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https://www.courtlistener.com/api/rest/v3/opinions/8493006/ | CARL L. BUCKI, Bankruptcy Judge.
In these related proceedings, the Chapter 7 trustee objects to proofs of claim that a mortgagee has filed to recover unpaid rent allegedly due for property that the debtors had occupied as tenants prior to a foreclosure sale. At issue is the application of New York law relative to the recovery of foreclosure deficiencies.
C Kitchen Associates, Inc. (“C Kitchen”), and Gruber Supply Corporation (“Gruber Supply”) filed separate petitions for relief under Chapter 11 of the Bankruptcy Code on May 29, 1992. At that time, both debtors were tenants of property on Walden Avenue in the Town of Cheektowaga, New York. The owners both of this property and of the debtor corporations were Carl and Eva Gifaldi. Pursuant to an oral understanding with the Gifaldis, the debtors paid no rent in consideration for their occupancy.
Sometime prior to the debtors’ bankruptcy filings, Chase Manhattan Bank, N.A. (“Chase”) commenced an action to foreclose a first mortgage on the Walden Avenue property. In its complaint, Chase designated both C Kitchen and Gruber Supply as defendants, due to their status as tenants and occupants. The debtors’ bankruptcies effected a stay of the foreclosure proceedings, but this court granted an order lifting that stay in November 1992. Then in May 1994, Chase secured the appointment of a receiver of rents in the foreclosure action. Shortly thereafter, the Gifaldis filed their own petition for relief under Chapter 11 of the Bankruptcy Code. At about this time, Chase assigned its mortgage to Lennar Northeast Partners, L.P. (“Lennar”). On January 11, 1996, this court granted Lennar’s motion for stay relief in the Gifaldis’ case, and granted the motion of the United States Trustee to convert the cases of both C Kitchen and Gruber Supply to Chapter 7. The corporations’ Chapter 7 trustee made no motion to assume the lease of either debtor, but vacated the premises after *778completing a tag and auction sale of personal property in July 1996.
At a duly scheduled auction in November 1996, the foreclosure referee sold the Walden Avenue property to Lennar. The referee’s deed, however, was not recorded until more than a year later. Although the outstanding loan balance exceeded the bid price, the New York courts ultimately denied Lennar’s application for a deficiency judgment, on the basis that it had failed to make timely application for such relief under section 1371 of the New York Real Property Actions and Proceedings Law. Nonetheless, Lennar now seeks to recover, from the bankruptcy estates of C Kitchen and Gruber Supply, the rental value of the leased premises for the period between the conversions to Chapter 7 and the date on which the trustee vacated the premises, together with the cost of clean-up. For the reasons recited hereafter, these claims are to be disallowed in full.
Lennar may assert rights from either of two perspectives: that of current owner or that of unsatisfied mortgagee. In the foreclosure proceeding, Chase and Lennar chose to designate C Kitchen and Grubber Supply as defendants. The effect of the foreclosure sale, therefore, was to terminate both leases. Thus, neither debt- or could have any continuing lease obligations to the successful bidder after the foreclosure sale. Because the Chapter 7 trustee vacated the Walden Avenue property prior to the foreclosure sale, Lennar as new owner could have no claim against the trustee for any hold-over occupancy. And because the new owner at foreclosure acquires property in an “as is” condition, Lennar as that new owner holds no claim for costs of clean-up.
Lennar urges reliance on the decision of the New York Court of Appeals in Markantonis v. Madlan Realty Corp., 262 N.Y. 354, 361, 186 N.E. 862 (1933), which held that in the particular foreclosure sale there at issue, the purchaser “acquired the title and ownership previously vested in the mortgagor, including the same right to enforce the lease which the mortgagor previously had.” In contrast to the present situation, the mortgagee in Markantonis had chosen not to name the tenant as a defendant. It was for that reason that the lease obligations survived, whereas in the present instance, C Kitchen and Gruber Supply have no lease liability to the new owner. Accordingly, the only possible basis of claim by Lennar would be whatever entitlement might exist to recover a deficiency on its mortgage.
Section 1371 of the New York Real Property Actions and Proceedings Law establishes the standards for collection of foreclosure deficiencies. Of relevance are subdivisions 3 and 4 of this section, which read as follows:
3. If no motion for a deficiency judgment shall be made as herein prescribed the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt and no right to recover any deficiency in any action or proceeding shall exist.
4. Notwithstanding the foregoing provisions and irrespective of whether a motion for a deficiency judgment shall have been made or, if made, shall have been denied, the court shall direct that all moneys remaining in the hands of a receiver of the rents and profits appointed in the action, after the payment of the receiver’s fees and the expenses of the receivership, or any moneys remaining in the hands of a mortgagee in possession or an assignee of the rents and profits of the premises, shall be paid to the plaintiff to the extent of the amount, if any, by which the judgment of foreclosure and sale exceeds the amount paid for the property upon the sale.
In the context of Lennar’s foreclosure of the Walden Avenue property, the state court has denied the application for a deficiency judgment. Ruling that that application was untimely, the court essentially concluded that Lennar had failed to move as prescribed by section 1371. According*779ly, by reason of subdivision 3 of that section, “the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt.” There no longer being any mortgage debt, Len-nar holds no remaining claim which it might recover from either C Kitchen or Grubber Supply.
Subdivision 4 of section 1371 recognizes that even when a deficiency application is denied, all monies remaining in the possession of the receiver of rents shall be paid to the mortgagee “to the extent of the amount, if any, by which the judgment of foreclosure and sale exceeds the amount paid for the property upon the sale.” In the present instance, however, no monies remain in the receiver’s possession. Nor has the receiver filed a proof of claim in either of the bankruptcy proceedings. Rather at issue is a claim that the mortgagee has filed not against the receiver, but against tenants. As to such a claim, subdivision 4 of section 1371 simply has no application.
The foreclosure of the Walden Avenue property has fully satisfied any mortgage debt owed to Lennar. Because the foreclosure also terminated any leasehold interests, neither C Kitchen nor Gruber Supply have any other obligation to Len-nar. Accordingly, the court will sustain the trustee’s objection to the proofs of claim that Lennar has filed in each of these cases.
So ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493010/ | MEMORANDUM OF DECISION
ERNEST M. ROBLES, Bankruptcy Judge.
On October 6, 1999, the Court heard the chapter 7 trustee’s Final Report and Application for Fees and Expenses and the Opposition thereto filed by the Office of the United States Trustee (“OUST”). Damon G. Saltzburg, Esq. appeared on behalf of the chapter 7 trustee, David L. Ray, Esq., and Peter S. Burke, Esq. appeared on behalf of the OUST.
After entertaining oral argument, the Court ordered further briefing on the issue of whether the chapter 7 trustee’s fees should be calculated using pre- or post-1994 amendment rates under 11 U.S.C. § 326(a).1 For the reasons set forth fully below, the Court finds that the pre-1994 amendment rates apply and orders the chapter 7 trustee to disgorge $6,771.85 of the fees received by the chapter 7 trustee on an interim basis.
I.
FACTS
Westar Paving, Inc., (“Debtor”) filed a voluntary chapter 11 petition on June 8, 1994. On July 18, 1995, the case was converted to chapter 7. On November 22, 1995, David L. Ray was appointed the chapter 7 trustee (“Trustee”).
The Trustee was awarded interim compensation on April 21, 1997, in the amount of $10,852.26 in fees and $178.54 in expenses. The Trustee submitted his Final Report and Application for Trustee Fees and Expenses (“Application”) on August 25, 1999. The Trustee requested $11,-000.68 in fees and $178.54 in expenses. In calculating the fee request, the Trustee used the posi>-1994 amendment rates under section 326(a) based upon total receipts of $155,013.55.2
The OUST filed an objection and requested a hearing on the Application. The OUST objects to the Application on two grounds. First, the OUST asserts that the Trustee’s maximum amount of compensation should be based upon the fee formula provided by section 326(a) as it existed prior to the 1994 amendments. Under the pre-1994 amendment rates, the maximum statutory fee is $4,830.41 based upon total receipts of $155,013.55.3 Second, the OUST asserts that the Application should have been submitted no later than December 31, 1997, and, because of the delay, the Trustee’s maximum statutory fee should be reduced by at least $750.00.4 Therefore, the OUST requests that the Trustee disgorge $6,771.85 of the fees received on an interim basis.
*392II.
ISSUE
In a bankruptcy case which is converted from chapter 11 to chapter 7 after the effective date of the 1994 amendments to section 326(a), should the pre- or post-1994 fee formula apply in determining the maximum compensation payable to the Trustee?
III.
DISCUSSION
For the reasons set forth below, the Court finds that the pre-1994 version of section 326(a) must be used to compute the maximum compensation payable to the Trustee in a case converted from chapter 11 to chapter 7 after the effective date of the 1994 amendments.
A. Application of the pre-1994 version of section 326(a) is consistent with the Bankruptcy Reform Act.
Section 326(a) establishes the maximum compensation payable to the Trustee. Section 326(a) has been amended twice within the last fifteen years to increase the percentages used to compute trustees’ fees. In 1984, section 326(a) was amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984 (“BAFJA”) to allow the trustee to receive 3% on any amount over $3,000 of total receipts.5 See Pub.L.No. 98-353, 98 Stat. 333 (1984). The Bankruptcy Reform Act of 1994 (“Reform Act”) again increased the trustees’ maximum compensation by adjusting the percentage distribution scheme.6 See Pub. L.No. 103-394, 108 Stat. 4106 (1994). The date of enactment of the Reform Act was October 22, 1994. Section 702(b) of the Reform Act provides that “amendments made by this Act shall not apply with respect to cases commenced under title 11 of the United States Code before the date of the enactment of this Act.” Pub.L.No. 103-394 at section 702(b). Therefore, if the conversion of this case from chapter 11 to chapter 7 does not effectively change the date of commencement of the case, then the pre-1994 fee formula must be applied.
A bankruptcy case is commenced by the filing of a petition. See Section 301.7 Section 348(a) provides that “conversion of a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but.. .does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief” Section 348(a) (emphasis added). *393The Court finds that the Reform Act and section 348(a) must be read so that each is consistent with the other. It would appear that the interpretation urged by the Trustee would in effect render section 702(b) of the Reform Act meaningless.
B. Statutory construction supports the OUST’s position.
Statutory language is conclusive absent expressed legislative intent to the contrary. See Consumer Product Safety Commission, et al. v. GTE Sylvania, Inc. et al., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980). Where the statutory language is plain, “the sole function of the courts is to enforce it according to its terms.” U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989); Burlington Northern Railroad Co. v. Oklahoma Tax Commission, 481 U.S. 454, 461, 107 S.Ct. 1855, 1859, 95 L.Ed.2d 404 (1987)(holding that where a statute is clear and unambiguous, the statutory language must control, unless there is clearly expressed legislative intent to the contrary), United States v. James, 478 U.S. 597, 606, 106 S.Ct. 3116, 3121, 92 L.Ed.2d 483 (1986), Caminetti v. U.S., 242 U.S. 470, 478, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917); In re Sufolla, Inc. v. U.S. National Bank of Oregon, 2 F.3d 977, 983 (9th Cir.1993); Johnston Envtl. Corp. v. Knight, 991 F.2d 613, 619-20 (9th Cir. 1993), In re Richard E. Shaw v. County of San Bernardino {In re Shaw), 157 B.R. 151, 152 (9th Cir. BAP 1993).
This bankruptcy case was commenced before the effective date of the Reform Act by the filing of the chapter 11 petition on June 8, 1994. See Section 301. The import of the language of section 702(b) of the Reform Act is that section 326(a) applies only to cases commenced after October 22, 1994. Since conversion of the case from chapter 11 to chapter 7 does not itself change the date of commencement, the determination of the Trustee’s compensation should, therefore, be governed by section 326(a) as it existed prior to the Reform Act. See Section 348(a).
The Trustee argues that the statutory language of section 326(a) is not clear on its face and, therefore, that the intent of Congress should determine the correct rate formula to apply. According to the Trustee, Congress’ intent in amending section 326(a) was to “more fairly compensate trustees for their services rendered in a case based upon the change in economic circumstances in the ten years since the code was last amended in 1984.” See Trustee’s Reply Brief at 3. Indeed, Congress amended section 326(a) to increase the fee percentages available to trustees in order to accommodate inflation and encourage the overall participation of parties as trustees. See In re Monus, 210 B.R. 541, 544 (Bankr.N.D.Ohio 1997). The Trustee cites the Supreme Court ease of Ron Pair Enterprises, Inc., 489 U.S. at 242, 109 S.Ct. at 1031, in support of his argument. The Supreme Court stated:
The plain meaning of legislation should be conclusive, except in the “rare cases [in which] the literal application of a statute will produce a result demonstrat-edly at odds with the intentions of its drafters.” In such cases, the intention of the drafters, rather than the strict language, controls.
Id., quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973 (1982).
This Court holds that the language of sections 301, 326(a), and 348(a) is clear on its face. Literal application of those sections will not produce a result “demon-stratedly at odds with the intentions of its drafters.” See Ron Pair Enterprises, Inc., 489 U.S. at 242, 109 S.Ct. at 1031, Griffin, 458 U.S. at 571, 102 S.Ct. at 3250. Since the language is clear, the plain meaning of those sections is conclusive. See Ron Pair Enterprises, Inc., 489 U.S. at 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290; Burlington Northern Railroad Co., 481 U.S. at 461, 107 S.Ct. at 1859, James, 478 U.S. at *394606, 106 S.Ct. at 3121, Caminetti, 242 U.S. at 478, 37 S.Ct. at 194, Consumer Product Safety Commission, et al. v. GTE Sylvania, Inc. et al, 447 U.S. at 108, 100 S.Ct. at 2056, In re Sufolla, 2 F.3d at 983, Johnston Envtl. Corp., 991 F.2d at 619-20, In re Shaw, 157 B.R. at 152.
C. Application of the BAFJA amendments supports the OUST’s position.
“[W]hen Congress amends the bankruptcy laws, it does not write on a clean slate.” Dewsnup v. Timm, 502 U.S. 410, 419, 112 S.Ct. 773, 778, 116 L.Ed.2d 903 (1992), quoting Emil v. Hanley, 318 U.S. 515, 521, 63 S.Ct. 687, 690-91, 87 L.Ed. 954 (1943). Rather, Congress is aware of prior judicial interpretation. See id. at 419, 112 S.Ct. at 779.
The amendments of the BAFJA of 1984 were effective as to “cases filed 90 days after the date of enactment.” Pub.L.No. 98-353 at § 553(a), 98 Stat. 333. Courts almost uniformly held that the BAFJA amendments did not apply to cases that were filed before the effective date and converted to chapter 7 after that date. See In re Orange Coast Plastic Molding, Inc., 64 B.R. 798, 799 (Bankr.C.D.Cal.l986)(holding that in a case filed before the effective date of the BAFJA amendments, section 326(a) as amended did not apply, even when the trustee was not appointed until after the effective date), U.S. Trustee v. Kinser, 128 B.R. 417, 420-21 (W.D.Va.1991)(conversion of a case does not constitute a new filing for the purpose of awarding higher trustee fees of section 326(a) as amended by BAF-JA), Kandel v. Alexander Leasing Corp., 107 B.R. 548, 551 (ND.Ohio 1988)(because the bankruptcy was commenced prior to 1984, the trustee’s compensation is limited to section 326(a) as written prior to the BAFJA, even though the trustee was not appointed until after the effective date of the amendment), In re Leedy Mortgage Company, Inc., 126 B.R. 907, 916 (Bankr.E.D.Pa.l991)(conversion of a case does not change the date of the filing of the petition or commencement of the case), In re Custom Rock Products, Inc., 75 B.R. 885, 887 (Bankr.D.Or.1987), In re Monex, 74 B.R. 43, 45 (Bankr.E.D.Tenn.1987)(holding that conversion of a case from one chapter to another does not create a change in the filing date).
Congress must have enacted the Reform Act with a full understanding of the case law that grew around the application of the BAFJA. If Congress intended the 1994 amendments to section 326(a) to be applied differently than the 1984 amendments, Congress would have so stated. Instead, the only difference in the 1994 amendments is that the effective date hinges upon the “date of commencement” instead of the “date of filing.” Compare Pub. L.No. 103-394, 108 Stat. 4106 (1994) with Pub.L.No. 98-353, 98 Stat. 333 (1984). However, as set forth above, this is a difference without a distinction.
The Trustee argues that the decisions of In re Yale Mining Corp., 59 B.R. 302 (Bankr.W.D.Va.1986), and In re Monus, 210 B.R. 541, more clearly follow the intent of Congress in amending section 326(a). In Yale Mining, the issue was whether the fees awarded to the preceding chapter 11 trustee needed to be considered in determining the fees of the subsequent chapter 7 trustee in a converted case. The court held that aggregation of fees between a chapter 7 and chapter 11 trustee is not required when a case is converted. In so holding, the court found that a chapter 7 and chapter 11 trustee do not serve within the same “case” within the meaning of section 326(c). See Yale Mining, 59 B.R. at 304. The district court in Kinser, 128 B.R. at 420-21, however, held that the Yale Mining decision did not control the issue presently before this Court. The Kinser court held that conversion of a case “from a chapter 11 to a chapter 7 case in bankruptcy does not constitute a new filing of a case for the purpose of awarding the higher trustee fees of section 326(a) as amended.” See id.
*395In In re Manus, 210 B.R. 541, the bankruptcy court held that in a case which is filed before the effective date of the 1994 Reform Act, and when that case is converted after the effective date, the amended fee formula under section 326(a) should be applied. The court relied solely upon the Yale Mining decision and disregarded Kinser. The court stated that its view was not “mainstream,” but was consistent with the policies intended by Congress. See id. at 543. This Court declines to follow Mon-us because the statutory language is plain and should be enforced. Moreover, the greater weight of authority goes against the Monus decision. See In re Orange Coast Plastic Molding, Inc., 64 B.R. at 799, Kinser, 128 B.R. at 420-21, Kandel, 107 B.R. at 551, In re Leedy Mortgage Company, Inc., 126 B.R. at 916, In re Custom Rock Products, Inc., 75 B.R. at 887, In re Monex, 74 B.R. at 45.
The Trustee further argues that Congress intended the amendments to section 326(a) to apply based upon the date a trustee is appointed, rather than the date the petition is filed. However, section 702(b) of the Reform Act is unambiguous in that the amendments only apply to cases commenced after October 22, 1994. Whether or not the Trustee was appointed after the effective date of the Reform Act is irrelevant as that fact does not change the date of the commencement of the case. See In re Orange Coast Plastic Molding, Inc., 64 B.R. at 799, Kinser, 128 B.R. at 418 (when case is filed before the effective date, whether the chapter 7 trustee is appointed before or after the effective date is irrelevant), see also Kandel, 107 B.R. at 551.
Here, the bankruptcy case was commenced prior to October 22, 1994. Therefore, the determination of the Trustee’s compensation is governed by section 326(a) as the provision existed prior to the Reform Act. Section 326(a) fixes the maximum compensation of the Trustee. See Section 326(a). Under section 326(a) as it existed prior to the 1994 amendments, the maximum fee the Trustee can receive based upon total receipts of $155,013.55 is $4,830.41.
The Court finds further, and the Trustee so concedes, that the Trustee should have submitted his Application earlier. Based upon the delay, and the Trustee’s proposed voluntary reduction, the Trustee’s final fees are reduced by $750.00. The Trustee’s final fee compensation shall be in the amount of $4,080.41.
IV.
CONCLUSION
Based on the foregoing, the Trustee shall disgorge fees in the amount of $6,771.85 and reduce his fees by $750.00, for a total fee amount of $4,080.41. The Court will prepare an order consistent with this memorandum of decision.
. Unless otherwise noted, all section references are to the Bankruptcy Code, 11 U.S.C. § 101 et seq.
. The amount requested, $11,000.68, is comprised of: 25% of the first $5,000 ($1,250); 10% of the next $45,000 ($4,500); and 5% of any amount in excess of $50,000 ($5,250.68), based upon total receipts of $155,013.55. See Section 326(a) (1994).
. The pre-1994 amendment statutory fee is comprised of: 15% of the first $1,000 ($150); 6% of the next $2,000 ($120); and 3% of any amount disbursed in excess of $3,000 ($4,560.41), based upon total disbursements of $155,013.55. See Section 326(a) (1986).
. The Trustee has voluntarily offered to reduce his total fee by $750.00 because the case should have been closed earlier.
. Section 326(a) after the BAFJA amendments stated:
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 fifteen percent on the first $1,000 or less, six percent on any amount in excess of $1,000 but not in excess of $3,000, and three percent on any amount in excess of $3,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.
. Section 326(a) after the Reform Act stated: 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 three 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 debtor, but including holders of secured claims.
.Section 301 states:
A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter. The commencement of a voluntary case under a chapter of this title constitutes an order for relief under such chapter. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493011/ | ORDER SUSTAINING OBJECTION TO EXEMPTIONS
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the trustee’s Objection to Exemptions, *605filed on January 25, 2000, to which the debtor responded on March 3, 2000.
James M. Lofton, Jr., died on October 7, 1999, and his wife thereafter received over $100,000 in life insurance proceeds. With a portion of those funds, she paid various creditors the sum of $46,281.10. On December 17, 1999, she filed a chapter 7 bankruptcy case, claiming the $46,281.10 as exempt. On January 25, 2000, the trustee timely objected to the debtor’s claim of exemptions with regard to the insurance proceeds spent or transferred prior to the filing of the case. The trustee has not objected to the claim of exemption of the life insurance proceeds still in the hands of the debtor. The matter was called for hearing on March 7, 2000, at which time the parties requested that the Court determine the preliminary issue of whether the funds were property of the estate subject to a claim of exemption.
Upon the commencement of a chapter 7 ease, all property and rights to property of the debtor become property of the estate. 11 U.S.C. § 541(a). Upon the filing of the case, the debtor is also entitled to exempt certain assets from property of the estate. 11 U.S.C. § 522(b) (“Notwithstanding section 541 of this title, an individual debtor may exempt from 'property of the estate the property listed in either paragraph (1) or, in the alternative, paragraph (2) of this subsection.”) (emphasis added). Once the assets are exempted, and, if no objection is filed to the exempt status, the assets are no longer property of the estate. In re Gamble, 168 F.3d 442 (11th Cir.1999).
The fact that the assets may no longer be property of the estate does not preclude, however, any rights the trustee may have to recover the payments as preferences or fraudulent transfers under section 547, 548 or 550 of the Bankruptcy Code. Nor does the fact that the transfers may be recoverable by the trustee make the funds transferred property of the estate. Rather, section 541(a)(3) provides that interests in property that the trustee recovers are property of the estate. Not until the judicial determination is made that the property may be recovered does it become property of the estate. In re Thielking, 163 B.R. 543 (Bankr.S.D.Iowa 1994).
In this instance, the debtor transferred the assets prior to the commencement of the case in payment for various debts. There is no indication or even argument that the debtor retained any interest in the transferred funds. Thus, on December 17, 1999, when she filed this bankruptcy case, the debtor had no property interest in the $46,281.10. Since the debtor had no property interest in the funds, they did not become property of the estate and thus, are not, as of the commencement of the case, subject to exemption under section 522. The fact that the trustee may later recover the funds or that the debtor may later attempt to claim an exemption in the recovered funds, does not create property of the estate status for the funds until that judicial determination in favor of recovery is made.
Of course, once the trustee recovers property transferred by the debtor, section 522(g) generally precludes the debtor from claiming the recovered property as exempt. See generally Schieffler v. Beshears (In re Beshears), 182 B.R. 235 (Bankr.E.D.Ark.1995). Under section 522(g), if the funds are recovered, they are be distributed according the Bankruptcy Code and may not be claimed exempt, absent a showing under the provisions of section 522(g). Since the debtor’s statements in her brief indicate that she cannot meet at least one of these requirements, i.e., that the transfers were involuntary, it is unlikely that she will be able to claim any funds recovered by the trustee as exempt. Since, the recovered funds will be property of the estate under section 523(a)(3), the benefit will be to her creditors and will effect the policies underlying the avoidance statutes: to restore to the estate unfair or discriminatory transfers *606and place all creditors, including relatives, on an equal basis to receive the debtor’s assets.
In light of the foregoing, it is
ORDERED that the trustee’s Objection Exemptions, filed on January 25, 2000, is sustained.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493013/ | CARL L. BUCKI, Bankruptcy Judge.
In this Chapter 7 proceeding, the case trustee objects to the debtors’ claim of a cash exemption for moneys that were to be distributed from a decedent’s estate. Due to the specific nature of the bequest, this *752court will allow an exemption, but only to the estate beneficiary.
James and Jill Schapiro originally filed a petition for relief under Chapter 13 of the Bankruptcy Code. In their schedules, they acknowledged Jill’s interest in a probated estate. The source of this interest was a bequest under the will of Mildred Bennett, who had died prior to the bankruptcy filing. Because no distribution had yet occurred, however, the debtors’ schedules assigned no value to their interest. Later, after the case converted to Chapter 7, the Shapiros amended their schedules to list the value of the bequest at $12,443, and to claim that this asset was entitled to a partial cash exemption in the amount of $5,000. The case trustee thereupon filed the present objection to the claim of exemption. Pending the decision of this court, counsel have placed the estate distribution into escrow.
The debtors base their claim of an exemption upon New York Debtor and Creditor Law § 283 subd. (2). It provides generally that a debtor who does not claim a homestead exemption may exempt up to $2,500 of cash. The subdivision defines cash to mean “currency of the United States at face value, savings bonds of the United States at face value, the right to receive a refund of federal, state and local income taxes, and deposit accounts in any state or federally chartered depository institution.” The trustee contends that the debtors held only a claim to a decedent’s estate, and that until the time of distribution, the debtors were not possessed of currency or of any of the other specified forms of cash. In response, the debtors cite the decision of the Honorable Leon J. Marketos in In re Bartoszewski, 36 B.R. 424 (Bankr.N.D.N.Y.1984). As in the present instance, the case involved the claim of an exemption in a monetary inheritance that the debtors had received post petition. “[I]n the interest of justice and pursuant to the equitable powers vested in the Court,” Judge Marketos held “that a vested future right to payment of inheritance money is ‘cash’ within the purview of § 283(2) of the New York Debtor and Creditor Law.” 36 B.R. at 425.
Having been decided in another district, In re Bartoszewski has no binding effect upon this court. Even within the district in which it was decided, the Bankruptcy Court has twice limited the case’s holding to the facts and circumstances presented. In re Abdo, 65 B.R. 56 (Bankr.N.D.N.Y.1986), In re Sykes, 76 B.R. 924 (Bankr.N.D.N.Y.1987). In the instant matter, however, this court need not now accept the broad holding of In re Bartoszewski. Rather, it is the special character of the decedent’s bequest to Mrs. Schapiro that compels a similar result.
After the hearing on the trustee’s objection and at the request of the court, the parties supplied a copy of Mildred Bennett’s will. Its operative provision is found in paragraph “Third”, which reads: “I give and bequeath to MURIAL ROBINSON the sum of FIFTY THOUSAND ($50,-000.00) DOLLARS and to any of her daughters who may survive me, the sum of TWENTY-FIVE THOUSAND ($25,-000.00) EACH.” Jill Schapiro was a surviving daughter of Murial Robinson. Had she been the beneficiary of a residual bequest, this court would have had to address the same troublesome issue to which In re Bartoszewski speaks. Rather, the will bequeathed to Mrs. Schapiro a specific amount of dollars. Such is the currency that the Debtor and Creditor Law includes in the definition of cash. Having a right to cash, Mrs. Schapiro could properly claim an exemption for up to $2,500 of its value.
The debtors claimed an exemption for $5,000, presumably being the amount of $2,500 for each of the husband and wife. Only Jill Schapiro is a beneficiary under the will, however. Having had no entitlement under the will, James Schapiro may not now receive an exemption for any portion of the escrowed funds. Accordingly, the trustee’s objection is sustained except for an allowed exemption to Mrs. Schapiro for $2,500 of the distribution from the estate of Mildred Bennett. The balance of *753the funds now held in escrow shall be paid to the trustee for his administration.
So ordered | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493014/ | ORDER
JOHN E. WAITES, Bankruptcy Judge.
THIS MATTER comes before the Court upon Plaintiffs’ Motion to Transfer Venue to the United States Bankruptcy Court for the Northern District of Ohio, Eastern Division (the “Motion to Transfer Venue”). Based upon the pleadings presented to the Court and the arguments of counsel at the hearing, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
1. Gregory J. Best (“Defendant”) filed for relief under Chapter 7 of the Bankruptcy Code on June 2,1999.
2. At the time of the filing of the petition, Defendant had resided in South Carolina for approximately seven months. Defendant’s schedules indicate that, from at least 1994 through 1998, Defendant resided in Mogadore, Ohio.
3. An overview of Defendant’s schedules indicates that he has minimal contacts with the State of South Carolina.
*8084. In his schedules, Defendant listed 298 general unsecured creditors, 256 of which are located in Ohio and only two of which are located in South Carolina.
5. Defendant’s Schedule D lists the Ford Motor Credit Company and National City Bank as the only creditors holding secured claims; both secured creditors are located in Ohio.
6. Defendant’s schedules reflect that he owns no real property.
7. Defendant’s major assets listed in Schedule B consist of the following:
a. A $50,000,000.00 insurance bond from Ford Motor Credit Company subject to a court-appointed receiver in Summit County, Ohio (the “Receivership”), with deposits being made to KeyBank in Mansfiled, Ohio.
b. $ 8,387,500 for his ownership interest in Bodnar Financial Group, located in Summit County, Ohio; this asset also being subject to the Receivership.
c. $50,000 for his 50% ownership interest in Laurex Ltd., also located in Summit County, Ohio and subject to the Receivership.
d. Stocks having total value of $24,-337.00. Defendant’s schedules do not specify the location of the stocks nor do they indicate whether the stocks are subject to the Receivership.
8. Plaintiffs filed this adversary proceeding on August 31, 1999, challenging Defendant’s right to discharge pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), or (a)(6).
9. The Complaint alleges that, for many years, Defendant and others were involved in fraudulent investment schemes.
10. Multiple lawsuits have been commenced against Defendant and others alleging violations of various securities laws. Approximately thirty cases are presently pending against Defendant before courts within the Northern District of Ohio.
CONCLUSIONS OF LAW
Section 157(b)(1) of Title 28 provides bankruptcy judges with the authority to “hear and determine all cases under title 11 and all core proceedings arising under Title 11, or arising in a case under title 11.” 28 U.S.C. § 157(b)(1). Core proceedings include “matters concerning the administration of the estate.” 28 U.S.C. § 157(b)(2)(A). Many courts have held that a motion to change venue of a bankruptcy case falls within the category of “matters concerning the administration of the estate” and thus is a “core” proceeding under 28 U.S.C. § 157(b)(2)(A). See In re Baltimore Food Systems, Inc., 71 B.R. 795, 796-97 (Bankr.D.S.C.1986); see also Couri v. Fisher (In re JCC Capital Corp.), 147 B.R. 349, 356 (Bankr.S.D.N.Y.1992); Storage Equities, Inc. v. Delisle, 91 B.R. 616, 617 (N.D.Ga.1988); McLemore v. Thomasson (In re Thomasson), 60 B.R. 629, 631-32 (Bankr.M.D.Tenn.1986). The court in In re Thomasson noted that “[a] motion to change venue of a ‘core’ adversary proceeding partakes of the quality of the proceeding in which it arises and can be finally determined by the bankruptcy court.” The adversary proceeding in the case before this Court, like the adversary matter in In re Thomasson, involves a determination of discharge and discharge-ability, which is in itself a “core” proceeding; accordingly, the Motion to Transfer Venue is properly before this Bankruptcy Court.
Courts have the discretion to transfer cases to another district even where the original venue is proper. See In re Baltimore Systems, Inc., 71 B.R. at 801. Section 1412 of Title 28 provides: “A district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.” 28 U.S.C. § 1412. The movant bears the burden to prove that transferring the case to another district would be for the interest of justice or would be of more convenience to the parties involved. Id. In de*809termining whether transfer of venue is appropriate, courts have considered the following factors:
1. the proximity of creditors of every kind to the Court;
2. the proximity of the bankrupt (debt- or) to the Court;
3. the proximity of the witnesses necessary to the administration of the estate;
4. the location of the assets;
5. the economic administration of the estate;
6. the necessity for ancillary administration if bankruptcy should result.
In re Baltimore Food Systems, Inc., 71 B.R. at 802.1
In In re Thomasson, 60 B.R. 629 (Bankr.M.D.Tenn.1986), the court was faced with a very similar factual situation. In that case, a lawsuit was filed in Chicago, Illinois, against the debtor, alleging that the debtor and others had violated securities laws and the Racketeering Influence Corrupt Organization statute. The debtor attempted to avoid the lawsuit by filing a Chapter 7 petition in Tennessee. An adversary proceeding was commenced to determine the dischargeability of certain debts. Plaintiffs moved to transfer venue from the Middle District of Tennessee to the Northern District of Illinois. In determining whether venue should be transferred, the court considered the fact that only two of the debtor’s creditors were located in Tennessee while sixty-nine of them were located in the Chicago area and that the debtor owned no assets in Tennessee. The court concluded:
These adversary proceedings involve litigation, transactions and witnesses all within the State of Illinois. Retaining venue in the Middle District of Tennessee will cause extreme hardship to the real parties in interest, to witnesses and to the trustee who would be forced to prosecute these actions at significant expense and without support from the estate. Delays in prosecution are likely if venue is retained in this district, in light of the distant physical location of witnesses and evidence.
... Factors favoring transfer include that over 95% in number and amount of the debtor’s creditors reside in the Northern District of Illinois.
Id. at 632; see also Ford v. Ford (In re Ford), 191 B.R. 233, 237-38 (Bankr.M.D.Fla.1995) (granting the motion to transfer venue from Florida to West Virginia in' an adversary proceeding seeking declaration that judgment debt was non-dischargeable after considering that “all transactions under scrutiny took place in Ohio or West Virginia that all witnesses with knowledge of these transactions are in those states and none of them are in Florida”); In re Weber, 118 B.R. 441, 444 (Bankr.E.D.Va.1990) (concluding that transfer of venue from the Eastern District of Virginia to the Eastern District of New York was proper because “[sjubstan-tially all of the debtor’s assets, his residence, attorney, accountant and books and records are located in New York.”).
Applying the factors set forth above, this Court finds that transferring the adversary proceeding to the Northern District of Ohio is in the best interest of justice and for the convenience of the parties. The majority of factors, in fact, indicate that transfer of venue is appropriate given the facts of the case. Considering the proximity of the creditors, it is evident that the first factor is met. Defendant’s schedules show that all secured creditors and the largest number of unsecured creditors are located in Ohio. Second, the vast *810majority of the witnesses and the Plaintiffs involved in the proceeding are residents of Ohio. Third, as reflected in Defendant’s schedules filed with the Court, Defendant’s major assets are located in Ohio. Fourth, in considering the access to sources of proof, it is evident that, because this case involves the Security Exchange Commission, various banks and accountants, and the appointed receiver; the case is document intensive, and all the records that are essential to the proceeding are located in Ohio.
At the hearing, Defendant argued that his financial situation would further suffer if he had to incur the costs to travel to Ohio to litigate this adversary proceeding. The proximity of Defendant favors the retention of the proceeding in the District of South Carolina. The Court realizes that Defendant, who only recently moved to South Carolina from Ohio, is an individual in bankruptcy; however, the burden imposed on him if venue were transferred to the Northern District of Ohio is minimal in comparison to the cost that would be incurred by all the Plaintiffs and witnesses involved in this case if venue remained in the District of South Carolina.
Even though there is no question that Defendant could receive a fair trial in South Carolina, as Plaintiffs argue, the causes of action alleged against Defendant involve complex principles of Ohio law which might be better resolved within Ohio courts. Furthermore, Defendant’s Securities and Exchange license was issued by the State of Ohio; thus, the State of Ohio has an interest in this matter as it relates to Defendant’s alleged illegal activities. After considering the interest of justice and the convenience of the parties, the Court finds that, in light of the factors set forth above, venue should be transferred to the Northern District of Ohio. It is therefore,
ORDERED that the Plaintiffs’ Motion to Transfer Venue is granted.
IT IS FURTHER ORDERED that any Scheduling Order entered in this Adversary Proceeding is hereby vacated.
AND IT IS SO ORDERED.
. Courts in other jurisdictions have included other factors to the list set forth in In re Baltimore Food Systems, Inc. such as: the relative ease of access to sources of proof, the availability of compulsory process for attendance of unwilling witnesses and the cost of obtaining the attendance of willing witnesses, the enforceability of judgment, relative advantages and obstacles to a fair trial, and a state's interest in having local controversies decided within its borders. See, e.g., In re ICC Capital Corp., 147 B.R. 349, 357 (Bankr.S.D.N.Y.1992); In re Thomasson, 60 B.R. 629, 632 (Bankr.M.D.Tenn.1986). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493015/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
MARY D. SCOTT, Bankruptcy Judge.
I. FACTUAL BACKGROUND
Larry Terry owned and operated a collection agency, Cheques, Inc.1 At some time in the mid-1980’s, he combined his agency with another agency, Recovery Systems, owned by Gerald Vaden. In September 1988, Terry, Vaden and Jack Wilson, the owner of the building Recovery Systems leased, combined to form Cheqnet Systems, Inc. (“Cheqnet”). From that point in time. Cheques became dormant and the operating collection agency was Cheqnet. Cheqnet generally operated on a consignment basis. Merchants would forward customer checks returned for insufficient funds to Cheqnet which would then seek payment from the customer. If no payment was received directly from the customer, the checks were forwarded to the municipal court for prosecution. All funds collected by Cheqnet or the municipal court were deposited into an account of Cheqnet and then the amount of the check was remitted to the merchant. Cheqnet would retain a collection fee authorized by law as payment for its services.
Larry Terry was president of Cheqnet, and Connie and Gerald Vaden vice president and secretary/treasurer respectively. Terry and Vaden each received approximately $100,000 from Wilson for his purchase into the business. The funds were given, in part, by a $50,000 note with a separate agreement that required the corporation to forgive approximately $7,000 on the note each year. In that manner, Terry and Vaden only recognized that amount of income from the transaction in each taxable year. The remainder was obtained in the form of a mortgage coupon bond2 and a mortgage against the real property owned by Wilson. Thus, based upon the agreement, on October 20, 1988, Cheqnet granted a bond mortgage to Larry Terry and Gerald Vaden in exchange for funds to be used as working capital. The mortgage was recorded on November 15, 1988. Terry received his payments, with interest, on the mortgage each year *876until 1997. Terry also signed a promissory note at the same time for $50,000.
Cheqnet apparently operated fairly successfully until 1994 when it experienced increasing competition from certain municipalities prosecuting “hot check” violations. In reaction to this increasing competition, Cheqnet sought other means of revenue. Specifically, it sought to collect a higher fee for its services than authorized by law. The relevant check collection fee authorized by Arkansas law at the time of these transactions was fifteen dollars per check. Ark.Code Ann. §§ 5-37-303, 5-37-304, 5-37-307. Not finding this amount profitable, Cheqnet filed a declaratory judgment action against the State Board of Collection seeking the ability to collect twenty-five dollars per check. In anticipation of a successful conclusion to their litigation. Cheqnet began collecting twenty-five dollars per check rather than the permitted fifteen dollars. It lost the case. Cheqnet Systems, Inc. v. State Board of Collection, 319 Ark. 252, 890 S.W.2d 595 (Ark.1995),3 and, as a result, was compelled to agree to pay, in the concomitant class action lawsuit. Cheqnet Systems, Inc. v. Montgomery, 322 Ark. 742, 911 S.W.2d 956 (Ark.1995)(certifying class), the overcharge exacted from the check writers, plus interest. Only the first payment of $30,000 was made by Cheqnet with funds derived from loans from Larry Terry and Jack Wilson, the principal stockholders of Cheqnet.
As a result of these unsuccessful lawsuits, Cheqnet lost some of its largest customers and suffered a reduction in its line of credit. At this same time, Terry negotiated with a large local grocer to collect checks on its behalf. This contract, however, would require Cheqnet to purchase the checks at eighty percent of their face value. Thus, Cheqnet would be required to put forth a significant initial cash outlay in order to purchase the checks, and, only upon collection, would it realize any profit from the venture. Cheqnet’s loss in the class action lawsuit with the Montgomery class, however, was well known, and Cheqnet could not obtain financing to purchase the checks from the grocer.
Accordingly, the owners of Cheqnet resurrected Cheques, and it began renting office space from Cheqnet. Cheques obtained financing, purchased the checks from the grocer and, informally at first but later, formally, contracted with Cheqnet to process the checks. Specifically, Cheques and Cheqnet entered into a contract under which Cheques retained title to the checks but delivered them to Cheqnet for collection (the amount of the check plus the $20.00 service fee). Cheques agreed to pay Cheqnet seven dollars for each check collected. If collection efforts were unsuccessful, the checks were to be delivered to the Sherwood Municipal Court for processing by the state court system. Initially, all checks were transmitted to the court by Cheqnet employees and under the name of Cheqnet, although its principals later asserted that this was an error and that all processing with the municipal court should have occurred under the Cheques name. In addition to this contract with Cheques, Cheqnet continued to solicit from and collect checks for merchants in the central Arkansas area on a consignment basis. Its basic operations did not change.
The checks in issue in this proceeding are the ones Cheques purchased from the grocer but were collected by Cheqnet through the Sherwood Municipal Court from and after the time of the bankruptcy case filing. Although, at first, the proceeds were paid directly to Cheques from the Sherwood Municipal Court, in May 1997, several months after the filing of the bankruptcy case, the chapter 7 trustee directed the clerk of the Sherwood Municipal Court to deliver all funds to the trustee of the debtor, Cheqnet, rather than to Cheques.
Upon garnishment by the Montgomery class, Cheqnet filed this bankruptcy case on January 31, 1996. At that time, Che-ques owed Cheqnet the sum of $7,211 for *877checks collected by Cheqnet pursuant to their agreement.
II. PROCEDURAL BACKGROUND
Larry Terry and Cheques instituted this adversary proceeding (1) seeking a determination that the checks processed by Sherwood Municipal Court were not, as asserted by the trustee, property of the Cheqnet bankruptcy estate and that Che-ques is entitled to all of the proceeds of the funds collected by the Sherwood Municipal Court, and (2) that Larry Terry is entitled to distribution of $50,000 as a secured lien holder of certain real property sold by the trustee.
The trustee filed a counterclaim against Cheques for the funds Cheques owes to the estate and for offset should the Court determine that the checks held by the Sherwood Municipal Court are not property of the estate. In addition, the trustee asserts that the mortgage recorded on November 15, 1988, is defective because Larry Terry does not hold a secured interest in the real property and, thus, is not entitled to distribution of any proceeds as a secured creditor. Finally, the trustee seeks to subordinate any claim of Larry Terry to the claims of other unsecured creditors, extinguish any liens held by Terry and also seeks a judgment in the amount of $15,000 for services rendered by Cheqnet to Terry.
III. CONCLUSIONS OF LAW
A. Property of the Estate
Cheques was the holder of certain checks purchased from a grocery chain in the central Arkansas area. Cheques contracted with Cheqnet to act as collection agent to recover the proceeds of the checks for a fee of seven dollars per check. Although physical possession of the checks was given to Cheqnet, there is no endorsement to Cheqnet or contract provision regarding title to the checks. Cheqnet subsequently delivered many of the checks to the Sherwood Municipal Court for collection and, after the filing of the bankruptcy case, the proceeds were remitted to the chapter 7 trustee. The trustee asserts that the entirety of the proceeds are property of the estate; Cheques asserts that it is entitled to the proceeds, less the seven dollar fee established by the contract.
Property of the estate includes “all legal or equitable interests of the debt- or in property as of the commencement of the case.” 11 U.S.C. § 541(a). Property of the estate is also limited to interests of the debtor:
Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest.. .becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.
11 U.S.C. § 541(d). While federal bankruptcy law determines the effect of legal or equitable interests in property, N.S. Garrott & Sons v. Union Planters National Bank (In re N.S. Garrott & Sons), 772 F.2d 462, 466 (8th Cir.1985), the Court looks to state law to determine the nature and extent of the interest, Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); In re N.S. Garrott & Sons, 772 F.2d at 466. Accordingly, Arkansas law determines the nature and extent of the debtor’s interest in the proceeds of the checks. Of course, as discussed above, the estate succeeds only to the title and rights in property the debtor had at the time of the filing of the petition in bankruptcy. In re N.S. Garrott & Sons, 772 F.2d at 467.
It is uncontroverted that the debtor, Cheqnet, was a holder of the checks at some point in time. However, Cheqnet subsequently turned over the checks to the Sherwood Municipal Court under Cheqnet’s contractual authority to collect the proceeds. In addition, Cheqnet held an equitable interest in the proceeds, at least to the extent of seven dollars per check, under its contract with Cheques. *878Thus, the debtor held some legal and equitable interest in the checks and this interest became property of the estate upon the filing of the petition.
The fact that’ the debtor was entitled to receive seven dollars for each check collected, however, does not render all of the proceeds property of the estate. Although, prior to turning the checks over to the Sherwood Municipal Court, it was a holder of the checks — negotiable instruments — it was not a holder in due course, see generally Ark.Code Ann. § 4-3-302, and thus did not take the checks free of the claims of any other entity having a prior claim or right to the checks, see Ark. Code Ann. § 4-3-305. Although Cheqnet held the cheeks at one point and had the right to enforce the instruments, its rights were not necessarily superior to those of Cheques. Thus, although property of the Cheqnet estate may consist of the right to enforce the instruments, its rights are subject to the contract with Cheques, and Cheques’ rights to the proceeds, less the seven dollar fee to Cheqnet. Accordingly, the entirety of the proceeds of the checks delivered by Sherwood Municipal Court from the grocer are not property of the estate. Pursuant to the contract, the property of the estate consists of the proceeds as limited by the contract, seven dollars per check.
B. Capacity to Sue
Although the Court has made a determination as to property of the estate, Cheques has no capacity to sue to recover any funds obtained by the trustee. The trustee is correct in his assertion that Che-ques does not have the capacity to sue because its corporate charter was revoked prior to the filing of the lawsuit.4 It is undisputed that the Secretary of State revoked Cheques corporate charter on December 31, 1996, and, as of the time of the filing of the lawsuit and trial, it had not been reinstated. Rule 7017, Federal Rules of Bankruptcy Procedure, provides that the capacity of a corporation to sue is determined by the law under which it is organized. Thus, Cheques capacity to sue is governed by substantive Arkansas law.
It is well settled under Arkansas law that a corporation not in existence may not initiate a lawsuit.5 See First Commercial Bank v. Walker, 333 Ark. 100, 969 S.W.2d 146, 152-53 (Ark.1998). Thus, following the revocation of its corporate charter, Cheques lost its capacity to sue, and any lawsuit it filed during this status must be dismissed. See id. A subsequent reinstatement of the corporate status does not retroactively restore or otherwise vest the corporation with a continuous existence. Tribco Manufacturing Co. v. People’s Bank of Imboden, 67 Ark.App. 268, 998 S.W.2d 756, 759 (Ark.Ct.App.1999).6 Moreover, Ark.Code Ann. § 26-54-112 governs the legal effect of reinstatement which provides only that once a charter is reinstated, the corporation shall thereafter *879be treated as if its name had not been declared forfeited. Thus, as in Tribco Manufacturing, a subsequent reinstatement of the corporate charter does not serve to retroactively validate the initiation of the lawsuit by Cheques.7 Accordingly, the cause of action by which Cheques seeks recovery, Count I of the complaint, will be dismissed.8
C. Mortgage Issues
When Wilson purchased his interest in Cheqnet, Terry took part of the consideration in the form of a mortgage coupon bond secured by a mortgage on the real property which had been owned by Wilson. The mortgage includes recitations that the secured parties are Gerald Vaden and Larry Terry, the legal description of the real property, that the mortgage is to secure all debts and is to be “security for any other indebtedness of whatsoever kind that the Grantee or the holders or owners of the Mortgage may hold against grantors... ” The trustee asserts that this mortgage is not valid because, among other grounds, the amount and terms of repayment are not recited.
In order to be a valid mortgage, Arkansas law requires that it must be in writing, provide a description sufficient to give notice of the property securing the debt and a description of the debt sufficient to give notice of the liability and to whom inquiry may be directed. See generally P. Jones, Arkansas Law of Title to Real Property, 547, 549 (1939 & 1959 supp.). For example, although it is usual to state the amount of the debt to be secured, Arkansas law does not require that it be stated in the mortgage. Rather, if the mortgagees sufficient to put a person examining the record on inquiry and directs that person to a proper source of more information the mortgage is valid. Curtis & Lane v. Flinn, 46 Ark. 70 (Ark.1885)(mortgage which stated that the mortgagor was “justly indebted” and sought to secure “the full and prompt payment of what he now owes or may hereafter becomé indebted” sufficient); Howell v. Walker, 111 Ark. 362, 164 S.W. 746 (Ark.1914); Cazort & McGehee Co. v. Dunbar, 91 Ark. 400, 121 S.W. 270 (Ark.1909); Hoye v. Burford, 68 Ark. 256, 57 S.W. 795 (Ark.1900)(mortgage properly secured “all indebtedness that I owe” mortgagee). Similarly, the mortgage appears to be executed, acknowledged, ratified and sufficiently binding upon all parties to render it valid, see O’Neal v. Judsonia State Bank, 111 Ark. 589, 164 S.W. 295 (Ark.1914), and enforceable against third parties.
D. Subordination
Section 510(c) of the Bankruptcy Code permits the Court to apply principals of equitable subordination to allowed claims. Equitable subordination is applied on a case by case basis Black v. Brando (In re Black Ranches, Inc.), 362 F.2d 19, 37 (8th Cir.), cert. denied, 385 U.S. 990, 87 S.Ct. 596, 598, 17 L.Ed.2d 450, 451 (1966), and cases in which insider transactions are at issue will be more closely scrutinized, Bergquist v. Anderson-Greenwood Avia*880tion Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1282 n. 13 (8th Cir.1988); In re Spring Grove Livestock Exchange, Inc., 205 B.R. 149, 162 (Bankr.D.Minn.1997)(level of misconduct necessary for equitable subordination varies with the relationship between the parties). Equitable subordination requires a showing that the claim holder engaged in inequitable conduct, that the conduct caused injury to a creditor or conferred an unfair advantage to the claim holder, and that equitable subordination is not inconsistent with the Bankruptcy Code. Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1282 (8th Cir.1988).
The trustee asserts that Larry Terry, as a principal of Cheqnet and therefor an insider, diverted revenue from Cheqnet to Cheques to the disadvantage of the Montgomery class of creditors. While it is true that Terry originally intended Cheqnet to be the party to purchase the grocer’s checks and that, instead, his corporation, Cheques, received the income, there was neither inequitable conduct nor motive to ultimately redirect the revenue. The only reason Cheqnet was able to garner any income from a contract relating to the grocer was because Terry resurrected Cheques. Cheqnet could not have obtained the contract in any event because it could not acquire the financing to purchase the checks from the grocer. Had Terry not resurrected Cheques to obtain financing and enter into the contract, neither Cheques nor Cheqnet would have realized the opportunity to contract with this particular grocer. The fact that Terry supplied some of the funds with which the Montgomery class was paid any funds further supports the finding that there was no inequitable conduct in his actions: he was attempting to facilitate payment, not thwart collection efforts. The other facts listed by the trustee do not necessarily constitute inequitable conduct. Rather, it appears that Cheqnet was failing and its earlier contracts were lost resulting in insufficient revenues. Cheques, for its part, simply did not pay its franchise taxes before any of the relevant events took place. These matters are not conduct which either conferred an unfair advantage upon Larry Terry or which caused the injury to other creditors. The fact that Cheqnet was thereafter unable to make the appropriate payments and, upon garnishment by the Montgomery class, filed the bankruptcy case, does not render the conduct inequitable.
E. Monetary Judgments
1. Against Cheques. The trustee seeks judgment against Cheques in the amount of $7211.00 for the services rendered by Cheqnet. Although Cheques has apparently declined to remit the amount admittedly owed due to Cheqnet’s inability to fulfill the remainder of the contract, no real defense has been offered to the action. Accordingly, judgment will be rendered in favor of the trustee on Count I of the counterclaim.
2. Against Larry Terry. Larry Terry executed a promissory note to Cheqnet in 1988, and each year he made a payment on the note. Each year, subsequent to the payment by Terry, the corporation forgave the payment requirement for that year and issued a check to Terry for the payment remitted. At the time of the filing of the bankruptcy, $15,000 remained owing on that debt. There is no corporate resolution or other action forgiving the remainder of the debt, and, as pointed out by the trustee, the forgiveness of subsequent payment is at the discretion of the corporation, not Larry Terry. The trustee, having succeeded to the interests of the corporation, is entitled to require payment of the note. Other than his claim that it had been forgiven in the past, Terry raises no defense to the trustee’s right to collect that debt. Accordingly, the trustee is entitled to require payment of the promissory note and judgment on Count IV of the counterclaim shall be issued in his favor.
ORDERED as follows:
*8811. Count I of the Complaint is dismissed.
2. The mortgage recorded on November 15, 1988, is valid and enforceable such that judgment shall be rendered in favor of Larry Terry on Count II of the complaint and Counts I and II of the counterclaim
3. Judgment shall be rendered in favor of the Trastee and against Cheques, Inc. in the amount of $7,211.00 on the counterclaim.
4. Equitable subordination under 11 U.S.C. § 510(c) is not appropriate such that judgment will be rendered in favor of Larry Terry on Count III of the counterclaim.
5. Judgment in favor of the trustee and against Larry Terry shall be rendered on Count IV of the counterclaim in the amount of $15,000 plus interest as required by the note.
IT IS SO ORDERED.
. Cheques was incorporated on March 16, 1983, but its charter was revoked on December 31, 1996. Its charter had not been reinstated at the time of the trial of this proceeding.
. A mortgage coupon bond is essentially a note payable from the corporation to the individuals, secured by a mortgage. The mortgage in this case describes the real property, the parties, and states that it stands for any debt between the parties and the corporation.
. The statute was subsequently amended to provide for a collection fee of twenty dollars.
. The Court properly receives this exhibit into evidence. Cheques can hardly be surprised by the defense since it was by its own actions that its corporate charter was revoked. Moreover, there is no showing that there was any right to believe the defense would not be asserted or that it relied upon the failure to assert the defense. See generally Tribco Mfg. Co. v. People’s Bank of Imboden, 67 Ark.App. 268, 998 S.W.2d 756 (Ark.Ct.App.1999).
. This does not mean, however, that the corporation is dissolved or that it does not hold title to property, See In re Russell, 123 B.R. 48 (Bankr.W.D.Ark.1990). Thus, the corporation may continue to exist for limited purposes. The fact that it may hold title or take certain actions under the Arkansas Business Corporation Act, Ark.Code Ann. § 4-27-101, et seq., does not necessarily mean that a corporation with a revoked charter for failure to comply with the requirements of Arkansas law must have the same rights to sue as a corporation seeking dissolution under the provisions of Arkansas law.
. The Court does not take into consideration the certificate of reinstatement from the Secretary of State submitted November 10, 1999, for the first time with Cheques' reply brief, filed on November 10, 1999. This document reflects only that, as of November 8, 1999, nearly three months after the conclusion of the instant trial, the corporation is "chartered and in good standing.”
. This authority provides only that activation of the corporate status does not validate a lawsuit filed while the corporation was in an inactive status. That is distinct from the situation in which a corporation, which becomes active again and is authorized to do business by the State of Arkansas, and then initiates a lawsuit to recover a debt incurred to it while it was not so chartered. Thus, while Tribco Manufacturing appears to preclude this lawsuit, it would not necessarily apply to preclude a suit filed after November 1999, the date of reinstatement, regarding the same subject matter. In any event, because the court has determined the extent of the estate’s interest in the funds being generated by the Sherwood Municipal Court, there remain future avenues established by the Bankruptcy Code for creditors of the estate to preserve and assert their rights.
. Cheqnet timely objected to the introduction of this document and that objection was overruled as relevant to the subordination issue, discussed below. In any event, the Court may consider the assertion that the corporation did not have the capacity to initiate the lawsuit at the time it was filed. See First Commercial Bank v. Walker, 333 Ark. 100, 969 S.W.2d 146, 152-53 (Ark.1998). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493016/ | MEMORANDUM
TIMOTHY J. MAHONEY, Chief Judge.
Hearing was held on Objection to Claim of Exemptions. Appearances: James Carney for the objecting party and Eric Wood for the Debtor. This memorandum contains findings of fact and conclusions of law required by Fed. Bankr.R. 7052 and Fed. R.Civ.P. 52. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(B).
Background
The Debtor in this case, Michael Heim-bouch, claims the right to an exemption for a significant portion of the value of his 1984 Corvette. A Corvette is a sports car manufactured by the Chevrolet division of General Motors Corporation. The seating capacity is two, one driver and one passenger. The Corvette is listed on the Debt- or’s schedules as having a present fair market value of $5,500.00. The Debtor is claiming $2,000.00 of the value of the Corvette exempt under Neb.Rev.Stat. § 25-1552 (Reissue 1998) as personal property. The Debtor is also claiming $2,400.00 of the value of the Corvette exempt under Neb.Rev.Stat. § 25-1556(4) (Reissue 1998), as a motor vehicle used “in connection with” his business. The business of the Debtor is farming. The Debtor acknowledges that any value of the Corvette in excess of the amount of $4,400.00 is not exempt.
The objection to the claim for exemption was brought by creditor Community First National Bank (“Bank”). It is the Bank’s position that (1) the objection to the Section 25-1552 portion of the claim of exemption is that the vehicle is not an immediate personal possession of the Debtor and, therefore, is not exempt, and (2) it would be inappropriate to claim a portion of the value of the Corvette exempt under Sec*896tion 25-1556(4) because the vehicle does not qualify as a tool or implement.
Facts
1. Debtor’s principal business or trade is farming.
2. Debtor has four (4) vehicles in addition to the Corvette. He has a 1993 Jeep Cherokee, which is subject to a lien held by the Debtor’s attorneys; a 1994 Jeep Wrangler, which is subject to two liens (Union Bank & Trust Co. and Banner County Bank); a 1995 Dodge Pick-Up Truck, which is subject to one lien (Banner County Bank); and a 1996 Dodge Pick-Up Truck, which is subject to two liens (Chrysler Credit Corp. and Banner County Bank). Except for the 1993 Jeep Cherokee which appears to be security for payment for legal services, the Debtor plans to reaffirm the debts on all of these vehicles.
3. Debtor owns one car, the Corvette.
4. During the farming season, Debtor makes two to three trips per week from his residence to Scotts Bluff or Harrisburg, Nebraska, a distance of approximately forty miles, for the purpose of purchasing parts or meeting with his banker. The Corvette is the vehicle he uses for such trips, unless the needed part is so large that it must be picked up in a truck.
5. During the winter, Debtor averages one trip per week to Scotts Bluff and other locations for the purpose of seed corn meetings, chemical meetings, or other activities related to the farming operation. He uses the Corvette for such trips.
6. The Debtor’s farm machinery is located on ground rented by him which is approximately six miles from his house. He frequently uses the Corvette to go from his house to the rented farm ground where the equipment is located.
Issues
A. Does the 1984 Corvette qualify for the exemption authorized by Neb.Rev.Stat. § 25-1552 as personal property of the Debtor?
B. Does the 1984 Corvette qualify for the exemption authorized by Neb.Rev.Stat. § 25-1556(4) because of its occasional use by the debtor “in connection with” the farming business?
Decision
A. The 1984 Corvette is personal property of the Debtor and qualifies for the Section 1552 exemption because this statute does not limit the personal property exemption to “immediate personal possessions.”
B. The 1984 Corvette does not qualify for the Section 1556(4) exemption because, although it appears to be used “in connection with” the farming business, there is no evidence that the 1984 Corvette is “held for use in the principal trade or business” of the Debtor, as is required by the statute.
Conclusions of Law and Discussion A. Neb.Rev.Stat. § 1552
The personal property exemption is claimed under Neb.Rev.Stat. § 25-1552. That section states, in relevant part: “Each natural person residing in the state shall have exempt from forced sale on execution the sum of two thousand five hundred dollars in personal property, except wages.” This sentence was enacted as an amendment to Section 25-1552 by the Nebraska Legislature in 1997. Although it has been held that a motor vehicle does not qualify as an “immediate personal possession” under Section 25-1556(1), In re Scrams, 172 B.R. 297 (Bankr.D.Neb.1994), Section 25-1552 does not require the “personal property” to be an “immediate personal possession.” 1
Debtor claims $2,000.00 of the $2,500.00 personal property exemption in the value of the Corvette and such claim does not violate the personal property exemption of Section 25-1552 and shall be allowed.
*897B. Neb. Rev. Stat. § 25-1556(4)
The second exemption statute at issue is Neb.Rev.Stat. § 25-1556(4). It does not appear that this statute, which was passed in the current form by the Nebraska Legislature in 1997, has been the subject of any court interpretation. The applicable parts of the statute states:
25-1556. Specific exemptions; personal property; selection by debtor.
No property hereinafter mentioned shall be liable to attachment, execution, or sale on any final process issued from any court in this state, against any person being a resident of this state: ... (4) the debtor’s interest, not to exceed an aggregate fair market value of two thousand four hundred dollars, in implements, tools, or professional books or supplies held for use in the principal trade or business of such debtor or his or her family, .. .which may include one motor vehicle used by the debtor in connection with his or her principal trade or business or to commute to and from his or her principal place of trade or business; ... (emphasis added)
Reading the plain words of the statutory language, in order to qualify as exempt, property identified as implements or tools must be “held for use” in the principal business or trade of the debtor. Included in the definition of implements or tools may be one motor vehicle used by the debtor “in connection with” his or her principal business or trade. However, such motor vehicle qualifies for the exemption only if, like other implements or tools, it is “held for use in the principal trade or business of such debtor.”
The Debtor does not argue that the 1984 Corvette was purchased for use as an implement or tool in the farming business. The Debtor does not argue that the 1984 Corvette, which, if actually purchased for personal use, has somehow, by its continued and occasional use in connection with the farming business, been converted into a vehicle actually “held for use” in the farming business. The Debtor does not testify or argue that he either purchased or continues to hold the vehicle for the purpose and with the intent of using it in the farming operation. He has several other vehicles which may actually be “held for use” and used “in connection with” the farming operation. These include a 1993 Jeep Cherokee, a 1994 Jeep Wrangler, and a 1995 Dodge Pickup Truck, and a 1996 Dodge Pickup Truck.
The statute does not define the phrase “held for use.” However, the word “hold” has been interpreted to mean “own or possess.” Webster’s Ninth New Collegiate Dictionary 575 (1990). The phrase “held ' for use,” therefore, could logically be construed as meaning, with regard to a motor vehicle, that if the debtor has equity of up to $2,400.00 in a motor vehicle which the debtor owns or possesses for the purpose of using in a farming operation and which actually is used in connection with the farming operation, the motor vehicle qualifies for the exemption.
In this case, there is no evidence that Mr. Heimbouch owns or possesses the 1984 Corvette sports car for the purpose of using it in a farming operation. According to him, he does use it occasionally “in connection with” the farming operation. However, a 1984 Corvette two-seater sports car could not be of much use in pulling equipment, hauling supplies, carrying fence posts, hauling water, hauling fuel for machinery and equipment, or carrying human beings across farm fields lacking improved roads. All of the above-listed possible farming activities could be accomplished by any of the other vehicles that Mr. Heimbouch owns. There is no evidence in the record, and it is simply not logical, that a farmer would own a Corvette for the purpose of using it in a farming operation.
Conclusion
A 1984 Corvette owned by the Debtor does not qualify for the exemption authorized in Neb.Rev.Stat. § 25-1556(4). The objection of the creditor is sustained as to that portion of the claimed exemption, but *898the objection of the creditor to the claim of exemptions under Neb.Rev.Stat. § 25-1552 is denied.
. Neb.Rev.Stat# 1556(1) states: "No property hereinafter mentioned shall be liable to attachment, execution, or sale on any final process issued from any court in this state, against any person being a resident of this state: (1) The immediate personal possessions of the debtor and his or her family.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493017/ | RULING SUSTAINING OBJECTION AND DENYING CONFIRMATION OF CHAPTER 13 PLAN
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
At issue in this proceeding is whether the court may confirm a Chapter 13 plan which modifies a first mortgage on the debtor’s principal residence by “stripping it down” to the fair market value of the residence, notwithstanding Bankruptcy Code § 1322(b)(2) (plan may “modify the rights of holders of secured claims other than a claim secured only by a security interest in real property that is the debt- or’s principal residence.”). Elissa H. Beckford (“the debtor”) claims the plan may do so because the mortgage held by United Companies Lending Corporation (“the creditor”) is not secured only by the debtor’s residence and thereby loses the § 1322(b)(2) protection. The creditor filed an objection to plan confirmation at the hearing held on February 16, 2000.
II.
The debtor, who filed her petition under Chapter 13 on June 25, 1999, owns a single-family house located at 67-69 East Euclid Street in Hartford, Connecticut, at which she resides (“the property”). The property description in the deed by which the debtor obtained title is as follows:
a certain piece or parcel of land with the buildings and improvements thereon, ... known as Nos. 67-69 East Euclid Street, also known as Lots Nos. 19 and 20, Block 15 on a map entitled, “Blue-fields, Property of Elva A. Simpson, Blue Hills ave., Hartford and Bloomfield, Conn. Scale 1" = 100' May 1913 Spencer & Washburn Engineers,” which map is on file in the Town Clerk’s Office ....
The Hartford Tax Collector issues separate tax bills for adjacent lots 19 and 20 as the two lots are separately assessed. Each lot has 50 feet frontage on East Euclid Street and is 100 feet deep. The house, built in 1915, is located only on lot 19. The present Hartford zoning regulations covering the property require a minimum lot size of 6,000 square feet for development.
John O’Malley (“O’Malley”), the creditor’s real estate appraiser, testified that the property was separated from the street by a hedge that runs across both lots; that a paved driveway is located on lot 20 to provide the only vehicle access to off street parking for the house located on lot 19; and that separate development of the lots, even if permissible, was not economically feasible because neither lot alone would be sufficiently large to accommodate both a house and off street parking.
The court, on January 11, 2000, had held a hearing on the debtor’s motion, filed pursuant to Bankruptcy Code § 506(a) and Fed.R.Bankr.P. 3012, to determine the value of the claims secured by the property. Thereafter the court issued an order finding that, as of the date of the bankruptcy petition, the claim of the creditor was $104,306.06; that the fair market value of the property was $58,000; that after a reduction for priority tax and water liens totaling $3,317.19, the creditor held a secured claim of $54,682.81 and an unsecured claim of $49,623.25.
*29Under the debtor’s plan, the creditor’s mortgage would be modified and “stripped down” to $54,682 with the unsecured portion to receive no dividend. The debtor contends that since the creditor’s mortgage covers two separate lots, only one of which is the debtor’s residence, the mortgage is not protected by § 1322(b)(2) and the debtor may modify the mortgage.
The creditor asserts the two lots should not be treated as separate collateral and that together they comprise the debtor’s residence. In addition, the creditor argues lot 20 is not saleable as a building lot because present Hartford zoning regulations require a minimum lot size of 6,000 square feet. The debtor responds that lot 20 remains a saleable lot in light of the provisions of § 35-13 of the Hartford Municipal Code:
Any lot in single ownership, which was a lot of record at the time of adoption of this chapter, that does not meet the requirements of this chapter for required lot area and lot width, may be utilized for any use permitted in the zoning district in which the lot is located, provided all the requirements for such zoning district, except the required lot area and lot width, are met on such lot. Hartford, Conn., Municipal Code § 35-13 (1977).
Accordingly, the debtor argues, lot 20 has been “grandfathered in,” and the debtor may sell it as a buildable lot.
III.
The court concludes that the debtor’s arguments are not persuasive and that the creditor’s objection must be sustained. The debtor relies on the holding in In re Maddaloni, 225 B.R. 277 (D.Conn.1998) to justify her claim of construing the creditor’s mortgage to cover more property than just the debtor’s residence. The debtor’s reliance on Maddaloni is misplaced. Maddaloni concerned a mortgage encumbering a single lot that contained a two-family house. The court’s holding, that because the property was used to produce income as well as to house the debtor’s family, the non-modification provisions of § 1322(b)(2) were inapplicable, lends no support to the debtor’s argument. In Maddaloni, the court looked to the use made of the property encumbered by the mortgage, not to whether the dwelling units had the potential to be physically separated or sold individually, to determine whether the mortgage secured property that was used for some purpose other than the debtor’s residence. See also In re Del Valle, 186 B.R. 347 (Bankr.D.Conn.1995) (mortgage on two-family house may be modified); In re Adebanjo, 165 B.R. 98 (Bankr.D.Conn.1994) (same regarding three-family house). On the other hand, a mortgage secured by a large parcel of land used solely as the debtor’s residence may not be modified. See Adebanjo, 165 B.R. at 103 (citing cases that have so held).
The Bankruptcy Appellate Panel (“the B.A.P.”) for the First Circuit recently sustained a mortgagee’s objection to plan confirmation in circumstances analogous to those presently before the court. GMAC Mortgage Corp. v. Marenaro (In re Marenaro), 217 B.R. 358 (1st Cir. BAP 1998). In Marenaro a mortgage was secured by three lots of record. The three lots were taxed separately and the debtor’s single-family house was located on one of the lots. There, as here, the debtor argued that the lots had the potential to be sold and developed separately, although they were actually being used for a yard and parking area. The B.A.P. held that, “If an abstract potential to use property in a different way, never amounting to a gleam in the eye of the owner at the time the mortgage is given, can withhold the protection of the anti-modification language from a mortgagee, then virtually every mortgage would be subject to modification. This interpretation would contradict the legislative history indicating that treatment of residential mortgages was intended to encourage the flow of capital into the home lending market.” Id. at 360-61 (ci*30tations and internal quotation marks omitted).
In the present matter, the court finds that the evidence presented supports a finding that the two lots at issue have been used together to provide a single-family residence for the debtor’s family and for no other purpose. The location of the driveway and off-street parking area supports the conclusion that, although the house may be located within the confines of one lot, both lots have been used together as one residence. The debtor has presented no evidence that she has ever used any portion of the property for any purpose other than her principal residence.
In addition, the court finds that Connecticut case law does not support the debtor’s argument that lot 20 is saleable as a building lot. The Appellate Court of Connecticut has interpreted language similar to that in Hartford Municipal Code § 35-13 as permitting development of substandard lots only if, as of the date of the regulations, the owner did not own any adjacent land. Neumann v. Zoning Bd. of Appeals of the Borough of Stonington, 14 Conn.App. 55, 60, 539 A.2d 614 (1988) (“Under many zoning ordinances, where a lot became substandard by virtue of the passage of more restrictive zoning regulations, and where that lot was at the time of the passage of that legislation under common ownership with that of an adjacent lot, such zoning regulations have refused to continue to recognize the separate validity of that lot. The common exception of lots which were recorded prior to the effective date of a restrictive ordinance is limited to lots which were in single and separate ownership on that date. Under such a provision, an owner is entitled to an exception only if his lot is isolated. If the owner of such a lot owns another lot adjacent to it, he is not entitled to an exception. Rather, he must combine the two lots to form one which will meet, or more closely approximate the frontage and area requirements of that ordinance.”) (quoting 2 Anderson, American Law of Zoning (3d Ed.) § 9.67) (internal quotation marks omitted).
IV.
For the foregoing reasons, the court concludes that the creditor’s objection to confirmation of the debtor’s proposed Chapter 13 plan must be sustained and confirmation be denied. It is
SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493018/ | OPINION
1
JOHN J. THOMAS, Bankruptcy Judge.
The judicial system’s need for order and finality requires that orders of courts having jurisdiction to enter them be obeyed until reversed, even if proper grounds exist to challenge them. A challenge for error may be directed to the ordering court or a higher court, as rules provide, but it may not be made collaterally unless it is based on the original court’s lack of jurisdiction. These principles are firm and long standing.
Spartan Mills v. Bank of America Illinois, 112 F.3d 1251 (4th Cir.1997) citing Celotex Corp. v. Edwards, 514 U.S. 300, 305-07, 115 S.Ct. 1493, 1498, 131 L.Ed.2d 403 (1995).
With these principles as my guide, I will now address the merits of the instant controversy. Contempri Homes, Inc. filed a petition under Chapter 11 on February 21, 1997. I entered an Order confirming the Joint Plan of Reorganization filed by the Debtor and the Creditors’ Committee on June 29, 1998. Thereafter, on November 17, 1998, the United States Trustee filed a Motion to Compel the Payment of Quarterly Fees and Motion to Dismiss, Convert to Chapter 7 or for the Entry of a Final Decree.
Central to this controversy is the impact of my Order confirming the plan of reorganization. Paragraph 14.4 of the plan reads as follows:
Trustee’s Fees. In accordance with 28 U.S.C. § 1930 and § 1129(a)(13) of the Bankruptcy Code, the Reorganized Debtor shall pay to the U.S. Trustee, on the Effective Date, and thereafter as required by the Code, all fees payable under § 1930 of Title 28, which shall be in an amount equal to no more than $3,750.00 for the quarter beginning July 1, 1998 and no more than $1,500.00 for each quarter thereafter.
The United States Trustee (UST) argues that regardless of this language, 28 U.S.C. § 1930(a)(6) as amended January 26, 1996, P.L. No. 104-99, Sec. 211 and September 30, 1996, P.L. 104-208, 110 Stat. 3009, requires the debtor to pay a quarterly fee for each quarter after a case is filed and to continue to make that payment until the case is converted, dismissed, or a final decree is entered.
The UST raises two issues, (1) may the terms of a confirmed plan of reorganization bind the UST with respect to obligations that arise after confirmation of the plan and (2) whether the term “disbursement” as contemplated by 28 U.S.C. § 1930 is limited to funds set aside for disbursement under the plan or does it include all disbursements made by the reorganized debtor? The UST relies primarily on Holywell Corp. v. Smith, 503 U.S. 47, 112 S.Ct. 1021, 117 L.Ed.2d 196 (1992) and In re CF&I Fabricators of Utah, Inc., 150 F.3d 1233 (10th Cir.1998) for the proposition that a plan cannot bind the parties with respect to post-confirmation fees which are non-negotiable statutory requirements in a bankruptcy context. In regard to her position that the term “disbursements” includes payments out*137side the plan as well as those made pursuant to the plan, the UST directs my attention to In re Postconfirmation Fees, 224 B.R. 793, 798 (E.D.Wash.1998); A.H. Robins Co., Inc., 219 B.R. 145, 151 (Bkrtcy. E.D.Va.1998); Vergos v. Uncle Bud’s, Inc., 1998 WL 652542 (M.D.Tenn.1998); and In re P.J. Keating Co., 205 B.R. 663 (Bankr.D.Mass.1997).
The response of the creditors’ committee can be summarized as follows. The UST is bound by the terms of the plan and the UST implicitly accepted the plan by not objecting to its confirmation. As such, the UST cannot now collaterally attack the final order confirming the plan because of the principles of both res judicata and collateral estoppel. Alternatively, the plan provided for payment of presently due and future trustee’s fees calculated on the total distributions contemplated by the plan. This calculation is also consistent with the statutory framework of 28 U.S.C. § 1930.
A failure to timely object to confirmation of a plan constitutes acceptance of the plan. In re Szostek, 886 F.2d 1405 (3rd Cir.1989) and In re Ruti-Sweetwater, Inc., 836 F.2d 1263 (10th Cir.1988). The finality aspect of court orders is discussed in the reasoning of the Ruti-Sweetwater court. “The Code contemplates that concerned creditors will take an active role in protecting their claims. Otherwise, Bankruptcy Rule 3017, which provides for fixing a deadline for filing rejections of a plan, and Bankruptcy Rule 3020(b), which provides for fixing a deadline for filing objections to confirmation, would have no substance.” Citing In re Record Club of America, 38 B.R. 691, 696 (M.D.Pa.1983). Id. at 1267. See also Spartan Mills v. Bank of America Illinois, 112 F.3d 1251 (4th Cir.1997) and Celotex Corp. v. Edwards, 514 U.S. 300, 305-07, 115 S.Ct. 1493, 1498, 131 L.Ed.2d 403 (1995).
In First Union Commercial Corporation v. Nelson, Mullins, Riley and Scarborough, 81 F.3d 1310, 1315 (4th Cir. 1996), I find the following which addresses the conclusiveness of a confirmation order:
The doctrine of res judicata applies in the bankruptcy context. Brown v. Felsen, 442 U.S. 127, 132, 99 S.Ct. 2205, 2209, 60 L.Ed.2d 767 (1979); Turshen v. Chapman, 823 F.2d 836, 839 (4th Cir.1987). A bankruptcy court’s order of confirmation is treated as a final judgment with res judicata effect. Stoll v. Gottlieb, 305 U.S. 165, 170-71, 59 S.Ct. 134, 136-37, 83 L.Ed. 104 (1938); Piedmont Trust Bank v. Linkous (In re Linkous), 990 F.2d 160, 162 (4th Cir.1993); see also 5 Collier on Bankruptcy ¶ 1141.01[1] (15th ed.1989). Pursuant to § 11 U.S.C. 1141(a), all parties are bound by the terms of a confirmed plan of reorganization. In re Chattanooga Wholesale Antiques, Inc., 930 F.2d 458, 463 (6th Cir.1991). Consequently, parties may be precluded from raising claims or issues that they could have or should have raised before confirmation of a bankruptcy plan, but failed to do so. Turshen, 823 F.2d at 839 (“The normal rules of res judicata and collateral estop-pel apply to the decisions of bankruptcy courts.”) (citation omitted); see also Chattanooga Wholesale, 930 F.2d at 463; Heritage Hotel Ltd. Partnership I v. Valley Bank of Nevada (In re Heritage Hotel Partnership I), 160 B.R. 374, 377 (9th Cir. BAP 1993) (listing cases), aff'd, 59 F.3d 175, 1995 WL 369528 (9th Cir.1995). More specifically, federal courts have consistently applied res judicata principles to bar a party from asserting a legal position after failing, without reason, to object to the relevant proposed plan of reorganization or to appeal the confirmation order. See, e.g., Department of Air Force v. Carolina Parachute Corp., 907 F.2d 1469, 1473-74 (4th Cir.1990); Justice Oaks, 898 F.2d at 1552.
Claim preclusion (res judicata) gives dispositive effect to a prior judgment if an issue which could have been litigated was not raised. “Claim preclusion re*138quires:, (1) a final judgment on the merits in a prior suit involving; (2) the same parties or their privities; and (3) a subsequent suit based on the same cause of action.” In Board of Trustees of Trucking Employees Welfare Fund, Inc. v. Centra, 983 F.2d 495, 504 (3rd Cir.1992).
To be collaterally estopped from relitigating an issue that was adjudicated in a prior action, the following must be present: (1) the issue sought to be precluded must be the same as the one involved in the prior action; (2) the issue must have been actually litigated; (3) the issue must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment. In re Ross, 602 F.2d 604, 608 (3rd Cir.1979).
The UST, properly served with the plan, had opportunity to review the plan and question any objectionable provision therein. The UST was present at the confirmation hearing and did not raise an objection at that time.
In applying the Centra test above, I look to the similarity of the underlying events of the claims to determine if they give rise to the same causes of action. I find that the instant motion and the process of obtaining confirmation of the plan with opportunity for objection stem from similar facts and events giving rise to the same cause of action and, therefore, the cause of action represented by both, i.e., the payment of UST’s fees, is precluded by res judicata.
Moreover, the attempt to alter the statutory framework of payment of UST fees under the terms of the plan is an issue that was adjudicated in the plan confirmation process and the UST is collaterally estopped under the test enunciated by In re Ross, 602 F.2d 604 (3rd Cir.1979).
Regardless of my ruling, I must address the UST’s reliance on the Holywell case to support her argument that the terms of the plan cannot bind the UST and her efforts to collect fees. The Holywell case provides that, “Even if § 1141(a)2 binds creditors of the corporate and individual debtors with respect to claims that arose before confirmation, we do not see how it can bind the United States or any other creditor with respect to post-confirmation claims.” Holywell, 503 U.S. at 58, 112 S.Ct. 1021. (Footnote ours.) The plan trustee in Holywell argued that he did not have to file returns or pay taxes on gains realized from the sale of debtors’ property put into trust because those responsibilities were not specifically spelled out as a term of the confirmed plan. The United States did not object to the plan which said nothing about whether the trustee had to file income tax returns or pay taxes on the sale of the properties. The trustee’s position in Holywell smacks of convenience because by his reasoning he did not need to do anything to fulfill any of his legal duties as a fiduciary under the law other than what was spelled out in the plan. Furthermore, the Holywell trustee could insulate himself from what otherwise would be considered normal requirements imposed on any assignee of property or trustee of any trust. I place significance on the fact that the plan in Holywell was silent as to the plan trustee’s responsibilities to pay future taxes as a result of the sale of property in his possession as a fiduciary.
In contrast to Holywell is the case of State of Maryland v. Antonelli Creditors’ Liquidating Trust, 123 F.3d 777 (4th Cir.1997), in which a confirmed plan exempted plan transfers from state stamp and other taxes. As in this case, the State of Mary*139land, which was a creditor by virtue of the debtor owing it pre-petition taxes, had notice with full and fair opportunity to object or otherwise participate in the confirmation process. After the plan was confirmed, the state brought an action in state court which was thereafter removed to federal court in an effort to collect the taxes. Maryland asserted it was not bound by the plan because it was not yet a creditor for the taxes which would only become due long after the plan was approved. In essence, the argument was that Maryland could not act presently because it might have only claims for future acts. The Antonelli court addressed the Holywell case, albeit in a footnote, and pointed out that unlike the plan in Holy-well, which was silent concerning the taxes, the Antonelli plan directly stated that the liquidating trust was not liable for the payment of the taxes and, therefore, the court could not see how the holding of Celotex, (that a bankruptcy court’s final order cannot be collaterally attacked), could be circumvented. See Antonelli, 123 F.3d at 782, FN*.
The distinctions between the Holywell and Antonelli cases are significant. It is too simplistic an approach for resolution of this case to rely on a blanket statement at the conclusion of a Supreme Court case (Holywell) that a confirmed plan cannot bind a creditor with respect to post-confirmation claims. Here, the UST is both a pre-confirmation and post-confirmation creditor because the fees were due the UST before the plan was confirmed and fees accrued post-confirmation based on plan disbursements by the Debtor. If the parties disagreed with or misapprehended the nature and extent of the disbursements as contemplated by the plan, or if the approval of the plan was in error, a collateral attack on the substance of my Order was not the proper way to resolve these issues. The propriety and legal basis of the Order confirming the plan could have been examined on appeal. Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir.1987). In any event, the UST’s reliance on Holywell falls short in her efforts to support the instant Motion.
Ultimately, the issue is whether I have jurisdiction to confirm a plan which addressed the post-confirmation payment of UST’s fees under 28 U.S.C. § 1930. The jurisdictional grant of 28 U.S.C. § 1334 is broad. Jurisdiction exists with a bankruptcy court to oversee disputes with the collection of UST fees both before and after confirmation. United States v. CF&I Fabricators of Utah Inc., 150 F.3d 1233 (10th Cir.1998), U.S. Trustee v. Gryphon at Stone Mansion, Inc., 216 B.R. 764 (W.D.Pa.1997), In re A.H. Robins, 219 B.R. 145 (Bankr.E.D.Va.1998). Furthermore, whether I had core or non-core related jurisdiction is of no moment because a confirmation order has claim preclusive effect in non-core related matters as well as core matters. CoreStates Bank, N.A v. Huls America, Inc., 176 F.3d 187 (3rd Cir.1999).
