 1998.
THE STATUTE
The statute at issue in this ease is 11 U.S.C. § 528(a)(1)(A). It provides that a discharge does not apply to “a tax”
... of the kind and for the periods specified in section 507(a)(2) or 507(a)(8)....
The applicable section which concerns this case is 11 U.S.C. § 507(a)(8). That section provides, in pertinent part, that income taxes are priority claims if they are:
(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; [or]
(ii) assessed within 240 days, plus any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition ...
The parties have focused on subsection (ii) of § 507(a)(8). The critical issue in this case is when did the State make its “assessment?” The State contends that it assessed the debtors, for tax years 1977-82, in the sum of $2,352,088.22, on January 17, 1996. This date was only 215 days before the filing of the debtors’ petition on August 19, 1996. The debtors contend that the assessment date occurred earlier, on October 27, 1995 — a period outside the protection of the 240-day period.
THE ISSUE
After reviewing the parties’ affidavits, contentions and legal authorities, the only issue in the case is whether, pursuant to Arizona statutory, regulatory or case law, a tax assessment becomes final when all times for appeal have been exhausted, which was no later than October 27, 1995, or when the Department issues its collection letter and begins collection proceedings. The latter date is January, 17,1996.
The first date is outside of 240 filing days prior to bankruptcy; the second date is within 240 days. Thus, the legal decision of when the assessment becomes “final” will decide this case for one side or the other.
UNDISPUTED FACTS
The parties have submitted this matter on undisputed facts. All agree that the facts are:
1. The debtors were Arizona residents for tax years 1977-82.
2. They were required to file income tax returns and pay any taxes due thereon.
3. On October 18, 1993, ADOR issued “Notices of Proposed Assessment” to the debtors for tax years 1977-82 in the amount of $2,352,088.22.
4. On November 3, 1993, this notice was timely protested by the debtors.
5. On September 18,1995, after a hearing in which the debtors did not participate, a departmental hearing officer issued a “Decision” containing “Findings of Fact and Conclusions of Law,” upholding the proposed assessments in favor of ADOR. The decision concluded by stating:
IT IS ORDERED that the assessments have become final and interest continues to accrue on unpaid taxes.
6. The debtors did not appeal the September 18,1995 decision within the 30-day appeal period provided by Ariz. Rev.Stat. § 42-124(A).
7. The Decision was mailed to the debtors at 12077 E. Clinton Street, Scottsdale, Arizona 85259, presumably on the same day. Allowing five (5) days for receipt. Ariz.R.Civ.P. 6(e), the last day to appeal would have been, at the latest, October 27,1995.
8. The period for appeal passed, and no appeal was filed by the debtors.
9. On January 17, 1996, by letter to the debtors, ADOR demanded payment.
10. The debtors filed chapter 7 proceedings on August 19,1996.
*743
THE ASSESSMENT PROCESS
The process for assessing a tax against an individual is neither mystical, flexible nor cumbersome. An “assessment” occurs when a tax is determined and declared. See, generally, “State and Local Taxation,” 72 Am-JuR.2d § 704 (1974). In Arizona, assessment of taxes, and the final establishment of the amounts owed, occurs in the following manner and order:
1. Once a taxpayer has filed a return, the department (department of revenue) prepares and mails to the taxpayer a “notice of ... additional tax due” on forms prescribed by the department, if it believes additional sums are due. Ariz.Rev.Stat. § 42-118(A);
2. This is called a “notice of a proposed deficiency assessment,” and it is mailed to the taxpayer. Ariz.Rev.Stat. § 42-113(B)(8);
8.Generally, this notice must, with a few exceptions not applicable here, be mailed within four years after the return either is filed or is required to be filed. Ariz.Rev.Stat. § 42-113(A);
4. The proposed deficiency assessment “becomes final” with in either 45 or 90 days from mailing, “unless an appeal is taken to the department.” Ariz.Rev. Stat. § 42-117(B);
5. If no appeal is taken, the “deficiency [is] assessed” and a “notice and demand ... for ... payment” is mailed to the taxpayer. Ariz.Rev.Stat. § 42-117(C);
6. The department’s certificate of mailing “is prima facie evidence of the assessment of the deficiency and the giving of the notices.” Ariz.Rev.Stat. § 42-117(D);'
7. After receipt of a “proposed assessment,” a taxpayer has between 45-90 days, depending upon the type of tax, to apply for a “hearing, correction or redetermination of the action taken by the department.” Ariz.Rev.Stat. § 42-122(A).
8. If the hearing is not requested, “the amount determined to be due becomes final at the expiration of the period.” Ariz.Rev.Stat. § 42-122(B) (emphasis added);
9. If a request for hearing is made and a hearing, held, “all orders or decisions” issuing therefrom “become final” 30 days later, unless the taxpayer appeals to the state board. ' Ariz.Rev.Stat. § 42-122(C) (emphasis added).
10. The appeal to the state board “becomes final ” after 30 days, unless an appeal is timely made to the Superior Court. Ariz.Rev.Stat. § 42-124(A) (emphasis added).
The exhibits attached to the parties’ moving papers indicate that the State issued a “deficiency assessment” or “proposed assessment” and the debtors filed an appeal or request for a hearing (See, Ex. “B,” “C” to affidavit of David L. Harris). An undated notice was sent to the debtors, by the state, explaining (underlined or in bold letters no fewer than five times) that a “Final Order” of the hearing officer’s decision was imminent “unless an appeal is filed”.... (Ex. F. to affidavit of David L. Harris). The hearing officer’s decision was entered September 18, 1995 (Ex. “D” to State’s Motion), which noted and ordered “that the assessments have become final and interest continues to accrue on unpaid taxes.” (Ex. “D”).
In an effort to enforce collection, a notice was sent to the debtors on January 17, 1996, explaining that the “above audit assessment has become final and is now due.” (Ex. “E”).
DISCUSSION
Decisions from administrative proceedings become final when further administrative appeals are either fully exhausted or, if administrative review is sought in the courts, when the Superior Court and the Arizona appellate courts have issued final judgments thereon.
So long as a party has not completed the administrative process, a decision of an administrative body is not considered “final” for purposes of maintaining an administrative review action in the Superior Court. Ariz. Rev.Stat. § 12-905(B). Here, the debtors had one more step left to them in the administrative proceedings, an appeal to the “state *744board.” Ariz.Rev.Stat. § 42-124(A). The “state board” means “the state board of tax appeals.” Ariz.Rev .Stat. § 42-101(1).
However, the debtors elected not to appeal further, and therefore lost their rights to continue their grievance before the state board and on to the Arizona Superior Court. A party which fails to exhaust his administrative remedies has no right to hopscotch his case to the Superior Court. Roer v. Superior Court In and For Coconino County, 4 Ariz.App. 46, 417 P.2d 659 (1966). Administrative remedies must be exhausted before judicial relief can be sought. Hinz v. City of Phoenix, 118 Ariz. 161, 575 P.2d 360 (App.1978).
Just as judicial review of a state board decision cannot be maintained if it is not brought within 30 days of the state board’s decision, Ariz.Rev.Stat. § 42-124(B)(2), neither can a debtor continue contesting the decision from an earlier proceeding if he fails to press to the next level within the time permitted by statute. In this case, the time permitted for appeal of the September 18, 1995 Decision was 30 days, plus five (5) for mailing. Ariz.Rev.Stat. § 42-124(A); Ariz. R.Civ.P. 6(e). Because the debtors failed to do so, they are bound by the September 18, 1995 decision. The review statute, Ariz.Rev. Stat. § 42-124(A) clearly discusses issues of “finality:”
A A person aggrieved by a final decision or order of the department under this article may appeal to the state board by filing a notice of appeal in writing within thirty days after the receipt of the decision or order from which the appeal is taken. The board shall take testimony and examine documentary evidence as necessary to determine the appeal, all pursuant to administrative rules to govern such appeals. On determining the appeal the board shall issue a decision consistent with its determination. The board’s decision is final on the expiration of thirty days from the date when notice of its action is received by the taxpayer, unless either the department or the taxpayer brings an action in superior court as provided in subsection B. (emphasis added).
A “final decision” includes within its definition a decision from which no appeal or writ of error can be taken; it is conclusive of the issues decided. U.S. ex rel. Fink v. Tod, 1 F.2d 246, 251 (2d Cir.1924), rev’d on different grounds, 267 U.S. 571, 45 S.Ct. 227, 69 L.Ed. 793 (1925); Blaok’s Law DICTIONARY, “Final Decision or Judgment” (6th ed.1990). “Finality,” an extremely important concept of law, includes within its family the doctrines of res judicata and collateral estoppel, principles which serve to limit the number of times that a party can be vexed by the same claim or issue, and which promote efficiency in the judicial system by putting an end to litigation. Gilbert v. Beru-Asher, 900 F.2d 1407, cert. den. 498 U.S. 865, 111 S.Ct. 177, 112 L.Ed.2d 141 (U.S.Ariz.1990); see also, Ariz. Rev.Stat. 42-122(B) and (C) (failure to request a hearing after receipt of a “proposed assessment” causes the amount to become “final”).
The finality inherent in the assessment process is' statutorily mandated, above all, by the consistent use of the words “final,” modifying the word “decision” in Ariz.Rev. Stat. § 42-124(A); see also, Administrative Review Act, Ariz.Rev.Stat. §§ 12-901(2); 12-902(A) and (B). In fact, the Administrative Review Act leaves no doubt as to the effect of an administrative decision which was not timely appealed to the next level:
If under the terms of the law governing procedure before an agency an administrative decision has become final because of failure to file any document in the nature of an objection, protest, petition for hearing or application for administrative review within the time allowed by the law, the decision shall not be subject to judicial review under the provisions of this article except for the purpose of questioning the jurisdiction of the administrative agency over the person or subject matter, (emphasis supplied).
Ariz.RekStat. § 12-902(B); see also, Woerth v. City of Flagstaff, 167 Ariz. 412, 808 P.2d 297, review denied (App.1990); Eshelman v. Blubaum, 114 Ariz. 376, 560 P.2d 1283 (App.1977). When the state legislature enacts a statute, a court is required to interpret the legislature’s intent by giving the statute *745“such an effect that no clause, sentence or word is rendered superfluous, void, contradictory or insignificant.” Marlar v. State, 136 Ariz. 404, 410-411, 666 P.2d 504 (App.Div.11983). The plain meaning of the word “final” means final.
Therefore, from the law cited above, it is clear that the ADOR’s “proposed assessment” of the taxes at issue in this case bec'ame final, and subject to no further controversy, when the debtors failed to appeal the ruling against them by October 27, 1995.
One further comment is in order. The State’s argument that “final assessment” is made only when demand for payment is made is inconsistent with both the applicable statutes and the critical concept of establishing “finality.” The sending of collection letters, or the commencement of enforcement proceedings, are not subject to strict statutory time lines. When, or even if to commence collection activity remains a discretionary administrative function within the agency (ADOR). Because the collection arm of the taxing agency can function as quickly or slowly, or indeed if ever, as it desires, that action does not, as a matter of law, determine the finality date of when an “assessment” is made. To so hold would turn the legislature’s desire for establishing the finality of a tax liability on its head. The State’s argument to the contrary is therefore rejected. In fact, the statute itself belies the State’s argument. It clearly requires that collection activity begins only after an assessment becomes final:
C. If a deficiency is determined and the assessment becomes final, the department shall mail notice and demand to the taxpayer for the payment of the deficiency. The deficiency assessed is due and payable at the expiration of ten days from the date of the notice and demand.
Ariz.Bev.Stat. § 42-117(C) (emphasis supplied). Clearly, by the language of the statute itself, collection and assessment are mutually exclusive concepts, with a final determination of assessment coming first, followed, at a later time, by collection.
CONCLUSIONS OF LAW
The State’s assessment of taxes for the years 1977-82 became final upon expiration of the 30-day appeal time from the State’s September 18, 1995 decision, plus five (5) days for mailing; 1.
2. The State’s proposed assessments, after October 27, 1995, became final assessments beyond which the debtors could not appeal further;
3. Any act of enforcement or the commencement of collection activity by the State does not expand the definition of finality beyond October 27, 1995. Collection activity is immaterial to the establishment of the legal finality of the assessment;
4. The debtors’ bankruptcy filing was more than 240 days after the final assessment was made;
5. The taxes for years 1977-82, in the amount of $2,352,088.22, are discharged by the bankruptcy of the debtors. 11 U.S.C. §§ 523(a)(1); 507(a)(8)(A)(ii).
RULING
This matter having been submitted on undisputed facts, and the court having granted debtors’ Motion for Summary Judgment and denied the State of Arizona’s Motion for Summary Judgment,
IT IS ORDERED that debtors’ counsel lodge a proposed form of Judgment within 20 days. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492824/ | ORDER VACATING, IN PART, FINAL JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for hearing on Wednesday, July 9, 1997 to consider the Debtor’s Motion for Rehearing on United States Motion for Summary Judgment on Debtor’s Objection to Claim. At the hearing, the Debtor was represented by W. Gregory Golson, Barnett Bank was represented by Mark Wolfson, and the United States of America was represented by John A. Galotto. The Court, having heard the argument of counsel at the hearing, having considered the record, including the Debtor’s Affidavit in Support of the Motion for Rehearing and the proof of the Debtor’s Request for Consistent Settlement under § 6224(c), and being otherwise duly advised of the premises finds it appropriate to vacate, in part, the Final Judgment entered in favor of the United States on April 15, 1997. Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Final Judgment entered in favor of the United States on April 15, 1997 be, and the same hereby is, vacated in part solely with respect to the Debtor’s Objection to the United States of America’s proof of claim no. 5 and the Motion for Summary Judgment filed in connection therewith. It is further
ORDERED, ADJUDGED AND DECREED that any findings of fact and conclusions of law contained in this Court’s findings of fact, conclusions of law and memorandum opinion dated April 15, 1997 as such findings of fact and conclusions of law relate to the Debtor’s Objection to Claim No. 5 on the grounds of request for consistent settlement pursuant to 26 U.S.C. § 6224(c) be, and the same hereby are, vacated in their entirety. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492825/ | ORDER DENYING MOTION FOR PARTIAL SUMMARY JUDGMENT (Doc. # 52)
ALEXANDER L. PASKAY, Bankruptcy Judge.
This cause came on for hearing upon the Motion for Partial Summary Judgment filed on August 7,1997 by Bethann Scharrer (Liquidating Trustee) in the above-captioned adversary proceeding. The Liquidating Trustee requests that this Court determine as a matter of law that a portion of the payments made by American Leasing and Acceptance Corporation and American Leasing and Acceptance Corporation of Lakeland (Debtors) to certain investors (Investors) are interest, which is deductible by the Debtors for income tax purposes for the tax years 1991 through 1994. The Liquidating Trustee contends there are no material facts in dispute on the issue of the interest expense deduction and, therefore, summary judgment in her favor is appropriate. The Court reviewed the Motion and the record, and finds as follows:
This Motion is directed to a part of the claim set forth in Count I of the Liquidating Trustee’s Complaint, specifically, Paragraph 18(j) which states,
The IRS calculated the interest deductions for 1991 through 1994 incorrectly in that no deduction was allowed for tax years 1991 and 1992 and the deduction allowed for 1993 and 1994 was too small.
The relief sought by the Liquidating Trustee is a declaration by this Court that the Debtor was entitled to an interest expense deduction on its corporate income tax return for the years 1991 up to and including 1994. The Liquidating,Trustee contends that Internal Revenue Cede § 163 permits payment of interest as a deductible expense. Further, she contends that a portion of the repayment to the Investors should have been deductible by the Debtors as an interest expense.
What really makes the relief sought unusual and unique is that for tax years 1991 and 1992, the Debtors claimed no interest expense deductions but did, however, claim the deductions for tax years 1993 and 1994. After an examination by the IRS, a determination was made that the interest expense claimed as a deduction on the 1993 and 1994 tax returns was allowable. Thus, there appears to be no real case or controversy since the Government did not disallow any interest expense deductions claimed by the Debtors. Thereafter, the Liquidating Trustee did not *757file an amended return for the years 1991 and 1992.
Notwithstanding, it is the Liquidating Trustee’s contention that even though there is technically no objection to the Government’s claim on record, she is entitled to seek a determination by this Court that the income expense should have been deducted by the Debtor on the 1991 and 1992 tax returns. Further, the Government’s claim for those years should be adjusted by deducting these expenses from the taxable earnings of the Debtor. According to the Liquidating Trustee, these facts are sufficient to present a “case or controversy” which is a condition precedent to this Court’s jurisdiction to consider the Motion under consideration.
For the sake of judicial economy, this Court will consider the issue raised by the Liquidating Trustee rather than await the filing of an amended return claiming a deduction for interest expense by the Liquidating Trustee which would possibly lead to a challenge of the Government’s disallowance. The facts of the particular issue at hand me as follows:
At the relevant time, one or both of the Debtors owned and operated a used ear lot in Lakeland, Florida. In order to obtain funds needed to purchase used cars at the car auction, the Debtors solicited funds from individuals, not institutions lenders. These individuals were referred to as investors. The Debtors had available lists of certain contracts with customers and the interested Investor would select a specific car contract. The cars purchased were either sold or leased to customers.
The transactions with the parties who advanced the funds to the Debtors is the crux of the controversy which were described sometimes as “investments” and other times as “sales and purchases” of the automobile. According to the Liquidating Trustee, these investments were loans and the payments made to the Investors were clearly a misnomer since none of them acquired an equity security interest (i.e. stock in the Debtor’s corporation). However, these investments did include an interest component which, according to the Liquidating Trustee, should have been claimed as a proper business expense deduction. According to the document in the record, specifically the Affidavit of Ferguson, the Debtors assigned the lease payments to the particular Investor.
It is without dispute that if a particular contract which was assigned went into default, the Debtor was required to substitute another contract of equal or greater value or would pay the contract in full, giving the Investor full recourse on the contract. Further, all contracts assigned were guaranteed by the Debtors. (Affidavits of Glenn, Higgins, Stinson and Ferguson). Subsequently, some investors were issued 1099-INT Forms and did, in fact, pay income tax on the interest they received from the Debtor. Some Investors perfected a security interest in the cars for which they advanced funds in order to enable the Debtor to make the purchase. There is no evidence in this record that any of the Investors acquired an ownership interest in the particular ear they financed. In fact, the Debtors were only purchasing the lease payments called for under the lease and title to the vehicle remained with the Debtors. None of the purchasers or lessees of the car had any dealing with the Investors. Rather, the Debtor handled all matters such as billing, collection, repossession, etc, with their customers and the Investors simply received monthly checks from the Debtors. In addition, there is nothing in this record to indicate that the Investors bought anything from the Debtors. The Investors wore consistently treated by the Debtors as if the funds they advanced were loans.
It is undisputed, therefore, that (1) the ownership of the vehicles purchased by the Debtors with the funds obtained from Investors was not transferred to the Investors; (2) the Debtors remained liable on the contracts by virtue of their guarantees; (3) the Debtors bore the risk of loss or damage to the vehicles; (4) the Investors had no dealings with the lessors or the purchasers of the vehicles and all installment payments were made to the Debtors who in town were required to pay the agreed amount to the Investors as reflected by the assignment of leases; (5) when the purchaser or the lessee of the vehicle defaulted on the contract, the vehicle was repossessed by the Debtors and *758not by the investor, at which time the Debtor had the right to resell or release the vehicle in question; and (6) there is evidence in this record that some investors did, in fact, pay taxes on the interest they received using the 1099-INT form.
However, the Government contends that there remains genuine issues of material facts in dispute. Although the Liquidating Trustee contends that all investors were routinely provided 1099-INT Forms, there is evidence from the record that some Investors, in fact, did not receive these forms from the Debtors. In addition, the Government disputes whether (1) the Investors reported and paid tax on the payments they received from the Debtor; (2) the loans were treated in the transaction as loans or as sales of chattel paper consisting of notes or leases; (3) any mistake, undue influence, fraud or duress existed; (4) Investors received all payments due prior to the bankruptcy; and, (5) the amounts the Investors reported they were paid were accurate.
In view of the foregoing, this Court is satisfied that genuine issues of material fact remain in dispute and, therefore, Paragraph 18(j) of Count I of the Complaint cannot be decided as a matter of law. Plaintiffs Motion for Partial Summary Judge, therefore, should be denied.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Partial Summary Judgment by the Plaintiff, be and the same is hereby denied.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492826/ | *769ORDER ON PLAINTIFF’S MOTION FOR SANCTIONS PURSUANT TO RULE 11
ALEXANDER L. PASKAY, Chief Judge.
THE MATTER under consideration in this Chapter 7 liquidation case is the Motion for Sanctions Pursuant to Rule 11 filed by Plaintiff, Jennifer Hoult (Ms. Hoult), which is based upon Ms. Hoult’s contention that the Defendant, David Hoult (Debtor), and his counsel willfully violated the certification requirements of Fed.R.Civ.P. 11(e)(1)(A) and Fed.R.Bankr.P. 9011 by filing the Answer, Affirmative Defenses and Counterclaims (Doc. No. 22) in this adversary proceeding. In support of her Motion, Ms. Hoult relies upon the following facts which appear to be without substantial dispute:
In 1988, Ms. Hoult, who is the Debtor’s daughter, filed a five-count complaint against the Debtor in the United States District Court for the District of Massachusetts (District Court). Ms. Hoult alleged that the Debtor sexually abused her when she was a child and asserted causes of action for assault and a battery in Count I; reckless and intentional infliction of emotional distress in Count II; negligence in Count III; negligent infliction of emotional distress in Count IV; and •breach of fiduciary duty in Count V. A jury trial was held, at which time Ms. Hoult presented evidence only relevant to the claims in Counts I, II and V. The court instructed the jury only as to those Counts. The jury returned a general verdict in favor of Ms. Hoult in the amount of $500,000.00 and the District Court entered judgment in that amount against the Debtor on July 14, 1993. The Debtor moved for a new trial which motion was denied. The Debtor appealed the judgment and, later, appealed the order which denied his motion for a new trial.
On July 14,1994, the Debtor filed with the District Court a Motion to Vacate the Judgment, arguing that the District Court should have precluded the testimony of Ms. Hoult’s expert related to the phenomenon of repression and the recovery of repressed memory of victims of childhood sexual abuse. After briefing and oral argument, the District Court denied the Debtor’s Motion. The Debtor appealed the denial of this Motion to the First Circuit Court of Appeals. The First Circuit affirmed the District Court’s denial of the Motion to Vacate.
In 1996, the Debtor sued Ms. Hoult in the District Court, asserting claims for libel and seeking damages, alleging that Ms. Hoult libeled him in three letters in which Ms. Hoult wrote that during her childhood she was sexually abused by the Debtor (Libel Action). On February 14, 1997, the District Court granted in part and denied in part Ms. Hoult’s Motion to Dismiss the Complaint. On June 30, 1997, the District Court granted Ms. Hoult’s Motion for Reconsideration, dismissed the Libel Action in its entirety and entered judgment in favor of Ms. Hoult. The Debtor appealed the Order of Dismissal to the First Circuit Court of Appeals. On October 9, 1998, the First Circuit affirmed the judgment of the District Court. The Debtor filed a Motion for Rehearing which is currently pending and awaiting a decision by the First Circuit.
The Debtor filed his Petition for relief under Chapter 7 of the Bankruptcy Code on October 8,1997. On December 23,1997, Ms. Hoult commenced the instant adversary proceeding, seeking the determination of nondis-ehargeability of the Judgment pursuant to Sections 523(a)(4) and (a)(6) of the Bankruptcy Code. In due course, the Debtor filed an Answer, Affirmative Defenses and Counterclaim.
The Debtor in his Counterclaim seeks a money judgment based on the very same claim which was unsuccessfully asserted thus far in the Libel Action pending in the District Court. Ms. Hoult filed a Motion to Dismiss the Counterclaim and a Motion to Strike the Affirmative Defenses which were asserted in response to the Second Amended Complaint. On October 19, 1998, the Court granted the Motion to Dismiss, dismissing the Debtor’s Counterclaim and partially granting Ms. Hoult’s Motion to Strike, striking without prejudice seven of the nine asserted affirmative defenses.
Ms. Hoult contends that the Debtor’s Affirmative Defenses and Counterclaim have no basis in existing law, are patently frivolous and serve solely to harass Ms. Hoult. She *770seeks attorney’s fees and costs and such additional sanctions as may be appropriate.
In opposition to the Motion for Sanctions, Debtor’s counsel contends that the Counterclaim was filed in good faith and was supported by existing law. She asserts that it is her duty to assert all available claims on behalf of her client and that the dismissal of the Libel Action by the District Court is of no consequence because the Debtor’s Motion for Reconsideration of the Judgment affirming the District Court’s Order of Dismissal is still pending before the First Circuit. Debt- or’s counsel contends that without a final determination of the validity of the claim underlying the Debtor’s Counterclaim, the Counterclaim has been properly asserted in this Court. Debtor’s counsel also argues that even if filing a counterclaim to a claim under 11 U.S.C. § 523 is procedurally improper, a point which Debtor’s counsel does not concede, Fed.R.Bankr.Pro. 7008(c) requires the Court to treat the counterclaim as an affirmative defense if the document has been mistakenly designated a counterclaim instead of an affirmative defense. In this instance, she contends that the affirmative defense asserted is set-off.
Although Ms. Hoult seeks sanctions based upon Fed.R.Civ.P. 11 as well as Fed. R.Bankr.Pro. 9011, it should be noted that Rule 11 is inapplicable here. The relevant rule is Fed.R.Bankr.Pro. 9011 which provides,
(b) REPRESENTATIONS TO THE COURT. By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,—
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on the lack of information or belief.
Fed.R.Bankr.Pro. 9011
Even a cursory perasal of the record leaves no doubt that the signature of Debtor’s counsel violated both the spirit and the letter of Rule 9011.
The assertion that it is proper to assert a counterclaim for setoff to a complaint to determine the dischargeability of a debt pursuant to 11 U.S.C. § 523(c) is not supported by any rule. Ms. Hoult’s claim is that the debt owed by the Debtor which is represented by a money judgment entered by the District Court falls within the exception to the discharge for willful and malicious injury to an entity under 11 U.S.C. § 523(a)(6). Ms. Hoult is not seeking a money judgment because she already obtained one. Thus, a setoff against a claim of nondischargeability is inappropriate. See In re Black, 95 B.R. 819 (Bankr.M.D.Fla.1989). Further, no good faith argument can be advanced to change existing law.