While the parties raised the issue of how to define the term “disbursements” in 28 U.S.C. § 1930, that issue is mooted by both the res judicata and the collateral estoppel effect the Order confirming the plan has on the UST’s attempt to collect fees other than provided for in the plan.
An appropriate Order will follow.
ORDER
For those reasons indicated in the Opinion filed this date, the Motion of the United States Trustee to Compel the Payment of Quarterly Fees and Motion to Dismiss, Convert to Chapter 7 or for the Entry of a Final Decree, filed November 17, 1998, (Doc. # 372), is denied.
. Drafted with the assistance of Richard P. Rogers, Law Clerk.
. 11 U.S.C.A. § 1141(a). Except as provided in subsections (d)(2) and (d)(3) of this section, the provisions of a confirmed plan bind the debtor, any entity issuing securities under the plan, any entity acquiring property under the plan, and any creditor, equity security holder, or general partner in the debtor, whether or not the claim or interest of such creditor, equity security holder, or general partner is impaired under the plan and whether or not such creditor, equity security holder, or general partner has accepted the plan. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493019/ | OPINION
DONALD R. SHARP, Bankruptcy Judge.
NOW before the Court for consideration is the Application of Rose Ann Roberts for Attorneys’ Fees. This opinion constitutes the Court’s findings of fact and conclusions of law to the extent required by Fed. R.Bankr.Proc. 7052 and disposes of all issues before the Court.
FACTUAL AND PROCEDURAL BACKGROUND
Rose Ann Roberts (“Plaintiff’) and George Holloway (“the Debtor”) were formerly married. Plaintiffs claim against the Debtor arises out an assignment of interest in the McKinney 282 Joint Venture Pursuant to an Agreement Incident To Divorce and Assignment of Interest In Profits, Losses, Distributions and Obligations (“Agreement”). The Debtor filed for bankruptcy on March 13, 19921, following Plaintiffs filing a suit in state court to recover money wrongfully taken by the Debtor upon the sale of real property covered by the Agreement. Plaintiff claimed proceeds from the sale of property awarded to her which should have been paid to her were misappropriated by the Debtor. Plaintiff filed her Complaint to Determine Dischargeability with respect to that debt and a trial was held before this Court which resulted in the entry of a Final Judgment finding the debt of $146,649.50 plus interest and attorneys fees non-dis-chargeable. The amount of the award of attorneys’ fees was set at $100,000.00. The Debtor appealed the decision. The District Court upheld this Court’s ruling regarding the dischargeability of the debt and the award of interest, but remanded the matter solely with respect to the award of attorneys’ fees.2 The District Court determined that the award of attorneys’ fees required analysis of the Johnson factors as set forth in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974).3 The opinion recognizes that such an analysis was not possible given the insufficiency of the probative evidence and “sketchy cross examination”. Further, the District Court made clear that the Bankruptcy Court was not obligated to reopen evidence on this issue for the reason that “Roberts failure to sustain the evidentiary burden of showing reasonableness the first time this issue was fully litigated does not entitle Roberts to an automatic second bite at the apple.” Nonetheless, the Court acknowledged Plaintiffs good faith and left rehearing the matter to this Court’s discretion. Thereafter, Plaintiff filed her Application for Attorneys’ Fees. Not surprisingly, the *200Debtor objected.4 The Application came on for hearing and at the conclusion of the hearing, the Court took the matter under advisement.
RELIEF SOUGHT
The Application of Rose Ann Roberts for Attorneys’ Fees (the “Application”) seeks this Court’s determination that the fees incurred on her behalf in this case are non-disehargeable debt. This Application is atypical to this Court insofar as the fees will not be paid out of the bankruptcy estate or effect any distribution to creditors, the case having been closed in 1995. The Application seeks this Court’s approval of $174,989 in fees for 1,243.73 hours of services rendered on her behalf by Pezzulli & Associates, reimbursement of expenses incurred in performing such services in the amount of $13,127.00 plus additional attorneys’ fees in connection with the preparation of the Application. The period covered extends from October, 1989 through the preparation of the Application and its proposed hearing. This period includes all of the original state court litigation, the appellate litigation and the bankruptcy litigation.
DISCUSSION
The Court has considered the records in this case, the application before the Court, the arguments of counsel, the testimony and credibility of witnesses and the evidence adduced at the hearing respecting the Application. Pursuant to 11 U.S.C. §§ 330 and 331, all professionals applying for fees must demonstrate that the services to be compensated were actual, reasonable and necessary. This Circuit uses the “lodestar method” to calculate attorneys’ fees. In the Matter of First Colonial Corp. of America, 544 F.2d 1291, 1299 (5th Cir.), cert. denied, 431 U.S. 904, 97 S.Ct. 1696, 52 L.Ed.2d 388 (1977), establishes the proper procedure for determining attorney fee awards in bankruptcy. Simply put, the Court must assess the value of the attorneys’ services by first calculating the “lodestar.” Generally, the lodestar is calculated by multiplying the number of hours reasonably expended by a reasonable hourly charge. In re Lawler, 807 F.2d 1207, 1211 (5th Cir.1987). Once the “lodestar” determination has been made, the Court must then analyze the attorneys’ services in light of the factors set forth in Johnson and referred to above. Application of the Johnson factors is generally considered an adjustment of the rather mechanical “lodestar” calculation to tailor the fee award to the specific facts of the case under consideration. Finally, the court must explain the basis of its award. In doing so, the court must briefly describe its findings and explain how an analysis of the Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974), factors led to its decision. In re Allied Texas Investments, Inc., 1989 WL 265432 (Bkrtcy.N.D.Tex.). Each of the Johnson factors should be considered, but none are controlling. Cobb v. Miller, 818 F.2d 1227, 1232 (5th Cir.1987). The fee applicant bears the burden of proving that the Johnson factor adjustments as well as the number of hours and the hourly rate for which compensation is requested are reasonable. Hensley v. Eckerhart, 461 U.S. 424, 437, 103 S.Ct. 1933, 1941, 76 L.Ed.2d 40 (1983).
As stated hereinabove, the number of hours for which applicant seeks *201compensation is 1,243.73. However, the Court may deduct for tasks that are not reasonable, duplicative or unnecessary. The Court -will not allow compensation in instances where the services performed by the professional are in the nature of overhead or could be performed by a non-billing or lower billing professional. In the case before the Court, attorneys performed services that could have been delegated to lower charging firm members. For example, on 11/18/97 and 11/24/97 Ms. Farquar called the clerk’s office regarding sending a record; also, on 7/28/97 she charges time for filling out a form. There were numerous telephone conferences billed without reference to subject matter. The Court has no evidence upon which it can find that the time expended during such conferences was reasonable or necessary. Accordingly, the Court must adjust any award with respect to these hours billed. Travel time was not billed at half the charges as is required in this district (see %o for example). Many time entries show “time lumping” which makes it difficult to ascertain if the'time spent on certain tasks is reasonable.5 There are numerous examples of interoffice conferences among members of the firm.6 As a result of the foregoing irregularities in the Application, this Court is unable to ascertain the true number of hours necessary to calculate the “lodestar”.
In addition, to calculate the “lodestar” the Court must have an hourly rate to factor into the equation. The Application states that Pezzulli & Associates’ “average hourly rate” is $140.00. Average hourly rates are patently misleading.7 In fact, the Application never gives this Court a true hourly rate for the professionals who provided the services.8 All rates are shown as “average rates”. To state that there is an “average rate” means that at times an attorney might charge $180./hour, i.e. an acceptable rate in this district — or even a lower amount — , but at other times, $220 or $240/hr., rates which would only be allowed in extraordinary circumstances in a bankruptcy case. Based upon the information in the Application, it is impossible to ascertain the hourly rates absent a calculation on each, individual time entry. Mr. Pezzulli recognized this flaw to some extent. He testified that “While the summary does not reflect the rate charged per attorney per month, it does reflect the total average rate for each attorney. The actual rate per month is simply calculated from the monthly statements. You can look at the time and the dollar amount and you know the precise amount. So, every*202thing necessary to calculate that to go to the blended rate of $140 is before the Court.” Moreover, arguendo, Pezzulli’s “average” rate is $210.70, according to the Application, which is in excess of the amount usually allowed by this Court for a partner in a firm. Farquar’s “average” rate is shown as $177.56 — also in excess of the rate usually allowed by this Court for an associate. The other attorneys who billed time to the file have average rates less than the highest rate allowable by the Court for an associate; nonetheless, there is no record of the rate actually billed for their services. Regardless of the fact that there is no clear statement in the record of hourly rates except for Pezzulli’s current hourly rate of $275./hour, which is higher than this Court will allow, Pezzulli and his expert witness, Vincent Steven Walkowiak, both testified that the rates were “reasonable”.9 Two of the ten paralegals who worked on the matter over the term of years were billed out at an “average” rate of $75/hour.10 The rate of $75/hour is excessive for a paralegal in the field of bankruptcy in this District. Otherwise, it appears that the paralegals billed their time at $50/hour, a rate this Court would find acceptable, if such were an actual rate. The rate of $75/hour has also been billed for the services performed in this case by three law clerks.
The Application offers this Court no information whatsoever regarding these clerks and designates one by initials instead of by name. According to the testimony, these law clerks performed “spot research”-. As a result of insufficient information, this Court is unable to ascertain correct hourly rates with which to calculate the “lodestar”.
In this circuit, creditors may recover their attorneys’ fees in § 523 actions if they would have a contractual right to such attorneys’ fees under state law. Matter of Luce, 960 F.2d 1277, 1286 (5th Cir.1992); Matter of Jordan, 927 F.2d 221, 227 (5th Cir.1991). Such a contractual right was found by this Court in this case in the Agreement. At this juncture Applicant has had two opportunities to appear before this Court to support an award of fees. Applicant has provided masterful argument justifying entitlement but insufficient evidence upon which this Court can quantify an award and calculate the “lodestar” prerequisite to the Johnson analysis mandated by the District Court. It has long been the opinion of this Court that it is not the burden of the Court or of the Debtor to disprove or examine the minutiae of a fee application once it has been demonstrated clearly that the description of the services is unreliable and the benefit incurred upon the estate as a result of the services provided or alleged to have been provided is dubious.
Further, Applicant seeks reimbursement of expenses incurred in performing such services in the amount of $13,127.00. No supporting documents, receipts, invoices or statements have been provided to support the expenses. Although copy charges appear to be appropriate at $0.20 each, there is a “miscellaneous” charge of $141.00 devoid of any explanation.
This Court is of the opinion that the amounts requested pursuant to the Application exceed the amounts normally awarded in similar cases. For example, Pezzulli & Associates seek an additional *203$10,000 for services rendered in preparing the Application. Such an amount exceeds what this Court deems to be reasonable for the preparation of a fee application in a case of this proportion and given the irregularities of the Application specified here-inabove.
CONCLUSION
The instant Application is before the Court, as the District Court characterized it, “in light of Roberts’ apparent good faith”. Roberts has been treated to her “second bite at the apple”, but the evidence that was formerly lacking is now before us and it is dubious, irregular and inconsistent. The Court has not been provided adequate information upon which it can calculate the “lodestar”. Absent this foundation, it is not possible for the Court to assess the value of the attorney’s services. It is also impossible to apply a Johnson-factor analysis without a “lodestar” figure to adjust.11 In view of this Court’s inability to conduct a “lodestar” determination and a Johnson factor analysis based on accurate records, any award of attorney fees would be on exactly the same basis as the earlier award vacated by the District Court. That is, an assessment based on this Court’s experience rather than the analysis required by the District Court’s remand and the jurisprudence dealing with fee awards. Accordingly, the relief sought in Plaintiffs Application must be denied. An order will be entered ae-cordingly.
. The Debtor received his discharge on July 16, 1992.
. The Debtor appealed the dischargeability issue to the Fifth Circuit Court of appeals. The Fifth Circuit affirmed the District Court’s judgment affirming this Court’s ruling on the issue of dischargeability.
. The Johnson factors are: (1) the time and labor required; (2) the novelty and difficulty of the issues; (3) the skill required to perform the legal services properly; (4) the preclusion of other employment by the attorney; (5) the customary fee; (6) whether the fee is fixed or contingent; (7) the time limitations imposed by the client or circumstances; (8) the amount involved and results obtained; (9) the experience, reputation, and ability of the attorneys; (10) the undesirability of the case; (11) the nature and length of the professional relationship with the client; and (12) the award in similar cases. 488 F.2d at 717-19.
. One portion of the Debtor’s argument was that the fees sought to be approved by Plaintiff failed to accurately reflect a reduction of $50,000. This element would be subsumed under the rubric "Nature and Length of the Professional Relationship with the Client” in a Johnson factor analysis. Counsel for the Debtor argued that Pezzulli & Associates may have written-off $50,000 of the fees accrued. Plaintiff identified the arrangement as one in which her counsel informed her that his gift to her would be that he would pursue the Debtor for that portion of her debt to the firm. Whether Pezzulli & Associates has forgiven a portion of Plaintiff’s debt does not effect the outcome of this Court’s determination as to whether the services such debt represents were performed or were reasonable and necessary.
. The practice of time "lumping” has uniformly been condemned by courts because clumping makes it difficult to ascertain what charges were made for specific purposes. See In re George Worthington Company, 76 B.R. 605, 608 (Bankr.N.D.Ohio 1987); In re NRG Resources, Inc., 64 B.R. 643, 654 (W.D.La.1986).
. For example, 12/2/92 DAB & SPK, 11/4/92 CEF & GTM and CTM & SPK, 11/10 CEF & GTM, "hi SPK & GTM, 9/30/92 GTM & SPK and others.
. The Court is not offended by the presentation of an "average” hourly rate. Acceptable fee applications frequently include an average, but support and clarify the method of calculating such rate. An acceptable Application discloses each attorney's hourly rate and status within the firm for each year in which such attorney performed services on the case. Absent detailed disclosure as required under the Code, the Court is unable to take into account normal fluctuations in attorney rates as a result of experience or promotion within the firm. It is not uncommon in a bankruptcy case for the Court to review a professional fee application spanning a period of years. An attorney performing services on a case for four years, three as an associate and one as a director, should not be allowed the director’s hourly rate for all four years nor denied the increase if such increase is appropriate. To include paralegal hours in the calculation is an artifice that lowers a firm's "average” hourly rate and conceals attorney rates that may exceed amounts allowable in this District.
.At trial Mr. Pezzulli testified that his hourly rate was $275/hr. He did not specify whether such rate was his rate at the time of trial or had been his rate throughout the period covered by the Application.
. In a Johnson factor analysis "Experience, Reputation, and Ability of Attorneys" bear upon the amount of the award. The attorneys who performed the majority of the legal services rendered on behalf of Plaintiff have moderate to high years of experience and good credentials. Mr. Pezzulli testified as to his own credentials and those of Ms. Farquar. The skill, expertise and reputations of the attorneys and paraprofessionals who performed services in this case on behalf of the Plaintiff has been adequate except in relation to the fee application process.
. The number of professionals who worked on the file was a bone of contention raised in the Debtor's Objection. Given the number of years and diversity of courts before which the matter has been heard over the years, that number is not unreasonable.
. The Court is aware that elements of the Johnson analysis are incorporated into its discussion of the "lodestar” in the form of "customary fee", "time and labor required” and "awards in similar cases”. • "Amounts involved and results obtained” as well as "whether the fee was fixed or contingent” are evident upon a reading of the factual background. The Court will add briefly that it must disagree with the Applicant’s assertion that the “significant number of hours spent demonstrates the difficulty and complex nature of the factual and legal questions involved in this case.” This case has been contentious, but the legal issues have been straightforward and hardly unique. The facts were unambiguous. Misappropriation of funds is commonly seen in the State Courts and dischargeability is commonplace to the Bankruptcy Court. However, defending the Debtor’s numerous appeals has increased the costs to Plaintiff. An adjustment to the lodestar is not justified when the questions involved are no more difficult than questions in other, comparable bankruptcy cases and the results obtained are similar to those that might have been obtained from other local attorneys. In re Property Company of America, 110 B.R. 244 (Bkrtcy.N.D.Tex.1990). In short, while this case was contentious, it was not complex. There is no evidence before this Court that it was undesirable as it pertains to a Johnson analysis; indeed, the Application states that it was not undesirable. If there was a calculable “lodestar”, these factors would mitigate against any upward adjustment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493020/ | ORDER
RANDOLPH BAXTER, Bankruptcy Judge.
Before the Court is a motion of Visi-Trak Corporation (the Debtor) for relief from judgment or, alternatively, to amend judgment. Also before the Court is a motion of the official Committee of unsecured creditors (the Committee) for a stay pending appeal and its motion for rehearing pursuant to Rule 59, Fed.R.Civ.P. and Rule 9023, Bankr.R. Upon due consideration of each motion, the following findings of fact and conclusions of law are hereby rendered:
The Debtor caused its voluntary petition for relief to be filed on June 15, 1999. Upon a duly noticed hearing on the motion of the largest unsecured creditor, John R. Mickowski, the Debtor’s case was dismissed on March 24, 2000. The aforementioned motions were timely filed in response.
*237Upon presentment and consideration of evidence adduced at the hearing on the subject motions, it is apparent that this Court’s finding for dismissal of the Debt- or’s case relating to certain prepetition conduct attributed to the Debtor was unwarranted. An examination of the District Court’s June 1, 1999 and June 4, 1999 hearing transcripts clearly evinces that that Court’s Temporary Restraining Order was violated by the Debtor.1 Exhibit D. Indeed, the Debtor’s counsel conceded there was a violation of the T.R.O. Nonetheless, upon further directive, the assets removed were returned to the Debtor’s location. No evidence of any further removal of the Debtor’s assets have been alleged or demonstrated in violation of the District Court’s Preliminary Injunction Order. The District Court was not required to engage the services of the U.S. Marshal to enforce either of its injunctive orders, as was previously understood.
Accordingly, the Debtor’s Motion for Relief from Judgment is hereby granted. Consequently, the Committee’s Motion for Stay and its Motion for Rehearing are rendered moot. This Court’s Order and Judgment of dismissal entered on March 24, 2000 are hereby vacated, and the case is reinstated. The Debtor’s Motion for leave to file its disclosure statement is granted until April 28, 2000.
IT IS SO ORDERED.
. See, Transcript of Proceedings had before The Honorable John M. Manos, June 1, 1999, pp. 8, 9, 11-20. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493021/ | ORDER ON MOTION TO ALTER OR AMEND ORDER ON DEFENDANT’S MOTION TO DISMISS OR IN THE ALTERNATIVE TO ABSTAIN, MOTION FOR JUDGMENT ON THE PLEADINGS AND MOTION FOR SUMMARY JUDGMENT DATED OCTOBER 21, 1999
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration in this adversary proceeding is Plaintiff, *319Mark C. Edwards’ (Mark) Motion to Alter or Amend Order on Defendant’s Motion to Dismiss or in the Alternative to Abstain, Motion for Judgment on the Pleadings and Motion for Summary Judgment Dated October 21,1999. In the Order of Dismissal, this Court determined that it lacked jurisdiction to grant the injunctive relief sought by Mark, granted summary judgment in favor of Giffin and dismissed the Complaint. Mark now seeks to alter or amend the Order of Dismissal, pursuant to Fed. R.Bankr.Pro. 9023. The Court reviewed the Motion, the relevant part of the record, heard argument of counsel and now finds and concludes as follows:
In the 1970’s, George C. Edwards (Debt- or) owned certain real property in Steuben County, Indiana (Real Property). In 1973 and 1979, the Debtor transferred the Real Property to his son Mark.
Years later, Charles F. Giffin (Giffin) sued the Debtor. Giffin obtained a judgment (Judgment) against the Debtor in the Steuben County Circuit Court, Steuben County, Indiana on October 6, 1987. Gif-fin recorded the Judgment in Steuben County.
Subsequently, Giffin instituted an action to satisfy the judgment lien under Indiana law (the “Indiana State Court Action”), asserting that the Debtor’s transfer of the Real Property to Mark was fraudulent and that under Indiana law Giffin acquired a hen on the Real Property that he was entitled to enforce.
On April 13, 1989, the Debtor filed his Chapter 7 case. Diane Jensen (Trustee) was appointed as the Chapter 7 Trustee. After the Chapter 7 case was closed as a no-asset case, the Debtor filed a Motion seeking to reopen the case. The Motion was granted on June 24,1999, and the case was reopened for further administration.
On May 8, 1996, the Trustee filed a Motion for Authority to Sell Property of the Estate Free and Clear of Liens, seeking to sell the Real Property even though the Real Property had been transferred by the Debtor to Mark in the 1970’s. Based on the record it appears that the Trustee actually had nothing to sell since the subject property was not property of the estate. Nonetheless, the Trustee’s Motion was considered in due course, and treated as a motion to approve a compromise between the Trustee and Mark of the Trustee’s claim to avoid a fraudulent transfer. On October 30,1996, this Court entered an Order approving the compromise. The terms of the compromise were fulfilled as Mark paid the $10,000 to the estate and the Trustee executed the appropriate releases relinquishing her purported fraudulent transfer claims against Mark.
On May 13, 1991, Giffin filed a Motion for Relief from Automatic Stay in order to pursue his fraudulent transfer action against Mark. The Motion was denied on the grounds that Giffin lacked standing to pursue a fraudulent transfer claim because the claim was property of the estate and had to be asserted by the Trustee. The Court also found that as property of the estate, the claim was the Trustee’s to assert.
In the Indiana State Court Action, the Allen Superior Court (Trial Court) substituted the Trustee for Giffin as plaintiff and then dismissed the case. Giffin appealed the Trial Court’s decision to the Court of Appeals of Indiana (Appellate Court) which reversed the Trial Court’s decision, reinstated Giffin’s suit and remanded it to the Trial Court. Following the decision by the Appellate Court, Mark filed a Petition for Rehearing which was granted for the limited purpose of responding to Edwards’ contention that the bankruptcy court’s Order Approving Compromise is res judicata and that the Appellate Court lacked jurisdiction to question the judgment of the Bankruptcy Court. The Appellate Court found that the Bankruptcy Court’s decision was not res judicata and that the decision left issues of state law properly within the jurisdiction of the Indiana courts to decide. In addition, the Appellate Court held that it had jurisdiction to decide whether Giffin *320had a valid lien on the Real Property, and whether he was a secured creditor under Indiana law. The Appellate Court concluded that under Indiana law, Giffin had a valid lien on the Real Property.
Mark commenced the above-captioned adversary proceeding on June 24, 1999. In his one-count Complaint, Mark requests that this Court grant injunctive relief enjoining Giffin from pursuing the Indiana State Court Action against him and to transfer Giffin’s suit to this Court. During the pendency of this adversary proceeding, on September 20, 1999, the Indiana Supreme Court denied Mark’s February 25, 1999 Petition to Transfer. The Court of Appeals also held that Giffin was entitled to pursue an action to enforce his lien against the Real Property. See Giffin v. Edwards, 708 N.E.2d 876, 879 reh’g granted in part, 711 N.E.2d 35 (Ind.Ct.App.1999). The effect of the Appellate Court’s February 25, 1999 decision is final and binding upon Mark. Ind.App.R. 11(B)(3).
Reconsideration of a judgment after its entry is an extraordinary remedy which should be used sparingly. See Sussman v. Salem, Saxon & Nielsen, P.A., 153 F.R.D. 689 (M.D.Fla.1994); NL Industries, Inc. v. Commercial Union Ins. Co., 935 F.Supp. 513, 516 (D.N.J.1996). The four basic grounds upon which a Rule 59(e) motion may be granted are (1) to correct manifest errors of law or fact upon which the judgment is based; (2) to allow the movant to present newly discovered or previously unavailable evidence; (3) to prevent manifest injustice; and (4) where there is an intervening change in controlling law. Sussman, supra.
In the instant case, Mark seeks an amendment to the Order of Dismissal based on alleged factual errors. He contends that this Court erred by concluding that the Real Property was transferred on October 6, 1987 when the transfers occurred in 1973 and 1979. Also, he contends that it was a factual error to find that Giffin had pursued an action to foreclose his judgment lien when it was actually a fraudulent conveyance action. Finally, Mark contends that a refusal to correct these errors would jeopardize the court-approved compromise between himself and the Trustee because Order of Dismissal makes the compromise “illusory”.
The Order of Dismissal was based on the conclusion that the outcome of the Indiana litigation could not possibly have any effect on the administration of the Debtor’s estate. This is so because the property involved in the Indiana litigation was not and is not property of the estate, and the Trustee’s fraudulent transfer claim was settled with Court approval and it is no longer property of the estate.
The facts resulting in the ultimate conclusion that this Court lacks jurisdiction and the decision to dismiss this adversary proceeding is that the adversary proceeding presents a dispute between non-debtors, Mark and Giffin. The Trustee’s fraudulent transfer claim against Mark, no matter how valid a claim, was compromised with court approval. The Real Property involved in the Indiana State Court Action is not property of the estate.
The fact findings that Mark contends are erroneous are of no consequence and would not be a basis to find jurisdiction to entertain this adversary proceeding to grant the relief sought. Since an amendment to the Order of Dismissal will serve no useful purpose, the Motion should be denied. See Blair v. Delta Air Lines, Inc., 344 F.Supp. 367 (S.D.Fla.1972), affirmed 477 F.2d 564 (5th Cir.1973).
In view of the foregoing, this Court is satisfied that the Motion should be denied.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED, that the Motion to Alter or Amend Order on Defendant’s Motion to Dismiss, or in the Alternative, to Abstain, Motion for Judgment on the Pleadings and *321Motion for Summary Judgment is hereby denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493022/ | FINDINGS OF FACTS, CONCLUSIONS OF LAW, AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Bankruptcy Judge.
The matter under consideration in this Chapter 7 liquidation case is a claim of nondischargeability asserted by The St. Paul Fire and Marine Insurance Co. (St. Paul) against Theodore Vinecki and Margaret Vinecki (Debtors). In its Complaint, St. Paul alleged that the Debtors obtained money from St. Paul by false pretenses, false representation or actual fraud, therefore, the debt owed to St. Paul by the Debtors should be excepted from the overall protection of the general discharge by virtue of Section 523(a)(2)(A) of the Bankruptcy Code.
*325The facts relevant to the claim under consideration, as established at the final evidentiary hearing are as follows.
The Debtors were married in 1984 and were still married in 1989 when they formed a corporation known as T & M Trucking and Leasing, Inc., (T & M). This was a Subchapter S corporation and the Debtors were the sole stockholders and officers of T & M. T & M operated a fleet of trucks in interstate commerce under an I.C.C License.
In October 1996, T & M procured, through an independent insurance agency, Caputo Insurance Agency, Inc., (Caputo) an insurance policy from Athena Insurance Company, a division of St. Paul. The Policy, No. CA 05500947, covered the fleet then operated by T & M. On January 17, 1997, the coverage was extended by an endorsement which added a 1996 Freight-liner Tractor, Serial No. 1FLTYDX-YB6TH709990 (the Truck) to the Policy which already covered T & M’s fleet. The endorsement identified T & M as the owner of this new addition to the coverage and indicated as the loss payee R.P.S., Inc. (Pl.’s Ex. 11)
The Truck was originally purchased in 1995 from Hunt, Inc., and the purchase was financed by Mercedes-Benz Credit Corp. (Mercedes-Benz).
It is unclear from this record why the title certificate identified Mercedes-Benz as the owner and also as the holder of the first lien on the Truck which, of course, is a legal impossibility since one cannot have a lien on its own property because the hen interest is merged into the ownership interest. The Truck was leased to T & M and under the lease was required to carry sufficient insurance to protect the interest of Mercedes-Benz. This record is void of any evidence to show the identity, except the corporate name and the interest of R.P.S., who was indicated to be the loss payee under the policy covering the Truck (Pl.’s Ex. 1).
In September, 1997, the Truck was involved in an accident in Buffalo, Wyoming, and the Truck was a total loss. Theodore Vinecki, on behalf of T & M, submitted a Sworn Statement of Proof of Loss (the Form) (PL’s Ex. 1) and claimed a loss for the Truck and a utility trailer valued at $59,000. The Form submitted identified R.P.S., Inc., as the loss payee. The Form does not indicate that Mercedes-Benz had any interest in the Truck or in the utility trailer. In due course, St. Paul issued its draft No. 063564981 (PL’s Ex. 2) in the amount of $58,000 payable jointly to T & M and R.P.S., Inc. The check was deposited in the corporate account of T & M and cleared by the bank, even though the check was not endorsed by R.P.S., Inc.
On June 1, 1998, Mercedes-Benz informed St. Paul that it was the owner of the Truck and intended to file a claim for the loss under the insurance policy issued by St. Paul covering the Truck. In support of its claim, the letter sent by Mercedes-Benz included a copy of the Motor Vehicle Lease Agreement and the title indicating that the Truck had been owned by Mercedes-Benz. (PL’s Ex. 3). St. Paul honored the claim and eventually paid Mercedes-Benz $58,000 and obtained the title to the Truck.
On June 17,1999, the Debtors filed their Joint Petition for Relief under Chapter 7 of the Bankruptcy Code. St. Paul timely filed the Complaint involved in this adversary proceeding, No 99-570, which sought a determination of nondischargeability of the liability of the Debtors to St. Paul pursuant to Section 523(a)(2)(A) of the Code.
This Section provides:
§ 523. Exceptions to discharge.
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
*326(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
The provisions of the Code concerning the discharge of debts are remedial and are traditionally construed liberally in favor of Debtors and strictly against parties who seek to except a particular debt owed to the challenging party from the general bankruptcy discharge. The liberal construction is consistent with the well recognized policy aim of the Code which, as annunciated by the courts, was to give a “fresh start in life free from the past financial misfortunes of debtors.” Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970); Local Loan v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934); See also Parker-Marshall Group, Inc. v. Lee, 188 B.R. 297 (M.D.Fla.1995). In re Boodrow, 126 F.3d 43 (2d Cir.1997).
However, it is equally true that even the most liberal construction cannot save a debtor once it has been established by competent proof all of the operating elements of one of the several exceptions to the discharge. Moreover, the standard of proof is no longer clear and convincing, but the less rigorous preponderance of the evidence standard. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Before applying the foregoing legal principles to the facts established at the final evidentiary hearing, it should be noted that at the end of the presentation in-chief by St. Paul, this Court granted the Motion for Involuntary Dismissal filed by counsel for Margaret Vinecki. The claim of non-dischargeability against her was dismissed on the ground that the proof presented by St Paul fell short of establishing a prima facie case against her. This left for consideration the claim against Theodore Vi-necki, the other Debtor involved in this adversary proceeding.
The primary thrust of St. Paul’s claim is based on the proposition that this Debtor obtained money from St. Paul by false pretenses, misrepresentation or actual fraud. This claim is based on the undeniable fact that both the Policy Change Endorsement (PL’s Ex. 11) and the Proof of Loss Form (Pl.’s Ex. 1) identified R.P.S., Inc., as the Loss Payee, which was patently false because it is clear that the true loss payee under the Policy and the Endorsement was Mercedes-Benz, and there is nothing in this record to show that R.P.S., Inc., ever had any cognizable interest in the Truck.
However, before one considers the falsity and its impact, it is necessary to establish that this Debtor “obtained money” by fraud from St. Paul. The draft issued by St. Paul as payment for the loss of the Truck was made payable to T & M Trucking and Leasing, Inc., and R.P.S., Inc. Then the draft was deposited in the corporate account of T & M Trucking and was cleared by the bank, even though it was not endorsed by R.P.S., Inc. Be that as it may, it is clear that T & M Trucking was a Subchapter S corporation and all corporate income flew through to the Debtors. It is fair to infer that the Debtor benefitted from the insurance proceeds paid by St. Paul. Thus ordinarily, under the “receipt of benefit” doctrine the Debt- or did obtain monies from St. Paul. In re Bilzerian, 100 F.3d 886 (11th Cir.1996). While the fact pattern involved in Bilzerian bears no resemblance to the fact pattern involved in the present instance, the doctrine is still applicable.
However, this is just the starting point of the inquiry and there still must be satisfactory proof of fraudulent conduct by the person charged. The only relevant proof in this record are two crucial documents. One is the Policy Endorsement and the other is the Proof of Loss submitted to St. Paul, both of which contained an *327untrue statement concerning the identity of the loss payee under the Policy. There is some difficulty with both of these documents. The Proof of Loss is signed by the Debtor Theodore Vineeki, but it is not notarized even though the form calls for a sworn statement of the proof of loss. The Policy Change Endorsement, which added the coverage on the truck, also identifies R.P.S. as the loss payee. This document is not signed by the Debtor and neither is the Commercial Policy Change Request (Pl.’s Ex. 11). The Debtor denied that he prepared these documents and that he furnished any of the information on these forms, especially the information concerning the identification of the loss payee. One might conclude from the foregoing that the proof on this crucial issue is in equilibrium, therefore, St. Paul failed to establish with the requisite degree of proof the misrepresentation, false pretenses or actual fraud, any of which is an indispensable element for a viable claim under Section 523(a)(2)(A). However, this conclusion does not bear close analysis.
First, it is very hard to accept the proposition that the incorrect information on both documents were dreamed up by the insurance agent who handled both transactions, and it is fair to infer that the incorrect information came from the Debtor. This, coupled with the undeniable and undisputed fact that the Debtor deposited the draft received from St. Paul and obtained all the proceeds of the draft monies, which he very well knew that he was not entitled to and should have been paid to Mercedes Benz, is more than sufficient to establish the requisite fraudulent intent to sustain a claim under Section 523(a)(2)(A). Therefore, the debt owed by Theodore Vi-necki to St. Paul is within the Section 523(a)(2)(A) exception and is not released by the general discharge of Theodore Vi-necki entered in this case.
In addition to seeking a determination of the nondischargeability of the debt, St. Paul also seeks a money judgement for damages including interest, costs and reasonable attorney’s fees. This Court is not completely satisfied that St. Paul is entitled to attorney fees, nor is it satisfied that it is appropriate for this Court to enter a money judgment without the consent of the Defendant. For this reason this matter shall be scheduled for oral argument before the undersigned in Courtroom 9A, Sam M. Gibbons United States Courthouse, 801 North Florida Avenue, Tampa, Florida 33602, on March 21 2000, at 10:00 am.
A separate Final Judgment shall be entered in accordance with the foregoing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493023/ | OPINION
RAYMOND T. LYONS, Bankruptcy Judge.
A lawyer, Frank T. Araps, sued his former client, Claudio D. DeBaggis, to recover his costs of defending himself against a claim by Khalil Shaqfeh accusing Araps of mishandling $13,000.00 of Shaqfeh’s funds. Ultimately, Araps settled with Shaqfeh for $5,000.00, however, he spent a considerable amount in defense costs in state court and in pursuing DeBaggis in this court. Araps argues that his client defrauded him, there by exposing him to liability to Shaqfeh. Therefore, Araps claims DeBaggis is obligated to reimburse him for the settlement amount and defense costs. He further argues that such obligation is not dis-chargeable under 11 U.S.C. § 523(a)(2)(A). The court holds that DeBaggis did not defraud his lawyer or any one else. Therefore, Araps’ claim is dischargeable. Furthermore, Araps’ claims for contribution and indemnification are barred as a matter of law.
JURISDICTION
This court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a) and the Standing Order of the United States District Court for the District of New Jersey dated July 23, 1984 referring all proceedings arising under Title 11 of the United States Code to the bankruptcy court. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) concerning dischargeability of particular debts. This constitutes the court’s findings off act and conclusion so flaw as required by Fed. R. BankR. P. 7052.
FACTS
In November 1990, Claudio D. DeBaggis and his partner Jim Pirone obtained a franchise from Triangle Repro Centers Co. of Delaware (the “Franchisor”) to operate a retail duplicating and reproduction business. They leased retail space on Route 27 in North Brunswick, New Jersey and formed a new corporation, Triangle Repro Center of North Brunswick, Inc., to operate the business (the “North Brans wick Franchise”). The shareholders in the corporation were Claudio DeBaggis (25%), his wife, Mary DeBaggis, (25%) and Jim Pi-rone (50%). Pirone invested approximately $65,000.00 in the business while the DeBaggis’s put up only $10,000.00. Mr. and Mrs. DeBaggis, however, worked long hours in the start up operation for little or no salary. After about a year, Pirone became disenchanted with the business and wanted to be bought out.
Coincidentally, Khalil Shaqfeh was looking to acquire a Triangle Repro Center franchise. Shaqfeh, an employee of the Franchisor, had been successful in the sales and marketing of reproduction services. He was, also, a close, personal friend of Joseph Teti, the principal of the Franchisor. Shaqfeh became interested in owning his own franchise. Besides working for the Franchisor, Shaqfeh owned a patio furniture business and several residential apartment buildings, so he was an experienced business person. In addition, Shaqfeh is highly educated, having earned a degree in electrical engineering from the University of Chicago and a masters in business administration from the University of Pennsylvania. Through a colleague at the Franchisor, Shaqfeh was introduced to DeBaggis.
*386Another coincidence was the looming expiration of the first year of the North Brunswick Franchise and a dispute with Joseph Teti, the principal of the. Franchisor, overpayment of the $20,000.00 balance of the franchise fee. Attorney Araps, who had been a customer of the North Brunswick Franchise, learned of the dispute from DeBaggis. On Sunday, March 8, 1992 DeBaggis met with Araps to discuss the renewal of the North Brunswick Franchise. DeBaggis told Araps that the Franchisor was pushing for payment of the balance of the franchise fee. DeBag-gis had depleted his savings and Pirone, who had already invested over $50,000.00 and wanted to get out of the business, refused to contribute any more. DeBaggis told Araps he planned a phased purchase of Pirone’s interest and had a prospective new partner, Shaqfeh, who would put up some money. Araps agreed to represent DeBaggis in resolving his differences with the Franchisor. The first order of business was for Araps to draft a response to the Franchisor. At a later time he would draft a promissory note for a loan from Shaqfeh to the North Brunswick Franchise.
A series of discussions between DeBag-gis and Shaqfeh lead to an oral agreement for Shaqfeh to acquire a 50% interest in the North Brunswick Franchise.1 According to DeBaggis, the price was $55,000.00 with $15,000.00 up front and $20,000.00 in cash over two years. After the initial investment, Shaqfeh was to begin working in sales and marketing of reproduction services for the North Brunswick Franchise (as he had done for the Franchisor). The balance of $20,000.00 for the half interest in the North Brunswick Franchise would be earned by Shaqfeh’s foregoing compensation for his services. Stock in the corporation would be issued to Shaqfeh on a pro rata basis as he paid cash and earned compensation.
Meanwhile, Araps had success fully negotiated resolution of all issues with the Franchisor including a promise by DeBag-gis to pay the $20,000.00 balance of the franchise fee by April 1, 1992. Also, De-Baggis and Pirone came to an agreement for the corporation to redeem Pirone’s investment by monthly payments overtime. Thus, if all contemplated transactions would have been completed, Shaqfeh would own half the North Brunswick Franchise and Mr. and Mrs. DeBaggis would own the other half. Jim Pirone would have been bought out.
The time came for Shaqfeh to put up his $15,000.00 down payment, but he claimed he could only raise $13,000.00 and would pay the additional $2,000.00 in a month.2 In mid-March 1992, DeBaggis and Shaqfeh spoke to Araps (the “Conference Call”) about Shaqfeh’s investment in the North Brunswick Franchise and the fact that the $20,000.00 balance of the franchise fee was due to the Franchisor by April 1, 1992. Araps suggested that Shaqfeh’s money, together with $7,000.00 raised by DeBaggis from other sources, be deposited into Ar-aps’ trust account and then paid over to the Franchisor to preserve the North Brunswick Franchise. Araps specifically informed Shaqfeh that the money would be *387immediately paid over to the Franchisor.3 The parties expected Araps to draw up documents to reflect Shaqfeh’s involvement with the North Brunswick Franchise, but Araps was looking for more details before he could begin drafting documents. Araps, also, advised Shaqfeh to get his own lawyer since Araps could only represent one party, DeBaggis, in the transaction.
On March 26, 1992 Shaqfeh and DeBag-gis had an appointment to meet at Araps’ office so that Shaqfeh could give his down payment to Araps. When they arrived, Araps was not there; he was in court trying a case. Araps called his office and asked his office-mate to accept the check from Shaqfeh, which was done. Shaqfeh’s $13,000.00 was deposited into Araps’ trust account together with $7,000.00 DeBaggis borrowed from his mother-in-law. After the deposit cleared, Araps for warded a check for $20,000.00 to the Franchisor, in payment of the balance of the franchise fee.
The transaction with Shaqfeh was never fully consummated. Shaqfeh began selling reproduction services for the North Brunswick Franchise but after two or three week she stopped working. Efforts by the DeBaggis’s to get Shaqfeh back to work were unavailing. Shaqfeh was a “no show”. Needless to say, Shaqfeh also failed to pay any more to wards the purchase price of a half interest in the North Brunswick Franchise. The DeBaggis’s concluded that Shaqfeh was focusing on his other business or personal affairs and lost interest in the North Brunswick Fran-ehise. Neither DeBaggis nor Araps heard from Shaqfeh for several months.
Almost a year later, by letter dated February 4, 1993, Shaqfeh’s lawyer wrote to Araps and demanded that Araps refund the $13,000.00 from his trust account. Understandably, Araps was outraged by the demand since he was certain Shaqfeh understood that his money would be turned over to the Franchisor by April 1, 1992. Araps was also concerned, as well he should have been, that Shaqfeh’s lawyer alleged a mishandling of trust funds: a serious, potentially career-ending offense for a lawyer. Araps disclaimed any liability to Shaqfeh and simultaneously tried to convince DeBaggis to refund the $13,-000.00 to Shaqfeh. Araps’ motive in this regard is clear. If he could convince De-Baggis to pay $13,000.00 to Shaqfeh, Shaqfeh would no longer pursue his claim that Araps mishandled funds in his trust account. DeBaggis, likewise, disclaimed any liability and refused Araps’ entreaties that here fund money to Shaqfeh. DeBag-gis maintained that Shaqfeh had defaulted on his agreement to purchase half the business and therefore the $13,000.00 was non-refundable.
A second year elapsed before Shaqfeh instituted suit in New Jersey state court on March 24, 1994 against Araps and De-Baggis for recovery of the $13,000.00. Ar-aps cross-claimed against DeBaggis for contribution and indemnification. After spending substantial funds on defense costs, Araps settled with Shaqfeh for $5,000.00.4
*388Mr. and Mrs. DeBaggis filed a voluntary-petition under chapter 7 of the Bankruptcy Code on September 24, 1996 thus staying the state court action against Mr. DeBag-gis. 11 U.S.C. § 362(a). Both Shaqfeh and Araps commenced adversary proceedings in this court objecting to the dis-chargeability of their claims against De-Baggis on the basis of fraud under 11 U.S.C. § 528(a)(2)(A). The adversary proceedings were consolidated. On the first day of trial in bankruptcy court, DeBaggis settled with Shaqfeh, leaving only Araps’ complaint against DeBaggis that his claim for contribution and indemnification should be nondischargeable. Araps seek store cover not only the $5,000.00 he spent to settle with Shaqfeh, but also his attorney’s fees and costs of defending himself against Shaqfeh in the state court ($22,556.62)5 and his attorney’s fees and costs of pursuing his adversary proceeding against De-Baggis in the bankruptcy court ($18,-768.12).
Araps’ complaint alleges that DeBaggis misrepresented that the “would (i) provide the terms of an employment agreement and stock sale between himself and Shaqfeh to Araps in writing so that Araps could prepare the documentation; or (ii) provide a Promissory Note to Shaqfeh; or (iii) reach agreement with Shaqfeh as to a combination of the above as soon as a decision is reached as to which option (De-Baggis) and Shaqfeh would pursue.” Ar-aps claims that he was defrauded because DeBaggis never intended to reach agreement with Shaqfeh. Furthermore, Araps contends that had he known DeBaggis considered the deposit nonrefundable, he would never have released it. Lastly, Ar-aps maintains that had he known DeBag-gis did not consider him to be his lawyer, he would never have released the money.
CONCLUSIONS OF LAW
A. Fraud
“The overriding purpose of the Bankruptcy Code ‘is to relieve debtors from the weight of oppressive indebtedness and provide them with afresh start.’ ” Starr v. Reynolds (In re Reynolds), 193 B.R. 195, 200 (D.N.J.1996) (quoting Insurance Co. of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1113 (3d Cir.1995)). Accordingly, exceptions to discharge are to be narrowly construed. A countervailing policy is that debts incurred through fraud should not be discharged. The discharge is reserved for the honest but unfortunate debtor. Grogan v. Garner, 498 U.S. 279, 286-287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “Where a debtor has committed fraud under the code, he is not entitled to the benefit of a policy of liberal construction against creditors.” Cohen v. De La Cruz (In re Cohen), 106 F.3d 52, 59 (3d Cir.1997), aff'd 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). This countervailing policy is codified in § 523(a)(2)(A) of the Bankruptcy Code which provides:
A discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud....
This fraud exception to discharge has been part of the bankruptcy law of the United States since 1898. Cohen v. De La Cruz, 523 U.S. 213, 217, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), Field v. Mans, 516 U.S. 59, 64-66, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Since Congress has not provided a separate definition, fraud has the *389same meaning in the Bankruptcy Code as in the common law of torts. Id. at 69-70, 116 S.Ct. 437.
The operative terms in § 523(a)(2)(A), on the other hand, “false pretenses, a false representation, or actual fraud,” carry the acquired meaning of terms of art. They are common-law terms, and, as we will shortly see in the case of “actual fraud,” which concerns us here, they imply elements that the common law has defined them to include....
It is ... well established that “[w]here Congress uses terms that have accumulated settled meaning under ... the common law, a court must infer, unless the statute otherwise dictates, that Congress means to in corporate the established meaning of these terms.”
[W]e will look to the concept of “actual fraud” as it was under stood in 1978 when that language was added to § 523(a)(2)(A). Then, as now, the most widely accepted distillation of the common law of torts was the Restatement (Second) of Torts (1976), published shortly before Congress passed the Act.
Id. (citations omitted).
Following the Court’s guidance, one should look to the Restatement for the meaning of fraud. The Restatement (Second) of Torts, § 525, sets forth the law regarding liability for fraudulent misrepresentation.
One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation.6
As the Supreme Court pointed out, “courts that have previously construed this statute, routinely requir[e] intent, reliance, and materiality before applying § 523(a)(2)(A).” Field v. Mans, 516 U.S. at 68, 116 S.Ct. 437. Thus, for a debt to be nondischargeable under § 523(a)(2)(A) the creditor must prove that:
(1) the debtor represented a fact, opinion, intention or law;
(2) the representation was false;
(3) the representation was material;
(4) the debtor obtained money, property or services through the misrepresentation;
(5) the debtor knew at the time that the statement was false (or was made with reckless disregard for its truth);
(6) the debtor intended the creditor to rely on the statement;
(7) the creditor actually relied on the statement;
(8) the reliance was justified;
(9) the creditor sustained damage; and
(10) the damages were the proximate result of the false representation.
De La Cruz v. Cohen (In re Cohen), 191 B.R. 599, 604 (D.N.J.1996), aff'd sub nom. 106 F.3d 52 (3d Cir.1997), aff'd 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). AT&T Universal Card Servs. Corp. v. Wong (In re Wong), 207 B.R. 822, 826 (Bankr.E.D.Pa.1997). The plaintiff bears the burden of proving the objection to discharge. Fed. R. Banks. P. 4005. Each element of the objection must be proved by a preponderance of the evidence. Grogan v. Garner, 498 U.S. at 287-88, 111 S.Ct. 654; Starr v. Reynolds (In re Reynolds), 197 B.R. 204, 205 (Bankr.D.N.J.1996).
*390To determine if plaintiff has me this burden of proof, the court will focus on the precise allegations of Araps’ complaint. The first allegations of fraud relate to statements allegedly made by DeBaggis during the Conference Call in mid-March of 1992. In his complaint, Araps alleges:
27. During the Conference Call, Defendant represented to Araps that Defendant would provide, in writing, the terms of the employment agreement and stock sale when the terms were agreed to by the parties.
28. Defendant also represented to Araps that in the event that terms were not reached, Defendant would provide a Promissory Note to Shaqfeh for the initial payment....
30. Based on the representations of Defendant, Araps advised Shaqfeh that the initial payment toward Shaqfeh’s purchase would not be held in escrow, that Araps would only serve as temporary custodian and that the initial payment would be used as partial payment to Teti toward the Franchise Amount....
35. . Prior to disbursal of the funds, Defendant again represented to Araps that Defendant would (i) provide the terms of an employment agreement and stock sale between himself and Shaqfeh to Araps in writing so that Araps could prepare the documents; or (ii) provide a Promissory Note to Shaqfeh; or (iii) reach agreement with Shaqfeh as to a combination of the above as soon as a decision is reached as to which option Defendant and Shaqfeh would proceed with.7
36. Based upon these representations by Defendant, Araps disbursed to Teti the initial $13,000.00 along with $7,000.00 obtained by Defendant from another individual and $775.00 from Triangle ....
39. "Defendant made the statements more fully described above, knowing them to be false or with a reckless' disregard as to whether they were true or false....
54. Araps’ damages were a direct and proximate result of the above described false statements by Defendant in that had Araps known that Defendant would not be providing, in writing, the terms of the employment agreement and stock sale, Araps would not have released the funds to Teti....
57. Araps’ damages were a direct and proximate result of the above described false statements by Defendant in that had Araps known that Defendant would not be providing a Promissory Note to Shaqfeh, Araps would not have released the funds to Teti.
The first alleged misrepresentation was that DeBaggis promised to provide a written outline of the terms of agreement between him and Shaqfeh. This was a promise to do something in the future. The fact that DeBaggis never provided a written outline of the terms of his deal does not, necessarily, mean that he did not intend to do as he promised. This statement of intention would have been fraudulent only if DeBaggis, in fact, had no intention of fulfilling his promise. In this case, Shaqfeh became a “no show” and defaulted on his obligations under the agreement with DeBaggis. It is entirely understandable that DeBaggis would not submit an outline of a deal to Araps if it had be come apparent that Shaqfeh would not perform. Thus, even if this statement had been made, it was not false.
The second alleged misrepresentation was that DeBaggis would provide a promissory note to Shaqfeh if they were unable to finalize the terms of their deal. Again, this is a promise to do something in the future. Subsequent events suggest that if the parties ever contemplated a loan by Shaqfeh, they abandoned that concept. Three witnesses, Mary DeBaggis, Claudio *391DeBaggis and Shaqfeh, all testified that they reached agreement on Shaqfeh acquiring a half interest in the North Brunswick Franchise. The legend handwritten by Shaqfeh on his $13,000.00 check reads: “For partnership in Triangle Reproof North Brunswick.” None of the principals considered Shaqfeh’s money a loan. The only question is, was Shaqfeh’s money to be held in escrow until documents were drafted by Araps and signed by the parties, or was it to be disbursed to the Franchisor immediately? The court has accepted Araps’ testimony, corroborated by DeBaggis, that the money was not to be held in escrow, but was to be disbursed immediately to assure renewal of the franchise. No facts have been presented which would lead to a conclusion that De-Baggis fraudulently represented that he would give Shaqfeh a promissory note.
Clearly, a year later in March of 1993, Araps suggested that DeBaggis should give Shaqfeh a note for the $13,000.00. His motive for that was obvious. If De-Baggis would repay Shaqfeh, the heat would be off Araps for having allegedly mishandled trust funds. DeBaggis, on the other hand, refused to consider refunding Shaqfeh’s money. As far as DeBaggis was concerned, Shaqfeh walked away from the deal and was not entitled to his money back. So, even if Araps is correct and there was a discussion about a promissory note to Shaqfeh, events changed which lead DeBaggis to conclude that no money was due Shaqfeh. If DeBaggis was mistaken as to his obligation to refund Shaqfeh’s money, at most he was liable on a breach of contract, not fraud.
The third alleged misrepresentation in the Conference Call was that DeBaggis would reach agreement with Shaqfeh on a combination of employment agreement, stockholders agreement and promissory note. Once again this was a promise to do something in the future. There is nothing to suggest that DeBaggis did not intend to conclude a transaction with Shaqfeh. As long a DeBaggis intended to proceed with Shaqfeh, as the court find she did, there could have been no misrepresentation even though the deal was not consummated through no fault of DeBaggis.
A debtor is unlikely to admit that he intended to deceive another. Insurance Co. of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1118-19 (3d Cir.1995). Consequently, fraudulent intent may be inferred from the debtor’s conduct and other surrounding circumstances. Id. at 1118. See also In re Reynolds, 193 B.R. at 200-01. In this case, the circumstances support DeBaggis’ position that he intended for Shaqfeh to be a 50% owner of the North Brunswick Franchise. DeBaggis’ other partner, Pirone, left the business and monthly payments were made to redeem Pirone’s investment in the business. Mr. and Mrs. DeBaggis both continued to work night and day in the business which experienced growth in its first few years of operation. Shaqfeh’s $13,000.00 was paid to the Franchisor to preserve the franchise, not diverted to some other purpose. Although Shaqfeh’s recitation of the facts differs dramatically from DeBaggis’, as well as Araps’, Shaqfeh does admit that he made sales calls for a few weeks and then stopped. Considering the testimony of all witnesses and observing their demeanor, as well as reviewing the documentary evidence, including deposition transcripts, the court accepts DeBaggis’ account that the deal never went forward because Shaqfeh failed to honor his part of the bargain. Stated another way, DeBaggis did not misrepresent his intent to consummate a deal with Shaqfeh at the time Shaqfeh put his $13,000.00 into Araps’ trust account. This is the principal misrepresentation alleged by Araps and a finding that the allegation is false defeats Araps’ complaint in this regard.
Araps’ complaint, curiously, alleges that DeBaggis made certain false statements a this deposition in April of 1996, four years after disbursement of Shaqfeh’s $13,000.00 and after Shaqfeh had started suit in the state court. Araps contends *392that, some how, these false statements exposed him to liability to Shaqfeh for the $13,000.00. Specifically, Araps’ complaint alleges:
49. Defendant, in his April 24, 1996 deposition, stated that Araps was not representing Defendant in the transaction with Shaqfeh. That statement was false.
50. Defendant, in his April 24, 1996 deposition, stated that the $13,000.00 amount was considered by Defendant to be nonrefundable. That statement was false.
51. Based upon Defendant’s willful actions8 and false statements, Plaintiff was damaged.
52. As a direct and proximate result of Defendant’s false statements, Araps released the $13,000.00 to Teti. As a result, Araps was subjected to a lawsuit by Shaqfeh causing Araps damages in attorneys’ fees, costs and settlement fees to Shaqfeh.
53. Araps’ damages were a direct and proximate result of the above described false statements made by Defendant in that had Araps known that Defendant considered the $13,000.00 to be nonrefundable, Araps would not have released the funds to Teti....
55. Araps’ damages were a direct and proximate result of the above described false statements by Defendant in that had Araps known that Defendant did not consider Araps to be his attorney in the transaction, Araps would not have released the funds to Teti.
56. Araps’ damages were a direct and proximate result of the above described false statements by Defendant in that had Araps known that Defendant considered the initial deposit to be nonrefundable, Araps would not have released the funds to Teti.
The short answer to this part of Araps’ complaint is, it would be impossible for Araps to rely upon a misrepresentation made in 1996 as an inducement for action taken by him in 1992. Never the less, taking these allegations seriatim, first is the statement that Araps was not DeBag-gis’ lawyer. DeBaggis was incorrect. Ar-aps was representing him both regarding the franchise renewal and in the discussions with Shaqfeh. Araps, however, was not mislead by DeBaggis. To the contrary, Araps understood the true state of affairs all along. So even though DeBag-gis was mistaken when he said a this deposition that Araps was no this lawyer, Araps did not rely on that misstatement and it had no causal connection to Araps’ payment of Shaqfeh’s $13,000.00. The fact that DeBaggis may have been mistaken about Araps’ status as his lawyer, whether at the time of the depositor later, could not have constituted a fraud on Araps. Even if DeBaggis intentionally lied in the state court case by denying Araps was his lawyer, DeBaggis did not “obtain” money, creditor services by means of such false statement; thus, the claim by Araps is dischargeable. See Field v. Mans, 516 U.S. at 78-79, 116 S.Ct. 437 (Ginsburg, J„ concurring). The disbursal of money by Araps occurred long before DeBaggis ever denied that Araps was his lawyer and could not have been “obtained” by the alleged fraud. Nevertheless, the court finds that DeBaggis did not intentionally make a false representation that Araps was not his lawyer. Any statement by DeBaggis to that effect was an innocent mistake on his part.
The second alleged misrepresentation in DeBaggis’ 1996 deposition was that he considered Shaqfeh’s deposit non*393refundable. The court finds as a fact that this statement was true. A true statement can not be the basis for nondischargeability under § 523(a)(2)(A).
B. Contribution
DeBaggis settled with Shaqfeh just prior to the start of trial. As a result, DeBaggis argues that Araps no longer has a cause of action for contribution against him under New Jersey law citing Tefft v. Tefft, 192 N.J.Super. 561, 471 A.2d 790 (App.Div.1983). Since this legal issue was raised for the first time as trial was about to commence, the court decided to proceed with trial and give Araps an opportunity to brief this issue. Araps has failed to cite any authority contrary to Tefft and has not attempted to distinguish the circumstances of this case from Tefft. In light of the finding that DeBaggis has not defrauded Araps, it is unnecessary to reach this issue. Never the less, it appears that De-Baggis is correct that once he settled with Shaqfeh he was no longer exposed for contribution to Araps. Indeed, Tefft holds where both defendants settled with the plaintiff (as happened here), claims for contribution under the Joint Tort feasors Contribution Act, N.J.S. 2A:53A-1, et seq., were extinguished.
The court stated:
[T]he right to contribution accrues only on payment by a joint tort feasor of a money judgment recovered against him on a judgment for the injuries he occasioned. Payment of more than a pro rata share entitles him to restitution under the statute, except as to a settling tort feasor. Moreover, the [New Jersey Supreme C]ourt implied in Greyhound that contribution was not intended when all tort feasors settle.... [Settlement by all tort feasors bars an action for contribution because there can no longer bean adversary verdict. ... The policy of our law is that a settling party is released from further responsibility.
Id. at 567-69, 471 A.2d 790. (emphasis added)
The New Jersey Supreme Court has cited Tefft with approval and adopted its holding. In Young v. Latta, 123 N.J. 584, 589 A.2d 1020 (1991) the court wrote:
[A] settling tort feasor shall have no further liability to any party beyond that provided in the terms of the settlement. ... The Appellate Division has explained that the court should dismiss a non-settler’s cross-claim for contribution as a matter of law as a result of the settlement....
Id. at 591, 589 A.2d 1020. A federal court applying New Jersey law follows the same rules regarding contribution. Carter v. Univ. of Med. and Dentistry of N.J., 854 F.Supp. 310 (D.N.J.1994).
Thus, it appears that DeBaggis is correct. Under New Jersey law, once he settled with Shaqfeh he is released from further responsibility to Araps by way of contribution.
C. Indemnity
Since contribution is not available and there is no contract of indemnity, the only other theory Araps may recover on is implied indemnity. Having found no fraud, it is unnecessary to reach the issue of indemnification. If, however, as a matter of law, Araps is not entitled to indemnification, there is another reason to award judgment to DeBaggis.
“[T]he right of indemnity is granted only to those whose liability is secondary and not primary, i.e., whose [conduct] is not morally culpable but is merely constructive, technical, imputed or vicarious.” Hut v. Antonio, 95 N.J.Super. 62, 69, 229 A.2d 823, 827 (Law Div.1967) (quoting Public Serv. Elec. & Gas Co. v. Waldroup, 38 N.J.Super. 419, 432, 119 A.2d 172, 179 (App.Div.1955))(internal quotation marks omitted).
It would violate this policy to allow the primary wrong doer to bring an action for indemnification against another par*394ty. His only remedy, in the absence of a contract of indemnity, is for contribution — a remedy to tally different from that of indemnification. These remedies are mutually exclusive because one primarily liable is denied the right of indemnification and, under the Joint Tort feasors Contribution Act, one only ‘constructively’ or ‘vicariously’ hable may not be held for contribution....
Id. at 70, 229 A.2d 823.
The New Jersey Supreme Court has stated, “[t]o been titled to indemnification as one who is secondarily or vicariously liable, a party must be without fault.” Ramos v. Browning Ferris Indus. of S. Jersey, Inc., 103 N.J. 177, 191, 510 A.2d 1152, 1159 (1986). In the seminal case of Adler’s Quality Bakery, Inc. v. Gaseteria, Inc., 32 N.J. 55, 80, 159 A.2d 97, 110 (1960) the supreme court, quoted from Builders Supply Co. v. McCabe, 366 Pa. 322, 77 A.2d 368 (1951):
The important point to be noted in all the cases is that secondary as distinguished from primary liability rests upon a fault that is imputed or constructive only, being based on some legal relation between the parties, or arising from some positive rule of common or statutory law or because of a failure to discover or correct a defector remedy a dangerous condition caused by the act of the one primarily responsible.
DeBaggis argues that Araps may not seek indemnity because he was at fault. According to DeBaggis, Araps was negligent in not confirming in writing that Shaqfeh’s $13,000.00 would be paid over immediately to the Franchisor. This negligence needlessly exposed both DeBaggis and Araps to a suit by Shaqfeh for refund of the money, says DeBaggis. This argument misplaces the focus on Araps’ actions. Rather than looking at what Araps may have done to DeBaggis, one should focus on Araps’ alleged wrongdoing to Shaqfeh. If Araps would be primarily liable to Shaqfeh, as contrasted with secondary, vicarious or constructive liability, then Araps cannot seek indemnity from DeBag-gis. In this case, Shaqfeh alleged that Araps breached a duty to hold his funds in escrow. That liability, if proven, would have been primary, not secondary, vicarious or constructive. Thus, Araps is not entitled to indemnity from DeBaggis.
“Ordinarily, a party who is at fault may not obtain indemnification for its own acts. As an exception to the general rule, one who in good faith and at the direction of another commits a tort is allowed indemnity against the person who caused him to act.” Ramos v. Browning Ferris Indus. of S. Jersey, Inc., 103 N.J. at 190, 510 A.2d at 1158-59. (citations omitted). Araps does not come with in this exception because he was not acting at the direction of DeBaggis when he disbursed Shaqfeh’s $13,000.00. If one accepts Araps’ recollection of the facts, he acted with the express authorization of Shaqfeh. The only way Araps could be liable to Shaqfeh is if one disbelieves Araps. In such case, Araps’ liability would be primary and he would not be entitled to indemnification by De-Baggis.
CONCLUSION
The foregoing demonstrates that Araps has not me this burden of proving by a preponderance of the evidence that De-Baggis made any fraudulent misrepresentations. Thus, DeBaggis is entitled to a judgment that his obligations to Araps are dischargeable. In addition, Araps’ claim for contribution is barred because DeBag-gis settled with Shaqfeh; and Araps is not entitled to indemnification because his liability, if any, was not secondary, vicarious or constructive.
. Testimony concerning the events between the fall of 1991 and the spring of 1992 was hopelessly in conflict. For example, Shaqfeh and Araps both testified about a March 1992 conference call with DeBaggis; however, their recollection of the discussions were diametrically opposed. DeBaggis, on the other hand, denied that the call ever occurred. Since none of the dealings was reduced to writing, the court had to discern the true facts from the conflicting testimony based upon the credibility of the witnesses and their demean- or, as well as common sense and experience. For the most part, the court believes Araps’ recollection of crucial events which, as will be seen, leads the court to find that Shaqfeh was not defrauded by either Araps or DeBaggis and, consequently, Araps was not defrauded by DeBaggis.
. Shaqfeh testified that $13,000.00 was the entire purchase price for a half interest in the North Brunswick Franchise. The court does not accept his recollection of the details of the agreement.
. Likewise, Mr. and Mrs. DeBaggis both testified that Shaqfeh knew his money was to be paid over to the Franchisor. Shaqfeh claimed he knew nothing about paying the balance of the franchise fee and that Araps should have held his money in escrow pending execution of a shareholder agreement. It is hard to believe that Shaqfeh knew nothing about the due date for the franchise fee in light of his sophistication and experience in working for the Franchisor, to say nothing of his close, personal friend ship with the owner of the Franchisor, Joseph Teti. The court accepts Araps' testimony that Shaqfeh knew his $13,000.00 would be paid out immediately to the Franchisor. In retrospect, Araps should have confirmed in writing to Shaqfeh that his money was to be paid to the Franchisor immediately. Hind sight is 20/20.
. Araps claims that judgment was entered in his favor against DeBaggis on his cross claims for contribution and indemnification. Despite submitting hundreds of pages of exhibits into evidence, Araps did not provide a copy of any state court judgment against DeBaggis. Attached to Araps’ proposed findings of fact was an unsigned copy of a form of order *388striking DeBaggis’ answer and awarding judgment to Araps on his counter claim, but it does not appear that this order was ever entered by the state court.
. In his pretrial memorandum, Araps specifies his costs of defense in the state court action as $4,318.32. At trial Araps introduced accounting records for time spent by himself and attorneys in his firm together with other costs which significantly inflated his damage claim.
. Another section of the Restatement (Second) of Torts which may be applicable to the facts of this case is § 557 which reads:
Fraudulent Misrepresentations Inducing Unlawful Acts or Omissions
One who by fraudulent misrepresentations induces another to do an act that would be lawful if there presentation were true but which is in fact unlawful is liable to the other for the loss that he incurs in consequence of the unlawfulness of the act thus induced.
. DeBaggis denies making any of these alleged representations. The court assumes for the purposes of this opinion that Araps’ recollection is correct.
. The complaint mentions only § 523(a)(2)(A)-the fraud exception to discharge. In his pretrial memorandum, Araps accused DeBaggis of willful and malicious fraud and cited § 523(a)(6) as the basis of nondischargeability. At trial, the court specifically inquired of counsel for Araps which subsection of 523 he was proceeding under. Counsel confirmed that Araps was relying solely on § 523(a)(2)(A) and was alleging fraud. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493024/ | DECISION & ORDER
JOHN C. NINFO, II, Chief Judge.
BACKGROUND
On March 25, 1999, Russell G. MacArthur, d/b/a Accent Painting and Power Washing South, Quality Pro Painting, and Rochester Painting and Power Washing, (the “Debtor”) filed a petition initiating a Chapter 7 case.
On June 15, 1999, Wegmans Food Markets, Inc. (“Wegmans”) commenced an adversary proceeding (the “Adversary Proceeding”) to have certain debts determined to be nondischargeable under Section 523. The Complaint in the Adversary Proceeding alleged that: (1) Wegmans was the holder of a judgment against the Debtor (the ‘Wegmans Judgment”) in the amount of $660.57, entered in the Rochester City Court on September 12, 1994, which it obtained after five checks issued by the Debtor to Wegmans for cash or goods were returned either for insufficient funds or because the bank account that the check was drawn on was closed at the time the check was issued; (2) Wegmans was currently the holder of four payroll checks in the aggregate face amount of $1,241.44, issued by the Debtor to either John DeCaro (“DeCaro”) or Grant Browne (“Browne”) on July 22, 1994 or July 29, 1994 (the “Payroll Checks”); (3) the Payroll Checks were drawn on a bank account that was closed at the time the checks were issued; (4) after the Debtor had issued and delivered the Payroll Checks to DeCaro and Browne, they endorsed and cashed them at Wegmans, which became a holder in due course of the Checks; and (5) the debt represented by the amounts due on Payroll Checks was nondischargeable under Section 523 because the Debtor knew that: (a) the bank account on which the Checks were drawn was closed at the time he issued and delivered them; and (b) DeCaro and Browne would cash their Checks, and DeCaro and Browne, or the party that cashed their Payroll Checks, would ultimately sustain a loss because the Checks would never be honored.
The Debtor interposed an answer (the “Answer”) to the Complaint which included an Affirmative Defense that two of the Payroll Checks, those issued on July 29, 1994, one to DeCaro and one to Browne, were forgeries.
At a pretrial conference: (1) the Debtor, by his attorney, advised the Court that he did not oppose the Court entering an order which determined that the amounts due on the Wegmans Judgment were nondis-chargeable; and (2) the Court advised the attorney for Wegmans that it was uncertain as to how the fact situation which it had presented in the Adversary Proceeding fell within one of the exceptions to discharge set forth in Section 523.
On January 21, 2000, the Court conducted a Trial at which James Weller (“Weller”), the Credit Manager of Wegmans, the Debtor and Browne testified. On the day of the Trial, Wegmans filed a Memorandum of Law in support of its position that the knowing and intentional issuance and delivery of a check on a closed bank account by an individual who had obtained goods or services constituted larceny in New York State, and, therefore, the debt represented by the amounts due on the Payroll Checks were nondischargeable under Section 523(a)(4).1
*616At trial, Browne testified that: (1) he had worked for the Debtor as a painting foreman for approximately six months before July 1994, and, as such, was at times asked by the Debtor to distribute payroll checks to the painting crew; (2) he had obtained the Payroll Checks from the Debtor and had distributed them to himself and DeCaro, along with other members of the painting crew, on both July 22, 1994 and July 29, 1994; (8) he obtained the Payroll Checks for distribution directly from the Debtor after he had gone to the Debtor’s home to get them; (4) after they received their Payroll Checks, he and DeCaro had gone to Wegmans to cash them; (5) when he obtained the Payroll Checks from the Debtor, he did not see the Debtor sign the checks, nor did he actually look at the signatures on the Checks; and (6) he denied that when he obtained possession of the July 29, 1994 Payroll Checks from the Debtor they were unsigned and he later had someone sign the Debtor’s name to them.
At trial, the Debtor testified that: (1) although he could not specifically recollect how the July 22, 1994 Payroll Checks were distributed, he admitted that he did sign the Checks with knowledge that the bank account on which they were drawn was closed; (2) he did not sign the July 29, 1994 Payroll Checks and did not physically hand them to Browne or DeCaro; (3) he wished to pay the amounts due on the July 22, 1994 Payroll Checks; (4) he believed someone may have taken the July 29, 1994 Payroll Checks from his home; and (5) he received a call from Browne indicating that he had possession of the July 29, 1994 Payroll Checks which were unsigned, and that he was going to have the Debtor’s girlfriend sign the Debtor’s name to them.
At trial, the Debtor and the attorneys for the Debtor and Wegmans stipulated that the Court could enter an order which determined that the amounts due on the July 22, 1994 Payroll Checks were nondis-chargeable.
DISCUSSION
I. Findings of Fact
After hearing the conflicting testimony of Browne and the Debtor, and carefully observing the demeanor and credibility of both Browne and the Debtor, I find that Browne’s testimony was more credible. I further find that: (1) although the Debtor may not have signed the July 29, 1994 Payroll Checks, he caused them to be signed or otherwise authorized his signature to be placed on the Checks; and (2) the Debtor distributed or authorized the distribution of the Payroll Checks to De-Caro and Browne with knowledge that the bank account on which the Payroll Checks were drawn had been closed in June 1994.
II. Potential Section 523 Causes of Action
The exceptions to discharge set forth in Section 523 are to be construed strictly against a creditor requesting that a debt be determined to be nondischargeable. See In re Peters, 133 B.R. 291 (S.D.N.Y.1991), aff'd 964 F.2d 166 (2d Cir.1992). The intention of Congress in setting forth the exceptions in Section 523(a) was to insure that a debtor received a fresh start but not a head start.
In its Memorandum of Law, Wegmans’ only assertion was that the debts it held against the Debtor, as the holder in due course of the Payroll Checks, were nondis-chargeable because the Debtor had committed larceny within the meaning and intent of Section 523(a)(4). The Court has taken that as an acknowledgment by Wegmans that it does not have or wish to pursue a cause of action under either Section 523(a)(2)(A) or Section 523(a)(6).
Section 523(a)(2) excepts from discharge any debt for money, property, services or an extension, renewal or refinancing of credit, to the extent obtained by false pretenses, a false representation or actual fraud. In this case, even if the Debtor had drawn the July 29, 1994 Payroll Checks on a bank account which he *617knew was closed, it does not appear that he obtained any money, property or services from either DeCaro, Browne or Weg-mans by issuing and delivering the Payroll Checks. DeCaro and Browne had already performed their services for the Debtor by the time they received their Payroll Checks, so they were not induced to perform those services in specific reliance on the July 29, 1994 Payroll Checks, but only on an expectation and promise of payment pursuant to their oral or written employment contract.2 As to Wegmans, the Debtor never obtained any money, property or services from Wegmans when DeCaro and Brown cashed their Payroll Checks.
Recently the United States Supreme Court in its decision in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) made it clear that to prevail on a cause of action for willful and malicious injury under Section 528(a)(6), the debtor must have intended the actual injury caused. In this case, the Debtor could never have known for certain that Wegmans or any other third party would actually cash or honor the Payroll Checks, and not be reimbursed by DeCaro or Browne when their Check was dishonored by the bank on which it was drawn because the account had been previously closed. Any party honoring or cashing one of the Payroll Checks would have acted in reliance on the warranty of the payee, DeCaro or Browne, that the Check was good or they would make it good.
Ill Section 523(a)(4)
Larceny, for purposes of Section 523(a)(4), is defined by reference to Federal Common Law, and it requires that the creditor show that the debtor wrongfully took property from it with fraudulent intent. See In re Marcou, 209 B.R. 287, 293 (Bankr.E.D.N.Y.1997), and the cases cited therein.
From the facts and circumstances presented in this Adversary Proceeding, it is clear that the Debtor never wrongfully took, obtained or withheld any property from Wegmans, so there was no Federal Common Law larceny.
In its Memorandum of Law, Wegmans cited to the Court Section 190.05 of the New York State Penal Law which provides that a person is guilty of issuing a bad check when:
1. (a) As a drawer or representative drawer, he utters a check knowing that he or his principal, as the case may be, does not then have sufficient funds with the drawee to cover it, and (b) he intends or believes at the time of utterance that payment will be refused by the drawee upon presentation, and (c) payment is refused by the drawee upon presentation; or
2. (a) He passes a check knowing that the drawer thereof does not then have sufficient funds with the draw-ee to cover it, and (b) he intends or believes at the time the check is passed that payment will be refused by the drawee upon presentation, and (c) payment is refused by the drawee upon presentation.
In addition, Wegmans cited to the Court Section 155.05 of the New York State Penal Law which provides in part that:
2. Larceny includes a wrongful taking, obtaining or withholding of another’s property, with the intent prescribed in subdivision one of this section, committed in any of the following ways: ... (c) By committing the crime of issuing a bad check, as defined in Section 190.05[.]
Even if the Court were to look to New York rather than Federal Common Law in analyzing whether the debt in question should be excepted from discharge because *618it was for larceny, Wegmans has not met its burden.
Based upon the Court’s findings, as set forth above, the Debtor issued “bad checks” when he signed the July 29, 1994 Payroll Checks, or caused them to be signed or authorized his signature to be placed on them, and delivered or authorized their delivery to DeCaro and Browne, knowing that they were drawn on a closed bank account.
A quick reading of the definition of larceny as set forth in the New York State Penal Law, which states that it includes committing the crime of issuing a bad check, makes it appear that the debt due to Wegmans, as a holder in due course of the amounts due on the July 29, 1994 Payroll Checks, is nondischargeable by reason of larceny because the issuance of a bad check in all circumstances constitutes larceny.3 However, the case law in New York is clear that the issuance of a bad check is only larceny under Section 155.05(2)(e) if the check was issued in connection with the taking, obtaining or withholding of property. See People v. Campobello, 154 A.D.2d 911, 546 N.Y.S.2d 62 (App.Div.1989) (issuance of a “bad check” to repay a loan), and People v. Gasbara, 95 A.D.2d 333, 468 N.Y.S.2d 54 (App.Div.1983) (issuance of a “bad check” to repay a real estate deposit).
The Debtor never obtained any property or services of any kind from Wegmans, and, as discussed above, he did not obtain property or services from DeCaro and Browne by reason of his issuance of the Payroll Checks. The services which the Debtor obtained from DeCaro and Browne had already been performed by the time he issued the Payroll Checks. Although the Debtor might have been guilty of the crime of issuing a bad check under New York Law, it does not appear to this Court that he could be found guilty of larceny as set forth in Section 155.05(2)(c).
For these reasons, although the Court does not condone the Debtor’s actions in any way, it cannot find the debt due to Wegmans for the amounts due on the July 29, 1994 Payroll Checks to be nondis-chargeable. Not every wrongful or even criminal act by a debtor which results in an indebtedness is nondischargeable, only those specifically excepted from discharge by Congress in Section 523.
CONCLUSION
The debt due to Wegmans as the holder in due course of the July 29, 1994 Payroll Checks is determined by this Court to have been discharged by the Debtor’s discharge entered on July 2, 1999. The debts owed to Wegmans, represented by the Wegmans Judgment and the July 22, 1994 Payroll Checks, are determined to be non-dischargeable, due to the agreement of nondischargeability by the Debtor.
IT IS SO ORDERED.
. Section 523(a)(4) provides that:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]
11 U.S.C. § 523(a)(4) (2000).
. If DeCaro or Browne commenced an Adversary Proceeding against the Debtor and they could prove that he had intended all along to obtain their services without paying for them because he always intended to issue them a payroll check drawn on a closed bank account, they might be able to meet the required burden under Section 523(a)(2)(A).
. Absent a bankruptcy, whether a drawer of a check is charged with issuing a bad check or larceny is of no practical consequence. In either case, if convicted, it is likely that there will be a restitution award, and ultimately the drawer will pay the amounts due. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493026/ | MEMORANDUM OPINION
JACK B. SCHMETTERER, Bankruptcy Judge.
This matter is before the court on motion of Loraine Carlson (“Ms. Carlson”) to adopt as her designation of record on appeal the designation of items that were filed in the appeal of Brandt v. Dennis Carlson from judgment entered in Adversary Case No. 97-A-00967.
BACKGROUND
On March 26, 1999, the undersigned judge by three separate final judgment orders supported by one combined opinion disposed of three adversary proceedings following consolidated trial of those cases, Brandt v. Hourigan (97-A-00850), Brandt v. Dennis Carlson (97-A-00967) and Brandt v. Loraine Carlson (97-A-01153). In Brandt v. Loraine Carlson, judgment was entered against Ms. Carlson on two Counts and in her favor on one Count. On April 5, 1999, Ms. Carlson sought to alter or amend the judgment against her. On April 13, 1999, her motion was denied for reasons then stated from the bench. On April 23, 1999, Ms. Carlson filed a notice of appeal from both the March 26, 1999 judgment and the April 13, 1999 order. While Ms. Carlson was represented by counsel in the proceedings before the bankruptcy court, she is no longer represented by counsel and seeks to appeal pro se.
Ms. Carlson’s appeal was not perfected in April of 1999 because she failed to comply with Federal Rule of Bankruptcy Procedure 8006 which requires an appellant to file a designation of the record within ten days after filing the notice of appeal. On January 24, 2000, nine months after her designation should have been filed, Ms. Carlson filed her pending motion to adopt the designation of items filed by her former husband in the appeal of Brandt v. Dennis Carlson.
For reasons stated below Ms. Carlson’s motion will be granted.
DISCUSSION
A notice of appeal must be filed with the Clerk of the United States Bankruptcy Court within ten days of entry of the judgment. Fed. R. Bankr.P. 8002(a). The appeal period is automatically extended if any party makes a timely motion to alter or amend the judgment. Fed. R. Bankr.P. 8002(b). If such a motion to alter or amend is filed, the time for appeal runs from the entry of the order disposing of the last such motion. Fed. R. Bankr.P. 8002(b).
Here the judgment was entered against Ms. Carlson on March 26, 1999, and on April 5, 1999, she timely sought to alter or amend the judgment. That motion was denied on April 13, 1999. Therefore, the ten day period for filing her notice of appeal began to run from entry of that order and had not expired on April 23, 1999 when the notice of appeal was ultimately filed by Ms. Carlson.
While Ms. Carlson complied with Bankruptcy Rule 8002 regarding filing a timely notice of appeal, she did not comply with Bankruptcy Rule 8006 which requires an appellant to designate an appeal record within ten days of filing notice of appeal. Ms. Carlson now seeks to perfect her appeal.
The first question, however, is whether this court has jurisdiction to consider her motion.
*756The bankruptcy judge loses jurisdiction over the subject matter of an appeal once the appeal notice has been filed. In re Statistical Tabulating Corp., Inc., 60 F.3d 1286, 1289 (7th Cir.1995). That judge does retain, however, some limited authority to act in aid of the appeal process. John P. Maguire & Co., Inc. v. Sapir (In re Candor Diamond Corp.), 26 B.R. 844, 847 (Bankr.S.D.N.Y.1983). Questions concerning what items should be included in the designation of record can be resolved in aid of the appeals process. Metro North State Bank v. Barrick Group, Inc. (In re Barrick Group, Inc.), 100 B.R. 152, 154 (Bankr.D.Conn.1989) (Bankruptcy judge had jurisdiction to determine whether a disputed item in a designation of appeal record played any part in his deliberations). Bankruptcy judges have also found that they have authority to grant or deny a motion for extension of time to file a designation of appeal record. See, e.g., United States v. Dowell (In re Dowell), 95 B.R. 693 (Bankr.W.D.Mo.1989).
Although the Bankruptcy Code does not state whether the bankruptcy judge is the proper judicial officer to hear a motion of this type, it does appear jurisdiction to consider Ms. Carlson’s motion still rests here, and that her motion should be allowed.
Rule 8001 deals with the manner of taking an appeal. Rule 8007 deals with transmittal of the record and docketing of the appeal with the district court.
Rule 8001 provides in relevant part:
An appellant’s failure to take any step other than the timely filing of a notice of appeal does not affect the validity of the appeal, but is ground only for such action as the district court ... deems appropriate, which may include dismissal of the appeal.
It is thus clear that the district court has authority to impose sanctions including dismissal for failure to comply with the rules governing the perfection of an appeal. See In re Scheri, 51 F.3d 71 (7th Cir.1995); In re Hubka, 82 B.R. 537, 538 (Bankr.D.Neb.1988); In re Clark, 82 B.R. 906, 907 (Bankr.S.D.Ohio 1988).
While up to the district court to determine what type of sanction if any is to be imposed on an appellant for failure to designate timely a record for appeal, a district court judge does not have an opportunity to consider any matter concerning an appeal until the record is designated1. That is so because, pursuant to Rule 8007, an appeal from a bankruptcy court judgment is not even docketed with the district court until a designation of the record is filed. Fed. R. Bankr.P. 8007. Only after the record is complete is it transmitted to the district court and entered into the district court docket. Fed. R. Bankr.P. 8007.
If the bankruptcy court did not have jurisdiction to hear the motion to designate, the situation would present the ultimate “Catch 22” for the appellant: the case would not be docketed in the district court because a designation of the record had not been filed; and the designation of the record could not be filed because the bankruptcy court would not have jurisdiction to hear the motion to designate the record. Such logic would prevent the appeal from ever reaching the district court’s docket, keeping the appeal forever in the legal limbo in which it now sits.
CONCLUSION
Considering Rules 8001 and 8007, this judge has jurisdiction and should grant Ms. Carlson’s motion to adopt the designa*757tion of the record, although it is untimely, in order to allow the appeal to be docketed with the district court. It will then be up to the district judge to decide how to proceed once the designation of record is actually filed and the appeal docketed before that judge.