The Debtor also argues, however, that the Counterclaim was filed in good faith, based upon Fed.R.Civ.Pro. 8(c), made applicable to adversary proceedings by Fed. R.Bankr.Pro. 7008(c), which provides,
(c) Affirmative Defenses. In pleading to a preceding pleading, a party shall set forth affirmatively accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, waiver, and any other matter constituting an avoidance or af*771firmative defense. When a party has mistakenly designated a defense as a counterclaim or a counterclaim as a defense, the court on terms, if justice so requires, shall treat the pleading as if there had been a proper designation.
Counsel’s reliance on Rule 8(c) furnishes scant, if any support for the propriety of filing the Counterclaim. As noted earlier, a claim for recovery of a money judgment cannot setoff a claim for nondischargeability. More importantly, the Debtor has no standing to seek monetary damages against Ms. Hoult based on defamation of character or libel because a chose of action based on either legal theory is property of the estate and can only be asserted by the Chapter 7 trustee. See 11 U.S.C. § 541(a). Debtor’s counsel’s argument that the Debtor may assert the claims if the Trustee abandons them is specious because nothing in the record warrants a finding that the Trustee abandoned the claims asserted by the Debtor.
The good faith in filing the Counterclaim is also belied by the undisputed fact known to all, including Debtor’s counsel, that the identical claim including identical allegations was asserted by the Debtor in the District Court and that the District Court’s dismissal of the claim was affirmed by the First Circuit. The fact that the Debtor filed a Motion for Rehearing which remains pending is of no consequence. This fact does not detract from the validity of the Order of Dismissal which remains the law of the ease unless the First Circuit reverses its decision and reinstates the claim. See In re Grim, 104 B.R. 486 (Bankr.S.D.Fla.1989) (Pendency of appeal does not destroy the finality of judgment for purposes of collateral estoppel.). Thus, even if the Debtor acquired standing by the Trustee’s abandonment of the claim, the Debtor is still barred from asserting the claim based upon the law of the case doctrine.
Viewing the Motion for Sanctions even in a light most favorable to Debtor’s counsel, the record is clear that the filing and signing of the Counterclaim by Debtor’s counsel violated Fed.R.Bankr.Pro. 9011. Ms. Hoult’s Motion is well taken and, therefore, should be granted.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Plaintiffs Motion for Sanctions Pursuant to Rule 11 be, and the same is hereby granted. Counsel for Plaintiff shall submit time records and a schedule of expenses incurred in connection with this adversary proceeding within fifteen (15) days from the date of the entry of this Order.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492827/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 case and the matter under consideration is a contested matter presented for this Court’s consideration by Trustee’s Objection to Claim of Exemption and Trustee’s Objection to Amended Claim of Exemption. The property Ralph E. Sluis and Elizabeth P. Sluis, the Debtors, (Debtors) claimed as exempt, and to which the Trustee objects, are Social Security benefits in a bank account maintained by the Debtors. The immediate matter is a Motion for Summary Judgment, filed by the Chapter 7 Trustee, Diane L. Jensen (Trustee). The Trustee contends that there are no genuine issues of material fact and that she is entitled to judgment, in her favor, as a matter of law. The Debtors concede that there are no disputed facts. However, the Debtors contend that based on the applicable law, the Trustee’s Objection to Claim of Exemption and Trustee’s Objection to Amended Claim of Exemption should be overruled and the claimed exemption should be allowed.
The facts relevant to the resolution of this controversy as they appear in the record are as follows.
On May 18, 1998, the Debtors filed their voluntary Petition for Relief under Chapter 7 of the Bankruptcy Code. In Schedule C, the Debtors claimed the funds in a bank account as exempt, among other items, contending that these funds are accumulated head of household wages and thus, exempt pursuant to Florida Statutes § 222.11.
On June 19, 1998, Trustee’s Objection to Claim of Exemption was filed. The basis of the Trustee’s Objection, as it relates to the bank account, is that this account includes more than head of household wages. On July 16, Í998, the Debtors filed their Response to Order Directing Response to Objection to Exemptions. In their Response, the Debtors contend that the bank account only contains head of household wages and Social Security benefits. The Schedules were amended to reflect the Social Security benefits claimed as exempt pursuant to § 522(d)(10)(a) and Trustee’s Objection to Amended Claim of Exemption was filed. On September 8, 1998, this Court entered its Order on Trustee’s Objection to Claim of Exemption and Resetting Pretrial. The Order overruled the Trustee’s Objection as it related to the head of the household wages and reset for pretrial the Trustee’s Objection as it related to the Social Security benefits. On October 13, 1998, the Trustee filed her Motion for Summary Judgment on the same.
Section 522(d)(10)(A) provides that:
(d) The following property may be exempted under subsection (b)(1) of this section:
(10) The debtor’s right to receive—
(A) a social security benefit, unemployment compensation, or a local public assistance benefit;
11 U.S.C. § 522(d)(10)(A).
An exemption claimed under § 522(d)(10)(A) does not exempt accumulated Social Security benefits. See In re Lazin, 217 B.R. 332, 334 (Bankr.M.D.Fla.1998). The parties have stipulated to the fact that on the date of the commencement of this Chapter 7 case, the relevant bank account contained $2216.00 in accumulated Social Security benefits. In light of such, the Trustee’s Objection to Claim of Exemption and Trustee’s Objection to Amended Claim of Exemption, as they relate to the accumulated Social Security benefits in the relevant bank account, should be sustained and the Motion for Summary Judgment, filed by the Trustee, should be granted.
Accordingly, it is
*777ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment, filed by the Chapter 7 Trustee, Diane L. Jensen, be and the same is, hereby granted. It is further
ORDERED, ADJUDGED AND DECREED that the Trustee’s Objection to Claim of Exemption and Trustee’s Objection to Amended Claim of Exemption, as they relate to the accumulated Social Security benefits in the relevant bank account, be, and the same are hereby, sustained. Ralph E. Sluis and Elizabeth P. Sluis, the Debtors, are not entitled to the claimed exemption of their accumulated Social Security benefits, pursuant to § 522(d)(10)(A) of the Bankruptcy Code.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492829/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JERRY A. FUNK, Bankruptcy Judge.
This adversary proceeding requires the determination of whether third-party payment to a creditor is an avoidable preference under 11 U.S.C. § 547(b). From the evidence presented, the Court finds such payment is not avoidable.
FINDINGS OF FACT
A. Introduction
On April 1, 1998, Gregory K. Crews (“Trastee”), Trustee for the estate of Sneakers Sports Grille Inc. (“Debtor”) filed a complaint seeking to avoid and recover a transfer pursuant to 11 U.S.C. § 547(b).
Debtor, a Florida corporation owned by David A. Berlin (“Berlin”) and William O’Donnell (“O’Donnell”), operated a sports-theme restaurant in Jacksonville Florida. Debtor leased space in a shopping plaza from Shopping Center Equities, Inc. (“SCE”), defendants in this proceeding, for the operation *797of its restaurant.1 SCE’s lease to Debtor included furniture, fixtures, and equipment obtained by SCE from a previous tenant.
Debtor routinely defaulted on the terms of these leases.2 On July 14, 1997 SCE sent Debtor notice of default in the sum of $66,-595.05 for rent and use of the premises leased.3 (Pl.’s Ex. 26.) This notice demanded payment or possession within five business days from receipt. Default of obligations under the lease not being Debtor’s only financial problems, Berlin began to look for investors. Greg Pratt (“Pratt”) was referred to Berlin through a friend that told Pratt that Berlin was looking for investors. However, Pratt sought to purchase Debtor’s assets and business rather than make an investment.
B. Sneakers’ Agreement with Debtor
Berlin and Pratt signed a Letter of Intent on October 26, 1997 describing terms of an offer by Pratt to purchase Sneakers Sports Grille, the Debtor corporation.4 (Pl.’s Ex. 1.) The purpose of this letter of intent was to outline the essential terms of the offer, which expired on November 14, 1997. On November 11, 1998, Debtor and Sneakers Enterprises, Inc. (“Sneakers”), a corporation formed by Pratt, entered a Purchase and Sale Agreement (“Agreement”). (Pl.’s Ex. 2.) Berlin signed this Agreement individually and as president of Debtor and Pratt signed as president of Sneakers. The signed Agreement called for a purchase price of $90,000.00 for all of Debtor’s assets and up to an additional $10,000.00 for the current value of the inventory. The Agreement provided:
8. Conditions Precedent to Seller’s Obligations. Seller’s obligations to perform under this Agreement are subject to the fulfillment of each of the following conditions before or at the Closing:
(f) Purchaser shall secure a new lease from Landlord agreeable to Purchaser and a General Release from Landlord in favor of Seller, David A. Berlin and William O’Donnell by paying to Landlord the sum of $50,000.00.
Debtor attached an extensive list of inventory to this agreement as Schedule A. This list was a partial inventory of the assets being transferred from Debtor to Sneakers as part of the purchase and sale agreement. Also attached was Schedule B, listing leased assets.5 All of the property listed in Schedule B is owned by SCE and was considered part of the lease between SCE and Debtor. Schedule C to this agreement allocated the $100,000.00 purchase price paid by Sneakers to Berlin as follows:
Equipment $40,000.00
Fixtures $40,000.00
Goodwill $10,000.00
Inventory $10,000.00
*798C. Sneakers’ Agreement with SCE
On November 11,1997, SCE and Sneakers agreed to certain lease terms, including a $50,000.00 payment for equipment and other property. (Pl.’s Ex. 5.) However, the final negotiated Bill of Sale between SCE and Sneakers was for a purchase price of $100,-000.00, rather than $50,000.00.6 Additionally, SCE entered into a lease agreement with Sneakers and Pratt, as an individual guarantor. (Pl.’s Ex. 13.) Sneakers and SCE entered into this lease independent of the Bill of Sale, which only governed the purchase of SCE’s assets. The lease specifically noted a pending status of SCE’s inventory of landlord’s tangible and personal property. Initial negotiations between SCE and Pratt did not include all of the assets and personal property that SCE owned. However, the final Bill of Sale included substantially more assets than originally contemplated by SCE and Sneakers.
Pratt testified that he and SCE negotiated the lease that Sneakers would operate under. Trustee contends that $50,000.00 of payments made by Sneakers was done on Debtor’s behalf and that such payment constitutes a preference. Pratt testified that this $50,-000.00 payment to SCE was not connected to the purchase of Debtor’s assets. Rather its sole purpose was consideration for the purchase of assets from SCE. Pratt testified that the $50,000.00 payment in question, which was made to the landlord, was never to go to Berlin. This payment was part of the consideration for the purchase of assets from SCE. These were the same assets that Debtor previously leased from SCE. Pratt paid all of the money in each transaction directly from his own funds. None of the money paid to SCE was ever possessed or controlled by Berlin or Debtor. SCE never demanded that Pratt pay any past due rent. Rather, SCE and Pratt conducted their own negotiations. Additionally, Paragraph 8(f) of the agreement between Debtor and Pratt does not provide that the $50,000.00 payment was to be used for back rent owed by Debtor.
Debtor filed a voluntary petition under Chapter 7 on February 13, 1998. Trustee’s Complaint to Recover Preferential Transfer (Doe. 1) filed on April 1, 1998 alleges that Sneakers paid SCE approximately $80,000.00 in funds otherwise payable to Debtor on account of Debtor’s past due rent obligations to SCE. Trustee claims this payment was made within ninety days of Debtor’s petition being filed on account of an antecedent debt owed by Debtor to SCE during a period Debtor was insolvent. Trustee claims this payment allowed SCE to receive more than it would in a Chapter 7 liquidation of Debtor’s assets had Sneakers not made this payment to SCE. For these reasons, Trustee seeks to have the Court set aside this payment as an avoidable transfer under 11 U.S.C. § 547(b). SCE denies Trustee’s claims and allegations.
CONCLUSIONS OF LAW
To recover transfers as preferential under 11 U.S.C. § 547(b), the Trustee must prove that the transfers: 1) were of an interest of the debtor in property; 2) were on account of an antecedent debt; 3) were to or for the benefit of a creditor; 4) were made while the debtor was insolvent; 5) were made within ninety (90) days prior to the commencement of this bankruptcy case; and 6) enabled SCE to receive more than it would have received if the transfers had not been made and SCE had asserted its claim in a Chapter 7 liquidation. Feltman v. Board of County Comm’rs of Metro Dade County (In re S.E.L. Maduro (Florida), Inc.), 205 B.R. 987, 990 (Bankr.S.D.Fla.1997).
The Court initially addresses whether the transfers made by Sneakers to SCE were of an interest of the debtor in property. The Supreme Court addressed this issue in Begier v. Internal Revenue Service, 496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). The Court stated:
Equality of distribution among creditors is a central policy of the Bankruptcy Code. According to that policy, creditors of equal priority should receive pro rata shares of the debtor’s property. Section 547(b) fur*799thers this policy by permitting a trustee in bankruptcy to avoid certain preferential payments made before the debtor files for bankruptcy. This mechanism prevents the debtor from favoring one creditor over others by transferring property shortly before filing for bankruptcy. Of course, if the debtor transfers property that would not have been available for distribution to his creditors in a bankruptcy proceeding, the policy behind the avoidance power is not implicated. The reach of § 547(b)’s avoidance power is therefore limited to transfers of “property of the debtor.”
The Bankruptcy Code does not define “property of the debtor.” Because the purpose of the avoidance provision is to preserve the property includable within the bankruptcy estate — the property available for distribution to creditors — “property of the debtor” subject to the preferential transfer provision is best understood as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings. For guidance, then, we must turn to § 541, which delineates the scope of “property of the estate” and serves as the postpetition analog to § 547(b)’s “property of the debtor.”
496 U.S. at 58-59, 110 S.Ct. 2258 (citations omitted) (footnote omitted). Section 541(a)(1) provides that the “property of the estate” includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”
The Court in Feltman discussed the issue of whether certain transfers by a purchaser of debtor’s assets to a creditor were “interests of the debtor in property”. 205 B.R. at 991. The Court, looking to the issue of control, noted that the debtor never actually controlled any of the funds at issue. Id. However, the third party did not transfer funds simply to pay designated creditors or, as in this case, in consideration of goods purchased from a party other than the Debt- or. Rather, funds were transferred as consideration for the third party’s acquisition of the debtor’s assets. The debtor and the third party had entered an asset purchase agreement where the third party was to deposit money in an escrow account that later was to be transferred to cover certain obligations of the debtor. Id. at 989. In Felt-man there was a direct link throughout the entire asset sale between the debtor, the third party, and the creditors. The debtor’s control was established when it agreed to sell assets to the third party in exchange for the third party’s transfers to certain named creditors. Id. at 991.
The Feltman Court noted that:
[Ajvoiding preferential transfers received indirectly from the buyer of a debtor’s assets is not a novel concept. Other courts have reached the same result where those transfers are for the benefit of the debtor or result in diminution of the debtor’s estate. See Buckley v. Jeld-Wen (In re Interior Woods Prods. Co.), 986 F.2d 228 (8th Cir.1993); See also Taunt v. Fidelity Bank (In re Royal Golf Prods. Corp.), 908 F.2d 91, 94 (6th Cir.1990) (third party payments are voidable to the extent that the debtor pledged its property as security for these payments and thus depleted its estate); Sommers v. Burton (In re Conard Corporation), 806 F.2d 610 (5th Cir.1986) (assumption of debt by purchaser as part of sales price constituted avoidable transfer).
205 B.R. at 991.
Judge Paskay discussed whether rent payments made by the principals of a debtor to the debtor’s landlord constituted avoidable preferences. Sport Stations, Inc. v. Naples Partnership, (In re Sport Stations, Inc.), 152 B.R. 335 (Bankr.M.D.Fla.1993). Judge Pas-kay stated that “[Wjhen a payment is made by a nondebtor third party to a creditor it cannot be preferential because the funds used to pay the debt are not property of the estate and, thus, the amount of funds available for distribution to other creditors is not reduced.” Id. at 337. The Court determined that payments made to the debtor’s landlord by the principals from the principals’ own funds were not property of the estate and did not diminish funds available for distribution to creditors. Id. The Court held that the debtor had no viable claim of preference against the landlord to avoid the payments made by the principals. Id.
*800The Trustee has the burden of establishing that the property transferred was property in which Debtor had an interest. Id. The Bankruptcy Code requires the trustee to establish by a fair preponderance of the evidence that there was a transfer of an interest of the debtor in property. Tolz v. Barnett Bank (In re Safe-T-Brake, Inc.), 162 B.R. 359, 362-363 (Bankr.S.D.Fla.1993). See also Brown v. First Nat’l Bank of Little Rock, Ark, 748 F.2d 490, 491 (8th Cir.1984).
In this case, Trustee is attempting to characterize a payment of $50,000.00 from Sneakers to SCE as being on behalf of Debt- or. Additionally, Trustee makes a separate preference claim on personal property taxes paid by Sneakers. However, the preponderance of the evidence before the Court does not support Trustee’s position. Trustee claims that Debtor had both legal and equitable interest in the $50,000.00 transfer to SCE under the agreement between Sneakers and Debtor. However, the evidence presented suggests the independence of the transactions that occurred. First, Sneakers purchased all of Debtor’s assets for which Debtor received $90,000.00 plus $10,000.00 for inventory. Second, Sneakers and SCE negotiated the purchase price of certain assets and the terms of a lease agreement. None of the funds paid by Sneakers to SCE belonged to Debtor. Additionally, Debtor never controlled these funds. Pratt negotiated on behalf of Sneakers with SCE to work out the best deal he could for his corporation. Debtor was not involved in nor had any impact on these negotiations.
The Ninth Circuit found that a pre-petition payment made by the purchaser of the debtors’ assets to a creditor was an avoidable preference. Mordy v. Chemcarb, Inc. (In re Food, Catering & Housing, Inc.), 971 F.2d 396 (9th Cir.1992). In that case, the debtor sold substantially all of the assets of the business to a third party, just as in this case. However, the creditor in that case admitted that payments received from the purchaser were received within ninety days of the debt- or’s filing and were for antecedent debts. Id. at 397. The Court noted that payment of a debtor’s antecedent debts are transfers “to or for the benefit of a creditor” under Section 547(b). Id. at 398. SCE claims that payments received from Sneakers were not on account of an antecedent debt owed by Debt- or. The Court agrees. The evidence presented shows that the equipment Sneakers purchased from SCE had value in excess of the $100,000.00 paid. Trustee presented no evidence refuting this testimony. SCE had basically given up on collecting any money from Debtor after Debtor had repeatedly bounced checks and failed to meet promises. Berlin had told SCE for months that he had money coming in from investors. This was never true.
Berlin did bring Pratt to the table. However, no consideration outside of what Sneakers paid directly to Debtor for its assets, including its goodwill, was paid to Debtor, Berlin, or to SCE on behalf of Debtor. Pratt negotiated with SCE to benefit Sneakers. Pratt’s concerns were with the operation of his corporation. And in completely separate transactions, Sneakers paid Debtor for Debt- or’s assets and then paid SCE for SCE’s assets.
Trustee also claims funds used to pay personal property taxes constitute an avoidable preference. Again the preponderance of the evidence does not support Trustee’s position. While Debtor was initially responsible to pay taxes on the property leased from SCE under Debtor’s lease with SCE, when Debtor failed to meet this obligation under the lease, SCE became responsible for these taxes. Additionally, when Sneakers purchased assets from Debtor, taxes associated with those assets became the responsibility of the new owner, Sneakers, and were no longer an obligation of Debtor. Unpaid personal property taxes created a lien on the assets Sneakers purchased from SCE and from Debtor. The Court notes that Debtor was previously obligated to SCE for taxes on leased assets under the lease but had no obligation to the Department of Revenue. Rather, Sneakers assumed all existing tax liability when it purchased assets with taxes being owed on those assets. When Sneakers paid taxes owed on assets it purchased, that payment only benefited Sneakers, not Debt- or.
*801Trustee attempts to fractionalize the amount of taxes owed on property previously owned by SCE and property previously owned by Debtor. (Doc. 34.) This attempt is done based on an evidentiary record void of exact values of the assets involved. Further, Debtor sold the personal property to Sneakers and now claims taxes paid on that property constitutes a preference payment.7 Additionally, Pratt testified that the 1997 personal property tax bill was not due until after Sneakers purchased Debtor’s assets and SCE never credited Debtor’s account for Sneakers’ payment of those taxes. Again, the preponderance of the evidence before the Court does not support the Trustee’s position that the taxes paid constitute a preference.
CONCLUSION
Trustee claims that the additional $50,-000.00 paid under the actual bill of sale was done due to SCE’s concern for a possible preference action. However, the evidence shows that the value of equipment purchased by Sneakers from SCE under the bill of sale far exceeded the actual purchase price of $100,000.00. Trustee presented no evidence contradicting the value of what Sneakers purchased. Rather, Trustee relied on the initial lease agreement to support his accusation that the additional $50,000.00 payment to SCE was made on behalf of Debtor. The evidence does not support Trustee’s preference claims on any of the payments made by Sneakers to SCE.
The Court finds that Debtor did not have legal or equitable interests in the payments made by Sneakers to SCE as of the commencement of the case. Having determined that these transfers were not of an interest of the debtor in property, the Court will not fully address other elements required for an avoidable preference. However, the Court finds that the evidence presented and relied upon in reaching this decision does not support Trustee’s claim that payment was made on account of an antecedent debt.
A Separate order will be entered in accordance with the foregoing.
. Debtor and SCE entered two leases. (PL's Ex. 17 & 18). The first lease was signed on December 12, 1995 by Berlin as President of Debtor and individually guaranteed by O’Donnell. On April 24, 1996, a second lease was signed by O'Donnell, as Vice-President and Secretary of Debtor, and had no guarantor.
. Patricia C. Luten, who works in property management accounting and handles receivables for Sleiman Enterprises, owner of SCE, testified that charges to Debtor were written off by SCE. Mrs. Luten said the reasons for writing off this debt was that every check that Debtor gave to SCE for the ten months preceding the sale to Sneakers had bounced. She said SCE had incurred numerous charges due to Debtor's insufficient funds. She testified that Berlin told her O’Donnell was in South Florida and had filed his own bankruptcy case. Mrs. Luten claimed that SCE did not file a proof of claim in this case nor try to collect back rent for the reason that Debtor had nothing to collect.
. On November 6, 1997, Debtor owed SCE $89,-915.47. (Pl.'s Ex. 20.) This debt consisted of $57,151.68 in past due rent, $9,772.11 for 1996 tangible personal property taxes, and $7,565.78 for 1997 tangible personal property taxes. Credited against this amount was Debtor's deposit in the amount of $9,242.59.
. Paragraph 1 of this letter provided that Pratt would pay Berlin $140,000.00 for all the assets, tangible and intangible, connected with Debtor. Pratt would also pay for the assessed value of inventory up to $10,000.00. Paragraph 2 set out that Berlin would retain all debts and obligations that Debtor accrued prior to settlement.
. Schedule B is an eleven page long list of Debt- or's leased assets, which included restaurant hardware, video equipment including over thirty televisions, computer equipment, video games, and a pool table. In a separate transaction Sneakers purchased all of these previously leased assets from SCE.
. The initial lease agreement between SCE and Sneakers excluded walk-ins, bars, HVAC systems, hoods/fire suppression and other built in fixtures or equipment. (PL's Ex. 5.) The actual Bill of Sale included these items. (PL's Ex. 10.)
. Debtor represented to Sneakers in their agreement that the 1996 and 1997 taxes would be paid out of the $100,000.00 purchase price that Sneakers paid to Debtor. (Doc. 34.) Trustee’s evidentiary use of this agreement is somewhat hypocritical. In one sense Trustee characterizes Debtor’s agreement with Sneakers as proof that the $50,000.00 payment in question was a preference. However, Trustee does not stress that the same agreement provides Debtor’s responsibility to make tax payments from money paid to Debt- or by Sneakers. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492830/ | MEMORANDUM OPINION AND DECISION
RICHARD L. SPEER, Chief Judge.
This cause comes before the Court upon the parties’ respective Motions for Summary Judgment and Replies. This Court has reviewed the arguments of counsel, exhibits, and the entire record of the case. Based upon that review, and for the following reasons, the Court finds that Plaintiffs debt to Defendant is Dischargeable.
FACTS
Along with its Motion for Summary Judgment, the Plaintiff has provided the Affidavit of Nancy VandeKieft, who was employed as “Administrative Assistant, Admissions— Adult Services” at Defendant, Spring Arbor College, (hereafter “Spring Arbor”). The following facts which follow are taken from this affidavit.
Spring Arbor is a four year liberal arts college with its main campus located in Spring Arbor, Michigan. Plaintiff, Michael Feyes, enrolled and began classes at Spring Arbor on May 23, 1994. Pursuant to Spring Arbor’s enrollment process, Mr. Feyes attended an orientation-like “convocation” meeting on the first night of class. At the meeting, Mr. Feyes completed a document entitled “Payment Plan Worksheet.” This worksheet detailed the charges and estimated assistance for Mr. Feyes’ first two semesters. These charges total Four Thousand Eight Hundred Eighty-nine Dollars ($4,889.00) for the first semester, and Four Thousand Two Hundred Ninety-one Dollars ($4,291.00) for the second. The worksheet also contains boxes wherein Mr. Feyes was to choose either a monthly payment plan, or a semester payment plan. Mr. Feyes checked neither. The worksheet also contained the following language at the bottom, “I understand that I am responsible for all tuition, books, and fees not covered by financial assistance.” Mr. Feyes signed and dated the worksheet in the provided spaces.
Mr. Feyes subsequently withdrew from classes in the spring semester of 1994. He then enrolled and participated in classes in the fall semester of 1994. Mr. Feyes again enrolled in classes in the fall semester of 1995. Consequently, Mr. Feyes was charged for the tuition and related expenses for that semester, totaling Four Thousand Three Hundred Seventy-five Dollars ($4,375.00). It is these fees which remain unpaid and are at issue in this ease. As Ms. VandeKieft continues to explain in her affidavit:
Spring Arbor College does not require full payment before enrollment or commencement of classes where the Payment Plan Worksheet is previously signed, as in Mr. Feyes’s case. Often times, the full extent of financial aid available and payable from other sources is not known and/or paid until later, and Spring Arbor extends credit to students to permit enrollment and participation in classes pending payment from other sources, when available, or from the student’s own resources. This was the situation for Mr. Feyes with respect to expenses incurred for the semesters prior to Fall 1995.
Mr. Feyes brought the present adversary proceeding seeking a determination of the dischargeability of the Fall 1995 fees under § 523(a)(8) of the Bankruptcy Code.
STATUTE
The Bankruptcy Code, Title 11 of the United States Code, provides in pertinent part: 11 U.S.C. § 523. Exceptions to Discharge
(a) A discharge under section 727, 1141, 1228[a] 1228(b), or 1328(b) of this section does not discharge an individual debtor from any debt—
(8) for an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship, or stipend, unless—
(A) such loan, benefit, scholarship, or stipend overpayment first came due before more than 7 years (exclusive of any applicable suspension of the re*889payment period) before the date of the filing of the petition; or
(B) excepting such debt from discharge under this paragraph will impose undue hardship on the debtor and the debtor’s dependents.
DISCUSSION
Determinations as to the dischargeability of particular debts are core proceedings pursuant to 28 U.S.C. § 157. Thus, this case is a core proceeding.
This cause comes before the Court upon the parties’ respective Motions for Summary Judgment and Replies. A movant will prevail on a Motion for 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 a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 817, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986), Fed.R.Civ.P. 56(c), Fed. R.Bankr.P. 7056. In order to prevail, the movant must demonstrate all elements of the cause of action. R.E. Cruise, Inc. v. Bruggeman, 508 F.2d 415, 416 (6th Cir.1975). Thereafter, the opposing party must set forth specific facts showing there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). Inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). See also In re Bell, 181 B.R. 311 (Bankr.N.D.Ohio 1995).
As, Defendant contends, In re Merchant, 958 F.2d 738 (6th Cir.1992) is the controlling law in this case. In Merchant, the issue before the Court was whether credit extensions in favor of the debtor as evidenced by promissory notes payable to a university were beyond the scope of “loan” as the term is used in § 523(a)(8) of the Bankruptcy Code. The Court explained and held:
The term “loan” is not defined in the Bankruptcy Code; therefore, the court must infer that Congress intended for the term “loan” to be construed in the accordance with its established meaning. NLRB v. Amax Coal Co., 453 U.S. 322, 329, 101 S.Ct. 2789, 2793, 69 L.Ed.2d 672 (1981). While this Circuit has not defined the term “loan” other circuits have adopted the following definition:
[A] contract whereby, in substance one party transfers to the other party a sum of money which that other agrees to repay absolutely, together with such additional sums as may be agreed upon for its use. If such be the intent of the parties, the transaction will be considered a loan without regard to its form.
In re Grand Union Co., 219 F. 353 (2nd Cir.1914). See also United States Dept. of Health and Human Services v. Smith, 807 F.2d 122, 124 (8th Cir.1986); Calcasieu-Marine National Bank of Lake Charles v. American Employers’ Insurance Co., 533 F.2d 290, 296-97 (5th Cir.1976) (using Grand Union’s “classic definition of a loan”).
Notwithstanding this broad definition, both the district court and the bankruptcy court determined that the University’s credit extension was not within the 11 U.S.C. § 523(a)(8) exception to discharge.
The district court and bankruptcy courts rejected the reasoning of In re Hill, 44 B.R. 645 (Bankr.D.Mass.1984). The Hill court found that the term “loan” under section 523(a)(8) included extensions of credit when the following factors are present: (1) the student was aware of the credit extension and acknowledges the money owed; (2) the amount owed was liquidated; and (3) the extended credit was defined as “a sum of money due to a person”. We find the Hill analysis persuasive.[FN2]
[FN2] This is further supported by In re Shipman, 33 B.R. 80 (Bankr.W.D.Mo.1983), which held that the “central issue in determining dischargeability is whether the funds were for educational purposes, not whether the funds constituted a loan.”
In this case [the debtor] signed forms evidencing the amount of her indebtedness before she registered for classes. She re*890ceived her education from the University by agreeing to pay these sums of money owed for educational expenses after graduation. The credit extensions were loans for educational expenses.
Following the Hill analysis we hold the credit extensions are not dischargeable under 11 U.S.C. § 523(a)(8).
958 F.2d at 740-741.
Mr. Feyes makes two arguments that the debt at issue is dischargeable. First, he argues that Spring Arbor is not a nonprofit institution. However, along with its reply Spring Arbor attached proof of certification as a nonprofit corporation, refuting this argument. Mr. Feyes second and primary argument focuses on the fact that there was no promissory note signed in this case. Indeed, even the worksheet upon which Spring Arbor relies only related to 1994 tuition and fees, not the 1995 charges that are at issue in this ease.
Applying Merchant, this Court finds that the debt at issue was not a “loan” as the term was intended in § 523(a)(8). While the Merchant court noted the broad definition of the term, it nevertheless chose to articulate three factors to determine when an extension of credit is a “loan” per § 523(a)(8). One of those terms was that the amount owed should be liquidated. There is no indication in the record that there was an understanding of a liquidated amount between the parties as to the fees for the 1995 fall semester. Spring Arbor’s worksheet does not detail tuition for this period. Had Spring Arbor been asserting a claim for the 1994 fees, perhaps the outcome would be different. However, there was no signed document or express agreement as to these particular fees. It is also important that in the Merchant court’s holding, it stressed the fact that the debtor had signed forms evidencing the amount of her indebtedness, and that (like a regular student loan) she received her education by agreeing to pay these sums after graduation.
In its argument, Spring Arbor places great reliance on In re Hill, 44 B.R. 645 (Bankr.D.Mass.1984). It is true that the court in Merchant expressly followed Hill (though the factors articulated by the court in Merchant were not expressly articulated in Hill). However, a close reading of Hill does not support Spring Arbor’s position. In Hill, the student had been going through the registration process, but was.told that he could not register for classes because his tuition was unpaid. He produced a loan application that had been initially approved by a bank, but was told this was insufficient. He relayed the situation to his ice hockey coach, who arranged that the debtor could register as a “R + 30”, that is, his registration would be open for thirty days. After the thirty days expired, his status was “arranged.” By the time his loan finally came through, the debt- or had just been suspended from school on account of poor grades. The debtor then chose to use his loan proceeds at another institution. 44 B.R. at 646.
In holding that this was a “loan” pursuant to § 523(a)(8), it was important to the Hill court that:
The debtor was well aware of the fact, and in fact acknowledged as he had to, that on registration he owed [the University] $2,500 for tuition. Indeed, until he was put on academic suspension, it was his intention to pay the University the proceeds of the [loan] when received. He was well aware of the terms of the loan. He was being extended credit, namely, the cost of tuition, without interest, to be paid as soon as he received the proceeds of his student loan. The amount was certain.
44 B.R. at 647 (emphasis added). Thus, it was the fact that there had been this express and particular arrangement between the university and the debtor as to this particular extension of credit that was important to the Court in Hill. The credit extension was arranged around waiting for the particular loan proceeds at issue in that case to be applied against the particular fees in that case. There was clearly an express, albeit oral, agreement as to this particular transaction. Finally, the amount of the fees was certain and expressly agreed upon.
In the case at bar, there is simply no indication in the record as to a particular arrangement as to the fall of 1995 fees. Again, were Spring Arbor pursing a claim for *891the 1994 fees which were expressly acknowledged on the worksheet, perhaps the outcome would be different. However, it simply appears that by the fall of 1995 Spring Arbor was no longer making a specific “loan,” but was simply letting Mr. Feyes incur indebtedness on a credit basis, to be repaid when he could. This situation is no different than that of other unsecured creditors. As the Merchant Court acknowledged, “Congress elected to exclude certain obligations from the general policy of discharge based upon the conclusion that the public policy in issue, availability and solvency of educational loan programs for students, outweighs the debt- or’s need for a fresh start.” 958 F.2d at 740. There was simply no educational loan program at issue here. Rather, Spring Arbor simply chose not to charge for the services provided until after the services were rendered. If Congress had intended to make all debts for educational purposes nondischargeable, it could have done so. Instead, it chose only to exclude educational loans (or certain overpayments) from discharge.
There was yet another case cited by the Court in Merchant which needs to be mentioned. In footnote 2, the court cited In re Shipman, 38 B.R. 80 (Bankr.W.D.Mo.1983) for support and for the holding that the “central issue ... is whether the funds were for educational purposes, not whether the funds constituted a loan.” A closer review of this case reveals that it also does not support Spring Arbor’s position. First, the Shipman court noted that the exception to discharge for student loan debts was created in reaction to the millions of dollars being lost annually through the default and discharge of federally guaranteed student loans. Id. at 82. Thus, the portion of the sentence just before the portion quoted by the court in Merchant was, “[t]his direct link to the federal education statute is an excellent indication that the central issue ...” Id. In Ship-man, the loan at issue originated from a work-study program with the Missouri Department of Mental Health. The court looked to the particular aspects of the particular loan, and found that it did not qualify as a “loan” per § 523(a)(8). Id. at 82.
Similarly, the debt at issue here does not relate to the type of educational “loan” intended to be within the scope of § 523(a)(8). Again, if Congress had wished to make all debts to institutions of higher education non-dischargeable, it could have. Rather, Congress had something more particular in mind. It wished to insure the solvency of student loan programs. While it is also clear that Congress intended this protection to apply to any education loan program (not just federal ones, or they would have said that too), there is no such program at stake here. Spring Arbor simply let Mr. Feyes attend classes in the fall of 1995 -without first paying for them. The rule articulated in Merchant requiring at least a liquidation of the credit extended, is among the more broad holdings on the issue. (See In re Johnson, 218 B.R. 449 (8th Cir. BAP 1998) for a review of various interpretations of the word “loan”.) However, Spring Arbor’s policy of allowing students to attend classes without signing any loan documentation pertaining to a liquidated amount (at least after their first year), is even beyond this broad scope. Indeed, the position Spring Arbor now advances would in effect give any educational debt to an educational institution blanket nondischargeability. This is simply not what Congress provided for in § 523(a)(8).
For all these reasons, this Court finds that the debt at issue is dischargeable. In reaching the conclusion found herein, the Court has considered all of the evidence, exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in this Opinion.
Accordingly, it is
ORDERED that Defendant Spring Arbor College’s Motion for Summary Judgment be, and is hereby, DENIED, that Plaintiff Michael David Feyes’ Motion for Summary Judgment be, and is hereby, GRANTED, and that it is hereby determined that the debt at issue be, and is hereby, DIS-CHARGEABLE. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492831/ | OPINION
RYAN, Bankruptcy Judge.
Chapter 13 debtor Raymond Cervantes (“Debtor”) filed a complaint (the “Complaint”) to determine the dischargeability of his child support obligations owed to creditor Santa Cruz County (“County”). The bankruptcy court held that the support arrearag-es that accrued after the entry of a state court paternity and child support judgment (the “Judgment”) were nondischargeable, but that the support arrearages that were assigned to County as a condition of receiving public assistance prior to entry of the Judgment were dischargeable. With respect to the pre-Judgment support arrearages, the bankruptcy court held that the nondischarge-ability provisions of Bankruptcy Code (the “Code”)1 §§ 523(a)(5) and 1328(a) did not apply.
County appeals that portion of the order for summary judgment providing that preJudgment support arrearages assigned to County were dischargeable. We AFFIRM.
I. FACTS
The stipulated facts set forth in the bankruptcy court’s published decision, Cervantes v. Santa Cruz County (In re Cervantes), 212 B.R. 643 (Bankr.N.D.Cal.1997), are summarized below. In March 1993, Monica Samu-dio applied for Ad to Families with Dependent Children (“AFDC”) on behalf of her minor daughter, Samantha Cervantes. As a condition for receiving AFDC, Monica assigned to County all rights to support from Debtor that she had on behalf of herself or Samantha pursuant to California Welfare and Institutions Code (“CW & IC”) § 11477 and the Social Security Act, 42 U.S.C. § 602(a)(26)(A). At that time, Samantha’s paternity had not been legally established.
In October 1994, County obtained the Judgment against Debtor in state court. The state court ordered Debtor to make prospective child support payments in the amount of $219 per month (the “post-Judgment arrearages”) and to reimburse County $4,161 for child support arrearages covering the period from March 1993 through September 1994 (the “pre-Judgment arrearages”).
On September 11, 1996, Debtor filed a chapter 13 bankruptcy petition. County subsequently filed the Complaint to determine the dischargeability of the pre- and post-judgment arrearages under § 523(a)(5). Both parties filed cross motions for summary judgment. The bankruptcy court held that the post-judgment arrearages were nondis-chargeable under § 523(a)(5). However, the court held that the pre-Judgment arrearages owed to County were dischargeable because neither Monica nor Samantha had any accrued rights to assign prior to the entry of the Judgment. See Cervantes, 212 B.R. at 647-48. County filed a timely notice of appeal of the order on cross motions for summary judgment (the “Order”). County appeals that portion of the Order holding that the pre-Judgment arrearages were dis-chargeable.
*21II.ISSUES2
A. Whether the bankruptcy court erred when it refused to discharge the pre-Judgment arrearages under § 523(a)(5)(A).
B. Whether a nondischargeable debt under § 523(a)(18) is dischargeable in chapter 13.
III.STANDARD OF REVIEW
We review issues of statutory interpretation, which are questions of law, de novo. See County of El Dorado v. Crouch (In re Crouch), 199 B.R. 690, 691 (9th Cir. BAP 1996).
Similarly, we review rulings on summary judgment de novo. See Bank of Los Angeles v. Official PACA Creditors’ Comm. (In re Southland + Keystone), 132 B.R. 632, 637 (9th Cir. BAP 1991).
IV.DISCUSSION
County argues that the bankruptcy court erred in determining that the pre-Judgment arrearages were dischargeable because the 1991 amendment to CW & IC § 11350 gave Monica and Samantha a right to support for the period preceding the date that the Judgment was entered, and thus, the assignment of this right to County was valid and nondis-chargeable under § 523(a)(5)(A). Additionally, County asserts that Congress’s failure to include debts of a kind described in § 523(a)(18) in the nondisehargeability provision of chapter 13 was inadvertent, and thus, such debts should be nondischargeable in a chapter 13 plan.
A. The Bankruptcy Court Did Not Err In Holding That The Pre-Judgment Ar-rearages Were Not Excluded From Discharge Under § 523(a)(5)(A).
The bankruptcy court held that the preJudgment arrearages did not fall within the exception to discharge provided for under § 523(a)(5)(A). The version of § 523(a)(5)(A) that applies to this case provides in pertinent part:
A discharge under section ... 1328(b) of this title does not discharge an individual debtor from any debt—
(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record ... but not to the extent that—
(A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section I02(a)(26) of the Social Security Act [1*2 U.S.C. § 602(a) (26) ], or any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State).
11 U.S.C. § 523(a)(5)(A)(1995) (emphasis added).3
As the emphasized language indicates, if a debt for alimony or support of a spouse or child of the debtor is assigned to another entity, the debt is dischargeable, unless the debt is assigned pursuant to 42 *22U.S.C. § 602(a)(26). See 11 U.S.C. § 523(a)(5)(A); Visness v. Contra Costa County, 57 F.3d 775, 776-(9th Cir.1995), cert. denied, 516 U.S. 1099, 116 S.Ct. 828, 133 L.Ed.2d 770 (1996). Under 42 U.S.C. § 602(a)(26),4 a state participating in the AFDC program must condition eligibility for AFDC aid on an applicant’s assignment to the state of any support rights which have accrued at the time such assignment is executed. See Visness, 57 F.3d at 776 (citing 42 U.S.C. § 602(a)(26)).5 These assigned support rights become an obligation owed to the state by the individual responsible for support. See 42 U.S.C. § 656(a)(1995).
In Visness, a case involving facts virtually identical to the facts here, the Ninth Circuit held that a debt, established by a county under CW & IC § 11350 and assigned under 42 U.S.C. § 602(a)(26) and California’s implementing statute, CW & IC 11477(a), was nondischargeable under § 523(a)(5)(A) only if the debtor’s child, spouse, or former spouse had accrued support rights at the time of the assignment. See Visness, 57 F.3d at 778, 780-81 (citing County of Santa Clara v. Ramirez (In re Ramirez), 795 F.2d 1494, 1496-98 (9th Cir.1986), cert. denied, 481 U.S. 1003, 107 S.Ct. 1624, 95 L.Ed.2d 198 (1987)). The Visness court, reaffirming the Ramirez holding, concluded that support rights do not accrue in favor of a child under California law and are not assignable “until a court decree or agreement establishes the noncustodial parent’s support duty.” Id. at 779 (citing Ramirez, 795 F.2d at 1497, 1498 n. 3).6 Because the assignment occurred before the debtor’s parental support obligations were established under California law, the debt did not represent an assignment of rights that had accrued to a “spouse, former spouse, or child of the debtor.” Id. at 780-81. Consequently, the court held that the debt was not excluded from discharge under § 523(a)(5)(A). Id.
The 1991 Amendment To CW & IC § 11350 Is Irrelevant To The Facts Of This Case.
County argued before the bankruptcy court that the 1991 amendment to CW & IC § 11350 eliminated the conceptual foundation of Visness — that under California law, a custodial parent and child did not have a right to *23support that could be assigned prior to the date a support order was obtained. The bankruptcy court rejected County’s argument and held: (1) the amendment to CW & IC § 11350 did not cause the pre-Judgment arrearages to be a debt owed to a spouse, former spouse, or child of the debtor as required by § 523(a)(5); and (2) CW & IC § 11350 did not provide for retroactive assignment of support rights.7 See Cervantes, 212 B.R. at 648.
In 1991, the California legislature amended CW & IC § 11350 to provide as follows:
(a) In any case of separation or desertion of a parent or parents from a child or children which results in aid under this chapter being granted to that family, the noncustodial parent or parents shall be obligated to the county for an amount equal to the following:
(1) The amount specified in an order for the support and maintenance of such family issued by a court of competent jurisdiction; or in the absence of such court order, the amount specified in paragraph (2).
(2) The amount of support which would have been specified in an order for the support and maintenance of the family during the period of separation or desertion provided that any such amount in excess of the aid paid to the family shall not be retained by the county, but disbursed to the family ....
Cal. Welf. & Inst. Code § 11350(a)(West Supp.l998)(emphasis added).8 As County correctly notes, the Ninth Circuit in Visness did not address the change in CW & IC § 11350.
County contends that the 1991 amendment to CW & IC § 11350 provided the custodial parent and child “with new and significant statutory rights to support, defined as the amount of support (money) which would have been ordered pursuant to the California child support guideline from the date of separation of the noncustodial parent from his child.” Appellant’s Reply Br. 6 (citing Cal. Welf. & Inst. Code § 11350(a)(2)). Thus, according to County, because the custodial parent and child now have a right to support before the date a support order is obtained, such right accrues on the date that the noncustodial parent separated from the child and can be assigned to County. We reject County’s argument because the 1991 amendment to CW & IC § 11350 is irrelevant to the issue before us.
The 1991 amendment to CW & IC § 11350 changed the amount of support that a noncustodial parent owes the county in the absence of a court order. See Cal. Welf. & Inst. Code § 11350(a)(1). Here, a child support order was entered. Under both versions of CW & IC § 11350, the noncustodial spouse is obligated to the county for “[t]he amount specified in an order for the support and maintenance of such family issued by a court of competent jurisdiction.” Cal. Welf. & Inst. Code § 11350(a)(1) (West Supp.1998); Cal. Welf. & Inst. Code § 11350(a) (West 1991). Thus, the amount owed by Debtor to County falls under CW & IC § 11350(a)(1), whieh is identical to CW & IC § 11350(a) as it existed prior to the amendment. In consequence, the amendment to CW & IC § 11350 does not affect the outcome of this proceeding, and we are bound by the Ninth Circuit’s determination that a custodial parent’s or child’s right to support does not accrue until a court order establishing a support obligation is entered. See Visness, 57 F.3d at 779-81 (and California cases cited therein); *24Ramirez, 795 F.2d at 1497, 1498 n. 3 (and California cases cited therein).
Additionally, CW & IC § 11350(a)(2) cannot be used to collaterally attack a court order establishing the amount of child support owed to a county by a noncustodial parent. As previously stated, the calculation of the amount of support specified in CW & IC § 11350(a)(2) only applies in the absence of a court order. To permit County to fix the amount owed by the noncustodial spouse pursuant to CW & IC § 11350(a)(2) after the Judgment had been entered would effectively circumvent the binding effect of the Judgment. The California legislature clearly intended to set the amount owed to a county under CW & IC § 11350(a)(2) only in cases where there is no child support order. Consequently, the amendment to CW & IC § 11350 did not give Samantha or Monica accrued support rights beyond the Judgment and applicable California law.9
B. The Bankruptcy Court Did Not Err In Determining That The Addition Of § 523(a) (18) By The 1996 Welfare Reform Act Did Not Make The Pre-Judgment Support Arrearages Nondis-chargeable In Chapter 13.
County argues that the bankruptcy court erred in concluding that § 523(a)(18), which makes a debt “in the nature of support” and “enforceable under Part D of title IV of the Social Security Act (42 U.S.C. 601 et. seq.)” nondischargeable, did not apply in chapter 13 cases. County further asserts that Congress’s failure to include § 523(a)(18) in the nondischargeability provision of chapter 13 was inadvertent and that Congress clearly intended to make all debts in the nature of support owed to a state or municipality under the Social Security Act nondischargeable throughout the Code, including chapter 13.
The bankruptcy court rejected County’s argument after concluding that “had [Congress] intended to make debts under Code § 523(a)(18) nondischargeable in Chapter 13 cases, it would have added § 523(a)(18) as an exception to a debtor’s ‘superdischarge’ under § 1328(a), as it did, for example, with § 523(a)(5).” Cervantes, 212 B.R. at 648. We adopt the bankruptcy court’s reasoning and conclude that the pre-Judgment arrear-ages are dischargeable in chapter 13.
CONCLUSION
In sum, the bankruptcy court, following Visness, correctly held that the pre-Judgment arrearages were not excluded from discharge under § 523(a)(5)(A) despite the 1991 amendment to CW & IC § 11350. The amendment to § 11350 is irrelevant here because the state court entered an order establishing Debtor’s child support obligations. Thus, the assignment prior to the entry of the Judgment did not convey to County any “accrued” rights as required by 42 U.S.C. § 602(a)(26) and § 523(a)(5)(A).
In addition, the bankruptcy court correctly determined that § 523(a)(18) did not cause the pre-Judgment arrearages to be nondis-chargeable in the chapter 13 case.
Accordingly, we AFFIRM.
. The Code is set forth in 11 U.S.C. §§ 101-1330 (1998).
. County raises an additional argument for the first time on appeal that the nondisehargeability provision of 42 U.S.C. § 656(b) is an independent nondisehargeability provision that trumps the nondisehargeability provision of § 1328(a). Although County quoted 42 U.S.C. § 656(b) together with § 523(a)(5)(A) for the proposition that assigned support arrearages were nondis-chargeable, County did not assert that 42 U.S.C. § 656(b) provided an independent basis for non-dischargeability that trumps § 1328(a). In addition, neither party referred to 42 U.S.C. § 656(b) as a basis for nondisehargeability at the April 24, 1997 hearing on the cross motions for summary judgment. Furthermore, the bankruptcy court’s opinion does not address this argument. We will not consider issues raised for the first time on appeal. See Concrete Equip., Co. v. Fox (In re Vigil Bros. Constr., Inc.), 193 B.R. 513, 520 (9th Cir. BAP 1996).
. On August 22, 1996, Congress deleted the reference in § 523(a)(5) to "section 402(a)(26)” of the Social Security Act and inserted “section 408(a)(3)’' of the Social Security Act. See Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Pub.L. No. 104-193 (Aug. 22, 1996). However, the amendments to § 402(a)(26) of the Social Security Act (42 U.S.C. § 602(a)(26)), and to section 408(a)(3) of the Social Security Act (42 U.S.C. § 608(a)(3)), did not become effective until July 1, 1997 — after Debtor filed his bankruptcy petition. Thus, we do not decide the effect of these amendments on § 523(a)(5)(A) in this case.
. Section 602(a)(26) provides in pertinent part:
A State plan for aid and services to needy families with children must ... provide that, as a condition of eligibility for aid, each applicant or recipient will be required ... to assign the State any rights to support from any other person such applicant may have (i) in his own behalf or in behalf of any other family member for whom the applicant is applying for or receiving aid, and (ii) which have accrued at the time such assignment is executed.
42 U.S.C. § 602(a)(26)(1995)(emphasis added).
. California has implemented the directives set forth in 42 U.S.C. § 602(a)(26) by passing CW & IC § 11477(a), which requires the AFDC applicant to assign all "accrued” support rights to the state. See Cal. Welf. & Inst. Code § 11350 (West Supp.1998).
. We note that California Family Code § 4009 provides that "[a]n order for child support may be made retroactive to the date of filing the notice of motion or order to show cause, or any subsequent date, or any subsequent date, except as provided by federal law....” Cal. Fam. Code § 4009 (West 1994)(emjphasis added). In 1992, this statute repealed and superceded California Civil Code § 4700(a), which was substantively identical to California Family Code § 4009. See County of Santa Clara v. Perry, 18 Cal. 4th 435, 75 Cal.Rptr.2d 738, 956 P.2d 1191, 1195 (Cal.1998).
Although the Ninth Circuit in Visness cited In re Marriage of Goosmann, 26 Cal.App.4th 838, 844, 31 Cal.Rptr.2d 613 (1994), for the longstanding general rule in California that an order for child support operates prospectively, see Visness, 57 F.3d at 779, it did not address Marriage of Goosmann's holding that an original child support order could operate retroactively if the party seeking child support makes a formal request in a notice of motion or order to show cause. See Marriage of Goosmann, 26 Cal.App.4th at 843-45, 31 Cal.Rptr.2d 613 (citing Former Cal Fam. Code § 4007(a)).
Similarly, we need not consider the effect of California Family Code § 4009 because neither party raised this issue before the trial court or on appeal and there is no evidence in the record that a formal notice of motion or order to show cause was filed. See Perry, 75 Cal.Rptr.2d 738, 956 P.2d at 1194-98 (holding that child support can only be made retroactive to the filing of the notice of motion for judgment or order to show cause, and not to the filing of the original complaint); Marriage of Goosmann, 26 Cal.App.4th at 845, 31 Cal.Rptr.2d 613 ("The party seeking child support ... must make a formal request [for retroactive support] by procedurally correct means, and then the support order may be made retroactive to that proper formal request.”).
. County does not challenge the bankruptcy court’s finding that CW & IC § 11350 did not provide for retroactive support rights.