For the foregoing reasons, Ms. Carlson’s motion to adopt the designation in Brandt v. Dennis Carlson as her designation of the record will be granted.
. Rule 8007(b) Duty of clerk to transmit copy of record; docketing of appeal. When the record is complete for purposes of appeal, the clerk shall transmit a copy thereof forthwith to the clerk of the district court.... On receipt of the transmission the clerk of the dis-Irict court ... shall enter the appeal in the docket and give notice promptly to all parties to the judgment, order or decree appealed from of the date on which the appeal was docketed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493027/ | Entry Reviewing Decision of Bankruptcy Court
TINDER, District Judge.
The Appellant, James J. Cutillo, appeals the decision of the bankruptcy court, the Honorable Basil H. Lorch, III, which determined that certain of his debt to Jerry Hubner and Steven Hubner is excepted from discharge by operation of 11 U.S.C. § 523(a)(2)(B).
I. Background
Jerry Hubner and Steven Hubner filed a Complaint to Determine Dischargeability of Debt. The case was tried before the bankruptcy court on September 19, 1997, and on December 19, 1997, the court entered judgment, finding that $81,307.10 was excepted from discharge by operation of 11 U.S.C. § 523(a)(2)(B). James Cutillo took a timely appeal from that decision.
Cutillo was a shareholder, director and president of Equity Financial Services, Inc. (“EFS”), which was engaged in the business of marketing and brokering mortgage loans. In the fall of 1994, EFS needed additional capitalization, so Cutillo and James and Rosie Hunter, also shareholders of EFS, offered the Hubners an opportunity to invest in the corporation, obtain 10% of EFS’s outstanding stock, and become officers and directors of the business.
The Hubners sought financial information on EFS. Cutillo transmitted written financial information of EFS by facsimile on November 14, 1994. The balance sheet showed that EFS had substantial net worth and identified, as an asset, fees receivable by EFS in the amount of $91,-734.15. The balance sheet was consistent with the projected income statement which *768showed that beginning 0 months after the .date of the report, EFS would be generating gross income in the amount of $87,850 per month, increasing to nearly $300,000 per month by the end of 1995. The information included a “pipeline report,” identifying mortgage loan transactions in the process of being closed by EFS during the weeks after November 15, 1994. This report indicated that EFS was in the process of closing loans which would produce fees of $91,734.15. More than $60,000 of the “fees collected” identified in the pipeline report bore the “Loan Status” designation “A,” which indicated that such loans had already been approved by a mortgage lender and only awaited closing.
Steve Hubner spoke at length with Cu-tillo in order to evaluate the financial information provided. Cutillo reported that EFS was closing between 35 and 50 mortgages per month, generating an average gross fee from each closing of about $1,500. This “pipeline information” regarding mortgage loans currently scheduled to be closed by EFS was particularly significant to Hubner because if EFS had current commitments to close loans from which fees in excess of $60,000 would be generated, EFS was likely to generate substantial net profits and pay substantial dividends to the Hubners, as projected by the financial statements transmitted by Cutillo.
The financial information also included a “key account summary” which reflected that EFS could expect to generate more than 1,400 mortgage loan transactions from several large referral sources, thus generating net fee income in 1995 in excess of $600,000. The key account summary indicated, and Hubner confirmed with Cutillo, that the key accounts represented existing relationships from which EFS was already receiving substantial referrals.
The written financial information Cutillo transmitted to the Hubners was false. EFS had neither $90,000 nor $60,000 of mortgage fees in the pipeline. Rather, from November 1994 through May 1995, the monthly gross fee receipts averaged less than $15,000 and was less than $10,000 in several months. Of the files identified in the pipeline report, 18 apparently were non-existent and no more than 12 actually closed. EFS never received any substantial volume of business from the key accounts and had no source of mortgage loan funding for the manufactured and modular housing sellers identified as existing key accounts in Cutillo’s summary.
Cutillo was intimately involved in EFS’s operations and had ready access to its books and accounting records. Based on his involvement in the business, he had to be aware that EFS was not closing between 35 and 50 loans per month at an average fee of $1,500.
To further induce the Hubners to invest in EFS, Cutillo misrepresented that their investment would be used' to defray the capital costs of opening a South Bend satellite office, which was the agreed upon basis for the Hubners’ investment. Cutillo needed their investment to defray accumulated payroll and other debts owed by EFS, and the Hubners’ investment was used to pay such debts.
The Hubners referred the information to their accountant for his review and recommendation. Thereafter, the Hubners decided to invest in EFS. They contributed $75,000 to the capital of EFS in exchange for 20% of the outstanding shares. They were to become officers and directors of EFS and would have operating responsibility for a South Bend branch of EFS. The transaction was closed on December 2, 1994. Cutillo remained president of EFS as well as a 40% shareholder and director. James Hunter retained his 40% of EFS’s stock as well. Had the Hubners known that EFS was not generating the substantial fee income represented by Cutillo’s transmittal, they would not have invested in EFS stock.
The Hubner’s investment was injected into EFS during December 1994. The South Bend office opened that month and two employees began working under the *769Hubner’s direction. On December 20, 1994, the Hubners issued a check in the amount of $6,307.10 to Checks & Balances, a payroll firm, to cover the payroll of the two South Bend employees.
EFS continued to lose money, largely because it was having trouble finding investors to fund the large number of manufactured housing loans in the pipeline. As a result, in February 1995, the Hubners injected additional funds into EFS by way of a guaranty of $100,000 line of credit. EFS’s financial status did not improve. On June 7, 1995, the Hubners, along with Hunter, removed Cutillo as an officer and director of EFS, installing Steve Hubner in his place. Thus ended Cutillo’s contact and involvement with EFS.
II. Analysis
The bankruptcy court’s findings of fact are upheld unless clearly erroneous and the legal conclusions are reviewed de novo. See Matter of A-1 Paving & Contracting, Inc., 116 F.3d 242, 243 (7th Cir.1997). The Appellant challenges the bankruptcy court’s findings and conclusions regarding the non-dischargeability of certain of the debt owed the Hubners. 11 U.S.C. § 523(a)(2)(B) provides in pertinent part:
A discharge .... does not discharge an individual debtor from any debt for money ... to the extent obtained by ... use of a statement in writing — (i) that is materially false; (ii) respecting the debt- or’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive
The issues presented by this appeal are whether the bankruptcy court erred in finding that (1) Cutillo “obtained money”; (2) Cutillo used a statement in writing that was materially false respecting the Debt- or’s or an insider’s financial condition; (3) the Hubners reasonably relied on the statements in writing; (4) the check for $6,307.10 was paid as a result of the Hub-ner’s continuing reliance on the statements in writing; and (5) Cutillo intended to deceive the Hubners as to the current financial condition of EFS.
Cutillo argues he did not obtain any money because all of the Hubners’ money was used for EFS’s purposes. He claims that he derived no benefit from the money. He also claims that the Hubners’ investment resulted in control of EFS by the Hubners and Hunter to the complete exclusion of Cutillo.
The bankruptcy court’s finding that Cutillo obtained money from the Hubners is not clearly erroneous. Several courts of appeals have held that where an individual uses fraud to induce another to pay money to that individual’s corporation or partnership, the individual has “obtained” such money within the meaning of Section 523(a)(2)(B). See, e.g., In re Bilzerian, 100 F.3d 886, 890-91 (11th Cir.1996); BancBoston Mortgage Corp. v. Ledford, 970 F.2d 1556 (6th Cir.1992); Luce v. First Equip. Leasing Corp., 960 F.2d 1277 (5th Cir.1992); Ashley v. Church, 903 F.2d 599 (9th Cir.1990). The Bilzerian court rejected an argument much like that made by Cutillo here:
[Gjranting a debtor a discharge based solely on the fact that he or she did not directly receive a benefit places a limitation on § 523 that is not apparent from the text of the provision itself. Moreover, such a limitation would provide a dangerous incentive for the sophisticated debtor, who could circumvent the provision by creating a shell corporation to receive the fruits of his or her fraud. As we have previously stated, we will not allow the malefic debtor [to] hoist the Bankruptcy Code as protection from the full consequences of fraudulent conduct.
100 F.3d at 891. In re Bilzerian and these other decisions are persuasive. Even though Cutillo may not have directly obtained the Hubners’ money, as president and a shareholder of EFS, he received the benefit of their money invested in EFS. *770In that regard, it is noted that Cutillo received compensation as president of EFS. The court concludes that the bankruptcy court did not clearly err in finding that Cutillo obtained the Hubners’ money.
The bankruptcy court’s finding that the written financial information as to EFS that Cutillo transmitted to the Hubners was materially false and misleading is not clearly erroneous. The written financial information represented that EFS had an asset of fees receivable in the amount of $91,734.15 and that beginning 1)6 months after the date of the projected income statement, EFS would generate gross income in the amount of $87,850 per month, increasing to nearly $300,000 per month by the end of 1995. In addition, the pipeline report indicated that EFS was in the process of closing loans from which $60,000 in fees would be generated and for which the loans had already been approved by a mortgage lender and only awaited closing. Further, the information in the key account summary reflected that EFS could expect to generate more than 1,400 mortgage loan transactions from several large referral sources, thus generating net fee income in 1995 in excess of $600,000. This summary indicated that the key accounts represented present existing relationships from which EFS was already receiving substantial referrals. These representations made by the written financial information provided by Cutillo were representations of EFS’s present existing financial condition, not mere projections, contrary to Cutillo’s contentions.
Moreover, these representations were false. EFS did not have $90,000 or even $60,000 of mortgage fees in the pipeline. Of the files identified in the pipeline report, 18 apparently were non-existent and no more than 12 actually closed. From November 1994 through May 1995, the monthly gross fee receipts averaged less than $15,000 and was less than $10,000 in several months. EFS never received any substantial volume of business from the key accounts and had no source of mortgage loan funding for the manufactured and modular housing sellers identified as existing key accounts in Cutillo’s summary.
Cutillo argues that the bankruptcy court erred in finding that the financial statements, namely the balance sheet, portrayed EFS as solvent and profitable because it reflected an accumulated net income loss for November 30, 1994 and reflected that EFS’s current cash assets were less than its current liabilities. Cu-tillo chooses to ignore the fact that the balance sheet represents that EFS’s total assets exceeded its total liabilities by more than $300,000 and that EFS had sufficient income in the pipeline to meet expenses. The bankruptcy court correctly found that the written financial information Cutillo transmitted to the Hubners portrayed EFS as a solvent and profitable business.
The bankruptcy court’s finding that the Hubners reasonably relied on the written financial statements that Cutillo provided them is not clearly erroneous. The evidence, specifically Steve Hubner’s testimony, establishes that the Hubners did in fact rely on the written financial information provided by Cutillo. Cutillo’s assertion that the Hubners relied on their accountant rather than on Cutillo or the written financial statements finds no support in the testimony cited by Cutillo nor anywhere else in the record. The cited testimony establishes that the Hubners’ accountant reviewed the information provided by Cutillo; it does not establish that the Hubners’ relied on their accountant rather than Cutillo and the statements provided by him. (See Tr. at 10, 18.) Cutillo also maintains that the Hubners could not have reasonably relied on the written financial information he provided because that information showed EFS to be unprofitable and insolvent. As discussed, however, the information showed EFS’s total assets to be in excess of its total liabilities, reflected a large number of scheduled closings in the pipeline, and showed existing relationships with several key accounts. Moreover, Steve Hubner *771discussed EFS’s financial situation at length with Cutillo, and Cutillo never indicated that EFS was insolvent or unprofitable. Instead, he stated that EFS was closing between 35 and 50 mortgages per month, generating an average gross fee from each closing of about $1,500.
The evidence supports the bankruptcy court’s finding that the Hubners paid $6,307.10 for payroll owed by EFS for employees hired for the South Bend office. Cutillo argues that the evidence supports an inference that the two employees were employees of the Hubners, but any such inference based on the record would not be reasonable. Steven Hubner testified without contradiction that the two employees were hired for the South Bend office of EFS. The evidence establishes that within a few short weeks after making their initial $75,000 investment in EFS, the Hubners paid a check in the amount of $6,307.10 for payroll owed EFS for the two employees hired for the South Bend office. Thus, the bankruptcy court did not clearly err in finding that the Hubner’s check for $6,307.10 was paid as a result of their continued reliance on the written financial statements.
The bankruptcy court’s finding that Cutillo intended to deceive the Hubners as to the current financial condition of EFS is not clearly erroneous. Cutillo contends that an intent to deceive is inconsistent with a projected balance sheet that shows EFS as unprofitable and insolvent. As discussed, however, the balance sheet provided the Hubners did not show EFS as unprofitable and insolvent. He also claims that he himself believed the projections he provided to the Hubners. Whether he believed in the future projections is irrelevant. The fact remains that Cutillo made representations to the Hubners of EFS’s present financial condition and these representations were false. Given Cutillo’s involvement in EFS’s operations as president and his ready access to its books and records, as the bankruptcy court found, Cutillo had to know that such information was false. He had to know that EFS was not closing loans at the monthly rate or average fee he represented orally to Steve Hubner. Cutillo also had to have been aware that the key accounts did not represent existing relationships and that EFS was not receiving substantial referrals from those accounts — several were nonexistent. In addition, he had to know that the Hubners’ investment would be used, not to defray costs of opening a South Bend office, but for accumulated payroll and other debts owed by EFS. Lastly, Cutillo claims that he diminished his interest in EFS. The evidence, however, established that Cutillo owned 40% of EFS stock both before and after the Hubners invested in EFS.
III. Conclusion
The bankruptcy court’s decision that $81,307.10 of Cutillo’s debt to the Hubners is excepted from discharge by operation of 11 U.S.C. § 523(a)(2)(B) withstands the court’s review on appeal and, therefore, is AFFIRMED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493028/ | ORDER ON REMAND
STEVEN H. FRIEDMAN, Bankruptcy Judge.
This matter came before the Court upon the Order Vacating Entry of Final Judgment entered by the United States District Court for the Southern District of Florida. The District Court reversed this Court’s order finding that the taxes owed to the United States by the Debtor, Robert Kramer (the “Debtor”), were non-dischargeable pursuant to 11 U.S.C. § 523(a)(1)(C). The District Court also instructed this Court to make “special factual findings as to the Debtor’s specific intent in employing [First Western’s tax] scheme to avoid paying taxes for the relevant years.” As pointed out by the District Court,
In order to bar dischargeability of three-year or older loans under the fraud exception, the government must demonstrate that the debtor ‘acted with specific intent to evade a tax believed to be owing.’ This, in turn, requires a finding that ‘(1) the Debtor had knowledge of *872the falseness of the return, (2) the Debt- or had an intent to evade the taxes, and (3) there was an underpayment of taxes.’ (Citations omitted)
In its Memorandum Opinion, this Court relied heavily upon the findings of Freytag v. Commissioner, 89 T.C. 849, 1987 WL 45307 (1987), aff'd, 904 F.2d 1011 (5th Cir.1990), aff'd, 501 U.S. 868, 111 S.Ct. 2631, 115 L.Ed.2d 764 (1991). However, Frey-tag, a test case on the issue of whether certain tax deductions involving the purchase and sale of forward contracts, merely addressed the third element, i.e., whether there was an underpayment of taxes. The third element is an uncontested issue in light of the Stipulation of Settlement entered into by the Debtor and the United States in 1991. Thus, this Court was required to review the evidence and determine whether the Debtor had knowledge of the falseness of the return and whether the Debtor had an intent to evade taxes.
Certain findings of fact made by this Court in its Memorandum Opinion remain relevant and are reiterated below. In 1978, the Debtor joined with a man known as Sidney Samuels in an investment advisory company that came to be known as Samuels, Kramer & Company (“SK & C”). Samuels also owned a company known as First Western Government Securities (“First Western”). First Western was a dealer in government securities. Eventually, First Western assumed the functions of SK & C. The salient facts of the transactions in which these companies were involved are thoroughly explained by the United States Tax Court in Freytag v. Commissioner, 89 T.C. 849, 1987 WL 45307 (1987). Some facts are highlighted in this opinion.
First Western marketed portfolios of forward contracts for securities of the Government National Mortgage Association, (securities known as “Ginnie Maes”), and the Federal Home Loan Mortgage Corporation, (securities known as “Freddie Macs”). These portfolios consisted of short and long positions in the Ginnie Maes and Freddie Maes forward contracts. The technique used by First Western theoretically resulted in its customers both deferring and converting ordinary income into long term capital gain. First Western engaged in many unorthodox practices which enabled it to offer to its customers enormous tax benefits compared to the amounts of their “margin” deposits and without increasing First Western’s risk of loss. In fact, First Western could “fíne tune” its program to reach any result. Each customer’s portfolio was constructed so as to achieve the desired tax loss. The end result of these transactions was that First Western customers would report tax losses that were seven to ten times larger than their initial investment. The Tax Court in Freytag found the transactions between First Western and its customers to be “illusory and fictitious and not bona fide transactions.” Id. at 875.
The Debtor was one of First Western’s customers to take advantage of these “illusory and fictitious” tax losses. The Debtor reported $69,208 in losses from First Western securities transactions for 1978, $145,348 in losses for 1979, and $730,948 in losses for 1980. The IRS issued a notice of deficiency to the Debtor for these tax years reflecting a deficiency of $23,614 in 1978, $66,074 in 1979, and $612,927 in 1980. The IRS contends that, as an officer of First Western and the “principal architect of a scheme” that created “artificial tax losses”, the Debtor intended to defraud the United States of taxes which he owed. The IRS also points to a 1980 conversation between John Walsh and the Debtor, portions of which were memorialized by John Walsh, wherein the Debtor stated that Samuels was not “hedging” and was running a sham. The Debtor testified at trial that he made those comments when he was angry with Samuels. The Debtor further testified that at the time of the transactions he believed the transactions to be legitimate. He stated that a law firm called R.P. Rhoades gave an opinion that the tax trades proposed by First Western were valid tax right-offs. However, the Debtor did not produce a copy of this opinion.
*873The Government argues that because the Debtor was a principal of First Western and because First Western used his computer programs, he knew, or should have known, at the time he filed his tax returns in 1979, 1980 and 1981, that the deductions or losses he claimed were illusory and fictitious and thus, the returns were fraudulent. The Court finds the evidence that the Debtor (1) was a principal of First Western, and (2) established the computer program to track the trading in government securities, to be insufficient to establish that the Debtor willfully or fraudulent evaded taxes. Consequently, the Court finds that the taxes owed by the Debtor to the United States are discharge-able.
A separate final judgment will be entered in accordance herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493029/ | OPINION AND ORDER SUSTAINING DEBTOR’S OBJECTION TO CLAIM OF OHIO DEPARTMENT OF TAXATION
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the debtor’s objection to the proof of claim filed by the Ohio Department of Taxation. The Ohio Department of Taxation opposed the objection, and the Court conducted a hearing on December 10, 1999. Following the hearing, the Ohio Department of Taxation submitted a memorandum in support of its claim. This contested matter is now ready for decision.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and *124the General Order of Reference entered in this district. This is a core matter which this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(B).
. Findings of Fact
1. The debtor operated a business known as Pizza Tom’s at 202 Main Street, Coshocton, Ohio, from September 10, 1986, to October 1, 1987. During this time, the debtor held a vendor’s license, as well as a liquor permit issued by the Ohio Department of Liquor Control. See Transcript of Proceedings pp. 7-8.
2. As required of a vendor operating in the State of Ohio, the debtor remitted sales taxes to the Ohio Department of Taxation on December 8, 1986, January 31, 1987, June 15, 1987, July 31, 1987, and August 10, 1987. See Debtor’s Exhibit 3 and Transcript of Proceedings pp. 23, 35.
3. The debtor sold the business known as Pizza Tom’s to Thomas Meechan on October 1, 1987, for $30,000. Pursuant to the sales agreement prepared by Eugene B. Weir, Meechan’s attorney, $25,000 of this amount was placed in escrow pending payment of all sales taxes then due and the transfer of the debtor’s liquor permit to Meechan by the Ohio Department of Liquor Control. See Transcript of Proceedings p. 9.
4. The debtor executed all documents required of him for the transfer of the liquor permit. See Transcript of Proceedings pp. 27-28. He notified the Ohio Department of Taxation that he was cancel-ling his vendor’s license and requested that any further correspondence be sent to his home address. See Transcript of Proceedings pp. 21-22, 22-23, 35. The Ohio Department of Taxation did not cancel the debtor’s vendor’s license and continued to direct all correspondence to the debtor’s former business address. See Transcript of Proceedings pp. 51-52.
5. On November 24, 1987, the debtor received a check from Attorney Weir’s trust account for approximately $9,000. This amount represented the balance of the net proceedings after payment of the sales taxes then due. See Transcript of Proceedings pp. 9, 26-27.
6. Thomas Meechan and his wife Roberta applied for the transfer of the debt- or’s liquor permit, but it does not appear that the Ohio Department of Liquor Control ever transferred the permit from the debtor’s name to the Meechans. See Creditor’s Exhibit C and Transcript of Proceedings p. 48.
7. The liquor permit held by the debtor during the time he operated the business would have expired October 1, 1988. The Ohio Department of Taxation’s assertion on page 2 of its post-hearing memorandum to the contrary, there is no credible evidence that the debtor executed a renewal application, and no such application was made a part of this record. The debtor flatly denied any such assertion. See Transcript of Proceedings p. 15 and Creditor’s Exhibit A.
8. Thomas Meechan dba Pizza Tom’s filed an application for renewal of the liquor permit in October 1989. Although the application was signed by Thomas Meechan only, the debtor’s preprinted name appears at the bottom of the form along with the address for Pizza Tom’s. See Debtor’s Exhibit 1.
9. The Ohio Department of Taxation put a hold on Meechan’s renewal application for certain tax delinquencies, but lifted the hold on December 29, 1989. The Ohio Department of Liquor Control granted a provisional reinstatement of the liquor permit on January 8, 1990. Two and a half months later, however, the Ohio Department of Liquor Control cancelled the permit due to the holder’s alleged failure to file for a renewal and also cancelled the Meechans’ transfer application due to the transferor’s purported failure to renew the permit. See Creditor’s Exhibit C.
10. From at least December 4, 1987, the Ohio Department of Liquor Control was fully aware of the sale of the debtor’s *125business to the Meechans and the intended transfer of the liquor permit. The December 2, 1999 certification refers to records for the liquor permit in the name of Thomas D. and Roberta J. Meechan, dba Pizza Tom’s. See Creditor’s Exhibit C.
11. The debtor was unaware until December 1991 or January 1992 that the liquor permit had not, in fact, transferred. See Transcript of Proceedings p. 30 and Creditor’s Exhibit A. Up to this time, the debtor had good reason to believe that the transfer had occurred prior to his receipt of the net sales proceeds on November 24, 1987.
12. In April 1993, the debtor received a phone call from the Ohio Attorney General’s office that unless he paid some $103,-000 in delinquent sales taxes for Pizza Tom’s, his checking accounts and rental properties would be seized. See Transcript of Proceedings pp. 10-11.
13. On March 10, 1994, the Board of Review for the Ohio Bureau of Employment Services issued a decision finding the debtor not to be liable for 1989 contributions based on wages earned by employees of Thomas and Roberta Meechan. The decision states in relevant part:
Furthermore, the purchase price which was held in the attorney’s trust account was released to the appellant, an act which was not to occur until the liquor permit was transferred. The appellant had justifiable cause to believe that the liquor permit had in fact been transferred under such circumstances. The record further establishes that following the filing of the liquor permit and payment from the attorney’s trust account the appellant did not receive any further correspondence from the Ohio Department of Liquor Control or any other state agency dealing with taxation.
Although the liquor permit for the business did not in fact transfer the appellant had justifiable grounds for believing the permit did in fact transfer and the appellant will not be held liable for contributions owed by the purchaser.
See Debtor’s Exhibit 2 and Transcript of Proceedings pp. 18-21.
14. On March 29, 1999, the debtor filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code. He scheduled as disputed the claim of the Ohio Department of Taxation for 1986-87 sales taxes in the aggregate amount of $46,-521.44. His amended plan, which was confirmed on September 1, 1999, provided that no payment would be made on that claim until a final determination of its validity. See Debtor’s Amended Schedule E and Amended Chapter 13 Plan filed June 25,1999.
15. The Ohio Department of Taxation filed a proof of claim on May 6,1999. This claim included sales tax judgments arising from the business known as Pizza Tom’s. The total amount of these judgments, including penalties and interest is $47,944.21. The periods for which those sales taxes were due ranged from April 1988 to January 1990. See Debtor’s Exhibit 4 and Transcript of Proceedings p. 54.
16. The proof of claim filed by the Ohio Department of Taxation also included sales tax assessments for May 1997 through April 1998, as well as income tax assessments for 1996 and 1997. These assessments apparently stem from a subsequent business of the debtor unrelated to the operation of Pizza Tom’s. The debtor apparently does not dispute these assessments. See Debtor’s Amended Schedule E. The sales tax assessments total $87,-000.81, of which $2,894.86 represents penalties. The income tax assessments add up to $1,621.21, including $502.14 in penalties. See Debtor’s Exhibit D.
Conclusions of Law
1. The filing of a properly executed proof of claim constitutes prima facie evidence of the validity and amount of the claim. Bankruptcy Rule 3001(f). Following the presentation of the debtor’s casein-chief, this Court determined that the debtor had successfully rebutted this pre*126sumption. See Transcript of Proceedings pp. 37-38.
2. The question of whether the debtor or the taxing authority has the ultimate burden of proof in a bankruptcy proceeding to determine the validity of a tax claim is not settled. For purposes of this proceeding only, the Court will assume that the debtor must disprove by a preponderance of the evidence the validity of the Ohio Department of Taxation’s claim. Cf In re Howard Industries, Inc., 225 B.R. 388, 390 (Bankr.S.D.Ohio 1997), following In re Ford, 194 B.R. 583, 587-89 (S.D.Ohio 1995) (after rebutting prima facie correctness of IRS’ proof of claim, debtor still retained ultimate burden of proving that the assessments were correct, just as a taxpayer would have to do in a non-bankruptcy forum).
3. The Court concludes that the debtor has satisfied his burden of proof with respect to each of the items set forth in the foregoing Findings of Fact, including the pivotal issues of whether he had good reason to believe that the liquor permit had been transferred to the Meechans and whether he renewed his liquor permit after the sale of his business. Therefore, the only questions remaining for decision by this Court are legal.
4. Ohio Revised Code Section 5739.13 provides that a vendor is personally responsible for all sales taxes attributable to business transactions. It is the Ohio Department of Taxation’s contention that this liability continues so long as the vendor’s license remains in effect even though the vendor has a legitimate belief that he has cancelled his license. The Ohio Department of Taxation further contends, without citing to any specific statute or administrative rule, that where a liquor permit is active and has not been transferred out of the vendor’s name, the vendor’s license cannot be cancelled. See Transcript of Proceedings p. 49.
5. This Court concludes, even accepting the Ohio Department of Taxation’s legal contentions, the debtor should not be liable for any sales taxes arising from operation of the business known as Pizza Tom’s after October 1, 1988. But for the renewal of the debtor’s liquor permit without his involvement, the liquor permit would have expired on that date. In that event, the debtor would have been free even under the Ohio Department of Taxation’s contentions to cancel his vendor’s license at that time. The debtor had, in fact, purported to cancel his vendor’s permit one year earlier. Presumably, the Ohio Department of Taxation would finally have honored his request once the liquor permit expired. The Court concludes it would be inequitable to hold the debtor responsible for the Ohio Department of Liquor Control’s apparent negligence.
6. This Court additionally concludes that the debtor’s belief that the liquor permit had been transferred to Thomas Meechan and that his vendor’s license had been cancelled were well-founded under the circumstances; and, that the debtor for this reason as well, should not be liable for any sales taxes related to operation of Pizza Tom’s after the sale of this business to Thomas Mee-chan. In making this conclusion, the Court has not given preclusive effect to the decision of the Board of Review for the Ohio Bureau of Employment Services. See Debtor’s Exhibit 2. It is noteworthy, however, that this tribunal reached an identical decision with respect to the debt- or’s liability when confronted with the same facts under a statutory framework which the Ohio Department of Taxation admits is similar to that of Ohio Revised Code Section 5739.13. See Ohio Department of Taxation’s post-hearing memorandum pp. 6-7.
7. The Court has reviewed the case authorities cited by the Ohio Department of Taxation in its post-hearing memorandum and does not believe they are disposi-tive of whether the debtor is liable for the sales taxes which arose after his transfer of the business. In Captain Frank’s, Inc. *127v. Limbach, the only reported case of the three, the seller knew that the transfer of the liquor permit had not occurred and entered into a management agreement with the buyer pending approval of the transfer. 76 Ohio App.3d 438, 439, 602 N.E.2d 357 (Cuyahoga Co. Ct.App.1991). In fact, as the result of the subsequent denial of the transfer, the sale of the restaurant was never consummated. Id. at 440, 602 N.E.2d 357, 358. In both of the unreported cases, the Ohio Board of Tax Appeals, as one of the bases for its decisions, found the sellers to have been negligent in some manner. In Young v. Tracy, No. 93-J-402, slip. op. at 3-4(BTA), the Board cited the failure of the seller to surrender his vendor’s license. In Drago v. Tracy, No. 92-A-945, slip op. at 6(BTA) (Jan. 14, 1994), the Board chided the seller for his inattention to a significant business transaction and his neglect in failing to effect a completion of the transaction. None of the factual scenarios presented by these three cases are found in the debtor’s case; hence, they are distinguishable.
8. The Court also concludes that the Ohio Department of Taxation’s citation to Westwood Constr. Co. v. Board of Review, 11 Ohio App.3d 120, 463 N.E.2d 426 (1983), does nothing to counteract the force of the decision of the Board of Review for the Ohio Bureau of Employment Services in the debtor’s case. See Debtor’s Exhibit 2. Westwood states nothing more than the abstract proposition that the liquor permit holder is the “employer” for unemployment tax purposes for all employees who worked under the permit at the permit’s location, even though the permit holder was not the owner or operator of the business. Id., 463 N.E.2d at 427. There is absolutely no indication that the type of facts presented by the debtor’s case was present in Westwood. In fact, the opposite can be surmised since Westwood merely affirmed the decision of the Board of Review. Obviously, the Board of Review felt that the debtor’s case warranted a different result.
Based on the foregoing Findings of Fact and Conclusions of Law, the Court SUSTAINS the debtor’s objection to the claim of the Ohio Department of Taxation. This claim shall be allowed in the amount of $10,322.02. Of this amount, $7,427.16 shall be paid as a priority claim, with the remaining $2,894.86, representing penalties, paid as a general unsecured claim. The balance of the Ohio Department’s claim is disallowed.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493030/ | MEMORANDUM OPINION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW
THOMAS S. UTSCHIG, Bankruptcy Judge.
The plaintiff in this adversary proceeding seeks to determine the validity of its *135alleged mechanic’s lien against the debtor. The plaintiff is represented by Paul K. Schwartz, and the debtor is represented by George B. Goyke. The essential factual allegations are as follows. The debtor contacted the plaintiff and requested that the plaintiff perform repairs on a piece of equipment. The plaintiff came to the debtor’s place of business and performed the repairs on the debtor’s premises. Upon completion of the repair work, the plaintiff requested and received a check for its services in the amount of $8,485.50. Thereafter, the debtor stopped payment on the check, apparently based upon its belief that the work was to have been performed under a warranty and it was not obligated to pay for the services.
The debtor’s plan of reorganization does not consider the plaintiff to be a secured creditor, and instead places this creditor in the general unsecured class. The plaintiff filed this adversary proceeding to enforce its perceived lien rights and has filed a motion to determine the validity of its hen, which the Court will consider as a motion for summary judgment. The plaintiff believes that it has a valid mechanic’s lien on the debtor’s equipment pursuant to Wis. Stat. § 779.41(1), which provides that:
Every mechanic and every keeper of a garage or shop ... who repairs or does any work on personal property ... has a lien on the personal property for the just and reasonable charges therefor ... and may retain possession of the personal property until the charges are paid....
According to the plaintiff, the fact that it did the work on the debtor’s premises should not make any difference in determining whether or not it has a lien. Further, the plaintiff argues that it only “surrendered” its possession of the equipment because of the debtor’s deception in issuing a check which it later dishonored. It cites the case of M & I Western State Bank v. Wilson, 172 Wis.2d 357, 362, 493 N.W.2d 387 (1992), for the proposition that mechanic’s lien laws should be “liberally construed to accomplish their equitable purpose of aiding materialmen and laborers to obtain compensation.... ”
The Court agrees that the statute should be read in a light beneficial to the plaintiff, but the essential question remains whether a lien under § 779.41 is limited to those situations in which the mechanic has actual physical possession of the property. Neither party has cited the Court to authority which specifically addresses this threshold issue. They each point to the statute, which mentions that the mechanic may “retain” possession of the asset. The debtor argues that this means that the mechanic must have had possession originally, which cannot happen when the repair services are performed on the owner’s property. The plaintiff argues that the statute is actually silent on this point, and that there is nothing in the statute which prevents a mechanic from taking the repaired equipment from the owner’s property if the owner doesn’t pay for the services. In this regard, the plaintiff suggests that it would have been fully within its rights to bring a tow truck onto the debtor’s property and haul the equipment away.
In answering this apparently novel question, the Court first looks to the language of the statute, which allows the mechanic to “retain” possession of the property, but does not define what constitutes possession. Black’s Law Dictionary defines possession as “the fact of having or holding property in one’s power,” “the exercise of dominion over property,” or “the right under which one may exercise control over something to the exclusion of all others.” Statutes such as Wis.Stat. § 779.41 are generally codifications of common law lien rights. See Wilson, 172 Wis.2d at 362, 493 N.W.2d 387 (in which the court stated “we may look to the common law of mechanic’s hens” to determine whether such a lien exists). For example, Wisconsin courts recognize a common law lien, as stated by the Wisconsin Supreme Court:
*136This court has held for years that a person who has bestowed labor upon an article or done some other act in reference to it by which its value has been enhanced has the right to detain the same until he is reimbursed for his expenditures and labor; and that every bailee for hire who by his labor and skill has added value to the goods has a lien upon the property for his reasonable services or charge rendered.
Moynihan Associates, Inc. v. Hanisch, 56 Wis.2d 185, 190, 201 N.W.2d 534 (1972).
The Restatement of Security describes a similar common law lien in favor of a “bail-ee who at the request of the bailor does work upon or adds materials to a chattel.” See Restatement (First) of Security, § 61(a). The comments to this section state that “since the lien for work done or materials added depends upon possession, if the services are rendered upon chattels in an owner’s possession, the artisan has no lien.” Restatement (First) of Security, § 61(a) cmt. e. This comment goes.on to provide the following illustration:
A requests an artisan to come to his home and repair a grandfather’s clock. The clock is repaired on A’s premises. The artisan is not a bailee and has no lien for his services.
Accordingly, under common law, the plaintiff would not be entitled to assert a lien for work done on the debtor’s premises. Given that Wis.Stat. § 779.41 is silent on the issue, the Court is constrained to interpret the statute in accordance with general common law principles relating to such liens. The plaintiff never had lien rights against the debtor’s property, and the subsequent dishonor of the check has no impact upon the plaintiffs status as an unsecured creditor.
Accordingly, the plaintiffs motion to determine the validity of its lien is denied, and the adversary proceeding is dismissed. The parties shall bear their own costs.
This decision shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493085/ | DECISION AND ORDER
RICHARD L. SPEER, Chief Judge.
This cause comes before the Court upon the Trustee’s Objection to the Debtors’ claim of exemption in certain insurance policies. In response, the Debtors filed an Objection to the Trustee’s Motion to Deny Exemption. On March 14, 2000, the Court held a hearing on the matter at which time the Parties agreed that all the issues involved in this proceeding were solely questions of law. Accordingly, pursuant to an Order dated March 29, 2000, the Court ordered that, “the Trustee and the debtors shall file briefs with the Court not later than April 14, 2000, setting forth their respective positions with pertinent authority, if any, as well as a stipulated set of facts.”
Within the time frame stated above, the Court received briefs from each of the Parties. However, as of the date of the entry of this Order, the Court has yet to receive, from either Party, a stipulated set of facts. In addition, the Court, upon reviewing the briefs submitted by the Debtors, finds that the Debtors’ insurer, American Community Mutual Insurance Company, may have an interest in this proceeding.
Accordingly, it is
ORDERED that the Trustee and the Debtors submit, within Forty-five (45) days from the entry of this Order, a Stipulated Set of Facts to the Court. The Stipulated Set of Facts should specify: (1) the total amount of insurance proceeds distributed by the Debtors’ medical insurers, and whether such disbursements were made in one lump sum or increments; (2) the total cost of the Debtor’s (Linda Feas-el) medical bills; (3) the amount of insurance proceeds received by the Debtors personally, and whether such funds are now available; (4) whether any of these insurance proceeds were received prepetition; (5) what portion of these insurance proceeds were paid on account of both prepetition and postpetition medical services. In addition, and although not ruling on the matter, the Parties should set forth how many months are at issue in this proceeding for purposes of the Six Hundred ($600.00) dollar per month limitation contained in O.R.C. § 3923.19.
*530It is FURTHER ORDERED that the Clerk, U.S. Bankruptcy Court, serve a copy of this Order along with a copy of the briefs submitted by the Trustee and the Debtors to the American Community Mutual Insurance Company, 39201 Seven Mile Road, Livonia, Michigan 48152. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493086/ | OPINION
ROSEMARY GAMBARDELLA, Chief Judge.
Before the Court is a motion by Dr. George Radney and Jane Radney (the “Radneys”) to disqualify the law firm of Gibbons, Del Deo, Dolan, Griffinger & Vecchione (“Gibbons”) from representation of A & S Fuel Oil Co., Inc. (“A & S”). The Radneys argue that the Court must disqualify Gibbons on the grounds that it previously represented them, and on the grounds that its representation of A & S creates an appearance of impropriety.
In opposition to the Radneys’ motion, Gibbons argues that the Radneys have waived their right to allege the existence of a conflict of interest, that, regardless of the applicability of a such a waiver, no attorney-client relationship existed between Gibbons and the Radneys, and finally that its representation of A & S does not create an appearance of impropriety.
The Court conducted a hearing concerning this matter on November 10, 1998. The following constitutes this Court’s findings of fact and conclusions of law.
FACTS
In or about December 1993, the Rad-neys purchased fifty percent (50%) of the common stock of A & T Paramus, Inc. d/b/a International Motor Plaza, Inc. (“Debtor”). See Certification of Jane Rad-ney in Support of Motion to Disqualify Counsel (“Radney Certif.”) ¶ 12. Abraham Stahl owns the remaining fifty percent *609(50%) interest in Debtor. See id. Debtor operates as a fuel and service station in Mahwah, New Jersey. See id.
Jane Radney asserts that, at the time of the Radneys’ purchase of part ownership of Debtor, “Mark Stahl, the son of Abraham Stahl, was responsible for the management and operation of the Debtor’s business, including the purchase and delivery of fuel” and for “securing and paying vendors such as A & S.” Id. ¶ 13.
She asserts that “[s]ometime in late 1995 or early 1996, unbeknownst to me and my husband, Mark Stahl began giving fraudulent deposit information to A & S and began tendering bad personal checks drawn on his mother’s and father’s personal accounts when there were insufficient funds in such accounts to cover checks totalling [sic] approximately $478,000.” Id. ¶ 14.
State Court Proceedings
Prior to Debtor’s petition filing, A & S filed in the Superior Court of New Jersey, Morris County a Complaint (the “A & S Action”) against Debtor, the Radneys, Abraham Stahl, Esther Stahl, and Mark Stahl pursuant to which it sought to recover over one-million dollars ($1,000,000.00) in damages resulting allegedly from, inter alia, Debtor’s failure to pay for delivered fuel. See id. ¶ 18, Ex. 6 (copy of Amended Complaint). In its Complaint, A & S alleged that the Radneys had previously executed a guaranty of Debtor’s obligations to A & S (the “Guaranty”).1 See id. Ex. 6 ¶ 6.
The Radneys, as alleged oppressed minority shareholders, had also filed in the Superior Court of New Jersey, Bergen County (the “State Court”) a Complaint (the “Radneys’ Action”) against the Stahls and others for relief pursuant to N.J.S.A. § 14A:7(c). See id. ¶ 18 n. 6.
By order dated April 30, 1996, the State Court consolidated the Radneys’ action and the A & S Action (collectively, the “State Court Action”). See id. ¶ 18; Ex. 8 (copy of Order of Consolidation).
On July 12, 1996, the State Court entered an order granting summary judgment to A & S with respect to its claims against Mark and Abraham Stahl, but denied the motion with respect to its claims against the Radneys. See id. Ex. 10 (copy of Order).
The Meeting
On June 4, 1996, Debtor filed a petition under Chapter 11 of the United States Bankruptcy Code. See id. ¶ 17. Jane Rad-ney maintains that the she and her husband are creditors of Debtor. See id. ¶ 1.
On September 19, 1996, the United States Trustee appointed William J. Hunt (“Hunt”) as Chapter 11 Trustee of Debt- or’s estate. See Order Directing Appointment of Trustee.
On November 27, 1996, Jane Radney met with Frank Vecchione, Esq. (“Vec-chione”), and Anthony La Rocco, Esq. (“La Rocco”), both members of Gibbons, to discuss the possibility of her retaining Gibbons to represent the Radneys in the State Court Action and Debtor’s bankruptcy proceeding.2 See Radney Certif. ¶ 3 (“I, on behalf of Dr. Radney and myself, met and consulted extensively with [Vecchione] and [La Rocco] about retaining them to assert various claims against and assert certain defenses involving A & S.”); Certification of Jane Radney in Further Support of Motion to Disqualify Counsel (“Radney Response Certif.”) ¶ 5 (“When I called [La Rocco] to schedule a time to meet, I told him my husband and I needed legal representation in both the bankruptcy proceeding and the State Court Action.”).
*610Jane Radney characterizes the meeting as “very substantive and extensive, lasting between three and four hours.” Radney Response Certif. ¶ 7. She alleges, specifically, that during this meeting:
I discussed with Messrs. Vecchione and La Rocco various facts, claims, defenses and strategies. As to the present Chapter 11 case (since I was advised that Mr. Vecchione was a bankruptcy expert), I discussed the Debtor’s financial problems, the Debtor’s operations during the chapter 11 case and [the Radneys’] rights and interests in the Debtor. During my meeting with Mssrs. Vecchione and La Rocco, I specifically discussed with them confidential information bearing directly on [the Radneys’] defenses against A & S and the Debtor’s business and transactions with A & S.
Radney Certif. ¶ 3.
Jane Radney also alleges:
I brought a “huge stack” of documents, both prior court documents and internal confidential documents I wrote to the Operational Executive of the Debtor relating, among other things, to problems with the Debtor’s operations. I brought everything I had and tried not to exclude anything so the attorneys could know as much as possible about [the Radneys’] case and [the Radneys’] interests and concerns, whether confidential or not.... I had prepared a detailed summary of events leading up and relating to both the State Court Action and this bankruptcy proceeding. I tried to convey as much information as possible in the summary which contains substantial confidential information regarding, among other things, my and my husband’s activities and certain activities of the company and its shareholder and his son, Mark Stahl.... Moreover, during the meeting, I conveyed to the Gibbons attorneys facts and impressions concerning our claims that [A & S] and the other shareholder of the Debtor were acting in collusion to obtain exclusive control of the Debtor at a steeply discounted price.
Radney Response Certif. ¶¶ 7-8.3
Finally, Jane Radney maintains that “[her] recollection is that both Mr. Vec-chione and Mr. La Rocco reviewed many of the documents [she] had brought and made extensive notes on large pads.” Id. ¶ 9.
With respect to the meeting with Jane Radney, La Rocco asserts that “[he] only recall[s] the meeting because it occurred at an unusual time, on the eve of the Thanksgiving Holiday after normal business hours,” that “[he] do[es] not recall the specific issues discussed at the meeting,” and that “[he] neither kept notes nor did [he] keep any written information, if such information was even provided by Ms. Radney.” Certification of Anthony P. La Rocco (“La Rocco Certif.”) ¶¶ 2, 4. He also asserts that “[he] did not open a client matter, bill any time for the meeting or prepare a retainer letter as required by RPC 1.5.” Id. ¶ 6. La Rocco maintains further that “[a]fter informing Ms. Radney of [Gibbons’s] decision, [he] never spoke to either of the Radneys again” and that “[b]oth before and after December 1997, [he] never discussed any details or information with respect to the meeting with Ms. Radney with anyone at [Gibbons].” Id. ¶¶ 6, 8.
Vecchione asserts that he does not recall the meeting with Jane Radney. See Certification of Frank J. Vecchione (“Vecchione Certif.”) ¶ 3. He asserts, specifically, that “[he] do[es] not recall the meeting, Ms. Radney or the details of any discussions,” and that he believes that he did not receive any confidential information and that “[his] role at the meeting was simply to discuss any potential bankruptcy issues.” Id. Vec-chione also maintains that “[he does] not *611recall receiving any written information related to the Radneys’ cases,” that “[he] kept no notes nor copies of any information related to the November 27, 1997 meeting,” and that “[he has] not discussed the subject of the meeting with any other attorney at [Gibbons].” Id. ¶ 4.
Finally, Paul R. DeFilippo (“DeFilip-po”), also a member of Gibbons, maintains that “[n]either James Lawlor nor [DeFilip-po], the only attorneys working on [Debt- or’s] Chapter 11 case, ever discussed the subject matter of the November 1996 meeting with either Messrs. Vecchione or La Roeco.” Certification of Paul R. DeFi-lippo (“DeFilippo Certif.”) ¶ 28.
Gibbons Assumes Representation of A & 5
After the meeting, Gibbons declined to represent the Radneys. See Radney Cer-tif. ¶ 4.
On April 11, 1997, Gibbons filed with this Court a Substitution of Counsel pursuant to which it assumed representation of A & S in this case. See DeFilippo Certif. ¶ 4, Ex. A (copy of Substitution of Counsel). DeFilippo asserts that “[a]s early as March 31, 1997, [he] informed the then-counsel for the Radneys, Ravin, Greenberg 6 Marks, ... that [Gibbons] would be acting as counsel for A & S.” Id. ¶ 3.
DeFilippo alleges that “A & S has been an active participant in this case in addition to its meetings and negotiations with the Trustee, the Debtor, and the Rad-neys.” Id. ¶ 8. DeFilippo asserts, for instance, that he and the Radneys’ counsel, among others, conducted settlement discussions in May 1997. See id. ¶ 7. He asserts, also, that Gibbons filed in February 1998 a motion to convert the case, and in March 1998 an objection to a motion for a settlement of certain environmental matters. See id. ¶ 8. DeFilippo avers that, in each of these instances, the Radneys’ failed to object to Gibbons’s status as counsel for A & S. See id. ¶¶ 7, 9.
On or about May 21, 1997, Gibbons assumed representation of A & S in the State Court Action., See id. ¶ 11.
On October 2, 1997, the State Court entered an order entering default against the Radneys following their failure to appear at a pre-trial conference. See Order of Dismissal;1 DeFilippo Certif. Ex. D (copy of Order of Dismissal).
The State Court subsequently entered an order vacating the dismissal and compelling the Radneys to appear for depositions. See DeFilippo Certif. ¶ 15.
The Radneys failed to appear for the depositions. See id. ¶ 18.
In a letter dated December 16, 1997, Frank Holahan, Esq., (“Holahan”) then counsel for the Radneys in the State Court Action, advised James N. Lawlor, Esq. .of Gibbons of the potential impropriety of Gibbons’s representation of A & S, in light of Jane Radney’s prior meeting with LaR-occo and Vecchione. See Radney Certif. Ex. 2 (copy of Letter Dated December 16, 1997).
In a letter dated December 29, 1997, DeFilippo advised Holahan of his belief that no conflict existed. See id. Ex. 3 (copy of Letter Dated December 29, 1997). DeFilippo asserted that, inter alia, LaRoc-co and Vecchione had been and would continue to be “Chinese-walled” from the case, and that the Radneys, having waited to object, had waived their right to assert a conflict. See id.
In March 1998, Gibbons withdrew as counsel for A &' S in the State Court Action. See id. ¶ 7. DeFilippo asserts that “[although A & S and [Gibbons] considered the Radneys’ allegations of a conflict to be meritless, rather than continue to engage in wasteful litigation over the conflict issue, it was determined that A & S would be better served by replacement counsel in the State Court Action.” DeFi-lippo Certif. ¶ 19. He adds that Gibbons withdrew “with the hope that'the Radneys would appear at the duly ordered - depositions” and ■ “in an effort to expedite the *612discovery that was pending for more than a year.” Id. ¶¶ 19-20.
DeFilippo emphasizes that the Radneys continued to fail to appear at depositions after Gibbons’ withdrawal, resulting in the entry of a July 20, 1998 order by the State Court striking their Answer, suppressing their defenses, and dismissing their counterclaim with prejudice, as well as the entry of an order dated September 21, 1998 denying vacation of that order. See id. ¶¶ 21-23.
By order dated November 5, 1998, the Appellate Division reversed the order dismissing the Radneys’ pleadings and reinstated their Answer and Counterclaim. See Letter Memorandum of Michael A. Saffer, Esq. Dated November 19, 1998.
On May 18, 1998, A & S, through Gibbons, filed a proposed Plan of Reorganization and a Disclosure Statement. See Radney Certif. ¶ 9.
The Radneys object to the Disclosure Statement. See id. ¶ 10. Jane Radney alleges that “[i]f the A & S plan is approved, [the Radneys’] equity interests in the Debtor (over one million dollars) will be wiped out and A & S, through a newly formed entity, will wind up owning the Debtor’s assets while unsecured creditors will only receive 5 cents on the dollar.” Id. She also objects on the grounds that “A & S appears to.have lent the Debtor money to give A & S ‘control.’ ” Id. ¶ 20.
Radneys Move to Disqualify Gibbons
On August 27, 1998, the Radneys filed a Notice of Motion to Disqualify Gibbons, Del Deo, Dolan, Griffinger & Vecchione From Representing A & S Fuel Oil Co. See Notice of Motion to Disqualify.
In support of its motion to disqualify Gibbons, the Radneys argue that the Court must disqualify Gibbons pursuant to New Jersey Rule of Professional Conduct (“RPC”) 1.9. See Memorandum of Law in Support of Motion to Disqualify (“Rad-neys’ Brief’) at 2. They argue, specifically, that an attorney-client relationship existed between Gibbons and themselves, on the basis of the meeting between Jane Radney and La Rocco and Vecchione, that their interests are materially adverse to A & S’s interests, and that Gibbons’s representation of A & S shares a “substantial relationship” with its prior representation of the Radneys. See id. 4-8. They also argue that Gibbons’s representation of A & S raises “an appearance of impropriety.” See id. at 9-10.
In opposition to the Radneys’ motion, Gibbons argues that the Radneys have waived their right to assert the existence of a conflict of interest, that, even assuming that their motion is timely, the Rad-neys do not constitute “former clients” of Gibbons for the purposes of the application of RPC 1.9. and finally, that Gibbons’s representation of A & S does not create an appearance of impropriety. See Memorandum of Law in Opposition to Motion to Disqualify Gibbons, Del Deo, Dolan, Grif-finger & Vecchione From Representing A & S Fuel Oil Co., Inc. (“Gibbons’s Brief’).
With regard to the relationship of this case to the State Court Action, DeFilippo maintains that “[t]he litigation in the State Court between the Radneys and A & S is based upon written personal guarantees signed by the Radneys,” and that “[t]he claims made by A & S in the State Court Action have no relationship to [Gibbons’s] representation of A & S in this chapter 11 case.” DeFilippo Certif. ¶ 25. With regard to Jane Radney’s allegation that “[she] discussed the Debtor’s operations during the chapter 11 case and [her] rights and interests in the Debtor,” he argues in his Certification that:
any information allegedly given by the Radneys to A & S related to [Gibbons] regarding the Debtor is not confidential information. [Debtor] is a separate legal entity from the Radneys. William Hunt, Esq. serves as Trustee for A & T, and the Radneys no longer control [Debtor’s] attorney-client privilege. Thus, the Radneys decision to share such information related to [Debtor] *613does not constitute disclosure of confidential information [vis-a-vis] the Rad-neys.
Id. ¶ 26 (emphasis omitted) (quoting Rad-ney Certif. ¶ 3).
In response to Gibbons’s argument that they have waived their right to seek disqualification, the Radneys argue that “they moved for disqualification promptly after learning of the adverse nature of A & S Oil’s position in this bankruptcy proceeding.” Reply Memorandum of Law at 9. They allege that “[i]t was the fact that A & S Oil offered the A & S Oil [proposed] Plan which prompted the Radneys to seek disqualification of Gibbons, which now represents interests adverse to the Radneys.” Id.
ANALYSIS
The Court addresses three issues: (1) whether the Radneys waived their right to seek disqualification of Gibbons; (2) whether the Radneys constitute “former clients” of Gibbons, and whether this case constitutes a “substantially related matter” within the meaning of RPC 1.9(a); and (3) whether Gibbons’s representation of A & S creates an “appearance of impropriety” within the meaning of RPC 1.9(b).
I. Disqualification
This Court has asserted that “[t]he provisions of the Local District Court General Rules govern the practice of attorneys in the Bankruptcy Court for the District of New Jersey.” In re Star Broadcasting, Inc., 81 B.R. 835, 839 (Bankr.D.N.J.1988).
Local Rule 103.1(a) for the District of New Jersey provides that “[t]he Rules of Professional Conduct of the American Bar Association as revised by the New Jersey Supreme Court shall govern the conduct of the members of the bar admitted to practice in this Court, subject to such modifications as may be required or permitted by Federal statute, regulation, court rule or decision of law.” D.N.J. L. Civ. R. 103.1(a).
In interpreting the predecessor to this rule, the United States District Court for the District of New Jersey (the “District Court of New Jersey”) has stated that:
to resolve questions of professional ethics, this Court turns to New Jersey’s Rules of Professional Conduct. It is clear that the intention is for practitioners in both the state and federal courts in New Jersey to be governed by a single ethical code. Nevertheless, while efforts should be made to avoid inconsistent determinations under the RPCs, and this Court may certainly look for guidance to the decisions of the New Jersey state courts, our Local Rules do not require that this Court be bound by those decisions.
Carlyle Towers Condominium Assoc. v. Crossland Savings, FSB, 944 F.Supp. 341, 344-45 (D.N.J.1996) (footnote omitted). See also Essex Chemical Corp. v. Hartford Accident and Indemnity, 993 F.Supp. 241, 246 (D.N.J.1998) (“In construing the RPC, a district court may look to the decisions of the New Jersey Supreme Court and other relevant authority.”); Kaselaan & D'Angelo Assoc. v. D'Angelo, 144 F.R.D. 235, 237 (D.N.J.1992) (“[T]he ethical rules and constraints imposed on federal practitioners in New Jersey are the same as those imposed on New Jersey attorneys generally by the state Supreme Court.”) (quoting A. Lite, New Jersey Federal Practice Rules (1992 ed.) at 31-32).
Thus, in determining whether to grant or deny the Radneys’ motion to disqualify Gibbons, this Court applies New Jersey’s Rules of Professional Conduct.
In addressing a motion to disqualify, the Carlyle Court recognized that:
“[m]otions to disqualify are viewed with ‘disfavor’ and disqualification is considered a ‘drastic measure’ which courts should hesitate to impose except when absolutely necessary.” Alexander v. Primerica Holdings, Inc., 822 F.Supp. 1099, 1114 (D.N.J.1993) (citing Schiessle v. Stephens, 717 F.2d 417, 420 (7th Cir.*6141983)). “[Disqualification motions are often made for tactical reasons, but ... ‘even when made in the best of faith, such [disqualification] motions inevitably cause delay’ in the underlying proceedings.” Dewey v. R.J. Reynolds Tobacco Co., 109 N.J. 201, 218, 536 A.2d 243 (1988). Therefore, close judicial scrutiny of the facts of each case is “required to prevent unjust results.” Gould, Inc. v. Mitsui Mining & Smelting Co., 738 F.Supp. 1121, 1126 (N.D.Ohio 1990).
Carlyle, 944 F.Supp. at 345. See also Essex, 993 F.Supp. at 246 (“Although doubts are to be resolved in favor of disqualification, a party seeking to disqualify counsel carries a heavy burden and must satisfy a high standard of proof.”).
II. Waiver
In this case, the Radneys argue that the Court must disqualify Gibbons pursuant to RPC 1.9. See Radneys’ Brief. Before addressing the applicability of RPC 1.9, however, the Court must first address the issue of whether the Radneys have waived their right to object to Gibbons’s status as A & T’s counsel.
In Alexander v. Primerica Holdings, Inc., 822 F.Supp. 1099, 1101 (D.N.J.1993), the District Court of New Jersey addressed the issue of whether a party had waived the right to seek disqualification of an opponent’s counsel. In their complaint filed in December 1989, retired employees of a corporation’s predecessor had alleged that the corporation had violated the Employee Retirement Income Security Act. See id. at 1102. In January 1993, after the parties had litigated a motion for summary judgment and a motion for a preliminary injunction, and had conducted discovery, the plaintiffs raised the issue of disqualification of the defendant’s counsel. See id. at 1108. In March 1993, the plaintiffs formally moved to disqualify the defendant’s counsel on the grounds that such counsel had also represented some of the plaintiffs in other matters. See id. at 1109-1113. In opposing the motion, the defendant argued that the plaintiffs had waived their right to seek disqualification in light of their delay in pursuing such relief. See id. at 1114.
The Alexander Court first recognized that:
Waiver is a valid basis for the denial of a motion to disqualify. [Commonwealth Ins. Co. v. Graphix Hot Line, Inc., 808 F.Supp. 1200, 1208 (E.D.Pa.1992) ]; Zimmerman v. Duggan, 81 B.R. 296, 300 (E.D.Pa.1987); INA Underwriters Ins. Co. v. Nalibotsky, 594 F.Supp. 1199, 1204 (E.D.Pa.1984); Jackson v. J.C. Penney Co., 521 F.Supp. 1032, 1034-35 (N.D.Ga.1981). As the Commonwealth Ins. court stated:
[A] finding [of waiver] is justified ... when a former client was concededly aware of the former attorney’s representation of an adversary but failed to raise an objection promptly when he had the opportunity. In [this] circumstance, the person whose confidences and secrets are at risk of disclosure or misuse is held to have waived his right to protection from that risk.
808 F.Supp. at 1208.
Id. at 1115 (footnote and citations omitted).
The Alexander Court continued:
[i]n determining whether the moving party has waived its right to object to the opposing party’s counsel, consideration must be given to (1) the length of the delay in bringing the motion to disqualify, (2) when the movant learned of the conflict, (3) whether the movant was represented by counsel during the delay, (4) why the delay occurred and (5) whether disqualification would result in prejudice to the non-moving party. Commonwealth Ins., 808 F.Supp. at 1208. In particular, consideration should be given and inquiry made as to whether the motion was delayed for tactical reasons.
Id.
In applying these factors to the case, the Alexander Court found that the plaintiffs *615had waived their right to object to the defendant’s counsel. See id. at 1115-20. With respect to the issue of timing, the court found that “all facts which underlie this motion were known to [the plaintiffs] from the start of this litigation.” Id. at 1115. It found, specifically, that the plaintiffs had been aware of the alleged conflicts of interest since the inception of the case. See id. at 1115-1117.
The Alexander Court also considered the potential prejudice to the defendant. See id. at 1117-18. It noted that “[a] significant factor in the waiver/estoppel analysis is the prejudice which, as a result of a substantial delay, would inure to the non-movant if the motion for disqualification is granted” and that “[wjhen that prejudice would be great, courts have not granted motions to disqualify.” Id. at 1117. The court found that the defendant’s counsel “[had] handled all aspects of the case for [the defendant] and [had] engaged in substantial pre-trial preparation.” Id. It also recognized that counsel “[had] devoted thousands of hours to this litigation and [the defendant had] invested hundreds of thousands of dollars in its defenses,” and that “at this late stage in the litigation, it is doubtful that [the defendant] could find capable substitute counsel without substantial delay.” Id. at 1118. On these bases, the Alexander Court found that “all of this preparation, as well as the economic investment, would be unfairly lost to [the defendant] if [its counsel] were not allowed to continue in this case.” Id.
Finally, the Alexander Court considered the purpose of the plaintiffs’ motion. See id. at 1118-19. It noted that “[w]hen a motion to disqualify appears to have been made primarily for strategic purposes or would provide the movant with undue tactical advantage, courts ‘have been extremely reluctant to disqualify attorneys.’ ” Id. (quoting Nemours Found. v. Gilbane, Aetna, Fed. Ins. Co., 682 F.Supp. 418, 430-31 (D.Del.1986)). In evaluating the plaintiffs’ motives in seeking disqualification, the court considered their timing in bringing the motion. See id. at 1119. It also found that the plaintiffs had previously expressed a desire for expeditious resolution of the case, and stated that “[n]ow, however, [the plaintiffs] have lost their sense of urgency and seek to delay a resolution of this case substantially and indefinitely by requiring [the defendant] to obtain new counsel.” Id. The court also cited recent discovery “which appear[ed] to significantly damage [the plaintiffs’] case.” Id. at 1119-20. Thus, the court found that “[t]his motion has every appearance of a motion brought for the purpose of obtaining an unfair tactical advantage over [the defendant].” Id. at 1119.
The Alexander Court concluded that: [accordingly, the motion to disqualify [the defendant’s counsel] is denied. The motion appears to have been filed for the purpose of gaining for [the plaintiffs] an undeserved tactical advantage over [the defendant]. Moreover, even if this motion were brought in the best of faith, the unreasonable . three year delay in raising these issues, as well as the significant prejudice to [the defendant] that would follow from the disqualification of [counsel], compel denial of the disqualification motion. Simply put, [the plaintiffs] could have and should have raised these issues at the commencement of this litigation. Because they waited three years to do so, they have waived their opportunity to disqualify [counsel]; because for three years [the defendant] has detrimentally relied on [the plaintiffs’] silence, [the plaintiffs] are es-topped from asserting those grounds for disqualification.
Id. at 1120 (footnotes omitted). See also Chemical Waste Management, Inc. v. Sims, 875 F.Supp. 501, 505 (N.D.Ill.1995) (finding that party had waived right to object to opposing counsel where party had “consistently dealt” with that counsel during settlement discussions and where disqualification would result in prejudice); Freeman v. Vicchiarelli 827 F.Supp. 300, *616303-04 (D.N.J.1993) (“Courts encourage litigants to move to disqualify as soon as they recognize ethical conflicts; this practice discourages strategic procedural behavior and mitigates the amount of time and money spent before applying ethical rules of conduct.”).
In this case, Jane Radney met with La Rocco and Vecchione on November 27, 1996 to discuss the possibility of the Radneys’ retention of Gibbons in the State Court Action. See Radney Certif. ¶ 3. After declining to represent the Radneys, Gibbons assumed representation of A & S in this case in April 1997, and in the State Court Case in May 1997. See DeFilippo Certif. ¶¶ 4, 11. In December 1997, counsel for the Radneys advised Gibbons of the potential impropriety of such representation. See Radney Certif. Ex. 2 (copy of Letter Dated December 16, 1997). Gibbons remained, however, as counsel for A & S in this case, and has maintained a fairly conspicuous presence. For instance, in May 1997, Gibbons conducted settlement discussions with counsel for the Radneys. See DeFilippo Certif. ¶ 7. Moreover, in early 1998, Gibbons filed a motion to convert the case and an objection to a motion for the settlement of certain environmental matters. See id. ¶ 8. In March 1998, Gibbons withdrew as counsel for A & 5 in the State Court Case. See id. ¶ 7. On May 18, 1998, A & S, through Gibbons, filed a proposed plan of- Reorganization and a Disclosure Statement. See id. ¶ 9.
Despite such activity on the part of Gibbons, the Radneys failed to object to its status as counsel for A & S in this case. In fact, the Radneys did not file its motion to disqualify until August 1998, following A 6 S’s filing of a proposed Plan of Reorganization to which they object.4 Under these circumstances, this Court, in applying the Alexander factors, finds that the 'Radneys have waived their right to seek disqualification of Gibbons. First, as in Alexander, “all facts which underlie this motion were known ... from the start of this litigation.” Alexander, 822 F.Supp. at 1115. It is inconceivable that the Radneys were not aware, from the outset, of Gibbons’s status as A & S’s counsel. Indeed, DeFilippo specifically alleges that “[a]s early as March 31, 1997, [he] informed the then-counsel for the Radneys, Ravin, Greenberg & Marks, ... that [Gibbons] would be acting as counsel for A & S.” DeFilippo Certif. ¶ 3. Thus, the Radneys knowingly waited nearly a year and a half before objecting.
The Court also notes that the Radneys were represented by counsel during this delay. In fact, in December 1997, Hola-han, then counsel for the Radneys in the State Court Action, advised Gibbons of the potential impropriety of Gibbons’ representation of A & S. See Radney Certif. Ex. 2 (copy of Letter Dated December 16, 1997). Although it withdrew from the State Court Case, Gibbons continued to represent A & S in this case. The Rad-neys proffer no reason for their failure to timely proffer a formal objection to such representation.
The Court also recognizes “the prejudice which, as a result of a substantial delay, would inure to the non-movant if the motion for disqualification is granted.” Alexander, 822 F.Supp. at 1117. As noted, by August 1998, Gibbons had represented A & S in this case for a span of approximately seventeen months, during which it conducted, inter alia, settlement discussions and motion practice, and filed a proposed plan. Thus, Gibbons has invested considerable time and resources in this litigation. Further, A & S has no doubt invested a significant amount of money in this case. Thus, as in Alexander, “all of this preparation, as well as the economic investment, *617would be unfairly lost ... if [counsel] were not allowed to continue in this case.” Id. at 1118.
Finally, the Court considers the Rad-neys’ motives in seeking disqualification. The Court acknowledges, again, that the Radneys waited nearly a year and a half before filing their motion. The Court also notes that the Radneys did not object until after A & S had filed a proposed plan, pursuant to which, they contend, “[their] equity interests in the Debtor (over a million dollars) will be wiped out and A & S, through a newly formed entity, will wind up owning the Debtor’s assets.” Radney Certif. ¶ 10. It is possible that the Rad-neys’ current discomfort derives more from their treatment under this plan, rather than from any perceived conflict of interest. Under these circumstances, the Court finds that the Radneys’ motion, like the plaintiffs’ motion in Alexander; “has every appearance of a motion brought for the purpose of obtaining an unfair tactical advantage.” Alexander, 822 F.Supp. at 1119.
Accordingly, the Court denies the Rad-neys’ motion to disqualify. The Radneys appear to have filed their motion for the purpose of gaining some undeserved tactical advantage over A & S. At any rate, even if the Radneys’ had brought their motion in the best of faith, their unreasonable delay in filing the motion, coupled with the prejudice to A & S that would result from disqualification, warrant denial of the motion. Having informally objected in December 1997 to Gibbons’ role as A & S’s counsel, the Radneys could also easily have formally objected at that time. Because they waited to so object, and because ASS has relied on the Radneys’ seeming acquiescence to the state of affairs, the Court holds that the Radneys waived their right to disqualify Gibbons.
III. Former Clients/Substantial Relationship
Even assuming arguendo that the Rad-neys did not waive their right to seek disqualification, the Court finds that the parties had not established an attorney-client relationship by virtue of the meeting between Jane Radney and La Rocco and Vecchione.
RPC 1.9 provides in relevant part:
(a) A lawyer who has represented a client in a matter shall not thereafter:
(1) represent another client in the same or a substantially related matter in which that client’s interests are materially adverse to the interests of the former client unless the former client consents after a full disclosure of the circumstances and consultation with the former client; or
(2) use information relating to the representation to the disadvantage of the former client except as RPC 1.6 would permit with respect to a client or when the information has become generally known.
RPC 1.9(a).
Thus, in order to apply RPC 1.9 in this case, the Court must first find that the Radneys constitute “former clients” for the purposes of the rule. The Supreme Court of New Jersey has held that “[bjefore a professional obligation is created, there must be some act, some word, some identifiable manifestation that the reliance on the attorney is in his professional capacity.” In re Palmieri, 76 N.J. 61, 60, 385 A.2d 856 (1978). See also Comm. on Prof'l Ethics v. Johnson, 447 F.2d 169, 174 (3d Cir.1971) (“An attorney-client relationship is one of agency and arises only when the parties have given their consent, either express or implied, to its formation.”); Procanik v. Cillo, 226 N.J.Super. 132, 146, 543 A.2d 985 (App.Div.1988) (“It is clear that an attorney must affirmatively accept a professional undertaking before the attorney-client relationship can attach, whether his acceptance be by speech, writing, or inferred from conduct.”), certif. denied, 113 N.J. 357, 550 A.2d 466 (1988). Cf. In re Berkowitz, 136 N.J. 134, 145, 642 A.2d 389 *618(1994) (finding that attorney had represented a corporation in connection with a certain residential development on the basis of “[the attorney’s] relationship with [the corporation] as corporate counsel, his indication that he would look into the matter, and [the corporation principal’s] apparent reliance on his anticipated advice.”); In re Schwartz, 99 N.J. 510, 516, 493 A.2d 1248 (1985) (finding that attorney-client relationship commenced upon attorney’s filing of notice of appeal on behalf of client, and not upon receipt of retainer, where client relied upon his representations, and attorney failed to express reservations or conditions of representation). Here, the Radneys do not dispute that Gibbons affirmatively declined to represent them. See Radney Certif. ¶ 4. Nor do the Radneys argue that they relied on Gibbons in its professional capacity. Thus, an “identifiable manifestation” of consent to the formation of an attorney-client relationship is sorely lacking.
The Radneys nevertheless cite Herbert v. Haytaian, 292 N.J.Super. 426, 678 A.2d 1183 (App.Div.1996). See Radneys’ Brief at 5-7. The Herbert Court asserted that “[t]he creation of an attorney-client relationship does not rest on whether the client ultimately decides not to retain the lawyer or whether the lawyer submits a bill.” Herbert, 292 N.J.Super. at 436, 678 A.2d 1183. The Radneys cite this statement in support of their argument that they had established an attorney-client relationship by virtue of Jane Radney’s meeting and alleged exchange of confidential information with La Rocco and Vec-chione. See Radneys’ Brief at 7. They argue that Gibbons’s ultimate decision to decline representation does not bear on the issue of whether such a relationship was in fact created. See id. at 7. The Radneys neglect to mention, however, that the Herbert Court also held that “[w]hen ... the prospective client requests the lawyer to undertake the representation, the lawyer agrees to do so and preliminary conversations are held between the attorney and client regarding the case, then an attorney-client relationship is created.” Herbert, 292 N.J.Super. at 436, 678 A.2d 1183. Here, as noted, Gibbons declined to undertake representation of the Radneys. Moreover, it is not clear from the record whether the Radneys ever in fact requested Gibbons to undertake such representation. Thus, due to the parties’ lack of agreement or consent with respect to the issue of their relationship, the Court finds that an attorney-client relationship was not created, and concomitantly, that the Rad-neys do not constitute former clients of Gibbons for the purposes of RPC 1.9.
Further, with regard to the existence of a “substantial relationship” under RPC 1.9, the Court recognizes that Carlyle Court held that:
[t]he phrase “substantially related” has been interpreted by some courts to require a relationship between the factual issues of the case. See, e.g., Ciba-Geigy Corp. v. Alza Corp., 795 F.Supp. 711, 716 (D.N.J.1992) (finding factual differences between the litigations in question which precluded disqualification). Other courts have examined the identity of the legal issues involved. See, e.g., Steel v. Gen. Motors Corp., 912 F.Supp. 724, 735 (D.N.J.1995) (“Disqualification is mandated where ‘the issues between the former and present suits are practically the same or where there is a ‘patently clear’ relationship between them.’ ”); Kaselaan & D'Angelo Assoc. v. D'Angelo, 144 F.R.D. 235, 240 (D.N.J.1992) (same); Reardon v. Marlayne, Inc., 83 N.J. 460, 472, 416 A.2d 852 (1980) (same).
The “substantial relationship” test adopted by the Reardon court, and followed in Kaselaan & D'Angelo, as well as in other cases, indicates that “a substantial relationship between matters will exist where the ‘adversity between the interests of the attorney’s former and present clients ... has created a *619climate for disclosure of relevant confidential information.[’]” Reardon, 83 N.J. at 472, 416 A.2d 852. See Kaselaan & D’Angelo, 144 F.R.D. at 239 (citing Reardon).
In discussing a prior New Jersey case, the Kaselaan & D’Angelo court noted that having confidential information there meant having had access to the prior client’s “claims and litigation philosophy, its methods and procedures for defending claims and litigation, and its information regarding the administration of various business operations.” Kaselaan & D’Angelo, 144 F.R.D. at 241 (discussing Gray v. Commercial Union Ins. Co., 191 N.J.Super. 590, 468 A.2d 721 (App.Div.1983)). That court further indicated that in Cray, “plaintiffs attorney could use such information to the substantial disadvantage of his former client Commercial Union.” Id.
Carlyle, 944 F.Supp. at 350-51 (citations omitted).
Here, Jane Radney alleges that she imparted to La Rocco and Vecchione “confidential information bearing directly on [the Radneys’] defenses against A & S and the Debtor’s business and transactions with A & S.” Radney Certif. ¶ 3. Although she does not identify any disclosed information “bearing directly on [the Radneys’] defenses against A & S,” Jane Radney does allege that she provided La Rocco and Vecchione with “[a] summary which contains substantial confidential information regarding, among other things, my and my husband’s activities and certain activities of the company and its shareholder and his son, Mark Stahl.” Radney Response Certif. ¶ 8.
The Summary contains only a rough outline of the Radneys’ involvement with Debtor, however. It does not contain information concerning the Radneys’ “claims and litigation philosophy” or “its methods and procedures for defending claims and litigation.” Carlyle, 944 F.Supp. at 351. Moreover, while it does describe Debtor’s financial difficulties, the Summary does not contain information regarding the administration of Radneys’ “business operations.”5 See id. Finally, the information simply cannot be characterized as “confidential” or “privileged” in nature, as much of it is recounted here. Indeed, it does not constitute information that Gibbons “could use ... to the substantial disadvantage” of the Radneys. See id. (quoting Kaselaan, 144 F.R.D. at 241). Thus, because the Radneys cannot prove that Jane Radney provided Gibbons with information regarding their litigation philosophy, their methods and procedures for defending claims, or the administration of their business operations, the Court finds that Gibbons did not receive confidential information under the Carlyle Court’s standard. See id. Accordingly, because Gibbons did not receive confidential information, the Court also finds that “a climate for disclosure of relevant confi*620dential information” has not been created, and concomitantly, that the Radneys have failed to meet the substantial relationship test as defined by the Reardon Court. See Reardon, 83 N.J. at 472, 416 A.2d 852.
In so ruling, the Court recognizes that both La Rocco and Vecchione assert that they recall few, if any, specifics concerning the meeting. La Rocco alleges, specifically, that “[he does] not recall the specific issues discussed at the meeting” and that “[he] neither kept notes nor did [he] keep any written information, if such information was even provided by Ms. Radney.” La Rocco Certif. ¶ 4. Moreover, Vecchione maintains that he does not recall the meeting, and that he did not receive any confidential information. See Vecchione Certif. ¶ 3.
IV. Appearance of Impropriety
Finally, the Court finds that Gibbons’s representation of A & S does not create an appearance of impropriety within the meaning of RPC 1.9.
RPC 1.9(b) provides that “[t]he provisions of RPC 1.7(c) are applicable as well to situations covered by this rule.” RPC 1.9. RPC 1.7(c) provides in relevant part:
(c) This rule shall not alter the effect of case law or ethics opinions to the effect that:
M= i= *
(2) in certain cases or situations creating an appearance of impropriety rather than an actual conflict, multiple representation is not permissible, that is, in those situations in which an ordinary knowledgeable citizen acquainted with the facts would conclude that the multiple representation poses substantial risk of disservice to either the public interest or the interest of one of the clients.
RPC 1.7(c).
In construing RPC 1.9(b), the District Court of New Jersey has asserted:
New Jersey federal and state courts have consistently held that the appearance of impropriety doctrine is intended not to prevent any actual conflicts, but rather to “bolster the public’s confidence in the integrity of the legal profession.” Thus, whether an appearance of impropriety exists must be determined from the viewpoint of informed and concerned citizens. Essentially, the analysis requires a careful examination of all relevant facts and circumstances to ascertain what a reasonable person would find proper or improper, and whether any legitimate purpose would be served by disqualification. Given the extreme nature of disqualification and the tendency of such a remedy to undermine public confidence in the litigation process, the appearance must be “something more than a fanciful possibility”; it must have a reasonable basis in fact.
Essex, 993 F.Supp. at 253 (citations omitted). See also Ciba-Geigy, 795 F.Supp. at 719 (declining to find appearance of impropriety in case in which two successive matters in question were not substantially related, and in which firm had represented former client only in “discrete litigation”); McCarthy v. John T. Henderson, Inc., 246 N.J.Super. 225, 232-35, 587 A.2d 280 (App.Div.1991) (finding no appearance of impropriety in case in which parties alleging conflict did not constitute “former clients” of firm within meaning of RPC 1.9, and in which firm did not obtain information “of the nature that could be used to [those parties’] disadvantage”). Cf. In re Marvel Entertainment Group., Inc., 140 F.3d 463, 477 (3d Cir.1998) (“To allow disqualification merely on the ‘appearance of impropriety’ indeed would allow ‘horrible imaginings alone’ to carry the day.”).
In this case, the Radneys, as noted, do not constitute former clients of Gibbons for the purposes of RPC 1.9. Moreover, the parties’ actions in this case have not created a climate for disclosure of relevant confidential information. Under these circumstances, and in light of the extreme nature of disqualification, the Court finds that a reasonable person would *621conclude that Gibbons’s representation of A & S poses no substantial risk of disservice to either the public interest or the interest of one of the parties, and that the alleged appearance of impropriety amounts to nothing more than a “fanciful possibility.”
CONCLUSION
Accordingly, the Radneys’ Motion to Disqualify Gibbons, Del Deo, Dolan, Grif-finger & Vecchione From Representing A & S Fuel Oil Co. is DENIED.
An order in accordance with this Opinion shall be submitted.
. Jane Radney asserts that she and her husband, Dr. George Radney, "were duped by the Stahls into signing [the Guaranty].” Rad-ney'Certif. ¶ 19.
. The law firm was then known as Crummy, Del Deo, Dolan, Griffinger & Vecchione.
. Pursuant to the Court's request, the Rad-neys submitted a copy of the summary (the "Summary”) for in camera inspection.
. Jane Radney alleges that “[i]f the A & S plan is approved, our equity interests in the Debtor (over one million dollars) will be wiped out and A & S, through a newly formed entity, will wind up owning the Debtor's assets while unsecured creditors will only receive 5 cents on the dollar.” Radney Certif. ¶ 10. She also objects on the grounds that "A & S appears to have lent the Debtor money to give A & S 'control.' " Id. ¶ 20.
. Jane Radney approached Vecchione and La Rocco to discuss only the possibility of her retaining Gibbons to represent the Radneys. See Radney Response Certif. ¶ 5 ("When I called [La Rocco) to schedule a time to meet, I told him my husband and I needed legal representation in both the bankruptcy proceeding and the State Court Action.”). They did not discuss the possibility of Gibbons representing Debtor. See generally Radney Cer-tif.; Radney Response Certif. Thus, to the extent that the Summary contains information regarding the administration of Debtor’s operations, such information is not privileged for the purposes of the determination of this matter. Moreover, even assuming arguendo that Jane Radney, in her capacity as a part owner or principal of Debtor, had approached Vecchione and La Rocco to discuss the possibility of Gibbons representing Debtor, the Court notes that Hunt, Debtor’s Chapter 11 Trustee, controls Debtor's attorney-client privilege. See generally Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 354, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985) (“[W]e conclude that vesting in the trustee control of the corporation’s attorney-client privilege most closely comports with the allocation of the waiver power to management outside of bankruptcy without in any way obstructing the careful design of the Bankruptcy Code.”). Therefore, only Hunt can assert that such information is privileged, and he has not invoked that privilege. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493087/ | DECISION AND ORDER
ROSS W. KRUMM, Bankruptcy Judge.
A hearing was held on May 24, 2000, to consider the objection by John G. Leake, Trustee (hereinafter the “Trustee”) to the homestead deed filed by Ralph Blankenship (hereinafter the “Debtor”). At the conclusion of the hearing, the parties were given until June 9, 2000, to file any written authority regarding the ability of the Debtor to file an amended homestead deed beyond the statutory deadline which reduces the claim of equity in his real estate in order to allow an exemption of tax refunds. Both parties submitted written authority.
Background
The Debtor filed a joint Chapter 7 petition with his wife on March 8, 2000. Prior to the initial § 341(a) meeting of creditors on April 4, 2000, the Debtor filed a homestead deed claiming equity in his residence in the amount of $5,250.00 1 . The day after the meeting of creditors, the Debtor filed an amended homestead deed which retained the claim for the equity in the residence but also added his 1999 federal and state tax returns in the amount of $4,516.00 2. The Trustee admits that both *717homestead deeds were filed timely and in the proper location. However, the Trustee filed an objection to the exemption claimed in the tax refunds in the amended homestead deed on the grounds that the Debt- or’s claim to the equity in the residence exhausted the available exemption.
Positions of the Parties
The Debtor states that exemption statutes should be liberally construed in favor of debtors and that any doubt as to whether or not certain property is properly exempted should be resolved in favor of the debtors. In Re Perry, 6 B.R. 263 (Bankr.W.D.Va.1980). Thus, he argues that he should be allowed to file a second amended homestead deed to clarify his intention regarding his claimed homestead exemptions.
At the hearing on the Trustee’s objection, the Court questioned the Trustee’s counsel as to the possibility of filing a second amended homestead deed reducing the claim of equity in the residence to bring the total claimed exemption within the statutory guidelines. In his brief, the Trustee admits that many reported cases discuss the right to increase or decrease values of claimed property in amended homestead deeds, but he points out that the vast majority of these cases deal with increases rather than decreases.3 Also, the Trustee cites Va.Code § 34-134 and argues that its plain language prohibits the filing of a second amended homestead deed past the deadline5 to decrease the value of a claimed exemption in real property in order to claim an exemption in personal property. The Trustee interprets this section to create a pecking order giving a priority to real property exemptions over personal property exemptions.6 It is his position that once the Debtor in this case filed his initial homestead deed claiming real estate, his claim of exemptions was final and irrevocable.
Further, the Trustee contends that the Debtor’s first amended homestead deed was ineffective as it claimed exemption values exceeding the statutory allowable amount. He argues that the Debtor may not go back again after the expiration of the statutory deadline for claiming exemptions and add an asset which was not properly claimed prior to the deadline. See In Re Emerson, 129 B.R. 82 (Bankr.W.D.Va.1991), aff'd mem. 962 F.2d 6, 1992 WL 95139 (4th Cir.1992)7. The Trust*718ee states that the Emerson holding should be extended to prohibit the Debtor from going back and deleting an item. The Trustee also argues that the amendment in this case is not designed to merely clarify or correct a previously properly filed homestead deed.8
Finally, the Trustee argues that to allow this Debtor to file a second amended homestead deed reducing the amount of equity claimed in the residence and exempting the tax refunds will encourage debtors to claim all assets on schedules A and B as exempt and work out the details of a proper statutory exemption at a later date through améndment. If the Debtor can freely delete items past the filing deadline, the Trustee will be forced to object to many more claims of exemption at great expense to estates. Further, if there is no time limitation on when an amended homestead deed can be filed, “a debtor who maximized the homestead amount in 1990 in connection with a Chapter 7 case, and who files again this year could file an amended homestead deed to zero out the 1990 homestead deed, thus creating another maximum exemption amount for the current bankruptcy case[; t]hat would be unfair to creditors, it would mock the Virginia exemption law, and it might well create some very difficult title problems.” Trustee’s Brief at 8.