. Prior to the 1991 amendment, CW & IC § 11350 read in pertinent part:
In any case of separation or desertion of a parent or parents from a child or children which results in aid under this chapter being granted to such family, the noncustodial parent or parents shall be obligated to the county for an amount equal to:
(a) The amount specified in an order for the support and maintenance of such family issued by a court of competent jurisdiction; or in the absence of such court order,
(b) The amount of aid paid to the family during such period of separation or desertion limited by such parent’s reasonable ability to pay during that period in which aid was granted....
Cal. Welf. & Inst. Code § 11350 (West 1991).
. Because a support order was entered in this case establishing Debtor's liability to County for pre-Judgment arrearages, we do not reach the issue of whether the amended CW & IC § 11350(a)(2) undermines the Ninth Circuit’s holding in Visness when no support order as specified in CW & IC § 11350(a)(1) is entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492832/ | KLEIN, Bankruptcy Judge,
dissenting.
I dissent from the affirmance of the trial court’s summary judgment declaring that the $4,161 child support arrearage is discharged in bankruptcy because it was based on an inadequate summary judgment record and would remand for further proceedings.
While the trial court did an admirable job of analyzing a complex issue, the facts to which the parties stipulated in them cross-motions for summary judgment are inadequate to establish that either party is “entitled to a judgment as a matter of law” as required by Civil Rule 56(c). There is neither evidence establishing the terms of the assignment(s) executed by Monica Samudio nor evidence of when the child support action was filed in state court, without which it is impossible to apply the facts to the law.
*25My disagreement with the majority ultimately revolves about our differing perceptions of the assignments in question. I see them as contracts and read the key decisions as being grounded on contractual analysis, while the majority assumes that they are made by operation of law.
Since case law emphasizes the importance of the precise terms of the assignment contracts, it is essential that the summary judgment record be supplemented to include the actual terms of the written assignments executed by Monica Samudio when she first applied for public assistance on March 18, 1993, and all others she executed before the child support judgment was entered by the state court on October 1994. It is also important to know when the state court action was actually filed because there is a California statute that permits otherwise prospective child support orders to relate back to the date the action is filed.
I
The answer to the question whether a debt assigned to a county in consequence of the federally-supported Aid to Families with Dependent Children (“AFDC”) program is nondischargeable in chapter 13 bankruptcies under 11 U.S.C. § 523(a)(5) or any other provision of law requires one to navigate a labyrinth of five different versions of Bankruptcy Code § 523(a)(5), two versions of the Social Security Act, two versions of California Welfare & Institutions Code § 11350, California Family Code § 4009, and the Ninth Circuit decisions in County of Santa Clara v. Ramirez (In re Ramirez), 795 F.2d 1494 (9th Cir.1986), and Visness v. Contra Costa County (In re Visness), 57 F.3d 775 (9th Cir.1995).
An inventory of the various versions of the statutes is essential.
A
11 U.S.C. § 523(a)(5)
The Bankruptcy Code’s primary nondis-chargeability provision relating to child support is § 523(a)(5). Child support debts that are excepted from discharge under § 523(a)(5) are also excepted from the chapter 13 discharge. 11 U.S.C. § 1328(a).
There have been five different versions of § 523(a)(5) since 1978.
1
Version I covered only support based on a separation agreement, divorce decree, or property settlement agreement and excluded all assigned debts. Only debts owed directly to the child or to the custodial parent would be excepted from discharge:
(a) A discharge ... does not discharge an individual debtor from any debt — ... (5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child in connection with a separation agreement, divorce decree, or property settlement agreement, but not to the extent that — (A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise; or (B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support;
11 U.S.C. § 523(a)(5) (1978 version).
2
Version II, enacted in 1981,10 carved out an exception to the exclusion of assigned debts to make nondischargeable those AFDC debts required to be assigned under now-former Social Security Act § 402(a)(26) (formerly codified at 42 U.S.C. § 602(a)(26)):
(a) A discharge ... does not discharge an individual debtor from any debt — •... (5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child in connection with a separation agreement, divorce decree, or property settlement agreement, but not to the extent that — (A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section h02(a)(26) of the Social Security Act); or (B) such debt includes a liability designated as alimony, maintenance, or *26support, unless such liability is actually in the nature of alimony, maintenance, or support;
11 U.S.C. § 523(a)(5) (1981 version).
This was the version that figured in the Ninth Circuit’s Ramirez decision.
3
Version III, enacted in 1984, made two changes. It added orders of courts of record as a qualifying source for nondischargeable support. And it added an additional exception to the assignment exclusion designed to cover any support debt assigned to a governmental entity:
(a) A discharge ... does not discharge an individual debtor from any debt — ... (5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child in connection with a separation agreement, divorce decree or other order of a court of record, or property settlement agreement, but not to the extent that — (A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section 402(a)(26) of the Social Security Act, or any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State); or (B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support;
11 U.S.C. § 523(a)(5) (1984 version).
4
Version IV, enacted in 1986, added certain nonjudicial support determinations as another source of a support obligation excepted from discharge:
(a) A discharge ... does not discharge an individual debtor from any debt — ... (5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit, property settlement agreement, but not to the extent that — (A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section 4.02(a) (26) of the Social Security Act, or any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State); or (B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support;
11 U.S.C. § 523(a)(5) (1986 version).
This was the version that figured in the Ninth Circuit’s Visness decision.
5
Version V, enacted in 1996, changed the cross-reference to the Social Security Act— from § 402(a)(26) to § 408(a)(3) — in order to mirror revisions to the Social Security Act. This version actually came in two phases because the amendment to § 523(a)(5) took effect on August 22, 1996, but new Social Security Act § 408(a)(3) did not take effect until July 1,1997:
(a) A discharge ... does not discharge an individual debtor from any debt — ... (5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit, property settlement agreement, but not to the extent that — (A) such debt is assigned to another entity,, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section 402(a)(26) 408(a)(3) of the Social Security Act, or any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State); or (B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support;
11 U.S.C. § 523(a)(5) (1996 version).
This appeal involves the first phase of this version, i.e. the period between August 22, *271996, and July 1, 1997, when the cross-reference to Social Security Act § 408(a)(3) was a reference to nothing.
B
Social Security Act Nondischargeability
An independent exception to discharge is buried in the Social Security Act. It requires that two sections be read together and has had two versions during the life of the Bankruptcy Code.
Until July 1, 1997, the pertinent sections were § 402(a)(26) relating to assignments and § 456(b):
§ 302(a)(26). [Every applicant for AFDC shall] assign the State any rights to support ... which have accrued at the time the assignment is executed.
42 U.S.C. § 602(a)(26) (repealed 1997) (emphasis supplied).
§ 456(b). A debt which is a child support obligation assigned to a State under section 402(a)(26) of this act is not released by a discharge in bankruptcy under Title 11.
42 U.S.C. § 656(b) (amended 1997).
This is the language that figured in the Ninth Circuit’s decisions in Ramirez and in Visness. And it applies in this appeal.
Effective July 1, 1997, the pertinent sections are § 408(a)(3) and § 456(b):
§ 408(a)(3). A State ... shall require, as a condition of providing assistance ..., that a member of the family assign to the State any rights the family member may have (on behalf of the family member or any other person for whom the family member has applied for or is receiving such assistance) to support from any person, not exceeding the total amount of assistance so provided to the family, which accrue (or have accrued) before the date the family leaves the program ....
42 U.S.C. § 608(a)(3)(A) (emphasis supplied).
§ 456(b). A debt (as defined in section 101 of title 11 of the United States Code) owed under State law to a State (as defined in such section) or municipality (as defined in such section) that is in the nature of support and that is enforceable under this part is not released by a discharge in bankruptcy under title 11 of the United States Code.
42 U.S.C. § 656(b).
C
California Welfare & Institutions Code § 11350
California Welfare & Institutions Code § 11350 deals with the obligation of noncustodial parents of children to reimburse counties for AFDC payments. It was amended effective January 1,1992.
Noncustodial parents must pay to the county either the amount of support specified in a court order or the sum specified in § 11350.
Before January 1, 1992, the required payment was:
[t]he amount of aid paid to the family during such period of separation or desertion limited by such parent’s reasonable ability to pay during that period in which aid was granted;
Cal. Welf. & Inst. Code § 11350(b) (West 1991).
Effective January 1,1992:
[t]he amount of support which would have been specified in an order for the support and maintenance of the family during the period of separation or desertion provided that any such amount in excess of the aid paid to the family shall not be retained by the county, but disbursed to the family;
Cal. Welf. & Inst. Code § 11350(a)(2) (West Supp.1998).
The ostensible reason for the amendment was an effort to deal with the manner in which Ramirez dealt with “accrual” of support rights.
D
California Family Code § 4-009
California Family Code § 4009, formerly California Civil Code § 4700, dealing with retroactivity of child support orders, has provided since January 1,1993, that:
*28An order for child support may be made retroactive to the date of filing the notice of motion or order to show cause, or any subsequent date, except as provided by federal law.
Cal. Fam. Code § 4009 (West 1994).
This provision squares with California de-cisional law. The leading California case is In re Marriage of Goosmann, 26 Cal.App.4th 838, 31 Cal.Rptr.2d 613 (Cal.Ct.App.1994). In that case, a retroactive child support award was reversed to the extent that it was retroactive to a date before the proceeding requesting child support was initiated. Thus, retroactivity was reduced from thirty-four months to ten months: “We hold that an original child support order may be retroactive only to the date of the filing of the motion for support or to the date of the order to show cause seeking child support. ” Goosmann, 26 Cal.App.4th at 839, 31 Cal.Rptr.2d 613.
II
The majority relies heavily on the Ninth Circuit’s Visness opinion. Visness, 57 F.3d 775. But the majority is not accurate when it says that Visness concluded that support rights “are not assignable ‘until a court decree or agreement establishes the noncustodial parent’s support duty.’” Rather, Visness holds that if one assigns rights that “have accrued” as of the date of the assignment, then nothing is assigned where all rights accrue after the date of the assignment.
As the Visness opinion is somewhat opaque and has proved confusing to litigants and courts, it is worth winnowing the holding from the dicta so that we can be precise about what propositions are settled by Visness.
A
Visness can only be understood against the backdrop of the Ninth Circuit’s earlier Ramirez decision. County of Santa Clara v. Ramirez (In re Ramirez), 795 F.2d 1494 (9th Cir.1986).
Ramirez addressed two independent theories of nondischargeability for child support — 11 U.S.C. § 523(a)(5) (Version II) and Social Security Act § 456(b) — and concluded that the AFDC reimbursement obligation was discharged.
The facts were straightforward. Mrs. Ramirez assigned child support rights in 1979. The county sued Mr. Ramirez in 1980 seeking AFDC reimbursement and a determination of future support obligations. The state court, in 1981, entered judgment requiring Mr. Ramirez to pay child support thenceforth and ordered him to reimburse the county for prior AFDC payments. Mr. Ramirez filed a chapter 7 bankruptcy in 1982 and prosecuted an adversary proceeding seeking a determination-that the AFDC reimbursement obligation was discharged.
1
The Ramirez theory of nondischargeability under 11 U.S.C. § 523(a)(5) involved version II of that statute, which is set forth in the margin.11
The § 523(a)(5) issue was easily resolved. The AFDC reimbursement obligation did not qualify for exception from discharge under § 523(a)(5) because there was neither a separation agreement, nor a divorce decree, nor a property settlement agreement as required by that section. Without one of those three items, there was no qualifying source for nondischargeable child support. The court order did not suffice. It was not until Version III (which had already been enacted at the time Ramirez was decided) that a court *29order qualified as a source for nondischargeable status.
2
After concluding that § 523(a)(5) did not except the debt from discharge, the Ninth Circuit also found it necessary to consider the separate nondischargeability provision at Social Security Act § 456(b). 42 U.S.C. 656(b).
An applicant for AFDC must execute an assignment that meets minimum standards specified in the Social Security Act, and the assigned debt is nondisehargeable in bankruptcy by virtue of Social Security Act § 456(b). The assignment requirement, until July 1, 1997, was an assignment of: “any rights to support ... which have accrued at the time the assignment is executed.” 42 U.S.C. § 602(a)(26) (repealed 1997) (emphasis supplied). In contrast, the new regime requires assignment of support rights that accrue before the family leaves the AFDC program.12
The Ninth Circuit treated Social Security Act § 456(b) as valid and proceeded with an analysis that hinged on a combination of contract and California law. In the end, it concluded that what Mrs. Ramirez had assigned was zero.
The Ramirez assignment, which merely parroted the statutory requirement (“rights to support ... which have accrued at the time the assignment is executed”) without including any broader assignment, was treated as a contract. The AFDC recipient is the assignor. The county is the assignee.
The question then shifted to identifying the rights to support that had already accrued when the assignment was executed.
The Ninth Circuit concluded that California law does not impose assignable child support rights against a noncustodial parent without a formal judicial determination. As the action against Mr. Ramirez seeking such a determination was not even filed until nine months after Mrs. Ramirez executed the assignment, what was assigned was — nothing.
The Ninth Circuit did not view the pre-1992 version of California Welfare & Institutions Code § 11350 as compelling a different result. It is a naked statutory command that the noncustodial parent pay the county the amount the county paid in aid. It exists regardless of whether anyone ever executes an assignment. It creates no right that the child or noncustodial parent could assign.
The assigned AFDC debt may have been excepted from discharge by virtue of Social Security Act § 656(b), but the assigned debt was zero.
B
Visness presented the same basic facts as Ramirez. AFDC assignments were made in 1984 and 1985, AFDC participation ended in September 1987, and a court order for future child support and for AFDC reimbursement was entered in November 1987. Bankruptcy was filed in 1992.
What had changed from the time of Ramirez was that version IV of § 523(a)(5) was effective, instead of version II. There were two pertinent changes.
First, court orders had been added as a qualifying source for nondisehargeable child support payments, thereby eliminating one of the barriers that had existed in Ramirez.
Second, there was an additional safe harbor to the exclusion of assigned support debts at § 523(a)(5)(A): “or any such debt which has been assigned to the Federal Government or to a State or political subdivision of such State”. While this swept in more than AFDC assignments, it still left the focus on assignments.
The Ninth Circuit applied the same contractual analysis as in Ramirez. It looked at the language of the contract assigning the *30rights, which contract continued to contain the AFDC minimum of support rights that “have accrued at the time” the assignment is executed. The question then became a quest to identify what, if anything, had accrued at the time of the final assignment in March 1985. California law still required formal judicial determination, which was not to come until November 1987. Hence, as in Ramirez, the answer was — nothing.
To be sure, the Visness decision was imprecise about describing the two distinct prongs of § 523(a)(5)(A) and omitted mention of Social Security Act § 456(b). That imprecision has made Visness difficult to read and has confused courts and litigants. But the Visness court did not need to be precise in this respect because all three nondischarge-ability theories require that there be contracts of assignment that actually assign something. Since no rights had accrued as of the date of executing a contract that purported to assign only those rights that have already accrued, nothing was assigned.
Thus, Visness and Ramirez both stand for the proposition that assignments are contracts to be analyzed according to their particular terms. In both cases, the assignment was only of rights that had accrued as of a particular date and no rights have accrued as of that date. Hence, nothing was assigned. If something actually had been assigned under the facts of Visness and Ramirez, then the results would have been different.
Ill
The majority overlooks much that has changed since the time of the operative facts in Ramirez and Visness.
A
By 1989, California was using a standard form contract of assignment that was considerably broader than the minimum required by the Social Security Act. The new form covered both AFDC and medical assistance under the Medi-Cal program and was not limited to rights that had accrued as of the date of its execution.
Rather than a single assignment at the outset of participation in the AFDC program, the aid recipient agrees in form CA 2.1 to make regular assignments in connection with receiving each check. Specifically, the operative language of assignment includes the recipient’s agreement that: “receipt of an AFDC check and/or a Medi-Cal card will assign the past and present support rights of all persons for whom [the recipient is] requesting AFDC and/or Medical Assistance.” Cal. Health & Welfare Agency, Dept, of Social Services Form 2.1 (12/89).
Under this contractual regime, the aid recipient agrees that each receipt — or more accurately, negotiation — of an AFDC check constitutes a separate assignment that sweeps in support rights accrued through that date.
This form assignment was being used in California counties in 1993 and 1994, which is the period that matters in this appeal. See Patterson v. County of El Dorado, Family Support Div., Findings of Fact and Conclusions of Law, at p. 2, Adv. No. 96-2402 (Bankr.E.D. Cal. filed March 25, 1997).
Without the actual terms of the assignment in the summary judgment record, it is impossible to make a determination that is faithful to Ramirez and Visness.
B
Child support obligations in California can accrue retroactively to fhe date that the action seeking support was filed. Cal. Family Code § 4009; In re Marriage of Goosmann, 26 Cal.App.4th 838, 31 Cal.Rptr.2d 613 (Cal.Ct.App.1994) (child support obligation retroactive to date of request to court).
Although there is some ambiguity in the current version of the statute, it is not clear that older decisions under predecessor statutes have lost all vitality when they were modernized. The leading treatise on California law continues to cite them with approval. Richter v. Superior Court, 214 Cal.App.2d 821, 29 Cal.Rptr. 826 (Cal.Ct.App.1963) (court has power to award support and costs from date of filing complaint in filiation proceeding), cited with approval, 10 B. Witiun, SUMMARY OF CALIFORNIA LAW: PARENT & Child §§ 406 & 429 (9th ed.1989); Kyne v. Kyne, 38 Cal.App.2d 122, 100 P.2d 806 (Cal.*31Ct.App.1940) (same), cited with approval, 10 B. WiTKiN, id. Nor have those decisions been repudiated.
The accurate statement of California law is: child support awards are presumptively prospective but can be made retroactive to the date the court is asked to award support.
The Visness court did not consider, and did not need to consider, Family Code § 4009 or its predecessors. No issue of retroactive accrual of child support was presented by the facts of those cases.
The majority cites Goosmann indirectly by citing the portion of Visness that relied on Goosmann as an authoritative statement of California law for the general rule that child support awards are to be prospective only. But the majority overlooks the fact that the actual holding in Goosmann approved a retroactive child support award in reliance on Family Code § 4009. Specifically, it reversed the portion of a trial court’s award that was retroactive to date before the request for child support was made to the court.
There was no need for the Ninth Circuit panel in Visness to discuss the actual holding in Goosmann because Visness did not present facts that could have been sufficiently retroactive to have accrued before the assignments were executed. The earliest possible retroactive date — -the date of filing the action seeking child support — was after the execution of an assignment that did not encompass subsequently accruing rights. Thus, it was immaterial to the Visness court whether the date of accrual was the date of commencing the child support action or the date of deciding it.
While I agree with the majority and the trial court that the 1991 amendment to California Welfare & Institutions Code § 11350 does not create an independent support right that can be assigned, the majority pushes Visness too far when it purports to exclude the possibility of a retroactive award of child support.
C
If the standard Form CA 2.1 was used to accomplish the assignment in this case, then the continuing monthly assignments would mesh with the retroactivity provision of Family Code § 4009 to capture the full amount of retroactive child support within the assignment.
For example, if monthly assignments are made in months 1-6 and in month 7 there is a child support award that is retroactive to month 2, then months 2 through 6 are covered by assignments.
IV
I also disagree with the majority about which exception to the anti-assignment clause of § 523(a)(5)(A) applies.
The anti-assignment clause of § 523(a)(5)(A) provides that otherwise non-dischargeable court-ordered child support is, with two exceptions, discharged if it is assigned. The two exceptions afford safe harbors to assigned debts.
The majority focuses upon the first exception: “debts assigned pursuant to section 402(a)(26) of the Social Security Act” are nevertheless excepted from discharge. And it ignores the second: “any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State.”
The majority ignores the second safe harbor, which is commodious enough to protect any contractual assignment of rights that is made to a county government. The key is to have an assignment that actually assigns something. The assignments in Ramirez and Visness purported to assign only such rights as already existed at a time when no such rights existed. A change in the terms of the assignments would have led to a different result.
There are different terms of assignment in the standard California Form CA 2.1. There is an assignment of future rights that is ordinarily enforceable. See TransWorld Airlines v. American Coupon Exchange, Inc., 913 F.2d 676, 685 (9th Cir.1990); Restatement^) of Contracts § 321; 1 B. Witkin, SUMMARY OF CALIFORNIA LAW: CONTRACTS §§ 921-25 (9th ed.1987). And there are continuing assignments that, particularly when *32taken in the context of Family Code § 4009, could also lead to a different conclusion.
We do not know precisely what form of assignment was actually executed by the custodial parent in this appeal. The majority and the trial court make the unwarranted assumption that it was the same contract of assignment as in Ramirez and Visness. Ignoring the second safe harbor is tantamount to erasing twenty-two words from the Bankruptcy Code. This we cannot do.
Y
It is apparent that there are omitted material facts in two respects. First, the assignments are not in the summary judgment record. Without the assignments, one cannot interpret the particular contracts to ascertain whether there ever was an assignment that applied to an actual child support order. Nor is there summary judgment evidence indicating when the child support action was filed or whether Family Code § 4009 is applicable.
Without the omitted material facts, it is impossible to determine that one of the parties is entitled to judgment as a matter of law as required by Rule 56(c).
Although the majority says that it will only consider arguments that are specifically presented by the parties, the inadequacy of the record is directly before us as we conduct our de novo review. One aspect of de novo review of a summary judgment is that we must determine for ourselves whether, based on the summary judgment record, a party is entitled to judgment as a matter of law as required by Rule 56(c). See Rano v. Sipa Press, Inc., 987 F.2d 580, 587 (9th Cir.1993). Based on this record, we lack information adequate to determine whether either party is entitled to judgment as a matter of law.
Moreover, the underlying issue is itself a question of law — the law requires a focus upon the terms of the actual assignment, without which it is impossible to resolve the matter.
The rule that an argument not raised below is waived is a rule of discretion, not a rule of appellate jurisdiction. E.g. 11 James wm. Moore, et al., MOORE’S FEDERAL PRACTICE 3d § 56.41[3][c] (1998). Exceptions are commonly made where, as here, the issue involves solely a question of law. Koehring Co. v. Nolden (In re Pacific Trencher & Equip., Inc.), 735 F.2d 362, 364 (9th Cir.1984); Telco Leasing v. Transwestem Title Co., 630 F.2d 691, 693 (9th Cir.1980). Exceptions are also made when, as here, injustice would result. Singleton v. Wulff, 428 U.S. 106, 120, 96 S.Ct. 2868, 49 L.Ed.2d 826 (1976); Donovan v. Crisostomo, 689 F.2d 869, 874 (9th Cir.1982).
Indeed, in a nearly-identical situation the Ninth Circuit has vacated and remanded a summary judgment (with apologies to the appellate court) because of a factual gap first identified on appeal. Roberts v. Hollandsworth, 582 F.2d 496, 499-500 (9th Cir.1978).13
I would vacate and remand for further proceedings.
Accordingly, I dissent.
. In this dissent, the different versions of the statute are indicated by different typefaces.
. Version II of § 523(a)(5) provided that the discharge:
(a) A discharge ... does not discharge an individual debtor from any debt — ... (5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child in connection with a separation agreement, divorce decree, or property settlement agreement, but not to the extent that — (A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section 402(a)(26) of the Social Security Act); or (B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in tire nature of alimony, maintenance, or support;
11 U.S.C. § 523(a)(5) (1981 version).
. The new provision is:
A State ... shall require, as a condition of providing assistance ..., that a member of the family assign to the State any rights the family member may have (on behalf of the family member or any other person for whom the family member has applied for or is receiving such assistance) to support from any person, not exceeding the total amount of assistance so provided to the family, which accrue (or have accrued) before the date the family leaves the program ....
42 U.S.C. § 608(a)(3)(A) (emphasis supplied).
. The Ninth Circuit noted:
Well knowing the exceptionally heavy burden placed on our trial judges, we recognize that they should not be required to act as counsel, as well as judges, and consequently, advance legal theories not mentioned nor pursued by the advocates. We at the appeal level, in our somewhat cloistered atmosphere, have a substantially better opportunity to study and analyze a problem such as here presented.
Roberts, 582 F.2d at 500. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492833/ | MEMORANDUM OPINION
DONALD R. SHARP, Chief Judge.
The Court has before it the question of the dismissal of the captioned related bankruptcy *125proceedings along with all attendant adversary proceedings in either case. This memorandum opinion deals with both of the above cited cases which were combined for hearing. Separate orders will be issued as to each case.
The hearing before the Court is actually a rehearing on the Court’s earlier order of dismissal. The history of this case is that Joseph A. Barbaria filed a Chapter 11 proceeding which was subsequently converted to Chapter 7 with the appointment of Mark Weisbart as Chapter 7 Trustee. During some of the contentious litigation involved in that case, a bankruptcy proceeding for the Barbaria Family Trust, a trust established by and controlled by Joseph A. Barbaria was filed. It is difficult to recite the history of this ease but it can safely be summed up in saying that no meaningful steps toward a reorganization in chapter 11 were ever accomplished and no meaningful steps toward collection and liquidation of a Chapter 7 estate have ever been accomplished. The heart of the dispute that first arose in the Chapter 11 proceeding was the ownership of a home in which Mr. Barbaria lives. The property, earlier stipulated to be worth $700,000.00, is a residence located in Plano, Texas. The mortgage indebtedness against the property is somewhere between $600,-000.00 and $650,000.00. By agreement of the parties, the stay was lifted while the Barba-ria case was still pending as a Chapter 11 and immediately litigation arose over attempts enjoin any foreclosure with the parties eventually working out various agreements which may or may not have been consummated at this time. It is clear there is no substantial equity in this property for the benefit of either the bankruptcy estate of the Barbaria Family Trust or Joseph A. Bar-baria depending on who the ultimate owner of the property might turn out to be.
It is undisputed that the principal creditor of Mr. Barbaria is the Internal Revenue Service. Evidence has established that Mr. Bar-baria apparently failed to file tax returns from sometime in the early 1980s through 1993 or 1994. At some point, apparently in 1993, the Internal Revenue Service instituted an “amnesty” program wherein parties who had failed to file tax returns were allowed to file with the understanding that criminal prosecution for failure to file would be waived. Mr. Barbaria took advantage of that window of opportunity and apparently filed ten or twelve years of delinquent tax returns resulting in a tax liability of about 1.2 million dollars. The dispute now centers over the Internal Revenue Service’s efforts to collect the tax liability.
This Court held numerous hearings in the bankruptcy proceeding of Joseph Barbaria both before it was converted and after conversion to Chapter 7 and at one point, orally expressed the opinion that the matter should probably be dismissed. This conclusion was prompted by several factors. First, it was apparent to the Court that no meaningful efforts were being made toward a reorganization of a debtor with an ongoing business; second, it was apparent that the only creditor taking an active interest in the case was the Internal Revenue Service so that this Court was essentially refereeing a two party dispute; and third, it was clear that Mr. Barba-ria had no intention of cooperating in a full disclosure of his assets or his income and was only using the bankruptcy process to thwart the Internal Revenue Service in its collection efforts. Mr. Barbaria was placed on the stand on at least three different occasions and consistently refused to answer any question beyond his name and address by invoking his Fifth Amendment privilege against self-incrimination. This Court certainly does not have any quarrel with Mr. Barbaria’s right to invoke his Fifth Amendment privilege against self-incrimination and does not attribute an inference of bad faith or bad motive on Mr. Barbaria’s part by virtue of his having invoked his constitutional right not to testify. What this Court did note, was that Mr. Barbaria’s refusal to testify along with the totality of the circumstances in this case made it clear that no meaningful bankruptcy reorganization or liquidation could take place. No creditor, other than the Internal Revenue Service, appeared in the action and all proceedings were nothing more than two party disputes between Mr. Barba-ria and the Internal Revenue Service which primarily centered around his failure to disclose information to them and their continued *126attempts to get him to answer questions under oath. None of the attempts were successful.
Motions to dismiss Barbaria’s case were filed by the Debtor and motions to dismiss the Trust case (later withdrawn) were filed by the Internal Revenue Service. This Court, in keeping with its earlier expressed intention that the cases probably should be dismissed entered a short memorandum opinion and order of dismissal as to both cases without a hearing. Following that hearing, the United States Trustee’s office filed a request for rehearing and asserted that it was improper for the Court to dismiss the case without giving all parties and all Creditors the opportunity to demonstrate that the best interest of Creditors would be served by maintaining the case in bankruptcy court. The primary authority cited by the U.S. Trustee’s office was the Littlecreek case which did not deal with dismissal but with the fact that the Court should not find bad faith on the part of a debtor without a full evidentiary hearing. The Internal Revenue Service joined in the United States Trustee’s motion for reconsideration and creditors, K and B Lewis Texas Ltd. and Gary Drilling, also filed a joinder requesting reconsideration of the Court’s dismissal. The Court granted the request and set the matter for hearing at which all parties were given the opportunity to demonstrate that there was some meaningful reason to keep this ease in bankruptcy court.
This opinion constitutes the Court’s findings of fact and conclusions of law in regard to that hearing and disposes of the issues before the Court. Upon reconsideration and upon allowing all parties to develop a full evidentiary record, the Court is convinced that its earlier inclination to dismiss these cases was the correct one. The United States Trustee elected not to participate in the hearing since its position was not that it had information which would require the case to remain in bankruptcy court, but simply that it was procedurally improper to dismiss the case without allowing all of the Creditors an opportunity to conduct a full evidentiary hearing. In essence, the relief requested by the United States Trustee had been granted by simply scheduling the evidentiary hearing.
The hearing, as had all other proceedings in this case, quickly turned into nothing more than a two party dispute between the Internal Revenue Service and Barbaria. Gary Drilling, who had filed an objection to dismissal on the grounds that it intended to file a dischargeability complaint under § 523 of the Code, did not appear at the hearing and K & B Lewis appeared at the hearing through counsel and simply reiterated by way of oral argument that it preferred that the cases not be dismissed and asserted that the best interest of Creditors would be met by maintaining the Barbaria entities in a bankruptcy proceeding. K & B had no evidence to present.
The Chapter 7 Trustee appeared and stated that he believed that the Chapter 7 estate was administratively insolvent. This was based on the Trustee’s accumulation of approximately $30,000.00 in expenses in this matter to this point without the discovery of any significant assets with which to pay those expenses. The only asset that the Trustee has located and reduced to his possession is a diamond bracelet that was voluntarily relinquished to him from the Barbaria Family Trust which may or may not belong to Mr. Barbaría and which the Trustee believes to have a value of $15,000.00 to $20,000.00. The only evidence presented by the Trustee certainly preponderates in favor of dismissing these actions immediately.
The Internal Revenue Service presented its evidence which was simply a more expanded version of the evidence already adduced in the various other hearings this Court has conducted. It is obvious that Mr. Barbaria operates various business entities as either corporations or trusts and those entities carry such names as Intercoastal Corporation, Gulf Oil and Refining, Republic Steel Company and of course the Barbaria Family Trust. There was also evidence introduced that Intercoastal Corporation and Gulf Oil and Refining are both in bankruptcy in the Northern District of Texas. The status of those bankruptcies was not fully explained.
*127The Internal Revenue Service attempted to show the existence of assets which would make it beneficial for this case to remain in bankruptcy so that those assets could be liquidated. To that end, they placed a former employee of Mr. Barbaria on the stand and attempted to elicit information from him that would disclose the existence of those assets. The only thing that that testimony demonstrated was that the employee knew very little about Mr. Barbaria’s business but the IRS did introduce into evidence a 1997 financial statement showing that Republic Steel had total assets slightly in excess of $3,000,000.00 with a net equity in excess of $2,000,000.00. It is certainly not clear that that situation exists today nor is it clear at all that that was a true financial picture of Republic Steel when the financial statement was prepared. It is a very cursory statement and there is nothing to support the figures nor to make them at all believable. There is also no indication that Republic Steel is the alter ego of the Debtor and that those assets could be reached by his personal Creditors. The only other assets of which the former employee was aware were vehicles and personal property which apparently were not properly disclosed in Mr. Barba-ria’s bankruptcy schedules. However, the problem with that evidence is that the employee’s knowledge of the assets and what may have happened to them after he left Mr. Barbaria’s employment is so sketchy that one cannot infer that they were still in Mr. Barbaria’s possession at the time that the bankruptcy was filed. The Internal Revenue Service produced a revenue agent to testify as to his review of bank records for Republic Steel and Intereoastal Corporation of America and his first position was that he really didn’t remember any of the facts but upon persistent questioning by counsel, the testimony revealed that there was apparently slightly in excess of $1,000,000.00 in deposits in these accounts in 1997. How this interacts with the bankruptcy of Intercoastal Corporation now pending in the Northern District of Texas and by what method any assets of Intercoastal Corporation would be available to the Debtors of Mr. Barbaria was not explored nor explained. The Government again elicited information concerning the existence of the house in which Mr. Bar-baria lives and the fact that the house was titled in the name of the Barbaria Family Trust. Earlier testimony and the testimony at this hearing demonstrates clearly that there is virtually no equity in this house because of the large first and second mortgage already attached to it.
The Government produced clear evidence that Mr. Barbaria has failed to respond properly to interrogatories, motions to produce and motions to compel production. The Internal Revenue Service demonstrated clearly that Mr. Barbaria does not cooperate with them and does not cooperate in the conduct of his bankruptcy proceeding. The produced testimony from the landlord of the building where Mr. Barbaria maintains his office and demonstrated that he has had problems paying his rent, that he once gave the landlord a Rolex watch as security for payment of past due rent and that he leases the office in the name of the Barbaria Family Trust. The evidence clearly convinced this Court that Mr. Barbaria uses the Barbaria Family Trust which is the record owner of all of the corporate stock in Republic Oil Company, and Republic Steel and that any business transactions Mr. Barbaria conducts or conducted was through those corporations. There was no evidence adduced to show the extent of that business operation nor the nature of that business operation. There was no evidence produced to demonstrate a likelihood that any Creditor could pierce the corporate veil and seize those assets to satisfy Mr. Barbaria’s personal obligations. Of course, even if there had been such evidence, that would not mitigate in favor of keeping these cases in bankruptcy. Piercing the corporate veil can be accomplished in any court of competent jurisdiction and the Internal Revenue Service can proceed with that action unhampered by any bankruptcy proceeding once this case is dismissed. The Internal Revenue Service’s evidence clearly rehashed its difficulties in dealing with Mr. Barbaria in connection with his failure to file income tax returns since 1982 and his failure to pay that tax now that he has filed the returns. The evidence also clearly established that Mr. Barbaria is very adept at conducting whatever business he conducts through corporate entities and keeping little or nothing in his *128own name. Whether this evidences a deliberate shielding of his assets through sham corporations as the Government contends, or whether he simply operates corporations and is never able to amass assets in his own name, is not clear from the evidence. One thing that is clear is that the Government’s contention that they should be able to pierce the corporate veil and have all of the corporations declared sham entities can be done as well if not better in any court of competent jurisdiction as it can be in bankruptcy court. The Government clearly established that Mr. Barbaria owes approximately 1.2 million in past due income taxes. The Government alleges and asserts vigorously that the corporate entities of which they are aware are nothing but shams that Mr. Barbaria uses to conceal his personal assets. That may be true but there was no evidence to demonstrate that in this case. Even more importantly, if that were the case, that is not any reason to maintain these cases in bankruptcy court. Any court of competent jurisdiction can maintain a proceeding to reclaim those assets for the benefit of Mr. Barbaria’s Creditors.
One of the factors mitigating most strongly against keeping this case in bankruptcy is the testimony of the Chapter 7 Trustee. It was clear from the Chapter 7 Trustee’s testimony that he has expended a great deal of time and effort and has located nothing of any value. It is not reasonable to expect this Trustee to proceed with no hope of recovery of any of his expenses and it is certainly not in keeping with the needs of the bankruptcy system for this Trustee to devote an undue amount of time to this case when there are other liquidation proceedings that he should be pursuing. The fact that this case is over a year old and the Trustee’s only assessment at this point is that the case is administratively insolvent certainly indicates that there is no future in maintaining this action in bankruptcy. Despite a valiant effort, the Internal Revenue Service as the only Creditor who has ever taken a real interest in the case was unable to demonstrate that there are any assets on the horizon or any other action that gives a realistic hope of the Trustee being able to amass any assets for the benefit of any Creditors. This case is and remains what it has always been and that is a dispute between the Internal Revenue Service and Mr. Barbaria.
One of the cases cited by the Internal Revenue Service, In re Dreamstreet, Inc., 221 B.R. 724 (Bankr.W.D.Tex.1998) as authority for the fact that the Debtor does not have an unfettered right to dismiss a Chapter 7 proceeding does not mandate a continuation of this case in bankruptcy court. In the Dreamstreet case, the Court made a specific finding that the Debtor moved to dismiss the Chapter 7 proceeding upon the Trustee’s discovery of a fraudulent transfer action that looked extremely promising. In effect, a location of a potential valuable asset that could b'e reclaimed and distributed to Creditors. No such showing has been made in this case. The only concrete asset that has ever been demonstrated as an asset of the bankruptcy estate is the Debtor’s home which is hopelessly encumbered and which would never produce enough funds for any Creditor other than the Internal Revenue Service to recover a small amount. In fact, there is no indication that there are any assets anywhere that would be available for distribution to any Creditor and certainly no indication that there are assets in excess of the 1.2 million dollars constituting the Internal Revenue Service’s priority claim.
This hearing and all of the proceedings that have gone before it do nothing but convince this Court that its limited jurisdiction and function renders it incapable of granting to the Internal Revenue Service the relief that they really request in this controversy. The Internal Revenue Service can pursue all of its theories of recovery against Mr. Barba-ria and his related entities in a court where there is no question but that jurisdiction over those entities can be acquired. This Court saw no evidence that there is any asset out there to be reclaimed and can discern no reason why the best interest of any party would be met by retaining this case in the bankruptcy court. Accordingly, both the Bar-baria individual case and the Barbaria Family Trust case will be dismissed along with any related adversary proceedings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492834/ | MEMORANDUM OPINION
JOHN D. SCHWARTZ, Bankruptcy Judge.
This matter comes before the court on Plaintiffs’ Motion for Summary Judgment. For the foregoing reasons, Plaintiffs’ Motion is denied.
BACKGROUND
From 1983 to 1989, Debtor-Plaintiffs Mark R. and Beth A. Thorngren (“Plaintiffs”) failed to file their federal income tax returns. The United States of America Internal Revenue Service (“IRS”) contacted Plaintiffs in 1990 regarding the non-filing. In response to the IRS’ investigation, Plaintiffs’ filed the missing tax returns by July, 1992. After the IRS determined that Plaintiffs had intentionally failed to file their returns and, in addition, filed false W-4 forms, the IRS asserted penalties against Plaintiffs for fraud under the Internal Revenue Code. Thereafter, Plaintiffs made three offers to the IRS for settlement of the assessed taxes, penalties and interest. The IRS reviewed these offers and recommended their acceptance based on Plaintiffs’ “ability to pay and ... doubt, based on [Plaintiffs’] projected income, whether the remaining liability can be collected.” (Pis.’ Mem.Supp.Summ.J.Mot., p. 7.)1
On May 2, 1995, Plaintiffs filed for relief under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq.2, and on May 19, 1995, they filed this adversary proceeding to determine the dischargeability of their debt to the IRS. Plaintiffs now move this court for summary judgment in their favor.
JURISDICTION
This court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1344, 28 U.S.C. § 157(a) and Local Rule 2.33 of the United States District Court for the North*172ern District of Illinois. This matter is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(I).
DISCUSSION
In order to prevail on a motion for summary judgement, the movant must meet the summary judgement criteria set forth in Federal Rule of Civil Procedure 56, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056. Rule 56(c) reads in part:
The judgment sought shall be rendered forthwith 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.
Fed.R.Civ.P. 56(c); See also Boggs v. Adams, 45 F.3d 1056, 1059 (7th Cir.1995).
The purpose of summary judgment is to avoid unnecessary trials when there are no genuine issues of material fact in dispute. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585-6, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The moving party bears the burden of showing that no genuine issue of material fact is in dispute and that judgment in its favor should be granted as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). If the record, taken as a whole and in a light most favorable to the non-moving party, could not lead a rational trier of fact to find for the non-moving party, then there is no genuine issue for trial and summary judgment must be granted. Id.; Matsushita, 475 U.S. at 585-87, 106 S.Ct. 1348. While Plaintiffs correctly state that the IRS has the burden of proving nondischargeability, see Sommers v. Internal Revenue Service (In re Sommers), 209 B.R. 471, 477 (Bankr.N.D.Ill.1997); Dube v. United States (In re Dube), 169 B.R. 886, 891 n. 5 (Bankr.N.D.Ill.1994), the IRS correctly asserts that as summary judgment movants, Plaintiffs bear the burden of proving that there is no genuine issue for trial. Celotex, 477 U.S. at 322, 106 S.Ct. 2548.
Section 523(a)(1)(c) states in pertinent part that “[a] discharge under section [ ] 1141 ... of this title does not discharge an individual debtor from any debt ... for a tax ... with respect to which the debtor ... willfully attempted in any manner to evade or defeat such tax_” A finding of willfulness requires that “the debtor must both (1) know that he has a tax duty under the law, and (2) voluntarily and intentionally attempt to violate that duty.” Matter of Birkenstock, 87 F.3d 947, 953 (7th Cir.1996). The parties do not appear to dispute that Plaintiffs knew they had a duty to file their returns. Instead, the IRS claims that a factual dispute exists regarding whether Plaintiffs voluntarily and intentionally failed to file their returns and pay their taxes. This court agrees.
Plaintiffs’ main argument is that they simply relied on the advice of their accountant that because they had owed no taxes in the past, they would probably owe no taxes in the future. As Plaintiffs believed they possessed no tax liability, they argue that their failure to file tax returns was not willful. The IRS notes, however, that Plaintiffs admit in their depositions they knew of the obligation to file accurate W-4 forms and tax returns as well as pay their taxes. (IRS’ Opp’n to Pis.’ Summ.J.Mot., p. 4.) In addition, the IRS argues that Plaintiffs admit they sought and received filing extensions and “concluded they were lost in the system and, thus did not feel an imminent need to file” their returns until the IRS began its investigation. (Id.) Although Plaintiffs’ depositions include statements that they believed, based on advice from their accountant, they owed no taxes, these statements do not conclusively prove that their failure to file their returns was not willful. Although nonpayment of taxes, without more, “does not constitute willful evasion under Section 523(c)(1)(C),” this court must look to the totality of the circumstances. Sommers, 209 B.R. at 478. Indeed, Plaintiff Mark Thorngren’s deposition indicates that he may have stopped filing his returns prior to seeking his accountant’s advice. (See Mark Thorngren’s Dep., p. 11 (In his deposition, Mark Thorngren states, “[a]nd then ultimately the next year when I still hadn’t filed, my accountant *173kind of told me that I must be lost in the system and I probably shouldn’t file because that way they wouldn’t find me.”)). Hence, a dispute of material fact exists.
Plaintiffs also argue that because the IRS recommended acceptance of Plaintiffs’ settlement offers based on doubts as to whether Plaintiffs could satisfy the entire indebtedness, there is no dispute that Plaintiffs did not have the ability to pay their taxes. Plaintiffs’ argument, however, misses the mark. Whether Plaintiffs were able to pay their entire indebtedness to the IRS after assessment of interest and penalties is irrelevant to whether Plaintiffs had the ability, but willfully failed, to pay their taxes as they became due. “[A]n inability to pay debts in subsequent years is not a defense to previous intentional attempts to evade or conceal one’s tax liabilities.” Birkenstock, 87 F.3d at 953. Here, again, there is dispute of material fact. Because this court has determined that summary judgment is inappropriate in this matter, it need not reach Plaintiffs’ other arguments.
CONCLUSION
For the reasons articulated above, Plaintiffs’ Motion for Summary Judgment is denied.
. Although paragraph 17 of the IRS’ 402.N statement asserts that this fact is “immaterial,” it will be deemed admitted in accordance with the local bankruptcy rules for the Northern District of Illinois. Loc.R. 402.N(3)(b) (“All material facts set forth in the statement required of the moving party will be deemed to be admitted unless controverted by the statement of the opposing party.”).
. Unless otherwise stated, all statutory references refer to Title 11 of the United States Code. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492835/ | ORDER ON PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT AND DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THE MATTER under consideration in the above-captioned adversary proceeding is a Motion for Partial Summary Judgment filed by Plaintiffs, Hillsborough Holdings Corporation (“HHC”), et al. and the Motion for Summary Judgment filed by the United States of America (“IRS”). On December 9, 1996, the parties filed a stipulation entitled, “Parties’ Joint Fact Stipulation Re: Issue Scheduled for Trial on December 9 and 10, 1996” (“Stipulation”), stipulating to the following facts:
Jim Walter Corporation (“JWC”), Plaintiffs predecessor, was incorporated in 1965. Over the years, JWC, through its subsidiaries, grew and expanded through a number of different business ventures, including the acquisition and disposition of numerous other corporations and business lines. JWC and domestic affiliated corporations filed a consolidated federal income tax return for fiscal year ended August 31, 1971 and all year's thereafter within the jurisdiction of this Court, through August 31,1987.
In 1987 and 1988, JWC was involved in a leveraged buyout (“LBO”). The LBO result*215ed in the acquisition of JWC by a group of private investors led by Kolberg Kravitz & Roberts (“KKR”), accomplished through the formation of HHC and its various subsidiaries. In connection with the LBO, certain financing was necessary to meet the required capitalization as set out in a tender offer, which included approximately $3,100,000 in debt and $155,000,000 in equity.
HHC and its successors filed consolidated federal income tax returns for the fiscal year ended May 31, 1988 and all years thereafter within the jurisdiction of the Court. Although there were minor additions and deletions, the same basic group of companies continued to file a consolidated federal income tax return for each fiscal year after May 31, 1988, as reflected by the Internal Revenue Form 851 attached to the consolidated return filed each year. Each member of the affiliated group filing the consolidated return is jointly and severally liable for the tax determined with regard to each return.
JWC incurred certain expenses in connection with the LBO, including:
(1) Preliminary exploratory costs and costs related to the evaluation of four offers as part of its fiduciary duty (which were expensed pursuant to I.R.C. § 162 and are not at issue in the instant dispute);
(2) Costs of securing and placing specific debt used in financing the LBO (which were capitalized and are being amortized over the terms of each piece of specific debt and which are not at issue in the instant dispute); and
(3) Other costs incurred in connection with the LBO which were capitalized as nonamor-tizable intangible assets. These expenses are the subject of the dispute which is to be decided by this Court in response to the parties’ cross-motions for summary judgment and are hereinafter referred to as the “Expenses.” The Expenses are as follows:
Payee Amount
Corporate Planting Company, Inc. $ 54,605
Corporate Printing Company, Inc. 360,232
Deloitte, Haskins & Sells, CPA 1,100,000
Deloitte, Haskins & Sells, CPA 600,000
Foley & Lardner, PA 360,812
Georgeson & Company, Inc. 95,408
Kolberg, Kravis & Roberts 20,565
Kolberg, Kravis & Roberts 7,000,000
Payee Amount
Simpson, Thacher & Bartlett 169,990
Simpson, Thacher & Bartlett 2,732,600
Simpson, Thacher & Bartlett 410,841
Securities and Exchange Commission 487,293
Total: $13,392,346
The Expenses, which were paid by HHC or Walter Industries, Inc. are more fully described and identified as follows:
(a) The amount of $54,605.25 was paid to Corporate Printing Company, Inc. pursuant to Invoice Number 802013 dated February 3, 1988 for various printing, binding, labeling, and distributing of the Letter of Transmittal, Notice of Merger Agreement, Tender Offer Notice, and Notice of Pendency, all of which was related to the Tender Offer. This entire amount was allocated to nonamortizable intangible assets.
(b) The amount of $360,232.10 was paid to Corporate Printing Company, Inc. pursuant to Invoice Number 712034 dated December 9, 1987 for printing and binding of the Tender Offer. This entire amount was allocated to nonamortizable intangible assets.
(c) The amount of $3,200,000 was paid to Deloitte, Haskins & Sells, $1,100,000 of which was allocated to nonamortizable intangible assets, pursuant to a statement dated April 29, 1988 for professional services relating to the formation and structuring of HHC and various subsidiaries and the related merger of JWC with and into Hillsborough Acquisition Corporation.
(d) The amount of $600,000 was paid to Simpson Thacher & Bartlett, as reimbursement for their payment to Deloitte, Haskins & Sells pursuant to a statement dated April 29,1988 for tax services. This entire amount was allocated to nonamortizable intangible assets.
(e) The amount of $360,811.63 was paid to Foley & Lardner pursuant to a statement dated December 10, 1987 for professional services rendered in connection with the Florida law aspects of the LBO. This entire amount was allocated to nonamortizable intangible assets.
(f) The amount of $95,407.85 was paid to Georgeson & Company, Inc. pursuant to an invoice dated November 23, 1987 for services rendered as information agent for the offer *216to purchase the shares of JWC. This entire amount was allocated to nonamortizable intangible assets.
(g) The amount of $1,693,900.42 was paid to KKR pursuant to an invoice dated March 15, 1988, $20,565 of which was allocated to nonamortizable intangible assets.
(h) The amount of $35,000,000 was paid to KKR pursuant to page 28 of a memo indicating a transfer of funds to a KKR bank account, $7,000,000 of which was allocated to nonamortizable intangible assets. The remaining $28,000,000 was capitalized as debt issuance expense.
(i) The amount of $404,346.72 was paid to Simpson, Thacher,' pursuant to an invoice dated April 7, 1988, $169,990 of which was allocated to nonamortizable intangible assets.
(j) The amount of $6,500,000 was paid to Simpson, Thacher, pursuant to an invoice dated February 1, 1988, $2,732,600 of which was allocated to nonamortizable intangible assets.
(k) The amount of $448,032.79 was paid to Simpson, Thacher, pursuant to two invoices dated June 16, 1988, $410,841 of which was allocated to nonamortizable intangible assets.
(l) The amount of $487,293 was paid to KKR as part of an invoice dated March 15, 1988 in the amount of $1,593,900.42 (see (g) above) as filing fees required by the Securities and Exchange Commission for the tender offer statement, which was allocated to nonamortizable intangible assets.
On December 27, 1989, the Plaintiffs filed their voluntary Petitions for relief under Chapter 11 of the Bankruptcy Code. On May 14, 1991, Plaintiffs filed the above-styled adversary proceeding, seeking a determination as to the validity, extent and priority of liens with regard to claims filed by the IRS for federal income taxes, penalties, and/or interest alleged to be due and owing. On April 29,1996, the Plaintiffs filed a Second Amended Complaint which raised the issue under paragraphs 54 through 57 of Count VI, asserting a deduction or write-off of the Expenses, which were previously capitalized as nonamortizable intangible assets in connection with the LBO and such other amounts as may be required to be capitalized either by agreement of the parties or determination of this Court. The IRS filed an Answer to the Second Amended Complaint, denying the write-off of these expenses. Plaintiffs’ Consensual Plan of Reorganization (“Plan”) was confirmed on March 2,1995 and was effective on or about March 17,1995. Pursuant to the terms of the Plan, the Court retained jurisdiction to resolve the issues presented by this adversary proceeding.
Plaintiffs contend that the critical issues are (1) what did the Plaintiffs buy as a result of the Expenses; and (2) whether Plaintiffs lost the benefit of the Expenses as a consequence of the subsequently filed Chapter 11 cases. In answer to these questions, Plaintiffs contend that the Expenses allowed the parent company to attract the original equity of about $155,000,000 which was used to fund a portion of the acquisition of JWC and provide a basis for the issuance of approximately $3,100,000,000 of debt used to finance the LBO. Plaintiffs contend that the Expenses consist of legal and accounting services and were incurred specifically to shape the corporate structure and to obtain equity holders who were necessary to place the debt. The combination of the resulting equity and debt is the capital structure, the cost of which is the intangible asset which was required to be capitalized by the Plaintiffs for corporate income tax purposes, and is shown on their books as their tax basis in intangible assets.
Plaintiffs contend that what Plaintiffs purchased for their expenditures of $13,392,346 was the capital structure that resulted from the LBO and the positive long-term business attributes connected with that capital structure created in the course of the LBO. Plaintiffs contend that the capital structure created in the course of the LBO was basically as follows: (a) a corporation without public shareholders; (b) one major shareholder, KKR, holding about 91% of the total issued and outstanding stock; (c) a friendly Board of Directors controlled by KKR representatives; (d) Bank debt, revolving credit, and working capital lines, secured with various maturities; (e) Senior notes collateralized with various maturities; and (f) Five classes of bondholders with various interest rates (unsecured) having no equity or equity poten*217tial and no representation on the Board of Directors.