Discussion
In the case at bar, the Debtor maximized his homestead exemption in real estate in a timely fashion. Then, he amended his homestead deed in a timely fashion to claim the maximum homestead exemption in real estate plus an exemption in personal property to which he was not entitled. Thereafter, the time for filing a homestead deed expired. Now, out of time, the Debtor wishes to amend his homestead deed again to claim the personal property and eliminate most of the real property exemption claimed.
In analyzing the facts, it appears that within the filing time limits established by the Virginia Code, the Debtor made only one valid homestead exemption claim, and that claim was in his in real estate. His amended claim of exemption in both real and personal property was, on its face, improper and invalid. To allow him to validate it now by further amending to lower his claim in real estate equity is tantamount to allowing him to file a new homestead deed outside the statutory time limits imposed by Va.Code § 34-4. The Court finds that Debtor’s claim of exemptions in personal property was never properly exempted in a manner consistent with the Code of Virginia. See Va.Code § 34-14. The case at'bar is distinguishable from Shirkey because the Debtor here does not seek to amend merely to clarify an error made in describing the assets claimed as exempt with reasonable certainty. Here, the Debtor wishes to amend to make his claim of exemption in tax returns valid under Virginia law. The Fourth Circuit in Shirkey recognizes this distinction in citing Goldburg Co. v. Salyer, 188 Va. 573, 50 S.E.2d 272, 277 (1948): “It (the Supreme Court of Virginia) cautioned that courts are not authorized to reduce or enlarge the exemption, or to read into the exemption laws an exemption not found there.” Id. at 862, 50 S.E.2d 272.
Myers, supra, is also distinguishable since it involved a fact situation where the debtor claimed both real estate and personal property in his original homestead *719deed and then amended to reduce the amount of equity claimed in the real estate portion of the exemption and to adjust values in the exempt personal property. In re Myers, 1990 WL 542803.
Once the time for claiming exemptions under Virginia law expired, the exemptions validly claimed were allowable. Those not validly claimed are subject to the administration by the Trustee, and in this case, the Debtor’s tax refunds fall into that category.
Accordingly, it is
ORDERED:
That the Debtor’s claimed exemption in tax refunds through his first amended homestead deed is ineffective and he is now barred from any further amendment which would permit him to exempt said refunds.
. The Debtors divide the one dependent exemption equally between them so they can each exempt $5,250.00. The Trustee indicated in his brief that he does not oppose this action. Trustee's Brief at 2.
. The Debtor avers the claim for $5,250.00 of equity in his residence in the second homestead deed was a mistake and that the value of the exemption of the residence was supposed to be reduced to keep the total claimed exemption within the statutory amount.
. The Trustee cites In Re Myers, 1990 WL 542803 (W.D.Va.1990) aff'd mem., 941 F.2d 1207, 1991 WL 161487 (4th Cir.1991) as the only case in which a debtor is allowed to reduce the amount of equity in real estate by filing an amended homestead deed. However, the Trustee argues that the Myers decision is not on point because it deals primarily with the avoidance of a judgment lien and does not analyze whether the reduction of value in the claimed exemption in an amended homestead deed is permissible.
. "If the householder does not set apart any real estate as before provided, or if what he does or has so set apart is not of the total value which he is entitled to hold exempt, he may, in addition to the property or estate which he is entitled to hold exempt under §§ 34-26, 34-27, 34-29, and 64.1-151.3 in the first case select and set apart under §§ 34-4 and 34-4.1, so much of his personal estate as shall not exceed the total value which he is entitled to hold exempt and, in the latter case, personal estate, the value of which, when added to the value of the real estate set apart does not exceed such total value.”
. Va.Code § 34-17 requires a debtor in bankruptcy to file his homestead deed "on or before the fifth day after the date initially set for the meeting held pursuant to 11 U.S.C. § 341...”
. "Although it is probably not frequently considered by bankruptcy practitioners, in Virginia the homestead exemption for personal property and the homestead exemption for real property do not stand on equal footings. The real property exemption has priority, and only if it has not fully exhausted the available amount is the personal property exemption available at all.” Trustee’s Brief at 5.
. Holding that a debtor cannot by amendment add an asset to a homestead deed past the statutory deadline where that asset was owned by the debtor when the original homestead deed was filed and where the original homestead deed exhausted the total exemption.
. See Shirkey v. Leake, 715 F.2d 859 (4th Cir.1983) (holding that a debtor could correct a homestead deed by changing from "1978” to "1980” the description of a tax return claimed as exempt by the debtor). Shirkey holds that a debtor may amend to correct a description of tax refunds claimed in a timely and proper fashion. The Trustee claims that the present case is distinguished by the fact that the debtor had not filed a proper homestead deed identifying the tax returns because the homestead deed also claimed the full available amount of exemption in real property, thus making the claim on the tax returns invalid. If the tax returns were not validly exempted prior to the deadline, the debtor may not now "correct” the homestead deed by deleting the excess equity in real estate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493090/ | MEMORANDUM OPINION
WILLIAM F. STONE, Jr., Bankruptcy Judge.
This adversary proceeding presents the conflict between Mountain National Bank’s (“the bank”) blanket security interest upon the property, including inventory, of the debtors’ retail furniture store known as Triangle Discount Furniture and the rights of five purported consignors of furniture placed in that store for sale by the debtors. The debtors joined as defendants the bank and the five alleged consignors and sought a determination by this Court that the bank’s security interest did not constitute a lien upon the goods owned by the consignors. Only the bank of all six defendants has filed an answer or otherwise participated in this proceeding, but it has not filed any cross-claim against the other defendants. The debtors have sought to protect in this proceeding the interests of the asserted consignors without whom the store apparently would have effectively ceased operations long before it actually did.
*134The debtors originally filed a Chapter 13 petition on August 22, 1997 but were unable to propose a plan which was confirmed by this Court. At a hearing held before this Court on December 20, 1999 at which the debtors’ Third Modified Plan was denied confirmation, the Court granted the bank’s motion to convert the case to one under Chapter 7.
Neither the Chapter 13 Trustee nor the Chapter 7 Trustee has been made a party to this proceeding and accordingly the rights of the bankruptcy estate vis-a-vis the bank and the consignors could not be adjudicated in this proceeding.
An evidentiary hearing was held before the undersigned judge’s predecessor on May 5, 1998 and counsel for the debtors and the bank thereafter filed documentary exhibits and submitted written arguments in support of their respective positions. The Court took the matter under advisement in connection with a separate adversary proceeding involving the bank and the debtors. Counsel have agreed, however, that this proceeding stands on its own and is ready for decision. Although the undersigned judge did not preside at the hearing, Sanders Russell was the only witness and neither his testimony nor his credibility was seriously challenged by the bank in that hearing. The areas of disagreement between the parties principally relate to the legal consequences of undisputed facts.
The issues raised by the parties may be summarized as follows:
1. Whether the consignors’ rights, whatever they may be, have been forfeited by their failure to participate in this proceeding?
2. Whether the consignment agreements are actually security agreements for money lent to the debtors to finance the continued operation of their store?
3. Whether the wording of the bank’s security agreement and financing statements was sufficient to create a security interest in the furniture owned or financed by the consignors?
4. Whether the action of one of the consignors, Maurice Vaughn Furniture Company, in filing a financing statement for its furniture was sufficient to protect its rights against the bank even if the other consignors lose theirs?
5. Whether actual knowledge by responsible bank officials of the consignment arrangements made by the debtors with the consignors and its acquiescence in those arrangements precludes the bank from enforcing its security interest against the furniture financed or owned by the consignors if the latter failed to take all steps ordinarily necessary under applicable Virginia statutes to protect their rights?
Findings of Fact
On June 20, 1992 the debtors obtained a loan from the bank (then Patrick Henry National Bank) in the amount of $330,000 and executed a note in such amount payable to the order of the bank and secured by a credit line deed of trust upon four tracts of real property, including improvements, and a security agreement against the assets of the furniture store (Triangle Discount Furniture). The security interest was properly perfected by duly filed financing statements and this perfection was continued by timely filed continuation statements. As relevant to this proceeding the collateral subject to the security agreement and financing statements was stated to be
all the debtors’ ... inventory, ... furniture and fixtures, ... whether now owned or hereafter acquired or the proceeds thereof, associated with the property located at Highway 100 in Carroll County, Virginia and the rental property in the old B. and L. Chevrolet Company in the Towne of Hillsville and in the business known as Triangle Discount Furniture and owned and operated by Sanders J. Russell and Nellie C. Russell.
The factual and legal situations of the five alleged consignors are not identical. *135Maurice Vaughn Furniture Company was a distributor of furniture in its own right and placed items of its furniture line or lines with Triangle Discount Furniture. In addition, it had its own attorney prepare a consignment agreement which provided that Triangle Discount Furniture could sell the consigned items at any prices it desired so long as they were at least the minimum price set by the consignor. In other words, the consignee could keep any profit it made in excess of the prices set by the consignor. Furthermore, Maurice Vaughn Furniture Company duly filed financing statements in the Circuit Court of Carroll County and the State Corporation Commission of Virginia to perfect its rights pursuant to Va.Code § 8.2-326(c)(3).
The other consignors were not in the furniture business but each of them entered into an agreement with Russell providing that he or she would provide the funds necessary to purchase items of furniture from a designated manufacturer or from a designated line of furniture. The designated manufacturer or designated line of furniture would be different from that purchased by any other consignor and from any furniture lines handled by Triangle Discount Furniture as a part of the debtor’s own inventory. Mr. Russell arranged for an attorney to prepare a consignment agreement form which was used for each of these four other consignors. No financing statements were filed on behalf of any of these consignors. According to testimony by Russell, the attorney who prepared the agreement form told him that because each of these consignors was an individual rather than a corporation, no financing statement was necessary to protect their respective interests.
According to the evidence before the Court, each item of consigned furniture was posted with a tag containing the initials “TDC”, standing for “Triangle Discount Consignment,” and containing a number which identified the specific consignor having provided or paid for the item of furniture in question. When an item of consigned furniture was sold, the proceeds were placed in the store’s general account and remitted to the consignor upon request or in accordance with any remittance schedule which had been established between that consignor and Mr. Russell.
There was no evidence that any consign- or gave written notice to the bank that it was supplying furniture to Triangle Discount Furniture on a consignment basis.
Mr. Russell testified at the hearing as follows concerning the bank’s knowledge of those consignment arrangements:
Q. Now, did the Bank... .the Patrick Henry Bank have any knowledge of how you were operating?
A. Other than.... Mr. Carl Davis and I talked about it on three or four occasions. I would partial consignment back when I first started. And he and I both.... he agreed with me that a full consignment was what I was going to have to do to maintain an inventory.
Q. When did you talk to Mr. Carl Davis?
A. In 1996 and.... early 1996. We had....we started planning just after December 1996 for the requested foreclosure proceeding.
Q. Are you talking about December of 1996, or are you talking about a year earlier?
A. We sold it in June of 1996, I think.
Q. So December of 1995? Is that the date you are talking about? You said before December of 1996.
A. No, it was....it was before the foreclosure. We had about four months of negotiating what to do on the foreclosure.
Q. And during that period of time who did you negotiate with?
A. Carl Davis.
Q. And at that time was he an officer of the Bank?
A. He was an officer, I think, over three banks. He was a senior officer.
*136Q. Do you know what title he had, or anything like that?
A. No, sir, I don’t.
Q. What information did you give to him concerning that the consignments?
A. That my inventory was down. I wasn’t selling enough to keep my payments on the property up. And we needed to sell free items. I gave him the same information. He and I both discussed about the consignments.
Q. And what did he say about your consignment arrangement?
A. He never said anything, “yea” or “nay”. No disapproval nor approval. He just listened and accepted what I had said. But now, Mr. Shockley at the time of the deed of trust, I offered him a chance for consignment. He declined because it could be, he said, a conflict of interest. But he did go tell Mr. Davis at that time that that is what I was going to do.
MR. BECK: Your Honor, I don’t think that Mr. Russell knows that, that Mr. Shockley told Mr. Davis anything.
THE COURT: That probably would not be admissible.
MR. LAMIE: Well, let me ask him.
Q. Do you have a basis for.... did Mr. Shockley make a statement to you to that effect, that he had told Mr. Davis?
A. Yes.
Q. He made that statement to you?
A. He made that statement.
Q. When did he make that statement to you?
A. Before he retired. Before he left the Bank.
Q. Was Mr. Shockley there at the same time that Mr. Davis was?
A. At the early part. Mr. Shockley was the Branch Manager in Hillsville, and Mr. Davis, I think, correlated the three banks together.
Q. When did you have a conversation with Mr. Shockley about his getting involved?
A. Probably in 1993. Probably in 1993.
Transcript pp. 23-25.
No evidence was offered that any bank representative made any representation either to its customer or any of the consignors that the bank would subordinate its rights under its security agreement or that the consignors did not need to take actions otherwise required by law to protect their interests. Accordingly, the Court finds that the bank was aware of and had actual knowledge that its customer was utilizing consignment arrangements to maintain a respectable store inventory and acquiesced in such arrangements but that it did not engage in any other conduct which promoted these arrangements or otherwise would have lulled the consignors to fail to protect themselves.
The Court further finds that the bank did not advance any loan funds in reliance upon the consignors’ furniture. Indeed the reason that the Russells initiated the consignment arrangements was that all of the debtors’ cash flow was needed to make the regular loan payments to the bank and it was unwilling to make any additional advances to them. Therefore, the bank was clearly benefitted by the addition of the consignors’ furniture to its customer’s inventory and would receive a “windfall” if its security agreement captures such furniture.
Wfliile the Court finds that the bank knew of the consignment arrangements, no evidence was offered that Triangle Discount Furniture’s creditors generally were aware that it was engaged in selling consignment goods. The debtors’ bankruptcy schedules reflect that they had in excess of thirty creditors at the time they filed their petition.
Conclusions of Law
Issue # 1: Whether the consignors’ rights, whatever they may be, have *137been forfeited by their failure to participate in this proceeding? The complaint which initiated this proceeding sought a determination that the bank’s security interest did not attach to the consignors’ furniture. The relief sought was favorable to the consignors and no relief against them was requested. Accordingly, their failure to appear and participate cannot by itself result in an adverse determination against them. While a default may result in the relief sought against the defaulting party being granted, it cannot properly result in relief more extensive than that demanded in the pleading which has been served upon such party.
Issue #2: Whether the consignment agreements are actually security agreements for money lent to the debtors to finance the continued operation of their store? While the arrangements with the consignors other than Maurice Vaughn Furniture Company have some characteristics of a financing operation rather than a true consignment, under the facts of this proceeding it makes no difference in which way they are characterized. In the absence of evidence that the debtors were generally known by their creditors to be engaged in selling consignment goods, the initial step necessary for the consignors to protect themselves, the filing in the correct offices of a sufficient UCC financing statement, was the same as would be required if they were purchase money inventory financiers. Va.Code § 8.2-326. Therefore, there is no need to decide whether these arrangements are true consignments.
The remaining issues for decision necessarily implicate the interests of the Chapter 7 Trustee.
The Court has concluded that it should not render a decision purporting to adjudicate the rights of the consignors visa-vis the bank without the joinder of the bankruptcy trustee as a party to this adversary proceeding. If this Court were to decide in favor of either the bank or the consignors, particularly as to the four consignors who did not file any financing statements to give any public notice of their arrangements with the debtors, it could well be faced with having to revisit these same issues at the instance of the Chapter 7 Trustee. The evidence before the Court is that all of the consignors’ unsold furniture was located on the store premises at the time of the debtors’ filing.
Because Virginia no longer has a consignment “sign” law and no evidence was presented that the debtors’ creditors generally were aware that the debtors were engaged in selling furniture on consignment, under Va.Code § 8.2-326 the consignors were bound to file financing statements in order to prevent their property from becoming subject to the claims of their consignee’s creditors. It is clear that the rights of the bankruptcy trustee would not be affected by any knowledge or asserted inequitable conduct on the part of the bank. Accordingly, in the absence of the trustee the Court is not able to make a final and binding determination of the rights of the parties in this furniture. See In re Marcoly, 32 B.R. 423, 424 (Bankr.W.D.Pa.1983); In the Matter of High-Line Aviation, Inc., 149 B.R. 730, 738 (Bankr.N.D.Ga.1992).
While it appears that the position of Maurice Vaughn Furniture Company, which was the only consignor to file UCC financing statements, is probably valid against the bankruptcy trustee and that its real contest is with the bank upon the latter’s prior filed financing statements to be determined under the priority rules of Va.Code § 8.9-114, subject to arguments on the possible application of equitable estoppel and unjust enrichment principles, the Court concludes that the possibility that the Trustee might assert a claim against Vaughn’s furniture is sufficient reason to decline to rule on the issue in the absence of the Trustee as a party to this proceeding.
In the absence of the Chapter 7 Trustee, the operations of Triangle Discount Furni*138ture having long ceased and the debtors claiming no interest in the consignors’ furniture, there would be no strong basis in the Court’s view for it to decide a controversy between non-debtors, the outcome of which would be controlled by Virginia law, and that it would be preferable were the Trustee not added for this Court to abstain from hearing the proceeding in favor of the Virginia court in which actions brought by the bank against the consignors have been pending asserting the same claims against the consignors which it seeks to assert here.
An order shall be issued contemporaneously with this Memorandum Opinion adding the Chapter 7 Trustee as a party defendant to this proceeding and directing that he file such pleadings as he may be advised within thirty (30) days of the entry of such order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493092/ | DECISION AND ORDER
RICHARD L. SPEER, Chief Judge.
This case comes before the Court upon the Plaintiffs Complaint to determine the dischargeability of a debt. The specific debt which the Plaintiff seeks to hold non-dischargeable arises from a money judgment originally rendered against the Defendant by the Lucas County Court of Common Pleas on July 2, 1971, in the case captioned Ray Martin v. Richard Stoddard. The statutory grounds upon which the Trustee relies for his Complaint are 11 U.S.C. § 523(a)(2)(A) and 11 U.S.C. § 523(a)(4) which generally provide that those debts which arise from a debtor’s fraudulent conduct are nondischargeable in bankruptcy.
On June 13, 2000, the Court held a Trial on the matter. The Defendant, although receiving notice of the Trial, was not present. At the Trial, the Plaintiff presented both testimonial and documentary evidence in support of his Complaint to determine dischargeability. The Court then, after hearing all the evidence put forth by the Plaintiff, found that the Plaintiff had sustained his requisite burden of proof under the standards set forth in §§ 523(a)(2)(A) and 523(a)(4) of the Bankruptcy Code.
Accordingly, it is
ORDERED that the money judgment rendered against the Defendant, Richard Stoddard, on July 2, 1971, by the Lucas County Court of Common Pleas, in the case captioned Ray Martin v. Richard Stoddard, Case No. Cl 70-1042, be, and is hereby, determined to be a nondischargeable debt in bankruptcy pursuant to 11 U.S.C. § 523(a)(2)(A) and 11 U.S.C. § 523(a)(4). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493415/ | ORDER DEFINING CLASS TO BE CERTIFIED IN CASE
MARGARET A. MAHONEY, Chief Judge.
This matter is before the Court on the issue of the class to be certified in this ease. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 1334 and 157 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b) and the Court has the authority to enter a final order.
After reviewing the submissions of the parties, the Court concludes that a broad definition is appropriate. Until the actual trial of the class action case on the merits, it is inappropriate to narrowly define who is a member of the class. Less harm results from a broad definition, particularly in light of the fact the class was constituted under Rule 23(b)(2) and no notice to class members will be given at this time. The trial will determine who actually will be entitled to injunctive relief or damages. Since sufficiency of disclosure is *36at issue, the Court will not declare now that the date for the inclusion in the class is later than January 1, 1994. The subclass of debtors whose files were referred from or directed by LOGS Financial Services is also appropriate. There is sufficient evidence in the record to allow certification.
The Manual for Complex Litigation (3d), published by the Federal Judicial Center for judges states:
It is ... necessary to arrive at a definition that is precise, objective, and presently ascertainable.... [Gjreater precision is required in (b)(3) actions than in those brought under ... (b)(2). Definitions ... should avoid criteria that are subjective.... The judge should consider whether the definition will serve the purpose for which the class is certified (i.e., the resolution of common questions of fact and law in a single proceeding). The definition should not, therefore, exclude a substantial number of persons which claims similar to those of persons included in the class.
Manual for Complex Litigation (3d) (Fed. Judicial Center, ed., 1995) at 30.14. The definition chosen will accomplish the goals stated above.
IT IS THEREFORE ORDERED that the class in this case shall be defined as follows:
Subclass 1. All bankruptcy debtors who have filed a Chapter 13 petition on or after January 1, 1994(1) who had proofs of claim filed in their cases by Defendant Home-Side which (a) did not disclose postpetition/preconfirmation fees at all, (b) did not disclose them with sufficient specificity, or (c) did not include these fees in the arrear-age claims; (2) who. had these fees collected or posted to their accounts in some way by Defendant HomeSide after filing bankruptcy; and (3) in whose cases Defendant HomeSide did not file a specific application for these fees which was approved by the United States Bankruptcy Court.
Subclass 2. All bankruptcy debtors who have filed a Chapter 13 petition on or after January 1, 1994(1) who had proofs of claim filed in their cases by Defendant Home-Side; (2) who had these fees collected or posted to their accounts in some way by Defendant HomeSide after filing bankruptcy; and (3) where the bankruptcy work was referred from, and/or directed in whole or in part by, LOGS Financial Services, Inc., and LOGS was paid a fee by the attorney to whom the bankruptcy work was referred. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493416/ | ORDER DENYING DEFENDANTS’ MOTION TO DISMISS AND SCHEDULING A FINAL HEARING ON DEFENDANTS’ MOTION FOR RELIEF FROM STAY
MARGARET A. MAHONEY, Chief Judge.
This matter is before the Court on the defendants’ motion to dismiss this adversary complaint on the grounds that it fails to state a claim for which relief can be granted and on defendants’ motion for relief from stay. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 1334 and 157 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b) and the Court has the authority to enter a final order. For the reasons indicated below, the Court is denying defendants’ motion to dismiss and scheduling a final hearing on defendants’ motion for relief from stay.
FACTS
Brenda Scott executed a vendor’s lien to Ranee and Patricia Williams in September 1997 on her residence located in Mobile, Alabama. Ms. Scott defaulted in her payment to the Williams and the Williams scheduled a foreclosure sale of the property. A foreclosure notice was sent to Ms. Scott and was duly published. The foreclosure was scheduled for October 9, 2000, Columbus Day. At the time set for sale the auctioneer announced that the sale was postponed to October 18, 2000. The sale was held on the postponed date. Ms. Scott filed for relief pursuant to Chapter 13 of the Bankruptcy Code on October 30, 2000.
LAW
The issue raised by the parties is whether this case should be dismissed or the stay lifted because the foreclosure sale was *50properly conducted and the property was not property of Ms. Scott, the debtor, at the time she filed bankruptcy. Ms. Scott asserts that the scheduling -of the sale on a legal holiday voided the sale and/or that the postponement was improper and the sale thus void. The Williams assert that the sale was in all ways properly noticed and conducted.
The foreclosure sale was originally scheduled on a legal holiday, Columbus Day. Ala.Code § 1-3-8 (2000). Although the Ala.Code § 1-3-8 states that the holiday “shall be observed by the closing of all state offices,” it does not indicate that any legal actions occurring on that date shall be void. The general rule is that unless it is expressly prohibited by statute, a foreclosure sale or court proceeding is not invalid because it was held on a legal holiday. 50 Am.Jur. Sundays and Holidays, s 80; Spence v. Spence, 239 Ala. 480, 195 So. 717 (1940); Koehler v. Pioneer American Ins. Co., 425 S.W.2d 889 (Tex.Civ.App.Fort Worth, 1968, no writ); Miller Grading Contractors, Inc. v. Georgia Federal Savings & Loan Ass’n, 247 Ga. 730, 279 S.E.2d 442 (1981); Kantack v. Kreuer, 280 Minn. 232, 158 N.W.2d 842 (1968). There is no express declaration in Alabama. The Court concludes that the sale, if held on Columbus Day, would have been valid. The Court however does not have to decide this issue. The sale did not occur on that date, but was postponed. Postponement of sale is governed by Ala.Code § 6-8-69 (1975) which states:
Whenever it becomes necessary to postpone any sale that has been advertised to occur on a certain day, the same may be postponed by the auctioneer or attorney announcing, at the time set for sale, the date to which said sale is postponed; and the original notice shall be published once again, with a statement at the bottom that said sale has been postponed and the date when it will occur.
The statute provides for the announcement of a postponement on the day originally set for sale, which was done in this case. As noted above, legal actions will generally not be invalidated because they occurred on a holiday. Clearly if the sale would not be invalidated by the fact that it occurred on a holiday, the postponement of the sale on that day would also not be invalidated. However, there is no evidence that the notice was published again with a statement indicating the sale had been postponed. The defendants must establish this fact by a preponderance of the evidence and they did not. If all requirements of Ala.Code § 6-8-69 (1975) were not met, the postponement and subsequent sale may be unlawful. Therefore, Plaintiffs claim cannot be dismissed for failure to state a claim for which relief can be granted.
Whether the stay should be lifted must now be determined. If the postponed sale was properly noticed, then the property is not property of the estate and the stay does not apply. If the postponed sale was not properly noticed, the parties will need to present evidence as to whether the stay should lift or not pursuant to § 362(d)(1) or (2).
THEREFORE, IT IS ORDERED AND ADJUDGED:
1. The motion of Ranee and Patricia Williams to Dismiss is DENIED.
2. The motion of Ranee and Patricia Williams for relief from stay is set for final hearing on January 31, 2001 at 8:30 a.m. in Courtroom 2, United States Bankruptcy Court, 201 St. Louis Street, Mobile, Alabama.
3. Trial of this case is set on February 20, 2001 at 10:00 a.m. in Courtroom 2, *51United States Bankruptcy Court, 201 St. Louis Street, Mobile, Alabama. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493417/ | ORDER CONDITIONALLY DENYING CONSECO FINANCE CORPORATION’S RELIEF FROM THE STAY
MARGARET A. MAHONEY, Chief Judge.
This case is before the Court on the motion of Conseco Finance Corporation (Conseco) for relief from stay. This Court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and the Court has the authority to enter a final order. For the reasons indicated below, the Court is denying the motion for relief.
FACTS
Debtor owned a homestead in Clarke County, Alabama, upon which Conseco had a valid first lien. On September 7, 2000, Conseco conducted a valid foreclosure sale of the property. It purchased the property at the sale. On September 11, 2000, Ms. Boone filed this bankruptcy case. The foreclosure deed was not filed in Clarke County until September 12, 2000.
After the bankruptcy filing, Conseco filed a relief from stay motion seeking possession of the property which Conseco asserts it now owns. Simultaneously, Con-seco was also sending the debtor monthly statements requesting that the debtor send payments to Conseco or the bankruptcy trustee “according to the terms of your bankruptcy plan.” Ms. Boone did send payments which were accepted by Conseco postbankruptcy and postforeclo-sure.
Preforeclosure, Ms. Boone testifies that she and Conseco had signed an extension agreement. She signed it and returned it to Conseco on August 15, 2000, together with a payment pursuant to the agreement. Conseco does not have the agreement in its file nor does it reflect that a payment was made. If the extension agreement was in effect, the debtor’s next payment under the agreement was not due until September 25, 2000.
LAW
There are two issues to be addressed in this case: (1) Was the foreclosure .valid? (2) Does Conseco’s acceptance of payments after foreclosure constitute a waiver of foreclosure or prevent Conseco from pursuing their rights due to estoppel?
*53A.
According to case law, a.foreclosure is concluded when the auctioneer so states or the hammer falls. Cottrell v. U.S. (In re Cottrell), 213 B.R. 33 (M.D.Ala.1997); In re Moton, Case No. 95-11773 (Bankr.S.D.Ala., December 19, 1995); In re McKinney, 174 B.R. 330 (Bankr.S.D.Ala.1994). In this case, the completion of the sale occurred before bankruptcy. Thus the title had passed to Conseco before bankruptcy and was not property of the estate. The debtor’s postpetition payments were not payments of the entire default or debt and were therefore not sufficient to force a waiver of the foreclosure or constitute a redemption. Frank v. Pickens, 69 Ala. 369, 1881 WL 1162 (1881).
Did the signed extension agreement change that status? The parties disagree as to whether the extension agreement was fully executed by both parties. The debtor states that she signed it and returned it with a payment. However, Conseco has no proof of the agreement. If Ms. Boone wants to rely on the agreement as a defense, it is her burden to prove its existence. Her testimony and Conseco’s are at odds. The evidence is in equipoise as the Court sees it. Ms. Boone needed more, e.g., a check or money order stub, a copy of the signed agreement, or a certified mail receipt to prove the existence of the agreement by a preponderance of the evidence.
Therefore, the Court concludes that the foreclosure sale was valid and title to the property at issue passed to Conseco at the conclusion of the foreclosure sale.
B.
Even if the foreclosure sale is valid, did Conseeo’s postpetition actions estop Con-seco from taking further steps to take possession of the property from the debt- or? Ms. Boone asserts that Conseco’s actions equitably estop them. Conseco accepted payments postpetition. The debtor relied on the notices sent to her and the payments accepted. Conseco cannot now assert a right to possession. Conseco argues that its actions do not rise to the level of waiver or estoppel.
Waiver is the intentional extinguishment of a known right. Ulster Savings Bank v. Kizelnik (In re Kizelnik), 190 B.R. 171 (Bankr.S.D.N.Y.1995). The proof necessary to show it must be clear. Conseco must have knowingly undone the foreclosure. Ms. Boone must prove waiver occurred. In re Krueger, 192 F.3d 733 (7th Cir.1999). She did not produce any evidence of acceptance of the checks in lieu of foreclosure. The evidence could show mere negligence on Conseco’s part, or a belief that Ms. Boone’s payments were rent as easily as the evidence shows an intent to waive the foreclosure.
Estoppel is an equitable remedy and requires proof of four elements: (1) knowledge of the facts by the party to be estopped; (2) the estopped party must have intended its actions to be acted upon or the debtor must have a right to believe the creditor’s conduct was so intended; (3) the debtor must have been ignorant of the facts; and (4) the debtor must have relied upon the other party’s conduct. Reeves Cedarhurst Development Corp. v. First American Fed. Sav. and Loan Ass’n, 607 So.2d 180 (Ala.1992); In re Kizelnik, supra at 180.
In this case, Conseco knew about the bankruptcy case as evidenced by the notices to Ms. Boone. Therefore, its actions were done with knowledge.
The evidence is less clear about Conse-co’s intentions. It told Ms. Boone to send payments to it according to her plan. The plan, providing for direct payments to *54Conseco of current payments, and for ar-rearages through the plan, was confirmed without objection by Conseco. There was no appeal of the confirmation order. The Court concludes that these facts, taken together, establish by a preponderance of the evidence that Conseco intended for the plan to continue, or at least that Ms. Boone had a right to assume that that was Conseco’s intent.
Ms. Boone knew about the foreclosure, but also knew about the supposed executed extension agreement, the Conseco billings after her bankruptcy filing and about her payments. She was ignorant of the fact that Conseco intended to stand on its foreclosure because its conduct was inconsistent with that.
Ms. Boone relied on Conseco’s letters and acceptance of money. She continued to send money, sending in two payments before this relief from stay was filed.
Ms. Boone’s damage is that she paid Conseco and will lose her home if it can stand on its foreclosure.
The fact situation in this case is somewhat unique, but under the factors analysis for equitable estoppel, Ms. Boone meets all of the tests. Ms. Boone thought she had done everything required of her. Conseco’s correspondence and acceptance of payments gave her cause to believe.
If Ms. Boone maintains her chapter 18 payments, she should be able to treat her debt as if the foreclosure had been undone and cure her arrearage. If her case is dismissed, or the stay lifted, Conseco should be able to proceed as if the foreclosure were completed. In essence, Ms. Boone will be on a strict compliance schedule due to Conseco’s postforeclosure actions. If she does not live up to her plan obligations in total, then Conseco may treat the property as its own.
THEREFORE, IT IS ORDERED that the motion of Conseco Finance Corporation for relief from stay is DENIED provided that the stay will lift automatically without further action by this Court if Ms. Boone does not make any plan payment on a timely basis commencing with the February 2001 payment or Ms. Boone does not timely make any regular monthly mortgage payment commencing with her February 2001 payment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493418/ | ORDER AND JUDGMENT DECLARING DEBT TO BE DISCHARGEABLE
MARGARET A. MAHONEY, Chief Judge.
This matter is before the Court on the complaint of Plaintiff, Julie Reetz, to determine dischargeability pursuant to 11 U.S.C. § 523(a)(15) of Robert E. Reetz’s obligation to pay the amounts owing on a Visa credit card. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b) and the Court has the authority to enter a final order. For the reasons indicated below, the Court is declaring that the Visa debt of the parties is discharged by Robert Reetz’s bankruptcy case.
FACTS
The Circuit Court of Baldwin County, Alabama granted a judgment of divorce to the parties on November 12, 1999. The judgment of divorce incorporates a settlement agreement drafted by the parties. Relevant sections of the judgment of divorce state:
12. DEBTS: The following debts of the marriage shall be paid in the corresponding manner.
VISA # 4264290450082102, approximately $5,000.00 shall be paid for by the Defendant and the Plaintiff shall be held harmless therefrom.
The balance of the account as of the date of Robert Reetz’s bankruptcy filing, according to a statement dated November 7, 2000, was $5,106.79. The statement included a finance charge for the prior month in the amount of $57.75. Finance charges have and will continue to accrue *57until the debt is paid. The minimum payment for the account is $70.00.1
The debtor filed for relief pursuant to chapter 7 of the Bankruptcy Code on August 14, 2000. The Trustee has filed a Final Report of No Distribution which states that there is no property available for distribution to creditors. At the time Mr. Reetz filed bankruptcy, he was working as a boat repairman and according to his schedules his income after taxes was $601.50 per month and his monthly expenses were $588. In his bankruptcy schedules, Debtor listed the value of his personal property at $730 which included only household goods and furnishings and a 1971 Buick Skylark. Debtor also listed a student loan as an unsecured priority claim in the amount of $8,456.78. In his Statement of Financial Affairs Debtor listed his income from employment in 1998 as $11,021.00; in 1999 as $11,628.00; and in 2000 as $3,952.00 (to the date of filing his case).
Debtor testified that his monthly net income is currently $1,780.00. expenses as follows: He listed
Fuel $ 325.00
Materials $ 200.00
Auto insurance $ 25.00
Loan on Van $ 210.00
Rent $ 100.00
Power $ 45.00
Cell phone $ 50.00
House phone $ 20.00
Storage Building $ 60.00
Loan from Parents (for legal fees) $ 200.00
Food $ 100.00
Child Support $ 350.00
Total Expenses $1,685.00
The net available income after deducting all of the above listed expenses is $95. To explain some of his expenses, Mr. Reetz testified that he now works as a subcontractor installing satellite dishes and is required to do a lot of driving, use a cell phone, and pay for materials. Mr. Reetz is attempting to have his child support payment reduced from $350 to $150 per month in Circuit Court based on his financial circumstances but it has not been reduced at this time.
Julie Reetz works as a special education teacher and earns net pay of $ 1,698. She currently receives $350 per month in child' support; however, if Mr. Reetz is successful in having his payment decreased, her income would decrease by $200. Currently her total income (with $350 in child support) is $2,048 per month. Ms. Reetz testified that her monthly expenses are as follows:
Rent $ 560.00
Loan $ 195.30
Min. Payment on Credit Card Mr. Reetz is responsible for under the divorce decree $ 70.00
Credit Card (Capitol One) $ 70.00
Student Loan $ 112.00
Digiph PCS (cell phone) $ 60.00
BellSouth $ 60.00
Cable $ 30.00
Power $ 85.00
Gas/Car maintenance and repairs $ 300.00
Car insurance $ 40.00
Health Insurance/Medical bills/Medieine $ 50.00
Groceries/Cosmetics/Toiletries/Cleaning Supplies $ 400.00
After School Daycare $ 110.00
Haircut (for her, her daughter & her dog) $ 30.00
Daphne Elementary Costs $ 15.00
Lunch Money/My School costs $ 65.00
Entertainment $ 120.00
Miscellaneous $ 50.00
*58Future Car Payment $ 350.00
Total Expenses $2,772.30
Ms. Reetz expenses exceed her monthly income by $724.30. Ms. Reetz testified that she included an estimated future car payment in her list of expenses because the car she is driving is old and in bad condition and requires a lot of repairs. She admitted that when she does obtain another car her expense for “gas/car maintenance and repairs,” listed at $300 per month, will go down.
LAW
The issue before the Court is whether the obligation to pay the credit card debt to Visa is nondischargeable under § 523(a)(15). The Debtor’s obligation to pay the credit card debt will be considered as a property settlement debt since there is no allegation that it is support.2 A property settlement obligation may be discharged under § 523(a)(15) if either of two conditions exist. If under § 523(a)(15)(A) a debtor does not have the ability to pay a certain debt or if under § 523(a)(15)(B) the benefit to a debtor outweighs the detrimental consequences to the nondebtor spouse, the debt should be discharged. Once the former spouse establishes the existence of the debt and the debt is determined not to be alimony, maintenance or support, the Debtor has the burden of proof to establish his entitlement to a discharge under either subsection of § 523(a)(15). In re Stone, 199 B.R. 753, 783 (Bankr.N.D.Ala.1996). If the debtor presents sufficient evidence to establish inability to pay and/or detriment under § 523(a)(15)(A) and (B), the burden of going forward to rebut this evidence on ability to pay and/or detriment shifts to the former spouse. Id.
A.
Section 523(a)(15)(A) requires the Court to determine whether paying the debt in question would reduce the debtor’s income below the amount which is necessary for the support of himself and his dependents. First, the Court must determine what amount of money is reasonably necessary to support the debtor. The Court must then see if funds are left for payment of the credit card indebtedness.
A debtor’s financial condition is determined by examining the debtor’s current and future circumstances rather than the circumstances as of some fixed point in time. Matter of McGinnis, 194 B.R. 917, 920 (Bankr.N.D.Ala.1996). Mr. Reetz indicated that his net monthly income is $1780 and his total monthly expenses are $1,685. His income has increased since the filing of his bankruptcy because he has begun a new line of work. His expenses also increased due to the necessary expenditures for his business. Necessary business expenses are specifically included in § 523(a)(15)(A) as an expense to be deducted from income. Most of his expenses seem reasonable, even low in some instances. The only evidence offered towards whether his finances are likely to change in the future was that he was currently in the process of requesting that his child support be decreased by $200 due to his financial problems. This Court could only speculate as to the likelihood of Mr. Reetz succeeding in lowering his child support payments so the present support is what the Court is considering.3 According to *59Debtor’s testimony he has $95 left over after deducting all expenses listed. However, Debtor did not include any entertainment or miscellaneous expenses on his expense sheet and he stated that he needed some money to entertain his daughter when she visited. He did not suggest an amount for that purpose, but if the Court were to find that the amount was just half of what Ms. Reetz included for entertainment and miscellaneous, the expense would be $85. That leaves Mr. Reetz only $ 10 of excess income per month to pay toward the Visa debt.
“A debtor has the ability to pay an obligation, for purposes of 11 U.S.C. § 523(a)(15), if the debtor has sufficient disposable income to pay all or a material part of the property settlement within a reasonable amount of time.” In re Smither, 194 B.R. 102 (Bankr.W.D.Ky.1996). In this case, Mr. Reetz could only pay $10 per month towards the debt which does not even cover the minimum monthly payment and is less than the monthly finance charge on the current Visa balance.
The Court observed Mr. Reetz and found his testimony to be credible. The same is true of Ms. Reetz. The problem in this case is a common one — too little money and too many bills. The debtor cannot pay the obligation and the plaintiff has failed to prove the first prong of the § 523(a)(15) test.
B.
Mr. Reetz has proven he cannot pay the debt. Therefore, the Court need not consider § 523(a)(15)(B). However, the debtor meets this test as well so Ms. Reetz is unsuccessful under either test. Section 523(a)(15)(B) requires that the Court weigh the effects of the discharge on the debtor and his former spouse. Mr. Reetz will definitely receive a benefit if the debt is discharged.
Ms. Reetz does not have the monthly disposable income to afford the credit card debts either since she operates at a deficit each month. However, looking at Ms. Reetz expenses, some of them seem higher than necessary — at least in comparison to Mr. Reetz. Ms. Reetz has sole custody of their daughter which explains why some of her expenses are more than that of Mr. Reetz. Her rent is $560 as compared to the rent Mr. Reetz pays of only $100. Mrs. Reetz’s “grocery/cosmetics/toiletries/cleaning supplies” expense is $400 per month as compared to $100 listed as “food” for Mr. Reetz. Ms. Reetz also pays for a cell phone, which unlike Mr. Reetz, does not appear to be necessary for her job. She has included in her list of monthly expenses $30 for cable, $30 for haircuts, $120 for entertainment and $50 for miscellaneous. All of these could be reduced or eliminated to make ends meet. In addition she testified that her “gas/car maintenance and repairs” expense would decrease if she obtained another car as she intends to do. With the reduction of rent to $460, groceries to $300, haircut expense to $15, entertainment to $100, miscellaneous to $ 25, cable to $0, cell phone to $0, and gas and car maintenance to $100 this Court finds that her expenses would be reduced by $550. In addition Ms. Reetz has included in her expenses $70 per month towards the debt that is at issue in this matter. However, even if these amounts were subtracted from her list of expenses Ms. Reetz would still have a deficit of over $100. In addition there is the possibility that her income would be reduced by up to another $200 if Mr. Reetz is successful in decreasing his child support obligation. Ms. Reetz does not have the monthly disposable income to afford the credit card debt. Ms. Reetz may find it necessary to file bankruptcy. This would be the case even without the consid*60eration of the disputed credit card debt since she operates at a deficit each month. It is not uncommon for divorcing parties to file bankruptcy in order to deal with marital debts. One or both may be required to file bankruptcy whichever decision the Domestic Relations Court makes.
The Court must “compare the standard of living of the debtor against the standard of living of his or her spouse, former spouse and/or children to determine whether the debtor will ‘suffer more’ by not receiving a discharge of the debts in question than his or her spouse would suffer if the obligations were discharged.” In re Smither, 194 B.R. 102, 110 (Bankr.W.D.Ky.1996). If the credit card debt is not discharged for Mr. Reetz, he will need to pay at least $70 per month for many years to pay off the Visa debt as the principal would decrease very slowly at that rate due to the finance charges. The detriment to him is substantial. There is no room in his budget for the payment. Ms. Reetz, if the credit card debt were discharged, would have more debt to pay than she already does. Even at her present debt level without the Visa debt, she cannot meet her expenses. The additional debt load may cause her to file bankruptcy sooner than she otherwise might, but since her income does not meet her expenses it will likely happen anyway at some point in time. Therefore, the fact that she may have to file bankruptcy is not a consequence of the credit card debt alone. Therefore, the Court concludes that detriment to Ms. Reetz is not as substantial as the detriment to Mr. Reetz. A bankruptcy court should not deny the debtor his fresh start simply because his former wife has chosen not to seek the same relief on her own behalf when her circumstances warrant it. In re Daiker, 5 B.R. 348, 352 (Bankr.D.Minn.1980). See also In re Hill, 184 B.R. 750, 756 (Bankr.N.D.Ill.1995).
THEREFORE, IT IS ORDERED AND ADJUDGED that the obligation of the debtor, Robert E. Reetz, to pay the Visa debt of Robert E. Reetz and Julie Reetz provided for in their judgment of divorce in the Circuit Court of Baldwin County dated November 12, 1999, is DIS-CHARGEABLE and judgment is awarded for the defendant.
. The finance charge is relevant because it would continue to accrue if Ms. Reetz does not file bankruptcy even though Mr. Reetz has. His bankruptcy stopped the accrual of interest for him, but for § 523(a)(15) purposes, the debt must be viewed from Ms. Reetz s standpoint. Mr. Reetz s obligation to her would not be discharged unless the Visa bill were paid in full together with all finance charges which she owes and will continue to owe.
. The parties are correct as to the Visa debt's characterization. It is not a bill necessary for the ongoing support of the parties' child.
. Mr. Reetz’s income has increased since the time of his divorce in November 1999 and it is likely that his expenses have increased as well due to his business expenditures. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493419/ | ORDER DENYING IN PART AND GRANTING IN PART NATIONS-BANC MORTGAGE CORPORATION’S MOTION FOR RECONSIDERATION
MARGARET A. MAHONEY, Chief Judge.
This matter is before the Court on the motion of NationsBane Mortgage Corporation for this Court’s reconsideration of its order of December 29, 2000, certifying a nationwide class. This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and the Court has the authority to issue a final order. For the reasons indicated below, the Court is granting the motion for reconsideration to the extent of vacating the class certification until the standing and adequacy issues can be reviewed as to the proposed inter-venor, and denying NationsBanc’s request for dismissal of the case. The claim of Claude and Terry Noletto became moot when they voluntarily converted their case to one under Chapter 7 for all of the reasons set forth in this Court’s order dated December 29, 2000, granting summary judgment to NationsBane on the No-lettos’ claim. That reasoning is incorporated by reference. The Court held that the mootness of their claim did not extinguish potential class claims. The Court holds to that position for the reasons stated in the December 29, 2000 order as well as for the following reasons.
Eleventh Circuit precedent pertinent to this issue starts with U.S. Parole Commission v. Geraghty, 445 U.S. 388, 100 S.Ct. 1202, 63 L.Ed.2d 479 (1980), which held:
[T]he named representative of an uncer-tified class could continue to appeal the issue of class certification even though the named representative’s individual claim had been rendered moot so long as the controversy continues to the “live” and the named representative has a legally cognizable interest or personal stake in the litigation.
Armour v. City of Anniston, 654 F.2d 382 (5th Cir.1981) (describing the Geraghty holding).
The Supreme Court held that whenever mootness of a claim occurs, it is not a determining factor as to whether a class action may continue. Geraghty at 398, 100 S.Ct. 1202 (“the timing [of class certification] is not crucial”). The main issues are whether there is a “live controversy” and whether a party has a personal stake in the outcome of the suit. Geraghty at 396, 100 S.Ct. 1202.
*62After Geraghty, two Fifth Circuit cases interpreted and expanded upon the Geraghty ruling. Armour v. City of Anniston, 654 F.2d 382 (5th Cir.1981); Satterwhite v. City of Greenville, 634 F.2d 231 (5th Cir.1981). Both these decisions are binding precedent in the Eleventh Circuit per Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981).
In the Armour and Satterwhite cases, class certification was denied and then the individual cases of the named class representatives were tried. In both cases, the plaintiffs had judgments entered against them as to all causes of action. The Fifth Circuit indicated that motions to intervene should be allowed to determine whether there is a live controversy and another plaintiff with a personal stake in the outcome. Armour at 384; Satterwhite at 231.
The Noletto case is a stronger case for allowing substitution of a new class representative than Armour or Satterwhite. The claim was a “live” claim which expired.1 In Armour and Satterwhite, the claims never existed at all — as determined with hindsight. If intervenors were possible in the Armour and Satterwhite suits, they should be decidedly more so in this case where a valid claim in the named plaintiff existed at the commencement of the case.
THEREFORE, IT IS ORDERED:
1. The motion of NationsBanc Mortgage Corporation for Reconsideration is GRANTED to the extent of vacating the class certification order of December 29, 2000.
2. A hearing on the motion of John H. Fair to intervene as a named plaintiff in this suit and the motion of plaintiffs for class certification will be heard on May 11, 2001 at 9:00 a.m.
3.The motion of NationsBanc Mortgage Corporation for Reconsideration is DENIED to the extent that it asks for dismissal of the case.
. This is entirely different than the Walters v. Edgar case which the defendant cited. Walters v. Edgar, 163 F.3d 430 (7th Cir.1998). The claims of the named plaintiff in that suit were held to be meritless and frivolous. That is not the situation with the Nolettos. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493420/ | ORDER ON UNITED STATES’ MOTION TO DISMISS CHAPTER 13 CASE AND MOTION TO CONSTRUE AND MODIFY PLAN
WILLIAM S. SHULMAN, Bankruptcy Judge.
This matter came before the Court on the United States’ motion to dismiss the Debtors’ Chapter 13 case and motion to construe and modify plan. Irvin Grodsky appeared for the Debtors; Charles Baer appeared for the United States and Jeffrey Hartley appeared for the Chapter 13 Trustee. The Court makes the following findings of fact and conclusions of law based on the pleadings, briefs, testimony, evidence and arguments of counsel:
FINDINGS OF FACT
The Debtors, Carolyn and John Kelly (hereinafter collectively “the Kellys”), filed their Chapter 13 petition on May 3, 2000. They submitted their plan on the standard form subscribed by the Bankruptcy Court for the Southern District of Alabama. Paragraph 2a of the plan states (with emphasis added):
2. From the payment so received, the Trustee shall make disbursement as follows:
a. The following priority payments shall be paid in full:
Trustee’s commission (monthly)
Attorney’s fees (over 7 months) Internal Revenue Service (over 60 months)... 1
*64Paragraph 5 of the Debtors’ plan provides: “Other provisions: See attached.” 2 The plan has a handwritten notation in the top right corner: “ Page 1 of 2.” The plan in the Court’s file has a second page, which has a handwritten notation in the same position: “Page 2 of 2.” The attachment to the plan reads as follows:
CHAPTER 13 PLAN
The vehicles belonging to KLK Delivery-listed on Exhibit “A” shall be transferred to the United States of America as the indubitable equivalent of a cash payment in the amount of $100,000.00 and the United States of America shall credit the Debtors’ [sic] with $100,000.00 against the Debtors’ federal tax liabilities in exchange for said vehicles. The Debtors shall deliver the vehicles to the Mobile Alabama office of the Internal Revenue Service on the 10th day following confirmation of the Plan unless the Internal Revenue Service directs a different location. Debtors shall be responsible for the cost of delivery of said vehicles to the Montlimar Drive, Mobile, Alabama office of the Internal Revenue Service. The Internal Revenue Service shall pay the cost for only delivery to any other location.
Betty Stalbert, a bankruptcy specialist with the New Orleans office of the Internal Revenue Service, testified that her duties as a bankruptcy specialist include reviewing chapter 13 plans and filing proofs of claim on the IRS’s behalf.3 She had worked with the IRS for 26 years and has been a bankruptcy specialist for one and half years. If Stalbert detects a problem with a plan under her review, she refers the matter to the U.S. Attorney’s office in the appropriate state.
Stalbert reviewed the Debtors’ chapter 13 plan in June 2000. Stalbert testified that when she saw paragraph 2a indicating that the IRS’s claim would be paid in full, she did not check any of the other provisions of the Debtors’ plan. Government Exhibit 1 is the IRS’s copy of the Debtors’ chapter 13 plan. Exhibit 1 is a single sheet with the information contained on Page 1 of 2 on the front, and the information contained on Page 2 of 2 on the back. The IRS’s case history sheet on the Debtors’ case indicates that Stalbert received the Debtors’ plan on June 13, 2000, and that the plan listed the “IRS as priority & to be paid in full.”4
Stalbert testified that she did not calculate the amount of the Debtors’ plan payment over the 60-month life of the plan because paragraph 2a identified the IRS’s claim as priority to be paid in full. In addition, she believed that the Chapter 13 Trustee would dismiss or convert the plan if the payment was not sufficient to meet the terms of the plan. She did not remember looking at the payment required by the plan. The Debtors’ plan required them to pay $1,000.00 for 60 months for a total of $60, 000.00 to be paid into the plan. The IRS’s proof of claim indicates liability in excess of $100,000.00. Stalbert did not recall looking at the dollar amount to be paid by the Debtors in their chapter 13 plan. She saw no provisions other than paragraph 2a that would affect the IRS. She stated that there was no attachment to her copy of the Debtors’ plan. She did not know if there were additional provisions on the back of the plan. If she had seen the information on page 2 of 2 of the *65Debtors’ plan, she would have referred the plan to the U.S. attorney’s office.
The IRS’s case history indicates that Stalbert prepared a proof of claim for the IRS on May 30, 2000, claiming $128,073.76 and including $88, 820.079 in priority taxes and $39,252.97 in non-priority taxes. A notation indicated that the Debtors had not filed a 1999 tax return on that date. Stalbert added a notation on May 30, 2000, stating that she corrected the government’s proof of claim to reflect a total of $160, 316.13 with $121,061.16 in priority taxes and $39,252.97 in non-priority taxes. She had not received a copy of the Debtors’ chapter 13 plan at that time. Stalbert testified that she notified her supervisor of the claim and the Debtors’ case was assigned to another bankruptcy specialist in the Birmingham office. Stalbert testified that the Debtors’ case was no longer under her supervision after May 30, 2000. She discovered that the case had been reassigned on July 13, 2000. The IRS’s copy of the Debtors’ plan is stamped “May 31 2000 Special Procedures Staff Birmingham Alabama.” Stalbert testified that the New Orleans Special Procedures Office of the IRS (her home office) did not receive a copy of the Debtors’ plan until June 2, 2000.
The Debtors plan was confirmed as filed on June 29, 2000. The IRS Special Procedures office in Birmingham received a copy of the confirmation order on July 6, 2000.5 Stalbert made an entry on the IRS case history that she received the confirmation order stating that the IRS would receive vehicles valued at $ 100,000.00 by the 10th day following the confirmation order. Stalbert testified that she contacted Mary Ann Capps, the bankruptcy specialist to whom the Debtors’ case had been reassigned, and told her about the confirmation order. Stalbert faxed a copy of the Debtors’ plan and the IRS’s proof of claim to Capps on July 18, 2000. The IRS filed a motion to dismiss the Debtors’ case and a motion to construe and modify the plan on August 8, 2000.
CONCLUSIONS OF LAW
The IRS alleges that the Debtors’ plan was at best ambiguous and at worst not filed in good faith. It seeks to modify the plan on grounds that the plan was contradictory, calling for full payment of the IRS’s priority claim over the life of the plan on page one of the plan, and offering to turn over automobiles to the IRS as the indubitable equivalent value of $100,000.00 on page two. The IRS also seeks to dismiss the Debtors’ plan on grounds that the Debtors sought to mislead the IRS by placing the provision about turning over the vehicles to the IRS on the second page of the plan.
The IRS filed a motion to dismiss the Debtors’ case based on the theory that the plan was filed in bad faith. As an initial ruling, the Court finds no evidence of bad faith on the part of the Debtors or their counsel. The Debtors used the form authorized by this District to outline their Chapter 13 plan. The area allowed in paragraph 2 for treatment of priority claims did not have sufficient space for the Debtors to fully explain their treatment of the IRS’s claim. As a result, the Debtors added a second page to the plan to outline their plan to turn over the vehicles to the IRS. The original plan contained in the Court’s file has two pages that are clearly marked “Page 1 of 2” and “Page 2 of 2”. There was no evidence that the Debtors sought to conceal the terms of their Chapter 13 plan from the IRS. Therefore, the Court finds that the Debtors’ plan was not *66filed in bad faith as to the IRS, and the IRS’s motion to dismiss on these grounds is due to be denied.
The IRS asks the Court to modify the Debtors’ Chapter 13 plan under 11 U.S.C. § 1829(a) to increase the Debtors’ plan payment to provide for a payout of the IRS’s claim within in the life of the plan. In the alternative, the IRS maintains that the Debtors’ plan is contradictory as to paragraphs 2(a) and paragraph 5 of the plan. The IRS asks the Court to construe the plan’s meaning, or to modify to allow cash payment of the IRS priority claim. The Debtors assert that the IRS has shown no grounds for modifying the plan, and that the plan is not contradictory or ambiguous.
Bankruptcy Rule 9024 adopts Rule 60 of the Federal Rules of Civil Procedure with some modifications. Under Rule 60(b)(1), “the court may relieve a party or a party’s legal representative from a final judgment, order or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect”. The IRS asked in its memorandum of law that its motion to construe the plan be treated as a motion for relief under Bankruptcy Rule 9024. Based on the evidence submitted and the IRS’s request, the Court will treat the IRS’s motion to construe the plan as a motion for relief from the confirmation order.
In Pioneer Inv. Serv. Co. v. Brunswick Assoc. Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), the United States Supreme Court held that “excusable neglect” under Rule 60(b)(1) should be determined from the totality of the circumstances surrounding the incident, including the following factors: the danger of prejudice to the debtor, the length of the delay and potential impact on judicial proceedings, the reason for the delay including whether it is within the reasonable control of the movant, and whether the movant acted in good faith. Pioneer, 507 U.S. at 395, 113 S.Ct. at 1498. In determining that a creditor’s failure to file a timely proof of claim was “excusable neglect” under Bankruptcy Rule 9006(b)(2), the Pioneer Court focused on inadequacies in the notice of the bar date, observing that the notice was “inconspicuous”, “peculiar” and “left a dramatic ambiguity in the notification”. Pioneer, 507 U.S. at 398, 113 S.Ct. at 1499.
The IRS’s failure to correctly interpret the Debtors’ plan was neglect under the Pioneer Court’s definition of neglect as giving “little attention or respect” to a matter, or, leaving “undone or unattended ... due to carelessness.” Pioneer, 507 U.S. at 388, 113 S.Ct. at 1494. Upon receiving the Debtors’ plan, Stalbert read only paragraph 2a of the plan. As a result, she missed paragraph five of the plan referring to the attachment, which included the turn over provision that the IRS now objects to. She did not calculate the Debtors’ payment over the life of the plan to make sure that the plan payments would satisfy the IRS’s claim, a simple calculation that would have alerted her that the Debtors did not intend for their cash payments to satisfy the IRS’s claim.
The next issue is whether the IRS’s behavior was excusable. In In re Norris, 228 B.R. 27 (Bankr.M.D.Fla.1998), the bankruptcy court applied the factors enumerated by the Pioneer Court to determine whether the IRS was entitled to relief from an order confirming the debtor’s chapter 13 plan which included a miscalculated amount for the IRS’s claim. The Norris Court found that the notice of final claim was clear and unambiguous and that the IRS had ample opportunity to review its claim and confirm its calculations prior to entry of the confirmation order. The Court refused to vacate the confirmation order to allow the IRS to amend its claim. Norris, 228 B.R. at 32.
*67The situation at hand hinges on the Debtors’ chapter IB plan. Like the notice in Pioneer, the plan copy received by the IRS was ambiguous. Paragraph 2a of the Debtors’ plan indicates that the IRS’s priority claim will be paid in full through the Debtors’ plan payments. However, paragraph five says “See attached” and the second page states that the Debtors will turn over certain trucks for the indubitable equivalent cash value of $100,000.00. The two provisions conflict, and are therefore ambiguous. Voyager Life Ins. v. Whitson, 703 So.2d 944, 948 (Ala.1997).
The ambiguity was not intended by the Debtors and is not due to any misconduct on their part. They took measures to insure that the provision was seen and properly noticed. However, the copy of the plan sent to the IRS defeated those measures. The law requires the Debtors, as drafter of the plan, to bear the ill effects of any ambiguity in its provisions. See In re Fawcett, 758 F.2d 588, 591 (11th Cir.1985) (“[T]he debtor as draftsman of the plan has to pay the price if there is any ambiguity about the meaning of the terms of the plan.”) The testimony at the hearing indicates that the IRS’s representative did not see the turn over provision of the Debtors’ plan until it was memorialized in the Court’s confirmation order. Again, like Pioneer, the IRS’s representative is not blameless in failing to read all provisions of the plan. However, the ambiguities created by the Debtors’ plan made her neglect excusable.
Under factors enumerated by Pioneer, the Court finds that the IRS’s failure to fully review the Debtors’ plan was excusable neglect under Bankruptcy Rule 9024. The IRS filed its motions to dismiss and modify shortly after receiving the Court’s confirmation order, so there was no substantial delay in addressing the matter. The Debtors may suffer some prejudice from having their confirmation vacated, however, the prejudice is outweighed by the injustice of depriving the IRS of a meaningful opportunity to object to the plan. There is also no evidence that the IRS has not acted in good faith. Based on the foregoing, the Court finds that the confirmation order of June 30, 2000 should be set aside and vacated. The Debtors will be allowed 14 days from the date of this order file a plan. A confirmation hearing should be rescheduled. It is hereby
ORDERED that the United States’ motion to dismiss the Debtors’ Chapter 13 case is DENIED; and it is further
ORDERED that the United States’ motion for relief under Bankruptcy Rule 9024 is GRANTED, and the Court’s order confirming the Debtors’ chapter 13 plan shall be VACATED; and it is further
ORDERED that the Debtors shall have 14 days from the date of the order to file a plan; and it is further
ORDERED that a confirmation hearing shall be scheduled for hearing on Wednesday, March 28, 2001 at 10:30 a.m.
. The words "Internal Revenue Service” and the number "60” appear to be typed onto the *64form.
. The words "See attached” appear to be typed onto the form.
. The Court will refer to the United States as "the IRS” throughout this opinion.
. See Government Exhibit 2.
. See Debtor’s exhibit 3. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493421/ | TECHNICAL CORRECTION TO OPINION FILED DECEMBER 27, 2001
JOHN J. THOMAS, Bankruptcy Judge.
The Opinion of this Court filed December 27, 2001 shall be corrected as follows:
The citation “In re Gianakas, 917 F.2d 759 (3d Cir.1900)” located on page 251 at Lines 19 and 20 of the Opinion shall be changed to read “In re Gianakas, 917 F.2d 759 (3d Cir.1990)”.
OPINION
1
This adversary proceeding was brought to determine if the debt owed to Bradford County Children and Youth Services (the County) is dischargeable under the Code. (Complaint to Determine Dischargeability of Certain Debts, filed 01/02/2001 (Doc. # 1A).) Debtor’s minor child was placed in various juvenile facilities in Bradford County because of delinquent behavior. Id. The County’s costs for the minor child’s care in those facilities totaled $33,528.24. In its Complaint, the County argued that this debt was nondischargeable under Code Sections 523(a)(5) and/or 523(a)(18). Debtor, while admitting the County is a creditor, denied that the debt is nondischargeable. (Debtor’s Answer to Complaint to Bradford County Children and Youth Services), filed 01/01/2001 (Doc. #3A).
As a preliminary matter, during telephonic argument on May 9, 2001, counsel for the County asserted that there were no federal funds paid on behalf of the Debt- or’s child. (Audio Tape, May 9, 2001.) This *250negates the County’s argument that the debt in question was nondischargeable under Section 523(a)(18)2 as asserted in its Complaint. If there had been federal funds, the debt in question would not be dischargeable under Section 523(a)(18). Furthermore, the same counsel agreed with the Court during the May 9, 2001 hearing that there was no Code Section other than 523(a)(5) that applies to the case at hand. Id.
Code Section 523(a)(5) reads as follows:
A discharge under section 727 ... 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, mainte-, nance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit or property settlement agreement, but not to the extent that—
(A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section 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) (emphasis added).
The statute is clear that a condition precedent of nondischargeability is that the obligee of the debt must be the “spouse, former spouse, or child of the debtor.” In fact, the House Report’s discussion leaves little doubt that this was the intent of Congress in adopting this provision. H.R.Rep. No. 595, 95th Cong., 1st Sess. 364 (1977), U.S.Code Cong. & Admin.News 1978, 5963, 6320 (“This language ... will apply to make nondischargeable only alimony, maintenance, or support owed directly to a spouse or dependent.”)
There are, however, numerous cases concluding that, in order to survive discharge, the debt need not be payable to “a spouse, former spouse, or child of the debtor.” Many of these cases have virtually ignored the limiting phraseology of Section 523(a)(5) and have held that debts payable to individuals, such as attorneys, guardians, and psychologists, are nondis-chargeable even though they are not payable to a spouse, former spouse, or child of the debtor. In re Peters, 133 B.R. 291 (S.D.N.Y.1991) (attorney fees); Matter of Gwinn, 20 B.R. 233 (9th Cir. BAP 1982) (attorney fees); In re Kloss, 29 B.R. 720, 721 (Bankr.M.D.Pa.1983) (attorney fees); In re Chang, 163 F.3d 1138 (9th Cir.1998), certiorari denied, Chang v. Beaupied, 526 U.S. 1149, 119 S.Ct. 2029, 143 L.Ed.2d 1039(Mem) (1999) (guardian fees); In re Lombardo, 224 B.R. 774 (Bankr.S.D.Cal.1998) (attorney fees); In re Weisberg, 218 B.R. 740 (Bankr.E.D.Pa.1998) (guardian fees); Miller v. Gentry (In re Miller), 55 F.3d 1487, 1489 (10th Cir.1995) (Guardian ad litem and psychologist fees). Some cases hold that an obligation is actually owed directly to the spouse, etc., inasmuch as the debtor has agreed to hold harmless that spouse for the underlying debt. See, *251for example, Long v. Calhoun, 715 F.2d 1103, 1106 (6th Cir.1983).
An expansive interpretation of the exceptions to discharge requires the implementation of exceptions to the exceptions to address inequities. See, for example, In re Lowther, 266 B.R. 753, 759-760 (10th Cir. BAP 2001). This is only one of the several difficulties in embracing such a broad view of Section 523(a)(5).
At this juncture, I want to distinguish those cases that have broadly interpreted the terms alimony, maintenance, and support to conclude that a debtor’s obligation to a spouse for payment to the nondebtor’s attorney, etc., may be nondischargeable even though not traditionally a “support and maintenance” expense. See, for example, Williams v. Williams (In re Williams), 703 F.2d 1055 (8th Cir.1983). Such a position is consistent with our circuit’s discussions of the nature of alimony, maintenance, and support using federal law parameters I must follow. In re Gianakas, 917 F.2d 759 (3d Cir.1990) (federal law determines dischargeability under 11 U.S.C. § 523(a)(5)). Nevertheless, these items, normally, must be payable to a “spouse, former spouse, or child of the debtor” regardless of the broad brush with which I paint the terms “alimony, maintenance, and support.”
If I were to accept the proposition that debts owing to lawyers, counties, creditors and others, can be nondischargeable under § 523(a)(5), then I must disregard the entire initial qualifying phrase of the exception so that any “debt ... for alimony to, maintenance for, or support of such spouse or child” would be nondischargeable. This would violate a cardinal tenet of statutory construction giving meaning to each word of a statute. Moskal v. United States, 498 U.S. 103, 111 S.Ct. 461, 466, 112 L.Ed.2d 449 (1990); Helton v. Fauver, 930 F.2d 1040, 1053 (3d Cir.1991). Moreover, the sacrosanct application of the language of the statute has been, not so subtly, brought to bear on inferior courts by the adoption of the “plain meaning approach” mandated by United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) emphatically reaffirmed this point, quoting from Sutherland on Statutory Construction to note, “Where a statute ... names the parties granted [the] right to invoke its provisions, ... such parties only may act.” Id. at 6, 120 S.Ct. at 1947, citing, 2A N. SingeR, Sutherland ON STATUTORY CONSTRUCTION § 47.23, at 217 (5th ed.1992).
In addition, statutory exceptions to discharge normally are subject to narrow construction, Werner v. Hofmann, 5 F.3d 1170, 1172 (8th Cir.1993) (per curiam), being limited to those instances where Congress has concluded that the creditor’s interest in recovering the debt is greater than the debtor’s interest in a discharge. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991).
In this case, the debt arose out of a May 5, 2000 Order of the Court of Common Pleas of Bradford County, Pennsylvania. (See Brief of Kenneth Wise, Debtor For Hearing April 23, 2001, filed to case no. 5-00-03356, (Doc. #29), at Attachment 8.) The basis for the debt was to reimburse the County for payments made to various juvenile facilities as determined by the Bradford County Court of Common Pleas. Id. Further, the May 5, 2000 Order directed the Debtor to pay the “Pennsylvania State Collection and Disbursement Unit ... For the Support of [debtor’s child]” to be made payable to “Pa SCDU” by check or money order. Id.
*252Several jurisdictions dealing with similar fact patterns have held that such a debt did not meet the Section 523(a)(5) exception to discharge. In re Spencer, 182 B.R. 263 (Bankr.E.D.Cal.1995); In re Erfourth, 126 B.R. 736, 740 (Bankr.W.D.Mich.1991) (debt obligation was owed to the county not the child, and the child had not assigned the debt to the county); Matter of Saafir, 192 B.R. 964 (Bankr.D.Neb.1996); In re Crouch, 199 B.R. 690, 693 (9th Cir. BAP 1996) (debt was owed to the County, not the debtor’s child).
The analyses used in two of the cases are applicable here. In In re Spencer, a Chapter 7 debtor owed money to the county for her children’s lodging in the county juvenile hall after they had been adjudged wards of the juvenile court. In re Spencer, 182 B.R. at 264. The bankruptcy court analyzed the issue of dischargeability using a two-part test: (1) whether the obligation is a'“ ‘debt to the child’ or validly assigned by the child to a government entity;” and (2) whether the obligation is in the nature of support. Id. at 266. The Spencer Court did not get past the first step of the analysis. It focused on the legislative history of Section 523(a)(5) and found that this section of the Code “applies only to support obligations owed directly to a spouse or child.” The Spencer Court narrowly construed Section 523(a)(5) and found that “the reimbursement for wardship costs ... was owed and payable directly to the [county probation department], not directly to the Debtor’s minor children. The obligation did not arise by assignment from Debtor’s minor children to the county.” Id. at 268.
In addition, the court in the Matter of Saafir found that a debtor’s reimbursement of expenses the State incurred while debtor’s child was a ward of the State was dischargeable. Matter of Saafir, supra. That court narrowly construed Section 523(a)(5) stating, “the fact that an obligation is in the nature of child support does not result in the debt’s exception from discharge unless either the obligation is to a spouse, former spouse, or child under section 523(a)(5), or ‘such debt,’ namely a debt to a spouse, former spouse, or child, is to a governmental assignee under section 523(a)(5)(A).” Saafir, 192 B.R. at 967. The legal issue before the court was whether the obligation in question was a debt to a spouse, former spouse, or child. The court found the debt was a judgment in favor of the State under its statutory right to reimbursement and was not a debt to a child, spouse, or former spouse. Id. Since it was not assigned to the government, it did not fit the exception to discharge of Section 523(a)(5)(A). Id. Similarly, the obligation in the case at hand was not assigned to the government.3
I find the reimbursement in the case at hand is owed to the County not to the Debtor’s minor child. Although a later Bradford County Court Order of February 13, 2001, which was included in Debtor’s Brief, (Doc. # 29), states that the support action was brought on behalf of the child and the right to collect has been assigned to the Commonwealth of Pennsylvania, the County did not visit this in its briefs or during the telephonic hearing, and thus I cannot make any findings regarding this issue. I find that the requirements of the Section 523(a)(5)(A) exception to discharge, which allows debts assigned to government entities to be nondischargeable, has not been met.
I also find that the subsequent Order of February 13, 2001 did not change the initial obligee of the debt. In that Order, the *253Court denied the Debtor’s motion for a rescission of the original Order of May, 2000. In addition to the denial, the Court added that “the obligation [in question] is to a child.” (See Brief of Kenneth Wise, Debtor For Hearing April 23, 2001, filed to case no. 5-00-03356, (Doc. # 29), at Attachment 5.) The last few words of that order were not material to the disposition of the pending motion for rescission and, thus, were no more than surplusage. Coffin v. Malvern Federal Savings Bank, 90 F.3d 851 (3d Cir.1996).
In summary, I conclude that the Debt- or’s obligation to the County of Bradford by reason of the detention of the Debtor’s minor child is dischargeable. DeKalb County Div. Of Family & Children Servs. v. Platter, 140 F.3d 676 (7th Cir.1998).
. Drafted with the assistance of Seth Cohen, Law Clerk.
. Code Section 523(a)(18) governs the exception to discharge of a debt "[o]wed under State law to a State or municipality that is—
(A) in the nature of support, and
(B) enforceable under part D of Title IV of the Social Security Act (42 U.S.C. § 601 et seq.).”
11 U.S.C. § 523(a)(18). (emphasis added).
. If the debtor's son had assigned such an enforceable obligation to the County, then it would not be dischargeable under 11 U.S.C. § 523(a)(5)(A). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493422/ | ORDER ON FEE APPLICATION OF BINDER & MALTER
JAMES R. GRUBE, Bankruptcy Judge.
I. INTRODUCTION
The Court has before it the Application For Compensation filed by Binder & Mal-ter on April 24, 2002.
Applicant received $600 from the debtors prior to the filing of the petition for pre-bankruptcy analysis. Following the filing, Applicant was awarded $2,750 in compensation at the time the Chapter 13 plan was confirmed. This award was pursuant to the fee guidelines maintained by the Court. Pursuant to the guidelines, the $2,750 was composed of:
$1,400 for the basic case; and an additional
$750 if the case involves real property claims;
$400 if the case involves state or federal tax claims;
$200 of the case involves vehicle loans or leases; ...
Applicant now seek additional compensation in the amount of $21,802.37. This means that the total cost of the Chapter 13 case to date is $25,152.37.
The application will be granted in part and denied in part.
II. THE NATURE OF THE CASE
While the scheduled fee of $2,750 included four components, it does not appear there were problems in all of these areas. The Cortezs scheduled a $600 state tax claim and a federal tax claim of $998.54. There is no suggestion of additional legal work required by the claims. The vehicular loan is $6,000 ($1,000 of which is unse*291cured) and encumbers a 1994 Ford Probe. There is no suggestion additional legal work was required. The Cortezs have seven unsecured creditors (six are credit cards) totaling $11,228.29. There are no apparent problems with unsecured creditors.
The debtors’ problems stem from two real properties they owned. They own a rental property in Mt. View, California, which they valued at $230,000 and on which they owe $210,000. They also owned their residence in San Jose, California. They value the residence at $367,000 and the encumbrances total $376,000.
With respect to the cost of this case, in excess of $15,112.50 arises from their residence in San Jose and in excess of $3,336.00 from the rental property in Mt. View.
III. DISCUSSION
In connection with the debtors’ residence, applicant describes three different areas in which work was performed. The first involved Special Counsel Steven Sin-er’s employment to pursue a claim the debtors had with the sellers from whom they purchased the property. The claim was ultimately dropped. Siner billed a total of $3,500 in connection with the claim. At the same time, Applicant billed $1,148 (12 time entries) to have Siner appointed as Special Counsel and another $1,980 (31 time entries) to follow his progress. These billings are excessive.
The second area of problems involved the secured claim of Meritech Mortgage, the holder of the first encumbrance on the residence. Applicant first objected to a small portion of Meritech’s claim. The objection was sustained by default. The cost was $360.00 (6 time entries).
Meritech then filed a motion for relief from the automatic stay based on alleged post-petition defaults by the debtors (pre-petition defaults approximated $17,000). The motion was resolved by a standard adequate protection order. Applicant billed $1,668 (22 time entries). Subsequently, Meritech filed another motion for relief from stay based on further alleged defaults. In connection with this motion there was an accounting dispute over which payments had been missed. Ultimately, an Amended Adequate Protection Order was negotiated. Applicant billed $5,667 (88 time entries).
Meritech later alleged yet another default. Prior to it being resolved, Applicant became fearful that a trustee’s sale would be conducted. Applicant therefore prepared a complaint and associated papers seeking a temporary restraining order against Meritech. Applicant billed $3,084.50 (44 time entries).
While all of this was going on, for a period of eleven months the debtors explored a refinance of their properties. Over this period Applicant billed $1,210 (16 entries) to discuss the prospects. Applicant’s billings in connection with the debtors’ residence are representative of those in other areas in the application. For example, in connection with a relief from stay motion on the rental property in Mt. View, Applicant billed $3,336 (56 time entries).
IV. CONCLUSION
The problems faced by Applicant in this case seem no more difficult than those faced by Chapter 13 practitioners on a regular basis. Yet the cost is much, much more. Applicant’s attorneys billed between $240 and $290 per hour. Those rates are at the high end of rates of attorneys in this community providing services to consumers. Such rates presume competency and efficiency.
*292In this case there is no indication of incompetency. There should be none as Applicant is composed of experienced bankruptcy lawyers and the problems were routine. However, there is plenty of evidence of inefficiency. Applicant does not sit down and resolve a problem. Rather, it nibbles at the problem generating numerous time entries and their corresponding billings. This is simply not a $25,000 case.
The Court grants the application in the amount of $9,750. This is in addition to the $2,750 approved at the time of confirmation. The balance of the application is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493095/ | OPINION
BOULDEN, Bankruptcy Judge.
This appeal arises from a dispute between two creditors over the interpretation of a provision in a confirmed Chapter 11 plan that allowed unpaid administrative claimants to seek disgorgement from paid administrative claimants. Utilizing the plan’s provision, the Chapter 11 debtor’s landlord obtained a judgment requiring disgorgement of almost $40,000 in fees from the debtor’s former general counsel. The law firm now appeals, challenging the bankruptcy court’s determination that the confirmed plan was res judicata, and that disgorgement from the law firm was appropriate under the facts of this case. Finding no error in the bankruptcy court’s ruling, we AFFIRM.
I. BACKGROUND
K.D. Company, a clothing manufacturer and the debtor herein (Debtor), filed a *483Chapter 11 petition in July of 1996. Behles-Giddens, P.A., n/k/a J.D. Behles & Associates, P.C. (BG), served as the Debt- or’s general counsel from the petition date until approximately May 1997, when it withdrew and was replaced by other counsel. Over the course of its employment, the Debtor paid BG $194,072.67 on account of approved interim fee applications.
On the petition date, and for a period of time post-petition, the Debtor leased real property that was owned by Martin A. Raft (Raft). The Debtor eventually rejected the lease and vacated the premises. In November 1997, the bankruptcy court approved, over the objections of BG and others, a stipulation between the Debtor and Raft resolving Raft’s claim for unpaid post-petition rent by allowing Raft an administrative expense claim of $120,000 (1997 Order). The bankruptcy court reserved judgment on the priority of Raft’s administrative expense claim in relation to other administrative expense claims, holding that such a decision would be made at a later date if the Debtor did not have sufficient funds to pay similar claimants in full.
The Debtor eventually was unable to pay all administrative claims in full. Some administrative claimants, including Raft, were not paid any amount on their administrative claims. Other administrative claimants were either paid in full or, as in BG’s case, were paid substantial portions of their claims.
In January 1997, BG filed a proposed disclosure statement and plan of reorganization for the Debtor. These documents did not specifically deal with the issue of the unpaid, or disproportionally paid, administrative claims. Subsequent economic events in the Debtor’s business and a change to different counsel prompted the Debtor to file a modification to the disclosure statement and plan. The modified disclosure statement, which was approved by the bankruptcy court, together with the modified plan (Modified Plan), attempts to address the unequal payment of administrative claims. The Modified Plan specifically addresses the Debtor’s failure to pay Raft’s claim, because, in light of the full or partial payments to other administrative claimants, Raft demanded that he be paid in full on the effective date as required by 11 U.S.C. § 1129(a)(9) 1, or he would object to confirmation.
The Modified Plan provides that instead of being paid in full on the effective date, administrative claimants will be paid over time, after cure of a mortgage arrearage but prior to the payment of unsecured creditors. In addition, paragraph 7.8 of the Modified Plan states as follows:
[A] condition of the confirmation of the Modified Plan will be the entry of an order, either separately or as part of the confirmation order, that the Debtor (or any successor to the Debtor) retains the right to obtain immediate disgorgement from any professional ... who has been paid any fees or reimbursement for costs ... as may be necessary for the Debtor (as Debtor in Possession), chapter 11 or Chapter 7 Trustee, or other successor to the Debtor, to provide equal payment of administrative claims within the priorities provided by the Bankruptcy Code. The order will be binding on any professional that will have received any post petition fees or cost reimbursement as of the date of the confirmation hearing.
Appellant’s App. at 1853; Modified Plan ¶ 7.8 (Emphasis added).
The Modified Plan then lists seven professionals, including BG, that had received payments of $340,702.28 out of a total amount of $532,715.07 in fees allowed during the Chapter 11 (the Disgorgement Targets). It also lists eight administrative claimants, including Raft, whose allowed *484claims totaling $224,465 were totally unpaid (the Disgorgement Payees). Paragraph 7.8 further states that if any of the Disgorgement Targets objected to the disgorgement provision, the Debtor would request immediate disgorgement as a condition to submitting the Modified Plan for confirmation, so as to assure pro rata distribution to the Disgorgement Payees.
Paragraph 7.8 includes the following language to ensure enforcement of the disgorgement provision:
In the event that the Debtor or a successor of the Debtor fails to take the necessary action to obtain a disgorgement of the interim payments as required by this paragraph, then any administrative creditor may make demand on the Debtor to take such action by means of the process described above for non-monetary defaults. If the Debt- or or its successor then fails to take such action, the claimant having sent the notice may take such action as it [sic] appropriate to enforce the provisions of this paragraph 7.8, including but not limited to filing an action (but only in the federal courts of the District of New Mexico ... ) to require disgorgement. By accepting any payment from the Debtor, the defendant in any such action shall agree to the jurisdiction and venue of these courts for any such action.
These provisions concerning the disgorgement of interim payments shall continue to be effective and binding on all the administrative and priority claim payees until all administrative and priority claims have been paid in full, even if such period extends beyond the substantial consummation of the Plan or the closing of the case.
Appellant’s App. at 1854; Modified Plan ¶ 7.8.
The Modified Plan also provides that the bankruptcy court retains jurisdiction to make such orders as are necessary to require professionals to disgorge any interim payments previously received, to ensure that all Chapter 11 professionals and other administrative expense claimants are paid their claims on a fully pro rated basis. Such jurisdiction continues “for as long as is necessary following the confirmation of the Plan (including without limitation after the substantial consummation of the Plan :.. ) to carry out the provisions of ... paragraph[ ] 7.8.... ” Appellant’s App. at 1855; Modified Plan ¶ 7.16.
The Modified Plan is silent as to whether the disgorgement provision of paragraph 7.8 also required non-professional administrative claimants to disgorge payments made to them in order to equalize payments to all administrative claimants. It is this omission, together with other references to disgorgement as allowed by § 726, that Raft later asserted created an ambiguity in the Modified Plan.
The Debtor’s approved modified disclosure statement, original plan and Modified Plan, notice of confirmation hearing and ballots were served on creditors, including BG, on June 18, 1998. On July 8, 1998, the date of the confirmation hearing, the Modified Plan was once again modified (Second Modification) to clarify that a member of the Debtor’s owner’s family would continue to work as a salesman for the Debtor for such time as ownership of the Debtor remained in the family. Notice of the Second Modification was not given to creditors.
On July 14, 1998, the bankruptcy court entered an order (Confirmation Order) confirming the Debtor’s Modified Plan, as further modified by the Second Modification (collectively, the Confirmed Plan). The Confirmation Order states that none of the administrative expense claimants, including the Disgorgement Targets, objected to accepting payment after the effective date, or to the Debtor’s reservation of its right to seek disgorgement as provided in Paragraph 7.8 of the Confirmed Plan.