As to whether Plaintiffs lost the benefit of the Expenses as a consequence of the subsequent Chapter 11 cases, Plaintiffs contend that as a result of the Chapter 11 filings on December 27, 1989, all of the debt was accelerated and financing was unavailable to Plaintiffs, except under onerous terms and conditions. Many suppliers and/or vendors required that business be conducted on a different basis. The homebuilding business suffered a significant decline in unit sales due to customer resistance to purchasing from a company in bankruptcy. Management no longer had alternatives to raise capital to operate for growth and expansion. Stockholders rights were suspended and ultimately materially changed under the Plan. As a result of the filing and confirmation of the Plan, substantial changes occurred in the ownership of the corporation and its capital structure.
The IRS contends, and this Court agrees, that the Plaintiffs did not show that the intangible benefits represented by the Expenses related solely to the debt and equity structure portion of the LBO. Rather, a genuine issue of fact remains as to whether the Expenses were incurred to accomplish the LBO. The IRS’ position is that each of the amounts comprising the Expenses should be analyzed and considered separately. Further, the IRS argues that the capital structure created by the LBO was not destroyed by the Chapter 11 cases. Rather, none of the debt existing at the time of bankruptcy was ever paid as a result of any acceleration clauses, the debt was restructured pursuant to Article III of the Plan and the creditors received a combination of cash and stock for their claims. Thus, since there was no “liquidation” of the Debtors and only a restructuring, the intangible value of the capital structure was not destroyed.
The initial question for this Court to decide is whether the Expenses which the Plaintiffs originally capitalized and carried on their books as “stock basis expenditures” were really attributable to the Plaintiffs’ exploration into restructuring its equity and debt through the mechanics of a leveraged buyout or whether the expenditures were attributable to accomplishing the LBO. The parties have not stipulated to the exact purpose of each of the expenditures comprising the Expenses and it is impossible for this Court to make this determination from the record. Even assuming for the basis of discussion that the claimed deductions are appropriately deductible expenses, genuine issues of material fact remain. Assuming for the sake of argument that Plaintiffs did in fact experience a loss of the utility of the Expenses, the issue remains as to what year the loss occurred.
Although a loss could have occurred during the pendency of the Chapter 11 cases, this Court is unwilling to accept that the Plaintiffs’ capitalization of acquisition costs related to the ultimate consummation of the LBO is a nonamortizable asset which was lost as a result of the filing of the Chapter 11. Plaintiffs’ argument that when a debtor files a petition for relief under Chapter 11, the intangible value of the capital structure, specifically the utility of the debt component aspect, is lost, simply does not hold any water. This is because while in theory all of the outstanding debts were accelerated, none whatsoever were paid upon the filing, nor during the pendency of the Chapter 11 eases. In fact, the debts were decelerated as a result of the confirmed Plan and paid only pursuant to Article III of the Plan. The fact that on paper there was an acceleration is of no consequence. Under the Plan, the creditors received a combination of cash and stock and the creditors remained dependent on the success of the Plaintiffs’ business.
A clearly recognized purpose of a corporate reorganization is to restructure a debt- or’s liabilities and that is exactly what occurred here. Plaintiffs’ contention that the intangible benefits of the equity structure of the LBO were rendered valueless by the Chapter 11 filings is not supported either by the facts of this case or by law. The mere filing of a petition for relief under Chapter 11 does not alter the equity structure of a corporation. When these cases were filed, no one had any idea what the ultimate plan of reorganization would be and conceivably, KKR could have come up with a capital infusion in order to retain their equity interests. From the Debtors’ perspective, therefore, management would have remained the same, although the makeup of the Board of *218Directors changed. After confirmation of the Plan, as a matter of corporate law, the reorganized corporation remained the same, although the makeup of the equity and the Board of Directors changed.
Having considered the record and the respective motions and briefs of the parties, this Court is satisfied that genuine issues of material fact remain and the respective motions for summary judgment should be denied.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Plaintiffs’ Motion for Partial Summary Judgment be, and the same is hereby denied. It is further
ORDERED, ADJUDGED AND DECREED that Defendant’s Motion for Summary Judgment be, and the same is hereby denied. It is further
ORDERED, ADJUDGED AND DECREED that a final evidentiary hearing is hereby scheduled before the undersigned in Courtroom C, 4921 Memorial Highway, Tampa, FL 33634, on July 16 1997, at 9:30 am. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492836/ | MEMORANDUM DECISION GRANTING MOTION TO DISMISS (TREATED AS A SUMMARY JUDGMENT MOTION) CLAIM FOR DOUBLE DAMAGES UNDER AS 45.45.030
HERBERT A. ROSS, Bankruptcy Judge.
Index Page
1. INTRODUCTION.440
2. FACTUAL AND PROCEDURAL BACKGROUND.440
3. ISSUES ADDRESSED AND NOT ADDRESSED.441
4. LEGAL ANALYSIS.441
4.1. The Alaska Usury Statutes.441
4.2. The Trustee’s Rights to Enforce a Usury Claim Based on the Investment Contract is Subject to the Defenses Against the Debtor.442
4.3. The Trustee Is Barred by AS 45.55.930(g) From Recovering Double Interest Under AS 45.45.030 442
4.4. It is Proper to Grant Summary Judgment Against the Trustee on a Motion to Dismiss Without Prior Notice of Intent to Treat as Summary Judgment Motion.443
5. CONCLUSION.444
TABLE OF USURY BRIEFS 444
1. INTRODUCTION —The trustee sued investors to recover double the usurious interest paid on investment contracts through debtors’ Ponzi scheme. Is recovery barred because the debtors violated state securities laws when issuing the investment contracts? The trustee stands in the debtors’ shoes, and AS 45.55.930(g) prevents the trustee from recovering for usury claims based on investment contracts issued in violation of the Alaska securities laws.
2. FACTUAL AND PROCEDURAL BACKGROUND —The debtors engaged in a Ponzi scheme which led to their bankruptcy. They lured investors into investing money on the promise of exorbitant profits. The profit varied, but was beyond the usury limits of AS 45.45.010(b) for loans which were not greater than $25,000.
The trustee has filed about 660 adversary proceedings to recover transfers which he claimed were fraudulent or preferential. The Bonham Recovery Actions (the BRA) is the lead proceeding for addressing global issues.
The trustee included in many of the complaints a count to recover double the amount of usurious interest under Alaska law on those contracts which were not greater than the $25,000 limit, pursuant to AS 45.45.010(b). A typical allegation in the adversary proceedings in which the trustee seeks to recover double damages is:
USURY CAUSE OF ACTION [AS 45.45.030]
34. Portions of Debtor’s checks to Defendants represented repayment of px-inci-pal and interest on Defendants’ loans to Debtor, as detailed in the second column in paragraph 1 hereof.
35. The checks (“the Usury Checks”) in rows that contain entries in the Usury penalty column in paragraph 1 of this complaint represent repayments on loans that were equal to or less than $25,000.
*44136. With respect to each Usury Check, Debtor paid the principal amount due on each contract, such payment being either in the form of payment or rollover or both.
37. The interest component of the Usury Checks was in excess of five percentage points above the annual rate charged member banks for advances by the 12th Federal Reserve District on the day on which the contract or loan commitment was made.
38. On authority of AS 45.45.030, Plaintiff is entitled to a recovery equal to two times the Usury Checks, as detailed in paragraph 1 of this complaint.1
The trustee also alleges that the debtors operated a Ponzi scheme since at least 1993,2 but he did not explicitly plead that the debtors violated the state securities laws. The trustee has, however, in other proceedings in the bankruptcy case alleged that the debtors violated the state securities laws from at least 1993, which is within the 2-year statute of limitation on usury recovery before the petition date on December 19, 1995. The court has adopted the trustee’s proposed finding that outlines the debtors’ violation of the Alaska securities laws in ruling on the trustee’s motion for substantive consolidation of the debtors’ estates.3 The original hearing on the consolidation motion was held concurrent with the motion to dismiss the usury counts.
A number of defendants have moved to dismiss the double-damage usury count on various grounds under FRCP 12(b)(6)4 for failure to state a claim for which relief can be granted. Attached to this memorandum is a table of the various memoranda on the issue. This may not be complete because the issue may have been discussed in various other pleadings in the individual adversary proceedings, but the table contains the briefs which have raised all the arguments pro and con on the double-damage issue.
3. ISSUES ADDRESSED AND NOT ADDRESSED — The determinative issue is whether the trustee may bring a claim for double-damages under AS 45.45.030 for usurious interest paid on an investment contract issued in breach of the state securities laws, in light of AS 45.55.930(g), which limits one who makes or performs a contract in violation of the securities laws from basing a suit on the contract.
Since that issue decides the matter, I will not address the other issues raised by the BRA defendants, which include: (a) whether the trustee is estopped from bringing a usury claim because it was personal to the debtors, (b) whether the investment contracts were loans covered by AS 45.45.010, et seq, (c) the proper application of payments between principal and interest, (d) how to determine whether a loan was less than $25,000 when many loans were rolled, etc.
4. LEGAL ANALYSIS—
4.1. The Alaska Usury Statutes — The trustee bases his claim to recover double the usurious interest paid by debtors on AS 45.45.030. This section provides:
Sec. 45.45.030 Action for recovery of double amount of usurious interest paid.
If interest greater than that prescribed in AS 45.45.010 and 45.45.020 is received or collected, the person paying it may, by action brought within two years after the payment, recover from the person receiving the payment double the amount of the interest received or collected.
The basic provisions defining the legal rate of interest are found in AS 45.45.010, which provide:
Sec. 45.45.010 Legal rate of interest.
(a) The rate of interest in the state is 10.5 percent a year and no more on money after it is due except as provided in (b) of this section.
(b) Interest may not be charged by express agreement of the parties in a con*442tract or loan commitment that is more than five percentage points above the annual rate charged member banks for advances by the 12th Federal Reserve District on the day on which the contract or loan commitment is made. A contract or loan commitment in which the principal amount exceeds $25,000 is exempt from the limitation of this subsection.
A person may not lawfully charge a higher rate of interest than that prescribed in the statutes on interest.5
4.2. The Trustee’s Rights to Enforce a Usury Claim Based on the Investment Contract is Subject to the Defenses Against the Debtor — A bankruptcy trustee has long been able to assert a right to a usury claim which belonged to a debtor.6 The trustee, however, takes the property of the estate under 11 U.S.C. § 541(a) subject to any encumbrances or blemishes that existed against the debtor.7 So, for example, an otherwise valid claim by a trustee to recover usurious interest paid by a debtor is not enforceable if the statute of limitations has run.8
In the bankruptcy vernacular, the trustee “stands in the shoes of the debtor.”9 The bankruptcy court in In re Sunde,10 a case in which the trustee sought to enforce a claim under the Minnesota usury laws, said:
The Plaintiff [trustee], of course, holds the cause of action in this proceeding as a successor-in-interest to the Debtors; their right of action under the Minnesota usury laws passed into their bankruptcy estate by operation of 11 U.S.C. § 541(a)(1). They did not claim it as exempt, so it is subject to the Plaintiffs administration. In the Plaintiffs hands, however, the right of action is subject to all of the same defenses, counterclaims, and legal infirmities to which it was subject in the hands of the Debtors, [citations and footnote omitted]
In pursuing his claim to double-damages under a usury theory, the trustee is invested with none of the rights of a hypothetical creditor under 11 U.S.C. § 544(a)(l, 2) or a bona fide purchaser of real estate under § 544(a)(3), the trustee’s so-called “strong arm powers.”11 His rights to recover under his usury theory are, however, more akin to the rights the debtors would have enjoyed had there been no bankruptcy, as distinguished from their rights under the bankruptcy avoiding powers.12
So, if Alaska law would have barred the debtors from bringing the double-damage usury suit, it bars the trustee in the BRA adversaries, too. There is such a bar.
4.3. The Trustee Is Barred by AS 15.55.980(g) From Recovering Double Interest Under AS 15.15.080 — It is indisputable that the debtors issued securities in violation of state law.13 The state securities laws provide that a person who makes a contract in violation of the Alaska Securities Act of 195914 may not base a suit on the contract:
A person who makes or engages in the performance of a contract in violation of a provision of this chapter or regulation or order under this chapter, or who acquires *443a purported right under the contract with knowledge of the facts by reason of which its making or 15 performance is in violation, may not base a suit on the contract.15
There is one Alaska case interpreting this section to bar an action by a party that violated the Alaska securities laws,16 and a number of cases enforcing similar state securities laws.17
The AS 45.55.930(g) defense to the trustee’s usury claim was concisely raised in a BRA defendants’ motion to dismiss.18 The defense noted that the trustee, in his motion for substantive consolidation, argued that debtors had committed securities fraud under the Alaska securities laws.
In response to this defense, the trustee argues: "... the recovery for usury has nothing to do with the Alaska Securities Act. The Trustee is not trying to enforce the investment contracts against the investors. Indeed, enforcing the contracts would prevent the Trustee from any recoveries, as nearly all payments which were made were required by the contracts between the debtor and the recipient investors.”19
The trustee’s logic is strained. The usury claims are suits based on the contracts. They refer to the specific contractual terms regarding interest paid on each of the contracts involved. The suits are based on the contract.
On the other hand, the trustee’s actions under 11 U.S.C. §§ 544(b), 547, and 548 are based on his avoidance powers, and seek to recover payments made to the investors because they were within a preference period or fraudulent. Although the investment contracts are part of the facts involved in these avoidance actions, the gravamen of the avoidance actions are not to enforce a right deriving out of the contracts. Rather, the trustee is enforcing rights to recover property vested in him under specific bankruptcy code sections to accomplish a fundamental principle of bankruptcy, equality of distribution.
The trustee has, throughout this bankruptcy case, often alluded to the fact that the contracts were issued in violation of the state securities laws. The court adopted findings to that effect in the proceeding involving-substantive consolidation of the debtors.20
The trustee cannot maintain an action for a double recovery of any usurious interest payments because the debtors could not.
4.4. It is Proper to Grant Summary Judgment Against the Trustee on a Motion to Dismiss Without Prior Notice of Intent to Treat as Summary Judgment Motion —The BRA defendants challenged the claim for double usury damages by a motion to dismiss.21
When a court considers matters outside the pleadings in a motion to dismiss, the matter becomes a summary judgment proceeding.22 The court can also propose to grant summary judgment on its own motion, but normally would be required to give prior notice and an opportunity for a party to defend against such a ruling.23
The principle fact issue inserted by the court to make this ruling is the debtors’ violation of the securities laws. The trustee has espoused that fact in this case on many occasions, so additional notice is superfluous. The 9th Circuit, in In re Rothery, held that *444there is no prior notice requirement when it is a bankruptcy judge’s intention to turn an FRCP 12(b) motion to dismiss into an FRCP 56 summary judgment, but normally the court must give a reasonable opportunity for the parties to present materials that would pertain to the summary judgment motion. The court said such notice is unnecessary if the parties are fairly apprized before the hearing that the court would look beyond the record.24
While the present case does not precisely fit the Rokliery mold, the additional information about state securities laws violations is a narrow additional factual element to the pleadings themselves, the pleadings themselves discuss a Ponzi scheme and presage such a violation, and the trustee has trumpeted such a violation throughout the case.
Additional notice of the intent to turn the FRCP 12(b) motion as it relates to the usury damages count of the BRA complaints is unnecessary.
5. CONCLUSION■ — The usury counts in the individual BRA adversary proceedings will be dismissed by a global order in the BRA lead adversary.25 The court will defer entering the order (or report and recommendation if the reference is withdrawn) pending ruling on the balance of the issues in the motions to dismiss.
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. Amended Complaint, Docket Entry 31, filed August 20, 1998, Larry D. Compton, Trustee v. L. Todd Vandenberg and Penny L. Vandenberg, Adv. No. F95-00897-579-HAR (BANCAP 97-4376).
. Id., at ¶ 7.
. In re Bonham, 226 B.R. 56, 69-71 (Bankr.D.AK.1998).
. FRCP 12(b), incorporated by FRBP 7012(b).
. AS 45.45.020, limiting interest as prescribed in the chapter on interest found at AS 45.45.010-.070.
. McCollum v. Hamilton National Bank of Chattanooga, 303 U.S. 245, 58 S.Ct. 568, 570, 82 L.Ed. 819 (1938).
. Calvert v Bongards Creameries (In re Schauer), 835 F.2d 1222, 1225 (8th Cir.1987); In re Mantle, 153 F.3d 1082, 1084 (9th Cir.1998); In re Baquet, 61 B.R. 495, 497-98 (Bankr.D.Mont.1986).
. Boyajian v. DeFusco (In re Giorgio), 862 F.2d 933, 936-37 (1st Cir.1988).
. See, e.g., Sender v Buchanan (In re Hedged-Investments Associates, Inc.), 84 F.3d 1281, 1284 (10th Cir.1996).
. Dietz v. Phipps (In re Sunde), 149 B.R. 552, 556-57 (Bankr.D.MN.1992).
. Collier on Bankruptcy, ¶ 544.02 (15th Ed Supp 1998).
. Sender v. Simon, 84 F.3d 1299, 1303 (10th Cir.1996); Waslow v. Grant Thornton, L.L.P. (In re Jack Greenberg, Inc.), 212 B.R. 76, 82 (Bankr.E.D.Pa.1997).
. AS 45.55.070-120
.AS 45.55.010-995.
. AS 45.55.930(g).
. Darnall Kemna & Co., Inc. v. Leslie Heppinstall, 851 P.2d 73, 78 fn. 7 (Alaska 1993).
. Eg., Cellular Engineering, Ltd. v. O’Neill, 118 Wash.2d 16, 820 P.2d 941, 950-51 (Wash.1991); Connecticut National Bank v. Giacomi, 242 Conn. 17, 699 A.2d 101, 127 (Conn.1997); Criticare Systems v. Sentek, Inc., 159 Wis.2d 639, 465 N.W.2d 216, 220 (Wis.App.1990); and, see, Uniform Securities Act of 1956, § 410(f).
. Defendants' Motion to Dismiss Complaint for Failure to State a Claim, at pages 2*1-22, Docket Entry 94, filed March 21, 1997.
. Consolidated Opposition to Defendant’s Motion to Dismiss for Failure to State a Cause of Action, at pages 29-30, Docket Entry 148, filed April 21, 1997.
. See, footnote 3.
. FRCP 12(b), incorporated by FRBP 7012(b).
. FRCP 12(b)(6); Cunningham v. Rothery (In re Rothery), 143 F.3d 546, 548 (9th Cir.1998).
. Id.
. Id.
. Adv. No. F95-00897-168-HAR (Bancap 96-4182). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492870/ | ORDER
RICHARD L. SPEER, Chief Judge.
This cause comes before the Court upon the United States’ Motion to Alter or Amend Judgment. This matter initially came before the Court on the Debtors’ objection to the IRS’ proof of claim. The issue before the Court, and upon which the Court entered judgment, was whether the IRS’ claim for 1993 taxes should be allowed priority status pursuant to § 507(a)(8) of the Bankruptcy Code. This Court held that these taxes should not be given priority status. Shortly thereafter, the Court granted a motion by the Chapter 13 Trustee to dismiss the Debtors’ Chapter 13 case.
The IRS filed its Motion to Alter or Amend Judgment before the expiration of the appeal period. In its Motion, the IRS urges this Court to vacate its earlier judgment concerning the priority status of the 1993 taxes, arguing that it will be barred by the doctrine of res judicata from relit-igating its priority claim as to these 1993 taxes. Quoting United States v. Munsingwear, 340 U.S. 36, 38, 71 S.Ct. 104, 95 L.Ed. 36 (1950), the IRS argues that under the doctrine of res judicata, a judgment is binding in a subsequent suit between the same parties; and that even if the second suit is for a different cause of action, the right, question or fact once determined must, as between the same parties, be taken as conclusively established so long as the judgment in the first suit remains unmodified. The IRS also notes that it cannot presently appeal the judgment as to the Debtors’ 1993 taxes because as a result of the dismissal of the Debtor’s bankruptcy case, the issue has become moot.
“The established practice of the Court in dealing with a civil case from a court in the federal system which has become moot while on its way here or pending our decision on the merits is to reverse or vacate *915the judgment below[.]” Id. at 39, 71 S.Ct. 104. It therefore appears that it is appropriate to vacate this Court’s July 2, 1998, Opinion and Judgment as moot.
Accordingly, it is
ORDERED that this Court’s July 2, 1998, Opinion and Judgment be, and is hereby, VACATED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492871/ | MEMORANDUM OPINION
JAMES D. WALKER, Bankruptcy Judge.
This matter comes before the Court on Motion for Summary Judgment filed by Ben H. Dover, Jr. and Dover Realty Company, Inc. in response to a Complaint filed by William M. Flatau, Chapter 7 Trustee *169(“Trustee”), seeking turn over of property of William F. and Betty Sanders’s (“Debtors”) estate. This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(E). After considering the pleadings, evidence and applicable authorities, the Court enters the following findings of fact and conclusions of law in compliance with Federal Rule of Bankruptcy Procedure 7052.
Findings of Fact
For purposes of this motion for summary judgment, the following facts are treated as not being in dispute. Ben H. Dover, Jr. (“Dover”) is a realtor licensed in the State of Georgia and is the qualifying broker for the Dover Realty Company, Inc. In November 1995, Dover entered into a listing agreement with Debtors for the purpose of selling certain real property owned by Debtors for the asking price of $79,500.00. The agreement provided that Dover was entitled to a six percent sales commission. On January 5, 1996, Dover received a written offer to purchase the property from Gerald and Sylvia Meares for the asking price of $79,500.00 (the “Meares Offer”). The offer was subject to certain conditions. Satisfaction of these conditions and payment of Dover’s six percent sales commission would have netted Debtors $71,615.50 from the sale. However, Dover did not disclose this offer to Debtors. Instead, Dover presented to Debtors an offer to purchase their property on behalf of himself and Dover Realty Company, Inc. for $73,000.00. The offer was also subject to certain conditions. However, Dover waived his right to a six percent sales commission. As a result, Debtors stood to net $71,852.00 from the sale to Dover. Debtors accepted Dover’s offer (the “Dover Contract”) but later chose not to close on the sale. Rather, Debtors chose to list the property with the Bullard Realty Company for $75,000.00 and, ultimately, were able to achieve a sale at that price.
Sometime after the property was sold, Debtors learned of the Meares Offer. On November 14, 1996, Debtors filed for relief from their debts under Chapter 7 of the Bankruptcy Code. On December 10, 1997, Trustee filed a complaint seeking turn over of estate property alleging that DoveFs failure to disclose the Meares Offer constituted a breach of his fiduciary duty and tortious interference with contractual relations between the Meares’s and Debtors, entitling the estate to recover a judgment against Dover.
In response to this complaint, Dover has filed a motion for summary judgment claiming that the complaint fails to state a cause of action because Debtors suffered no damages as a result of his conduct. Dover alleges that because Debtors chose not to close on the Dover Contract, the measure of damages in this case is the difference between the amount Debtors would have netted from the Meares Offer and the amount they would have netted from the Dover Contract. Rather than suffering a loss under this calculation, Debtors would have netted $236.50 more in the sale to Dover. Thus, Dover claims that even if Trustee is able to prove all of the other elements of his tort claims, his action fails as a matter of law because of a lack of damages.
Conclusions of Law
Summary judgment is appropriate when there is no dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c)1; Combs v. King, 764 F.2d 818, 827 (11th Cir.1985). If there is a genuine issue of fact in dispute, summary judgment must be denied. Warrior Tombigbee Transp. Co. v. M/V Nan Fung, 695 F.2d 1294, 1296-97 (11th Cir.1983). The party seeking summary judgment may do so by showing that an essential element of the non-movant’s case is lacking. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
*170Here, Dover argues that the essential element lacking in Trustee’s case is damages. See Clements v. Hendi, 182 Ga.App. 118, 119, 354 S.E.2d 700 (1987) (“It is well settled as a general rule that before an action for a tort will lie, there must be an injury accompanying such tort.”); see also O.C.G.A. § 51-1-8 (1994). However, the Court finds that this element of Trustee’s case is not lacking, for the reason specified by Dover, and therefore, denies Dover’s motion for summary judgment.2
Dover’s assertion that Debtors suffered no loss as a result of Dover’s failure to disclose the Meares Offer is premised on an incorrect assumption that the Dover Contract is relevant evidence to this case. Contrary to Dover’s contention, what Debtors could have received from the Dover Contract is irrelevant to any determination of their damages.
“ ‘The law is uniform and well settled that an agent, who has been engaged to sell real estate for the owner, may not, either directly or indirectly, purchase it himself, without the express consent of the principal after a full knowledge of all the facts.’ ” Johnson Realty, Inc. v. Hand, 189 Ga.App. 706, 707, 377 S.E.2d 176, 179 (1988). The policy of this rule is to prevent the agent from allowing his personal interests to conflict with the interests of his principal and the duties he owes his principal. Dolvin Realty Co. v. Holley, 203 Ga. 618, 621, 48 S.E.2d 109, 111-12 (1948).
If an agent for the purpose of selling property of the principal purchases it himself, ... the sale is voidable; it will always be set aside at the option of the principal; the amount of consideration, the absence of undue advantage, and other similar features are wholly immaterial; nothing will defeat the principal’s right of remedy except his own confirmation, after full knowledge of all the facts.
Id. at 621, 48 S.E.2d at 112.
Thus, the Dover Contract was voidable according to Georgia law. The use of the Dover Contract as evidence which would serve to limit Debtors’ damages would create an element of enforceability for the contract where none exists under Georgia law. The rule which Dover urges this Court to follow would violate the spirit and the rule of Georgia law. Therefore, the Court finds that the Dover contract is not relevant to the determination of Debtors’ damages. As a result, Dover’s motion for summary judgment is denied.
. Ríale 56 is made applicable by Federal Rule of Bankruptcy Procedure 7056.