By December 1998, Raft had not obtained any payment on his administrative expense claim. He twice demanded that *485the Debtor seek disgorgement of fees paid to professionals pursuant to paragraph 7.8 of the Confirmed Plan. In February 1999, having had no response from the Debtor, Raft filed a “Motion of Martin Raft for Disgorgement of Professional Fees and Expenses Pursuant to Confirmation Order and Confirmed Plan.” This pleading ultimately was treated by the bankruptcy court as a complaint commencing an adversary proceeding. Responses were filed by BG and others, but, with the exception of BG, all of the administrative expense claimants either defaulted or eventually settled the matter.
Raft and BG filed motions for summary judgment which were denied, but in so doing, the bankruptcy court apparently2 made several rulings that narrowed the issues for trial. The bankruptcy court held that the Confirmed Plan and Confirmation Order had a res judicata effect on the parties, and BG could not collaterally attack them. It ruled that the 1997 Order established Raft’s $120,000 administrative expense claim in the case, but the priority of his claim was unresolved. It also ruled that the Confirmed Plan, which controlled the dispute, was ambiguous and required the court to hear extrinsic evidence to interpret it. Finally, the bankruptcy court left for trial whether disgorgement was appropriate, stating that Raft was required to show an administrative deficiency and that the Disgorgement Targets received more than their pro rata share of available estate funds. The matter thereafter was tried as a two-party dispute between Raft and BG.
After trial, the bankruptcy court entered its findings and conclusions, and an order and judgment (Disgorgement Order)3 that incorporated the prior rulings on summary judgment. In the Disgorgement Order, the bankruptcy court held that, although ambiguous, the Confirmed Plan was an enforceable, binding contract. As a binding contract, the Confirmed Plan entitled the Disgorgement Payees, upon the Debt- or’s default, to seek disgorgement from the Disgorgement Targets if they did not receive a pro rata share of what had been paid pre-confirmation to the Disgorgement Targets. Furthermore, the bankruptcy court concluded that the Confirmed Plan provided that Raft’s administrative expense claim, as established under the 1997 Order, was of equal priority to other administrative expense claimants, such as BG.
So finding, the bankruptcy court went on to determine that disgorgement was appropriate under the Confirmed Plan inasmuch as the Disgorgement Targets had received more than their pro rata share of available funds, the Debtor was “not a probable source of funds to pay the unpaid administrative expense claimants[,]” Appellant’s App. at 58-59; Find, of Fact and Concl. of Law, at Find, of Fact ¶ 13, and Raft had made proper demand on the Debtor to seek disgorgement under the Confirmed Plan prior to exercising his individual right to do so. Based on a pro rata calculation, and deducting what other professionals had already agreed to disgorge, Raft was entitled to collect approximately $40,000 from BG.
*486BG filed a timely notice of appeal from the Disgorgement Order. In response to this Court’s request for supplemental briefing resulting from issues raised by documents contained in the appendix, we learned that the bankruptcy court converted the Chapter 11 case to a Chapter 7 case on July 26, 2000. On the date of the § 341 meeting, the Chapter 7 trustee filed a report indicating there were no assets in the case for distribution to creditors.
II. APPELLATE JURISDICTION
With the consent of the parties, this Court has jurisdiction to hear timely-filed appeals from “final judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit. 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr.P. 8002. BG timely filed a notice of appeal from the Disgorgement Order, and the parties have consented to this Court hearing the appeal by failing to elect to have it heard by the district court. 28 U.S.C. § 158(c); Fed. R. Bankr.P. 8001; 10th Cir. BAP L.R. 8001-1. The Disgorgement Order is a final order because it “ ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.’ ” Van Cauwenberghe v. Biard, 486 U.S. 517, 521-22, 108 S.Ct. 1945, 100 L.Ed.2d 517 (1988) (quoting Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945)). In reviewing the final Disgorgement Order listed in BG’s notice of appeal, we also review the bankruptcy court’s earlier interlocutory orders denying Raft and BG’s motions for summary judgment. Cole v. Ruidoso Mun. Sch., 43 F.3d 1373, 1382 n. 7 (10th Cir.1994) (quoting 16 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 3949 at 440 (Supp.1994), concluding that “a notice of appeal that names the final judgment is sufficient to support review of all earlier orders that merge in the final judgment under the general rule that appeal from a final judgment supports review of all earlier interlocutory orders.”).
Although the Disgorgement Order is a final appealable order, we are obligated to decide, sua sponte, the jurisdictional issue of whether the appeal is moot as a result of the conversion of the Debtor’s Chapter 11 case to Chapter 7. Arizonans for Official English v. Arizona, 520 U.S. 43, 73, 117 S.Ct. 1055, 137 L.Ed.2d 170 (1997) (court has obligation to satisfy itself that it has jurisdiction to hear appeal) (quoting Bender v. Williamsport Area School Dist., 475 U.S. 534, 541, 106 S.Ct. 1326, 89 L.Ed.2d 501 (1986)); accord Cox v. Phelps Dodge Corp., 43 F.3d 1345, 1347 n. 1 (10th Cir.1994). “To qualify as a case fit for federal-court adjudication, ‘an actual controversy must be extant at all stages of review, not merely at the time the complaint is filed.’ ” Arizonans for Official English, 520 U.S. at 67, 117 S.Ct. 1055 (quoting Preiser v. Newkirk, 422 U.S. 395, 401, 95 S.Ct. 2330, 45 L.Ed.2d 272 (1975)). A matter is moot if the issues presented are no longer live because we are incapable of rendering effective relief or restoring the parties to their original position, or the parties lack a legally cognizable interest in the outcome. Church of Scientology v. United States, 506 U.S. 9, 12, 113 S.Ct. 447, 121 L.Ed.2d 313 (1992); County of Los Angeles v. Davis, 440 U.S. 625, 631, 99 S.Ct. 1379, 59 L.Ed.2d 642 (1979). If Raft does not have a post-conversion claim against BG or his right to recover against BG granted by the Confirmed Plan was terminated by conversion, we must dismiss this appeal as moot. For the reasons set forth below, we conclude that the appeal is not moot.
Raft’s pre-confirmation administrative expense claim was discharged when the Confirmed Plan was confirmed. 11 U.S.C. § 1141(d)(1)(A); Confirmed Plan, ¶ 7.9; see Reliable Electric Co. v. Olson Const. Co., 726 F.2d 620, 623 (10th Cir.1984) (claim not discharged upon plan confirmation only if creditor fails to receive reasonable notice of confirmation hearing). The discharged, pre-confirmation administrative expense claim was replaced upon confirmation with the right to obtain payment *487as set forth in the Confirmed Plan, or, as some courts have stated, replaced by a “Plan Claim.” In re Troutman Enters. Inc., 253 B.R. 8, 11 (6th Cir. BAP 2000) (confirmation discharged creditors’ pre-confirmation debt and replaced it with their Plan Claims) (citing In re Benjamin Coal Co., 978 F.2d 823, 826 (3rd Cir.1992) (confirmation of Chapter 11 plan discharged the allowed administrative expense claim)). Since the Debtor failed to seek disgorgement from the Disgorgement Targets, Raft was entitled to sue them in his own behalf to obtain recovery of his Plan Claim. The Confirmed Plan was neither revoked nor vacated upon conversion.4 Therefore, the rights granted to Raft under the Confirmed Plan also remained post conversion.
Not only does Raft’s Plan Claim against BG survive conversion, but his right to recover from BG is not impacted by the conversion of the Debtor’s Chapter 11 case to Chapter 7.5 Upon confirmation of the Confirmed Plan, the assets of the estate, including the right to seek disgorgement from the Disgorgement Targets, vested in the reorganized Debtor. 11 U.S.C. § 1141(b); Confirmed Plan, ¶ 7.1; see Paul v. Monts, 906 F.2d 1468, 1472 (10th Cir.1990) (per curiam); Harker v. Troutman (In re Troutman Enters., Inc.), 253 B.R. 1, 5 (6th Cir. BAP 2000) (general rule is that all property of a Chapter 11 estate vests with the reorganized debtor upon confirmation).6 This right to seek disgorgement from the Disgorgement Targets was then transferred to Raft pre-conversion when the reorganized Debtor failed seek disgorgement upon proper demand. The disgorgement right created under the Confirmed Plan belonged to *488Raft, not the reorganized Debtor, at the time of conversion, and was not the property of the pre-confirmation estate or the reorganized Debtor.7
We therefore conclude that the conversion of the Debtor’s Chapter 11 case to Chapter 7 has not rendered this appeal moot. We can render effective relief in this case by determining whether the bankruptcy court erred in its treatment of Raft’s Plan Claim under the Confirmed Plan, and by determining whether recovery against BG was appropriate.
III. STANDARD OF REVIEW
“For purposes of standard of review, decisions by judges are traditionally divided into three categories, denominated questions of law (reviewable de novo), questions of fact (reviewable for clear error), and matters of discretion (reviewable for ‘abuse of discretion’).” Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988); see Fed. R. Bankr.P. 8013; Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1370 (10th Cir.1996).
The application of the res judicata doctrine is a question of law subject to de novo review, meaning that we afford no deference to the bankruptcy court’s decision. Plotner v. AT & T Corp., 224 F.3d 1161, 1168 (10th Cir.2000). Questions as to whether a contract, such as the Confirmed Plan, is ambiguous are likewise reviewed de novo. Mid-West Conveyor Co. v. Jervis B. Webb Co., 92 F.3d 992, 995 (10th Cir.1996). However, if the bankruptcy court’s interpretation of the Confirmed Plan is based on “the record, testimony or other extrinsic evidence, its interpretation is reviewed for clear error.” Pioneer Liquidating Corp. v. United States Trustee (In re Consolidated Pioneer Mortgage Entities), 248 B.R. 368, 375 (9th Cir. BAP 2000) (citations omitted). “A finding is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948).
IV. DISCUSSION
BG’s brief details twenty-one points of error. However, this rather unwieldy and somewhat repetitive list can be consolidated into three issues: 1) whether the bankruptcy court erred in barring BG’s collateral attack of the Confirmed Plan and Confirmation Order, 2) whether the bankruptcy court erred in its interpretation of the Confirmed Plan, and 3) whether the bankruptcy court erred in ordering disgorgement. For the reasons stated below, we conclude that the bankruptcy court did not err and must be affirmed.
A The Bankruptcy Court Did Not Err in Barring BG’s Collateral Attack of the Confirmed Plan and the Confirmation Order.
BG argues that it is not bound by the Confirmed Plan that fixed the amount and priority of Raft’s claim, established the rights of creditors to seek disgorgement from each other, and contained disgorgement provisions that deviated from those found in § 726. We find no error in the bankruptcy court’s conclusion that all of these issues were resolved by the binding Confirmed Plan, and that BG’s litigation of these issues is precluded by the doctrine of res judicata.
*489The Confirmation Order incorporates the 1997 Order, thereby fixing the amount and also resolving the priority of Raft’s claim. Even though the 1997 Order reserved the issue of the priority of Raft’s administrative claim in relation to other administrative claims, the bankruptcy court correctly ruled in the Disgorgement Order that “[t]he reservation of a determination of the priority of the Raft claim in the November 12, 1997 stipulated order had an implicit temporal element and expired upon confirmation of the Plan.” Appellant’s App. at 62; Find, of Fact and Concl. of Law, at Concl. of Law ¶ 7. If the Confirmed Plan had not resolved both the amount and priority of Raft’s claim, it would not have provided for Raft’s pro rata payment with other administrative claimants. Nor would it have allowed for disgorgement to equalize payments to Raft at the same priority as the Disgorgement Targets.
Further, even if, as argued by BG, the provisions of the Confirmed Plan allowing the Disgorgement Payees to seek disgorgement directly from the Disgorgement Targets rather than all paid administrative claimants are inconsistent with § 726, they are nonetheless binding upon the parties. 11 U.S.C. § 1141(a); Paul, 906 F.2d at 1471 (quoting In re St. Louis Freight Lines, Inc., 45 B.R. 546, 552 (Bankr.E.D.Mich.1984) (party in interest is bound by the terms of a confirmed plan even if it receives less than that to which it is otherwise legally entitled)). BG did not object to the Confirmed Plan’s disgorgement provisions at the time of confirmation,8 and it did not timely appeal the final Confirmation Order. Therefore, it is estopped from raising the legality of the provisions at this late date. Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253, 1258 (10th Cir.1999) (a creditor must protect its interest by timely objection to a proposed plan or appealing the confirmation order, and, if it fails to do so, cannot later complain about confirmed plan provisions, even if they are inconsistent with the Bankruptcy Code).
BG also argues that res judicata does not bar it from relitigating issues resolved by the Confirmation Order because the Second Modification was not properly noticed or approved. In particular, BG contends that the alleged defects in the noticing and approval of the Second Modification prevented it from having “a full and fair opportunity to litigate” its claims at confirmation. Plotner, 224 F.3d at 1168 (citing cases). BG also contends that the Confirmed Plan is invalid as it did not receive due process as required under Dalton Development Project v. Unsecured Creditors’ Committee (In re Unioil), 948 F.2d 678 (10th Cir.1991), and Reliable Electric, 726 F.2d at 620. These arguments are without merit.
Renoticing modifications to a plan is not required if the modifications are immaterial. Beal Bank, S.S.B. v. Jack’s Marine, Inc., 201 B.R. 376, 380 n. 4 (E.D.Pa.1996); In re Cajun Electric Power Coop., Inc., 230 B.R. 715, 730 (Bankr.M.D.La.1999) (citing In re American Solar King Corp., 90 B.R. 808, 823 (Bankr.W.D.Tex.1988) (citing additional authority)); In re Penrod, 169 B.R. 910, 918 (Bankr.N.D.Ind.1994). The Second Modification was immaterial because it merely clarified that a member of the Debtor’s owner’s family would continue to work as a salesman solely for the Debtor for such time as ownership of the Debtor remained in the family. It did not adversely or materially affect the amount paid to creditors or their claims, and it certainly did not relate to the disgorgement issue of which BG complains. Nor has BG indicated how the Second Modification is material to its disgorgement dispute with Raft, or how it would have changed its position in the case if it had received prior notice. As such, *490further notice of the Second Modification was not necessary, and lack of such notice and approval did not prevent a “full and fair opportunity to litigate.”
Furthermore, the Confirmed Plan and Confirmation Order are binding because the notice that was provided in this case was adequate under the requirements of Unioil and Reliable Electric. The Debtor’s disclosure statement, Modified Plan, notice of the confirmation hearing, and ballots were circulated to BG on June 19, 1998.9 After confirmation of the Confirmed Plan that included the Second Modification, notice of the Confirmation Order was circulated to creditors, including BG. These facts, as established by the record, show that BG received adequate notice of the Modified Plan and the confirmation hearing, and it failed to timely object to confirmation. In addition, BG received adequate notice of the final Confirmation Order, and it failed to timely appeal.
All of the points of error raised by BG are a collateral attack on the Confirmed Plan and Confirmation Order. As concluded by the bankruptcy court, the Confirmed Plan and the Confirmation Order are binding on the parties under § 1141 and principles of res judicata, regardless of whether BG agreed with their provisions. Paul, 906 F.2d at 1471; In re Salina Speedway, Inc., 210 B.R. 851, 855 (10th Cir. BAP 1997); see also United States v. Richman (In re Talbot), 124 F.3d 1201, 1209 (10th Cir.1997) (concluding under analogous provisions that a confirmed chapter 13 plan is res judicata, and its terms are not subject to collateral attack in a disgorgement proceeding brought by Chapter 13 trustee). A confirmation order is a final judgment in the case, and neither it nor the plan that it confirms may be attacked other than by filing a timely appeal. Stoll v. Gottlieb, 305 U.S. 165, 170-72, 59 S.Ct. 134, 83 L.Ed. 104 (1938); Salina Speedway, 210 B.R. at 855-56 (citing cases). Any complaint that BG had with the contents of the Confirmed Plan or in the procedure related to its confirmation should have been resolved by objection thereto and timely appeal. BG failed to do either, and the bankruptcy court was correct in determining that BG may not collaterally attack the binding Confirmed Plan and the final Confirmation Order.
B. The Bankruptcy Court Did Not Err in its Interpretation of the Binding Conñrmed Plan.
BG maintains that the Confirmed Plan was an unenforceable contract as a matter of law. It also contests the bankruptcy court’s determination that provisions of the Confirmed Plan were ambiguous and that extrinsic evidence was appropriate to interpret it. These arguments are without merit.
The Confirmed Plan is valid and binding on BG. Contrary to BG’s arguments, whether the parties had a meeting of the minds as to the disgorgement provisions in the Confirmed Plan is not the guiding standard in this case. Rather, as stated in United States Trustee v. CF & I Fabricators of Utah, Inc. (In re CF & I Fabricators of Utah, Inc.), 150 F.3d 1233 (10th Cir.1998):
[A] reorganization plan has some indi-cia of a contract. For instance, the interested parties negotiate and draft the document, reach mutual agreement, and consideration is exchanged. Yet, it is also clear a confirmed plan is much more than a contract. For example, once confirmed, a plan is enforceable as a court order against parties who did not even agree to its terms. See 11 U.S.C. § 1141(a).
*491Id. at 1239; see Paul, 906 F.2d at 1471; Salina Speedway, 210 B.R. at 855. As the bankruptcy court correctly concluded, BG is bound by the terms of the Confirmed Plan even if it had a different understanding of their meaning or did not realize their effect. Turney v. FDIC, 18 F.3d 865 (10th Cir.1994) (the debtor’s failure to comprehend what was set before him does not invalidate the provisions of a confirmed plan); DiBerto v. Meadows at Madbury, Inc. (In re DiBerto), 171 B.R. 461, 470-71 (Bankr.D.N.H.1994). Here, the record fully supports the bankruptcy court’s findings that BG has sophisticated knowledge of bankruptcy practice and law, and it understood that the Modified Plan would be binding on it upon confirmation. BG’s failure to object to the Modified Plan’s confirmation was an informed and conscious choice, see n. 10 supra, and its desire to have the Modified Plan confirmed outweighed its desire to press its rights under § 1129(a)(9). Having not objected to the confirmation of the Modified Plan and not timely appealed the final Confirmation Order, BG must abide by the terms of the Confirmed Plan as interpreted by the bankruptcy court.
Not only did the bankruptcy court correctly decide that the Confirmed Plan was binding on BG, but it also did not err in admitting extrinsic evidence, as allowed under applicable state contract law, to resolve the ambiguities therein related to who was subject to disgorgement. C.R. Anthony Co. v. Loretto Mall Partners, 112 N.M. 504, 817 P.2d 238 (1991) (rejecting “four corners” approach to contract interpretation and allowing admission of extrinsic evidence to aid in interpretation); see Woodcock v. Chemical Bank (In re Woodcock), 45 F.3d 363, 366 (10th Cir.1995) (considering extrinsic evidence in determining meaning of ambiguous term). Based on the evidence presented, the bankruptcy court correctly concluded that only the Disgorgement Targets, not all administrative claimants that had been paid pre-confirmation, were subject to disgorgement under the' Confirmed Plan. This conclusion is fully supported by the bankruptcy court’s findings of fact that BG, an entity with sophisticated knowledge of bankruptcy practice and law, understood that it was relinquishing potential disgorgement rights from all administrative claimants under § 726 and its rights under § 1129(a)(9) in hopes of obtaining a confirmed plan. These findings are fully supported by the record and are not clearly erroneous.
C. The Bankruptcy Court Did Not Err in Ordering Disgorgement.
Finally, BG asserts the bankruptcy court abused its discretion in ordering disgorgement. It argues that disgorgement is “incredibly rare” in a Chapter 11 ease, and that insufficient proof was presented that the reorganized Debtor was incapable of paying the Disgorgement Payees’ Plan Claims.
BG misinterprets the applicable standard of review. This case is unlike those cases where bankruptcy courts have discretion to order professionals to disgorge fees if the professional violates or does not ultimately meet the provisions of §§ 327 or 330. Instead, the bankruptcy court was required to enforce the binding Confirmed Plan. It found that all procedures and predicate acts necessary to compel disgorgement under the terms of the Confirmed Plan had been completed. Specifically, the reorganized Debtor had not and could not pay Raft’s Plan Claim, and BG had received more than its share. A review of the record reveals ample evidence to support the bankruptcy court’s findings on these two points. Having so found, the bankruptcy court had no discretion regarding the disgorgement provisions, and disgorgement was required. Talbot, 124 F.3d at 1207 (plan and confirmation order control disposition of the issue of disgorgement in a confirmed chapter 13 case). We find no error in the bankruptcy court’s decision requiring disgorgement.
*492
V. CONCLUSION
For the reasons stated above, the Disgorgement Order is AFFIRMED.
. All future statutory references are to title 11 of the United States Code, unless otherwise indicated.
. No order or transcript of the October 19, 1999 ruling is included in the record before us, but the substance of the ruling is repeated in a subsequent summary judgment order dated January 5, 2000.
. The bankruptcy court concluded that it had jurisdiction to issue the Disgorgement Order in the dispute between BG and Raft pursuant to the Confirmed Plan’s retention of jurisdiction provisions, allowing it to issue any order necessary to ensure that Chapter 11 professionals and administrative expense claimants are paid their claims on a pro rated basis. See United States Trustee v. CF & I Fabricators of Utah, Inc. (In re CF & I Fabricators of Utah, Inc.), 150 F.3d 1233, 1237 (10th Cir.1998) (citing with approval United States Trustee v. Gryphon at Stone Mansion, Inc., 216 B.R. 764, 768-69 (W.D.Pa.1997) for the proposition that a bankruptcy court's "related to” jurisdiction allows it to resolve post-confirmation disputes if the matter sufficiently affects creditors' recoveries under a plan of reorganization).
. See 11 U.S.C. § 348; Fed. R. Bankr.P. 1019 (the Advisory Comments to this Rule, which implements § 348, state that it "is not intended to invalidate any action taken in the superseded case before its conversion to chapter 7.”); see also 11 U.S.C. § 1144 (citing only fraud as grounds for revocation); Troutman, 253 B.R. at 13 (citing cases) (conversion does not disturb confirmation or revoke discharge); Carter v. Peoples Bank & Trust Co. (In re BNW, Inc.), 201 B.R. 838, 850 (Bankr.S.D.Ala.1996) ("[c]onversion is ... not a means of vacating a final confirmation order without grounds timely and sufficient under § 1144....”); In re Winom Tool & Die, Inc., 173 B.R. 613, 616 (Bankr.E.D.Mich.1994) (conversion from Chapter 11 to Chapter 7 does not serve to revoke confirmation order); Robb v. Lybrook (In re Lybrook), 107 B.R. 611, 613 (Bankr.N.D.Ind.1989) (conversion does not operate as nullification of earlier orders); Kepler v. Independence Bank (In re Ford), 61 B.R. 913, 917-18 (Bankr.W.D.Wis.1986) ("Nor does the fact that a case is converted to a chapter 7 following the failure of a confirmed plan result in the nullification of all actions by the parties or orders of the court which occurred during the pendency of the unsuccessful plan.”); see generally In re Young, 237 B.R. 791 (10th Cir. BAP 1999) (§ 1330, which essentially mirrors the language of § 1144, is the only way to revoke a confirmation order).
. Some courts have held that when a Chapter 11 case involving a confirmed plan is converted to Chapter 7, creditors holding pre-confir-mation, administrative claims against the estate lose their administrative priority, and are treated as pre-petition, unsecured creditors when seeking recovery from the Chapter 7 estate. See Benjamin Coal Co., 978 F.2d at 826. It is unnecessary for us to determine whether this view is correct because this case does not involve the priority of Raft’s Plan Claim in the Chapter 7 scheme, or the recovery or distribution from the Chapter 7 estate. Raft is asserting his Plan Claim arising under the Confirmed Plan against BG, not the Chapter 7 estate.
. Although there is some confusion between the use of the terms "Debtor” and "Reorganized Debtor,” which are used interchangeably in the Confirmed Plan, it appears that all assets vested in the entity that existed post-confirmation, or the reorganized Debtor. There was no trust created for the exclusive benefit of creditors such as in Pioneer Liquidating Corp. v. United States Trustee (In re Consolidated Pioneer Mortgage Entities), 248 B.R. 368 (9th Cir. BAP 2000) (concluding that a Chapter 11 plan that created a trust for the exclusive benefit of creditors had a fiduciary duty to those for whose benefit it was created). In any event, the distinction is not important in this case because the right to obtain payment from the Disgorgement Targets transferred to Raft upon the Debtor's failure to seek disgorgement upon demand.
. There are divergent rulings as to the composition of a Chapter 7 estate when a Chapter 11 plan is confirmed pre-conversion. See Troutman Enters., 253 B.R. at 5 (gathering cases). Some courts hold that, upon confirmation of a Chapter 11 plan, all estate assets vest in the reorganized debtor and that no assets remain for inclusion in the Chapter 7 estate. Others conclude that the Chapter 7 estate includes property that was held by the reorganized debtor on the date of conversion. Under either line of cases, the right to seek disgorgement in this case is not included in the Chapter 7 estate because it transferred to Raft pre-conversion.
. Had it done so, apparently the Debtor would have immediately sought disgorgement orders in conjunction with confirmation.
. The affidavit of Jennie Deden Behles states that because BG determined that the finances of the Debtor must have become substantially worse, "it would be futile to expend funds in further objecting to the First Amended Plan and Disclosure Statement since the unsecured creditors’ committee was carrying that objection.” Appellant’s App. at 664; Behles Aff. ¶ 22. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493096/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON GEORGE WASHINGTON LIFE INSURANCE COMPANY’S OBJECTION TO DEBTOR’S CLAIM OF EXEMPTION FOR THE P.A. STOCK
GEORGE L. PROCTOR, Bankruptcy Judge.
This case came before the Court upon Opinion and Order of the United States District Court for the Middle District of Florida, Jacksonville Division, entered on February 29, 2000. The District Court remanded with instructions to determine the value of Debtor’s stock in his law firm. The Court provided the parties with the opportunity to present supplemental evidence at an evidentiary hearing held on *498July 20, 2000. Upon the evidence presented and submissions by the parties, the Court enters the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
1. On February 1, 1996 (“Petition Date”), Dudley D. Allen (“Debtor”) filed for relief under Chapter 7 of the Bankruptcy Code. ( Doc. 1.) Debtor’s bankruptcy schedules (Doc. 2) listed various items as exempt under Article X, § 4 of the Florida Constitution, including $794 in cash and personal property and one hundred shares of Debtor’s law firm, Dudley D. Allen, P.A.
2. On March 21, 1996, George Washington Life Insurance Company (“G.W.”) filed an objection to several of Debtor’s claims of exemption, including the firm’s shares of stock (“P.A.Stock”). (Doc. 18.)
3. On July 18 and 19, 1996, the Court held hearings on G.W.’s objections. At trial, G.W. argued that the P.A. Stock was not exempt property because its value exceeded the remaining $206 exemption permitted under § 4. G.W. demonstrated that the firm had receivables that were considerably greater than $206.1 Moreover, the record illustrated that Debtor pledged the P.A. Stock to his wife (“Creditor”) shortly before the Petition Date as collateral for two lease agreements. (G.W.Ex. 4 at 104-05.) According to these leases, $300.67 was still due under the agreements as of the Petition Date. G.W. asserted that such a pledge would not have been made if the P.A. Stock were worthless. (G.W.Br. at 47.)
4. Debtor, however, argued that the evidence presented by G.W. was insufficient to prove the value of the P.A. Stock since G.W. did not address the accounts payable or other long-term obligations of the corporation. (Debtor Mem. at 35.)
5. Debtor testified that the P.A. Stock was worth nothing since the firm owned no assets and had limited income due to Debt- or’s involvement in pending litigation. Moreover, he testified that the firm’s receivables were quickly depleted by its concurrent liabilities. (Tr. at 199-203.)
6. On December 18, 1996, the Court held that G.W. failed to carry the burden of proof required to sustain the objection regarding the P.A. Stock because it did not present evidence other than the firm’s profits and receivables. The Court accepted Debtor’s value of the P.A. Stock as $206 and allowed the exemption. (Doc. 40 at 17.)
7. G.W. filed a Notice of Appeal from the Judgment and the case came before the Honorable Harvey E. Schlesinger, United States District Judge, Middle District of Florida, Jacksonville Division (Case No. 3:97-cv-87-J-20). (Doc. 42.)
8. On February 29, 2000, Judge Schlesinger held the Bankruptcy Court’s findings concerning the value of the P.A. Stock to be clearly erroneous since G.W. did present additional evidence of value — namely, that Debtor pledged the P.A. Stock as collateral for a loan. Since this Court did not weigh the probative impact of this evidence, the District Court remanded the issue for further findings of fact. (Doc. 89 at 2-3.)
9. On July 20, 2000, the Court conducted an evidentiary hearing. The sole issue before the Court was the valuation of the P.A. Stock.
10. At the hearing, Debtor testified as to the value of the items that were secured by the P.A. Stock. This included law books, office equipment, and furnishings worth approximately $7,600. Debtor also insisted that when he initially pledged the P.A. Stock, he did not believe it had any value. Finally, Debtor stated that although the original lease has expired, he *499has renewed the leases and continues to use the P.A. Stock as collateral.
CONCLUSIONS OF LAW
The commencement of a bankruptcy case creates an estate that is comprised of all the property in which a debtor has a legal or equitable interest as of the petition date. See 11 U.S.C. § 541(a). However, an individual debtor may exempt property from the estate by claiming exemptions authorized by § 522. 11 U.S.C. § 522(b)(2)(A).
A state may opt out of the federal exemptions available under § 522(d) and limit its residents to the exemptions provided under state law. § 522(b); See In re Podzamsky, 122 B.R. 596, 598 (Bankr.M.D.Fla.1990). The state of Florida has exercised this option. See Podzamsky, 122 B.R. at 598; Fla.Stat. ch. 222.20 (1999). Accordingly, the interplay of § 522(b) and ch. 222.20 permits a debtor who is a Florida resident to claim exemptions under the Florida Constitution. Fla. Const., art. X, § 4.
A debtor is required to list the property claimed as exempt on his or her schedule of assets. Fed.R.Bankr.P. 4003(a). § 4 entitles a debtor to claim an exemption of up to $1,000 in personal property and retain such property free from the reach of creditors. Fla. Const., art. X, § 4(a)(2). In this case, Debtor listed the P.A. Stock on his schedules and claimed them as exempt under § 4.
Once the exemptions have been claimed, interested parties can file objections within thirty days from the conclusion of the meeting of creditors or the filing of any amendment to the schedules. Fed. R.Bankr.P. 4003(b). G.W. filed a timely objection asserting that Debtor’s claim of exemption for the P.A. Stock was improper because its value was greater than the remaining exemption amount of $206, thereby exceeding the $1000 allowance set forth under the Florida Constitution.
A claim of exemption is considered prima facie evidence of its validity. Fed.R.Bankr.P. 4003 ed.’s cmt. (c) (West 2000). Thus, the objecting party bears the burden of proving that the exemptions are improperly claimed. Fed.R.Bankr.P. 4003(c). Once the opposing party has established an appropriate objection, the burden shifts to the debtor to prove the validity of the claim. Fed.R.Bankr.P. 4003 ed.’s cmt. (c) (West 2000). The issue presented on remand is whether this Court properly overruled G.W.’s objection and allowed Debtor’s claim of exemption.
Since there is no readily available market from which to glean the value of the P.A. Stock, the Court must determine its worth through the valuations offered by the parties. In Debtor’s Post-Trial Memorandum, he argues that G.W.’s “evidentia-ry presentation ... shows only half the picture”: while it noted the firm’s profits and receivables, it did not address the “corresponding liabilities of the corporation.” (Debtor’s Post-Trial Mem. at 7.) At the evidentiary hearing, Debtor testified that the firm’s expenses offset its income. Additionally, these liabilities did not include the salary that was owed to him. Using Debtor’s “balance sheet” valuation, it appears that the P.A. Stock, is indeed worthless.
However, the District Court noted that “the mere examination of assets is insufficient to prove value.” (Doc. 89 at 2.) In so holding, it cited a First Circuit opinion:
The determination of the “fair valuation” of the debtor’s assets at a specific time is at best an inexact science, and may often be impossible. As a result, insolvency frequently must be determined by proof of other facts or consideration of other factors from which insolvency may be inferred. Constructora Maza, Inc. v. Banco de Ponce, 616 F.2d 573, 577 (1st Cir.1980) (citations omitted).
This Court agrees with the District’s Court’s conclusion that the mere presence of assets and liabilities does not necessari*500ly reflect the fair value of an entity. This is especially true when there are other factors that might suggest a differing value. The Court does not believe that the “balance sheet” valuation relied upon by Debtor is a precise indication of the worth of the P.A. Stock on the Petition Date. The parties have presented evidence of income and expenses both before and after the Petition Date, yet neither party has given an accurate assessment of the firm’s assets and liabilities as of the Petition Date, the only date which is relevant to the Court’s analysis. Thus, the Court declines consideration of those figures in this instance.
Noting that the “balance sheet” valuation is of little use, the Court must ascertain a more accurate formula. G.W. urges the Court to find that the P.A. Stock has value since it was pledged as collateral to secure two lease agreements: Debtor “would not have pledged the stock to his wife as security if it had no value.” (G.W.’s Posi-Hr’g Br. at 47.)
The Court finds G.W.’s position persuasive. Debtor’s claim that the P.A. Stock is of no value would lead to the absurd conclusion that an item may be secured with worthless collateral. This would render the very purpose of collateral useless! Black’s Dictionary defines “collateral” as “[property that is pledged as security against a debt.” Black’s Law Dictionary 255 (7th ed.1999). Collateral is offered to guarantee repayment of a debt or obligation. Consequently, the collateral must be valuable enough to either encourage the debtor to fulfill his promise or to provide the creditor with some relief if the debtor fails to satisfy his debt.
In this case, the collateral must have been valuable to both Creditor and Debtor. It is likely that Creditor believed that the P.A. Stock had value since she accepted it as security. Furthermore, Debtor must have had some incentive to consistently satisfy his lease obligations. Finally, if the P.A. Stock were indeed worthless, as Debt- or claims, it is unlikely that the lease would have been renewed while secured by the P.A. Stock. Surely a creditor would not enter into an agreement where she knew the collateral to be worthless.
At the evidentiary hearing, Debtor was given the opportunity to explain why he pledged the P.A. Stock as collateral if it was worthless. Debtor did not respond to this inquiry. His failure to address this important question, which was emphasized by the District Court, is insufficient to overcome G.W.’s objection.
In light of the fact that there is sparse evidence in the record regarding the firm’s assets and liabilities as of the Petition Date, the Court will establish the value of the P.A. Stock by determining the amount owed under the two leases on the Petition Date. The value of the P.A. Stock must be, at minimum, equivalent to the amount owed on the lease as of the Petition Date. Debtor owed a total of $816.29 under the lease of books and lease of personal property.2 The P.A. Stock was pledged by Debtor only two months prior to his Petition Date. At that time, the amount due under the lease was $300.67. Therefore, the Court calculates the value of the P.A. Stock to be $300.67 on the Petition Date.
CONCLUSION
G.W. has satisfied the burden of proof necessary to sustain an objection to a claim of exemption for the P.A. Stock. The Court finds that the value of the P.A. Stock exceeds the remaining $206 exemption by $94.67. Accordingly, the Court *501must deny Debtor’s claim of exemption for $94.67 and will require Debtor to pay such amount to the Trustee within thirty days of the Court’s Order. A separate Order will be entered in accordance with these Findings of Fact and Conclusions of Law.
. G.W. highlighted that the corporation had nearly $7,297.43 in receivables on December 31, 1995 and $6,316.41 in receivables on May 2, 1996. (G.W.Ex. 4 at 115-116; G.W.Ex. 19 at 3-4.)
. The lease of books was for a two-year term beginning May 1, 1995. The monthly lease payments were $10.41 per month. Debtor filed his bankruptcy petition in February 1996. Thus, there were 15 payments remaining under the lease agreement as of the Petition Date, which amounted to $156.15. The lease of personal property was for a two-year term beginning June 1, 1994. There were 4 lease payments of $36.13 remaining as of the Petition Date that totaled $144.52. Thus, the amount owed under the lease of books and personal property as of the Petition Date was $300.67. (G.W.Ex.11.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493097/ | RULING ON PLAINTIFF’S MOTION TO RECONSIDER JUDGMENT
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
ISSUE
The court on August 2, 2000 (“the Ruling”) granted the motion of Brian L. Lyman (“the debtor”) for summary judgment in this adversary proceeding brought by PDS Engineering & Construction, Inc. *519(“PDS”) to determine dischargeability of a debt under Bankruptcy Code §§ 523(a)(2) and 523(a)(6). Because PDS had failed to file a statement of disputed facts in accordance with D.Conn.L.Civ.R. 9(c)2 1, the court deemed admitted the factual allegations in the debtor’s Local Rule 9(e)1 Statement of undisputed facts. PDS, on August 11, 2000, filed the instant motion to reconsider. PDS alleges that it did not receive a copy of the debtor’s reply brief which raised the issue of the Local Rule 9(c)2 Statement, and thus was oblivious to the requirement.2 PDS submitted a document titled “Statement of Facts in Dispute” with its motion, and an “Amended Statement of Facts in Dispute” with its reply brief on September 15, 2000.
II.
DISCUSSION A Excusable Neglect
PDS brings its motion for reconsideration pursuant to Fed.R.Civ.P. 60(b)(1),3 made applicable in bankruptcy proceedings by Fed.R.Bankr.P. 9024, and D.Conn.L.Civ.R. 9(e)4, made applicable in bankruptcy proceedings by D.Conn. LBR 1001-1, claiming that its failure to submit the statement required under D.Conn.L.Civ.R. 9(c)2 was attributable to excusable neglect — the mistake or inadvertence of its counsel. At the outset, the court notes that PDS is accountable for the acts and omissions of its counsel. See Pioneer Investment Services Co. v. Brunswick Associates L.P., 507 U.S. 380, 397, 113 S.Ct. 1489, 1499, 123 L.Ed.2d 74 (1993) (“Pioneer”). The Supreme Court, in Pioneer, held that the determination of what sorts of neglect will be considered excusable is “... an equitable one, taking account of all relevant circumstances surrounding the omission. These include ... the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reason*520able control of the movant, and whether the movant acted in good faith.” Pioneer, 507 U.S. at 395, 113 S.Ct. 1489. Under the circumstances of this proceeding, the court finds that PDS’s failure to comply with D.Conn.L.Civ.R. 9(c)2 was a good faith mistake and that the prejudice to the debt- or from granting the motion consists primarily of the costs and fees associated with the delay and reargument of the issues. Despite the presence of such factors in PDS’s favor, the scales are decidedly tipped against granting the motion for reconsideration. PDS had more than two years from the submission of the debtor’s motion for summary judgment to the date PDS’s Rule 9(c)2 Statement was due to read and comply with the pertinent rules. Even more significant than the length of the delay and the effect of further delays on the judicial proceedings, however, is the reason for the delay. Although PDS argues that it did not receive a timely copy of the debtor’s reply brief, which referred to PDS’s failure to submit a Rule 9(c)2 Statement, it is the responsibility of PDS and its counsel to be familiar with the rules of procedure; the debtor is not responsible for informing his adversary of the rules.
It is well established that counsel’s ignorance of the rules of procedure generally will not justify reconsideration of a judgment. “Pioneer noted that inadvertence, ignorance of the rules, or mistakes in construing the rules do not usually constitute excusable neglect.... [Fjailure to follow the clear dictates of a court rule will generally not constitute such excusable neglect .... [Wjhere counsel failed to offer a persuasive justification for failing to comply with ... local court rules, there was no basis for deviating from the general rule that a mistake of law does not constitute excusable neglect.... Where ... the rule is entirely clear, we continue to expect that a party claiming excusable neglect will, in the ordinary course, lose under the Pioneer test.” Canfield v. Van Atta Buick/GMC Truck, Inc., 127 F.3d 248, 250-51 (2d Cir.1997) (citations and internal quotation marks omitted); see also Weinstock v. Cleary, Gottlieb, Steen & Hamilton, 16 F.3d 501, 503 (2d Cir.1994) (“As this court has explained numerous times: The excusable neglect standard can never be met by a showing of inability or refusal to read and comprehend the plain language of the federal rules. Counsel’s lack of familiarity with federal procedure is not an acceptable excuse.”) (citations and internal quotation marks omitted).
The court concludes that PDS has not established the requisite excusable neglect for its failure to comply with the requirements of D.Conn.L.Civ.R. 9(c)2, and its motion for reconsideration is, therefore, denied. The court will, nevertheless, comment upon the other issues raised by PDS’s motion.
B. PDS’s Amended Statement of Facts in Dispute
Although PDS has twice revised the format of its statement of disputed facts, the amended statement still fails to comply with the requirements of D.Conn.L.Civ.R. 9(c)2. Like the earlier submissions, the amended statement does not specifically admit or deny the allegations of each paragraph of the debtor’s statement and it does not indicate any material facts as to which there is a triable dispute.
C. Substantive Issues of the Ruling
Even if the court were to accept PDS’s amended statement, the amended statement fails to dispute any material facts. In Part III of its Ruling, the court set forth in detail the facts it deemed admitted. PDS does not dispute the existence, validity, dates or amounts of any of the transactions stated therein. The only statement in Part III which PDS disputes is that, “The debtor made no representation to PDS about his personal financial condition when he executed the second mortgage.” (Ruling at 6.) PDS alleges that the debtor orally represented that the taxes and mortgage payments on the house were current and “represented to *521PDS by showing an appraisal of the residence that the value of the property exceeded the current mortgage by the approximate amount of the debt.” (PDS Facts at 15.) As noted in the Ruling, to be actionable under § 523(a)(2)(B), a statement about the debtor’s financial condition must be “in writing.” The truth or falsity of PDS’s allegations concerning the debt- or’s oral representations, therefore, does not affect the dischargeability of the indebtedness. Any dispute as to such oral representations, therefore, is not material.
The court considers only whether PDS’s allegations regarding an appraisal would alter the conclusions of the Ruling. The court concludes that they do not. The elements of § 523(a)(2)(B) require “a statement in writing (1) that is materially false.” Neither PDS’s statement of facts in dispute nor the affidavit cited to support the statements about an appraisal allege that such appraisal contained any misrepresentation. Accordingly, even if the court were to accept PDS’s statement regarding an appraisal as true, it would not support a finding of nondischargeability under § 523(a)(2)(B).
Similarly, PDS’s amended statement does not dispute any of the factual allegations relied on by the court in ruling that “there is no basis for finding the debtor obligated for the Link debt, let alone for a nondischargeability debt under § 523(a)(6),” for “willful and malicious injury.” (Ruling at 9.) As discussed in the Ruling, PDS’s allegation that Link, at the direction of the debtor, transferred assets to the detriment of PDS is unsupported, since the uncontroverted facts establish that any property transferred was fully encumbered by creditors whose liens were perfected long before PDS filed a mechanic’s hen on the Link property. The transfers of property, therefore, caused no injury at all, malicious or otherwise, to PDS.
Because PDS’s amended statement alleges no facts that would alter the court’s prior decision to grant the debtor’s motion for summary judgment, PDS has raised no dispute as to any material fact.
III.
CONCLUSION
In accordance with the foregoing discussion, the court concludes that PDS’s failure to comply with the requirements of D.Conn.L.Civ.R. 9(c)2 was not excusable neglect, and that the PDS’s motion for reconsideration of this court’s August 2, 2000, grant of summary judgment for the debtor, is hereby denied. The court also concludes that the motion is not sustainable in any event. It is
SO ORDERED.
. D.Conn.L.Civ.R. 9(c) provides:
(c) Motions for Summary Judgment.
1. There shall be annexed to a motion for summary judgment a document entitled "Local Rule 9(c) 1 Statement”, which sets forth in separately numbered paragraphs a concise statement of each material fact as to which the moving party contends there is no genuine issue to be tried. All material facts set forth in said statement will be deemed admitted unless controverted by the statement required to be served by the opposing party in accordance with Rule 9(c)2.
2. The papers opposing a motion for summary judgment shall include a document entitled "Local Rule 9(c)2 Statement,” which states in separately numbered paragraphs corresponding to the paragraphs contained in the moving party’s Local Rule 9(c) 1 Statement whether each of the facts asserted by the moving party is admitted or denied. The Local Rule 9(c)2 Statement must also include in a separate section a list of each issue of material fact as to which it is contended there is a genuine issue to be tried.
3. The statements referred to above shall be in addition to the material required by these Local Rules and the Federal Rules of Civil Procedure.
. PDS does not dispute that the brief was timely, and properly mailed to it by the debt- or.
. Fed.R.Civ.P. 60 provides in relevant part:
Rule 60. Relief From Judgment or Order
(b) Mistakes; Inadvertence; Excusable Neglect; Newly Discovered Evidence; Fraud, Etc. On motion and upon such terms as are just, the court may relieve a party or a party’s legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; ....
. D.Conn.L.Civ.R. 9(e) provides:
(e) Motions for Reconsideration.
1. Motions for reconsideration shall be filed and served within ten (10) days of the filing of the decision or order from which such relief is sought, and shall be accompanied by a memorandum setting forth concisely the matters or controlling decisions which counsel believes the Court overlooked in the initial decision or order.
2. In all other respects, motions for reconsideration shall proceed in accordance with Rule 9(a) of these Local Rules. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493098/ | MEMORANDUM AND ORDER ON DEBTOR’S MOTION TO AVOID LIENS IMPAIRING EXEMPTION
ALAN H. W. SHIFF, Chief Judge.
The issue here is whether the debtor may invoke Connecticut’s homestead exemption to avoid a judgement lien that emanated from an unsecured revolving personal line of credit.1
BACKGROUND
The debtor owned a single family residence in Bridgeport, Connecticut. On February 6, 1976, he signed an agreement with People’s Bank to receive a $5,000 unsecured revolving line of credit that could be terminated by People’s at will, i.e., in the absence of default by the debtor. See People’s Bank Personal Credit Line Agreement, filed February 10, 2000. In 1993, the Connecticut legislature enacted Public Act No. 93-301. Section 2 of the Act added subsection 52-352b(t) which created a $75,000 homestead exemption as a measure of protection for homeowners. Section 3 of the Act provided that it “shall take effect October 1, 1993, and shall be applicable to any lien for any obligation or claim arising on or after said date.” P.A. 93-301 § 3 (emphasis added). It is undisputed that at the time of the effective date, the debtor owed $3,627.86. See 9/22/93 to 10/20/93 statement. As of January 23, 1995, there was a zero balance on that account. See 12/21/9/. to 01/23/95 statement. Thereafter, the debtor utilized the credit line, defaulted, and on September 19, 1997. People’s recorded the subject judgment lien on the debtor’s residence in the amount of $6,581.87 to secure the corresponding debt. On April 15, 1998, the debtor commenced this chapter 7 case. On April 12, 1999, he filed the instant motion under 11 U.S.C. § 522(f)(1)(A) to avoid the judgment lien, claiming that it impaired his homestead exemption provided by Connecticut law and the Bankruptcy Code. See Connecticut General Statutes § 52-352b(t) and 11 U.S.C. § 522(b)(2)(A). The parties have agreed that the issue may be decided on the record. Accordingly, judicial notice has been taken of the case docket. See Fed.R.Evid. 201, made applicable here by Fed.R.Bankr.P. 9017; Calabro v. United States, 830 F.Supp. 175, 178 (E.D.N.Y.1993).
DISCUSSION
Section 522(b)(2)(A) of the bankruptcy code provides that a debtor may elect state law exemptions as an alternative to the federal exemptions provided in § 522(d). *523Code section 522(f)(1)(A) provides that “the debtor may avoid the fixing of a [judicial] lien on an interest ... 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 ... ”.
The debtor argues that since People’s judgment lien was recorded after the effective date of the Act, he may avoid that lien under § 522. People’s contends that the judgment lien should not be avoided because it relates back to the pre effective date agreement which created the claim or obligation. The precise fact pattern presented here was considered in Caraglior v. World Savings & Loan (In re Caraglior), 251 B.R. 778 (Bankr.D.Conn.2000), that is, a pre effective date agreement which was freely terminable and a post effective date debt and corresponding judgment lien. In that case, the Caraglior court granted the debtor’s motion to avoid the judgment lien, reasoning that “[the creditor] could have canceled the credit card agreement in anticipation of the impending change in Connecticut exemption law as the surest way of terminating its exposure.” Id. at 782. Although Caraglior addressed a credit card agreement and not a revolving line of credit, the court finds no basis for distinguishing those scenarios, and People’s has provided none. The issue is not when the debtor-creditor relationship arose, but whether there was a lien on a claim or obligation which arose after the effective date. Because the instant lien relates exclusively to post effective date debt, the exemption applies.
Accordingly, the debtor’s motion is GRANTED, and it is SO ORDERED.
. The debtor's probate estate is now his successor in interest. See Rule 1016, F.R.Bankr.P. (The "[d]eath ... of [a] debtor shall not abate a liquidation case under chapter 7 of the Code. In such event the estate shall be administered and the case concluded ... as though the death ... had not occurred.”) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493099/ | Memorandum of Decision re Plan Confirmation
ALAN JAROSLOVSKY, Bankruptcy Judge.
I. Introduction
Debtor Southern Humboldt Community Healthcare District (“District”) is a health care district created under § 32000 et seq. of the California Health and Safety Code to provide hospital services to the rural portions of southern Humboldt County. It filed its Chapter 9 petition January 20, 1999. Its plan of reorganization is now before the court.
The District’s primary creditor is Six Rivers National Bank (“Bank”). The District owes the Bank about $665,000.00 on account of a 1998 loan evidenced by a note and secured by a deed of trust to District real property. The deed of trust is probably avoidable as a preference; for purposes of confirmation, the Bank is treated as unsecured.
The District asserts that the Bank has no claim at all because under state law the District was not permitted to incur indebtedness beyond its ability to repay within the fiscal year. Therefore, according to the District, the Bank has no claim and its ballot must not be counted. If the District is correct, then it has sufficient votes to obtain confirmation of its plan.1
II. Procedural Status
This matter was continued for two months due to health problems of the District’s counsel. Unfortunately, this delay appears to have confused the District and muddied the procedural status of this ease.
The matter now before the court is the confirmation of the District’s plan. It is not an objection to claim, nor is it the trial of the District’s adversary proceeding against the Bank. The court has considered all of the District’s argument and evidence, even though the District mistakenly captioned them in the adversary proceeding and they have been filed there and not in the base case. However, the District’s mistake is likely to cause confusion for anyone reviewing this matter in the future unless the District takes steps to undo its mistakes.
The District has not convinced the court that its plan ought to be forced on creditors without their consent. Moreover, its attempt to gerrymander an accepting class in order to meet the requirements of § 1129(a)(10) of the Bankruptcy Code violates the holding in In re Tucson SelfStorage, Inc., 166 B.R. 892 (9th Cir. BAP 1994). Accordingly, the plan can only be confirmed if the District is correct in its legal position and the Bank has no allowable claim. Since the parties have fully addressed this issue, and since there are no material facts in dispute, the court considers the issue as part of plan confirmation. If the court finds that the Bank in all likelihood has no allowable claim, the plan will be confirmed. If the court finds the Bank has an allowable claim, then the District has insufficient votes for confirmation and the plan will not be confirmed.2
*760III. Facts
In October of 1997 the District obtained a $50,000.00 unsecured line of credit from the Bank, where it maintained its checking and payroll accounts. By early 1998, the balance the District owed to the Bank on the credit line was $45,814.14. In addition, the District began to incur significant overdrafts in its checking account.
On March 23, 1998, the District’s board of directors authorized the District to borrow $663,824.00 from the Bank for the purpose of paying off the line of credit and the overdrafts and keeping the District operating until it could collect special assessment. The loan was intended to be a short-term “bridge” loan until the District could obtain long term financing.
The loan was funded on April 7, 1998. Of the loan proceeds, $262,611.00 was used to pay off the overdrafts and $45,814.14 was used to pay off the line of credit. The balance, less $5,190.86 in related costs, was made available to the District without restriction. The District immediately used $133,000.00 to fund its retirement account.
Although both the District and the Bank agree that the loan was intended as a short-term loan, the note signed by the District stated a five-year term. It also provided for a deed of trust, which was executed but not recorded.
Between July and October, 1998, the Bank advanced considerable additional sums to the District to cover cash flow and payroll shortfalls. On October 26, 1998, upon learning that the District intended to file a Chapter 9 petition, the Bank recorded its deed of trust. The District filed its petition on January 20,1999.
IV. Legal Issue
The sole legal issue in this case is whether the Bank can have any enforceable claim for a debt incurred in a prior fiscal year.3 The District’s position is based on § 32130 of the California Health and Safety Code, which provides:
A district may borrow money and incur indebtedness in an amount not to exceed 85 percent of all estimated income and revenue for the current fiscal year, including, but not limited to, tax revenues, operating income, and any other miscellaneous income received by the district, from whatever source derived. The money borrowed and indebtedness incurred under this section shall be repaid within the same fiscal year.
Restrictions on the borrowing of public entities are common in California and other states. They may apply to counties, municipalities, quasi-municipal corporations, and special assessment districts. They may include a limitation on debt as a percentage of revenue, a restriction on the fiscal year from which loans may be repaid, or both. They are intended to prohibit the accumulation of public debt without the consent of the taxpayers, and require governmental agencies to carry on their operations on a cash basis. 56 Am. Jur.2d, Municipal Corporations, Counties, and Other Political Subdivisions, § 606. Such restrictions may be created by constitution or statute. Claims made on loans in excess of borrowing limitations are unenforceable. 64A C.J.S., Municipal Corporations, § 1599, citing, inter alia, City of Los Angeles v. Offner (1942) 19 Cal.2d 483, 486, 122 P.2d 14.
It appears to the court an inescapable conclusion that the Bank’s claims against the District are completely unenforceable. This is not a conclusion the court enjoys reaching, as money from the Bank not only allowed the District to keep operating but also allowed its employees to fatten their retirement accounts. This situation ap*761pears to fall squarely within the legal maxim that no good deed goes unpunished. Nonetheless, the law appears clear and must be followed.
V. Conclusion
The validity of the Bank’s claim is not properly before the court. Even if it were, the court might well abstain from adjudicating it, as such important issues of state law are probably best left to the state courts. However, for plan confirmation purposes the court may estimate the claim. In re Corey, 892 F.2d 829, 834 (9th Cir.1989). Based on the clear mandate of § 32130 of the California Health and Safety Code, the claim must be estimated at zero.
Since the District has met all of the requirements of § 1129 of the Bankruptcy Code which are applicable to Chapter 9 cases, its plan must be confirmed. Counsel for the District shall submit an appropriate form of order forthwith.
. § 1129(a)(8) of the Bankruptcy Code, requiring the acceptance of each class of impaired claims, is made applicable to Chapter 9 cases by § 901(a).
. The court has set a deadline for confirmation of a plan, which has passed. Accordingly, if the District's plan is not confirmed the case will be dismissed pursuant to the court’s order filed April 17, 2000.
. The five-year term of the note is not a crucial fact, since most of the loan proceeds were used to pay the credit line and the overdrafts. The Bank can prevail only if its overdraft and credit line claims could be enforced after the end of the fiscal year. For confirmation purposes, it does not matter whether the Bank’s claim is $663,824.00 (the amount of the note) or just $308,425.14 (the amount of the overdraft plus the credit line). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493101/ | MEMORANDUM OPINION AND ORDER
CHARLES M. CALDWELL, Bankruptcy Judge.
This adversary proceeding came before the Court on July 6, 2000, for a trial on a complaint filed by the Plaintiff, Pauline Stamm-Lingo (“Plaintiff’). The Plaintiff seeks an order declaring nondischargeable a judgment entered in her favor by the Franklin County Common Pleas Court, pursuant to sections 523(a)(2)(A) and/or (a)(6).1 The Court finds the Plaintiff has failed to sustain her burden of proving that: a) the Debtor, Robert L. Secrest (“Defendant”), made false statements regarding his credentials or ability to complete the work he was hired to perform; b) he intended to deceive the Plaintiff; c) she justifiably relied on Defendant’s representations; d) the Defendant’s actions were the proximate cause of any loss; and e) the debt owed by the Defendant was incurred as a result of the Defendant’s intent to cause injury. What follows is a brief statement of the facts and analysis which led the Court to this conclusion.
The Plaintiff and the Defendant became acquainted in September 1995, when the Defendant was an eighteen-year-old senior at Fairfield Career Center and Vocational School for Gahanna Lincoln High School. The parties were introduced by the Plaintiffs granddaughter, Nicole Burdette. At the time she met the Defendant, the Plaintiff was interested in purchasing 478^480 East Gates Street in Columbus, Ohio. The property had been badly damaged by fire, and the Plaintiff knew it needed substantial repairs. She intended to rehabilitate the property for rental. No evidence was presented as to whether the Plaintiff had any experience in hiring contractors, rehabilitating property, or serving as a landlord.
The Defendant informed the Plaintiff that he was interested in being hired to rehabilitate the property and gave her his business card, which displayed the name of his construction company, “Secrest Contracting.” The Defendant’s business card also stated that he was licensed and bonded, although it did not state that these credentials were valid only in the city of Gahanna. The Defendant credibly testified, however, that he orally informed the Plaintiff he was not licensed or bonded in the city of Columbus.
*19The Defendant had only a modest amount of experience in the construction business, limited to being a student in his vocational school’s carpentry program, and assisting family and friends with small carpentry and painting jobs. He had never undertaken or assisted in the rehabilitation of houses as badly damaged as 478-480 East Gates, and he admitted having no experience in the operation of a business, including managing and training employees, or preparing and maintaining business records.
Notwithstanding his limited experience, the Defendant informed the Plaintiff he would be able to do the work necessary to render the property habitable. This, apparently, was all the assurance the Plaintiff needed. She hired the Defendant, and gave him sole responsibility for rehabilitating 478 — 480 East Gates, as well as 488-488/6 East Gates, which the Plaintiff subsequently purchased and which had been severely vandalized. The Defendant commenced work on the houses in late November 1995.2
The parties had no written contract, and the Plaintiff and Defendant offered conflicting testimony on the terms of compensation. According to the Plaintiff, she agreed to pay the Defendant $25.00 per hour. The Defendant testified more credibly that they originally agreed he would be paid at the end of the project in an amount equal to fifty percent of the cost of the rehabilitation. Soon after he began working, however, the Plaintiff offered to pay him as the work progressed, subject to the fifty percent ceiling. The Defendant testified that after the Plaintiff terminated his employment, their oral contract was modified a third time, to value his work at $25.00 per hour for the purpose of liquidating the obligations under the arrangement. The parties agree that the Plaintiff was to pay for all additional labor, materials and necessary equipment as the work progressed, and that the Defendant was to provide the Plaintiff with receipts for materials or equipment purchased for the project.
At the outset of the project, whenever the Defendant required funds to pay laborers or purchase materials, he requested a check or cash from the Plaintiff. This arrangement proved cumbersome; however, and at the Defendant’s request, the Plaintiff opened a checking account that bore her name as well as the Defendant’s. The Defendant was given authority to write checks on the account and to make cash withdrawals. The Defendant routinely wrote checks to pay for materials, and to himself and others as compensation for labor performed on the properties.
After receiving two bank statements which noted many cash withdrawals, the Plaintiff began questioning the Defendant to obtain receipts. The Defendant was able to provide some receipts, but could not account for all of the cash withdrawn. The Defendant testified the funds were used to purchase materials from vendors reluctant to accept personal checks and for laborers who preferred to be paid in cash. The Plaintiff admitted she knew that as many as nine people in addition to the Defendant worked on the houses, and that these individuals were being paid in cash. The dispute over expenses, as well as the Plaintiffs unhappiness with the rate at which the project was progressing, caused the Plaintiff to terminate the Defendant’s employment in early February 1996.
On February 29 and March 1, 1996, the Plaintiff and Defendant met to determine where the money had been spent and any sums the Defendant was owed. These meetings were unsuccessful, and the Plaintiff requested additional documentation. *20At the Plaintiffs request, the Defendant attempted to compile an accounting of the time he had devoted to working on the houses, including time spent not only at the properties, but time taken to negotiate with vendors, obtain permits, and other tasks not related to physical labor on the premises. The Defendant credibly testified this accounting was difficult to prepare, because the Plaintiff had not required him to record his hours at the outset of their arrangement. The Defendant logically explained this was due to their agreement that he would be paid a flat rate, based on a percentage of the cost of the rehabilitation. Nonetheless, he prepared an invoice for each of the two properties, and presented them to the Plaintiff. The invoices reflected that the Defendant worked in excess of four hundred hours over the time he was employed by the Plaintiff. The Plaintiff testified that she did not believe the Defendant worked as many hours as he declared on the invoices. The meetings and invoices failed to result in a resolution of the parties’ differences.
On July 8, 1998, the Plaintiff sued the Defendant in Franklin County Common Pleas Court, alleging violations of Columbus Municipal Code section 4114.01, et seq., and of Ohio’s Consumer Sales Practices Act, O.R.C. section 1345.01, et seq. After the Defendant failed to answer or otherwise respond to the Plaintiffs complaint, the common pleas court entered a judgment against him by default on February 22, 1999. On February 25, 1999, Franklin County Common Pleas Court Magistrate Rita Bash Eaton issued a decision awarding the Plaintiff compensatory damages in the amount of $33,676.00 and punitive damages in the amount of $25,000.00. Magistrate Eaton’s decision was reduced to judgment on April 1, 1999. The Defendant filed a petition for relief under chapter 7 of the Bankruptcy Code on July 16, 1999, and the Plaintiffs complaint commencing this adversary proceeding was filed on October 22,1999.
In order to establish that a debt is nondischargeable under section 523(a)(2)(A), a plaintiff must prove that:
(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth;
(2) the debtor intended to deceive the creditor;
(3) the creditor justifiably relied on the false representation; and
(4) its reliance was the proximate cause of loss.
In re Rembert, 141 F.3d 277, 280-281 (6th Cir.1998) cert. denied 525 U.S. 978, 119 S.Ct. 438, 142 L.Ed.2d 357 (1998). The Plaintiff must prove each of these elements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 n. 11, 111 S.Ct. 654, 661 n. 11, 112 L.Ed.2d 755 (1991). Any exception to discharge is to be construed strictly in favor of the debtor. Rembert, 141 F.3d at 281 citing Manufacturer’s Hanover Trust v. Ward (In re Ward), 857 F.2d 1082, 1083 (6th Cir.1988).
The Plaintiff asserts the Defendant made the following statements, knowing them to be false:
(1) that he was licensed and bonded; and
(2) that he was able to do the work necessary to complete the rehabilitation of the properties.
The Plaintiff presented no evidence to prove the Defendant was not licensed or bonded. The Defendant credibly testified that he was licensed and bonded in the city of Gahanna, and that he informed the Plaintiff that he was not licensed and bonded in the city of Columbus. Based on the testimony offered, the Court cannot conclude the Defendant made false representations as to his credentials.
The Plaintiff also presented no evidence to prove the Defendant lacked the ability to perform the work necessary to complete the project. The Plaintiff merely complained that the work was not done *21quickly enough, yet she presented no evidence that the work took an inordinate amount of time according to industry standards. The Court does not find it surprising that a high school student, working around school hours and on weekends, would not be able to completely rehabilitate two badly damaged duplexes within the approximately nine weeks that elapsed between the time the Plaintiff hired and fired him. The Plaintiff was aware of the Defendant’s age, time restrictions and level of experience from the outset, yet she appears to have expected him to perform in the manner of an experienced, full-time contractor. The Court finds these expectations to have been unreasonable.
The Plaintiff asserted that the invoices she received from the Defendant were falsified. Yet, she offered no evidence (other than her uncorroborated testimony) of exactly what work was completed, and exactly how much time the work should have taken, according to industry standards. Without such evidence, the Court cannot conclude that the invoices were false. The Plaintiff failed to prove the Defendant intended to deceive her. The Court finds that the testimony of both the Plaintiff and Defendant established nothing more than a hastily-arranged, unwritten agreement, which predictably resulted in mutual dissatisfaction. The Defendant does not appear to have set out to lie, cheat or steal from the Plaintiff; he simply appears to have been eager and inexperienced.
The Plaintiff could and should have taken steps to protect herself by reducing the terms of the agreement to writing, and by not giving the Defendant essentially unsupervised access to a bank account. Instead, she appears to demand that the Defendant be held responsible for her disregard of the risks she assumed when she hired someone of the Defendant’s youth and inexperience. The Plaintiffs reliance upon the Defendant’s statements that he was capable of completing the project, which have not been proven false, should have been qualified in light of his age and experience, and the Plaintiff cannot now seek to hold the Defendant solely responsible for the injury she suffered. The Plaintiff has failed to establish that she justifiably relied on the Defendant’s statements, and has failed to prove that the actions of the Defendant, rather than the Plaintiffs own lack of due diligence, were the proximate cause of any pecuniary loss.
The Plaintiff finally seeks a finding that the debt owed to her by the Defendant is nondischargeable under section 523(a)(6), which provides, in relevant part:
(а) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(б) for willful and malicious injury by the debtor to another entity or to the property of another entity.
The Sixth Circuit, relying on Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), has recognized that “only acts done with the intent to cause injury — and not merely acts done intentionally — can cause willful and malicious injury [of the kind encompassed by section 523(a)(6) ].” In re Markowitz, 190 F.3d 455, 464 (6th Cir.1999). The Sixth Circuit has explained that an actor must “will or desire harm, or believe injury is substantially certain to occur as a result of his behavior” in order for a debt resulting from his conduct to be nondischargeable. Markowitz, 190 F.3d at 466. Here, the Plaintiff has failed to prove anything other than that the Defendant was young and inexperienced. The evidence does not establish that the Defendant intended to cause injury to the Plaintiff.
In sum, the Court finds the Plaintiff has failed to sustain her burden of proving all of the elements necessary to prevail under sections 523(a)(2)(A) or (a)(6). Accordingly, the judgment entered in favor of the *22Plaintiff in the Franklin County Common Pleas Court is DISCHARGEABLE.
IT IS SO ORDERED.
. Unless otherwise noted, all statutory citations will refer to Title 11 of the United States Code, a.k.a. the Bankruptcy Code.
The Plaintiff's complaint also included a section 523(a)(4) claim; however it was abandoned at trial.
. The parties also agreed that Defendant would perform and be compensated for work done on a third property located on Glenn Avenue in Columbus, Ohio, and on a motor vehicle belonging to the Plaintiff. Whether this agreement existed at the outset of the business relationship between the Plaintiff and Defendant is not clear, but the parties do not dispute its existence. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493102/ | MEMORANDUM OPINION
DONALD R. SHARP, Chief Judge.
This matter is before the Court on a remand from the United States District Court for the Eastern District of Texas. The plan of reorganization was previously confirmed by the bankruptcy court, the Honorable C. Houston Abel presiding. On appeal to the district court, that opinion was affirmed in all respects with the exception of the rate of interest to be paid on the unsecured portion of the principal debt from Westwood Plaza Apartments, Ltd. to the Department of Housing and Urban Development. The district court determined that the rate provided in the plan of 3 percent per annum on the unsecured portion of the debt was “clearly erroneous” and remanded the case to this Court for determination. Debtor then attempted to modify the plan which this Court denied, holding that the mandate of the district court was to determine the appropriate interest rate before any further action could be taken. That is the matter that is before the Court now for consideration.
An ancillary dispute has arisen since the Department of Housing and Urban Development transferred its rights under the original note and confirmed plan to Asset Recovery Fund, Inc. and Asset Recovery Fund, Inc. (ARF) is now the party-in-interest. Westwood Plaza Apartments, LTD. Objected to Asset Recovery Funds proceeding on the basis that the original note was lost while in the possession of HUD and therefore, ARF could not properly be the holder of the debt and enforce *196the rights under the original contract. In oral rulings, this Court overruled that position since the evidence clearly reveals that HUD’s rights have all been transferred to Asset Recovery Fund, Inc. and there is no question but that Westwood Plaza was indebted to HUD prior to that transfer. To the extent that the original note may be lost, it is immaterial since there is ample documentary evidence including the plan of reorganization to establish the terms and parameters of the obligation. To the extent that there is any question as to Asset Recovery Fund, Inc.’s standing to pursue this action, this Court holds that it is the proper party to proceed.
In the district court’s remand of the proceeding to this Court, the District Court determined that the bankruptcy court had erred in not performing a present value analysis to determine whether the plan proposed by the Debtor provided ARF with payments equaling the present value of its unsecured claim. The District Court specifically held that the same analysis utilized in determining the appropriate interest rate for a secured claim should be utilized for an unsecured claim. The Court analyzed the statutory language and found no substantial difference between the provisions dealing with payments for secured and unsecured claims.1
Although the district court did not specifically hold that the 3 percent interest rate was too low, the sense of the opinion convinces this Court that it believed it to be so. The Court only held that the rate was “clearly erroneous” and not insufficient or too low. However, the Court did allude to the fact that feasibility issues would have to be reexamined once a new interest rate was determined because the plan may not be feasible with a “higher interest rate.” This Court ruled that the feasibility issue must remain unresolved until the interest rate was determined. To that end a hearing was conducted at which the parties presented evidence concerning the appropriate rate of interest to be charged on the unsecured claim.
At the hearing, the evidence consisted of testimony by an “expert” witness from each side with some charts and documents prepared by the witnesses. Although both parties were aware of the district court mandate to perform a present value analysis, neither party focused on determining the discount rate to be applied to a stream of payments proposed under the plan which would demonstrate that the stream of future payments equated to the present value of the unsecured claim. The expert witnesses focused on the appropriate “market rate” of interest to be applied to an unsecured loan of this type. Both parties conceded that such a loan as this was not available in the market place and therefore, there were no comparable loans one could look to in determining an appropriate interest rate. From a pure economic standpoint, the only criticism one can make of using a “market rate” as the equivalent of a discount rate is that the discount rate is an attempt to determine a future stream of payments that will be the equivalent of the amount of the claim’s present value. Obviously, some factor would have to be considered for the risk of non-repayment unless one were talking of a risk free investment. The market rate, on the other hand, is not designed to simply repay the equivalent of the present claim but is a rate calculated by the lender to repay that claim, compensate for the risk of non-repayment and hopefully factor in some profit margin for the lender. It is obvious that neither of these computations is an exact science by simply looking at the myriad of articles and cases discussing the issue.
It is obvious that the prevailing jurisprudence, especially in the Fifth Circuit, has determined that the best method *197for the courts to resolve these issues is to apply an appropriate market rate of interest to determine the amount of the payments to be made to the secured or unsecured lender. See In re Briscoe Enterprises, Ltd., 994 F.2d 1160 (5th Cir.1993) and In re Collins, 167 B.R. 842 (Bankr.E.D.Tex.1994). In the instant case, the appropriate rate of interest on the secured portion of this loan was determined by taking the prime rate and adding to that a certain risk factor to compensate for the risk of non-payment of the loan. The district court specifically approved that methodology and approved the rate that was determined by the Court citing the Briscoe case as authority. Also, the district court determined that the methodology for determining the unsecured rate, based on an analysis of the statutory language, should be the same. Therefore, the appropriate procedure for this Court to follow in the instant case is to take the prime rate at the time of the confirmation of this plan and apply to that an appropriate risk factor to compensate for the risk of nonrepayment to establish the proper rate of interest to be applied to the unsecured portion of this loan.
The testimony of the Debtor’s expert was very difficult to follow and understand. His ultimate conclusion was that a discount or interest rate of 5 percent should be the appropriate rate of interest to be charged. However, his testimony contains inconsistencies and in one instance, a faulty analysis. One of the prime factors that he testified to considering is the question of feasibility. In fact, he argued that he had considered the plan and “looked for a way to make it feasible.” There is no support in economic theory or the jurisprudence to tailor the interest rate to a determination of what the Debtor needs it to be to make his plan feasible. Additionally, Debtor’s expert conceded that an unsecured loan was inherently riskier than a secured loan and that the increased risk would inherently require a higher interest rate. However, his conclusion is that the maximum rate to be charged on the unsecured portion of the loan is 2-1/2 percent less than the amount being charged on the secured portion. This conclusion defies logic and is totally inconsistent with this acknowledgment that the unsecured portion of the debt carries a higher risk. This Court believes that the fault in the analysis stems from Debtor’s beginning point of a treasury bond rate of 7.25 percent which is a risk-less rate and then rather than adding points to that riskless rate to compensate for the risk in this case, he lowered the rate by seventy-five basis points because the unsecured portion of the debt shortens the payout term of the original loan by nine years. The fault in that analysis is that the 7.25 percent assumed rate should have first been increased by some factor to compensate for the increased risk and then it may have been appropriate to discount it some amount for the shortened payout period. The Debtor’s evidence is too inconsistent to be given any credibility. This Court believes that the testimony presented by ARF most closely utilizes the analysis mandated by the district court’s opinion as well as the jurisprudence represented by the Fifth Circuit’s opinion in Briscoe. ARF’s expert witness, John Doyal testified that the appropriate rate of interest was prime rate plus two to two and one-half percent for the risk factor of non-payments. Mr. Doyal conceded that this would simply be a loan that was not available on the open market and that there were no comparable market rates to be found. However, he used the methodology sanctioned by the jurisprudence and most commonly used in hearings of this type and that is to take a published rate such as risk free treasury t-bills or the prime rate and add an appropriate risk factor. Obviously, the risk factor is a subjective judgment. As the Fifth Circuit stated in Briscoe, “often the contract rate will be an appropriate rate but reference to a similar maturity treasury rate is instructive. The treasury rate is helpful *198because it includes all necessary factors except the risk premium.” This Court believes that Mr. Doyal made the appropriate analysis and will adopt his testimony as the proper determination of the interest rate to be charged.
The evidence was clear that the prime rate at the time of plan confirmation was six percent. To that rate, Mr. Doyal proposed adding a risk factor of 2 to 2-1/2 percentage points. This determination was based on his knowledge of the commercial real estate market based on long and varied experience he’s had. This Court finds that his testimony was very thoughtful and his years of expertise in this area of lending are certainly factors that should give his opinion great weight. Additionally, the analysis creates a logical pattern given both parties’ acknowledgment that the unsecured portion should carry a higher interest rate than the secured portion. Since the secured portion carries a rate of 7.5 percent interest and using Mr. Doyal’s analysis to add a 2-1/2 percent risk factor to the 6 percent prime rate, one arrives at an interest rate of 8.5 percent on the unsecured portion of the loan creating a logical pattern based on the testimony of all parties.
This Court holds that the unsecured claim constituting class four of Debtor’s plan of reorganization must pay ARF, the successor to HUD, interest at the rate of 8.5 percent on the entire unsecured claim.
. The Debtor argued at hearing that the district court had incorrectly interpreted the Bankruptcy Code in making this determination. However, that is an issue that the Debt- or should have pursued on appeal to the Fifth Circuit rather than on remand in this Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493103/ | ORDER DENYING MOTION FOR SUMMARY JUDGMENT FILED BY THE UNITED STATES OF AMERICA
ROBERT E. BRIZENDINE, Bankruptcy Judge.
Before the Court is the motion of the United States of America for summary judgment on the above-named Debtor-Movants’ objection to the claim of Respondent, the United States of America, by and through the Internal Revenue Service, for unpaid income taxes for the tax years ending 1988, 1989, and 1990 including interest and penalties. Upon review of this matter, the Court concludes that the motion should be denied.
Previously, this Court entered an Order denying the Debtors’ objection. This Order was affirmed by the District Court, *247but the U.S. Eleventh Circuit Court of Appeals vacated and remanded the matter to this Court by Judgment entered on July 26, 1999. Morgan v. United States (In re Morgan), 182 F.3d 775 (11th Cir.1999). In its ruling, the Eleventh Circuit determined that 11 U.S.C. § 105 permitted a bankruptcy court, in exercise of its equitable powers in appropriate circumstances, to toll the three-year period set forth in Section 507(a)(8)(A)(i) in connection with a debtor’s prior bankruptcy case. Hence, the issue presented to this Court is whether the facts of this matter support a finding that said three-year period should be tolled in exercise of the Court’s equitable powers under Section 105(a).1
As noted by the United States, the Eleventh Circuit rejected the notion that dilatory conduct or bad faith must be established before the equities can be adjudged to be in favor of the government. 182 F.3d at 780 n. 8. Although the United States has shown that it vigorously pursued collection efforts against the Debtors and Debtors have not specifically responded to the factual issues implicated herein, the Court finds that the record is still not sufficient to permit a finding regarding application of Section 105(a). For instance, the Court needs further factual development pertaining to the particular circumstances surrounding payments made to the United States by the Debtors in their prior case and the grounds for its dismissal. Once the record is more fully developed, the Court can then properly determine whether the facts constrain the application of equity in tolling the three-year provision of Section 507(a)(8)(A)®.2
In their brief, Debtors’ principally challenge the legal basis for applying Section 105(a). That issue, however, has been settled by the Eleventh Circuit in its Judgment. This Court’s equitable powers under Section 105(a) are sufficient to toll the three-year period provided in Section 507(a)(8)(A)(I). The question this Court must now decide following remand of this case by the circuit court is not whether Section 105(a) can be applied in support of equitable tolling, but whether the facts on this record support such application and use of this Court’s equitable powers in connection with Section 507(a)(8)(A)(I) and the efforts of the United States to collect the unpaid tax liabilities in question from the Debtors.
Accordingly, it is
ORDERED that the motion of the United States of America for summary judgment be, and hereby is, denied and this matter will be set for trial upon separate written notice.
IT IS SO ORDERED.
. As discussed in the aforesaid orders, the significance of the tolling issue centers on whether certain claims of the United States against Debtors for unpaid taxes are entitled to priority treatment in this case under Section 507(a)(8)(A)(i), and more specifically, the effect of Debtors' prior bankruptcy case on the running of three-year time period contained in that provision.
. In reviewing the pertinent facts, the Court can address the types of problems raised as hypothetical in the Debtors' brief. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493104/ | OPINION AND ORDER ON OBJECTION TO CONFIRMATION
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the objection of Peoples Banking & Trust Company (“Peoples”) to confirmation of the chapter 13 plan proposed by debtors Timothy and Karen Boylan.
The Court has jurisdiction in this matter under 28 U.S.C. § 1334 and the General Order of Reference previously entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L).
In 1996 the debtors filed a chapter 7 case in this court. They received a discharge in that case which included their personal liability to Peoples on the note which was secured by a mortgage against their residence. The lien rights of Peoples survived. The debtors also filed a chapter 13 case in 1998 which was dismissed in December of 1999.
On March 7, 2000 the debtors filed this second chapter 13 case. They propose to pay $1,358 each month to the chapter 13 trustee to pay all secured and priority claims and a 13% dividend to their unsecured creditors. Part of the monthly payment ($700.36) is to be paid by the trustee to Peoples on account of the monthly mortgage obligation. Arrearage on that mortgage obligation is to be paid by the trustee at the contract rate of interest. A review of the schedules reveals that the only obligations in the plan are the first and second mortgages on the debtors’ residence, real estate taxes and three small unsecured debts. In their amended plan the debtors propose to treat the second mortgage debt as an unsecured claim, based on the appraisal value of the real property. The holder of the second mortgage has not objected to that amendment and has filed a proof of claim as an unsecured creditor.
Peoples objects to confirmation and alleges that the treatment proposed by the plan is not legally permissible because of the discharge of the debtors’ personal obligation for the mortgage debt in the prior chapter 7 case. Peoples also cites debtors’ defaults in payments under their first chapter 13 case during which the obligation to Peoples increased by $5,000, the debtors’ failure to make payments after Peoples obtained relief from the automatic stay in the first chapter 13 case and the subsequent foreclosure judgment awarded to Peoples in the state court. Peoples believes the debtors are not proposing their plan in good faith.
Peoples argues that because of the discharge entered in the chapter 7 case, it no longer has a note obligation which can be decelerated, arrearage cured, and current payments maintained in a chapter 13 plan. Peoples now has recourse only against the debtors’ real property for repayment of its loan.
The Court has reviewed ease law dealing with the issue of the inclusion of a mortgage obligation in a chapter 13 plan where the debtors’ personal liability on the note for which the mortgage serves as security was discharged in a prior chapter 7 case. That review and a reading of the statutes cause the Court to find that Peoples is an entity with a “right to payment” from property of the debtors or their bankruptcy estate which arose prepetition. Accordingly, Peoples has a “claim” within the meaning of 11 U.S.C. § 101(5), as amplified by 11 U.S.C. § 102(2). Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). That “claim” is an enforceable lien against the debtors’ property, despite the earlier discharge which relieves the debtors of personal liability. As the holder of a “claim,” Peoples is a “creditor” pursuant to 11 U.S.C. § 101(10). As a “creditor,” Peoples’ *313“claim” may be treated in the debtors’ chapter 13 plan.
The issue remaining, therefore, is what treatment the debtors may propose in their chapter 13 plan for the holder of a lien enforceable only against the debtors’ principal residence. One difficulty in the analysis comes from the favored treatment given to home mortgage obligations generally in the chapter 13 statute. See 11 U.S.C. § 1322(b)(2).
Essentially § 1322(b)(2) permits a debt- or to propose a plan which modifies the rights of the holder of a secured claim, unless that claim is secured only by a security interest in real property that is the debtor’s residence. Section 1322(b)(5) somewhat softens the impact of § 1322(b)(2)’s prohibition against the modification of those rights by permitting the cure of a default and the maintenance of payments on any secured claim, including one secured by a mortgage against the debtors’ residence, if the last payment on the secured claim is due after the final payment under the plan. This provision recognizes the long term nature of the mortgage obligation and the exclusion of such an obligation from the chapter 13 discharge. See 11 U.S.C. § 1328(a)(1).
The position taken by Peoples in its objection is that, if it is a “creditor,” which it argues it is not, it is entitled to the protection of § 1322(b)(2), but is not subject to the limited exception in § 1322(b)(5) because it no longer has a contract for a long term debt enforceable against the debtors.
Section 1322(c)(1) was added to the Bankruptcy Code in 1994. That section provides that:
Notwithstanding subsection (b)(2) and applicable nonbankruptcy law,
(1) a default with respect to, or that gave rise to, a lien on the debtor’s principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbank-ruptcy law; ...
This amendment makes it clear that cure and deceleration are permissible until an actual foreclosure sale. There has been no foreclosure sale in this case. The Court of Appeals for the Sixth Circuit had previously announced a “foreclosure sale” rule in Federal Land Bank v. Glenn (In re Glenn), 760 F.2d 1428 (1985), cert. denied 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119. The 1994 amendment to Title 11 U.S.C., codified as § 1322(c), appears to go beyond Glenn, however. Section 1322(c) is broadly drafted and requires a default only “with respect to a lien on the debtor’s principal residence.” Once that qualification has been met, the debtor has a right to decelerate and cure the default and maintain payments under the now reinstated loan. Based upon that expression of Congress’ intent, this Court finds that the debtors’ plan proposal is contemplated by the statute. This finding, however, is not a ruling about the relative rights of the parties upon the conclusion of this case.
Peoples also challenges the debtors’ good faith in this third attempt at bankruptcy relief within four years. In response the debtors describe their now enhanced business prospects. Subsequent to the hearing they also entered into an agreement with Peoples to settle a relief from stay motion. That agreement permits Peoples to proceed with their foreclosure action if the debtors fail to make their promised payments to the trustee, fail to pay and keep current the real estate taxes on the property subject to Peoples’ lien, fail to keep in effect required insurance or fail to maintain the property. That agreement with its protections for Peoples, as well as the debtors’ testimony at the hearing on confirmation, cause the Court to find that this plan is proposed in good faith.
Based on the foregoing, and despite the reservations this Court has about “chapter 20” filings, the Court OVERRULES the objection to confirmation filed by Peoples. *314Confirmation of the debtors’ plan is GRANTED and an order confirming the plan will be entered forthwith.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493105/ | JUDGMENT
Pursuant to the judgment of the United States Court of Appeals, the mandate in this case is hereby recalled and the Panel’s opinion and judgment of June 8, 1999 are vacated. Certified copies issued forthwith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493108/ | MEMORANDUM OF DECISION
LEE M. JACKWIG, Bankruptcy Judge.
Chapter 7 Trustee Burton H. Fagan (“Trustee”), as Defendant/Intervenor in this complaint to determine secured status brought by Creditor Edward H. Roberts (“Creditor”), asks the Court to grant summary judgment on his counterclaim that seeks to avoid Creditor’s claim as a preferential transfer under 11 U.S.C. section 547(b). Contending his claim is based on a statutory lien that is excepted from avoidance by operation of 11 U.S.C. section 547(c)(6), Creditor resists the Trustee’s motion.
Having conducted a telephonic hearing to consider the parties oral arguments and having reviewed the record on the motion and the written arguments, the Court now enters its decision.
The Court has jurisdiction of this matter pursuant to 28 U.S.C. section 1334 and the standing order of reference entered by the U.S. District court for the Southern District of Iowa. This is a core matter under 28 U.S.C. section 157(b)(2)(E), (F) and (K).
BACKGROUND
On August 30, 1999 Debtor Barbara L. Horstmann (“Debtor”) filed a petition for relief under Chapter 7 of. the United States Bankruptcy Code. On the same date she filed her Schedules and Statement of Financial Affairs. According to the Summary of Schedules, Debtor had $62,500.00 in assets and $231,799.98 in liabilities on the date of filing. At paragraph 17 (other liquidated debts owing debtor) on Schedule B (Personal Property) and in paragraph 6 (assignments and receiver-ships) of the Statement of Financial Affairs, the Debtor indicated $60,000.00 from a divorce settlement was held by a Gary J. Rolfes and implied the full settlement amount was $120,000.00. On Schedule C (Property Claimed As Exempt), Debtor made no claim regarding the divorce settlement. On Schedule F (Creditors Holding Unsecured Nonpriority Claims), she reported owing Edward and Lucille Roberts $128,000.00. In paragraph 4 (suits, executions, garnishments and attachments) of the Statement of Financial Affairs, Debtor included the divorce action of Horstmann v. Horstmann (Equity #23098) and the collection action of Edward Roberts v. Barbara Horstmann (Law # 94143). She represented the first matter was final as of October 20, 1997 and the second was a pending garnishment.
On November 19, 1999 Edward H. Roberts commenced this adversary proceeding against the Debtor to determine the secured status of his claim under 11 U.S.C. section 506. Creditor alleges his claim is based on a $128,297.69 judgment entered in the Circuit Court of the 14th Judicial Circuit in and for Rock Island County, Illinois on June 3, 1999 and registered in the Iowa District Court for Scott County on July 23, 1999. He states the Clerk of Court for Scott County issued execution of his judgment on a supersedeas bond being held in the dissolution action by the Clerk of Court of the Iowa District Court for Clinton County. He reports the execution occurred on or about August 13, 1999 and in conjunction with the Sheriff of Clinton County serving notice of garnishment and interrogatories on the latter Clerk.1
*566Creditor contends the execution created a statutory lien on the supersedeas bond pursuant to Iowa Code sections 626.22 and 626.33. Alleging he complied with all the relevant provisions of the Iowa garnishment law prior to the bankruptcy petition date, Creditor maintains the garnishment put any good faith purchaser on notice of the pendency of his claims as contemplated by 11 U.S.C. section 545. Accordingly, he asks the Court to reclassify his claim as a secured claim with priority over unsecured claims and any other claims secured by the property in issue.
The Debtor has not filed an answer or otherwise responded to the complaint. Though not a named party to the adversary proceeding, William H. Horstmann filed an answer on December 27, 1999 through his attorney Gary J. Rolfes. After reviewing the controversy at the time of the stipulated scheduling conference on February 16, 2000, the Court entered an order indicating no further action would be taken in the adversary proceeding while the Chapter 7 trustee administered the Chapter 7 case. The Court added she would review the status of both the Chapter 7 case and the adversary proceeding on or soon after May 17, 2000.
On March 13, 2000 the Trustee filed a notice of and motion for compromise or settlement of controversy in the Chapter 7 case. He explained the agreement as follows:
Debtor herein is entitled to the sum of $120,000 arising out of a dissolution decree from her ex-husband. 25% of said debt is payable at the end of this year. Prior to debtor filing her petition in bankruptcy, ex-husband paid to First Midwest Bank the sum of $17,820.84 on a debt owed by debtor, said debt being secured with ex-husband’s life insurance policy. Ex-husband now agrees to pay over to this estate the entire sum of $120,000.00 without any further wait if Trustee gives him credit for the $17,820.84 previously paid by him to First Midwest Bank. This would leave $102,179.16 net payable to this bankruptcy estate which will be paid over instanter, thereby avoiding protracted litigation.
No objections were filed by the noticed bar date of April 3, 2000 and, as indicated in the motion, the compromise was deemed approved without further order of the Court.2 Nevertheless, on April 20, 2000 the Trustee submitted a proposed order that referenced his motion, noted the lack of objection, found the compromise to be in the best interest of the estate and directed the Clinton County Clerk of Court to turn over the funds held in the approximate amount of $120,000.00 to the Trustee who, in turn, would pay $17,820.84 of such funds to William H. Horstmann. The Court entered that order on April 21, 2000.3
Meanwhile, on April 3, 2000, the Trustee filed a motion for leave to intervene in the Creditor’s adversary proceeding. No interested party objected by the noticed bar date of April 17, 2000. Accordingly, the Court granted the motion and the Clerk’s Office filed the Trustee’s previously submitted answer and counterclaim.4 In his answer, the Trustee contends the Creditor’s execution and levy on the supersede-as bond did not constitute a statutory lien *567as defined in 11 U.S.C. section 101(53). The Trustee alleges in his counterclaim that the supersedeas bond was property of the estate and that Creditor’s execution, levy and garnishment — considered individually or collectively — amounted to a preferential transfer under section 547(b). On May 1, 2000 the Creditor filed his answer to the Trustee’s counterclaim. In sum, he argues his claim was based on a statutory lien and therefore excepted from avoidance by operation of sections 545 and 547(c)(6).
On May 10, 2000 the Trustee filed this motion for summary judgment, affidavit, statement of undisputed material facts and memorandum of authorities in support of the motion. The Trustee asks the Court to enter a judgment that avoids the Creditor’s judgment, execution, levy and garnishment, that directs the proceeds of the supersedeas bond be preserved for the benefit of the estate, and that directs the proceeds be turned over to the Trustee for administration. He also asks the Court to dismiss the Creditor’s complaint and to assess costs against the Creditor.
On May 22, 2000 the Creditor filed his resistance. Once again the Creditor argues his claim is based on a statutory lien and therefore is excepted from avoidance and entitled to treatment as a secured claim under section 506. Though he challenges the Trustee’s affidavit because it does not appear to contain matters within the Trustee’s personal knowledge as required by Federal Rule of Civil Procedure 56(e), the Creditor acknowledges there does not appear to be any genuine issue with respect to the material facts. Nevertheless, he contends the application of the law to those facts prevents this Court from entering summary judgment as a matter of law. Accordingly, he asks the Court to deny the Trustee’s motion for summary judgment on the counterclaim. In the alternative, he asks the Court to grant the relief requested in his complaint.
On June 20, 2000 the Court conducted a telephonic hearing on the controversy. At the conclusion of the arguments,5 the Court indicated she would invite the United States Trustee to file an amicus brief given that the parties were in agreement the specific pending issue appeared to be one of first impression and disposition could impact the administration of many other cases. The Court set July 11, 2000 as the filing deadline for such a brief and for any supplemental briefs from the Trustee and the Creditor. On June 21, 2000 the Court entered a written order to that effect.
The United States Trustee did not file an amicus brief. On July 11, 2000 the Trustee filed a supplemental memorandum. The Creditor submitted a letter brief dated July 10, 2000 and attached copies of two reported cases upon which he relied during oral argument.
DISCUSSION
Federal Rule of Bankruptcy Procedure 7056 makes Federal Rule of Civil Procedure 56 applicable in adversary proceedings. Rule 56(a) permits a party like the Trustee to seek summary judgment upon a counterclaim. Rule 56(c) mandates that summary judgment be granted “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.”
The parties are in agreement that there is no genuine issue as to any material fact. Hence, the summary judgment on the counterclaim is proper if the Trustee is entitled to judgment as a matter of law.
*568The Creditor, moreover, does not contend the Trustee has not established the prima facie elements of a preference under section 547(b).6 The record before the Court on this summary judgment supports finding the Trustee has borne his burden of proof in that regard. That is, the execution by levy and garnishment constituted a transfer of an interest of the debtor in the supersedeas bond. The August 1999 transfer was undertaken to secure payment of the June 3, 1999 judgment that Debtor owed the Creditor. The transfer occurred within 90 days of the bankruptcy petition date and therefore Debtor is presumed to have been insolvent at the time of the transfer by operation of section 11 U.S.C. 547(f).7 Lastly, the transfer enables the Creditor to receive more than he would as a general unsecured creditor in this case. Such a creditor will only share pro rata in proceeds remaining after payment of priority claims and after payment of any valid liens on the proceeds of the liquidated property of the estate.
The Creditor, however, invokes section 547(c)(6) that prevents a trustee from avoiding a preferential transfer if it “is the fixing of a statutory lien that is not avoidable under section 545 of this title.”8 Maintaining his claim is based on a “statutory lien” as that term is defined in section 101(53), Creditor contends the Trustee is not entitled to judgment as a matter of law. Section 101(53) provides;
“[Sjtatutory lien” means lien arising solely by force of a statute on specified circumstances or conditions, or lien of distress for rent, whether or not statutory, but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute.
11 U.S.C. § 101(53).
Maintaining the Creditor’s claim is based on a “judicial lien” as that term is defined in 11 U.S.C. section 101(36), the *569Trustee contends section 547(c)(6) is inapplicable and judgment on the counterclaim is proper as a matter of law. Section 101(36) provides: “[Jjudicial lien” means “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
The Trustee otherwise agrees with the Creditor that “the validity, nature and effect of hens in bankruptcy proceedings are governed by the law of the state in which the property is located.” In re Lewis Energy Corp., 36 B.R. 205, 207 (Bankr.D.Colo.1983). Likewise, he concurs that “[wjhether or not the lien in the instant case is statutory is purely a matter of state law.” In re APC Construction, Inc. 132 B.R. 690, 693 (D.Vt.1991). Finally, there is no dispute that the proceeds of the supersedeas bond are located in Iowa, meaning this Court must apply Iowa law in determining whether the Creditor’s claim is based on a statutory lien or a judicial lien.
The Creditor relies on section 626.33 (Lien — equitable proceeding — receiver) that provides:
The plaintiff shall, from the time such property is so levied on, have a lien on the interest of the defendant therein, and may commence an action by equitable proceedings to ascertain the nature and extent of such interest and to enforce the lien; and, if deemed necessary or proper, the court may appoint a receiver under the circumstances provided in the chapter relating to receivers.
Iowa Code § 626.33.9 Creditor reasons that his lien would not exist but for this statute and his having undertaken the levy and, therefore, his lien is one “arising solely by force of the statute on specified circumstances or conditions.”
In support of his analysis, Creditor cites generally Walters v. Walters, 231 Iowa 1267, 3 N.W.2d 595 (1942). In that case, the Iowa Supreme Court declined to determine, as a matter of law, whether unpaid installments of alimony become a lien as they accrue if the underlying dissolution decree does not specifically provide that they will constitute a lien on the property of the party ordered to pay them. The appellate court explained: “Here, appellant because of the levy under the execution had a lien, independent of the judgment, from April 3, 1941, the time of such levy.” Id. at 596. Creditor also cites APC Construction, 132 B.R. at 694 for the proposition that judicial proceedings necessary to enforce a statutory lien do not thereby convert such a lien into a judicial lien.
With respect to the APC Construction case, the Trustee correctly observes that the lien in issue in that case was a mechanic’s lien — a classic statutory lien, unlike the lien under consideration in this case. With respect to the Walters case, the Trustee argues the Creditor’s reliance is misplaced because the decision does not address what constitutes a statutory lien. He points out the sole issue before that court was whether the amounts awarded in the dissolution decree constituted a judgment or order upon which an execution could issue under sections 11567 and 11648 of the Iowa Code in effect at the time.10 Concluding there is little connection between the Walters decision and the pend*570ing controversy and focusing on the fact that Creditor’s claim is based in part upon the service of the notice of garnishment and interrogatories, the Trustee recommends the Court turn her attention to In re Yetter, 112 B.R. 301 (Bankr.S.D.Iowa 1990).
The Court agrees that the Yetter decision generally supports the Trustee’s position. Noting Iowa case law holds that garnishment is a species of attachment and that attachment creates a lien under Iowa law, the Yetter court held that garnishment under Iowa law creates a judicial lien. Id. at 303. Indeed, Iowa Code section 639.38 (Lien acquired — action to determine interest) specifically provides:
The plaintiff shall, from the time such property is taken possession of by the officer, have a lien on the interest of the defendant therein, and may, either before or after the plaintiff obtains judgment in the action in which the attachment issued, commence action by equitable proceedings to ascertain the nature and extent of such interest and to enforce the lien.
Iowa Code § 639.38. That is, a lien created by this section is a “lien obtained by ... other legal or equitable process or proceeding,” meaning it is a “judicial lien” as that term is defined in section 101(36).
As is evident from the above quoted language, a section 639.38 judicial lien may exist independent of any judgment.11 Section 101(36) contemplates such a statutory scenario by setting forth the ways a judicial lien may be obtained in the alternative — by judgment, by levy, by sequestration, or by other legal or equitable process or proceeding. Thus, the portion of the Walters opinion, upon which the Creditor relies, is consistent with a finding that a lien created by section 626.33 is a “lien obtained by ... levy,” meaning that it is a “judicial lien” as that term is defined in section 101(36).
CONCLUSION
Wherefore, the Court finds the Creditor’s claim is based on a judicial lien that the Trustee may avoid as a preferential transfer pursuant to 11 U.S.C. section 547(b).
A separate Order granting the Trustee’s motion for summary judgment and a separate Judgment on the Trustee’s counterclaim shall be entered accordingly.
. On August 18, 1999 the Clerk of Court of the Iowa District Court for Clinton County *566answered the interrogatories. She reported being in possession of a check for $139,563.73 that was owed the Judgment Debtor.
. By operation of Federal Rule of Bankruptcy Procedure 9006(1), an objection filed April 6, 2000 would have been timely. Accordingly, the effective date of the implied order was April 7, 2000.
. Whereas the Trustee served his motion on parties in interest, the Clerk of Court limited service of the April 21, 2000 Order to the Debtor, the Debtor’s attorney, the Trustee, the Trustee’s attorney and the U.S. Trustee.
. The Clerk’s Office filed the Trustee’s Answer and Counterclaim on April 25, 2000 and on May 2, 2000. The two filings appear to be identical and both bear original signatures. The first was served on March 1, 2000 and the second was served on March 27th, 2000.
. Among other questions, the Court asked the attorneys about the turnover of the proceeds in issue. Trustee's counsel indicated he had not been involved in the Trustee’s motion to compromise or settle with Debtor's ex-husband. Creditor’s counsel had participated in some settlement discussion and otherwise appeared to be aware of the intent and extent of the Trustee’s motion.
. 11 U.S.C. section 547(b) provides:
Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if — •
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b).
. 11 U.S.C. section 547(f) provides:
For the purposes 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.
11 U.S.C. § 547(1).
. 11 U.S.C. section 545 provides:
The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien —
(1) first becomes effective against the debt- or—
(A) when a case under this title concerning the debtor is commenced;
(B) when an insolvency proceeding other than under this title concerning the debtor is commenced;
(C) when a custodian is appointed or authorized to take or takes possession;
(D) when the debtor becomes insolvent;
(E) when the debtor's financial condition fails to meet a specified standard; or
(F) at the time of an execution against property of the debtor levied at the instance of an entity other than the holder of such statutory lien;
(2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists;
(3) is for rent; or
(4) is a lien of distress for rent.
11 U.S.C. § 545.
. In his complaint, the Creditor also cited section 626.22 (Levy on judgment). That section provides:
The levy upon a judgment shall be made by entering upon the judgment docket a memorandum of such fact, giving the names of the parties plaintiff and defendant, the court from which the execution issued, and the date and hour of such entry, which shall be signed by the officer serving the execution, and a return made on the execution of the officer’s doings in the premises.
Iowa Code § 626.22.
. Section 11567 provided in relevant part that "[ejvery final adjudication of the rights of the parties in an action is a judgment,” and section 11648 provided in relevant part that ''[jludgments or orders requiring the payment of money ... are to be enforced by execution.” Today, Iowa Rule of Civil Procedure 219 defines "judgment” and Iowa Code section 626.1 discusses the enforcement of judgments.
. In the context of an execution upon a judgment or order requiring the payment of money or delivery of possession of property, Iowa Code section 626.26 (Garnishment) provides that "[pjroperty of the defendant in the possession of another, or debts due the defendant, may be reached by garnishment.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493109/ | MEMORANDUM OPINION
MARK W. VAUGHN, Chief Judge.
The Court has before it the Trustee’s objection to the proof of claim of CNA UniSource originally seeking a 507(a)(3) priority claim in the amount of $69,150.65, which was amended to $34,319.15 and further reduced to $30,473.27. Specifically, the Trustee objects to the claimed priority status of CNA UniSource. At a hearing held on October 17, 2000, the Court permitted the parties to provide additional memoranda of law and submit the matter for ruling based on the pleadings, including exhibits attached thereto and their memoranda. For the reasons set out below, the Court sustains the Trustee’s objection.
Jurisdiction
This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the “Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire,” dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
Facts
On or about November 1, 1998, the Debtor, Aurora Graphics, Inc., and CNA UniSource entered into a “Professional Employer Services Agreement” (the “Agreement”). On April 18, 2000, when the Debtor filed its petition under Chapter 7 of the Bankruptcy Code, this Agreement was still in effect. Subsequent to the petition filing date, CNA UniSource paid certain employees’ claims for wages and/or benefits and obtained an assignment for each of the employees’ claims. Based on these assignments, CNA UniSource claims it is entitled to be paid as a priority creditor under section 507(a)(3) of the Bankruptcy Code. The Trustee objected on the grounds that pursuant to the Agreement, CNA UniSource was in fact an employer of these wage claimants with an independent duty to pay them and, thus, there was no consideration for the assignment.
Discussion
A party that pays wage claims of a debtor where such party is under no legal obligation to do so may receive an assignment of those employees’ priority claims against the debtor. See In re Paris Industries Corp., 95 B.R. 258 (Bankr.D.Me.1989). In support of its claim for *614priority status, CNA UniSource argues that it was not an employer, but that it only provided administrative services. Therefore, CNA UniSource argues, it was under no obligation to pay the wages or benefit claims of the Debtor’s employees, and by doing so it provided consideration for the assignment of the employee claims.
In determining its status, CNA Uni-Source asks the Court to look to the “totality of the circumstances,” citing New Hampshire cases applying this test in determining whether an individual is an employee or independent contractor for purposes of workers’ compensation benefits. See Burnham v. Downing, 125 N.H. 293, 480 A.2d 128 (1984); Hamel Real Estate, Inc. v. Sheperd, 121 N.H. 733, 433 A.2d 1320 (1981). It also cites Continental Insurance Co. v. New Hampshire Insurance Co., 120 N.H. 713, 422 A.2d 1309 (1980), which determined whether vicarious liability would be imposed based upon “whether on all the facts the community would consider the person an employee.” Id. at 716, 422 A.2d at 1311. The Court finds these cases to be inapposite since the specific circumstances to which those tests apply are not present here. Rather, the Court will first look to the unambiguous terms of the Agreement.
In support of its argument that it is not an employer, CNA UniSource urges the court to look only to paragraph 15 of the Agreement, which applies to third party rights, stating: “This Agreement shall in no way be interpreted as creating an employment contract express or implied between CNA UniSource, Client [Aurora] or any employee assigned to the Client’s worksite.” See Trustee’s Objection to Allowance of Claim, Ex. A, ¶ 15. However, whether there is an employment contract between CNA UniSource and individual employees is not controlling since, in most instances, individuals who are unquestionably employees do not work pursuant to employment contracts.
In assessing CNA UniSource’s status, the Court will look to the entire Agreement. A reasonable interpretation of the Agreement must lead to a finding that CNA UniSource is at least a co-employer of the individuals and, thus, obligated to pay wages. Evidence of CNA UniSource’s clear intent to act a co-employer is found throughout the Agreement, including the following passages:
Paragraph 1 of the Agreement entitled “Employment Arrangement” contains, in part, the following language:
This Agreement establishes a co-employer employment arrangement between CNA UniSource and Client [Aurora] where CNA UniSource will assume certain of the Client’s common law employer responsibilities as stated in this Agreement and as may be required by law.... CNA Uni-Source shall retain responsibility for the overall direction and control of such employees.... Under this arrangement, Client and CNA Uni-Source mutually acknowledge and agree that the intent of this Agreement is to materially change the nature of the employment relationship at the Client’s worksite(s) to a co-employer employment arrangement where CNA UniSource shall be the “administrative employer” and Client shall be the “worksite employer” with respect to those employees assigned by CNA UniSource to work at Client’s worksite(s).
Id. at 1 ¶ 1;
Paragraph 2 of the Agreement establishes that CNA UniSource will provide “professional employment services as Client’s co-employer,” requiring that CNA UniSource pay employees from its accounts, that CNA UniSource’s federal tax identification number will be used, and that CNA UniSource will obtain worker’s compensation insurance for the employees. Id. at ¶ 2;
Paragraph 6A, which pertains to workers compensation, clearly indicates that *615the employees shall be considered employees of CNA UniSource:
Client understands, agrees, and acknowledges that no person shall become employed by CNA UniSource, be covered by CNA UniSource’s workers’ compensation insurance or any other benefit or term or condition of employment, or be issued a payroll check unless that person has prior to commencing such employment, completed CNA UniSource’s employment application, W-4 withholding form and form 1-9, all of which must be delivered to CNA UniSource before the person commences employment. CNA UniSource shall not be considered an employer for any person until that individual completes these forms and Client is notified that the person has been hired by CNA UniSource.
Id. at ¶ 6A;
Paragraph 13C of the Agreement sets out the status of the parties upon termination of the Agreement:
Upon termination of this Agreement for any reason, CNA UniSource shall withdraw from the Professional Employer Services arrangement with Client and the employees assigned to Client’s worksite(s) will be terminated and transferred to Client’s payroll as of the effective date of termination of the Agreement.
Id. at ¶ 13C;
Paragraph 13E of the Agreement specifically provides that Aurora will indemnify and hold harmless CNA UniSource from “any liability whatsoever to any employee formerly assigned by CNA UniSource to Client’s worksite(s) prior to the effective date of termination of this Agreement for any wages or other benefits to which such employee may be entitled.” Id. at ¶ 13E.
Finally, the Court must refer to language on page 3 of CNA UniSource’s marketing proposal. Under the topic “Overview,” it contains the following language: “What is our Approach? We establish a co-employer relationship with you in which we become the legal employer of record in order to administer your employer-related responsibilities- Why Can We Deliver? We believe that the role of the employer is a profession in and of itself. It is, quite simply, what we do.” Id. at Ex. B. The Court will not simply allow CNA UniSource to ignore its own marketing proposal and Agreement (which it presumably drafted) in order characterize its status as co-employer as something else so that it might take advantage of priority status afforded by § 507(a)(3).
The Court also rejects CNA UniSource’s attempt to distinguish In re Mel-Hart Products, Inc., 156 B.R. 606 (Bankr.E.D.Ark.1993), which the Trustee cites in support of his objection. In Mel-Hart the debtor contracted with a firm to provide employees. The contract, like the Agreement here, established the debtor and the firm as “co-employers” and required the firm to provide such administrative services as paying wages, withholding and paying employment taxes, withholding and paying social security taxes and unemployment taxes, and providing workers compensation coverage. Id. at 607. As in the instant case, after paying employee wages, the firm argued that it was entitled to priority status as an assignee of the employee wage claims. The bankruptcy court rejected the firm’s claim, finding that it was obligated to pay the wages of the employees. Id.
CNA UniSource asks the Court to distinguish Mel-Hart on the grounds that the firm in that case actually provided employees to the debtor, where in this case, the employees were already employed by Aurora. The Court finds this argument unpersuasive. Whatever the employment arrangement between the Debtor and its employees that existed prior to the contract with CNA UniSource, the terms of the Agreement unmistakably changed. Paragraph 1 of the Agreement spells out the change: “Under this arrangement, *616Client and CNA UniSouree mutually acknowledge and agree that the intent of this Agreement is to materially change the nature of the of the employment relationship at the Client’s worksite(s) to a co-employer employment arrangement where CNA Un-iSouree shall be the ‘administrative employer’ and Client shall be the ‘worksite employer’ with respect to those employees assigned by CNA UniSouree to work at Client’s worksite(s).” See Trustee’s Objection, Ex. A at ¶ 1. By its own terms the Agreement superceded any previous employment arrangement, creating an arrangement where employees were “assigned” by CNA UniSouree to the Debtor. Furthermore, as previously cited, under the Agreement CNA UniSouree assumed “responsibility for the overall direction and control of such employees.” Id.
The Court need go no farther. CNA UniSouree entered into the Agreement specifically agreeing to be a co-employer in its own words. For providing certain administrative functions and employee benefit plans, it was paid a fee by Aurora. On the filing of bankruptcy, it simply had a claim like any other creditor for fees not paid. The Court finds that CNA Uni-Source, under the terms of the Agreement, had an obligation to pay the wages to these employees and, thus, may not stand in their shoes as a 507(a)(3) priority creditor. The objection of the Trustee is sustained, and the CNA UniSouree claim shall be allowed as a general unsecured claim.
This opinion constitutes the Court’s findings and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate order consistent with this opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493110/ | MEMORANDUM OPINION
ROBERT E. NUGENT, Bankruptcy Judge.
This matter came before the Court for hearing on November 15, 2000, on the Trustee’s Complaint (1) To Avoid And Recover Unperfected Security Interest; And (2) To Determine Rights. The Trustee seeks to preserve for the estate a lien secured by a 1993 Oldsmobile, asserting under his hypothetical lien creditor powers in 11 U.S.C. § 544(a) that such a lien creditor would take the Oldsmobile prior to Boeing Wichita Employees Credit Union (“Credit Union”) because the Credit Union apparently intended to release the lien. The Credit Union argues its lien was not released because the employee’s signature was not notarized and the release never presented to the Division of Vehicles (“DMV”); thus the lien remains perfected notwithstanding the employee’s signature. The Trustee appeared by his attorneys Erin Syring and Todd Allison. Boeing Wichita Employees Credit Union appeared by Eric D. Bruce and Karen Pickens. Sheila Maksimowiez appeared for the debt- or, Mary Lou Lopez. After careful review of the case, the Court is ready to rule.
FACTS
From the facts submitted on stipulations, the exhibits admitted by agreement of the parties, and the witness testimony offered by the Credit Union, the Court makes the following findings of fact. On or about February 20, 1995, debtor granted the Credit Union a security interest in the Oldsmobile in question. Although the nature of the transaction is unclear, the Court can discern from the evidence that the Credit Union’s name is shown on the certifícate of title issued for the Oldsmobile as of that date. Noone contests that the Credit Union’s lien as granted in 1995 was properly perfected. At some unknown point in time prior to the inception of the 1997 transaction described below, the Credit Union appears to have at least contemplated releasing the lien on the Oldsmobile. Indeed, the certificate of title bears the signature of Nancy Parrish who worked as a title and insurance clerk at the Credit Union, but the signature is not notarized.1 Neither party contests the authenticity of Nancy Parrish’s signature. On or about August 1, 1997, the debtor entered into a loan agreement with the Credit Union, granting a security interest *897in the same Oldsmobile. For unexplained reasons, the Credit Union seems to have taken no action to perfect this newly-granted security interest. Ms. Lopez filed her bankruptcy case on December 7, 1998.
The trustee offered no witnesses. The Credit Union offered the testimony of Rosemary Denny, a Credit Union employee for 20 years and currently the manager of the credit union’s South Oliver Street, Wichita, branch. She testified that she was familiar with the Credit Union’s policy and procedure on lien releases. She stated that its procedure requires two people to sign a lien release. Loan officers, the vice-president of lending and branch managers are authorized to notarize a lien release. Ms. Denny could only speculate the lien release was not completed because the Credit Union learned of the second lien on the Oldsmobile in time to prevent notarizing the signature and presenting the title. The Court admitted this testimony, but finds that, with regard to the purported release, it has little probative value. Ms. Denny could not say whether the balance of Ms. Lopez’ credit had ever been paid to zero.
The Credit Union also presented the testimony of Marge Bailey, the Bureau Chief for the DMV, who testified about what the DMV requires with regard to a lien release. Bailey, who has been the Bureau Chief at the DMV for ten years, supervises the issuing of title certificates. She stated that in accordance with DMV policy which is based on the requirements set forth in Kan.Stat.Ann. § 8-135, signatures on the lien release portion of the title certificate must be notarized and if they are not, DMV will reject the certificate and return it to the vehicle’s owner. Bailey testified that the notary policy is written in the DMV manual and in memoranda sent to the counties, presumably their tag offices.2 The standard form for a certificate of title issued by DMV contains on its face a blank for release of a creditor’s lien. The blank includes spaces for the signature of the secured creditor and a notary public. The parties stipulated to the admission of various exhibits, several of which portrayed the secured title in question with and without the Parrish signature in the release area. The title was issued on the standard form. Bailey also testified that she searched the DMV’s master file of records concerning the Oldsmobile and found no lien release on file.
ANALYSIS
Hampered though it is by the lack of probative evidence in this matter, the Court starts by determining the extent of the trustee’s avoiding power in this case. The trustee is permitted to avoid any transfer of property or obligation incurred by the debtor that would be avoidable at state law by either:
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists; [and]
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such the time, whether or not such a creditor exists ....
11 U.S.C. § 544(a)(1) and (2). The parties agree that the Credit Union took no action to perfect the security interest it was granted in 1997 and, if that security interest is perfected, it is only because the 1995 lien was not released of record.
The priority of the trustee’s hypothetical judicial lien on debtor’s property as of the date the bankruptcy petition was filed must be determined in accordance with nonbankruptcy law, usually state law. 11 U.S.C. § 544(a)(1); Sender v. Simon 84 *898F.3d 1299 (10th Cir.1996); Gaddis v. Allison, 234 B.R. 805 (D.Kan.1999). Here the trustee must show that as a hypothetical hen creditor, he would take prior to the purported secured party as a matter of state law. As provided in Kan.Stat.Ann. § 84—9—301(1)(b), a person who becomes a lien creditor before a security interest is perfected takes prior to the holder of an unperfected security interest. In order to stand as a “lien creditor,” the trustee must demonstrate by a preponderance of the evidence not only that the 1995 lien was properly released, but also that the 1997 hen was never perfected. Unfortunately, all that this record reflects is that a representative of the Credit Union allegedly signed her name in the release area of the certificate.
As a matter of state law, Kan.Stat.Ann. § 84 — 9—302(3)(c) provides, in part, that security interests in vehicles are perfected only by presentation of the registration or perfecting documents specified under the Motor Vehicle Code. See Kan.Stat.Ann. § 8-135. Kan.Stat.Ann. § 84-9-302(3)(c) provides, in part, that a security interest in a titled motor vehicle—
... can be perfected only by presentation, for the purpose of such registering or such filing or such indication, of the documents appropriate under [K.S.A. § 8-135] to the public official appropriate under [K.S.A. § 8-135] and tender of the required fee to or acceptance of the documents by such public official, or by the mailing or delivery by a dealer or secured party to the appropriate state agency of a notice of security interest as prescribed by K.S.A. § 8-135.... Such presentation and tender or acceptance, or mailing or delivery, shall have the same effect under this article [Article Nine] as perfection by filing under this statute, (emphasis added)
Having briefly discussed the trustee’s need to establish his lien creditor status and what the Uniform Commercial Code requires of lenders to achieve perfection of vehicle liens on a par with other Article Nine transactions, the Court must now turn to the often inscrutable provisions of Kan.Stat.Ann. § 8-135 as they relate to releases of hens. That statute provides, inter alia, that “[w]hen a prior lienholder’s name is removed from the title, there must be satisfactory evidence presented to the division that the lien or encumbrance has been paid in full.” Kan.Stat.Ann. § 8-135(c)(6) (emphasis added). The statute also states that a release is effected by furnishing to the holder of the title a release of lien or executing such a release in the space provided on the title. On the certifícate of title, the lien release includes space for the lienholder’s name, a signature by the lienholder’s representative and a notary block. Although the statute does not specifically call for release signatures before a notary, Bailey testified that the DMV equated “satisfactory evidence” with notarization and would not accept a lien release without notarization. Kan.Stat. Ann. § 8-135 being the only statute governing the perfection of security interests in vehicles, proper compliance with its provisions seems necessary not only to perfect a security interest in a vehicle, but also to release one. See Beneficial Finance Co. of Kansas, Inc. v. Schroeder, 12 Kan.App.2d 150, 151, 737 P.2d 52 (1987) (Pursuant to K.S.A. § 84-9-302(3), a security interest in a vehicle may be perfected by noting its existence on the vehicle’s certificate of title, or by mailing or delivering notice of the security interest to the Division of Motor Vehicles, K.S.A. § 8 — 135(c)(5).) Both the Motor Vehicle Code and the Kansas U.C.C. require the presentation or delivery by mail of documentation satisfactory to the DMV to effect a release.
What the Court must determine is what a lien creditor might find were he or she to review the DMVs records to determine who else might claim an interest in this vehicle. The only evidence in the record in that regard is Bailey’s testimony to the effect that the Credit Union’s lien is shown on the title and in the Division’s records. The purported release signature was not notarized and presumably would not have been accepted by a county treasurer or the Division without the notarial seal. The *899existence of Ms. Parrish’s signature, while suggestive, is in no way conclusive that the Credit Union took meaningful action to release the lien. Nowhere is it shown that the certificate was mailed or otherwise delivered to the DMV,3 nor does it appear that DMV has ever determined that the release purported on the title would have been the “satisfactory evidence” that Kan. Stat.Ann. § 8-135 contemplates.
The trustee ably argued in his trial brief that the only purpose for notarizing signatures is the authentication of the identity of the signer, and that, in this case, there was no need for authentication because no one has suggested that Ms. Parrish’s signature is other than genuine or that any fraud was afoot. See Kan.Stat.Ann. § 53-107. To support his view that the absence of the notary’s seal was not fatal to the release, the trustee relied upon Farmers Insurance Co. v. Schiller, 226 Kan. 155, 597 P.2d 238 (1979) and Kirk v. Miller, 7 Kan.App.2d 504, 644 P.2d 486 (1982). Both of these cases involved situations where the ownership of a vehicle at the time of an accident was in question. In each case, the sellers had signed over the title to the buyers, but had failed to do so before a notary. When the respective accidents occurred, an issue arose as to who owned the vehicles and which owner’s insurer would be responsible for the attendant losses. In Schiller, evidence was developed at trial that the sellers and buyers intended to secure a notary stamp on the certificate the next day and that other facets of the sale agreement had yet to be completed. The Supreme Court held therefore that the sale of the vehicle was not complete. In Kirk, the Court of Appeals held that no further facets of the agreement to buy and sell remained to be completed and that the sale was complete.
In the instant case however, neither the trustee nor the creditor adduced any evidence about the circumstances surrounding the naked signature on the release form. There simply is no evidence, other than Ms. Parrish’s mute, unwitnessed signature, that the Credit Union intended to release its lien. The Court can easily envision the legion opportunities for mischief which would result from a system wherein naked purported signatures of secured parties could be presented in support of releasing liens on motor vehicles without some additional authentication. How else is the Division to ascertain the authenticity of a signer than by requiring that his or her signature be notarized?
No evidence shows that Ms. Lopez’ 1995 obligation was ever paid in full. The trustee offered no such evidence and Credit Union representative could not tell the Court anything about the debtor’s loan history. Satisfactory evidence that the lien or encumbrance is paid is full is an express requirement of Kan.Stat.Ann. § 8-135. Other courts have also held that this prerequisite must be shown before a release is effective. See In re Smith & West Constr. Inc., 28 B.R. 682, 684-85 (Bankr.D.Or.1983); In re Office Machines Exchange, Inc., 47 B.R. 644, 647 (Bankr.S.D.Ill.1985) (mere execution of the release portion on the certificate of title by a lienholder is insufficient to effectuate a release where there is no satisfaction of security interest).
Finally, the trustee argues that this is a case of a mistaken release. In his brief, the trustee cites several cases which hold that the mistaken release of a UCC-1 financing statement renders the security interest no longer perfected. See J.I. Case Credit Corp. v. Foos, 11 Kan.App.2d 185, 717 P.2d 1064 (1986), rev. denied 239 Kan. 638; In re Kitchin Equip. Co. of Virginia, Inc., 960 F.2d 1242 (4th Cir.1992); In re Pacific Trencher & Equip., Inc., 735 F.2d 362 (9th Cir.1984). In these cases, there was no question that the releases were properly prepared and filed. No such situation exists here, though. There is insufficient evidence to show that the lien release was intended. Because the trustee *900has failed to prove that the lien release was prepared properly, the Court need not consider whether the release was “mistaken.”
The trustee had the burden to prove that his lien creditor status trumped the secured status of the Credit Union. To do this, he had to show by a preponderance of the evidence that the 1995 lien was released or should be viewed as released in accordance with applicable Kansas law and, accordingly, that the current evidence of perfection does not serve to perfect the 1997 security interest. Because the trustee has failed to carry his burden of proof, judgment is entered on the Trustee’s complaint for the defendant Credit Union and the debtor and the same will be filed on a separate Judgment on Decision to be entered this day.
IT IS SO ORDERED.
. The date of Nancy Parrish's signature is not known and no evidence one way or the other was provided.
. The parties did not submit a DMV manual or memorandum into evidence.
. Indeed, the debtor appears to have had possession of the title from the time Ms. Parrish signed it until the debtor delivered it to the trustee. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493112/ | ORDER ON PLAINTIFF’S MOTION IN LIMINE AS TO USE OF DEPOSITIONS
C. TIMOTHY CORCORAN, III, Bankruptcy Judge.
This adversary proceeding came on for consideration of the plaintiffs motion in limine (Document No. 73) and the opposing papers filed by the defendants (Documents Nos. 78 and 79). The motion is before the court on the briefs (Documents Nos. 83, 86, 87, 89, 90, and 91) pursuant to the terms of the court’s preliminary order on plaintiffs motion in limine entered on October 12, 2000 (Document No. 84).
I.
In her motion, the plaintiff seeks the court’s determination as to the limited question of whether the depositions of 16 witnesses taken in a prior action may be considered as taken in this proceeding for purposes of allowing their use in this adversary proceeding pursuant to F.R.Civ.P. 32(a)(4).1 Rule 32, of course, is applicable in this adversary proceeding by virtue of F.R.B.P. 7032.
In this adversary proceeding, the debt- or’s Chapter 7 trustee as plaintiff seeks to recover alleged preferences and fraudulent conveyances from various insiders, parties related to insiders, and others. The prior action, Albright v. American Diversified Financial Services, Inc., Case No. 98-1300-Civ-T-26B (“Albright”), was a case in the district court brought before the *343filing of the bankruptcy case in which a number of investors as plaintiff sought damages for fraud in the marketing and sale of partnership units of the debtor and fraud in its operations. If the depositions taken in that action meet the requirements contained in the last paragraph of F.R.Civ.P. 32(a)(4), the depositions will be considered to be taken in this adversary proceeding so that their use at trial can be determined in relation to the other provisions of Rule 32.
“[WJhether to admit a deposition from a prior lawsuit is vested in the ... court’s sound discretion.” Hub v. Sun Valley Co., 682 F.2d 776, 777 (9th Cir.1982). The requirements of Rule 32(a)(4) have “been construed liberally in light of the twin goals of fairness and efficiency.” Id. at 778.
The parties stipulated that the depositions were “lawfully taken” in the prior action so the plaintiff bears the burden of establishing only the following elements of the last paragraph of F.R.Civ.P. 32(a)(4):
1. The prior action in which the depositions were taken involves the “same parties or their representatives or successors in interest” as the parties in this proceeding.
2. The prior action in which the depositions were taken involves “the same subject matter” as is involved in this proceeding.
3. The depositions were “duly filed in the former action.”
II.
With respect to the first element, identity of parties, the plaintiff asserts that the plaintiffs in Albright were, at the time that case was filed, creditors of the debtor. Each of those plaintiffs has filed a proof of claim in this bankruptcy case, and the trustee represents their interests in this adversary proceeding.
The plaintiff similarly argues that the defendants in both actions are identical with the exception of one, Pinnacle Payphones, Inc., which was not a defendant in the Albright case. The plaintiff argues that the addition of Pinnacle Payphones as a defendant in this proceeding does not destroy the identity of parties between the two actions because Pinnacle Payphones is an alter ego of the debtor, David Branch, and Daniel Branch, who are parties to both actions. Furthermore, the plaintiff notes that the clerk has entered a default against Pinnacle Payphones in this proceeding.
In their papers, the defendants do not resist these assertions by the plaintiff. The court, therefore, deems this element conceded by the defendants.
III.
The second element is that the pri- or action in which the depositions were taken involves “the same subject matter” as is involved in this proceeding. “The accepted inquiry focuses on whether the prior cross-examination would satisfy a reasonable party who opposes admission in the present lawsuit.” Hub, at 778. “Consequently, courts have required only a substantial identity of issues.” Id.
For example, in Leger v. Texas EMS Corp., 18 F.Supp.2d 690, 694 (S.D.Tex.1998), the court held that a deposition used in a prior proceeding was admissible for summary judgment purposes where the two actions involved “negligence and ... damages for the injuries that Plaintiff allegedly sustained.” Although the plaintiff sought relief in each case based upon a different theory of law, the court was unconcerned about these differences because both cases involved damages for job-related injuries arising out of a single occurrence. Id.
Likewise, in Eliasen v. Fitzgerald, 105 Idaho 234, 668 P.2d 110, 116 (1983), the court held that a deposition taken in connection with a divorce action was admissible in a subsequent probate proceeding because both actions concerned “the characterization and ultimate distribution of the [deponent’s] property.”
*344The plaintiff argues that this element is satisfied here because both actions involve substantially identical issues. In support of her argument, the plaintiff provides a comparison of factual assertions and legal theories between the Albright amended complaint and the amended complaint in this proceeding. The plaintiff also points out that, in the defendants’ motion to withdraw the reference filed in the main bankruptcy case, the defendants themselves took the position that the two actions involve the same issues.
The defendants, on the other hand, focus on the differences between the Albright amended complaint and the amended complaint in this proceeding as support for their argument that there is an inadequate nexus between the two actions. They argue that the subject matter of the Albright case, at the point in time that the parties deposed most of the witnesses, was very different from the subject matter of this proceeding. They point out that, when the depositions were taken, the Albright case was principally a case dealing with fraud in the marketing and sale of investment units, unlike this proceeding in which the plaintiff is seeking to avoid preferential and fraudulent transfers made after the companies were formed. The defendants further argue that the position they took in the motion to withdraw the reference is not inconsistent with their position here because the motion to withdraw the reference was based upon a comparison of the two actions at different points in time.
The court’s task in determining this element is made more difficult by the plaintiffs failure to specify, other than in a cursory fashion, what portion, to what extent, and for what purpose she seeks to use against the defendants in this proceeding the depositions at issue. Typically, of course, parties are very specific when they ask a court to allow the use of depositions taken in prior actions. Courts, therefore, usually can make discreet rulings in specific contexts. A review of the procedural history of these two cases, however, does illuminate the parties’ opposing positions.
A group of disgruntled investors filed Albright on June 23, 1998, seeking damages from the defendants for losses that they had incurred as a consequence of their investment in Paramount Payphones. The plaintiffs amended their complaint on September 1, 1998. The amended complaint included counts of unregistered sale of securities, securities fraud, breach of fiduciary duty, racketeering, civil theft, and, finally, two counts of fraudulent transfers. Other than the fraudulent transfer counts, the amended complaint focused on the pre-purchase conduct of the defendants in their marketing and sale of partnership units. The fraudulent transfer counts included general allegations of fraudulent transfers of real property, pay phones, and monies between Paramount Payphones and some of the defendants in the aggregate amount of approximately $6 million.
The parties began deposing witnesses in October 1998 and by March 29, 1999, had deposed 18 witnesses. On March 29, 1999, the plaintiff filed a motion to amend the amended complaint in the Albright case. The proposed second amended complaint dropped the counts that dealt with the sale and marketing of investment units and greatly expanded the fraudulent transfer counts, dramatically changing the focus of the Albright case. The defendants opposed the plaintiffs motion to amend the amended complaint.
After the filing of the plaintiffs motion to amend the amended complaint, the parties deposed five witnesses, one of whom had previously been deposed. The plaintiff seeks to use in this proceeding depositions from only two of these witnesses.
The debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on September 10, 1998. The plaintiff then filed this adversary proceeding on September 23, 1999. The plaintiff amended the complaint on November 13, 1999 (Document No. 17). The amended complaint *345sought more than $24 million in damages on theories of state and federal law that the debtor made preferential and fraudulent transfers to the defendants. The plaintiff sought to avoid 276 transfers of real property, pay phones, and monies.
The defendants filed a motion to withdraw the reference of this adversary proceeding (Document No. 13) on October 22, 1999. In it, the defendants asserted that the Albright case and this proceeding involved the same parties and substantially identical issues. The defendants based those allegations on the Albright proposed second amended complaint that was then before the district court in connection with the plaintiffs’ motion for leave to amend. Shortly thereafter, the plaintiff voluntarily dismissed from the Albright case the defendants in this proceeding. The district court denied the plaintiffs motion to amend the amended complaint as part of its dismissal of those defendants.
The facts and circumstances involved in the Albright case and this proceeding clearly overlap, as the plaintiff asserts. Nevertheless, common facts do not necessarily establish that the two actions involve the same subject matter because the factual predicate that must be proven by the plaintiff to satisfy her burden of proof on each legal theory varies.
The critical factor is whether the two lawsuits involve “substantially identical issues” and whether each deposition “relates to issues common to both lawsuits” so that the adverse party in the first action has the same motivation to cross-examine the deponent as the adverse party would have in the later action. Hub, at 778. Looking at the chronology of events as they occurred in these two actions, it is clear that the issues were not substantially identical between the two actions at the time most of the witnesses were deposed. Indeed, it is apparent that the plaintiff filed her motion to amend the amended complaint in Albright based, at least in part, upon testimony elicited from the witnesses who were deposed prior to March 29, 1999. In these circumstances, it cannot fairly be said that “the prior cross-examination [in the Albright case] would satisfy a reasonable party who opposes admission in the present lawsuit.” Id.
The defendants’ statement that both actions involve “substantially identical issues,” made in the motion to withdraw the reference, does not alter this conclusion. The defendants made that statement at a time when the motion to amend the second amended complaint was still pending. The defendants, therefore, based their assertions on the claims asserted in the proposed second amended complaint (that had not been permitted) rather than on the claims asserted in the amended complaint (the then operative complaint). The defendants’ assertions made in the motion to withdraw the reference are therefore irrelevant to the issue of whether the amended complaint in Albright and this proceeding involve substantially identical issues.
At bottom, this court’s determination of the pending motion must turn on whether the use of the depositions taken in the prior case would further the goals of fairness and efficiency. In these circumstances, where most of the depositions in the Albright case were taken at a time when the primary focus was on fraud in the marketing and sale of partnership units, it would be unfair to permit those depositions to be used in this proceeding, where the primary focus is on preferential and fraudulent transfers of property and monies. The plaintiffs stated willingness to allow the defendants to further depose the witnesses and to file supplemental depositions cannot ameliorate this unfairness to defendants that would result in allowing the depositions to be used in this proceeding.
IV.
The third element the plaintiff must demonstrate is that the depositions were “duly filed” in the prior proceeding. The plaintiff argues that this element is *346satisfied if the deposition is delivered to counsel pursuant to F.R.Civ.P. 30(f) because the district court’s Local Rule 3.03(d) prohibits the filing of depositions with the court unless specifically directed.
In Milton v. United States, 105 F.2d 253, 255 (5th Cir.1939), the court explained the origins and meaning of “filing” in the context of a court proceeding:
The word “filed” ... is, as applied to court proceedings, a word of art, having a long established and well understood meaning, deriving from the practice of filing papers on a string or wire. It requires of one filing a suit, merely the depositing of the instrument with the custodian for the purpose of being filed.
(Emphasis supplied).
“In courts which direct that depositions not be automatically filed, the reporter can transmit the transcript or recording to the attorney taking the deposition (or ordering the transcript or record), who then becomes custodian for the court of the original record of the deposition.” Advisory Committee Notes to 1987 Amendments to Rule 30(f). Thus, the plaintiff argues that, because the attorney is the custodian of depositions until they are filed with the court, the “duly filed” requirement of Rule 32(a)(4) is satisfied once the attorney is in possession of the deposition.
The defendants take a much more narrow view of the “duly filed” requirement of Rule 32(a)(4), arguing that a deposition is “duly filed” only if it is filed with the court. They point out that, pursuant to F.R.Civ.P. 5(e), filing of papers in court is accomplished by filing them with the clerk of court. Because none of the depositions at issue here were filed with the court in the Albright case,2 the defendants argue that the plaintiff has failed to satisfy this element.
Although each side supports its position with credible authority, it appears to the court that the plaintiff has advanced the better-reasoned position. An adoption of the narrow construction urged by the defendants would unfairly and unnecessarily circumscribe a party’s ability to utilize depositions taken in a prior civil action in this district because the district court’s local rules prohibit the filing of depositions.3 To insist that the depositions must be filed with the court where such filing is prohibited would be inconsistent with the liberal construction that is to be used in determining Rule 32(a)(4) issues. Hub, at 778.
Accordingly, the court concludes that the depositions at issue here have been “duly filed” within the meaning of Rule 32(a)(4) where local rule prohibits the filing of the deposition with the court and where they have been delivered to the attorney taking the deposition or ordering the transcript.
V.
In summary, the court concludes that the plaintiff has established that the two actions involve the “same parties” and that the depositions sought to be used were “duly filed” in the Albright case as required by the last paragraph of F.R.Civ.P. 32(a)(4). The plaintiff has failed to establish, however, that the two actions involve substantially identical issues to a degree sufficient to satisfy the “same subject matter” requirement of Rule 32(a)(4). Accordingly, the court determines that the depo*347sitions in issue are not considered to be taken in this adversary proceeding for purposes of determining their use at trial in relation to other provisions of Rule 32.
The motion in limine is determined accordingly.
. Although the plaintiff includes references to the depositions of Alan Longwell, Jay Curry, John Elliot, and Jose Eduardo Del Rio in her briefs filed in support of her motion, the plaintiff specifically excluded these witnesses from her motion because they reside within the Middle District of Florida and are not unavailable for trial. Accordingly, the court has not considered any of the plaintiff's or defendants' arguments as to these witnesses.
. It is true that portions of a few of the depositions in issue appear in the Albright court file as exhibits or attachments to a motion for sanctions, that attachment of excerpts to the motion does not, of course, constitute filing within the meaning of Rule 30(0 and Rule 32(a)(4).
. The court notes that the December 1, 2000, amendments to Rule 5(d) prohibit the filing of deposition transcripts "until they are used in the proceeding or the court orders filing.” After December 1, 2000, therefore, the filing of depositions is no longer an issue of local practice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493113/ | OPINION
WILLIAM H. GINDIN, Bankruptcy Judge.
PROCEDURAL HISTORY
This dispute arises from a motion filed by More Shopping Center, L.P. (hereinafter “movant”) for relief from the automatic stay provided for in 11 U.S.C. § 362(a). For the reasons set forth below, this court will deny the relief sought by movant based upon the doctrine of equitable estop-pel. In addition, this court will deny debt- or’s cross-motion for turnover of the funds it deposited into the Prothonotary Office of the Court of Common Pleas of Montgomery County.
The court conducted a hearing on this matter on September 14, 2000, and reserved decision. Counsel for both parties submitted supplemental memoranda.
This court has jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(G). To the extent that this determination constitutes a “non-core” determination, this opinion shall constitute a report and recommendation pursuant to 28 U.S.C. § 157(c)(1).
FACTS
In November of 1998, Jung H. Im (hereinafter “debtor”) entered in an agreement with Young Sik Choi (hereinafter “Choi”), the owner of More Shopping Center, L.P. (hereinafter the “Shopping Center”), the movant in the instant matter. Debtor agreed to assist Choi in the construction of the Shopping Center. His services were to be without pay from February, 1997 until December, 1998. Debtor contributed $60,000 in improvements to the property. It was debtor’s understanding that in return for its services, it would be granted the right to lease commercial space at the Shopping Center for a period of five (5) years with an option to renew for an additional five (5) year term. Although debtor asserts that these terms were reduced to writing, it has not provided this court with a written lease agreement or any writing showing the terms. Movant, on the other hand, asserts that it merely agreed to an at will lease and that no terms were reduced to writing.
On January 14, 2000, movant provided debtor with a notice to “quit and surrender” the leased premises as debtor had failed to tender required monthly payments. The notice gave debtor ten (10) days to vacate the premises. On February 4, 2000, movant filed suit against debtor in the District Court of Montgomery County. The District Court entered judgment in favor of movant. Debtor appealed the District Court’s decision to the Court of Common Pleas of Montgomery County on March 15, 2000. While the appeal was pending, debtor deposited rental monies into the Prothonotary Office. In June, 2000, movant received the monies held by the Prothonotary Office. Subsequently, on July 26, 2000, debtor filed a Chapter 13 bankruptcy petition. In its reorganization plan, debtor assumed the asserted five year lease agreement. On August 8, 2000, movant filed a motion for relief from the automatic stay imposed by 11 U.S.C. § 362(a). Debtor timely answered the mo*439tion, and included as part of its answer a “Cross Motion for Turnover of Funds Deposited in the Court of Common Pleas of Montgomery.”
DISCUSSION
Debtor presents three arguments in its opposition to movant’s motion for relief from the automatic stay. This court finds debtor’s first two arguments to be without merit. Debtor, however, will prevail on its third argument. First, debtor asserts that the agreement at issue amounts to a year to year tenancy under the Statute of Frauds. Second, debtor argues that the lease was not properly terminated prior to the filing of the bankruptcy petition. Third, debtor alleges that movant is barred by the doctrine of equitable estop-pel from denying the existence of the five year lease. For the reasons set forth below, movant’s motion seeking relief from the automatic stay is denied.
First, this court concludes that since debtor was unable to produce an executed written lease agreement, the transaction at issue is governed by the Statute of Frauds. The Pennsylvania Landlord and Tenant Act provides in pertinent part:
Real property, including any personal property thereon, may be leased for a term of more than three years by a landlord to a tenant or by their respective agents lawfully authorized in writing. Any such lease must be in writing and signed by the parties making or creating same, otherwise it shall have the force and effect of a lease at will only and shall not be given any greater force or effect in law or equity, notwithstanding any consideration therefore, unless the tenancy has continued for more than one year and the landlord and tenant have recognized its rightful existence by claiming and admitting liability for the rent, in which case the tenancy shall become one from year to year. 68 P.S. § 250.202 (1999).
Under Pennsylvania law, leases of a duration greater than three years must be in writing. A lease agreement that has not been reduced to writing will be deemed either (a) an at will tenancy or (b) a year to year tenancy. Indeed the Supreme Court of Pennsylvania has declared that section 250.202 of the Landlord and Tenant Act
does not render unenforceable in their entirety leases which exceed three years in duration; its effect rather is to give violating leases the force and effect of leases at will, unless the parties recognize its existence by paying and accepting the rent for longer than one year, in which case, the tenancy becomes one from year to year. Blumer v. Dorfman, 447 Pa. 131, 289 A.2d 463, 468-69 (1972).
As such, this court finds that the lease constitutes an at will tenancy. Debtor has failed to make more than twelve rental payments to movant. Indeed, from January, 1999, to December, 1999, debtor merely tendered nine (9) payments to movant. As a matter of law the nine payments are insufficient to create a year to year tenant pursuant to § 250.202.
Second, this court holds that movant properly terminated the lease prior to the commencement of the bankruptcy case. Section 365 of the Bankruptcy Code states that “the trustee may not assume or assign any executory contract or unexpired lease of the debtor, ... if such lease is of nonresidential real property and has been terminated under applicable non bankruptcy law.” 11 U.S.C. § 365(c)(3). On January 14, 2000, movant delivered to debtor a notice to “quit and surrender” the leased property. The notice both made a demand for the overdue rent and granted debtor ten (10) days to vacate the leased space. Under Pennsylvania law, “[i]n case of failure of the tenant, upon demand, to satisfy any rent reserved and due, the notice shall specify that the tenant shall remove within ten days from the date of the service thereof.” 68 P.S. § 250.501. Movant complied with the statutory requirements.
Third, notwithstanding the above determinations, this court finds that movant is barred by the doctrine of equitable *440estoppel from asserting that the lease constitutes an at will tenancy. As stated above, debtor asserts that movant’s promise of the five year lease induced debtor to make a substantial investment into the Shopping Center. The Pennsylvania Supreme Court has opined that the doctrine of equitable estoppel applies “where one by his words or conduct willfully causes another to believe in the existence of a certain state of things, and induces him to act on that belief, so as to alter his own previous position, the former is concluded from averring against the latter a different state of things as existing at the same time.” Ervin v. Pittsburgh, 339 Pa. 241, 14 A.2d 297, 300 (1940); See also Novelty Knitting Mills v. Siskind, 500 Pa. 432, 457 A.2d 502, 503 (1983) (The doctrine of equitable estoppel serves to enforce “an informal promise implied by one’s words, deeds, or representations which leads another to rely justifiably thereon to his own injury or detriment”). The burden rests upon the party asserting estoppel to prove such estoppel by unequivocal evidence. Siskind, 457 A.2d at 503.
In support of its argument, debtor relies upon Ridley Park Shopping Center, Inc. v. Sun Ray Drug Co., 407 Pa. 230,180 A.2d 1 (1962). Ridley involves a written lease which was subsequently modified by an oral agreement. Specifically, the tenant originally contracted to lease a total of 60,000 square feet. In exchange for the rental space, the tenant was obligated to construct a building on the 60,000 square foot tract. Id. at 231, 180 A.2d 1. Before construction was initiated the tenant expressed to the landlord its desire to lease an additional 30,000 square feet of space contiguous to that specified in the written lease. Subsequently, the tenant constructed a building that covered approximately 100,000 square feet. Id. The landlord brought suit against the tenant alleging that the tenant “was occupying that portion of the premises in excess of the 60,000 square feet covered by the written leases.” Id. The landlord sought possession of that part of the leased space not covered by the written documents. The court declined to interpose the Statute of Frauds. The court noted: “Tenant assumed exclusive possession and expended a large sum of money in effecting permanent improvements on the land without the semblance of a complaint or objection from the [landlord]. Under such circumstances, the Statute of Frauds may not now be asserted.” Id. at 233,180 A.2d 1.
Debtor, like the tenant in Ridley, made substantial improvements upon movant’s real estate in exchange for a lease agreement. According to debtor, it “expended sums in excess of sixty thousand dollars ($60,000.00) to make substantial improvements to the Premises, including attaching fixtures thereto.” (Debtor’s Brief at 3). As such, this court holds that movant is estopped from denying the existence of the five-year lease. Debtor has successfully convinced this court that it invested $60,000 into the property relying upon movant’s promise of a five-year commercial lease.
The Money Deposited into the Protho-notary Office
Debtor asserts that the landlord must turnover the funds transferred to the landlord from the Prothonotary Office as (1) the rental payments constitute property of debtor’s estate; and (2) the monies are recoverable from the landlord as a preferential transfer pursuant to 11 U.S.C. § 547(b). For the reasons set forth below, this court finds that the rental monies are not recoverable as a preferential transfer because debtor has failed to satisfy the test set forth in § 547(b).
As stated above, when debtor appealed the judgment entered by the District Court of Montgomery County, debtor was required to make its rental payments to the Prothonotary Office. Such payments were handed over to movant in June, 2000. Pursuant to 11 U.S.C. § 542(a) of the Bankruptcy Code, debtor may recover “property that the trustee may use, sell, or lease” in the administration of the bankruptcy case. Debtor is correct in its assertion that the rental monies qualify as property of its bankruptcy *441estate 1 See Mason v. Benjamin Banneker Plaza, Inc. (In re Mason), 69 B.R. 876 (Bankr.E.D.Pa.1987) (holding that a debtor tenant may avoid, as a preferential transfer, payments made to its landlord during an appeal from an adverse tenant-landlord ruling). Thus, the critical issue for this court to determine is whether or not the transfer is avoidable under § 547(b).
Section 547 of the Bankruptcy Code provides in pertinent part:
(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, is 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.
The preferential transfer test set forth in § 547(b) is conjunctive; debtor must satisfy the requirements of each prong in order to invoke the avoiding power. This court finds that debtor has failed to satisfy the fifth factor. Indeed, the transfer has not bestowed upon the landlord more than it would have received in a chapter 7 case. In the chapter 7 proceeding, if debtor sought to assume the unexpired lease in default, § 365 mandates that “at the time of assumption of such contract or lease,” debtor must “cure[], or provide! ] adequate assurance that the trustee will promptly cure, such default.” 11 U.S.C. § 365(b)(1)(A). The landlord has not received more than what is owed to him due to debtor’s default under the lease. As such, § 547(b) precludes debtor from recovering the monies deposited into the Prothonotary Office.
CONCLUSION
For all of the above reasons, this court hereby denies movant’s motion for relief from the automatic stay imposed by 11 U.S.C. § 362(a). This court also denies debtor’s cross-motion for turnover of the funds deposited with the Prothonotary Office.
Counsel for movant shall submit an appropriate order within ten (10) days.
. A bankruptcy estate is comprises of "all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493114/ | OPINION
EDWARD R. GAINES, Bankruptcy Judge.
Before the court is the Objection to Confirmation, or in the Alternative to Convert or Dismiss filed on behalf of Margaret M. Altmann. Also before the court is the Motion for Modification of Plan filed on behalf of the Debtor, Charles Odis Alt-mann. Having considered the pleadings and memoranda submitted by counsel for the parties, as well as the evidence and testimony presented at the trial of the matter, the court concludes that the Motion for Modification by the Debtor should be denied; the Objection to Confirmation should be sustained; and, the Motion to Dismiss should be granted.
I. FACTUAL BACKGROUND
1. On July 20,1999, a petition for relief under Chapter 13 of Title 11 of the United States Code was filed by Charles Odis Altmann in the United States Bankruptcy Court for the Southern District of Mississippi.
*4692. An objection to confirmation or in the alternative to convert or dismiss was filed by Margaret M. Altmann on October 18, 1999. The objection noted that Margaret M. Altmann is the holder of a judgment in the original principal amount of $249,821.39 rendered in the Chancery Court of Wayne County, Mississippi.1 The Chancellor’s opinion included the following findings:
The Court finds that the Defendant’s conduct in this case was reprehensible, outrageous and abusive toward his grandmother, Margaret. There is abundant evidence to show that Chip, at a time when his grandmother was sick and distraught over the death of her son, took her money in the sum of $121,-000.00. This conduct evidences malice and a total disregard for the rights of his grandmother.
Based upon the foregoing, this Court awards a judgment against Charles Odis Altmann and in favor of Margaret Alt-mann. ...
Findings of Fact and Conclusions of Law, No. 97-0285 (May 11, 1999). There was no appeal taken from the decision rendered in the Wayne County Chancery Court.
3. The objection to confirmation filed by Margaret Altmann includes allegations that the debtor’s plan was not proposed in good faith as required by 11 U.S.C. § 1325(a)(3), that the judgment evidences an obligation that is otherwise nondis-chargeable in a Chapter 72, and that the debtor omitted assets from his Schedules and Statement of Financial Affairs.
4. On June 16, 2000, the debtor filed a motion for modification of plan indicating there were errors in the unsecured debts portion of the plan filed.
5. Briefs were subsequently filed on behalf of the parties on the issues raised and the matters were set for trial on November 2, 2000.
II. CONCLUSIONS OF LAW
The matters before the court are core proceedings pursuant to 28 U.S.C. § 157. The court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. § 157 and § 1334.
Section 1325 of the Bankruptcy Code includes the following provision:
§ 1325. Confirmation of plan.
(a) Except as provided in subsection (b), the court shall confirm a plan if—
(3) the plan has been proposed in good faith and not by any means forbidden by law; ...
11 U.S.C. § 1325(a)(3).
In In re Chaffin, 836 F.2d 215 (5th Cir.1988), the Fifth Circuit stated the following:
We adhere to our holding that the fact that Chaffin is invoking Chapter 13 to obtain discharge of a debt previously held non-dischargeable in Chapter 7 because it was incurred through fraud cannot, as a matter of law, suffice to show bad faith. Because the bankruptcy court in effect found that these factors per se constituted bad faith, we reverse the district court’s judgment affirming the bankruptcy court.
On reconsideration of the record, however, we find that other circumstances might exist that would warrant a finding of bad faith, and we direct the bankruptcy court to enter findings concerning these and any other circumstances that might indicate whether Chaffin did or did not act in bad faith ...
We emphasized in Public Finance Corp. v. Freeman that the good-faith inquiry under § 1325(a)(3) requires a careful ex-*470animation of the totality of the circumstances surrounding the debtor’s Chapter 13 filing.
Id. at 216-17.
In examining the circumstances in this case, the following factors are noted. One hundred percent of the debt scheduled in the debtor’s Chapter 13 relates to the Chancery Court proceeding and adverse judgment. There was no pending foreclosure or garnishment pending at the time the debtor filed his petition. Also, there was no effort made by the debtor to repay the debt owed. In addition to these factors, there was no appeal taken from the Wayne County Chancery Court judgment, and the debtor’s Chapter 13 proceeding may reasonably be viewed as an attempt to substitute for an appeal. Based on the Chancery Court’s opinion, the judgment would constitute a nondischargeable debt under Chapter 7. Additionally, the Chancellor found that a fiduciary relationship existed between the debtor and his grandmother.3
In considering the debtor’s conduct, the Chancellor specifically found that his conduct was reprehensible, outrageous and abusive toward his grandmother. In addition to these factors the debtor did not appear to deal openly and honestly with his creditors in the bankruptcy proceeding. He filed a mechanic’s lien against his grandmother’s property that he failed to disclose in the bankruptcy. Additionally, the notice of bankruptcy to his grandmother was mailed to an address where she had not lived for two years.
Having considered the totality of circumstances surrounding the filing of the debtor’s Chapter 13 proceeding, the court concludes that the debtor appears to have filed the proceeding in lieu of an appeal of the Chancery Court judgment and has failed to act in good faith in filing the Chapter 13. The court further concludes that the requirements of 11 U.S.C. § 1325(a)(3) have not been met and that the objection to confirmation filed by Margaret M. Altmann should be sustained, and the debtor’s motion for modification should be denied. The further concludes that the debtor’s Chapter 13 proceeding should be dismissed.
An order will be entered consistent with these findings and conclusions pursuant to Federal Rule of Bankruptcy Procedure 9021 and Federal Rule of Civil Procedure 58. This opinion shall constitute findings and conclusions pursuant to Federal Rule of Bankruptcy Procedure 7052 and Federal Rule of Civil Procedure 52.
. Evidence at trial indicated that the judgment was amended on June 24, 1999, to reflect a total judgment against Charles Odis Altmann in the sum of $173,787.39.
. In the debtor’s response to the objection to confirmation it is admitted that some of the obligation might be nondischargeable in a Chapter 7 proceeding.
. See, In re Sitarz, 150 B.R. 710 (Bankr. D.Minn.1993). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493115/ | MEMORANDUM OPINION AND ORDER
WILLIAM S. HOWARD, Chief Judge.
This matter is before the Court on the Debtors’ Objection to Claim Nos. 17, 18 and 34 Filed by National Bank of Blacks-burg, filed herein on August 25, 2000. The *477National Bank of Blacksburg (“NBB”) filed its Response to Debtors’ Objection to Claim Nos. 17, 18 and 34 on September 22, 2000. This matter was heard on September 28, 2000, and taken under submission by Order entered on October 30, 2000. The issues placed before the Court are the liability of debtor Technologies International Holdings, Inc. (“TIH”) as guarantor on a note, and whether equitable considerations, including marshaling of assets, require the claimant to seek satisfaction from the principal obligor on the note before turning to the guarantor.
At the hearing on September 28, 2000, the Court ruled that Claim Nos. 17 and 18 should be deleted and that Claim No. 34 should be unsecured. Claim No. 34 shows June 1, 1998 (pre-petition), as the date the debt was incurred. Claim Nos. 17 and 18 showed March 29, 1999 (post-petition) as the date the debt was incurred. Otherwise the proofs of claim were alike in every way. The claim now under consideration, Claim No. 34, shows a total of $206,163.73 owed on account of TIH being guarantor on a note in the name of Biosys-tems Technology, Inc. (“BTI”). Attached to the proof of claim are copies of notes dated June 1, 1998, and March 29, 1999, and a Guaranty by Corporation (“the Guaranty”) dated June 1, 1998. The June 1, 1998 Note (“the Prepetition Note”) bears the number 15292-0117 and is stamped “Refinanced.” The March 29, 1999 Note (“the Postpetition Note”) bears the number 15292-0121 and is also stamped “Refinanced.”
The terms of the Guaranty set out that TIH was liable as a guarantor of BTI’s indebtedness in the principal amount of $200,000.00 on a promissory note dated June 1, 1998, and “any extensions, renewals or replacements thereof.” The Prepet-ition Note provided for open end credit enabling BTI to borrow up to the maximum principal sum more than once. This open end credit feature was to expire on June 1, 2002. The yearly interest rate was 8.750% on the outstanding principal balance to be paid on the first day of each month beginning July 1, 1998. The purpose of the loan under this Note was “short term working capital requirements.” The Postpetition Note provided for a single advance of $203,912.28 with interest at the rate of 9.500% to be paid from March 29,1999 to July 27,1999. The purpose of the loan under the Postpetition Note was to “place line of credit # 152920117 on a single pay basis (with this replacement note).”
TIH contends that the refinancing of the Prepetition Note paid BTI’s indebtedness under that Note in full as a matter of law, thereby discharging TIH’s liability under the Guaranty. TIH further contends that the refinancing was not an “extension, renewal or replacement” contemplated by the Guaranty because the terms of the Postpetition Note were “materially different” from the terms of the Prepetition Note. The major difference, according to TIH, is the change from an open end credit arrangement to a four month term loan. TIH further argues that its liability is limited by the terms of the Guaranty to the principal amount, $200,000.00.
The Notes and Guaranty being considered here are subject to Virginia law, having been executed in Virginia between Virginia entities (on the Notes). The effect of refinancing must therefore be determined by reference to Virginia law as interpreted by that state’s courts. The parties herein both cite In re Biondo, 180 F.3d 126 (4th Cir.1999) as being supportive of their respective positions. However, the Biondo court was interpreting the phrase “extension, renewal or refinancing of credit” in the context of 11 U.S.C. § 523(a)(2). This Court is not faced with a dischargeability question, and must look at the effect of refinancing a note on the liability on a guaranty.
Virginia courts have addressed the various aspects of this question. In Gullette v. Federal Deposit Insurance Corporation, 231 Va. 486, 344 S.E.2d 920, 922-923 *478(1986), the Supreme Court of Virginia was faced with the issue of whether there was a novation of a 1979 Note executed by Gullette and a business associate of his resulting in Gullette’s release from liability on that Note. Gullette had also entered into a Guarantee Agreement on the note. The 1979 Note was stamped “PAID BY RENEWAL.” Gullette’s associate and two other individuals executed another note with the same bank in 1980. The language on the face of the note indicated that the purpose of the note was to restructure the debt under the 1979 Note.
The 1980 Note differed from the 1979 Note in several respects, including the fact that Gullette was not a party to it, it extended additional credit, it was secured by additional collateral, and it had a longer repayment term. The bank sued Gullette on the 1979 Note, and the trial court ruled that his liability continued. On appeal, the Supreme Court upheld the trial court, stating:
A novation is never presumed. The burden of proof was upon Gullette to establish by clear and satisfactory evidence that there existed on the part of all parties involved in the subject transaction the clear and definite intention to effect a novation of the 1979 Note.
Gullette argues that the fact the 1979 Note was stamped “PAID BY RENEWAL,” considered in context with the language in the 1980 Note, establishes circumstantially the requisite proof of a novation . [H]e argues that there cannot be a renewal unless the obligations from one note to another remain the same.
We disagree with Gullette. The law of Virginia is plain that a note, though changed in terms, can, nevertheless, be a renewal of a previous note.
At 922.
The court also rejected Gullette’s argument that the 1979 note was cancelled when it was stamped “PAID BY RENEWAL.” The court pointed out that Gullette had not met the requirements of a Virginia statute providing for the discharge of a party to an instrument by its holder by intentionally cancelling the instrument or the party’s signature or by renouncing his rights by a writing. Further, the significance of the stamp “PAID BY RENEWAL” was discounted, the court pointing out that the mere fact that an instrument was stamped “paid” does not, without other evidence, establish cancellation.
This case effectively addresses the arguments made by TIH concerning its liability under the Guaranty at issue here. TIH focused on the change in terms of the Prepetition and Postpetition Notes. The Gullette court made it clear that a change in terms will not effect a novation. Pursuant to the holding in Gullette, TIH must be considered to be liable under the subject Guaranty.
The Court next considers TIH’s contention that it should apply the doctrine of marshaling of assets or some other equitable theory to force NBB to first attempt to recover from BTI under the Postpetition Note. TIH contends that the fact that BTI has never been declared in default, and that NBB would, according to TIH, be in a much better position to recover from BTI than the bankruptcy estate would be provide justification for applying the doctrine of marshaling of assets. In reality, TIH is arguing the “fairness” of the situation it finds itself in.
NBB spends a great deal of time discussing TIH’s lack of standing as a secured creditor, which is a prerequisite for the application of marshaling of assets. See In re Computer Room, Inc., 24 B.R. 732, at fn. 5 (Bkrtey.N.D.Ala.1982). In the Court’s view, however, there is a more basic obstacle in the path of application of that, or any other, equitable theory. The Guaranty at issue here is by its terms unconditional and absolute. Further, in Ullit
*479waives presentment, demand for payment, notice of dishonor or nonpayment, and protest of any instrument evidencing indebtedness. The lender shall not be required first to resort for payment of the indebtedness to Borrower or other persons or their properties, or to first enforce, realize upon or exhaust any collateral security for indebtedness, before enforcing this guaranty.
As stated in Ives v. Williams, 143 Va. 855, 129 S.E. 675 (1925):
It is well settled in the law of guaranty that when the guarantor enters upon an absolute guaranty, the creditor is under no obligation to first endeavor to collect from the debtor, nor is he under obligation to give notice to the guarantor of default on the part of the primary debt- or. When the guaranty is absolute, as in this case, whether the contract of guaranty covers the performance of an act or the payment of money at a definite time, the liability of a guarantor is distinguished from a mere guaranty of solvency or collectibility, which is conditional in its nature or which may arise out of a continuing guaranty.
At 676.
The Guaranty is a contractual obligation, presumably freely entered into by TIH. It is obvious that NBB’s claim in this case is perfectly fair and justified under the terms of the Guaranty. Besides, as stated by the court in Computer Room, supra, at 737, quoting from Matter of Samuels & Co., Inc., 526 F.2d 1238 (5th Cir.1976):
We do not sit as federal chancellors confecting ways to escape the state law of commercial transactions when that law produces a result not to our tastes. Doing what seems fair may be heady stuff ... Today’s heady draught may give the majority a euphoric feeling, but it can produce tomorrow’s hangover.
This Court likewise finds it unnecessary, if not unwise, to bring equitable considerations into the determination of this matter.
In consideration of all of the foregoing, it is the opinion of this Court that TIH’s Objection to Claim No. 34 of National Bank of Blacksburg should be, and hereby is, overruled. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493117/ | MEMORANDUM OF DECISION
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
In this proceeding, Phyllis J. Wheeler (“the debtor”) seeks to avoid, pursuant to Bankruptcy Code § 522(f)1, a judgment hen held by Tolland Bank (“the bank”) encumbering her residence. The issue dividing the parties arises from the circumstance that the judgment lien covered a property interest prior to the debtor acquiring such interest. The parties have submitted the matter upon a stipulation of facts and their memoranda.
II.
The debtor, on May 13, 1999, filed a Chapter 7 bankruptcy petition listing as an asset her residence located at 281 Ference Road, Ashford, Connecticut (“the property”). She asserted a homestead exemption, pursuant to Conn.Gen.Stat. § 52-352b(t), in the amount of $75,000.00 in the property. The property has a fair market value of $56,800.00 and the bank’s judgment lien is the only encumbrance on the property.
The debtor and her now deceased husband, Clifford J. Wheeler (“Clifford”), originally acquired the property as joint tenants with rights of survivorship by deed recorded on October 17, 1962. The bank, on August 22, 1994, caused to be recorded a judgment lien for $86,36.89 against the interest of Clifford in the property. Clifford, on February 10, 1996, died with the debtor thereby succeeding to Clifford’s property interest.
Under the foregoing circumstances, the debtor claims she should be allowed to avoid the bank’s judgment lien to implement the “fresh start” policy of the bankruptcy law. The bank asserts that the debtor, having acquired Clifford’s interest in property subject to the judgment lien, may not avoid that lien.
III.
A.
The debtor’s interest in the property is a matter of state law. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (“Property, interests are created and defined by state law_”). In Connecticut, joint tenancy with rights of survivorship is a form of ownership created by statute. Conn.Gen. Stat. § 47-14a et seq. Connecticut stat*544utes specifically provide that the interest of a joint tenant may be encumbered by a judgment lien and that an such lien on the property interest of a joint tenant will continue to encumber the property interest passing to a survivor after the death of that joint tenant. Conn.Gen.Stat. § 47-14f (West 1995) (“During the life of any joint tenant his interest may be ... made subject to a ... judgment lien ... provided, upon the death of any joint tenant owning that interest, the ... lien ... shall likewise continue valid and enforceable against that interest as and when it accrues to the surviving tenants or tenant by reason of that death ....”) (emphasis added).
B.
The ruling in this matter is clearly controlled by the decision of the U.S. Supreme Court in Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991). In Farrey v. Sanderfoot, the Supreme Court resolved a dispute among the Courts of Appeal as to whether the language of § 522(f) “means that a lien may be avoided so long as it is currently fixed on a debtor’s interest .... [or whether it permits] avoidance of a lien only where the lien attached to the debtor’s interest at some point after the debtor obtained the interest.” Id. at 296, 111 S.Ct. 1825. The Court held, based upon § 522(f)(l)’s “purpose and history,” that “unless the debtor had the property interest to which the lien attached at some point before the lien attached to that interest he or she cannot avoid the fixing of the lien under the terms of § 522(f)(1).” Id.
IV.
The court concludes that, under Connecticut law, the debtor did not have the property interest to which the lien attached at a point prior to attachment of the lien to that interest, and that she cannot avoid the lien under § 522(f). Farrey v. Sanderfoot, 500 U.S. at 296, 111 S.Ct. 1825. Accordingly, Tolland Bank’s objection is sustained and the debtor’s motion to avoid the lien pursuant to § 522(f) is denied. It is
SO ORDERED.
. 11 U.S.C. § 522(f)(1) provides in relevant part:
Notwithstanding any waiver of exemptions but subject to paragraph (3), 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, other than a judicial lien.... | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493118/ | OPINION
RUSSELL, Bankruptcy Judge.
The appellant loaned $50,000 to the ap-pellee and the appellee’s husband, relying on assurances by her accountant and the couple’s attorney that they would be able to repay her. These assurances were made in view of a large inheritance the appellee stood to receive before the loan came due. The appellee received the inheritance and gave a portion of it to her husband with the instruction to repay the loan. He did not, however, remit anything to the appellant. After the appellee filed her chapter 71 petition, the appellant sought a determination of nondischarge-ability, pursuant to § 523(a)(2)(A), for the debt arising from the unpaid loan. A bench trial took place and at the conclusion of the appellant’s main case, the appellee moved for judgment. She argued that the appellant had failed to establish an intent to deceive on her part. The bankruptcy court found that the appellee lacked such an intent and granted her motion. This appeal followed. We AFFIRM.
*790I. FACTS
Appellee Carolyn Stearman and her husband, Fred Damato, were engaged in the operation of a Burlingame, California restaurant known as Café Trevi. Though they often worked together, Stearman herself had no ownership interest in the restaurant and was otherwise self-employed as a hair stylist. In late 1997, the restaurant encountered financial difficulties, and the couple sought out funds to meet short-term expenses.
Their accountant, George Del Fierro, knew of the restaurant’s difficulties and spoke with another client of his, appellant Lucia Prado, about the possibility of making a $50,000 loan to Stearman and Dama-to. Prado had experience in the restaurant business and Del Fierro arranged an initial meeting between Prado and the couple. The parties met once more and Prado was then given three documents by Damato, all dated November 5, 1997 and prepared by the couple’s attorney, Adam Kent. The first was a letter from Kent to Prado stating the following:
I represent Fred and Carolyn Damato with regard to a number of financial matters. It is my understanding that you have agreed to lend the Damatos the sum of fifty thousand dollars ($50,-000), payable within sixty days.
Based upon my personal knowledge of the Damatos’ business and financial affairs, it is my understanding that they will have more than sufficient funds with which to pay their debt to you within the next thirty to sixty days.
This is a reflection of my understanding as the Damatos’ legal representative, and is not intended to be either a guarantee of their obligation to you or as an inducement for you to enter into this or any other financial transaction with my clients.
The second document was a promissory note, executed by Stearman and Damato, in favor of Prado for $57,000, $7,000 of which was interest. The note was payable in sixty days. The third document Prado received was a deed of trust on Damato’s condominium located in San Carlos, California.2 This instrument was executed by Damato and secured payment of the note.
Prado, whose English proficiency was limited, presented the documents to Del Fierro for his review. Del Fierro explained to Prado the meaning of a trust deed. His explanation strengthened Prado’s view of the loan transaction, which had been shaped by Del Fierro’s earlier assurances that Stearman and Damato would be able to repay the loan because Stearman was expecting a large inheritance from her mother’s estate.3 Based on Del Fierro’s remarks and the above documents, Prado decided to loan $50,000 to Stearman and Damato and delivered to them a cashier’s check in this amount in early November 1997.
Stearman was indeed expecting a large inheritance within one or two months from this time. Unbeknownst to Prado, Stear-man, represented by Adam Kent, had filed a chapter 13 petition earlier, in July 1997. Her schedules indicated liabilities of $24,647 and assets of $350,000, which represented her expectation interest in her mother’s estate. Additionally, they indicated a monthly income of $1,000 and monthly expenses of $875.
In December 1997, Damato filed a chapter 13 petition of his own. Notably, his schedules showed that the condominium used to secure Prado’s loan was overen-cumbered such that the loan was effectively unsecured. The worthless nature of Damato’s security had been raised by Kent to Damato at the time Kent prepared the deed of trust. It was not, however, known to Stearman or communicated to Prado, *791who discovered it only after Damato filed his petition.