. Trustee has not moved for summary judgment on the issue of damages. At trial, Trustee will bear the burden of proof on that issue. This opinion does not establish the measure or method of such proof. In their Joint Pretrial Statement, the parties should articulate their respective views of the law on that issue and specify facts, either disputed or undisputed, which would satisfy or resist the proof of that element of the case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492873/ | SECOND ORDER ON DEBTOR’S MOTION TO MODIFY CONFIRMED PLAN OF REORGANIZATION PURSUANT TO § 1127(b) AND TO MODIFY PAYMENT TERMS OF SHIPYARDS AGREEMENT
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for hearing on July 16, 1997, at 4:00 p.m., to consider all issues remaining under the Debtor’s Motion to Modify Confirmed Plan of Reorganization Pursuant to 1127(b) and to Modify Payment Terms of Shipyards Agreement (“Motion to Modify”). At the hearing, the Debtor, the Official Committee of Unsecured Creditors, Lykes Lines Limited, LLC (the “Purchaser”), the Blue Water Entities, Mitsui Engineering & Shipbuilding Co., Ltd. (“Mitsui”), Mitsubishi Heavy Industries, Ltd. (“Mitsubishi” and together with Mitsui, the “Shipyards”), Trans-america Leasing, Inc., including its affiliate, TransOcean Container Corporation (collectively, “Transamerica”), Genstar Container Corporation (“Genstar”), the Morgan Bank Group, Pension Benefit Guaranty Corporation (“PBGC”), First American Bulk Carrier Corporation (“FABC”), District No. 1, Pacific Coast District, Marine Engineers Beneficial Association (“MEBA”) and numerous other creditors and parties in interest were represented by counsel. On July 15, 1997, this Court entered an Order on Debtor’s Motion to Modify Confirmed Plan of Reorganization Pursuant to § 1127(b) and to Modify Payment Terms of Shipyards Agreement dated July 15, 1997 which disposed of numerous issues related to the Motion to Modify. Among other things, the Court determined that the Modified Plan was feasible and disposed of objections filed by the MEBA Benefit Plans and South Carolina State Ports Authority (“SCSPA”). The responses or objections of the following parties were continued to the July 16,1997 hearing:-
(a) The objection and response of First American Bulk Carrier Corporation (“FABC”);
(b) The objection of MEBA, as that objection was articulated in paragraph 3 of the opposition (MEBA having withdrawn its other objections at the July 14 hearing);
(c) The response of the Morgan Bank Group;
(d) The conditional acceptance of APL;
(e) Any potential objection of PBGC (the Debtor having granted to PBGC an extension of time to object); and
(f) Any potential objection of the Shipyards (the Debtor having granted an extension of time to the Shipyards to file an objection).
At the hearing, these objections were resolved as follows:
(a) Based on the entry of that certain Order on Debtor’s (A) Amendment to Motion on Matters Related to the *547Maritime Administration and (B) Conditional Motion to Reject FABC Charters dated July 16, 1997 (the “FABC Charters Order”) the FABC objection was overruled with prejudice;
(b) MEBA withdrew its remaining objection;
(c) The Morgan Bank Group announced that subject to the condition that it be furnished with an agreed-upon certificate prior to Closing, it would accept the reduced payments set forth in the Modified Plan, thus disposing of all issues raised by its response;
(d) APL announced that APL had unconditionally accepted the Modified Plan;
(e) Counsel for PBGC announced that PBGC had satisfactorily reached agreement with all parties and that PBGC had no objection to confirmation of the Modified Plan; and
(f) The Shipyards interposed no objection at the hearing, based in part upon the execution of a letter agreement which was made of record at the hearing.
In addition, counsel for Genstar and Transameriea announced that they were prepared to make economic concessions that were equivalent to the five percent (5%) concessions of the Morgan Bank Group and the Shipyards. Finally, counsel for the Debtor announced that the three “bellwether” administrative claimants, Stichter, Riedel, Blain & Prosser, P.A., Stroock & Stroock & Lavan, and Joe B. Freeman, had agreed to economic concession of five percent (5%) of the amount that they would have received under the April 2, 1997, Plan of Reorganization on account of fees and expenses incurred pri- or to January 1, 1997. Based upon the agreement of these claimants, various of the other holders of allowed administrative claims are deemed to have likewise agreed to such concession, resulting in a reduction of the approximately $6.7 million aggregate amount for the claimants by five percent (5%), or about $335,000. Accordingly, it is
ORDERED, ADJUDGED, AND DECREED that the objections of FABC and MEBA be, and the same hereby are, OVERRULED with prejudice. It is further
ORDERED, ADJUDGED, AND DECREED that APL is hereby deemed to have accepted the Modified Plan. It is further
ORDERED, ADJUDGED, AND DECREED that the response of the Morgan Bank Group, to the extent that it constitutes an objection, be, and the same hereby is, OVERRULED, subject to the furnishing of a certificate of the Morgan Bank Group prior to Closing. It is further
ORDERED, ADJUDGED, AND DECREED that the Motion to Modify be, and the same hereby is, GRANTED in all respects. The Court will enter a separate Order confirming the Modified Plan and approving the Amended and Restated Third Modification. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492838/ | MEMORANDUM OPINION
DOUGLAS O. TICE, Jr., Bankruptcy Judge.
Trial was held August 10, 1998, on the trustee’s complaint against the estate of the debtor’s deceased former husband and against the administrator of the estate of the debtor’s deceased daughter.1 The facts of the case are not in dispute. The court is called upon to interpret a provision, of the marital separation agreement entered into by debtor and her former husband, Winfree Brown.
For reasons stated, the court rules that the trustee’s assertion that debtor has a property interest in either of the decedent estates must be rejected and judgment entered for the defendants. A cross claim by the Estate of Winfree Brown will be conditionally dismissed.
Facts
Angela H. Brown filed a voluntary chapter 7 petition on November 7, 1995, and Harry Shaia, Jr., serves as trustee in bankruptcy.
The debtor was formerly married to Win-free Brown. Two children were born of this marriage, Tangee S. Brown (d.o.b. May 26, 1979) and Tamesha B. Brown (d.o.b. December 8,1981).
The debtor and Winfree Brown were separated in 1988. Divorce proceedings were commenced, and on May 15,1990, the parties entered into a separation agreement which purported to resolve all financial matters between them.
Prior to the parties’ divorce, Winfree Brown died intestate on September 4, 1990. He was survived by his daughters, Tangee and Tamesha Brown. Marian Beacham and Clara B. Brown were qualified as co-administrators, d.b.n., for the estate of Winfree Brown in the Circuit Court of the County of Henrico, Virginia.
*671After Winfree Brown’s death debtor filed suit in Henrico Court by which she sought to have the separation agreement declared invalid. The validity and enforceability of the agreement was upheld by the circuit court and, on appeal, by the Supreme Court of Virginia. Brown v. Brown, 244 Va. 319, 422 S.E.2d 375 (1992).
On June 28, 1995, Tamesha Brown died intestate. Roy M. Terry, Jr., qualified as her administrator in the Circuit Court of the County of Chesterfield, Virginia.
Additional facts are stated in the discus- ' sion portion of this opinion.
Discussion And Conclusions
The court has jurisdiction over the subject matter of this complaint pursuant to 28 U.S.C. §§ 157(b), 1334 and 2201. This action is a core proceeding. Venue of this action is proper in this court pursuant to 28 U.S.C. § 1409.
This case involves a fairly simple issue: Whether the debtor, in the separation agreement of May 15, 1990, waived her right to claim an inheritance through her deceased daughter Tamesha. If she did not waive then the trustee as debtor’s chapter 7 trustee may claim debtor’s inheritance interest in Tamesha’s estate.2 If the debtor waived her right of inheritance from Tamesha, the trustee has no interest to claim.
The court must therefore resolve the dispute over the interpretation of a waiver provision of the separation agreement of debtor and Winfree Brown. Paragraph 21 of the agreement provided for the parties’ mutual release of claims as to each other’s property. Paragraph 21B contained debtor’s release and stated as follows:
B. That wife forever relinquishes and releases all right, title and interest which she now has or ever may have in and to the real, personal, mixed, separate or marital property of Husband, all right of dower, all right, title and interest which she has or ever may have in and to the property and assets of Husband presently held or acquired in the future or estate of Husband, at his death, and all right and interest to take against his Will or under the intestate laws, and each and every other right, title and interest she has or ever may have against Husband, his heirs, executors, administrators and assigns, excepting only every right that is given her in and by this Agreement, (emphasis supplied)
At trial, debtor testified that she did not intend by her release in Paragraph 21B to waive any claim to her daughter’s estate. Counsel for the Winfree Brown Estate called as a witness the attorney who represented Mr. Brown in the divorce proceedings and who prepared the separation agreement. That witness acknowledged that he and Mr. Brown never discussed the specific question raised here. However, the substance of his testimony was that the purpose of the mutual release provisions was for each spouse to release all possible interest in the assets of the other, including an interest by way of inheritance either through a spouse of a spouse’s heirs.
When viewed under the facts of this case the underscored language of Paragraph 21B is somewhat peculiar in referring to the wife’s release of “every other right, title and interest she has or ever may have against Husband, his heirs, etc.” The language preceding this would seem to have released all interest of wife in any property of the husband and makes no mention of husband’s heirs. The court can only conclude that the underscored language is typical lawyer boiler plate to cover any other possible type of claim the wife might have against the husband, his heirs or his estate.
I believe it is rather unlikely that the parties to such an agreement would have considered, much less intended, that they were effectively waiving their right to inherit from their children of the marriage who might predecease them. The literal application of the provision would seem to prevent a *672parent inheriting from a child, say 20 years later, an absurd and doubtful result.
In the instant case the result is not so absurd. The debtor’s daughter’s only property is that inherited from her father, property that debtor plainly released in Paragraph 21B. Both decedent estates remain open for administration.
Under Virginia case law, where a “separation agreement is complete on its face, and the language is plain and unambiguous .... [the court] must ascertain the intent of the parties by examining the four corners of the agreement.” Blunt v. Lentz, 241 Va. 547, 404 S.E.2d 62, 64 (Va.1991). Despite my reservations about the language of the agreement, I find that Paragraph 21B applied to the present facts must be construed according to its literal terms and not based upon this court’s speculations of what the parties intended.
It is the function of the court to construe the contract made by the parties, not to make a contract for them. The question for the court is what did the parties agree to as evidenced by their contract. The guiding light in the construction of a contract is the intention of the parties as expressed by them in the words they have used, and courts are bound to say that the parties intended what the written instrument plainly declares.
Blunt, 404 S.E.2d at 65. (emphasis in original)
On its face, the underscored portion of Paragraph 21B of the separation agreement says that the debtor-wife releases every right or interest she may ever have in the property of her husband, Winfree Brown or his heirs. “His heirs,” of course, includes his daughter, who inherited one half of his estate.
The court has found no case directly on point with the facts of this case. In general, the parties to a separation agreement may waive claims to property interests of their respective spouses, and where this is their intent the court must enforce their agreement. 9B Michie’s Jurisprudence Husband and Wife §§ 75, 76; Southerland v. Estate of Southerland, 249 Va. 584, 457 S.E.2d 375 (Va.1995). Southerland involved a mutual release provision in a separation agreement which was virtually identical to that in this case. The Virginia Supreme Court held that the wife had thereby released any claims she had as beneficiary of the deceased former husband’s life insurance even though he had failed to change the beneficiary designation. 457 S.E.2d at 376-78.
In this case, the court concludes that under Paragraph 21B of her separation agreement, debtor waived her right to claim an interest in Winfree Brown’s estate through the inheritance of her deceased daughter Tamesha. It follows that debtor’s trustee cannot claim the interest which was waived by the debtor.3
A separate order will be entered dismissing the trustee’s complaint. With respect to the counterclaim filed by the Winfree Brown estate for debtor’s indebtedness to the estate, the court presumes that this is now moot by virtue of the court’s ruling, and the counterclaim will be dismissed. If counsel for the estate believes that a ruling on the counterclaim is necessary, he may so request within 10 days of the entry of this opinion.
Counsel has also requested that the estate be reimbursed for attorney fees and costs. This request will be denied.
. On the day of trial the court granted the trustee's motion to add the daughter's estate as a party defendant.
. By consent order entered by the court on July 11, 1996, debtor released any claim against either estate. However, as the court was at some pains to point out in a subsequent order entered on September 10, 1996, the trustee was not a party to that release, and therefore the earlier order did not affect the trustee's right to claim debtor's interest for the bankruptcy estate.
. On the present record, the court finds that Tamesha had no significant assets other than the inheritance from her father. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492840/ | MEMORANDUM OPINION
ROBERT F. FUSSELL, Bankruptcy Judge.
I. INTRODUCTION
Pending before the Court is Creditor-Petitioner Calvin Walker, Jr.’s (“Walker”) April 28,1998 Petition to set aside the Respondent Trustee’s (“Trustee”) sale to the Respondent Loftins (“Loftins”) of 3.61 acres of land in Carroll County, Arkansas. For the reasons stated below, Walker’s Petition is GRANTED. The sale, which this Court approved on December 22, 1997 and confirmed on January 22,1998, is hereby SET ASIDE.
II. JURISDICTION
This Court has jurisdiction over the pending matter pursuant to 28 U.S.C. § 1334. Further, the above is a core proceeding with*760in 28 U.S.C. § 157(b)(2)(N) (orders approving sale of property).1
The following Memorandum Opinion constitutes findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
III. BACKGROUND FACTS
The debtor in the bankruptcy underlying this dispute is Gary Edward Rounds (“Rounds”), who once owned around 109 acres of land in Carroll County. Rounds testified2 thát he and the “creditor” at issue in this case, Calvin Walker, Jr., had been friends since the two were around thirteen years old. Since that time, the men saw each other regularly. Additionally, Mr. Walker allegedly helped Mr. Rounds, over the course of some years, on Mr. Rounds’s farm and in his sanitation business.
This controversy is rooted in Mr. Rounds’s purported oral conveyance, in 1991, of a 3.61-acre portion of the 109-acre tract to Mr. Walker (“Walker land”),3 allegedly in return for Mr. Walker’s labor. Mr. Rounds estimated that he owed Mr. Walker, for the work Walker had performed for him in the past, somewhere between $ 10,000.00 - 12,000.00. Mr. Walker testified that he considered that the land would constitute payment in full for this debt. Walker further testified that immediately after he and Rounds came to this oral understanding, Walker commenced clearing the 3.61 acres and cutting a road onto the property.
Gary Rounds first filed in Chapter 13 bankruptcy on March 25, 1994.4 At that time, he did not list Mr. Walker as a creditor.5
Later that year, sometime in December 1994, both Walker and Rounds testified that Rounds approached Walker to reduce to writing their 1991 oral agreement concerning the Walker land.6 Mr. Walker asserted that both he and Mr. Rounds together prepared what they styled as a “Temporary Ownership Deed” (“Deed”). Mr. Walker drew up the map contained in the “Deed”; Mrs. Jamie Walker (Mr. Walker’s wife)7 typed the text accompanying it; and the document was duly *761witnessed, notarized, and dated December 14,1994.
The text of the “Deed” is as follows:
TEMPORARY OWNERSHIP DEED
Be it known that Calvin Walker, Jr. has worked for me on my farm between Berry-ville and Huntsville on Highways 412 and 21 and helped me on occasion in my sanitation business. I give him the fenced-in acreage as shown by the strip map below as pay [sic] for the described work. Until my farm is paid off, this temporary ownership deed will be his promissory note showing this acreage on Highways 412 and 21 in the Northeast corner of the 80 acres of my farm adjoining the Christmas Tree Farm is paid in full. When my farm is paid off, I will issue him a proper deed— paid in full. Fenced-in area on map is acreage. Fence not fully complete as of this date, but will be. — Fenced-in area is 435 ft. on North side; 455 ft. on East side; 375 ft. on South side; and 420 ft. on West side.
M
Gary E. Rounds
The parties did not record their “Deed.”8 Nevertheless, after signing it, Mr. Walker testified that he obtained a survey, for which Gary Rounds paid, and Walker completed the fence referred to in the “Deed.”
From the time of the 1991 oral agreement until March 1998, when Walker testified that he first learned of the subsequent sale of the same Walker land to the Respondent Loftins, Mr. Walker and his wife testified that Walker built a stone entry, leading from the road he had cut onto the property, and installed a metal gate in it emblazoned with a “W”; put in a pond, flower beds, and an outhouse; and very nearly completed construction of a substantial cabin.
As noted, in December of 1995, Rounds’s first Chapter 13 case was dismissed for nonpayment. He refiled, again in Chapter 13, in April of 1996. In June of that year, his case was converted to a Chapter 7 and John Terry Lee, one of the respondents in the instant matter, was appointed Chapter 7 Trustee.
Just over a week after the Chapter 7 conversion, Mr. Rounds filed an amendment to schedules on which Calvin Walker, Jr.’s name and address appear in the bankruptcy record for the first time. That document is styled as “Second Amendment to Petition, Schedules and Statement of Financial Affairs,” filed with this Court on June 25,1996. Included in the first item in that document is debtor’s amendment to Schedule G, “to add the following executory contracts.” Listed in that grouping is the Rounds-Walker agreement concerning the Walker land now at issue. The amending document characterizes Mr. Walker’s interest as lodged in the “Temporary Ownership Deed,” a copy of which was appended and incorporated by reference. The certificate of service, accompanying the amending document and dated the same day, includes both the Trustee, John T. Lee, and his attorney Jill Jacoway.9
Mr. Lee’s administration of the estate proceeded. On August 13, 1996, he applied for approval of the sale of forty acres of land (“Loftin land”) adjacent to the contested 3.61 Walker acres, for a purchase price of $ 30,-000.00, to the Respondents Loftins.
At one time, the Loftins, Rounds, and Walker appear to have been each others’ friends. Walker and Rounds both so testified. Rounds testified that he also owed Mr. Loftin money. Thus, Mr. Rounds testified, to satisfy that debt, Rounds permitted the Loftins to run cattle on the forty acres neighboring the contested Walker tract. Both Jim and Anna Loftin testified at the September 7th hearing that they had spoken to Calvin Walker, on the land, numerous times. The Loftins, thus, appear to have been closely familiar with the land at issue and they also knew of Mr. Walker’s presence on it.10
*762The Trustee’s application of sale regarding the Loftin land represented that he had provided notice of the sale to all creditors and parties in interest, by first-class mail.11 The certificate of service in the Court file further specifies that Trustee Lee mailed this notice to the creditors listed on the mailing matrix. However, since Calvin Walker, Jr.’s name and address did not appear on this matrix,12 needless to say, he did not receive this notice or any of the other like ones.
Trustee Lee has conceded in a brief that Mr. Walker was not notified, neither of the sale of the Loftin land nor of the subsequent sale of the challenged 3.61-acre Walker tract, which “omission was an oversight_” (August 25, 1998 Br. at 1). The Trustee further testified at the September 7th hearing that ordinarily a creditor such as Mr. Walker should have been added to his mailing matrix. The Trustee did not know why this had not occurred, but he suspected a clerical oversight.
The sale of the forty acres to the Loftins proceeded. Trustee Lee applied for an order confirming sale on October 31, 1996; amended the application on November 18, 1996; and obtained the confirming order from this Court on November 20,1996.
A similar sequence of events occurred regarding the second sale of the remaining and adjacent Walker land here challenged. The Trustee applied for approval of sale of this land to the Loftins on November 25, 1997, which application made the same assertions as to similarly defective notice as did the prior August 13, 1996 application for the Loftin land. The purchase price proposed by the Loftins for the Walker tract, and later obtained from them, was $1,500.00. The Trustee represented in his application that this land was unimproved13 and that the purchase price was reasonable- — in fact, that it was worth more to the Loftins than anyone else, because it “square[d] off’ their prior-purchased forty-acre plot. The Order of Approval of this sale was dated December 22, 1997, and the Order Confirming Sale was dated January 22,1998.
Mr. Walker testified that the first he knew of the sale of the 3.61 acres to the Loftins was through a face-to-face conversation with Jim Loftin on the land, in March 1998. In that conversation, according to Mr. Walker, Mr. Loftin introduced himself as Mr. Walker’s “new landlord.”
Mr. Walker petitioned this Court to set aside the sale on April 28,1998.
IV. SPECIFIC FINDINGS OF FACT AND CONCLUSIONS OF LAW
Petitioner Walker asserts that lack of notice entitles him to the relief he seeks. In support of this assertion, he argues that his Deed conveyed status on him as a “known party in interest” sufficient to trigger the requirements, contained in the statute and the bankruptcy rules, that the Trustee notify him before selling the Walker land. 11 U.S.C. § 363; F.R.Bankr.P.2002. He further argues that, because he did not receive this notice, the sale violated his due process rights and must, thus, be set aside. The Trustee, for his part, has conceded the notice *763issue.14 The Loftins in their turn assert that Walker should be barred from asserting his no-notice objection to the sale now, when he had actual knowledge of the bankruptcy, and maybe even the sale itself, but did nothing to assert his claim at time of the sale.15
This Court agrees with Walker and the Trustee and finds that the Trustee’s having failed to provide the statutorily required notice of the proposed sale of the 3.61 acres to the Loftins renders the sale proeedurally defective and violative of Mr. Walker’s right to due process of law. Based on the analysis immediately following, the Court finds that Calvin Walker, Jr., was a known party in interest sufficient to trigger the statutory notice requirements, which were that he receive specific notice of the objectionable event and the time within which to object. The Court further finds that the burden was on the Trustee to provide this notice and that the Trustee failed to sustain his burden. The Court lastly finds that on the facts of this case, the appropriate remedy is to set the sale aside.
The applicable provision of the Bankruptcy Code pertaining to use, sale, or lease of property permits the trustee to sell property of the debtor’s estate, but only after notice and a hearing. Section 363(b)(1) states: “The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.” 11 U.S.C. § 363(b)(1). The Bankruptcy Rules specify that parties in interest to a debtor’s estate be given twenty days’ notice by mail of a proposed sale. Fed.R.Bankr.P. 2002(a)(2). The Advisory Committee Note states: “The notice of a proposed sale affords creditors an opportunity to object to the sale and raise a dispute for the court’s attention .... Once an objection is raised, only the court may pass on it.” Bankr.R.2002 advisory committee’s note (1983). This notice must include time and place of sale, terms and conditions, and the time fixed to object. Bankr.R.2002(c)(l).
The notice provisions are the cornerstone of bankruptcy procedure; notice to “parties in interest” is indispensable. The term “parties in interest” encompasses not only entities holding “claims” against the debtor, but also any entity whose pecuniary interests might be directly and adversely affected by the proposed action. This construction of “parties in interest” is consistent with the broad meaning Congress intended to convey on the words “claim,” “debt,” and “property of the estate.” Cf. 11 U.S.C. §§ 101(5)(A) (“claim” means right to payment, whether or not ... reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured [etc.]); § 101(12) (“debt” means liability on a claim); § 641(a)(1) (“property of estate” includes all legal or equitable interests of the debtor) (emphasis added).
Thus, for example, even notwithstanding the Code’s concern for finality in bankruptcy sales, it “will not ... protect a party buying from the trustee in a sale free and clear of liens[,] where no notice [was] given to the lienholder[;][s]uch a purchaser will be held to have purchased subject to the lien.” The burden to furnish such notice is on the trustee. Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Industries, Inc.), 43 F.3d 714, 720-21 (1st Cir.1994) (state-law products-liability action held to survive Chapter 11 due to failure of notice); MRR Traders, Inc. v. Cave Atlantique Inc., 788 F.2d 816 (1st Cir.1986) (notice of proposed sale of liquor license, sent to debtor’s landlord rather than landlord’s attorney, failed to satisfy notice requirements and justified setting aside sale); Esposito v. Title Ins. Co. of Pa. (In re Fernwood Mkts.), 73 B.R. 616 (Bankr.E.D.Pa.1987) (notice sent to lienholder’s attorney, rather than lienholder, held insufficient and grounds to set aside sale); cf. In re CRC Wireline, Inc. (“CRC ”), 103 B.R. 804, 806 (Bankr.N.D.Tex.1989) (court rejected trustee’s argument that em*764phasis on notice requirement would interfere with certainty and finality; court permitted otherwise-late claim due to notice failure); see also infra, n. 20. See generally Philip A. Schovanec, Bankruptcy: The Sale of Property Under Section S6S: The Validity of Sales Conducted Without Proper Notice, 46 Okla. L.Rev. 489, 517 & text accompanying n. 175 (1993) (“Schovanec”).
The Court finds that Mr. Walker was a “party in interest” because he might have had a cognizable pecuniary interest in land that he had received, in satisfaction of what he and Mr. Rounds thought was a legitimately incurred debt.16
Various explanations may be found for why Mr. Walker was omitted from various mailing matrixes, but, under the circumstances of the case at hand, the Court re-emphasizes that the ultimate burden of ensuring proper notice must rest on the Trustee. Western Auto Supply, 43 F.3d at 721. The circumstances here are that, on June 25, 1996, the debtor’s attorney properly served this Trustee, and his attorney, with a copy of the amended schedule that contained Walker’s name, his address, and an assertion that the nature of his alleged claim was in the form of an executory contract. In addition, affixed to this amendment was a copy of the written instrument itself with a map of the particular land in which Mr. Walker claimed an interest.17
Thus, from the mere title of the amending document only, the Trustee should have taken notice that Walker claimed an interest under what Walker characterized, in filings duly served on the Trustee, as either an executory contract or a “Temporary Deed.” Further, from the contents of the document attached to the amendment to schedules— both this document’s language attempting to describe the claimed property, as well as the hand-drawn map purporting to depict it — the Trustee should have taken notice that Walker sought to attach his claim to the very “Walker” land (the 3.61 acres) that the Trustee eventually sold to the Loftins, instead of and without notice to Walker. Under these circumstances, the burden rested on the Trustee to furnish notice of a proposed action directly seeking to alienate that very same land. There ean be no burden on Walker to inquire further about such proposed court action. CRC, 103 B.R. at 808.
The Trustee has conceded18 that Mr. Walker was inadvertently omitted from the mailing matrix when he should have been on it, as a party whose interest may have been of some kind, no matter whether legal or equitable. The ultimate merit of Walker’s claim is immaterial to that point. He should have had notice.19
The Loftins, in their December 28, 1998 Post-trial Brief at 18, cite cases for the contrary proposition that failure of notice should not entitle Walker to set aside the sale now, because he was aware of the bankruptcy, and even may have known specifically about the sale, yet he did nothing to assert his right to the property at the appropriate time. First, however, as counsel also forthrightly notes at that same point in his brief, the cited cases are applicable as to filing proofs of claims. The Court finds that they are not applicable here, however, where notice as to the sale of property is governed by additional statutory and rules requirements specifically as to notice required in that circumstance.