The loan came due in January 1998, but was not repaid. Stearman had received her expected inheritance in late 1997 and soon thereafter distributed a partial amount, $72,000, to her husband with the instruction that the funds be used for repayment. Her husband, however, failed to remit anything to Prado. In April 1999, Stearman having dismissed her chapter 13 case and filed a chapter 7 petition, Prado filed a complaint against her by which she sought a determination of nondischarge-ability, under § 523(a)(2)(A), for Stear-man’s debt arising from the unpaid loan.4 Stearman answered, denying that she had obtained the loan through false pretenses, a false representation, or actual fraud.
A bench trial was held in March 2000 at which the bankruptcy court heard testimony from five witnesses: Stearman and her husband Fred Damato, Adam Kent, Lucia Prado, and George Del Fierro. After Prado concluded her main case, Stearman moved for judgment pursuant to what the court identified as Rule 7052(c). Stearman asserted, inter alia, that Prado had failed to establish that she had the intent to deceive. The court heard argument from both parties before announcing its ruling on the motion.
The court initially observed that, though Prado’s complaint stated a cause of action under § 523(a)(2)(A), the parties had referred to § 523(a)(2)(B) in their trial briefs. The court viewed this difference as “academic,” stating that the critical elements of both sections were “virtually the same.” Turning to Stearman’s motion, it ruled that Prado had indeed failed to show an intent to deceive on Stearman’s part. Based on this failure, the court found that Stearman did not intend to deceive Prado at the time of the loan. It thus granted Stearman’s motion and entered judgment in her favor and against Prado. Prado timely appealed and later filed a motion for a new trial, which the court denied. While the parties address the denial of this motion in their briefs, its propriety is not an issue before us because the order denying the motion was never appealed.
II.ISSUE
Whether the bankruptcy court erred in finding that Stearman lacked the intent to deceive, thereby granting her motion for judgment at the conclusion of Prado’s main case.
III.STANDARD OF REVIEW
We review a finding made under Rule 7052(c) for clear error. See In re Lund, 202 B.R. 127, 129 (9th Cir. BAP 1996).
IV.DISCUSSION
Prado argues on appeal that the bankruptcy court erred in finding that Stear-man had no intent to deceive her at the time Stearman and her husband obtained the loan. We disagree.
The context for the court’s finding was Stearman’s motion for judgment under Rule 7052(c). Incorporating Federal Rule of Civil Procedure 52(c), Rule 7052(c) provides:
If during a trial without a jury a party has been fully heard on an issue and the court finds against the party on that issue, the court may enter judgment as a matter of law against that party with respect to a claim or defense that cannot under the controlling law be maintained or defeated without a favorable finding on that issue, or the court may decline to render any judgment until the close of all the evidence. Such a judgment shall be supported by findings of fact *792and conclusions of law as required by subdivision (a) of this rule.
On a motion under the rule,
[t]he judge is the trier of fact and “may weigh and consider the evidence and sustain defendant’s motion though plaintiffs evidence establishes a prima facie case that would have precluded a directed verdict for defendant in a jury case.”
Stone v. Millstein, 804 F.2d 1434, 1437 (9th Cir.1986) (quoting 5 James Wm. Moore et al, MooRe’s Federal Practice ¶ 41.13[4] at 41-193 through 94 (2d ed.1980)).
In Stone, the Ninth Circuit was elaborating on that portion of Federal Rule of Civil Procedure 41(b), now replaced by Federal Rule of Civil Procedure 52(c), which permitted a court to dismiss an action after the close of the plaintiffs casein-chief. See Fed.R.CivP. 52(c) advisory committee’s note. The circuit court stated:
We review the district court’s grant of involuntary dismissal under Rule 41(b) the same as a “a judgment in defendant’s favor following a trial to the court.” Thorne v. City of El Segundo, 726 F.2d 459, 468 (9th Cir.1983), cert. denied, 469 U.S. 979, 105 S.Ct. 380, 83 L.Ed.2d 315 (1984). The district court’s findings of fact are reviewed for clear error; questions of law are reviewed de novo.
Stone, 804 F.2d at 1437.
Thus, the focus is not on whether Prado made a prima facie case with respect to Stearman’s (alleged) intent to deceive, for even if she had, the court could have still ruled on Stearman’s motion as it did. Instead, the focus concerns the court’s dispositive finding of fact that Stearman lacked the intent to deceive. It was in view of this finding that the court granted Stearman’s motion for judgment.
The following excerpt from the court illuminates its finding:
When [Stearman] signed the note that is in evidence, she had a basis on which to believe that she could pay the debt. She knew that — she intended to pay it. She attempted to pay it. She had the wherewithal to pay it, and none of these facts support a finding that she therefore had an intention to deceive.
Transcript of Trial Proceedings, Mar. 15, 2000, p. 288. Additional remarks by the court also bear mention:
I have many, many cases where people say to me, we intended to pay when they had no basis whatsoever to think they could ever pay, and if [Stearman] did not have a real actual expectancy of inheriting sufficient money, then quite possibly I could accuse her and find that she had — she intended to deceive [Prado],
But the evidence is exactly the reverse. It’s a very difficult case for [Prado]. I appreciate that. But it is equally difficult in my mind for [Stearman], The only thing that [Stearman] didn’t do I suspect finally was pay [the] debt after she tried to pay it via her husband. But that does not go to intent to deceive. In fact, it’s inconsistent with intent to deceive.
Transcript of Trial Proceedings, Mar. 15, 2000, pp. 288-89.
Indeed, the uncontradicted fact and testimony are that Stearman based her ability to repay Prado on her expected inheritance and she attempted to repay through her husband. Thus, the court did not err in finding that Stearman lacked the intent to deceive Prado.
Prado urges otherwise, arguing that the court “completely overlooked the fact that even taking into account [Stearman’s] inheritance of approximately $350,000, she and her husband were still insolvent and did not have sufficient funds to pay back all of their creditors, including Ms. Prado.” Appellant’s Opening Brief, p. 7. She contends that Stearman’s chapter 13 case, pending at the time of the loan, her husband’s post-loan chapter 13 case, and the worthless deed of trust require an inference of intent to deceive on Stear-*793man’s part.5 Prado argued this point at trial, and the court was not persuaded by it. The recitation of it here is nothing more than an improper attempt to reliti-gate in an appellate forum.
V. CONCLUSION
The bankruptcy court did not err in finding that Stearman lacked the intent to deceive Prado in obtaining the loan, thereby properly granting her motion for judgment. We AFFIRM.
. Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330 and the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
. The condominium was Damato's separate property.
. This expected inheritance formed the basis for Kent's assertion that Stearman and Dama-to would have "more than sufficient funds” with which to repay Prado.
. At the time Prado filed her complaint, she had a similar one pending against Damato, who had filed a chapter 11 petition (later converted to chapter 7) after his chapter 13 case was dismissed in April 1998. Prado prevailed and obtained judgment against Damato in November 1999.
. A court may infer such an intent if the facts and circumstances of a particular case present a picture of deceptive conduct by a debtor. See In re Eashai, 87 F.3d 1082, 1087 (9th Cir.1996) (citing In re Faulk, 69 B.R. 743, 755 (Bankr.N.D.Ind.1986)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493120/ | *85
MEMORANDUM OPINION AND ORDER
TAMARA O. MITCHELL, Chief Judge.
This matter comes before the Court on a Joint Motion for Allowance of Compensation and/or Administrative Expense Pursuant to Section 503(b) and in Settlement or Compromise of a Controversy in Claim filed by John Kolius and the Chapter 7 Trustee on August 7, 2000. Appearing at the trial on November 28, 2000, were Lee R. Benton and Kyle Wise, counsel for John Kolius (“Kolius”), William Dennis Schilling, counsel for Chapter 7 Trustee Max C. Pope, Sr., Daniel D. Sparks, counsel for the debtor Aloha Racing Foundation, Inc. (“ARF” or “Debtor”), Jerry W. Schoel, counsel for James Bailey (“Bailey”), Thomas E. Reynolds, counsel for HealthSouth Corporation (“Health-South”), and J. Patrick Darby, counsel for Dr. James Andrews, M.D. (“Dr.Andrews”). This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 151, and 157(a) (1994)1 and the district court’s General Order of Reference Dated July 16, 1984, As Amended July 17, 1984.2 This is a core proceeding arising under Title 11 of the United States Code as defined in 28 U.S.C. § 157(b)(2)(A) and (O).3 This Court has considered the pleadings, testimony, exhibits, arguments of counsel and the law. Accordingly, this Court finds and concludes as follows.4
*86
I. FINDINGS OF FACT
5
The America’s Cup Challenge is a series of sailing races held every three to four years between high-end yachts built within limited design parameters. It is widely considered to be the most prestigious sailing event in the world. The America’s Cup Challenge is hosted by the previous winner. The challenger for the America’s Cup is determined through a series of qualifying races known as the Louis Vuitton Cup. Several boats may compete in the Louis Vuitton Cup but only the winner ultimately races against the current champion in the America’s Cup series. In February and March of 2000, the Thirtieth America’s Cup Challenge was held in Auckland, New Zealand following the Louis Vuitton Cup races in November and December 1999.
In the mid-1990’s, James Bailey, a resident of California, became interested in challenging for the Thirtieth America’s Cup and sought a crew and boat through his corporation, Bailko, Inc. (“Bailko”). Bailko formed the Aloha Racing Syndicate (“Syndicate”) and recruited John Kolius6 to be the Skipper and Sailing Director for the campaign.
Bailey, on behalf of the Syndicate negotiated an employment contract with Kolius (“the Contract”) whereby Kolius would be paid a total of $550,000 at a monthly rate over approximately a three-year period. (Movant’s Exhibit 1). The payments pursuant to the Contract were “back-end loaded” to accommodate cash flow problems which commonly occur in America’s Cup campaigns.
As both Skipper and Sailing Director, Kolius’s enumerated duties included acting as a liaison to the design and development teams for the boats7, identifying and recruiting crew members, assisting the Syndicate in fund-raising and public relations and, of course, skippering the training and competition vessels in the Louis Vuitton Cup and hopefully also in the America’s Cup itself. The Contract also provided that Kolius would have other “unidentified responsibilities which would be on a ‘mutually agreed upon basis.’ ” (Movant’s Exhibit 1 ¶ 3). The Contract does not include a provision for selling the Syndicate’s assets at the conclusion of the campaign. Kolius testified that based on his experience and understanding of the Contract, helping to sell the assets of ARF was not included in the Contract. The objecting parties had no contrary testimony or evidence regarding the Contract. This Court found Kolius to be a candid and credible witness with respect to all of his testimony.8
Shortly after the Contract was signed and Kolius began performing his duties for the Syndicate, all assets of the Syndicate were transferred to the Aloha Racing *87Foundation (“ARF”). This bulk transfer included the Contract with Kolius. Both Kolius and ARF continued to perform under the Contract until the ARF team was eliminated in the Louis Vuitton qualifying races.9 Kolius remained in Auckland to oversee the dismantling and shipping of the ARF boats and related equipment to Houston by February of 2000. Even though pursuant to the Contract Kolius was to receive monthly payments through August 2000, Kolius was not paid after January of 2000. The trial testimony revealed that it is undisputed that he is owed $102,000 pursuant to the Contract.
On May 11, 2000, ARF filed a petition under chapter 7 of the Bankruptcy Code. Max Pope was appointed Trustee of ARF’s estate and employed Dennis Schilling as his attorney. Mr. Schilling testified that in his attempts to liquidate the property of the estate on behalf of the Trustee, he spoke with several people about finding a buyer for the boats. Mr. Schilling also testified that he offered a ten percent commission to anyone who brought the ultimate buyer to the Trustee but he did not sign a contract with any of these potential “finders.” Also, because he did not know who the ultimate “finder” would be and the value of the boats was rapidly declining due to the limited number of potential buyers and them need to obtain the vessels early in their challenge efforts, Mr. Schilling did not advise the potential finders that they needed to get approval from this Court before searching for a buyer. Koli-us, who has no legal training, was not aware that he might need this approval before proceeding to find a buyer. On May 22, 2000, Team Sayanora, Inc. contacted Kolius about buying the assets of ARF. (Movant’s Exhibit 16). Kolius helped negotiate a $2,000,000 sale price between the Trustee and Team Sayanora.10 This price was the highest offer for the assets of ARF and after an appropriate motion was filed, this Court approved that sale on June 28, 2000. (Bankr.Proceeding No. 37).
Kolius filed a Proof of Claim for $302,000. This amount includes $102,000 claimed as a first priority lien on the proceeds of the vessels pursuant to the Contract and the Federal Maritime Lien Act found at 46 U.S.C. § 31342. The Claim also includes the $200,000 ten percent commission on the sale of the vessels. In an attempt to circumvent any dispute with the Trustee or other creditors, Kolius and the Trustee agreed to reduce the total amount payable to Kolius to $200,000. On August 7, 2000, Kolius and the Trustee filed a joint motion to have this Court approve the compromise. HealthSouth filed an objection on August 29 and Dr. Andrews filed an objection on September 11. Both objections allege that Kolius is not a disinterested person and has failed to satisfy the requirements for acting as a professional under 11 U.S.C. § 327(a). In addition, HealthSouth and Dr. Andrews contend that Kolius had agreed to sell the boats as part of his responsibilities as an employee of ARF. Kolius denies this contention and presented evidence to that effect.11 No other objection to the settlement was filed.
II. CONCLUSIONS OF LAW
A. Standard for Approving the Compromise
It must be noted at the outset that the purpose of this trial was not to determine whether Kolius is owed the ten percent commission of $200,000. The proper inquiry is whether $200,000 is a fair and equitable settlement under the circumstances of this case. See Protective Com*88mittee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 1168, 20 L.Ed.2d 1, 9 (1968), reh’g denied, 391 U.S. 909, 88 S.Ct. 1649, 20 L.Ed.2d 425 (1968). See also Anaconda-Ericsson, Inc. v. Hessen (In re Teltronics Servs., Inc.), 762 F.2d 185, 189 (2nd Cir.1985) (providing that the responsibility of the bankruptcy judge is to determine “whether the settlement falls below the lowest point in the range of reasonableness”). Rule 9019 provides this Court’s authority to approve a settlement.12 While Rule 9019 does not provide the standard for this Court to employ in reviewing a proposed settlement, the Eleventh Circuit has spoken on this issue. See Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II, Ltd.), 898 F.2d 1544 (11th Cir.1990), cert. denied, 498 U.S. 959, 111 S.Ct. 387, 112 L.Ed.2d 398 (1990). The factors to be considered in approving a settlement are:
(a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
Id. at 1549 (citations omitted). These factors will now be considered in turn.
B. Settlement Approval Factors
1. Probability of Success in the Litigation
13
This Court must peer into the future to determine the likelihood that Kolius would prevail on an objection to his Proof of Claim for $102,000 in wages and $200,000 in commission in determining whether $200,000 is a reasonable settlement. The burden is not on Kolius and the Trustee to conclusively establish that he would be successful at a trial on these issues. That would defeat the purpose of settlement and would eliminate any cost savings from the settlement. “All that he must do is establish to the reasonable satisfaction of [this Court] that, all things considered, it is prudent to eliminate the risks of litigation to achieve specific certainty though it might be considerably less (or more) than were the case fought to the bitter end.” In re Golden Mane Acquisitions, Inc., 221 B.R. 963, 966 (Bankr.N.D.Ala.1997) (quoting Florida Trailer & Equip. Co. v. Deal, 284 F.2d 567, 573 (5th Cir.1960)).
It is undisputed that Kolius is owed approximately $102,000 for pre-petition wages under the Contract. Kolius alleges that this claim is secured by a maritime lien on the boats, and consequently the proceeds from the sale of the boats. HealthSouth denies that this lien is applicable and alleges that Kolius is merely a general unsecured creditor. Kolius’s alleged lien attached, if at all, pursuant to the Federal Maritime Lien Act found in 46 U.S.C. § 31342 (1989). If the lien attached, it did so immediately when the debt arose, i.e., when the Contract became binding. See Equilease Corp. v. M/V Sampson, 793 F.2d 598, 602 (5th Cir.1986), cert. denied, 479 U.S. 984, 107 S.Ct. 570, 93 L.Ed.2d 575 (1986). Section 31342 provides:
(a) Except as provided in subsection (b) of this section, a person providing necessaries to a vessel on the order of the owner or a person authorized by the owner—
*89(1) has a maritime lien on the vessel;
(2) may bring a civil action in rem to enforce the lien; and
(3) is not required to allege or prove in the action that credit was given to the vessel.
46 U.S.C. § 31342.
Thus, Kolius’s first hurdle on the lien issue is to establish that he furnished repairs, supplies or other necessaries to the ARF boats. See Barwil ASCA v. M/V Sava, 44 F.Supp.2d 484, 487 (E.D.N.Y.1999) (citations omitted). The Act’s definition of necessaries provides that “ ‘necessaries’ includes repairs, supplies, towage, and the use of a dry dock or marine railway.” 46 U.S.C. § 31301 (emphasis added). This indicates that the definition is a non-exhaustive list. “Necessaries” has been “interpreted broadly to include any goods or services ‘reasonably needed’ in a ship’s business for a vessel’s continued operation.” Id. (citing Newport News Shipbuilding & Dry Dock Co. v. S.S. Independence, 872 F.Supp. 262, 266 (E.D.Va.1994)). Another court has interpreted necessaries to include “most goods and services that are useful to the vessel, keep her out of danger, and enable her to perform her particular function.” Equilease Corp., 793 F.2d at 603. Kolius would most likely be able to prove that he provided necessaries to the boats at a trial on this issue. He was both the Skipper and Sailing Director for the America’s Cup campaign. His services were “reasonably needed” in designing, testing, supervising maintenance and skippering the vessels in the Louis Vuitton qualifying races. Kolius was responsible for hiring and training the crew. Both prior to and after the Louis Vuitton races, Kolius assisted in the dismantling and shipping of the boats to New Zealand and then back to the United States. Once the boats were stored in Houston, Kolius periodically checked on the boats to ensure everything was in order. Without making a specific finding on this issue, it certainly appears that Koli-us’s talents were not only reasonably needed, but also vital to this campaign.
Kolius must next prove that the boats were “vessels.” The term is not defined by the Maritime Lien Act. However, “vessels” is defined in the General Provisions Title of the United States Code as “every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water.” 1 U.S.C. § 3 (1997). A craft does not have to be employed in commerce or even be employed in navigation to be a vessel. See M/V Marifax v. McCrory, 391 F.2d 909 (5th Cir.1968) (craft only needs to be “capable of being used” as transportation on water). The boats appear to be vessels within the meaning of the statute.
The third and final step to prove the existence of the lien would be for Kolius to show that the necessaries were provided upon the order of the owner or a person authorized by the owner. See Barwil, 44 F.Supp.2d at 487. As owner of the boats, ARF was authorized to procure necessaries or appoint someone to procure necessaries. 46 U.S.C. § 31341. If Kolius can prove his actions provided necessaries to the vessels, he was authorized to do so by ARF per the Contract which named him Skipper/Sailing Director and gave him all the aforementioned responsibilities.
It appears to this Court that Kolius has a substantial likelihood of prevailing in a hearing to determine whether he holds a maritime lien for his unpaid wages. Further, at the very least, he has a legitimate argument that his maritime lien continues beyond the sale of the boats and that he has a lien on the proceeds from the sale of the boats. Thus, there is a probability that Kolius could prevail on this lien issue.
With regard to the commission issue, there is substantial disagreement as to whether Kolius is owed a commission at all. HealthSouth asserts 1) that Kolius operated as a “professional” in finding a buyer for the boats and should not receive a commission because he failed to obtain court approval pursuant to § 327 and 2) *90that Kolius’s services were included in the amount due under the Contract.
Section 327(a) provides:
Except as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.
11 U.S.C. § 327(a). Kolius is obviously not an attorney, accountant, appraiser or auctioneer. Therefore, to be considered a professional within the meaning of § 327 he must fall within the “other professional persons” category. Id. The term “professional” is not defined by the Bankruptcy Code. This Court must therefore look to other sources to determine the likelihood that Kolius could prove that he did not operate as a professional. Both Kolius and HealthSouth attempt to guide this Court in attempting to define professional by suggesting definitions promulgated by other bankruptcy courts. The parties urged the same definition by citing cases which provide that “professionals” includes only those persons who are “intimately involved in the administration of the debt- or’s estate.” In re Northeast Dairy Cooperative Federation, Inc., 74 B.R. 149, 153 (Bankr.N.D.N.Y.1987) (quoting In re Seatrain Lines, Inc., 13 B.R. 980, 981 (Bankr.S.D.N.Y.1981)).
Kolius maintains that he merely operated as a “finder” and was not a professional because he had no authority to bind the Trustee or the estate. See In re Foundation Group Systems, Inc., 141 B.R. 196 (Bankr.E.D.Cal.1992) (a “finder” authorized to locate a buyer in exchange for a ten percent commission was not a professional under § 327). He argues that his only authorization was to find potential buyers for the Trustee and further that he was under no obligation to do so. There was no contractual obligation with the Trustee and in fact there is no dispute that Mr. Schilling had communicated to several other potential finders that he would support them in them attempt to obtain a commission from the estate if they delivered the ultimate purchaser of the boats to the Trustee. Kolius contends that his involvement was only tangential to the administration of the estate so as not to render him a professional under § 327. See Committee of Asbestos-Related Litigants and/or Creditors v. Johns-Manville Corp. (In re Johns-Manville Corp.), 60 B.R. 612, 620 (Bankr.S.D.N.Y.1986). Kolius also highlights the possibility that § 503 may be used to grant compensation even if he were to ultimately be found to be a professional. See In re Grabill, 983 F.2d 773, 777 (7th Cir.1993).
Conversely, HealthSouth asserts that Kolius was acting as a professional when he acted as an agent for the Trustee by brokering a deal between Team Sayanora and the Trustee. HealthSouth contends that Kolius should not get paid for his actions because he did not obtain court approval before trying to sell the boats. While it was ultimately up to the parties to reject or accept the deal, Kolius was involved in bringing about this meeting of the minds in much the same way a real estate agent would. HealthSouth alerts this Court to the fact that other courts have disregarded whether a claimant was licensed and looked to the nature of the services in determining whether the claimant was a professional. See Northeast Dairy, 1A B.R. at 153-154. HealthSouth contends that brokering a deal to dispose of essentially the only asset of the estate was certainly intimate involvement with the administration of ARF’s estate. See id. Thus, they contend that Kolius’s actions clearly fall within the Seatrain definition of professional. Alternatively, Health-South argues that the efforts by Kolius to *91sell the boats were part of his contractual obligation and included in the total amount due pursuant to the Contract.14
This issue will certainly be hotly contested if the compromise is not approved by this Court. If HealthSouth were to prevail at a hearing on whether Kolius acted as a professional, the estate stands to gain approximately $100,000; however, if Kolius were to prevail at said hearing, the estate stands to lose approximately $100,000 above what is now being sought.15 However, based upon the cases cited by the joint movants and the very credible testimony of Kolius, this Court believes that Kolius has a likelihood of prevailing on his nonprofessional status on these facts and that his efforts were not part of his contractual obligation but were additional.
Kolius further claims that the commission is due him as a § 503(b)(1)(A) administrative expense.16 HealthSouth claims that Kolius is due no commission because he was either operating as an unapproved professional or as an employee of the Debtor and that he was only doing what he was obligated to do under the Contract. HealthSouth’s argument is that his $102,000 claim for wages should encompass any efforts he undertook to sell the boats. Minutes of a Board of Director (the “Board”) meeting for January 7, 2000, indicate that Kolius had been designated as the representative of ARF to sell the boats. (Movant’s Exhibit 4(IV)(D)). Those Minutes also indicate that Kolius would not be paid a commission for these efforts. (Movant’s Exhibit 4(IV)(D)). HealthSouth maintains that as the employee of ARF with the most specialized knowledge about the boats, Kolius was the most logical choice to serve as the contact point for the Foundation. In addition, Ko-lius was on the Board at the time this meeting was held and attended most meetings though admittedly most he attended by telephone and sometimes not for the entire meeting.
Kolius maintains that he never saw these Board minutes and was not in attendance during the portion of the meeting when this resolution was passed. There was testimony from both Kolius and Dale Baker that Kolius often attended Board meetings by cell phone and often hung up when the business of the meeting did not concern him. Kolius’s testimony indicates that he assumes this is exactly what happened during the meeting in question. There is also a question of whether a quorum was even present at this meeting and thus whether or not the action taken at the meeting, the passage of the resolution, was valid.17 Kolius further testified that it was customary in the America’s Cup community for the person who brought the buyer to the table to receive a ten percent commission and that this was not a service or obligation performed by a skipper or sailing director in the performance of a contract. There was no agreement between Kolius and ARF for him to *92sell the boats but he always assumed he would get paid because the sale was outside his scope of duties as Skipper and Sailing Director under the Contract. He testified that once the team was eliminated from the Louis Vuitton races, his obligations under the Contract ended. Although HealthSouth attempted to show that his responsibilities continued at least through August of 2000 when the last payment under the Contract was due, Kolius’s testimony contradicts this position. Kolius also testified that Baker once sent him an e-mail suggesting that he sell the boats for free. Kolius testified that he rejected that suggestion. An e-mail from Baker to Koli-us dated 5/11/2000 was also put into evidence which provided:
JK,
With the filing of bankruptcy today, you need to cease your negotiations for the sale of the boats for the time being. As soon as the court trustee is appointed, if you want us to, we will recommend that you continue your expert sales efforts for a fee. Counsel tells me it will be about two weeks before the trustee is appointed and functioning.
Let me know your desires.
Dale Baker
(Movant’s Exhibit 14) (emphasis added). This e-mail was sent over four months after the Board meeting at which the resolution was allegedly adopted which purportedly designated Kolius as the selling agent for ARF. Further, James Bailey testified in his deposition that the sale of the boats by Kolius was outside the scope of the Contract and would have been the subject of a separate contract. (Movant’s Exhibit 31 pp. 54-56). Since Bailey is the one who negotiated the Contract with Koli-us, he is more qualified than HealthSouth to provide insight into what was covered by the Contract. Finally, Kolius testified that prior to the filing of the bankruptcy, he helped find a buyer for the boats without an agreement as to compensation because he had a long-standing relationship with Dr. Andrews and never imagined there would be a problem once the boats were sold.
Once again, a hearing on this issue would require extensive testimony and time. But based on what this Court has heard and seen it finds that there is a substantial likelihood that Kolius would prevail on this issue. For these reasons and those enumerated in the hen and § 327 discussions, this Court finds that approval of this settlement is in the best interest of all involved under this factor.
2. Difficulties of Collection
There is no evidence that there would be any difficulty in Kolius collecting the money from the estate. This factor must therefore weigh in favor of approving the compromise. See Golden Mane, 221 B.R. at 972.
S. Complexity of the Litigation Involved
The unresolved nature of the law on the issue of what constitutes a professional under the Bankruptcy Code and in this Circuit indicates that this litigation would certainly be complex. While this Court can define professional, the definition is a term of art and one could envision lengthy testimony, including expert testimony, at a trial on this issue which would also require an extensive finding of facts to determine whether Kolius fit into that definition. The same is true of a contest on the merits of Kolius’s administrative expense claim. The fact that the issues are complex and the proceedings would take time does not automatically mandate approval of the compromise. However, this Court finds the settlement to be fair to all parties, a potential savings to the estate and an expeditious solution to the difficult issues that are presented (or would be presented) by the parties.
A Paramount Interest of the Creditors
The final factor is the paramount interest of creditors and a proper deference to *93their reasonable views in the premises. Justice Oaks, 898 F.2d at 1549. Although HealthSouth and Dr. Andrews both oppose this compromise, it may not be in their best interest to do so. If this compromise motion is denied, Kolius would no doubt pursue his claims for the full $302,000. If successful at a hearing on these claims, Kolius would be entitled to $102,000 over and above what this proposed settlement now provides. In addition, HealthSouth and Dr. Andrews would potentially be forced to spend substantially more time on discovery and money on attorney’s fees at a hearing on Kolius’s claims. Furthermore, the value of the estate would continue to be diminished by substantial attorney fees for counsel for the Trustee in litigating these complex issues.
No other creditors have objected to this settlement. These other creditors might share in any distribution from the estate along with HealthSouth and Dr. Andrews.18 Approval of this compromise spares all parties the expense of further litigation on the issues described and potentially saves the estate over $100,000. Additionally, all creditors may be paid sooner rather than later if the compromise is approved. See Golden Mane, 221 B.R. at 974.
III. CONCLUSION
This Court finds that the compromise is fair and equitable to both the creditors and the estate. If this settlement is not approved, substantial further time and expense await both the creditors and the estate. The future proceedings concerning Kolius’s claims would be complex and could result in an even greater loss to the estate, and consequently the creditors. At the very least, this compromise certainly does not “fall below the lowest point in a range of reasonableness.” Anaconda-Ericsson, Inc., 762 F.2d at 189. Accordingly, it is hereby
ORDERED, ADJUDGED AND DECREED that the Objections to Joint Motion for Allowance of Compensation and/or Administrative Expense Pursuant to Section 503(b) and in Settlement or Compromise of a Controversy in Claim are OVERRULED. The Joint Motion is therefore GRANTED and the Compromise APPROVED.
. 28 U.S.C. § 1334(b) provides:
Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.
28 U.S.C. § 151 provides:
In each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or by order of the district court.
28 U.S.C. § 157(a) provides:
Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for that district.
. The General Order of Reference Dated July 16, 1984, As Amended July 17, 1984 issued by the United States District Court for the Northern District of Alabama provides:
The general order of reference entered July 16, 1984 is hereby amended to add that there be hereby referred to the Bankruptcy Judges for this district all cases, and matters and proceedings in cases, under the Bankruptcy Act.
. 28 U.S.C. § 157(b)(2) provides:
(b)(2)Core proceedings include, but are not limited to—
(A) matters concerning the administration of the estate
(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims.
. This Memorandum Opinion constitutes findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, applicable to adversary proceedings in bankruptcy pursuant to Federal Rule of Bankruptcy Procedure 7052.
. Pursuant to Federal Rule of Evidence 201, the Court may take judicial notice of the contents of its own files. See ITT Rayonier, Inc. v. U.S., 651 F.2d 343 (5th Cir.1981); Florida v. Charley Toppino & Sons, Inc., 514 F.2d 700, 704 (5th Cir.1975).
. Kolius’s reputation and accomplishments are well known in the sailing community. Kolius testified that in 1976, he won a silver medal in the Olympics. He has been sailing professionally since 1976 and has won World Championships. As a skipper, Kolius has participated in three America's Cup campaigns since 1983. In addition, he coached the Italian team that actually sailed in the America's Cup Challenge in 1993. In 1995, he coached the first all-female team to sail in the Louis Vuitton qualifying series.
. Two boats were designed and built.
. Kolius was the primary witness and there were no other witnesses who testified about the Contract except Dale Baker, the Secretary-Treasurer of ARF and a HealthSouth representative, who was not involved in the Contract negotiations and whose testimony was limited to a Board of Directors’ meeting and issues related to that meeting. Also, the deposition of James Bailey was put into evidence in which Mr. Bailey stated that the sale of the assets was outside the scope of the Contract. (Movant's Exhibit 31 pp. 54-56). Bailey was the one who originally negotiated the Contract with Kolius. Mr. Schilling also testified about his dealings with Kolius on behalf of the Trustee.
.The ARF vessel, “Abracadabra 2000,” finished seventh out of ten teams in the Louis Vuitton Cup. The Louis Vuitton Cup was won by Italy's “Prada”, who sailed against Team New Zealand in the America's Cup Challenge. The America's Cup was successfully defended by Team New Zealand.
. The ultímale price was determined by the Trustee and his attorney. Kolius was merely the middle man.
. See supra page 4 and note 8.
. FED. R. BANKR. P. 9019(a) provides:
(a) COMPROMISE. On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct.
. There are three issues to be discussed under this factor: 1) Kolius’s asserted maritime lien on the vessels and the proceeds of the sale thereof; 2) Kolius’s asserted claim to a commission and that he is not a professional requiring court approval; 3) Kolius's allegation that he has a § 503(b) claim.
. See more discussion regarding this assertion infra.
. Kolius has a claim for $302,000. It is undisputed that he is entitled to $102,000. If the compromise is approved he will receive $200,000. If the compromise is not approved, he will still receive the $102,000. The issue becomes whether he will get the $200,000 in commission, bringing his total to $302,000, or get no commission, leaving him with only the $102,000.
. 11 U.S.C. § 503(b)(1)(A) provides:
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—
(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case.
. The Bylaws of ARF provide that a majority of the directors must be present to constitute a quorum. (Movant's Exhibit 6 § 4.13). Ko-lius testified that ARF had nine directors. The meeting minutes for January 7, 2000 indicate that four directors were present. (Movant’s Exhibit 4 p. I). The minutes also indicate that Doug DeVos, one of the Board members, had telephonically delegated his proxy to Dr. Andrews prior to the meeting. There is some question whether this proxy was allowed under the Bylaws of ARF.
. There are other proceedings and matters to be resolved by this Court including a determination as to whether HealthSouth had a valid perfected security interest in the boats and their proceeds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493121/ | ORDER ON OBJECTION TO CLAIM AND ADMINISTRATIVE EXPENSE
ALAN H. W. SHIFF, Chief Judge.
Barry Strickland, the administrator of the Estate of Margaret Cappiali (“Claimant”) filed a proof of claim and a request for the payment of an administrative expense for the use and occupancy of a garage and adjacent land located at 36-38 St. Rochs Avenue, Greenwich, Connecticut. Capp Industries, Inc. (“Debtor”) objected to both.
BACKGROUND
The St. Rochs property was the location of the Cappiali family home and a garage /office building (“garage”). John Cappiali lived at that home all of his life. The Cappiali family has also used the St. Rochs property to run family businesses since John Cappiali’s grandfather (“John Sr.”) operated a construction business in the 1920s. In 1988, John Cappiali formed Capp Industries, Inc. which utilized the garage and adjacent land. On John Sr.’s death,1 his widow, Margaret Cappiali, inherited the St. Rochs property, which continued to be used as a family residence and by Capp Industries. In 1989, Margaret Cappiali died, and Plato Eliades was appointed administrator of her probate estate. The use of property by the family and Capp Industries continued as before her death. Upon Plato Eliades’s death in May 1997, the Claimant was named successor administrator.
On September 4, 1998, the Debtor commenced this chapter 11 case. On March 27, 2000, the Claimant filed an amended proof of claim in the amount of $290,640 for the use and occupancy of the garage and adjacent land. See Claimant’s Exh. 1. On April 13, 2000, the Claimant filed a request for the payment of a $48,353.502 administrative expense for the use and occupancy of the same space. See Claimant’s Exh. 2.
DISCUSSION
Under Connecticut law, “[a] tenant at sufferance is not obligated to pay rent but only the reasonable rental value *121of the premises as use and occupancy.... A tenancy at sufferance arises when a person who came into possession of land rightfully continues in possession wrongfully after his right thereto has terminated. ...” O’Brien Properties, Inc. v. Rodriguez, 215 Conn. 367, 371-372, 576 A.2d 469 (1990). See also Commissioner of Transportation v. Dock, Inc., 1995 WL 779098, 4 (Conn.Super.1995). However, “[u]se and occupation is not, in itself, a basis upon which to find liability; there must be, as in the case of an implied contract, at least an intent [by the owner] ... to charge and an intent by the [occupier] ... to pay, or circumstances such that [the owner] expected payment.” Commissioner of Transportation v. Textron Inc., 40 Conn.Supp. 202, 205, 485 A.2d 1373 (1984).
It is apparent that Capp Industries, and then the Debtor, used and occupied the garage and adjacent land until Margaret Cappiali’s death under an arrangement whereby those entities would maintain the property, and no money was charged for rent. See Claimant’s Exh. 5. Plato Eliades then permitted that use after her death. The first suggestion of a change in that arrangement was not until six years later when Plato Eliades’s sent a February 17, 1995 letter to John Cappiali:
I must close out this entire issue as I have allowed you too much time and uncontrolled use of the property. I urge you to provide me immediately with a proper accounting and a bona fide offer of purchase. Otherwise, I shall place the property in the hands of a realtor.
See Claimant’s Exh. 4.
Louis Spizzirro, attorney for the Debtor and John Cappiali, responded in a letter dated March 7,1995:
[Your] letter raises the issue of rent from John Cappiali or Capp Industries for the first time. As you are well aware, Capp Industries Inc. and John Cappiali occupy this property under an arrangement with the estate which allows them to remain on the premises rent free while safeguarding and managing the property of the estate.
See Claimant’s Exh. 5.
Neither Plato Eliades nor the Claimant refuted the existence the arrangement. Indeed, the Claimant admitted that he did not know whether or not there was any such arrangement. Transcript3, 15-16; 26. Therefore, the Court concludes that such an arrangement existed, at least until the Claimant attempted to terminate it. See infra at 122.
Under Connecticut law, “the administrator stands in the shoes of the decedent.” Holzmaier, v. Associated Internists of Danbury, 1998 WL 144980, 1 (Conn.Super.1998). Therefore, since Margaret Cappiali, as owner of the property, could have terminated the arrangement and demanded rent from the Debtor, as well as money for its use and occupancy from the date of the demand, so could Plato Eliades, as administrator of her probate estate. As noted, there is no persuasive evidence that he exercised those rights. The Claimant, as successor administrator, had the same rights. If the Claimant had proven4 that he terminated the arrangement, the Debtor would have been a tenant at sufferance in the garage and adjacent land, and it would be obligated to pay the fair market value for that use and occupancy. O’Brien Properties, supra, 215 Conn, at 371-372, 576 A.2d 469.
The Claimant testified that in April 19975 and during 1998, inter alia, he re*122jected any asserted arrangement and requested the payment of monetary rent:
Attorney Miltenberger: Did you ever tell Capp Industries that the Estate of Margaret Cappiali did not agree to that arrangement?
Claimant: Yes, I did.
Attorney Miltenberger: And how was that? When did you tell them that? Claimant: Pretty much every time we spoke. That would be in the courtroom in Hopewell, Virginia [probate proceedings] in April ’97, and a couple of times on the telephone we had occasion to talk during 1998. I always maintained that I wanted all rents turned over to me, and I wanted a complete accounting, and that I was not in agreement and unaware of any arrangement that he should stay there rent free to maintain [the] property. Transcript, 15-16.
The Claimant did not offer any evidence of the date he claims he terminated the arrangement other than those vague references. To the contrary, he admitted that he did not formally undertake any efforts to evict the Debtor. Transcript, 86.
John Cappiali denied that the Claimant rejected the arrangement and demanded the payment of monetary rent:
Attorney Charmoy: Did anyone, the estate or anybody else, to your knowledge, ever make a demand for rent from Capp Industries?
Witness: No
Attorney Charmoy: Did anybody ever make a demand for use and occupancy, other than this suit right now for use and occupancy [from] Capp Industries?
Witness: [No]
Transcript at 114.
Accordingly, it is concluded that the Claimant has not satisfied his burden of proving that he terminated the arrangement. But even if he did, his claim for use and occupancy must be disallowed, and his request for payment of an administrative expense must be denied, because there is insufficient persuasive evidence to establish a starting date for that obligation.6
Moreover, it is noteworthy that there was insufficient evidence to prove the fair market value of several of the elements of the claim and administrative expense. For example, with respect to the garage, not taking into account the rental value of vehicle storage in the garage,7 there was no evidence on the fair market value of the garage for any time other than 1998. Thus, the portion of the claim which references any other times must be disallowed.
Regarding the value of the use and occupancy of the garage and adjacent property for the storage of vehicles during the pre-petition and administrative period, the Claimant’s expert testified that a comparable rent in 1998 would be $200.00 per month per vehicle. Transcript at 92-93. The Claimant’s amended proof of claim, Claimant’s Exh. 1, assumed that eight vehicles were stored in the garage space, but he testified that he assumed that only five vehicles were stored. See Transcript, 23. Of more significance, the Claimant offered no evidence of the number of vehicles in the garage and adjacent land at any particular time, and that is fatal to a claim based on dollars per vehicle per month.
Further, as to the right of payment of administrative expense, the Claimant produced no evidence as to whether any vehi*123cle was owned by the Debtor or was stored for its benefit. However, John Cappiali testified, as did his sister Josephine Cappi-ali, that approximately half of the garage area was occupied by his personal “monster show truck” and its 60 inch tall tires. See Transcript, 44; 109. He also testified that he keeps a 23 foot boat, personal motorcycles, family cars and two pick-up trucks that were used for him personally and by the Debtor. See Transcript, 115.
Accordingly, the Claimant’s claim is disallowed, his request for the payment of an administrative expense is denied, and IT SO ORDERED.
. The dale of John Sr.’s death does not appear in the record.
. In his post-trial memorandum, the Claimant decreased the amount claimed for vehicle storage to $112,000.00 based on a revised assumption that the Debtor stored only five vehicles on the property. The Claimant did not file an amended request for administrative expenses.
. Transcript references the August 23, 2000 trial.
. "... the creditor has the ultimate burden of proving its claim by a fair preponderance of the evidence.” In re RBS Industries, 115 B.R. 419, 422 (Bankr.D.Conn.1990), citing In re Central Rubber, 31 B.R. 865, 867 (Bankr. D.Conn.1983).
.The Claimant had been involved with the Margaret Cappiali Estate since 1996 when he represented one of the heirs during the Virginia state court proceedings.
. As noted, the Claimant's proof of claim reaches back to the date of Margaret Cappia-li's death, notwithstanding the fact that the rental arrangement was in effect.
. As noted, supra at 120, the Claimant’s March 27, 2000 amended proof claim was for $290,640. That amount consisted of $111,440 for the fair rental value of the garage and an additional $179,200 for the storage of vehicles in the garage and on adjacent land. See Claimant's Exh. 1; Transcript, 88. On April 13, 2000, the Claimant filed a request for the payment of a $48,353.50 administrative expense for the use and occupancy of the same space. See Claimant’s Exh. 2. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493126/ | MEMORANDUM OPINION ON COMPLAINT TO DETERMINE DIS-CHARGEABILITY
WILLIAM H. BROWN, Bankruptcy Judge.
The Plaintiff, Carol Gilley Helsel, formerly Carol Marsh, filed this adversary proceeding to determine the discharge-ability of certain “hold harmless” debt assumptions under the parties’ divorce decree and its incorporated marital dissolution agreement. Section 523(a)(15) is the applicable Bankruptcy Code provision, as prayed in the complaint. When the debtor/defendant filed his answer, he was represented by counsel, but his attorney subsequently withdrew. The debtor appeared pro se at the trial of this proceeding on November 14, 2000. At the conclusion of the trial, the Court took the issues under advisement, and this Opinion contains findings of fact and conclusions of law pursuant to Fed. R.Bankr.P. 7052. This is a core proceeding. 28 U.S.C. § 157(b)(2)(I).
ISSUE
The issue presented under § 523(a)(15) is whether the debts assumed by the debt- or in the parties’ marital dissolution agreement are dischargeable in this Chapter 7 case. That Code section provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(15) not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, a determination made in accordance with State or territorial law by a governmental unit unless—
(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably *881necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debt- or is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.
11 U.S.C. § 523(a)(15).
FACTS
The facts concerning the debts assumed were not disputed. The marital dissolution agreement provided in its paragraph 18 that the husband, now the debtor, assumed a Bank of Boston Mastercard account and a Value City account, and he agreed to hold the wife, now the plaintiff, harmless on those obligations. Moreover, he agreed not to incur additional debt on those and other jointly-held accounts after the date of the agreement. The plaintiffs proof included the balance now due on the Bank of Boston credit card, $1079.00, and the balance that the plaintiff paid on the Value City account, $1,438.43. When demand was made upon her, the plaintiff exhausted her savings to pay the Value City account in order to protect her credit and to reduce its 20% accruing interest, and she has agreed to pay the Bank of Boston account, now held by Wacova Bank, at $15.00 per month. The plaintiff negotiated an interest reduction in the latter account to 10% for one year, at which time the interest will increase. The plaintiff testified that she was told by the defendant at some point that the Bank of Boston account had been paid off, but instead he continued to charge to that account after the execution of their marital dissolution agreement. The complaint also referred to a Radio Shack account, but no proof was offered at trial about that account.
The complaint asks for a judgment of indemnity, money damages, attorney’s fees, costs, and a determination that the judgment is nondischargeable. The answer raises the affirmative defenses of § 523(a)(15) that (A) the defendant is financially unable to pay these debts or (B) that their discharge would have a benefit to the debtor which outweighs the detrimental consequences to the plaintiff. The proof on the defenses was sparse, but the debtor did testify concerning his income and some expenses. The debtor has not remarried, has moved to Bolivar, Tennessee, where he works as a mechanic, and he lives modestly. He has certain debts, including tax obligations, that will survive his bankruptcy discharge. The plaintiffs testimony included the fact that she supports two dependent children, not born of this marriage, that she works 10.5 horn* days to repay these debts, and that she remains under financial stress. No one asked the plaintiff how much income she has, how much income her new spouse has, what their actual expenses are, nor what other specific debts she owes. The plaintiff has incurred attorney’s fees for this dischargeability action at $150.00 an hour.
DISCUSSION
The highest authority in this Circuit for the burden of proof on § 523(a)(15) issues is the Bankruptcy Appellate Panel, which concluded that “[t]he objecting creditor bears the burden of proof to establish that the debt is of a type excepted from discharge under § 523(a)(15).” Hart v. Molino (In re Molino), 225 B.R. 904, 907 (6th Cir. BAP 1998). In the present case, there is no dispute that these debts were assumed by the debtor in the parties’ marital dissolution agreement, which was incorporated into the divorce decree; thus, the debt assumptions clearly were “incurred by the debtor in the course of a divorce ... or in connection with a separation agreement, [or] divorce decree,” and are excepted from discharge unless one of the applicable defenses is established. 11 U.S.C. § 523(a)(15). The plaintiff, there*882fore, has carried her initial burden of proof. “Once the creditor has met this burden, the burden shifts to the debtor to prove either of the exceptions to nondis-chargeability contained in subsections (A) or (B).” In re Molino, 225 B.R. at 907 (citations omitted). This shifting burden is logical when subsections (A) and (B) are viewed as affirmative defenses to the proof of nondischargeability. See Hon. Bernice B. Donald & Hon. Jennie D. Latta, The Dischargeability of Property Settlement and Hold Harmless Agreements in Bankruptcy: An Overview of § 523(a) (15), 31 Fam.L.Q. 409, 421 (Fall 1997). “The debtor must make these showings by a preponderance of the evidence.” In re Molino, 225 B.R. at 907 (citation omitted).
The debtor/defendant failed in his burden of proving either affirmative defense (A) or (B). As to ability to pay, the debtor’s testimony established that he was on a tight budget, having incurred relocation expenses when he moved for a new job. He testified that he was making less now than in the time he was married to the plaintiff due to less overtime and less commission work than he expected. He is living modestly and he still has some other debt that will survive his Chapter 7 discharge. However, he expects to make approximately $30,000 this year, he has not remarried, and he has no dependents. Based upon his income, the debts at issue are relatively minor, totaling approximately $2,500.00, and they could be paid in installments over a reasonable period of time without depriving the debtor of necessary income. Moreover, the debtor failed to put on any proof about his inability to increase his income in the future. As the Molino court observed, proof to satisfy § 523(a)(15)(A) must show both present inability to pay as well as future inability. 225 B.R. at 908. The Court understands Mr. Marsh’s desire to improve his own standard of living, but the Court may not assume, absent proof, that Mr. Marsh is incapable of obtaining a higher-paying job that would both improve his lot and permit easier payment of these two debts.
As to the part (B) balancing between detriment to the plaintiff and the benefit to the debtor, the Molino court adopted a “balancing test ... to review the financial status of the debtor and the creditor ...,” which includes “a non-exclusive list of eleven factors that should be considered by the court.” In re Molino, 225 B.R. at 908-09. Since no one at trial proved the plaintiffs income, this Court has no way to effectively conduct a balancing test. The debtor bore the burden of proof on this element, and the lack of essential proof caused a failure in his burden. Other factors were not established as well, including the plaintiffs expenses, debts, assets, future employment prospects, and spouse’s income, to mention only a few. The picture of the debtor’s finances was also less than clear.
The Court concludes, therefore, that the debtor failed to establish by a preponderance of the evidence that either of the affirmative defenses of § 523(a)(15)(A) or (B) apply, leading to a conclusion that the two debts at issue are excepted from the debtor’s discharge.
The complaint seeks a monetary judgment. While the Court could simply say that the debts are nondischargeable, there was proof of the amount that the plaintiff has paid and that the debts have increased subsequent to the parties’ marital dissolution agreement. It is appropriate, therefore, for the Court to enter a judgment to the plaintiff for the amount of $2,517.43, this being the amount of the debts established by the proof. The parties’ agreement having provided for payment of interest, this judgment will bear interest at the statutory rate applicable under Tennessee law until paid. The parties should attempt to agree upon a monthly repayment schedule.
A final issue concerns the prayer for attorney’s fees and costs. A recent decision from the Ninth Circuit is persua*883sive. In Renfrow v. Draper, 232 F.3d 688 (9th Cir.2000), that court considered an award of attorney fees and costs to a plaintiff in a § 523(a)(15) adversary proceeding. First observing that “[t]here is no general right to recover attorney’s fees under the Bankruptcy Code,” the court went on to note that a party in a bankruptcy action may be entitled to fees if the state law governing the action and the contract at issue so provided. Id. at 693 (citations omitted). The contract here is the parties’ marital dissolution agreement, a contract governed by Tennessee law, and that agreement provides for attorney’s fees to the party prevailing on a breach of the agreement. It would appear, therefore, that the plaintiff here has an initial basis for an award of fees. There is, however, another element to the issue. The rule announced in Renfrow “does not permit a bankruptcy court to award a party attorney’s fees for litigating federal law issues in a bankruptcy court whenever state law is ‘integral’ to determining dischargeability. Instead, we held that attorney’s fees should be awarded solely to the extent they were incurred in litigating state law issues.” Id. at 694 (citing In re Baroff, 105 F.3d 439, 442-43 (9th Cir.1997) and Am. Express Travel Related Serv. Co. v. Hashemi (In re Hashemi), 104 F.3d 1122, 1127 (9th Cir.1996)). In other words, the litigation solely on the issue of dischargeability under § 523(a)(15) does not provide a basis for an attorney’s fee award to the plaintiff. If, however, there was “evidence of the [underlying] claim’s validity and of the amount that was owing under state law,” and “the bankruptcy court was required to determine whether the state court’s order was enforceable,” these are state-law issues that were litigated in the discharge-ability action, and the bankruptcy court could award fees to the plaintiff only in an amount “incurred litigating the validity and amount of the debts under state law.” Renfrow at 694.
Under this rule, which this Court concludes is a correct one, an award of attorney’s fees to the plaintiff in this case is problematic. There being no dispute at trial concerning the validity of the marital dissolution agreement, it does not appear that the Court was called upon to determine the validity of these debts. The significant issue in the litigation was whether the debts were dischargeable, and that is a purely federal-law issue, for which the Bankruptcy Code does not provide for attorney’s fees. However, the plaintiffs complaint sought a monetary judgment, the debtor contested the dischargeability at trial, and he filed an answer which denied his liability on the debts, thus forcing the plaintiff to put on proof about these debts. The Court finds, therefore, that a partial award of attorney’s fees at a reasonable hourly rate of $150.00 for three hours, a total fee of $450.00, is appropriate. A judgment will be entered in favor of the plaintiff for that amount.
In addition, under both the parties’ agreement and Fed.R.BanKR.P. 7054, an award of costs is appropriate. The plaintiff is entitled to a judgment for the costs related to this complaint, which will include the $150.00 filing fee and any fees incurred in issuing subpoenas. The plaintiffs attorney should file an itemization of the costs of subpoenas and any other costs within ten (10) days of entry of this opinion, serving a copy upon the debtor. In the absence of an objection by the debtor, which objection must be filed within an additional ten (10) days after service of the itemization, the itemized costs will be added to the monetary judgment in this proceeding, and an amended judgment will be entered. If an objection is filed, the Court will rule upon the objection without a further hearing, unless the objection asserts a basis for a further hearing.
A separate Order and Judgment will be entered consistent with this Opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493128/ | MONTALI, Bankruptcy Judge.
Creditor Ganis Credit Corp. (Ganis) held liens on recreational vehicles (R.V.s) that had been traded in to debtor Jan Weilert R.V., Inc. (debtor), an R.V. dealer. The chapter 71 trustee sought to recover two payments debtor made to Ganis totaling $48,304.59 as preferential transfers under 547(b). The bankruptcy court rejected Ganis’s ordinary course of business defense under § 547(c)(2) and entered judgment for the trustee.2 The only issue on appeal is whether the bankruptcy court correctly applied the objective industry standard for the ordinary course of business defense. We AFFIRM.
FACTS
The bankruptcy court succinctly stated the background facts:
Debtor sold new and used recreational vehicles (“R.V.s”). The used vehicles were often obtained when the purchaser of a new R.V. had an older one to be used as a trade-in or a used vehicle was brought in to be sold on consignment (“trade-ins”). The trade-ins were sold by the Debtor as used vehicles. Often, money was still owed to the original financiers who held security interests in the used R.V.s. These liens were to be paid out of the money received by Debt- or when the vehicle was traded in or when the used R.V.s were purchased by third parties.
Defendants were one of these “original financiers” and held security interests in used R.V.s sold by Debtor. In the ninety days prior to bankruptcy filing, Debtor made two payments to Ganis totaling $48,304.59-
In re Weilert R.V., Inc., 245 B.R. 377, 380 (Bankr.C.D.Cal.2000).
The case before us involves those two payoffs of liens on trade-ins. The first trade-in R.V. was delivered to debtor by a customer on November 21, 1996. Debtor resold it on January 30, 1997, receiving $37,005.33 from the buyer the same day. Debtor deposited the proceeds in its general account. On February 20,1997, twenty-one days later (and ninety-one days after trade-in), the check that debtor had issued to Ganis to pay off the lien cleared debtor’s bank account. Thus debtor had unrestricted use of that money for that period of time, while Ganis’s collateral had been turned over to the buyer, subject to the Ganis lien.
The second trade-in R.V. was received by debtor on January 27, 1997. Debtor resold it on February 6, 1997, for $11,299.26 and deposited the proceeds in its general account. The check debtor issued to Ganis to pay off the second R.V. cleared debtor’s account on March 19, 1997, forty-one days later (and fifty-one days after trade-in). Again, debtor had use of the sales proceeds for that period of time while Ganis’s collateral was out of its and debtor’s control. In each case, when Ganis was paid, it released its lien on the respective R.V.
After debtor filed chapter 7, appellee, as trustee, brought an adversary proceeding to recover the two payments as preferences. All of the elements of a preference under § 547(b) were established on sum*4mary judgment, and the propriety of that decision is not before us. In granting summary adjudication in favor of appellee on the § 547(b) preference elements the court found as ordinary course of business, debtor’s incurring obligations to pay off liens owed on trade-ins transferred to it by debtor’s customers. It also found that part of debtor’s ordinary course of business was to sell used R.V.s free and clear of any liens and that the payments were made in the ordinary course of business or financial affairs of debtor and Ganis (satisfying § 547(c)(2)(B)). In addition, a joint pretrial order established that the two payments to Ganis were “on account of an antecedent debt.”
After the trials in this case and the related case involving Bank of the West, the court issued a single opinion setting out its findings and conclusions. The court took judicial notice of the evidence presented in both cases, and considered all of the evidence in both cases in rendering its decision in each case.3 The court found that Ganis had not proven that the payments to it had been made according to ordinary business terms. Ganis appeals.
ISSUE
As noted, we do not revisit the trustee’s prima facie case under § 547(b). Our attention is limited to the only real issue at the trial, and the only issue on appeal, viz. whether Ganis had established that the payments to it were made according to ordinary business terms, as required for its ordinary course of business defense under § 547(c)(2)(C).
STANDARD OF REVIEW
Determining whether the bankruptcy court applied the correct legal standard is a question of law that the panel reviews de novo. See In re Loretto Winery, Ltd., 107 B.R. 707, 709 (9th Cir. BAP 1989). Whether a payment is made according to ordinary business terms is a question of fact reviewed for clear error. In re Kaypro, 230 B.R. 400, 403 (9th Cir. BAP 1999), aff'd in part, rev’d in part, 218 F.3d 1070 (9th Cir.2000). To the extent questions of fact cannot be separated from questions of law, the panel reviews them de novo as mixed questions of law and fact. Id. at 404.
DISCUSSION
Section 547(b) provides that certain transfers made by the debtor within 90 days before bankruptcy may be avoided as “preferences.”4 A transferee of a preferential payment may prevent avoidance if *5it can prove by a preponderance of the evidence that it satisfies the elements of one of the defenses to avoidance of preferential payments set out in § 547(c). § 547(g); Kaypro, 230 B.R. at 404. Section 547(c)(2) provides that the trustee may not avoid a transfer:
to the extent that such transfer was—
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debt- or and the transferee;
(B) made in the ordinary course of business or financial affairs of the debt- or and the transferee; and
(C) made according to ordinary business terms.
The defense at issue in this case is the third and final element of ordinary course of business defense set out in § 547(c)(2).
1. The Bankruptcy Court’s Ruling
In its published amended opinion addressing whether debtor’s payments to Ganis met the requirement of § 547(c)(2)(C), that the transfers be made according to ordinary business terms, the bankruptcy court acknowledged application of an objective standard, which “looks to whether the relevant industry would consider payment to have been made according to ‘ordinary business terms.’ ” Weilert, 245 B.R. at 382. Relying on testimony presented by David Russell, a witness for Bank of the West, the court found that the practice of R.V. dealers for trade-in vehicles was to pay off a lienholder on a trade-in vehicle within one to 45 days from the time the vehicle was sold to a third party, although payment could “easily be extended beyond 45 days from the date of trade-in.” Id. at 384.
The court also noted that it was customary in the industry, and in fact required by state law, that the lienholder sign over the lien documents upon payoff. Id. at 385.
The court stated:
At trial, Mr. Russell testified when a payment [from the original owner to the lienholder] was late, either the original owner of the vehicle would inform the lender that the vehicle was traded in, or the lenders would call the original owner to inquire about the late payment. A lender would typically inquire 15 days after the due date so that the maximum number of days from trade in to inquiry would be 45 days. Once a lender knew the vehicle was on a dealer’s lot, the lender would typically call the dealer to inquire as to dealer’s estimate of vehicle’s worth and the estimate of the time period needed to sell. However, after this inquiry, no further action was taken. Despite the passage of time, neither of the Defendants engaged in any further inquiry after being placed on notice that the vehicle was in the dealer’s possession. This is unfortunate, since it is the conduct of the lender, after this 45-day period, when inquiry notice arises, and a check is later received that must be the focus of attention to the “ordinary business practices.”
In a bankruptcy setting when these vehicle trade-in and consignment cases arise, lenders must first show they had followed a reasonable inquiry notice. For example, where a vehicle had been on the lot for some time, Defendants should also require proof of when the vehicle was sold, as well as when funds are tendered, i.e., more than receipt of a check should be required. Had Defendants engaged in further inquiry, they could have then required that the payment be issued as a two-party check to the borrower and lender. The borrower could endorse the check and then forward it to the lender. If Defendants had taken such precautions, then the preference would not be with the lender, but solely with the borrower. Until Defendants completed the inquiry and accepted the funds, Defendants were not required — by operation of law — to release their hens and sign over the certificates of title. Therefore, to preserve their ordinary course of business defens*6es in a bankruptcy setting when debtor-dealers are starting their slide into bankruptcy, lenders in the vehicle industry must take minimal affirmative steps to inquire when payments are late. The evidence presented demonstrates that lenders make no more than a cursory inquiry once they have been apprised that a vehicle is no longer in possession of their borrower, but in possession of the dealer for resale. Apparently, because the lender industry knows its security lies with the vehicle, they generally do not care when the dealer pays them off.... Such conduct, while it may seem prudent in a non-bankruptcy context, does not meet the objective business standard required by the 11 U.S.C. § 547(c)(2) defense.
Id. at 388. The court then captioned the following as Findings of Fact and Conclusions of Law:
Defendants had to be on notice after the first 45 days from trade-in (the next month’s payment due date plus 15 days) that the vehicle was on Debtor’s lot. So, until the next month’s installment date, Defendants were under no duty to conduct inquiry regarding the status of their vehicles. Any action taken by Debtor and Defendants within that 45-day time period, therefore, would be considered “ordinary” and would not be subject to avoidance as a preference.
Beyond that time period, however, Defendants were on notice that their security was on dealer’s lot and continued to remain unpaid. Therefore, Defendants must take some of the risk that they are dealing with an insolvent dealer. Defendants, and the vehicle trade industry, must take reasonable affirmative steps to preserve their security. Lenders are really afforded “two bites at the apple.” They would meet the ordinary course standard if payoff is within Jf5 days of trade-in or, if payoff is within 20 days of receipt of funds from the third-party purchaser. Merely stating the industry practice is “to do nothing” and follow the vehicle code by release of lien only on payoff, is insufficient to warrant a judgment in favor of Defendants. Such a failure to act would render the Section 547(c)(2) ordinary course defense meaningless.
Id. at 389 (footnote omitted) (emphasis added).
2. Ordinary Business Terms
Ganis argues that the court misapplied the legal standard for “ordinary business terms” in two ways, by adding a diligence standard and by focusing on the delay between the time a vehicle comes on debt- or’s lot as a trade-in and the time of payment, rather than the lack of delay between payoff and release of the lien.
The phrase “ordinary business terms” in § 547(c)(2)(C) is not defined in the Bankruptcy Code. The Ninth Circuit interprets it to mean that a creditor must show that the payment at issue was “ordinary in relation to prevailing business standards.” In re Food Catering & Housing, Inc., 971 F.2d 396, 398 (9th Cir.1992). In applying that standard, the court is to apply an objective standard, which requires proof of “practices common to businesses similarly situated to the debtor and transferee.” Loretto Winery, 107 B.R. at 709.
In the leading case on this subject, the Seventh Circuit explained:
[T]he creditor must show that the payment he received was made in accordance with the ordinary business terms in the industry. But this does not mean that the creditor must establish the existence of some single, uniform set of business terms....
... “[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 ex*7traordinary and therefore outside the scope of subsection C.
In re Tolona Pizza Products Corp., 3 F.3d 1029, 1033 (7th Cir.1993). Accord In re Cocolat, Inc., 176 B.R. 540, 550 (Bankr.N.D.Cal.1995).
Although the bankruptcy court initially articulated the correct legal standard, it went on to discuss at some length a different legal standard. It formulated and described a “reasonable creditor” standard and declared what practices a reasonable creditor should engage in, focusing on notice to the lienholder that a vehicle had been traded in. Ganis understandably complains that the court set forth a subjective view of how it thought the lenders in this industry ought to be more diligent in protecting their collateral. Indeed, the court was somewhat disapproving of what it perceived as a nonchalant attitude lenders exhibit even after they learn that their collateral has been sold without their being paid.
But that being said, the court also found, from the evidence presented, an objective standard that applies in the industry. The objective standard tests what the normal practices are in an industry with regard to payment. The objective nature of the standard comes from considering standards in the industry as a whole instead of simply looking at standards of practice that have developed between the one particular creditor and the debtor.
The court made a finding that the ordinary course of business standard is met if the dealer pays off the lienholder within 45 days of trade-in or within 20 days of receipt of funds from the third party purchaser. Although the finding is part of a paragraph discussing the fact that, after lenders have notice that their collateral is on a dealer’s lot, they “must take reasonable affirmative steps to preserve their security” (245 B.R. at 389), it is a finding nevertheless. Because that finding is supported by the testimony of Mr. Russell, it is not clearly erroneous and we cannot disturb it on appeal.
Ganis did not articulate in its brief or argument any criteria against which to measure whether the payments by debtor were “ordinary in relation to prevailing business standards,” Food Catering, 971 F.2d at 398, once outside the two time periods, nor point to any evidence that might suggest such criteria. That it may be ordinary or normal for a creditor in Ganis’ situation to do nothing does not establish that it was ordinary for debtor to have made the payments in question, which is the issue. Applying the standard the bankruptcy court found to the facts before us, both payments to Ganis fell outside the 20-day maximum time for payoff following a dealer’s receipt of the funds from its buyer. Accordingly, Ganis’s ordinary course of business defense fails.
If this is a harsh result in the industry because it forces unknowing lenders to surrender preferences when they do exactly what they can and must do—hold then-liens until payoff—the remedy is not in asking us to ignore the plain language of § 547(c). It is within the power of Ganis and other lenders similarly situated in the industry to police their collateral more diligently, thus precluding dealers such as debtor from floating the proceeds of their collateral for as long as occurred here.
3. Other Issues
Ganis also contends that there was never a debt between it and debtor because Ganis never made a demand for return of the vehicles. The bankruptcy court had previously ruled on summary judgment that the payments were made to Ganis “as a creditor of the Debtor” and that those payments were preferential transfers pursuant to § 547(b). That decision was neither appealed, nor the summary judgment papers included in Ganis’s excerpts of the record, nor does Ganis argue that summary judgment was erroneously granted. Further, the joint pretrial order, to which Ganis stipulated, did not *8list this as either an issue of fact or an issue of law. The question is simply not properly before us.
Appellee argues that a creditor’s self-serving testimony, without empirical evidence to support it, is insufficient to meet the standard of proof. In light of our decision, we will not address this issue except to note that in a similar context “self-serving” testimony of a representative of a preference defendant about his company’s ordinary course of business did not disqualify him under Fed.R.Civ.P. 56(e) and was sufficient to raise a material fact in dispute and defeat a partial summary judgment on a § 547(c)(2) defense. Kaypro, 218 F.3d at 1074-75.
CONCLUSION
Although the bankruptcy court’s interesting and well-reasoned analysis went further than it needed to, the court did apply the correct legal standard. Since its findings about the industry practice were not clearly erroneous, we AFFIRM.
. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330.
. The court’s published opinion covered two separate but related preference actions involving very similar facts: this adversary proceeding involving Ganis, and one involving Bank of the West. The order in the Bank of the West case is on appeal and cross-appeal to the District Court; those appeals remain pending. In re Jan Weilert RV Inc., No. 00-CV-86 (C.D.Cal. filed February 15, 2000) and No. 00-CV-158 (C.D.Cal. filed March 16, 2000).
. The court said:
This Court acknowledges that separate evidence was presented by both Ganis and Bank of the West. However, because the facts of these two cases are so similar and the Defendants are lenders in the vehicle trade industry, the Court takes judicial notice of the evidence presented by both Defendants and, for purposes of this Opinion only, weighs the cumulative effect of all the evidence presented in order to address whether the Section 11 U.S.C. § 547(c)(2)(C) objective standard was met in either case. The Court considered all of the evidence and testimony presented in both cases in rendering this opinion.
245 B.R. at 379 n. 1.
No party to this appeal has taken exception to this procedure, and we do not question it.
. Section 547(b) provides:
[Tjhe 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. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493129/ | PERRIS, Bankruptcy Judge,
dissenting:
The majority concludes that the bankruptcy court’s decision was based on its finding that the ordinary course of business standard would be met if the dealer paid off the lender within 45 days of trade-in or within 20 days of receipt of funds from a third-party purchaser. Because that finding was supported by the evidence, the majority says we cannot disturb it on appeal.
If that were all that the court found, I might agree. But the court did not stop there. It recognized that the focus in this case is the conduct of the lender after the first 45 days from the date of the trade-in. 245 B.R. at 388. The court concluded that, once more than 45 days had passed from trade-in, the ordinary course standard could still be met if the debtor paid the lender within 20 days of receipt of the resale proceeds of the vehicle. Id. at 389. Because debtor had done neither, the court concluded that the payment was not in the ordinary course of business.
There is no evidence to support a finding that the ordinary course of business in the industry is to take reasonable affirmative steps to preserve the lender’s security. The bankruptcy court essentially devised a standard that focused on what practices a reasonable creditor should engage in rather than on the correct standard of “practices common to businesses similarly situated to the debtor and transferee.” Loretto Winery, 107 B.R. at 709. The court affirmatively rejected as ordinary the possible industry practice to “do nothing” once a dealer possessed and was reselling the vehicle. 245 B.R. at 389. That was error. The question is what the normal practices of an industry are, not what the practices reasonably should be.
The court’s erroneous creation of its own “reasonable creditor” standard, based on what it determined a reasonable secured lender would do in circumstances similar to those in this case, infected its findings and conclusions. I would hold that the bankruptcy court erred by injecting a “reasonable creditor” standard into the ordinary course of business defense.
I respectfully dissent. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493131/ | ORDER GRANTING MOTION FOR SUMMARY JUDGMENT
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the United States Motion for Summary Judgment, filed on November 28, 2000, to which all parties have responded. Because this court lacks jurisdiction to determine the tax liability of the nondebtor Beverly Doncheff, and because there is no dispute as to the existence of the federal tax lien, the United States motion for summary judgment will be granted.
I
The chapter 7 trustee commenced this adversary proceeding requesting that the court determine the nature, extent and priority of liens. The trustee holds funds impressed with a federal tax hen and seeks to distribute the funds first to the United States in payment of the federal tax obligations and one half of the remainder to the nondebtor Beverly Doncheff as her share of the proceeds from the sale of property. Beverly Doncheff objects to this procedure, asserting that she is not liable for the taxes with regard to which the Notice of Federal Tax Lien was filed. In response, the United States asserts that this Court does not have jurisdiction to determine the federal tax liability of the nondebtor.
Athough the nondebtor party Beverly Doncheff asserts that there are material issues of fact to be determined, the facts essential to the determination are not in dispute. A joint federal income tax return for the 1996 taxable year was filed with the IRS and an assessment was made on November 17, 1997, against both Beverly and Anthony Doncheff, who were married at the time the return was filed.1 A Notice of Federal Tax Lien was recorded with the Sharp County Circuit Clerk and Recorder on February 9, 1998, against both Anthony and Beverly Doncheff.
Anthony Doncheff filed a chapter 7 bankruptcy case on March 2, 1998. During the pendency of this case, Anthony and Beverly obtained a divorce. In the context of this chapter 7 case, and with Court approval, the chapter 7 trustee sold three *179parcels of real property, jointly owned by Anthony and Beverly. Upon the sale of the property, some expenses and liens were paid by the trustee with the consent of all parties, and the trustee filed this action in order to obtain direction as to disbursement of the remainder of the funds. With regard to the funds remaining in the trustee’s hands, there are no other hens superior in right to the liens of the United States for internal revenue taxes.
II
Rule 56, Federal Rules of Civil Procedure, provides that summary judgment shall be granted where the pleadings, depositions, answers to interrogatories, admissions or affidavits show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Summary judgment is appropriate when a court can conclude that no reasonable juror could find for the non-moving party on the basis of the evidence presented in the motion and response. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). As the Supreme Court has made clear, “summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed ‘to secure the just, speedy and inexpensive determination of every action.’ ” Celotex, 477 U.S. at 327, 106 S.Ct. 2548.
After the movant has made a properly supported summary judgment motion, “the nonmovant [has] the burden of setting forth specific facts showing the existence of a genuine issue of fact for trial.” Anderson, 477 U.S. at 250, 106 S.Ct. 2505. The nonmovant may not rely on the allegations or denials in its pleadings to establish a genuine issue of fact, but must come forward with an affirmative showing of evidence. Anderson, 477 U.S. at 250, 106 S.Ct. 2505. Of course, the trial judge must accept as true the nonmovant’s evidence, must draw all legitimate inferences in the nonmovant’s favor, and must not weigh the evidence or the credibility of witnesses. Windon Third Oil and Gas v. Federal Deposit Insurance Corporation, 805 F.2d 342, 346 (10th Cir.1986).
Ill
When the IRS assessed the tax against Beverly and Anthony Doncheff, a lien upon “all property and rights to property” arose in favor of the United States. 26 U.S.C. § 6321. The subsequent recording of the Notice of Federal Tax Lien served to perfect the lien for purposes of state and federal law, including under the Bankruptcy Code. 26 U.S.C. § 6323. Thus, the United States lien attached to the real property jointly held by Anthony and Beverly Doncheff, and continued to attach to the property when Anthony Doncheff filed his chapter 7 petition, rendering the United States claim for taxes secured. When the trustee sold the parcels of real property, the lien continued to attach to the proceeds of the sale pursuant to the Order Approving the Sale free and clear of hens. Section 363(f) operates to preserve the secured creditor’s lien interest by permitting sale of the property free and clear of the
interest, but permitting the lien to attach to the proceeds of the sale of the collateral. See generally In re Lady H Coal Co., 199 B.R. 595-605 (S.D.W.Va.), aff'd, 99 F.3d 573 (4th Cir.1996), cert. denied, 520 U.S. 1118, 117 S.Ct. 1251, 137 L.Ed.2d 332 (1997) (“The well established rule that sales within a bankruptcy proceeding occur free and clear of any interest is founded upon the principle that good faith purchasers receive clean title to the property and that any claims against the property attach to the proceeds.”); In re M. Paolella & Sons, Inc., 161 B.R. 107, 124 (E.D.Pa.1993), aff'd, 37 F.3d 1487 (3d Cir.1994); Sen. Rep. No. 95-989, 95th Cong., 2d Sess. 56 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5842 (“Sale under this sub*180section is subject to the adequate protection requirement. Most often, adequate protection in connection with a sale free and clear of other interests will be to have those interests attach to the proceeds of the sale.”). Cf. In re Nowicki, 202 B.R. 729, 785 (Bankr.N.D.Ill.1996) (nondebtor spouse entitled to one half proceeds after joint liabilities, mortgage, water bills and county taxes, were deducted); In re Zella, 196 B.R. 752 n. 1 (Bankr.E.D.Va.), aff'd 202 B.R. 712 (E.D.Va.1996).
Thus, upon sale of property, a trustee is obligated to disburse proceeds from the sale of property first to the secured claims on which the debtors are jointly liable. In this instance, the secured claim for federal income taxes is such a secured claim and it must be satisfied first from the proceeds. Thereafter, absent joint, secured interests, Beverly Doncheff is entitled to her respective share of the proceeds. In re Van Der Heide, 164 F.3d 1183 (8th Cir.1999).
There is no real dispute as to the existence of the federal tax lien. Although Beverly Doncheff asserts that there is a question of fact as to whether there exists a tax lien, she offers no evidence or argument that the lien did not arise or that there is some infirmity in its perfection. Rather, her arguments address the liability for the underlying tax. The legal effect of the existence of the lien and its proper recordation, is that the United States is entitled to payment on its secured claim from the proceeds of the collateral to which its lien attached. Accordingly, the United States is entitled to summary judgment.
IV
Beverly Doncheff disputes the United States entitlement to payment from the proceeds, asserting that the proceeds should first be divided between herself and the estate, and that the United States may only collect on its claim from the estate’s interest in the proceeds. She states the issue as “whether the trustee may transfer Beverly’s property to the United States to pay an alleged claim of the United States against the bankruptcy estate of Anthony I. Doncheff.” This mischaracterizes the issue and the nature of the proceeding before the Court.
While it is true that the United States has a secured claim against the estate of Anthony Doncheff, the federal tax lien also attaches to property of Beverly Doncheff. Thus, while it is true that the United States could not seize property held solely in the name of Beverly Doncheff to satisfy Anthony Doncheffs liability, the assessment, and thus, the obligation, is against both Beverly Doncheff and Anthony Don-cheff. A creditor is entitled to the proceeds of the sale of collateral in which it has a security interest. In the bankruptcy context, the Bankruptcy Code requires that result.
Beverly Doncheff essentially argues that she is not liable for the underlying tax which gave rise to the assessment and lien interest. It is well settled, however, that this Court does not have jurisdiction to determine the federal income tax liability of a nondebtor. Gennari v. United States Department of Treasury (In re Educators Investment Corporation), 59 B.R. 910, 913 (Bankr.D.Nev.1986); Holland Industries v. United States (In re Holland Industries), 103 B.R. 461 (Bankr.S.D.N.Y.1989); see American Principals Leasing Corp. v. United States, 904 F.2d 477 (9th Cir.1990); United States v. McAuley, 101 B.R. 306 (M.D.Fla.1989); Williams v. United States (In re Williams), 190 B.R. 225, 229 (Bankr.W.D.Pa.1995). Thus, the Court cannot determine whether she is correct in her assertion that she is not liable for the tax.
Beverly Doncheff also argues that section 363 mandates that she be paid her share of the proceeds before any other interest. Section 363 provides:
(j) After a sale of property to which subsection (g) or (h) of this section applies, the trustee shall distribute to the *181debtor’s spouse or the co-owners of such property, as the case may be, and to the estate, the proceeds of such sale, less the costs and expenses, not including any compensation of the trustee, of such sale, according to the interests of such spouse or co-owners, and of the estate.
11 U.S.C. § 363(j) (emphasis added). It is true that she is entitled to disbursement of her interest in the proceeds of the sale. However, she misconstrues the nature and priority of her interest in the proceeds. As discussed above, upon assessment of the tax against her, a lien interest arose which attached to all property and rights to property held by her. That interest was properly perfected by the filing of a Notice of Federal Tax Lien. Thus, the United States has an “interest” that is superior in right to that of Beverly Don-cheff. That interest, in the form of a federal tax hen, attached to the proceeds of the sale of the property, entitles the United States to be paid from those proceeds.
V
The Court need not determine, as urged by Beverly Doncheff, whether she in fact owes the debt to the United States. (Indeed, as discussed above, this Court does not have jurisdiction to make that determination.) More importantly, for Beverly Doncheffs purposes, the determination by this Court that the United States is entitled to distribution on its secured claim, based upon its Notice of Federal Tax Lien, does not foreclose Beverly Doncheff from litigating the merits of the underlying assessment in the appropriate forum. This Court merely decides that the United States is entitled to distribution from the proceeds of collateral in which it has a security interest.
Beverly Doncheff believes this proceeding to be unfair to her. However, she misapprehends the nature of the proceeding and the manner in which tax liability is litigated. As a general rule, a taxpayer may either contest liability before the tax court or pay the tax and file a suit in the United States District Court. Only in very limited circumstances are substantive issues of tax liability brought before the bankruptcy court. Once the taxes have been paid, Beverly Doncheff may have the right to file a claim for refund and proceed in the United States District Court for a determination that she does not owe the taxes, raising the appropriate issues in that proceeding. The substantive issues of Beverly Doncheffs tax liability or the remedies available to her may not be determined by this Court.
It is uncontroverted that the United States filed a Notice of Federal Tax lien which attached to the property of the debt- or, Anthony Doncheff, and the nondebtor, Beverly Doncheff. As a secured creditor, it is entitled to distribution from the proceeds of the sale to which its lien attached. Accordingly, it is
ORDERED that the United States Motion for Summary Judgment, filed on November 28, 2000, is Granted. A separate judgment shall be entered.
IT IS SO ORDERED.
. Beverly Doncheff asserts that she did not sign the return and is not liable for any taxes due with regard to that year. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493135/ | *695
MEMORANDUM OF OPINION AND ORDER
RANDOLPH BAXTER, Bankruptcy Judge.
The matter before the Court is the dis-chargeability of a debt totalling $42,936.15, arising out of a long series of sales between the Plaintiff, Alside Supply Center (“Alside”) and the Debtor, Michael M. Kromar (“Debtor”). Herein, a determination of dischargeability is made pursuant to § 523(a)(2)(A) and (B) of the Bankruptcy Code.
The Court acquires core matter jurisdiction over these proceedings, pursuant to 28 U.S.C. §§ 157(a) and (b), 28 U.S.C. § 1334, and General Order Number 84 of this District. Following a duly noticed trial proceeding, the following findings and conclusions are made:
In October of 1995, the Debtor and his father, Ronald Kromar, began operations of a corporation named Lifetime Home Improvements, Inc. (“Lifetime”). At the outset, they were the only two shareholders in the corporation. In January, 1996, the two men sought an extension of credit from Alside to Lifetime. Acting on behalf of the corporation, they obtained and completed an application for credit from Alside and returned it by facsimile. (Debtor, Direct.)
The application requested five credit references. Lifetime supplied the names of five suppliers, of which it had actually purchased supplies from only two. (Debtor, Direct.) Second, the application requested a financial statement, to show the applicant’s assets, liabilities, and locations of real estate. The first line of the financial statement inquired whether the information provided concerned “company” or “personal” financial information. (Plaintiffs Exh. 1-2.) Lifetime’s application indicated that it provided both company and personal financial information, which included $75,000.00 cash on hand, $2,500 in equipment, and $160,000.00 in equity in certain residential real estate. Id. The application did not request, and the applicant did not provide, information detailing which assets were personal assets as opposed to those which belonged to the company. In fact, much of the cash on hand, and all of the real estate belonged to Ronald Kromar personally. Third, an “Agreement of Guarantee” [sic] accompanied the application. Therein, the signatures of four individuals — the Debtor, Rebecca L. Kromar, Ronald Kromar, and Myra Louise Kromar — appear at the bottom of the agreement. (Plaintiffs Exh. 2.) The parties later stipulated that the signature of Myra Louise Kromar is inauthentic.
Michael Drews (“Drews”), an Operations Manager for the West Cleveland branch of Alside, received and processed Lifetime’s application for credit. (Drews, Direct.) He testified that, although guarantors and security were necessary for the extension of credit to a new company, there was no requirement for a specific number of guarantors or amount of security. Id.
Upon receipt of the application and guaranties, Alside "granted Lifetime an initial extension of credit in the amount of $3,000. Id. Over the next two years, Lifetime transacted significant amounts of business with Alside, to the extent that Lifetime became one of Alside’s biggest customers. Id. In fact, the volume of Lifetime’s business with Alside was so significant that Alside rewarded the Debtor with such incentives as a free trip to the British West Indies, weekly lunches, and free rounds of golf. (Debtor, Direct.) Eventually, Lifetime’s credit fine was increased to $50,000.
At some point in April of 1996, Ronald Kromar withdrew from the corporation. He subsequently notified Alside that he wished to revoke his guaranty. He did not, however, inform Alside that it was his personal real estate and primarily his $75,000 in cash1 that were listed as collat*696eral in the financial statement portion of the credit application. (Ronald Kromar, Cross-Exam.) Later, one of Lifetime’s salesmen, Mike Delzappo, replaced Ronald Kromar as the second shareholder. (Drews, Direct.) Drews alleges that Lifetime never apprised Alside of these changes in ownership, as required by the contractual language of the credit application.
Although Lifetime had exhibited a good payment history throughout the first years of its relationship with Alside, its account fell into arrears in 1998. Drews testified that he first became aware of the problems with the account in June of 1998, and revoked the credit privileges soon thereafter, allowing Alside to fill orders on a cash-on-delivery basis only. Id. By August, 1998, the time of the last account activity, the balance stood at $44,936.15. (Plaintiffs Exh. 3-1.)
The Debtor filed a chapter 7 petition in bankruptcy on June 21, 2000. Alside now seeks to have the Court declare its debt nondischargeable under 11 U.S.C. § 523(a)(2)(A) or (B). In support thereof, Alside argues that the Debtor deliberately presented false information in the credit application, that it relied upon the information, and that it was damaged by that reliance. As examples of the alleged misrepresentation, Alside relies upon: (1) the nonexistence of a trade relationship with three of the five credit references; (2) the nondisclosure of the fact that the assets listed in the financial statement predominantly belonged to Ronald Kromar, who subsequently withdrew from the corporation; (3) the invalidity of Myra Louise Kromar’s signature; and (4) the noncompliance with the contractual language requiring notification to Alside of material changes in financial condition or ownership.