*765Second, even the rule of law the Loftins cite as to filing proofs of claims is not as absolute as counsel would have it. See 11 U.S.C. § 1141(d)(1) (if Chapter 11 creditor not listed on schedule and, therefore, omitted from requisite notices, then creditor’s claim not discharged).20
Thus, the Eighth Circuit has held in a recent case that “adequate notice” and “opportunity to participate” includes providing interested, “known” parties not only with generalized notice of the event in question, but also the specifics of it, including the dates within which objections must be lodged. “The constitutional component of notice is based upon a recognition that creditors have a right to adequate notice and the opportunity to participate in a meaningful way in the course of bankruptcy proceedings.” IRS v. Hairopoulos (In re Hairopoulos), 118 F.3d 1240, 1244 (8th Cir.1997). Thus, in Hairopoulos, the Court of Appeals for the Eighth Circuit held that the IRS could pursue collection efforts against a discharged Chapter 13 debtor, because IRS had not been properly notified of the debtor’s conversion from Chapter 7 to 13. The court rejected debtor’s contention that notice was served on IRS by way of a post-conversion attorney fee application, or a pre-conversion no-asset notice. The court emphasized that “the focus of the due process inquiry is on ‘the duty of the ... bankruptcy court to give notice of the relevant dates.’” Id. at 1245, quoting In re Interstate Cigar Co., 150 B.R. 305, 309 (Bankr.E.D.N.Y.1993) (emphasis added). See also Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) (inadequate notice is grounds for allowance of late-filed claims). The rule in § 1141 obtains even if the unscheduled Chapter 11 creditor were otherwise aware of the bankruptcy. Wallach v. Frink America, Inc. (In re Nuttall Equipment Co.), 188 B.R. 732, 735 n. 1, (Bankr.W.D.N.Y.1995); CRC, 103 B.R. 804, 808 (otherwise-late claim permitted despite creditor’s knowing of bankruptcy as well as wide publication of notice in print media; “[sjueh persons, even after receiving actual notice of the bankruptcy, have no duty to inquire about further court action.”). These notice rules — ■ as is also true for those that obtain in the case of sale of property — largely flow from due process considerations. Wallach, 188 B.R. at 735 n. 1. Thus, the mere generalized knowledge that Walker may have had as to the existence of the Rounds bankruptcy cannot serve to bar him from asserting, and this Court from so finding, that his due process rights were violated here.
The case law presents this Court with some options as to remedy. On the facts of this ease, setting aside the sale is the appropriate one.
Failure to give adequate notice is by far the most frequent mistake or infirmity held to warrant vacating a confirmed sale. Schovanec, 46 Okla.L.Rev. at 517 & text accompanying n. 175. The most common remedy, where adequate notice of sale has not been given, is to set the sale aside or to treat it as voidable, typically at the option of the person who failed to receive notice. Id.; see, e.g., M.R.R. Traders v. Cave Atlantique, Inc., 788 F.2d 816 (1st Cir.1986) (notice of proposed sale of liquor license, sent to debtor’s landlord rather than landlord’s attorney, failed to satisfy notice requirements and justified setting aside sale); Esposito v. Title Ins. Co. of Pa. (In re Fernwood Markets), 73 B.R. 616 (Bankr.E.D.Pa.1987) (notice sent to lienholder’s attorney, rather than lienholder, held insufficient and grounds to set aside sale). This more conventional approach views a sale conducted without proper notice as a taking of property that violates due process. Strict adherence to the notice requirements is, therefore, required.21 Schovanec, 46 Okla. L.Rev. at 517, text accompanying n. 176.
*766Some courts have taken a more lenient, flexible approach, which molds the remedy to the facts of the particular case. Schovanec, 46 Okla.L.Rev. at 520, 521; e.g., In re Cavalieri, 142 B.R. 710 (Bankr.E.D.Pa.1992) (subsequent dispute over automobile caused by clerical error in mistakenly releasing security interest). However, the facts of the case at bar do not invite this Court to decide whether the more flexible approach is necessary. For example, this case does not involve avoiding a slightly imperfect sale simply because of an insignificant, technical error in its consummation; Schovanec, 46 Okla.L.Rev. at 524. Here, the error was significant: There was no notice whatsoever. Similarly, there is no question in the case at bar whether an “overly rigid” approach ending in avoidance would work a disadvantage on the estate, id. at 520; here, on the contrary, the estate would be deprived of a valuable asset if the sale were allowed to stand.
Moreover, considerable evidence exists, even on the partial record made so far in this case, to establish that this is not a case in which an alternate remedy should be crafted to save the sale, in order to protect an innocent third-party purchaser in good faith. Rather, as has been noted, the evidence shows that the Loftins knew that the 3.61 acres had improvements on it at the time of the sale to them. (See supra, note 13.) The evidence further shows that the Loftins knew that Walker thought he had some kind of interest in the 3.61 acres. (See supra, text accompanying note 10.) Regardless of whether their conduct actually amounted to the “overly-shrewd” “picking of the Trustee’s pocket,” of which the Trustee accuses them in his November 24th brief at 5, the fact remains that the Trustee has testified that he would not have sold the Walker land to them at the $1,500.00 purchase price if he had known about the improvements.22
Therefore, there is nothing to prevent this Court from setting aside the sale, for failure of notice alone, and the Court will accordingly do so.
The parties have raised numerous other issues over and above the notice issue. However, the Court has determined that these are not properly raised in the present context, when the parties have argued only by petition and response, and hearings on the same. Rather, now that the Court has determined that the sale must be set aside, the appropriate procedure is for the Trustee, or any other party in interest, to file an adversary proceeding under Bankruptcy Rule 7001. This Rule provides, in relevant part: “An adversary proceeding_is a proceeding ... to determine the validity, priority, or extent of a lien or other interest in property....” Fed.R.Bankr.P. 7001(2). This is the appropriate procedure because, to date, the parties may have briefed some of the numerous issues raised, but they have not yet had the opportunity to conduct discovery, or to organize or present evidence properly and fully.
The issues that are to be determined subsequent to the notice issue — and there may be more than these — include at least: (1) whether Mr. Rounds improperly conveyed the written interest in the 3.61 acres to Mr. Walker, several months postpetition, in late 1994, without seeking leave of, or informing, this Court (Loftins’ December 28, 1998 Brief at 17); (2) whether this writing was ambiguous; (3) whether it was in the nature of a contract, executory or otherwise; a note; or a mortgage23 (Walker’s November 5, 1998 Brief at 20-24; Trustee’s November 24 Brief at 2-4; Loftins’ December 28 Brief at 10-15); *767(4) whether the writing can have legal force or effect, in light of the contingent nature of the donative language (Walker to receive land when Rounds paid off his debts in full); (5) whether Mr. Rounds could ever pay his debts in full, given the significant encumbrances on the land (Loftins’ December 28 Brief at 16); (6) whether Rounds’s and Walker’s failure to record this document, as the law ordinarily requires, would be fatal to Walker’s claim; and (7) failing a legal claim, whether Mr. Walker might have an equitable claim on the estate and, if so, how much, due to the improvements he allegedly made.
Again, however, an adversary proceeding and full discovery is the appropriate procedure to follow, before this Court may rule on these and any other matters. Moreover, a full evidentiary record is necessary finally to determine the extent and value of Walker’s claim, if any, on the bankruptcy estate.
In addition, since the sale to the Loftins was in the amount of $1,500.00, and since the Trustee has conceded at the September 7, 1998 hearing that he would not have agreed to that purchase price if he had known that there were improvements on it,24 the amount the Trustee receives on resale of the property, at a price that will more appropriately reflect the value of the real estate plus improvements, will have bearing on the extent of all relevant claims on the property.
Thus, for the above-stated reasons, the sale that this Court approved on December 22, 1997 and confirmed on January 22, 1998 is hereby SET ASIDE.25
IT IS SO ORDERED.
. Loftins' counsel has briefed arguments to the contrary (Response Brief of July 13, 1998 at 6-7). However, he orally conceded this Court’s jurisdiction in a hearing held on August 18, 1998. Even if he had not, an alternative basis in which jurisdiction may be found is 11 U.S.C. § 105(a) (court has equity jurisdiction to interpret its own orders); Miller v. Farmers Home Admin. (In re Miller), 16 F.3d 240, 244 (8th Cir.1994) (court can exercise equitable power to characterize and enter any orders as necessary; here, to treat creditor’s motion to set aside confirmation as motion for new trial). In any event, the purpose of the Code’s and the Rules' procedural notice requirements is, in part, to prevent disputes from falling into a "jurisdictional no-man’s land.” Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Industries, Inc.), 43 F.3d 714, 722-23(lst Cir.1994) (state law cause of action in products liability held to survive Chapter 11 due to failure of notice). Thus, for these reasons, the Court finds jurisdiction.
. Mr. Rounds testified in hearings before this Court on August 18 and 27, 1998. Mr. Walker testified on September 7, 1998.
. This is the parcel around which this ownership controversy has arisen. Designation of this parcel as the "Walker land” is intended to be for convenience only, to distinguish this tract from a neighboring parcel sold later to the Respondent Loftins. It is in no way intended to be a finding that Walker actually owns, or even has a claim on, this piece of land.
. Case No. 94-80177. On December 17, 1995, that case was dismissed for failure to make payments. Mr. Rounds filed again in Chapter 13 on April 9, 1996 (case no. 96-80361, the current case). On June 13, 1996, he converted to Chapter 7.
. Encumbrances on the land in question, existing at the time of the 1994 bankruptcy, included a mortgage on behalf of Marc May, which lien was originally filed in 1974, and one on behalf of Dynamic Enterprises, which was filed in 1983. The IRS lien in place at the time was recorded in November 1993. Thereafter, the debtor became subject to five more IRS liens that were recorded throughout 1996 and 1997, all of which tax liability eventually totaled in excess of $64,000.00.
. Despite Walker’s asserted close, long-time relationship with Rounds, and Mr. Rounds’s having approached him in 1994 to write down their agreement regarding the land, Walker testified that he did not become aware of Mr. Rounds's bankruptcy status until around either the spring or fall of 1996.
. Jamie Walker testified at the August 27, 1998 hearing.
. Accordingly, when the Trustee later caused a title search to he made, Mr. Walker’s alleged interest in the land did not appear as a matter of record.
. Ms. Jacoway has represented both Trustee Lee and Rounds's mortgagee Marc May.
.There was even testimony that they were aware that Walker thought he had a claim on “his” land. Both the Loftins testified to having heard Walker mention a “piece of paper” that he believed gave him a claim on the land. (Loftins’ testimony at September 7 hearing.)
. This is the § 363(b)(1) notice, which included statement of the 20-day objection period as required in Bankr.R.2000(a)(2), (c)(1).
. Neither Mr. Walker's address was included on the matrix, nor that of the other party contained in the Second Amendment: the Chambers Development Co., which held a confidentiality agreement pertaining to a garbage route sold.
. The assertions and testimony conflict as to the extent of the improvements that existed on the Walker land at the time of sale in November 1997. The Trustee accuses the Loftins of "overly-shrewd” dealings with him and asserts that they misled him into thinking the property was unimproved. (Trustee’s November 24 Brief at 4-5.) In contrast to this accusation, Walker testified that he had begun improving the property as early as 1991; by 1998, he claimed to have cut a road and built an entry onto the property; as well as installed a pond, flowerbeds, and an almost-completed and substantial cabin. Further, as noted in more detail infra at n. 24, Anna Loftin substantiated Walker’s testimony in some respects. However, the Court need not resolve this controversy at this juncture, because the sole issue presently and properly before it may be resolved on the failure-of-notice determination. As discussed in more detail below, other issues as to the nature and extent of Walker's claim, including the legal or equitable value of the asserted improvements, are more properly raised in the adversary proceeding that should follow this decision.
. In his August 25, 1998 brief, at 1, the Trustee acknowledges and apologizes that he did not serve notice on Walker. In his November 24th post-trial brief, at 6, the Trustee proposes that the Deed be deemed a mortgage and, on the strength of it, that the sale to the Loftins should be set aside, for failure to give notice to the mortgagee.
. The Court explains why it rejects this contention infra at 764-765.
. Thus, the Loftins' argument in their December 28th post-trial brief at 8-17, that Walker's status as a "creditor” depends on the validity and enforceability of the "Deed,” has no merit.
. Thus, the Loftins’ argument in their December 28th brief at 17, that the amended schedule was too vague to alert the Trustee that Walker might have been a potential creditor who deserved notice of the sale, also has no merit.
. Trustee’s August 25, 1998 Brief at 1; testimony at September 7th, 1998 hearing; November 24th post-trial brief, at 6.
.Since Mr. Walker never received notice of any kind, the Loftins' arguments on timeliness of appeal are inapposite. (Loftins’ Brief of July 13, 1998, at 4-6.) The Court fails to grasp how a person such as Mr. Walker should be required to appeal an order approving a sale within any given-time, when the person never was notified of the proposed sale and, therefore, had no reason to know that anything objectionable had occurred in the first instance.
. For a thoughtful analysis of distinctions that must be made in this context, see In re Eagle-Picher Industries, Inc., 215 B.R. 983 (Bankr.S.D.Ohio 1997) (“known" Chapter 11 creditors — those "reasonably” known to debtor — must receive actual and specific notice; otherwise, mere knowledge of pendency of bankruptcy, and notice by publication, might be sufficient if claimant's predecessor-in-interest had continued business dealings with debtor and if claim in question arose postpetition and if claimant had actual notice of bar date for claims; on those facts, publication notice of date of confirmation hearing was sufficient.).
. Thus, a further finding on the alternative ground of whether the sale was unconscionable *766(Walker’s August 26, 1998 Brief at 34-36), is unnecessary. Rather, Walker may raise a claim of unjust enrichment, if appropriate, against the debtor's estate in subsequent proceedings.
. The Court suspects that if the Loftins had taken care to inform the Trustee of Walker’s presence on the 3.61 acres and the improvements he had put there, matters would not have come to the present pass. That they have is most regrettable for all parties here concerned, not least of whom are the Loftins, who will have to continue to pay for litigation over a matter that could have been resolved by forthright dealings at the appropriate time. In other words, it appears to the Court that, in all likelihood, the Loftins brought this litigation on themselves.
. Further, the Trustee should re-raise in the adversary proceeding his argument that the Walker claim — if it was a mortgage — should be avoided (Trustee's November 24, 1998 Brief at 6).
. Anna Loftin also conceded in her testimony at the same September 7 hearing that, as of April 1997, the cabin, including a walkway and walls but not windows, had been built. (See Trustee's November 24, 1998 Brief at 5 n. 4.) She further testified that the entrance to the property had been present as early as 1995. Thus, since the Trustee applied for approval of sale of the 3.61 acres in November 1997, and obtained confirmation of it in January 1998, and because Anna Loftin is especially credible here because her testimony is adverse to her own interests, the Court finds that the purchase price should have, but did not, reflect the existence of these improvements to the land. The Court reserves any specific findings as to what that value might have been pending further evidentiary development.
. This is the relief that Petitioner Walker has requested. There is, thus, no need to offer him the option of treating the sale as voidable. See supra, at 765-766. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492842/ | DECISION
ROBERT E. GRANT, Bankruptcy Judge.
In this Chapter 7 case, it appears that all creditors will probably be paid in full. This adversary proceeding involves a dispute over the distribution of any surplus. The plaintiff is the official equity security holders’ committee (“Committee”) for the holders of the debtor’s Class C common stock. The defendant, Kauthar Sdn. Bhd. (“Kauthar”), holds 1,800 shares of Class D stock, which has a liquidation preference over the Class C shares. By this adversary proceeding, the Committee has asked the court to equitably subordinate Kauthar’s equity interest to the equity interests of the Class C shareholders. See 11 U.S.C. § 510(c).
The matter is before the court on Kaut-har’s motion for judgment on the pleadings. Kauthar contends that, pursuant to § 726(a)(6), any surplus remaining after creditors are paid in full belongs to the debt- or and not its shareholders. Thus, there is no reason to consider equitable subordination. Since there will be no distribution to shareholders, it also argues that the court lacks subject matter jurisdiction over a proceeding which will not affect the amount available for distribution to creditors or the administration of the bankruptcy estate.
A motion for judgment on the pleadings is determined by the same standard applied to a motion to dismiss for failure to state a claim. U.S. v. Wood, 925 F.2d 1580, 1581 (7th Cir.1991); Thomason v. Nachtrieb, 888 F.2d 1202, 1204 (7th Cir.1989). The court is required to view the facts presented in the pleadings and the inferences drawn from them in the light most favorable to the non-moving party. Flenner v. Sheahan, 107 F.3d 459 (7th Cir.1997); Wood, 925 F.2d at 1581; Thomason, 888 F.2d at 1204; In re Amica, Inc., 130 B.R. 792, 796 (Bankr.N.D.Ill.1991). The motion may only be granted if it then appears that under no set of circumstances can the plaintiff be granted relief. Frey v. Bank One, 91 F.3d 45, 46 (7th Cir.1996), cert. denied, 519 U.S. 1113, 117 S.Ct. 954, 136 L.Ed.2d 841 (1997).
The court does not agree with Kauthar’s contention that it lacks subject matter jurisdiction over this controversy. The argument confuses jurisdiction with the merits of a plaintiffs claim. “[Jjurisdiction is the power to decide.” Matter of Chicago, Rock Island and Pacific R. Co., 794 F.2d 1182, 1188 (7th Cir.1986)(Sanbom II Xemphasis original). That power includes the power to say no. Consequently, just because a plaintiff may not be entitled to the relief it seeks does not mean that the court lacks the jurisdiction necessary to decide the issue.
The scope of the jurisdiction exercised by a bankruptcy court is defined by 28 U.S.C. § 1334. In addition to having jurisdiction over the bankruptcy case itself, 28 *912U.S.C. § 1334(a), the court also has jurisdiction over “all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). Under the test adopted by the Seventh Circuit, a dispute is “related to” a case under title 11 when its resolution affects the amount of property available for distribution to creditors, the manner in which that property is to be distributed, or the administration of the estate. See Matter of Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987); Matter of Kubly, 818 F.2d 643, 645 (7th Cir.1987). See also In re Friendship Medical Center Ltd., 710 F.2d 1297, 1302 (7th Cir.1983). While the present dispute does not affect the amount of property available for distribution, it does involve how that property will be distributed. Thus, it comes within the scope of the court’s “related to” jurisdiction. Furthermore, since Plaintiffs right to relief is premised upon a specific provision of the Bankruptcy Code, the court also has jurisdiction over it as a “proceeding arising under title 11”. In re Spaulding, 131 B.R. 84, 88 (N.D.Ill.1990).
Pursuant to § 510 of the United States Bankruptcy Code, the court may
under principles of equitable subordination, subordinate for the purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest. 11 U.S.C. § 510(c)(1).
The Committee contends that this statute gives the court the ability subordinate Kaut-har’s equity interest to the interests of debt- or’s other shareholders. Kauthar disagrees. It argues that the court’s concern for how the assets of the estate are distributed after all creditors have been paid in full ends with § 726(a)(6)’s pronouncement that they go to the debtor. The court is inclined to agree with Kauthar.
In cases under Chapter 7, the distribution of property of the estate is governed by § 726 of the United States Bankruptcy Code. After payment of the different kinds of claims listed in the first five paragraphs of § 726(a), anything that remains goes “to the debtor.” 11 U.S.C. § 726(a)(6). “The Code goes no further respecting the rights of parties who are owners of the debtor.” In re Riverside-Linden Inv. Co., 925 F.2d 320, 323 (9th Cir.1991).
The ultimate question raised by this adversary proceeding thus becomes when, if ever, in a Chapter 7 case, should the bankruptcy court look beyond the mandate of § 726(a)(6) and involve itself in determining the relative rights of a corporate debtor’s shareholders to any assets that might remain after creditors are paid in full? Admittedly, § 510(c) appears to recognize the possibility, because it applies to cases pending under all chapters of the Bankruptcy Code, 11 U.S.C. § 103(a), and it does speak of subordinating allowed interests. Yet, simply because § 510(c) applies to all chapters and mentions the equitable subordination of allowed interests does not mean that the court will be concerned with doing so in every chapter.
In cases under Chapter 11 and 12, the opportunity to equitably subordinate the interests of a debtor’s equity holders may be necessary to reorganize or deal with the debtor’s capital/equity structure. Under Chapter 7, however, orderly liquidation and not reorganization is the goal. Rarely are there enough assets to fully pay creditors, much less provide a return to the debtor or its equity security holders. Thus, in the typical Chapter 7 case, the court will not be concerned with the competing claims of a debtor’s equity security holders because there will be nothing left to which they might lay claim.1
Perhaps out of recognition that the cases in which the estate will be solvent, so that equity holders might possibly receive a distribution, are extremely rare, the Bankrupt*913cy Code shows little or no concern for their interests in Chapter 7 cases. This is especially so by comparison to the attention they receive under Chapter 11. For example, Chapter 11 contemplates the possibility for the appointment of committees for both creditors and equity security holders, 11 U.S.C. § 1102(a), while Chapter 7 offers only the possibility of a creditors’ committee. 11 U.S.C. § 705. Similarly, there is really no mechanism for filing a proof of interest in Chapter 7 cases. Bankruptcy Rule- 3003 addresses the time for filing both proofs claim and proofs of interest in Chapter 11 cases; Rule 3002(e), which addresses the essentially same issue for Chapter 7 .cases, speaks only of filing claims. These excerpts from both the statute and the applicable rules of procedure implicitly seem to confirm what § 726(a) explicitly says, the Bankruptcy Code simply does not contemplate that equity security holders will share in the distribution of the estate in cases under Chapter 7 — any surplus is to be distributed to the debtor.
In contrast to the current Bankruptcy Code’s specific direction that surplus funds be distributed to the debtor, the former Bankruptcy Act made no provision for the distribution of any surplus that might remain after creditors had been paid in full. In the absence of any statutory authority governing the disposition of these funds, the courts relied upon equitable principles to recognize the debtor’s right to recover them. See 6 Remington on Bankruptcy, -§ 2890, at 509 (5th Ed.1952).
[I]nsolvency, inability to pay his debts in full, is the basis of the whole proceeding, and the Act of Congress in all its provisions has reference to that situation.... The act did not contemplate, and therefore did not provide for the disposition of, a balance in the hands of the trustee after the payment of all creditors in full. In such a situation, where in fact all the creditors are paid in full, every principle of equity would require the payment of such balance to the bankrupt, not because of any provision in the Bankruptcy Act, but because equity would clearly demand it. In re Lenox, 2 F.2d 92, 93 (W.D.Pa.1924). See also Johnson v. Norris, 190 F. 459, 462 (5th Cir.1911).
Thus, in corporate cases, “[t]he surplus would belong to the debtor, not its stockholders. The trustees would hold it for the bankrupt, from whom it came to them.” In re Witherbee, 202 F. 896, 899 (1st Cir.1913).
A “corollary” to this equitable principle developed which “recognize[d] that exceptional circumstances of equity may dictate that surplusage pass to one other than the bankrupt.” Matter of Wolverton, 491 F.2d 361, 365 (9th Cir.1974). One of those circumstances was where a corporate debtor was no longer in existence. In that situation, a distribution of any surplus might be made to the corporation’s shareholders. In re Georgian Villa, Inc., 55 F.3d 1561, 1563 (11th Cir.1995); Hendrie v. Lowmaster, 152 F.2d 83, 85 (6th Cir.1945). Relying upon this line of authority, which was developed under the former Bankruptcy Act, the Committee argues that Rimsat is essentially defunct, has no independent management and no longer conducts any business. It then contends that this presents a situation in which the distribution of any surplus should be made to the debtor’s shareholders, rather than to the debtor. Thus, it becomes appropriate to consider equitably subordinating Kauthar’s interest to the interests of other shareholders.
Even though the bankruptcy courts were, in limited circumstances, willing to use their equitable power to distribute surplus funds to a corporation’s shareholders, rather than to the corporate debtor, that does not mean that they were also willing to resolve disputes between shareholders over who was entitled to what. Quite to the contrary, they seem to have consciously eschewed doing so.
[I]t is outside the scope of bankruptcy to go into conflicting claims of stockholders or as to who is entitled to the assets of a dissolved corporation, and in such circumstances, the bankruptcy court may simply hold the assets or provide for their custody pending determination of rights by another tribunal. 6 Remington, § 2890 at 510.
Thus, in First Colonial Corporation of America, 693 F.2d 447 (5th Cir.1982), the court acted properly in directing the trustee to deliver surplus assets to a state court receiver. Similarly, in Berl v. Crutcher, 60 F.2d *914440 (5th Cir.1932), the district court acted properly in appointing a receiver to whom the bankruptcy trustee could deliver any surplus, pending resolution of the competing claims of shareholders. Consequently, although the practice under the former Bankruptcy Act may have developed an equitable principle which permitted a distribution of surplus funds to a corporation’s shareholders, it does not seem that the principle extended to the point where the bankruptcy courts would also resolve disputes between those shareholders.
Unlike the former Bankruptcy Act, the current Bankruptcy Code is quite specific as to the disposition of surplus assets. They are to go “to the debtor.” 11 U.S.C. § 726(a)(6). In the face of this statutory directive, it would seem that the Act cases which recognized the possibility of making such a distribution to a corporate debtor’s shareholders would have little, if any, continuing vitality. Even then, they did not go so far as to permit the bankruptcy court to resolve shareholder disputes. Accordingly, this court’s inquiry may begin and end with the plain language of the statute; “where, as here, the statute’s language is plain, ‘the sole function of the courts is to enforce it according to its terms.’ ” United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989)(quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917)).
Pursuant to § 726(a)(6), any property of the bankruptcy estate remaining after all creditors have been paid in full is to be distributed to the debtor — not to its shareholders. Since there will be no distribution to shareholders, there is no reason to consider equitably subordinating Kauthar’s interest to that of debtor’s other shareholders. Kauthar’s motion for judgment on the pleadings will be granted and this adversary proceeding will be dismissed. An order doing so will be entered.
. In Chapter 7, the question of equitable subordination and the interests of equity security holders more commonly involves an equity holder's attempt to disguise its interest as debt, so that it may share in the distribution to creditors. See Matter of Lifschultz Fast Freight, 132 F.3d 339 (7th Cir.1997); Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7th Cir.1990). Section 510 permits the bankruptcy court to foil this queue-jumping, by bumping the "claims" of equity holders back to the end of the line where they belong. See Lifschultz Fast Freight, 132 F.3d at 343-44. | 01-04-2023 | 11-22-2022 |
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