Section 523(a) reads, in pertinent part:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
(B) use of a statement in writing— (i) that is materially false;
(ü) respecting the debtor’s or an insider’s financial condition;
(in) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
11 U.S.C. § 523(a)(2)(A) and (B). In cases involving exceptions to discharge, the burden lies upon the complainant to prove nondischargeability by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Determining whether a debt falls within any of the enumerated provisions of § 523(a) requires a liberal construction of the Bankruptcy Code in favor of the debt- or, and a strict construction against the objecting creditor. Manufacturer’s Hanover Trust Co. v. Ward (In re Ward), 857 F.2d 1082, 1083 (6th Cir.1988).
Section 523(a)(2)(A) pertains to cases involving false pretenses, false representation, or actual fraud. To satisfy its burden of proof, Alside must establish: “1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; 2) the debtor intended to deceive the creditor; 3) *697the creditor justifiably relied on the false representation; and 4) its reliance was the proximate cause of loss.” Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir.1998) (citing Longo v. McLaren (In re McLaren), 3 F.3d 958, 961 (6th Cir.1993)). Whether the Debtor possessed an intent to defraud Alside is determined by a subjective standard. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995).
Under the first prong of the Rembert test, Alside must demonstrate that the Debtor obtained money — or, here, credit— through a material misrepresentation that the Debtor knew at the time to be false, or made with gross negligence as to its truth. Rembert, supra, at 280. For a financial statement to be “materially false,” it must be “one which paints a substantially untruthful picture of the debtor’s financial condition by misrepresenting information of a type which would normally affect the decision to grant credit.” In re Collier, 231 B.R. 618, 623 (Bankr.N.D.Ohio 1999).
Herein, the record does not evince that Alside granted credit due to a material misrepresentation. First, Lifetime’s providing a list of credit references of suppliers with which it had not yet developed a trade relationship does not constitute a misrepresentation. The credit application asks only for “credit references”; it does not specify that the references listed must be trade creditors or to what extent the relationship existed. Similarly, the information supplied by Lifetime in the financial statement was precisely the information that the application requested. Lifetime disclosed that some of the assets listed are personal assets, and the application did not ask the applicant to quantify personal versus company assets. That Al-side did not learn of the proportion of personal and company assets is due only to its own carelessness. Third, the invalidity of Myra Louise Kromar’s signature does not constitute a material misrepresentation either. Drews testified that there was no specific number of guarantors required. The signature of four individuals appears on the Agreement of Guaranty as guarantors. It is unsupported by the record that the credit would not have been granted absent that one questionable signature. Finally, the alleged noncompliance with the contractual language regarding future notification is not a misrepresentation because Rembert requires that the debtor know of any falsity at the time of the statement’s execution. Herein, Alside has failed to show a known falsity at the point of execution. Moreover, Alside has not shown by a preponderance of the evidence that the contract was, in fact, violated. For example, it is not clear that Lifetime was under any obligation to inform Alside that upon Ronald Kromar’s withdrawal, some of the assets provided were no longer available.
The second requirement under Rembert is that the debtor intended to deceive the creditor. Rembert, supra, at 280. Again, Alside has not met its burden in establishing that the Debtor intended to deceive it. As discussed above, the information supplied in the portions marked “Credit References” and “Financial Statement” was not deceitful. As to the invalid signature, there is no evidence suggesting that the Debtor knew of a forged signature before the application was transmitted to Alside.
The third element of Rembert is justifiable reliance on the debtor’s representation. Here, numerous aspects of the record show that there was no justifiable reliance whatsoever. With regard to the financial statement, Drews testified that he “assumed” that the assets listed belonged to the company, and that when Ronald Kromar left the corporation, that the assets remained. (Drews, Cross-Exam.) Alside performed no due diligence to confirm the title ownership of the assets. (Drews, Court Inquiry.) He also testified that Alside has a policy of checking the references that an applicant provides, but that it did not do so in this particular *698application. (Drews, Cross-Exam.) Further, Alside does not have a policy of checking the creditworthiness of the principals of a corporate applicant. Id. Even more striking, although Drews testified that Alside placed heavy reliance upon security for credit extended, the record is bereft of any security instrument, such as a note, a mortgage, or a security agreement of any kind. The security and guaranty upon which Alside relied appear largely illusory.
Under Rembert, the fourth element of a § 523(a)(2)(A) action is that the creditor’s reliance is the proximate cause of the loss. Rembert, supra, at 281. Because Alside did not meet its burden regarding the justifiable reliance requirement, the Court need not address that element. Thus, Al-side has not met its burden of proof with regard to § 523(a)(2)(A).
For several of the same reasons, Alside has not established the elements of § 523(a)(2)(B) by a preponderance of the evidence. That subsection requires: “use of a statement in writing i) that is materially false; ii)respecting the debtor’s or an insider’s financial condition; in) on which the creditor to whom the debtor is hable for such money, property, services, or credit reasonably relied; and iv) that the debtor caused to be made or published with intent to deceive.” 11 U.S.C, § 523(a)(2)(B).
As discussed above, the record does not demonstrate that the subject writing was materially false. The only item that was established to be false was the authenticity of Myra Louise Kromar’s signature, but the materiality of that falsity is questionable, because Alside apparently would have extended credit without that particular signature. Moreover, it was not established that the Debtor had any association with or knowledge of the alleged forgery of that signature.
The second element of § 523(a)(2)(B) is satisfied; the subject writing did involve the financial condition of an insider of the debtor. Under § 101(31), the definition of insider includes, where the debtor is an individual, a corporation in which the debtor is an officer. 11 U.S.C. § 101(31)(A)(iv). Here, the Debtor was president of Lifetime, which was the subject of the credit application.
The third element, however, is not satisfied. As discussed further above, Al-side has not established any reasonable or justifiable reliance. The extension of credit was attributable in large part to its lax practices in checking creditworthiness. Reasonable reliance does not exist where a creditor neglects to check references, makes unfounded assumptions about ownership of assets, performs no due diligence, does not investigate the credit history of the principals of a small business, and does not require binding security agreements to collateralize its interest.
Finally, the record does not demonstrate an intent to deceive on the part of the Debtor. If the Debtor acted with even a gross negligence toward the truthfulness of Lifetime’s application, then the fourth element of § 523(a)(2)(B) would be satisfied. First Nat’l Bank of Centerville v. Sansom, 142 F.3d 433, 1998 WL 57307 (6th Cir.1998). Herein, Alside has not established by a preponderance of the evidence either an intent to deceive or a gross negligence toward the document’s truthfulness. Therefore, Alside has failed to satisfy the elements of § 523(a)(2)(B), as well.
The Supreme Court has instructed that bankruptcy law exists to assist “the honest but unfortunate debtor” attain a fresh start, while ensuring fairness to that debtor’s creditors. Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). On the other hand, the purpose of § 523 of the Bankruptcy Code is to disallow the discharge of debts that violate that policy; Congress has determined that the types of debt addressed in subsections (a)(4) and (a)(6) are “morally distinguishable from usual debt. Each *699carries with it a moral opprobrium.” 2 Epstein, Nickels & White, Bankruptcy § 7-24, 327 (1992). The record in this case does not demonstrate that the Debtor was anything short of honest, nor that his debt to Alside carries any opprobrium. There is no justification to allow Alside— which was in the best position to avoid or lessen its loss, through greater diligence in its lending practices — to except the subject debt from discharge.
Accordingly, judgment is hereby rendered in favor of the Defendant, and the subject debt is hereby found dischargea-ble. Each party is to bear its respective costs.
IT IS SO ORDERED.
. Accounts varied as to the amounts contributed by the Debtor and Ronald Kromar. The *696Debtor testified that he had contributed approximately $25,000, and Ronald Kromar had supplied approximately $50,000. (Debtor, Direct.) Ronald Kromar believed that he had contributed approximately $70,000. (Ronald Kromar, Cross-Exam.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493136/ | DECISION
ROBERT E. GRANT, Bankruptcy Judge.
By this adversary proceeding, Plaintiff seeks a determination of the rights of the parties in a three-way alcoholic beverage permit (hereinafter “the Permit”) issued by the State of Indiana. At the heart of the dispute is the question of whether Indiana law allows liens to attach to these permits. The matter has been submitted to the court for decision upon the parties’ stipulations of fact and the briefs of counsel.
*714
Facts
The Permit was held in the name of J.R., Inc. until August 18, 1998 when the Indiana Alcoholic Beverage Commission authorized its transfer to Richard Barnes (hereinafter “Barnes”) and Marg Hooker (hereinafter “Hooker”). It was periodically renewed and stood in their individual names on June 25, 1999 when they each filed separate petitions for relief under the Bankruptcy Code.1
The Plaintiff, Thomas VanKirk, was an employee of J.R., Inc. from September 2, 1997, through February 13, 1998. In order to collect his unpaid wages, on February 17, 1998 he filed a notice of employee’s lien with the Allen County Recorder as to the property owned by J.R., Inc. See I.C. 32-8-24-2. He also filed a financing statement with the Indiana Secretary of State. In April of 1998, Plaintiff filed suit to foreclose his employee’s lien. The Allen Superior Court entered judgment in his favor, by default on April 23, 1999, foreclosing the hen “as to any and all assets of the corporation JR, [sic] Inc. on and after September 2, 1997.”2 On May 12, 1999, Plaintiff filed a motion for the appointment of a receiver, asking that the Permit be administered for the benefit of creditors. The Allen Superior Court held the motion in abeyance pending the disposition of an identical motion before the Allen Circuit Court. Neither court appointed a receiver before Barnes and Hooker filed their respective bankruptcy petitions. Plaintiff claims a lien on the Permit pursuant to I.C. 32-8-24-1, et seq.
On February 5, 1998, Defendants John W. Carroll and M. Sharlene Carroll, (hereinafter “the Carrolls”), loaned the debtors seventy-five thousand dollars ($75,000). The loan proceeds were used to pay delinquent taxes J.R., Inc. owed to the State of Indiana. This was done to allow the transfer of the Permit into the debtors’ individual names.3 To secure the loan, Barnes & Hooker, Inc. granted the Carrolls a security interest in “the liquor license in the name of Barnes & Hooker, Inc.”4 The Carrolls filed a financing statement reflecting this security interest on August 20, 1998. They claim they were led to believe that they were being granted a lien upon the three-way permit at issue here. They also argue that their loan to Barnes and Hooker increased the value of the Permit. These facts lead them to claim an equitable lien upon it. They contend that their financing statement, albeit with regard to a different permit, gave interested parties constructive notice of this equitable interest.
Denelle Barbaro (hereinafter “Barbaro”) claims to be without knowledge of the lien claims of herself and others. However, she too filed a financing statement, on January 30, 1997, with the Indiana Secretary of State. This financing statement identifies her as the secured party and J.R., Inc. as the debtor and refers to a security interest in “the operating equipment of [J.R., Inc.] located at [J.R., Inc.’s] *715address.” In the proceedings before the Allen Superior Court, Barbaro stipulated that her security interest did not extend to the Permit. This stipulation, together with the fact that she has not submitted a brief directed to the issue, leads the court to conclude that she is not advancing any claim to a lien in this court.
The other defendants, R. David Boyer and Yvette Eleven, are the trustees of the respective bankruptcy estates of Barnes and Hooker.
Analysis
It is not (and cannot be) disputed that, as a matter of federal law, the Permit is property of the two bankruptcy estates. See 11 U.S.C. § 541(a). The issue before the court, however, is whether the estates’ interests are encumbered by a lien in favor of any of the other parties to this proceeding. This issue is a question of state law. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
At the heart of the parties’ dispute is the question of whether Indiana law allows a lien to be placed upon an alcoholic beverage permit. The bankruptcy court in this district first addressed the issue in 1986, when Judge Rodibaugh decided In re Eagles Nest, Inc., 57 B.R. 337 (Bankr.N.D.Ind.1986). Noting that there was “virtually no Indiana case law in this area,” id. at 340, he was confronted with an issue of first impression. After surveying the language of the statute and the authority that was available (from both Indiana and elsewhere), Judge Rodibaugh concluded that “it is impossible to create an enforceable security interest in an alcoholic beverage permit in Indiana....” Id. at 340.
Three years later, the issue again reared its head in Official Unsecured Creditors’ Comm. v. Northern Indiana Liquor Sys., Inc. (In re Northern Indiana Liquor Sys., Inc.), Case No. 87-30052, Adv. No. 88-3177 (Bankr.N.D. Ind. June 29, 1989). There, Judge Dees also observed that he too was “[w]ithout ... guidance from the Indiana legislature or the Indiana courts ...” Id. at 25. After surveying the language of the statute and the authority that was available (from both Indiana and elsewhere), he came to the conclusion that a liquor license was property within the meaning of Article 9 of the Uniform Commercial Code and, thus, could be subject to a security interest.
Happily, the present author does not have to choose between the opposing views adopted by his colleagues. In the years since they grappled with the issue, the Indiana Court of Appeals has issued two separate decisions dealing with liens upon liquor licenses. See Cole v. Loman & Gray, Inc., 713 N.E.2d 901 (Ind.App.1999); Vanek v. Indiana Natl. Bank, 540 N.E.2d 81 (Ind.App.1989). Those decisions supply the authority that was previously lacking and both of them support the conclusion that Indiana law does not allow a lien to be placed upon an alcoholic beverage permit.
In the first of these decisions, Vanek, 540 N.E.2d 81, a bank sought a deficiency judgment against a guarantor (Simoney) following the disposition of the loan’s collateral. The guarantor defended, arguing that the bank had failed to dispose of a liquor permit, with the result that any deficiency should be reduced by the permit’s value. Id. at 83. The appellate court found no merit in this argument.
Simoney’s basis for the claimed setoff is that the liquor permit was secured collateral. This is incorrect.
The evidence is that [the bank] had a security interest by agreement only in the equipment owned by Brothers.... In any event, a security interest in a liquor permit is not perfectible under Indiana law and is not enforceable against the Indiana Alcoholic Beverage Commission. Matter of Eagles Nest, Inc. (1986), N.D. Ind. Bkrtcy., 57 B.R. 337, 340. It is not property within the scope of [Article 9 of the Uniform Commercial Code],
Vanek, 540 N.E.2d at 84.
In Cole, 713 N.E.2d 901, the Indiana Court of Appeals again confronted the ar*716gument that the rights of a guarantor had been impaired, this time because the secured party had failed to perfect its lien. The court concluded that such a failure constituted impairment, with the result that the guarantor was “released to the extent of the value of the security so impaired.” Id. at 904. In addressing the parties’ dispute concerning the amount of the resulting impairment and, in particular, how a liquor permit that was specifically included as collateral should be valued, the court stated:
The parties dispute the value of the alcoholic beverage permit and whether the permit should be considered when valuing the amount of impairment. We note that, under Indiana law, a security interest cannot be perfected in an alcoholic beverage permit. In the Matter of Eagles Nest, Inc., 57 B.R. 337, 340 (Bankr.N.D.Ind.1986)... .Therefore, in the case of default where a security interest was presumably created in a liquor license, the “bankruptcy estate takes the licfense free and clear of any security interest....” Eagles Nest, 57 B.R. at 340.
Cole, 713 N.E.2d at 905 n. 3
In the years since a member of this court last had the occasion to address the issue of whether Indiana law allows the creation of liens upon liquor licenses, the Indiana Court of Appeals has done so twice. In each instance, it was free to reject Eagles Nest and its conclusion that Indiana law does not permit them. It did not do so. Instead, the Court of Appeals decided that a liquor license is not property within the scope of Article 9 of the UCC and that it cannot be the object of a security interest. Since the question has not been addressed by the state’s highest court, this may not be the final word on the subject. Nonetheless, when a federal court is called upon to decide an issue of state law, two decisions from the state’s intermediate court, which speak directly to the matter at hand, are highly persuasive and should not be disregarded without a compelling reason. See Allen v. Transamerica Ins. Co., 128 F.3d 462, 466 (7th Cir.1997)(decisions of [intermediate appellate] courts control unless there are persuasive indications that the [state supreme court] would decide the issue differently); Staten v. Neal, 880 F.2d 962, 964 (7th Cir.1989)(when the state’s highest court has not ruled on an issue of state law, the federal courts must determine the matter after giving “proper regard” to rulings by the state’s lower courts). See also Hartford Accident and Indemnity Ins. Co. v. Washington Natl. Ins. Co., 638 F.Supp. 78, 81 (N.D.Ill.1986)(federal courts should not disregard uniform state appellate court results absent persuasive data that the highest court would decide otherwise)(citing West v. American Telephone and Telegraph Co., 311 U.S. 223, 237, 61 S.Ct. 179, 85 L.Ed. 139 (1940)).
There is no compelling reason not to follow Cole and Vanek. Quite to the contrary, those decisions appear to be consistent not only with the underlying statutes concerning liquor permits, but also with other Indiana decisions concerning them. A permit to sell alcoholic beverages “ ‘is strictly a creature of statute, and the rights of the permittee are such, and such only, as the statute gives.’ ” State ex rel. Pollard v. Superior Court of Marion County, 233 Ind. 667, 122 N.E.2d 612, 615 (1954)(quoting State ex rel. Indiana Alcoholic Beverage Comm. v. Superior Court of Marion County, 233 Ind. 563, 122 N.E.2d 9 (1954)). Indiana’s statutes specifically declare that the holder of a liquor license “shall have no property right in a wholesaler’s, retailer’s, or dealer’s permit of any type.” I.C. 7.1-3-1-2. Based upon statutory declarations of this type, “[n]o rule in Indiana is better established than that a license to sell intoxicating liquors is neither a contract nor a property right.” Pollard, 122 N.E.2d at 616. See also State ex rel. Harris v. Superior Court of Marion County, 245 Ind. 339, 197 N.E.2d 634, 640 (1964); Dagley v. Inc. Town of Fairview, 175 Ind.App. 379, 371 N.E.2d 1338, 1341 *717(1978); Selle v. Short, 164 Ind.App. 6, 326 N.E.2d 610, 613 (1975); King v. Harris, 140 Ind.App. 9, 212 N.E.2d 387, 391 (1965).
The only decision from the Indiana courts that attempted to erode this well established principle is Lake County Beverage Co., Inc. v. 21st Amendment, Inc., 441 N.E.2d 1008, 1011 (1982), where the court of appeals concluded that “a permit holder has a recognizable interest in the use of his liquor permit.” Id. Indeed, Northern Indiana Liquor Systems relied heavily on this Indiana decision in reaching the conclusion that a liquor license could be the object of a security interest. See Northern Indiana Liquor Systems, at 10-11, 27. The Indiana Supreme Court has, however, observed that Lake County Beverage was wrongly decided. In Ridenour v. Furness, it stated:
The majority in Lake County Beverage Co. took the position that the legislature had deleted this language [declaring that there was no property right in a permit] from the statute, therefore, giving rise to a presumption that the legislature intended to change the law. They reasoned the legislature had established a property right in the license. However, the majority apparently overlooked a statute that was passed in 1973, I.C. 7.1-3-1-2, which states: “A permittee shall have no property right in a wholesaler’s, retailer’s or dealer’s permit of any type.” Thus, the legislature had reenacted its statement in the 1945 statute, which the Court of Appeals in Lake County Beverage Co. found to have been deleted. We thus hold that Lake County Beverage.Co. is of no force in this case....
Ridenour v. Furness, 514 N.E.2d 273, 275 (Ind.1987).
In the face of Indiana’s statutory and decisional authority which declares that a liquor license is not property, Plaintiff argues that this court should look to the policy behind the employee’s lien upon corporate property. He also notes that a permit has many of the hallmarks of property — it has significant value, is transferable, and the permittee’s business may be operated by its guardian, personal representative, or receiver — and that it is property for the purposes of both § 541(a) and the Due Process Clause. See Midwest Beverage Co. v. Gates, 61 F.Supp. 688, 691 (N.D.Ind.1945)(the use of a permit, if not the permit itself, is property within the meaning of the Due Process Clause). Based upon these considerations, he urges the court to conclude that a liquor license is property for the purposes of I.C. 32-8-24-1, et seq.
The policies and other considerations Plaintiff focuses upon do not create the cognitive dissonance for the court that he seems to suggest should be present. The Indiana legislature has decreed that: “A permittee shall have no property right in a ... permit of any type.” I.C. 7.1-3-1-2. It has also created mechanisms which allow parties to “create a security interest in personal property,” I.C. 26-l-9-102(l)(a), and for employees to obtain a lien upon “the corporate property of a corporation.” I.C. 32-8-24-l(a)(l). Since the words used in statutes should be given their common meaning, I.C. 1 — 1—4—1(1), presumably the legislature used the word “property” in much the same way in each of these three statutes. The Indiana Court of Appeals has effectively said as much, through its conclusion that a liquor license is not property for the purposes of Article 9 of the UCC. Vanek, 540 N.E.2d at 84. If a liquor license is not “property” as that word is used in Article 9, there is no reason to give the word “property” a different meaning for the purposes of an employee’s lien. Indeed, the employee’s lien statute itself seems to lead to this conclusion when it establishes the priority of the employee’s lien upon “corporate property,” I.C. 32-8-24-2(2)(a), in relation to liens acquired by any other person upon “corporate property,” I.C. 32 — 8—24—2(b)(1), and, in doing so, makes a specific reference to Article 9. I.C. 32-8-24-2(b)(2)(A).
The hallmarks of property that Plaintiff points to do not persuade the court that it *718should give a different meaning to the word. Most of them, whether it is the due process procedures associated with the revocation or suspension of a permit and the opportunity for judicial review, the permit’s transferability, or the operation of the permittee’s business by its guardian, personal representative or receiver, are specifically granted by the same statute that governs the permits themselves. See I.C. 7.1-3-28-6, et seq.; I.G. 7.1-3-24-3, et seq. Consequently, their presence is entirely consistent with the principle that “the rights of the permittee are such, and such only, as the statute gives.” Pollard, 122 N.E.2d at 615(emphasis added). Those rights do not include a property right to which a lien can attach.
Neither does the fact that an alcoholic beverage permit is “property” for the purposes of § 541(a), so that it becomes property of the bankruptcy estate, give the court reason to pause. See 11 U.S.C. § 541(a)(1). Admittedly, property interests are created and defined by state law and, generally, are not analyzed any differently simply because someone is involved in a bankruptcy proceeding. Butner, 440 U.S. at 55, 99 S.Ct. at 918. Nonetheless, this general rule is subject to an important proviso: “Unless some federal interest requires a different result....” Id. See also In re Dow Corning Corp., 192 B.R. 428, 440-441 (Bankr.E.D.Mich.1996). Liquor licenses have, as Plaintiff acknowledges, significant value. Given the alternatives between declaring them to be property for the purposes of § 541(a), so that they become part of the bankruptcy estate, or relying upon state law which says that they are not, with the result being that something of significant value would either evaporate or remain with the debtor, the federal bankruptcy interest in paying creditors justifies analyzing them differently.
The fact that liquor licenses have value and are considered property within the meaning of the Due Process Clause does not trouble the court either. The argument fails to fully appreciate the fact that the manufacture and distribution of alcoholic beverages is a highly regulated undertaking, which the states may properly restrict in ways that they could not limit other endeavors. See, e.g., Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 (7th Cir.2000) (The 21st Amendment allows states to control the importation of alcoholic beverages in ways the Commerce Clause would forbid.). More importantly, it also fails to recognize that what is or is not property for the purposes of the Due Process Clause represents a continuum. This continuum includes things that are property in every sense of the word and fully subject to its protection. It also includes things that are not property in the traditional sense of the word and, yet, are subject to its protection, and still other things that may fulfill almost any definition of property, but, remain outside its scope. For example, drivers and professional licenses are not property in the traditional sense of the word and they are not transferable; so no one would suggest that they have intrinsic value or are lienable. Nonetheless, they are subject to the protection of the Due Process Clause. See Heying v. State, 515 N.E.2d 1125 (1987)(license has due process right in driver’s license); In re Schneider, 710 N.E.2d 178 (Ind.1999)(in attorney disciplinary proceeding, due process applies requiring notice of charges and opportunity to be heard). As for things that are both highly valuable and (unfortunately) readily transferable, but not protected by the Due Process Clause — the sale and possession of cocaine comes to mind — that substance clearly meets the legal definition of tangible personal property; yet, only the most extreme libertarian would suggest treating it as capable of being the object of a lien. Liquor licenses represent a hybrid between these two examples. They share characteristics of both. Like cocaine, they are valuable; they are also (within limits) transferable, whereas other licenses are not. Yet, like those other licenses, they are not property in the traditional sense of *719the word, although they are treated like property for the purposes of the Due Process Clause. See, e.g., Midwest Beverage Co., 61 F.Supp. at 688.
Under Indiana law, liquor licenses are not property which can be subject to a security interest created pursuant to Article 9 of the Uniform Commercial Code. Vanek, 540 N.E.2d at 84; Cole, 713 N.E.2d at 905 n. 3. The court concludes that they are not property that can be subject to an employee’s hen, created pursuant to I.C. 32-8-24-1, et seq., either.5 Consequently, Plaintiff has no lien upon the liquor license held in the debtors’ names.
The Carrolls claim an equitable lien upon the license, arguing that they believed they were being given a lien upon it through Barnes & Hooker Inc.’s security agreement and because the proceeds of the money they loaned to the debtors increased its value. This claim founders, initially, because equitable liens “have long been the object of scorn in bankruptcy” and are “contrary to the policy of bankruptcy law.” Small v. Beverly Bank, 936 F.2d 945, 949 (7th Cir.1991). More importantly, since the Carrolls could not, as a matter of Indiana law, obtain a valid security interest in the license, the court sees no reason why they should be allowed to accomplish indirectly, through an equitable lien, what they could not have accomplished directly. Equity should not be called upon to do something the law prevents.
Conclusion
Under Indiana law, an alcoholic beverage permit is not property to which a lien may attach. Accordingly, neither Plaintiff, the Carrolls, nor Bárbaro has a lien upon the Permit. The Permit is property of the respective bankruptcy estates and is held free and clear of any of the parties’ claimed liens. Judgment will be entered accordingly.
. Richard Barnes filed for bankruptcy (Case #99-11727) under Chapter 13 on June 25, 1999. His case was voluntarily converted to Chapter 7 on August 10, 1999. Margy Hooker filed for bankruptcy under Chapter 13 (Case #99-11726) on June 25, 1999. Her case was voluntarily converted to Chapter 7 on January 11, 2000.
. The state court did not identify the property subject to Plaintiff's lien with any greater specificity than this; nor did it determine whether he held a lien upon the Permit. (Pl’s.Compl.Ex. A). Had it done so, the principles of res judicata would seem to prevent this court from revisiting the question.
. The State of Indiana had previously denied renewal of the Permit and would not authorize its transfer unless all outstanding tax obligations of the permittee-transferor were completely satisfied.
. Barnes & Hooker, Inc. is a separate corporation owned by the debtors. It also held a liquor permit issued by the State of Indiana. That permit, however, was only a two-way, beer and wine license and is not the one at issue here.
. The court does not accept the suggestion that even if Plaintiffs employee’s lien cannot attach to the license it may, nonetheless, attach to the proceeds the trustees received when the license was sold. Section 552 of the Bankruptcy Code addresses the postpetition effect of a security interest and it contemplates that properly acquired by the estate after the date of the petition is not subject to liens arising out of agreements entered into prior to the case. 11 U.S.C. § 552(a). While there is an exception to this general rule, which will allow a lien to attach to the proceeds of property, for that to occur the lien must extend to both the "property of the debtor acquired before the commencement of the case and to the proceeds ... of such property.” 11 U.S.C. § 552(b)(1). Consequently, unless it first has a lien upon the property sold, a creditor will not obtain a lien upon the sale proceeds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493167/ | Memorandum of Decision
ALAN JAROSLOVSKY, Bankruptcy Judge.
Debtor Charles Billings fives with his unmarried 24-year-old daughter, Sierra, who suffers from epilepsy. Although she lived away from home briefly and has at times held low-paying jobs, Sierra has never been capable of steady employment. Because of her epilepsy, she is not permitted to drive. She moved back with Billings in 1999, when she became pregnant. Since that time, Billings has provided her room and board.
The issue before the court is whether these facts entitle Billings to claim the higher homestead exemption provided by California Code of Civil Procedure § 704.730(a)(2) to one who is a member of a family unit. “Family unit” is defined in § 704.710(b)(2)(D) as the debtor and “[a]n unmarried relative described in this paragraph who has attained the age of majority and is unable to take care of or support himself or herself.” If Billings is entitled to the higher homestead, his Chapter 13 plan is confirmable; if not, the trustee’s objection to the plan must be sustained.
The leading case on this issue is In re Howell, 638 F.2d 81 (9th Cir.1980). In that case, the court held that a debtor who had living with him his 23-year-old son was entitled to the higher homestead merely because the son was unable to find work. The court specifically rejected the argument that the dependent had to be physically or mentally handicapped, and implicitly rejected the notion that the dependency needed to be permanent.
*89In this case, Sierra has been unable to obtain steady or well-paying employment. Under the rule set forth in Howell, this fact alone is enough to justify the higher homestead amount for Billings. However, the primary cause of Sierra’s inability to support herself in her epilepsy. Accordingly, Billings would be entitled to the higher homestead amount under California law even if the absence of Howell. See Connell v. Crawford, 101 Cal.App. 162, 281 P. 442 (1929).
For the foregoing reasons, the trustee’s objection to Billings’ Chapter 18 plan will be overruled and the plan will be confirmed. Counsel for Billings shall submit an appropriate form of order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493168/ | Memorandum of Decision
ALAN JAROSLOVSKY, Bankruptcy Judge.
Debtor Robert J. Manthey is an entertainment agent. He filed his first Chapter 13 petition on July 14, 1997. His plan was duly confirmed, and he made payments to the trustee for several years. In early 2000, two problems arose in that case.
First, creditor Courtney Roberts appeared on the scene asserting a prepetition claim which Manthey had not scheduled because he did not know it existed when he filed his petition three years earlier. Roberts operated a bar in Eureka, California. In 1997, he had entered into a contract with Manthey whereby Manthey supplied entertainment for Roberts’ bar. The entertainers apparently performed lewd acts, resulting in license suspension proceedings against Roberts by the California Department of Alcoholic Beverages Control. Roberts brought suit against Man-they for his resulting damages.
The second to arise in the earlier Chapter 13 case was that the Internal Revenue Service filed an amended claim asserting additional priority tax debt. On May 26, 2000, the trustee filed a motion to dismiss the case on the grounds that it would take 103 months for Manthey to complete his plan, far in excess of the 60-month limit of § 1322(d) and § 1329(c) of the Bankruptcy Code.
After unsuccessfully attempting to deal with the two problems, Manthey elected not to oppose the trustee’s motion to dismiss. The court granted that motion on October 30, 2000. Manthey filed his second Chapter 13 petition, commencing this case, on December 8, 2000.
Manthey’s plan is now before the court. The only objecting party is Roberts, who alleges that the plan has not been proposed in good faith and accordingly should not be confirmed pursuant to ll-1325(a)(3) of the Bankruptcy Code. He alleges that Manthey’s debt to him would be nondis-chargeable in Chapter 7, and that Manthey should not be allowed to file a new Chapter 13 after dismissal of the prior case.
The court may, but need not, find bad faith where a debt to be discharged in Chapter 13 would be nondischargeable in a Chapter 7 case. The court has considered and declines to find bad faith based on this ground, as Roberts has made no prima facie showing that his claim would be nondischargeable in Chapter 7. In Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), the Supreme Court held that it is insufficient under § 523(a)(6)1 to show that the debtor acted willfully and that the injury was negligently or recklessly inflicted; instead, it must be shown not only that the debtor *91acted willfully, but also that the debtor inflicted the injury willfully and maliciously rather than recklessly or negligently. Where the injury results from a breach of contract, the creditor must show either that the debtor had a subjective motive to inflict the injury or that the debtor believed^ that injury was substantially certain to occur as a result of his conduct. In re Jercich, 238 F.3d 1202, 1208 (9th Cir.2001). The court finds no basis for Roberts’ bald assertions that Manthey intended to harm him, and accordingly declines to find bad faith based on this claim.
The court likewise declines to ascribe bad faith to Manthey’s refiling after dismissal of his prior case. Section 109(g) of the Bankruptcy Code prescribes when a debtor is ineligible due to a prior case, and is not applicable to Manthey. Moreover, this is not a case where a debtor has abused the bankruptcy system by repeated filings. Two problems arose in the prior case which made its continuance pointless. Those problems are not an impediment to this case. The court finds no bad faith in what appears to be nothing more than a common-sense use of the Bankruptcy Code as intended by Congress.
Even if the court found merit to one or both of Roberts’ grounds for objection it could still, considering all of the circumstances, confirm Manthey’s plan. In re Goeb, 675 F.2d 1386, 1391 (9th Cir.1982); In re Warren, 89 B.R. 87, 93 (9th Cir. BAP 1988). Since the court finds no merit to either of the asserted indicia of bad faith, there is no basis for denying confirmation. Accordingly, Roberts’ objection will be overruled and the plan will be confirmed. Counsel for Manthey shall submit an appropriate form of order.
. § 523(a)(6) is the only possible basis for Roberts to assert a nondischargeable claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493169/ | ORDER ON TRIDENT YACHT BUILDING PARTNERSHIP’S APPLICATION FOR ALLOWANCE OF ATTORNEYS’ FEES AND COSTS AS A PORTION OF THE PARTNERSHIP’S ALLOWED ADMINISTRATIVE EXPENSE (Doc. No. 612)
ALEXANDER L. PASKAY, Bankruptcy Judge.
The matter under consideration in this confirmed Chapter 11 case is the Application for Allowance of Attorneys’ Fees and Costs as a Portion of the Partnership’s Allowed Administrative Expense (Application) filed by Trident Yacht Building Partnership (Partnership), owner of the premises on which the business of Trident Shipworks, Inc., (Debtor) is located. The initial Application sought an award as a cost of administration under Section 503(b) of the Code in the amount of $173,292.00 as fees and $20,807.86 as expenses. In this instance the Plan of Reorganization which was confirmed was not the Plan of Reorganization submitted by the Debtor but by Westship, Inc., (West-ship), a major creditor of the Debtor. The amount sought by the Partnership was voluntarily reduced to $160,000.00 eliminating certain items which appeared to be double billing. Westship does not object to the billing rate or the total, but vigorously objects to recognizing and allowance of the Application as cost of administration.
In order to place the matter under consideration in a proper context, a brief review of the relevant portion of the record should be helpful.
The original Petition for Relief was filed February 3, 1999. Five days after the commencement of the case, the Partnership filed a Motion to Set Time to Assume/Reject Executory Contracts and to Compel Compliance with Section 365(d) regarding the lease involved (Doe. No. 6A). On March 1, 1999, the Partnership filed a Supplement to the Motion to Assume, which included the leases relating to major equipment referred to as Syncrolift and other contracts associated with the Syn-crolift lease. On March 8, 1999, the Debt- or filed a Motion to Extend Time to Assume or Reject Unexpired Real Property Lease with the Partnership, (Doc. No. 34). On April 19, 1999, this Court entered an Order denying Doc. No. 6 (Doc. No. 64) and entered an Order granting the Debt- or’s Motion to Extend Time (Doc. No. 65)
On July 15, 1999, the Debtor filed its Amended Motion to Assume Executory Contract with the Partnership (Doc. No. 127A). On July 21, 1999, the Partnership filed a Response to the Amended Motion to Assume and in it set forth the amount necessary to cure the arrearages for assumption. In the Response, which was quite precise and detailed, the amount stated did not include any attorney’s fees and costs. (Doc. No. 131).
On July 26, 1999, the Debtor filed Exhibits to its Motion to Assume the Lease with Partnership. Included in the Exhibits was a Settlement Agreement between the Debtor and the Partnership concerning the provisions to cure the arrearages under the lease. (Doc. No. 132A) The Settlement Agreement provides in pertinent part:
RECITALS Paragraph 3 (Page 2):
E. Partnership has a claim and is entitled under § 365 of the Bankruptcy Code in order for the Debtor to *105assume the Lease and Subleases & Agreements to monies or assurances it will be paid in a reasonable length of time (the Cure Claim); a copy of the Partnership’s Cure Claim is attached hereto.
F. Partnership and Debtor have agreed to the amount and the method of payment of the Cure Claim.
THEREFORE Paragraph 2 (Page 2)
2. The mutually agreed amount after payment of Real Estate Taxes (item 3 below) of the Cure Claim is $634,240.76.
The Settlement Agreement then goes on to say how the Cure Claim is going to be paid.
Lastly, Paragraph J on Page 5 provides:
J. This Settlement Agreement contains the entire understanding of the parties relating to the Cure Claim and supersedes all previous verbal and written agreements; there are no other agreements, representations or warranties not set forth herein.
Paragraph H on Page 4 provides:
H. In the event it becomes necessary for either party herein to seek legal means to enforce the terms of this Settlement Agreement, the non-prevailing party will be liable for all reasonable attorneys, paralegal and law clerk fees and costs, court costs ...
In other words, the party would be entitled to assert a claim for attorney’s fees and costs for services rendered in the future in connection with the enforcement of the terms of the agreement.
On July 30, 1999, this Court entered an order approving the Settlement Agreement and granting the Debtor’s Motion to Assume the Lease. (Doc. No. 139.) The record reveals that after the entry of the Order authorizing the assumption of the lease, the Debtor paid the real estate taxes pursuant to the Settlement Agreement, continued to pay the monthly rent which was approximately $79,000 a month and continued to pay the Cure Claim pursuant to the terms of the Agreement. In addition, one week after the Order was entered approving the assumption, the Debtor placed $106,000.00 in escrow with the law firm representing the Partnership, apparently as part of assurance of future performance under the assumed lease. The amount of the Cure Claim agreed upon also included a provision for payment of interest at the rate of 18 percent per an-num for two years.
It appears that Westship challenged the Order which authorized the assumption but failed to obtain a stay pending appeal. For this reason the Debtor continued to make all payments required for assumption by the Settlement Agreement during the pendency of the Chapter 11 case.
In due course of the case, both the Debtor and Westship filed at least three Disclosure Statements. In each Disclosure Statement, both parties identified the administrative claims of the estate. The Partnership did not object to the Disclosure Statements filed by the Debtor, but did object to every Disclosure Statement filed by Westship. Some of these objections were quite extensive and detailed. However, none of them mentioned anything about attorney’s fees as part of the cure amount which should be allowed as an administrative expense.
As noted, the Order of Confirmation confirmed not the Debtor’s Plan but the Amended Second Restated Plan of Reorganization filed by Westship. The Order of Confirmation made a finding that all the requirements for confirmation under Section 1129(a) had been met and also specifically found that the amounts needed to meet all allowed administrative expenses are fully funded.
*106It is the contention of Westship that based on the doctrine of res judicata and accord and satisfaction, the Partnership is not entitled to an allowance of attorney’s fees and costs as a cost of administration. In support of this proposition, Westship concedes that as of July 1999 the Partnership may have had a claim for attorney’s fees and costs as part of the cure amount. However, the settlement agreement resolved with finality the amount necessary to cure the arrearages, which was in excess of $600,000.00, and did not include any provision for attorney’s fees and costs.
According to Westship, the doctrine of res judicata bars relitigation not only of every issue which was actually litigated and claims asserted in support of the demand for relief, but it also bars every claim which might have been presented. In Baltimore S.S. Company v. Phillips, 274 U.S. 316, 47 S.Ct. 600, 71 L.Ed. 1069 (1927) the Supreme Court reaffirmed this proposition, and the holding in Baltimore was followed by the Eleventh Circuit Court of Appeals in the case of In re Justice Oaks II, Ltd., 898 F.2d 1544 (11th Cir.1990).
As the Supreme Court stated in Commissioner v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948), “When a court of competent jurisdiction has entered a final judgment on the merits of the cause of action, the parties to the suit and their privies are therefore bound not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.” Id. at 597, 68 S.Ct. 715.
Based on the foregoing, Westship contends that the doctrine of res judicata now precludes after confirmation the assertion of any entitlement to attorney’s fees and costs to be charged as costs of administration. And even if the Partnership had a claim for attorney’s fees and costs for services rendered prior to July 1999, that was resolved by the Settlement Agreement which fixed the amount required for assumption and became a final binding determination by the entry of the Order on July 30, 1999, which approved the Debtor’s Motion to Assume the lease.
Westship concedes that Westship challenged the Order and filed a Notice of Appeal, but that was a dispute between Westship and the Debtor. Although the Partnership did intervene and did participate in the appeal process, it was purely for its own benefit and not for the benefit of the estate. The appeal did not involve anything relating to the amount of cure which had been resolved by the parties by the Settlement Agreement.
The Debtor was not in default at the time the appeal was filed. Also, the lease was current, and the Cure Claim had been agreed upon; therefore, the fact that Westship filed an appeal and the Partnership participated in the appeal is of no consequence.
In opposition, the Partnership contends that the Partnership filed a proof of claim which included attorney’s fees, a proof of claim which was amended at least five times, and each of them asked for attorney’s fees. In addition, the Partnership also relies on Paragraph H as recited earlier which provided that notwithstanding any provision of the settlement agreement, if it becomes necessary for either party to seek legal means for the enforcement of the terms of the settlement, the party shall be entitled to assert a claim for attorney’s fees and costs.
None of these propositions urged by the Partnership overcomes the binding effect of the Settlement Agreement, or the binding effect of the Order which approved the Motion to Assume the lease in question. *107When the parties agreed to fix the amount needed to cure the default, that was a final binding determination of the amount, which agreement did not provide for any inclusion of attorney’s fees and costs. The provisions in Paragraph H are self explanatory and it is clear that a party who requires legal services to enforce the terms of the settlement which included the full and complete understanding of the parties, would be entitled to attorney’s fees and costs if it is needed to proceed to enforce. This provision is not contradictory to the conclusion of the binding effect of the Settlement Agreement.
For instance, assuming for the purposes of discussion, that after the case is closed, sometime later the tenant would default on the assumed lease and the landlord will be required to incur legal expenses in order to enforce the terms of the assumed lease. These attorney’s fees and costs incurred in connection with the enforcement of the landlord’s rights under the assumed lease, certainly could not be charged as a cost of administration of the estate of the Debtor since, with the Order of Confirmation, the estate is no longer in existence and is succeeded by the Reorganized Debtor. In the last analysis, it is clear that the doctrine of res judicata bars the application for allowance of cost of administration under consideration filed by the Partnership.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Application for Allowance of Attorneys’ Fees and Costs as a Portion of the Partnership’s Allowed Administrative Expense be, and the same is hereby, disapproved. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493170/ | MEMORANDUM OF DECISION ON PLAINTIFFS’ MOTIONS TO DISMISS THEIR COMPLAINT AND TO DISMISS THE DEFENDANT’S COUNTERCLAIMS
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
Before the court are (1) the more recent motion of Anthony L. Novak, Trustee (“the trustee”), the trustee of the joint Chapter 7 estates of Patrick W. Reilly (“Reilly”) and Betty Ann D. Reilly (“together, the debtors”), joined in by Reilly, to dismiss an adversary proceeding which the trustee and Reilly commenced against the defendant, James W. Sherman (“Sherman”); and (2) two prior motions separately filed by the trustee and Reilly to dismiss counterclaims, filed against them by Sherman in the adversary proceeding, for failure to state a claim upon which relief can be granted. The court had stayed its consideration of the motions to dismiss Sherman’s counterclaims at the request of all *201the parties while Sherman pursued his appeals of the court’s disallowance of his claim as a pre-petition creditor against the debtors’ bankruptcy estate. Following the affirmation of the court’s ruling of disal-lowance by appellate courts, the parties have now presented their arguments to the court as to all three motions with the filing of their supplemental memoranda of law.
II.
The transactions and circumstances surrounding the claim underlying this proceeding are more fully set forth in In re Reilly, 235 B.R. 239 (Bankr.D.Conn.1999), in which the court disallowed in its entirety Sherman’s claim against the debtors’ estate for $327,500, one-fourth of the proceeds (“the Ipswich proceeds”) of an alleged joint venture involving Sherman, Reilly and others and pertaining to the sale of a parcel of real property in Ipswich, Massachusetts. The court, in an opinion issued on June 14, 1999, found, after four days of trial and extensive post-trial briefing by the parties,1 that the joint venture at issue terminated several years prior to the events leading to the sale of the property, and held that Sherman’s claim to a portion of the proceeds lacked merit.
Subsequent to the disallowance of Sherman’s claim against the estate, Reilly and the trustee, on August 23, 1999, filed a joint complaint, seeking treble damages, in the Connecticut Superior Court, alleging that in pursuing his claim against the debtors’ estate, Sherman committed the tort of vexatious litigation. Sherman, on October 7, 1999, filed an answer, special defenses and counterclaims and a motion to cite in additional parties, alleging that Reilly, the trustee, Betty Ann D. Reilly, the trustee’s attorney, Patrick W. Boatman, Esq. (“Boatman”) and the debtors’ attorney, Joel M. Grafstein, Esq. (“Grafstein”), conspired to deprive him of his right to a share of the Ipswich proceeds. The prolix counterclaims consist of two counts. In the First Count of the counterclaim (“the First Count”), Sherman contends, in essence, that these named parties, whom he identified as “the co-conspirators”, conspired to defraud Sherman of his right “to file and pursue and recover on his claim against” the debtors’ estate. He alleges that the co-conspirators, in so doing, violated numerous Bankruptcy Code and Bankruptcy Rules provisions, Connecticut statutes and United States statutes concerning both the employment of Boatman as the trustee’s court-approved attorney, and the trustee’s fiduciary duties. Sherman, in this count, seeks damages of $650,000, consisting of his denied claim for $350,000, expenses of $200,000 incurred in prosecuting this claim, and $100,000 for defending the present complaint, plus double or treble damages. In the Second Count of the counterclaim (“the Second Count”), Sherman contends that the actions of the trustee, Boatman and Grafstein deprived him of his rights under the Fifth and Fourteenth Amendments to the United States Constitution. Sherman, under this count, claims compensatory damages of $350,000 and $300,000 in punitive damages against these three parties.
The trustee removed the present action from the Connecticut Superior Court to the bankruptcy court on October 15, 1999. The court, on November 24, 1999, denied Sherman’s motion to remand.
The trustee, on October 25, 1999, and Reilly, on November 4, 1999, filed motions to dismiss Sherman’s counterclaims, and a hearing thereon was held on November 24, 1999. As noted, the court stayed consider*202ation of such motions at the request of the parties while Sherman appealed the court’s disallowance of his claim to the Bankruptcy Appellate Panel, which affirmed on March 8, 2000, and the Second Circuit Court of Appeals, which affirmed on December 18, 2000. See In re Reilly, 245 B.R. 768 (2d Cir. BAP 2000), aff'd 242 F.3d 367, 2000 WL 1863582 (2d Cir.2000).
On January 10, 2001, the trustee filed a motion supported by Reilly, pursuant to Fed.R. Civ.P. 41(a)(2), made applicable in bankruptcy proceedings by Fed. R. Bank. P. 7041, to dismiss their complaint “without prejudice to the Debtor’s right to reassert said claim outside of the Bankruptcy Court once this ease is closed.” (Motion at ¶ 6). The motion alleged that the trustee had determined, following the dis-allowance of Sherman’s claim and the withdrawal of certain other claims against the debtors’ estate, that the estate is solvent; ‘ and to facilitate concluding the administration of the estate, the trustee wished to dismiss the adversary proceeding against Sherman. In the trustee’s brief filed on March 2, 2001, he requests that if the court does not dismiss Sherman’s counterclaims, the court “not act on” the motion to dismiss the complaint. (Trustee’s Memo of 3/2/01 at 4).
III.
A.
The court will first consider the motions of Reilly and the trustee to dismiss Sherman’s counterclaims under Fed.R. Civ.P. 12(b)(6), made applicable in bankruptcy proceedings by Fed.R. Bankr.P. 7012, for “failure to state a claim upon which relief can be granted.”
The First Count alleges that the debtors, the trustee, Boatman and Grafstein are liable for a civil conspiracy to deprive Sherman of his right to recover his claim against the debtors’ estate for a portion of the Ipswich proceeds. The applicable Connecticut law has been summarized as follows:
The Connecticut Supreme Court has recognized that the elements of civil conspiracy are: “1) a combination between two or more persons, 2) to do a criminal or unlawful act or a lawful act by criminal or unlawful means, 3) an act done by one or more of the conspirators pursuant to the scheme and in furtherance of the object, 4) which act results in damage to the plaintiff.” Marshak v. Marshak, 226 Conn. 652, 665, 628 A.2d 964 (1993). The court has further stated that “[ajccurately speaking ... there is no such thing as a civil action for conspiracy. The action is for damages caused by acts committed pursuant to a formed conspiracy rather than by the conspiracy itself.” Cole v. Associated Construction Co., 141 Conn. 49, 54, 103 A.2d 529 (1954); see also Marshak v. Marshak, supra, 226 Conn, [at] 669. This has been stated another way as “[t]he gist of a civil action for conspiracy is not conspiracy as such, without more, but the damage caused by acts committed pursuant to the formed conspiracy.” Governors Grove Condominium Association, Inc. v. Hill Development Corp., 36 Conn.Sup. 144, 151, 414 A.2d 1177 (1980).
Gamlestaden PLC v. Backstrom, 1995 WL 326047 at *9 (Conn.Super.1995).
In considering the motions to dismiss under Fed.R. Civ.P. 12(b)(6), the court construes any well-pleaded factual allegations in the First Count in favor of Sherman. Sykes v. James, 13 F.3d 515, 518 (2d Cir.1993) (In considering a motion to dismiss, the court “must construe any well-pleaded factual allegations in the complaint in favor of the plaintiff.”). “In determining whether to grant a Rule 12(b)(6) *203motion, the court primarily considers the allegations of the complaint, although matters of public record, orders, items appearing in the record of the case ... also may be taken into account.” 5A Wright & Miller, Federal Practice and Procedure: Civil 2d § 1357 (1990); cf. Sanford Brass v. American Film Tech., Inc., 987 F.2d 142, 150 (2d Cir.1993) (Under Rule 12(b)(6), court’s consideration may include documents incorporated in the complaint by reference and “matters of which judicial notice may be taken.”).
As noted, supra, damages are an essential element in an action for civil conspiracy. The only damages Sherman alleges in the First Count to have sustained as a result of the alleged conspiracy are his asserted right to a portion of the Ipswich proceeds and the costs and legal expenses he incurred in pursuing his claim against the estate. This court previously disallowed in its entirety Sherman’s claim against the estate for a portion of the Ipswich proceeds and the ruling was subsequently affirmed by both the Bankruptcy Appellate Panel and the Second Circuit Court of Appeals. Having exhausted the appeals process, Sherman is barred by the doctrine of collateral estoppel from now asserting that he was defrauded of a share of the Ipswich proceeds, unless relief from the prior ruling may be granted in accordance with Fed.R. Civ.P. 60(b). (Rule 60 is made applicable in bankruptcy proceedings by Fed.R. Bankr.P. 9024.) A motion under Rule 60(b)(3) based upon an alleged fraud must be made within one year from the date the judgment was entered. This time period is not extended during the pendency of an appeal. 11 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure: Civil 2d § 2866 (1995); Vaughan v. Petroleum Conversion Corp., 120 F.Supp. 175, 178 (D.Conn.1953). Since the court disallowed Sherman’s claim on June 14, 1999, a motion under Rule 60(b)(3) is time barred.
Sherman’s First Count does not allege facts sufficient to support an independent action for relief from the pri- or judgment. While, in a motion to dismiss, the court accepts the factual allegations of the First Count as true, the court need not accept as true the legal conclusions stated therein. An independent action based upon fraud imposes certain additional requirements on the pleader. Fed.R. Civ.P. 9(b), made applicable in bankruptcy proceedings by Fed.R. Bankr.P. 7009, provides that “in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Fed.R. Bankr.P. 9(b). “To satisfy ... Rule 9(b), the pleading must set forth the alleged fraudulent statements, identity of the speaker, time and place of the statements, and nature of the misrepresentations.” American Express Travel Related Services Co. v. Henein, 257 B.R. 702, 706 (E.D.N.Y.2001).
Although the First Count asserts several legal conclusions,2 the only alleged misrepresentations cited as providing grounds for Sherman’s allegations of fraud are certain statements contained in the trustee’s application to employ Boatman as attorney and Boatman’s support*204ing affidavit. At the time the court issued its order approving the trustee’s application to employ Boatman, it had before it both the application and the affidavit which fully disclosed Boatman’s relationships with the debtors, the contingency fee arrangements, and that Boatman would receive a $20,000 retainer from the assets of the estate. Sherman had the opportunity, at a January 22, 1998 hearing on the application, to raise any objections to the employment of Boatman. The First Count does not aver any additional statements or other new evidence that would indicate that either Boatman or the trustee committed a fraud upon the court by making false statements to it or withholding material information from it in connection with the proceedings to grant the trustee’s application to employ Boatman or those to disallow Sherman’s claim against the estate. Sherman merely alleges that the trustee’s statements in the application are inconsistent with Boatman’s statements in the affidavit. The court, aware of all the statements at issue, found no such inconsistency when it granted the trustee’s application.
“Rule 60(b)’s ‘savings clause’ allows ‘a court to entertain an independent action to relieve a party from a judgment ... for fraud upon the court.... Generally, claimants seeking equitable relief through independent actions must meet three requirements. Claimants must (1) show that they had no other available or adequate remedy; (2) demonstrate that the movant’s own fault, neglect, or carelessness did not create the situation for which they seek equitable relief; and (3) establish a recognized ground — such as fraud, accident, or mistake — for the equitable relief.” Campaniello Imports, Ltd. v. Saporiti Italia S.p.A., 117 F.3d 655, 661-62 (2d Cir.1997). In applying the first of these requirements, the Second Circuit Court of Appeals has held that “[a]n independent action for fraud may not be entertained if there was an opportunity to have the ground now relied upon to set aside the judgment litigated in the original action.” M.W. Zack Metal Co. v. Int’l Navigation Corp. of Monrovia, 675 F.2d 525, 529 (2d Cir.1982) (citations and internal quotation marks omitted); Weldon v. United States, 70 F.3d 1, 5 (2d Cir.1995). In Zack, the plaintiff sued insurance companies, inter aha, for fraud, contending the insurance companies’ attorneys defrauded the courts which had rendered adverse decisions against the plaintiff by misstating the law and withholding operative facts. The district court treated this claim as an independent action for fraud under Rule 60(b). The court ruled that because the plaintiff had an opportunity to raise the fraud claims in the courts in which they occurred, the plaintiff cannot maintain an independent action for fraud. The Court of Appeals of the Second Circuit affirmed the district court’s reasoning.
The court concludes that Sherman’s allegations do not support an independent action for relief from the prior judgment. Sherman is, therefore, barred by the doctrine of collateral estoppel from asserting any right to the Ipswich proceeds, and his allegations that the trustee, Reilly and others conspired to deprive him of such a right asserts no legally cognizable damage arising from the alleged conspiracy.3 Ac*205cordingly, the court concludes that the First Count fads to state a claim upon which relief may be granted because it fails to allege any legally cognizable damages and thus does not allege facts sufficient to support a claim for civil conspiracy under Connecticut law.
In the Second Count, Sherman contends that the actions of the trustee, Boatman and Grafstein deprived him of a constitutionally protected property interest in the Ipswich proceeds without due process. As discussed supra, the doctrine of collateral estoppel bars relitigation of the court’s previous determination that Sherman never had the asserted property interest. The Second Count, therefore, also fails to state a claim for which relief may be granted.
Because neither count of Sherman’s counterclaims states a claim for which relief may be granted, the court concludes that the motions to dismiss such counterclaims should be granted.
B.
Rule 41(a)(2) provides that a complaint may be voluntarily dismissed by a plaintiff after the defendant has served his answer only “upon order of the court and upon such terms and conditions as the court deems proper. If a counterclaim has been pleaded by a defendant prior to the service upon the defendant of the plaintiffs motion to dismiss, the action shall not be dismissed against the defendant’s objection unless the counterclaim can remain pending for independent adjudication by the court. Unless otherwise specified in the order, a dismissal under this paragraph is without prejudice.” The court, having concluded, supra, that the motions to dismiss Sherman’s counterclaims under Rule 12(b)(6) should be granted, no counterclaims remain to be considered under Rule 41(a)(2).
“A voluntary dismissal without prejudice under Rule 41(a)(2) will be allowed if the defendant will not be prejudiced thereby.” D’Alto v. Dahon California, Inc., 100 F.3d 281, 283 (2d Cir.1996) (citation and internal quotation marks omitted). The criteria applied in the Second Circuit for determining whether dismissal under Rule 41(a)(2) would be prejudicial to the defendant are set forth in Zagano v. Fordham University, 900 F.2d 12, 14 (2d Cir.1990): “Factors relevant to the consideration of a motion to dismiss without prejudice include the plaintiffs diligence in bringing the motion; any undue vexatiousness on the plaintiffs part; the extent to which the suit has progressed, including the defendant’s effort and expense in preparation for trial; the duplicative expense of relitigation; and the adequacy of plaintiffs explanation for the need to dismiss.”
The present proceeding was originally filed in state court on August 23, 1999. Sherman filed his answer and counterclaim in state court on October 7, 1999 and the trustee removed the action to the bankruptcy court under 28 U.S.C. § 1452(a) on October 15, 1999. Sherman filed a motion under 28 U.S.C. § 1452(b) to remand the proceedings to state court, which was denied by the bankruptcy court on November 24, 1999. Sherman consented to Reilly’s motion to extend the litigation timetable, granted by the court on February 29, 2000, continuing all matters under this adversary proceeding pending the outcome of Sherman’s appeals of the court’s disallowance of his claim against *206the estate for a portion of the Ipswich proceeds. The Second Circuit Court of Appeals affirmed that ruling on December 18, 2000. As a result of the disallowance of Sherman’s claim, and its subsequent affirmation, the trustee determined that the estate was solvent and filed his motion to dismiss under Rule 41(a)(2) without prejudice as to Reilly, but with prejudice as to the trustee, in order to enable him to conclude the administration of the estate.
Applying the Zagano factors to the circumstances here presented, the court finds that dismissal of the adversary proceeding is not prejudicial to Sherman. The trustee’s motion was filed promptly following the conclusion of Sherman’s appeals. Although originally filed in late 1999, the proceedings have been stayed, at Sherman’s request as well as the trustee’s and Reilly’s, pending the outcome of Sherman’s appeals. Sherman does not allege that he has incurred significant expense in preparing for this litigation. The only substantive issues litigated thus far in this adversary proceeding have been the motions to dismiss Sherman’s counterclaims. Granting the trustee’s motion would not, therefore, give rise to duplicative litigation. Finally, the trustee’s reason for seeking dismissal is persuasive. With Sherman’s appeals exhausted, the estate is solvent. As a result, the outcome of this adversary proceeding will have no effect on the creditors of the estate and the trustee seeks dismissal in order to complete his administration of the estate so that creditors may be paid and the bankruptcy case closed.
Having weighed the various considerations set forth in Zagano, the court concludes that dismissal of this adversary proceeding without prejudice to Reilly’s right to pursue it in another court is not prejudicial to Sherman and the trustee’s motion should be granted.
IV.
In accordance with the foregoing discussion, the court concludes that Sherman’s counterclaims fail to state a claim upon which relief may be granted. The motions of Reilly and the trustee to dismiss such counterclaims under Rule 12(b)(6) are granted.
The court further concludes that dismissal of the adversary proceeding without prejudice as to Reilly and with prejudice as to the trustee is appropriate. Accordingly, the trustee’s motion to dismiss the adversary proceeding under Rule 41(a)(2) is granted. It is
SO ORDERED.
. Sherman was represented by counsel during the trial in the bankruptcy court, but in the present proceeding, he is proceeding pro se. Sherman is a practicing attorney.
. These include, e.g., Sherman’s assertions that his adversaries "fraudulently procured an invalid approval of the employment of Boatman," (First Count ¶ 3.K); that they made “fraudulent misrepresentation[s] ... that Boatman had a valid appointment to represent ... the trustee” (First Count ¶ 3 J); that they made "fraudulent misrepresentation[s] ... of compliance with” various provisions of the Bankruptcy Code and Bankruptcy Rules in connection with Boatman's appointment (First Count ¶¶ 3.E, F); and that they undertook unspecified "unlawful and tortious acts” (First Count ¶ 4).
. The legal expenses incurred in pursuit of his unsuccessful claim are not an element of damages. See e.g. Town of Brookfield v. Candlewood Shores Estates, Inc., 201 Conn. 1, 14-15, 513 A.2d 1218 (1986) (Even where a litigant has prevailed, "[i]n the United States, the general rule of law known as the American Rule is that a prevailing litigant ordinarily is not entitled to collect a reasonable attorney's fees from the opposing party as part of his or her damages or costs.... In the main, exceptions are based upon statutory or con*205tract provisions authorizing the recovery of attorney's fees by a prevailing litigant.”) (citations and internal quotation marks omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493171/ | MEMORANDUM
WARREN W. BENTZ, Bankruptcy Judge.
Robert Charles Stringer and Bonnie Stringer, his wife, individually and d/b/a/ Stringer Trucking (“Debtor”) filed its original COMPLAINT TO COMPEL TURNOVER OF PROPERTY OF THE ESTATE, PURSUANT TO 11 U.S.C. § 542 (“Complaint”) on March 20, 2000. The Defendant, Pauline Chrysler individually and d/b/a Randy’s Smokeshop (“Chrysler”) filed a Motion to Dismiss the Complaint on the basis that this Court lacks jurisdiction because of the Debtor’s property being on Native Nation Territory and Chrysler being a Native conducting business on Native Nation Territory.
By Memorandum and Order dated June 26, 2000, we determined that while an Indian tribe or nation may not be amenable to suit in the Bankruptcy Court, the sovereign immunity enjoyed by a tribe does not impair jurisdiction over individual tribe members when there is no allegation that the individual is an official of the tribe or that the operation of the individual’s business was done in an official capacity for the tribe. In re Stringer, 252 B.R. 900 (Bankr.W.D.Pa.2000).
Debtor subsequently filed an Amended Complaint which adds a second Count.1 Chrysler again filed a Motion to Dismiss the Amended Complaint which is identical to the initial Motion to Dismiss. Chrysler states that “[tjhis jurisdictional motion to dismiss is brought again because since the Court’s decision, there has been a decision by the New York State Supreme Court, Appellate Division, which would likely cause the Court to change its decision on jurisdiction,” citing New York Ass’n. of Convenience Stores v. Urbach, 181 Misc.2d 589, 694 N.Y.S.2d 885 (N.Y.Sup.Ct.1999).
Initially, we note that the cited case was decided in July, 1999, long before our prior decision. The issue in New York Ass’n. of Convenience Stores case was “whether there is a rational basis to repeal the collection regulations and cease efforts to enforce the collection of tobacco product and motor fuel excise and sales taxes con*349nected to sales of such commodities by Indian retailers to non-Indian consumers.” The issue did not concern the Court’s jurisdiction over a tribe versus an individual member of the tribe. The Court stated that “Indian tribes have immunity from suit and cannot be sued to accomplish tax collection. This immunity extends to tribal retailers.” There is no indication in the case that the tribal retailers in question were not doing business in an official capacity for the tribe.
We will continue to follow those cases cited in our prior Memorandum which hold that sovereign immunity of a tribe does not impair jurisdiction over individual tribe members who are not acting as representatives of the tribe and that tribe members are amenable to suit if the subject of the suit is not related to a tribe officer’s performance of official duties. In re Stringer, 252 B.R. 900 (Bankr.W.D.Pa.2000); see also In re Diet Drugs, (Phentermine, Fenfluramine, Dexfenfluramine) Products Liability Litigation; Brown v. American Home Products Corp., 2000 WL 1599259 (E.D.Pa. Oct.26, 2000). Certain Courts have taken the further step and determined that the bankruptcy court has jurisdiction over an Indian tribe, as in Lower Brule Construction Co. v. Sheesley’s Plumbing & Heating Co., Inc., 84 B.R. 638, 642-43 (D.S.D.1988):
At least three bankruptcy courts have had occasion to decide similar questions of law relating to the jurisdiction of bankruptcy courts over Indian tribes. In In re Sandmar Corp., a bankruptcy court first addressed the issue of whether a bankruptcy court has jurisdiction over an Indian tribe to find the Tribe in contempt for violating the automatic stay of section 362 of the Bankruptcy Code. 12 B.R. 910, 911-12 (Bankr.D.N.M.1981). The issue for determination was phrased as follows: “[WJhether, in the absence of a statute which specifically limits that immunity, the Tribe’s immunity is total or can be limited by other circumstances and, if so, is it limited here.” 12 B.R. at 912. In holding that the tribe’s sovereign immunity was limited, the court reasoned that an aspect of their sovereignty was implicitly preempted “as a necessary result of their dependent status.” 12 B.R. at 913 (citing Oliphant v. Suquamish (sic) Indian Tribe, 435 U.S. 191, 98 S.Ct. 1011, 55 L.Ed.2d 209 (1978) and United States v. Wheeler, 435 U.S. 313, 315, 98 S.Ct. 1079, 1081, 55 L.Ed.2d 303 (1978)). The court went on to hold that the “real crux” of the matter was that allowing tribal courts to resolve bankruptcy cases involving non-Indians would be external to the Tribe’s long-recognized authority over its internal relations. 12 B.R. at 914. In addition, the Sandmar court noted that tribal courts have no body of bankruptcy law to apply and permitting tribal courts to resolve bankruptcy matters would destroy the purpose of uniformity in administering the Bankruptcy Code. 12 B.R. at 915.
The opinion of the Sandmar court has been followed on one occasion. See In re Shape, 25 B.R. 356, 358-59 (Bankr.D.Mont.1982). In addition, in an adversary proceeding growing out of a contract dispute much like this case, a bankruptcy court has held that the bankruptcy court has jurisdiction over a corporation formed by an Indian tribe, reasoning only that some court must have jurisdiction to decide the dispute. See In re Colegrove, 9 B.R. 337, 339 (Bankr.N.D.Cal.1981).
While each of these decisions was decided before the Bankruptcy Amendments of 1984 and before the opinions of the United States Supreme Court in La-Plante and Crow Tribe, they nevertheless support the holding of the Court *350that the bankruptcy court has jurisdiction to issue the interlocutory order in the adversary proceeding. Sandmar was decided when 28 U.S.C. § 1471 provided that bankruptcy courts had original but not exclusive jurisdiction of all civil proceedings arising under Title 11. In providing that the U.S. district courts ‘ shall now have this grant of jurisdiction, the 1984 amendments strengthen the implication that Congress intended U.S. district courts, rather than Indian tribal courts to assume a greater role in the administration of the Bankruptcy Code.
We find that we have jurisdiction over Chrysler. An appropriate Order will be entered.
ORDER
This_day of April, 2001, in accordance with the accompanying Memorandum, it shall be, and hereby is, ORDERED as follows:
1. The second Motion to Dismiss filed by Pauline Chrysler, individually and d/b/a Randy’s Smokeshop (“Chrysler”) is REFUSED.
2. This Court has jurisdiction over Chrysler.
3. To the extent that leave of Court is required for the filing of the Second Amended Complaint, such leave is granted.
4. Chrysler shall file an Answer to the Second Amended Complaint within 20 days.
5. A pretrial conference is fixed for May 7, 2001 at 11:00 a.m. in the Bankruptcy Courtroom, 717 State Street, 7th Floor, Erie, Pennsylvania. Only 15 minutes have been reserved on the Court’s calendar; no witnesses will be heard. Any party may participate by telephone pursuant to the attached instructions.
6. Chrysler may file a proof of claim which asserts a Chapter 11 administrative claim for amounts claimed due, if any, from the Debtor on account of transactions which occurred during the pendency of the Debtor’s Chapter 11 case.
7. Debtor shall promptly raise any objection that it has to Chrysler’s proof of claim so that the amount owed, if disputed, can be determined.
. In light of the testimony of Robert Stringer at a hearing held on January 24, 2001 and the documentation which Robert Stringer supplied to counsel, Debtors appropriately filed a Second Amended Complaint on April 3, 2001. We assume that Chrysler would raise the same Motion to Dismiss with regard to the Second Amended Complaint and therefore issue this Memorandum and Order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493172/ | ENTRY OF JUDGMENT
MARILYN SHEA-STONUM, Bankruptcy Judge.
This matter came on for hearing on January 24, 2001, and at the conclusion of the hearing, the Court rendered an oral decision. In accordance with the Court’s oral decision, which incorporated findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052, provisional judgment was entered on behalf of the debtor on his Motion for Contempt, Sanctions and Attorney Fees against the Cleveland Clinic (the “Clinic”) and the Court retained jurisdiction to review the filings and accounting ordered by the Court. A Provisional Entry of Judgment was entered on February 5, 2001.
In its Provisional Entry of Judgment the Court ordered, inter alia, that the Clinic was to pay punitive damages in the sum of $2,500, of which $1,750.00 could be purged by the filing of a detailed explanation as to actions to be taken to prevent further violations of the automatic stay and the post-discharge injunction, as occurred in the above-captioned case. On February 28, 2001, the Clinic filed its detailed report stating that there were procedures in place for a specific notation code on a patient’s file with the bankruptcy case number, although it might take one or two billing cycles before the notice was received and updated on the Clinic’s system. However, the Clinic acknowledged that these procedures were insufficient in this instance. The Clinic stated that in order to prevent a further violation of the Code, “more direct lines of communication have been established” so that any type of notification that a patient/debtor was receiving bills would be addressed immediately. In addition, if notification is received indicating that a patient/debtor continues to receive bills, the record of the patient/debtor will be “manually examined” to verify that all systems used to bill patients have notification of the bankruptcy. With this information, the Court is satisfied that the Clinic has complied with its order, and punitive damages of $1,750.00 are purged.
The Court’s Provisional Entry of Judgment also ordered that attorney for the debtor, Carl Hiteman, file with the Court a detailed accounting of each case in which he had been paid sums of money, without order of the Court, due to creditors’ violations of the automatic stay and/or post-discharge injunction, setting forth the amount of monies retained by him and the amount sent to the debtor. On February 26, 2001, Hiteman filed his *223accounting. He stated that there had been only one case in which creditors have returned money to the debtors out of the five or six cases in which he had made requests concerning violations of the automatic stay. In that case the debtors received from two creditors the sum of $1,300 from which they paid $200.00 to Hiteman. He further stated that the above-captioned case had been more complicated than the other case noted and that he had expended three hours of attorney time to attempt to stop the Clinic from billing the debtor, and requested $375.00 in fees in this case.
The requested fees are hereby GRANTED in full and within ten (10) days of the receipt of this Entry of Judgment the Clinic shall issue a certified check for this amount to Carl G. Hiteman at the address provided on the Certificate of Service attached to this Entry of Judgment.
Because of the representations that the Clinic has made concerning its efforts to avoid recurrence of the problems addressed herein, this Entry of Judgment will be submitted to the various legal publishing entities for publication in print and electronic media.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493173/ | DECISION
WILLIAM L. EDMONDS, Bankruptcy Judge.
Martin T. Buchholz asks for judgment against Irene Dewey in the amount of $73,800.00 and that the judgment be excepted from discharge under 11 U.S.C. §§ 523(a)(4) and (a)(2)(A). Trial was held February 21, 2001 in Sioux City. Steven R. Jensen appeared as attorney for Buch-holz; Wil L. Forker appeared as attorney for the debtor, Irene M. Dewey. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
Findings of Fact
Martin T. Buchholz is 91 years old and lives in a nursing home. He was not able to attend the trial. Irene Dewey’s fiancé is Robert L. Cook, Buchholz’s nephew and godchild. Cook is in his early fifties. In the spring of 1997, Cook began regular visits to his uncle’s home in Bancroft, Nebraska. Cook also lived in Bancroft. Cook worked the night shift for Gateway computers in North Sioux City, South Dakota. He would visit his uncle during the day and sometimes at night when he got off work.
Before the spring of 1997, one of Cook’s aunts was helping Buchholz with his finances. Buchholz was one of 15 children. Other family members, including Buch-holz’s younger brother Willis and his sister-in-law Phyllis, wanted someone other than the aunt to help Buchholz with his *260finances. Cook agreed to do it, but he wanted some other family member to help also. In early May 1997, Buchholz executed a “Durable Power of Attorney” naming Cook his attorney-in-fact with authority to control Buchholz’s bank accounts, real estate, and personal property. The power gave Cook the authority to gift or to sell any of Buchholz’s property. The power of attorney was drafted by Buchholz’s attorney and executed at the attorney’s office. On the day Buchholz executed the power of attorney, Cook called Phyllis and asked her to come to the attorney’s office so that she also could be given power of attorney for Buchholz. Phyllis is employed as the Clerk of Court for Thurston County, Nebraska. She went to the lawyer’s office and either the same day or soon after, Buchholz signed a Durable Power of Attorney naming Phyllis also as his attorney-in-fact (exhibit 4).
Buchholz kept control of his checkbook, continuing to sign checks. Cook also signed checks to pay some of Buchholz’s bills. At the time, Buchholz was 88 or 89 years old.
Prior to 1997, Cook went through a divorce. Afterward, he had substantial debts. At Gateway, he earned $8.50 per hour. He had very little money left over each month after paying his basic, necessary living expenses. He was “living paycheck to paycheck.”
In February 1998, Cook began dating Dewey who was a fellow employee at Gateway. Dewey was getting divorced. Her husband had left her in December 1997; she filed for divorce that month. Her divorce became final on April 30, 1998. At the time, she was living on an acreage near Akron, Iowa. As part of her dissolution, it was agreed that if she paid all the couple’s marital debts, she would receive the acreage where she lived and two motor vehicles, including a Jeep. She could not afford to pay these debts in full at the time.
On December 10, 1997, Buchholz signed a check for $38,000.00 to the First National Bank to enable Cook to obtain a cashier’s check for that amount. Cook used the cashier’s check to start an investment fund in his own name at Norwest Bank in Sioux City. The account was for Buchholz’s benefit. Cook had offered to help Buch-holz with his investments, and Cook had discussed his idea for the investment with Buchholz and Phyllis. Cook said he was told by Buchholz to put the investment account in Cook’s name. Cook told Phyllis that he was supposed to put it in Cook’s and Phyllis’ names but that he put it in his name only because he did not know her social security number.
On March 10, 1998, Cook obtained a second cashier’s check from First National Bank in Bancroft (attachment to exhibit 2). It was in the amount of $26,000.00. Cook testified that he used the money to pay off his own debts, but he testified that some may have been transferred to Irene Dewey. In a deposition, he admitted that the money went to Dewey to enable her to pay off her debt on her Jeep motor vehicle. Dewey testified that she received between $24,000.00 and $25,000.00 from Cook to pay off the Jeep loan. She said Cook wrote the check directly to Norwest, the secured creditor with the interest in the Jeep. Cook told her he had borrowed the money from his uncle. At the time, the couple was planning to get married. Dewey knew that Cook was Buchholz’s attorney-in-fact. I find that Cook transferred the entire $26,000.00 to Dewey for her use. Cook' testified that he considered it a loan to Dewey. He said he expected to be repaid, but he did not discuss repayment terms with her because of their -relationship. Dewey testified that she thought it was a gift.
On April 28, 1998, Cook obtained a third cashier’s check from First National Bank *261(attachment to exhibit 2). It was in the amount of $38,000.00. Cook said he used the money to pay his debts and some of Dewey’s debts. Dewey said Cook gave her the money, and she used it to pay off her remaining marital bills. The payment enabled her to retain the acreage and the two vehicles.
I find that the entire $38,000.00 was transferred to Dewey to enable her to pay marital debts. After paying the marital debts, Dewey sold her acreage near Akron. She used the equity she received from the sale as a downpayment to buy a house at 941 Reed Street in Akron. At the time of the purchase, in May 1998, the warranty deed for the home was made to Dewey and Cook as joint tenants with rights of survivorship. The purchase price of the home was $111,000.00. Dewey and Cook signed a promissory note to Firstar Bank for $88,000.00 to finance the purchase. In August 1999, Cook quitclaimed his interest in the house to Dewey. Cook has referred to Dewey as his “paramour.” He has lived with her “on and off’ since they began dating. They became engaged about a year ago.
Dewey knew that Cook had obtained the money from Buchholz. She said she thought they were loans to Cook. She testified that at the time Cook gave her the money, she would not have had the ability to repay Cook.
Cook maintains that the $26,000.00 he received in March and the $38,000.00 he received in April were loans from Buch-holz. He said he discussed the loans with his uncle and that he promised to pay his uncle back. Cook said the money came from Buchholz’s bank account. It may be that bank certificates of deposit owned by Buchholz were redeemed in order to obtain the March and April cashier’s checks.
On a visit to Buchholz, Willis Buchholz learned from Martin that Martin’s checking account was overdrawn. Willis, Martin, and Phyllis visited Cook in Akron sometime in late April, seeking an explanation. Cook’s only explanation was that Phyllis must have been writing checks.
Willis said he examined Buchholz’s checking account and discovered the transactions leading to the purchase of the cashier’s checks. He drove to Gateway to talk to Cook and confronted him about the checks. He said he got “no real answer.”
Cook’s power of attorney was revoked. Buchholz gave Willis power of attorney. Willis and Phyllis, on Buchholz’s behalf, reached an agreement with Cook on the return of funds (exhibit 2). Both sides were represented by attorneys. A “Letter of Understanding” was executed on June 16,1998.
Under the agreement, Cook agreed to return the balance of the investment account at Norwest. Cook agreed to have his house in Bancroft appraised and to transfer the property to Buchholz. The value of the transfer would be determined by the valuation of an appraiser to be selected jointly by the attorneys. After the return of the investment account and the transfer of the Bancroft property, any remaining balance of the $102,000.00 would be repaid within 60 days. The agreement provided for the execution of a promissory note for the unpaid balance and the execution of a deed of trust or mortgage to secure the unpaid balance. It is not clear from the agreement whether there was additional property to be used as security for the unpaid balance or whether the parties intended that the Bancroft home was to be mortgaged until it was transferred (see ¶¶ 2 and 3, exhibit 2). The lack of clarity on this point does not affect the court’s decision.
Cook signed a promissory note to Buch-holz for $50,000.00 (exhibit E) and a Deed *262of Trust (exhibit C). The Bancroft property was never sold or transferred to Buch-holz. Cook mortgaged the property to Countrywide Home Loans, Inc. to obtain money to pay his debts including his legal bills.
Of the $38,000.00 invested through Nor-west, only $27,000.00 was returned to Buchholz. These funds were returned on August 6, 1998. Cook claims that stock market losses caused the shortfall. He testified that if he had not been forced to cash in the investment, Buchholz would have earned ten times his investment. The documentary evidence does not bear out the stock market loss explanation.
As of April 30, 1998, the investment account contained the following shares of stock:
money market fund 23.98 shares
AIM Value Fund 272.093 shares
Fidelity Advisor High Yield 1,217.999 shares
Norwest ADV Small Company 931.966 shares
Norwest ADV Income Equity 263.462 shares
The total value of the portfolio was then $47,983.29 (exhibit 9).
As of May 29, 1998, the investment account was valued at $28,857.47 (exhibit 9). The per share value of the funds was not significantly different, but the number of shares was. The shares at the end of May were as follows:
money market fund 24.08 shares
AIM Value Fund 141.616 shares
Fidelity Advisor High Yield 861.537 shares
Norwest ADV Small Company 558.060 shares
Noiwest ADV Income Equity 151.316 shares
As of June 30, 1998, the value of the portfolio was $29,246.67 (exhibit 9). Cook did not explain the loss of shares.
In addition to the return of the Norwest money, Cook paid Buchholz only $1,200.00. As stated earlier, Cook did not transfer the house to Buchholz or sell it and pay him the proceeds. In an effort to collect the debt, Buchholz filed suit against Cook in May 1999 in the Nebraska state court. Cook filed his chapter 7 bankruptcy case in this court on April 6, 2000. Dewey filed her chapter 7 case on March 13, 2000.
Cook explains the $64,000.00 in cashier’s checks he received in March and April of 1998 as loans agreed to by Buchholz. Cook said he needed the money to pay his debts and that he had a three-fold plan for repaying it. First, the Norwest investment account would earn enough money to repay Buchholz. This explanation was incredible. The investment account was Buchholz’s money. Using its earnings to repay Buchholz’s loan to Cook makes no sense.
Second, Cook said he proposed to transfer his house in Bancroft to Buchholz. The reason he did not, he says, is that Phyllis would not let him. Third, Cook was to pay Buchholz something every month. Cook said that Buchholz said he was willing to take whatever Cook could afford to pay. Cook said that at one point, Buchholz was willing to take $100.00 to settle the amount in full.
Cook said he and Buchholz were “close,” that he intended to pay Buchholz back, and that he did not take Buchholz’s “last penny.” Cook says Buchholz is worth “a million dollars.” At the time of Cook’s bankruptcy filing, Cook owed Buchholz $73,800.00.
Discussion and Conclusions of Law
I have included substantial findings of fact regarding the relationship of Cook and Buchholz and regarding Cook’s transactions with his uncle. These are relevant to Buchholz’s claim against Dewey. Buch-holz has claimed in a separate adversary proceeding that he was damaged by Cook’s defalcation while Cook was acting as his *263fiduciary and by Cook’s defrauding him. Buchholz has asked for judgment against Cook in the amount of $73,800.00, and he has asked that the judgment be excepted from Cook’s discharge under 11 U.S.C. §§ 523(a)(4) and (a)(2)(A).
Buchholz alleged that Cook obtained the $38,000.00 cashier’s check in December 1997 in order to invest it for Buchholz and returned only $27,000.00. Buchholz contended that the $11,000.00 loss was a result of Cook’s defalcation. In the separate proceeding against Cook, I have found that the loss of $11,000.00 was the result of Cook’s defalcation. Also Buchholz claimed that Cook borrowed $26,000.00 in March 1998 and $38,000.00 in April 1998, with no intention of repaying it and that therefore his promise to repay was a fraudulent misrepresentation. I have found that this also was so.
The money taken from Buchholz by Cook as a result of the fraud was transferred to Dewey by Cook in order to help her solve her financial problems. Buchholz contends that Dewey conspired with Cook to accomplish the defalcation and the fraud and that therefore judgment should be entered against her also for the loss of $73,800.00 and that the judgment should be excepted from her discharge under the same sections of the Code-11 U.S.C. §§ 523(a)(4) and (a)(2)(A).
“Conspiracy is, basically, a combination of two or more persons to accomplish, through concerted actions, an unlawful end or a lawful end by unlawful means.” Tubbs v. United Central Bank, N.A., 451 N.W.2d 177, 183-84 (Iowa 1990). The principal element is an agreement or understanding to commit a wrong against another. Id. at 184. A conspiracy to defraud is normally shown by circumstantial evidence. Countryman v. Mt. Pleasant Bank & Trust Co., 357 N.W.2d 599, 606 (Iowa 1984). Buchholz must prove the elements of nondischargeable claim by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991). This burden requires the trier of fact to believe that the existence of a fact is more probable than its nonexistence. Metropolitan Stevedore Co. v. Rambo, 521 U.S. 121, 117 S.Ct. 1953, 1963, 138 L.Ed.2d 327 (1997).
Buchholz has not proven by a preponderance of the evidence that Dewey conspired with Cook to accomplish the defalcation or the fraud. It is true that she received the benefit of Cook’s wrongful acts, but it has not been proven that she agreed with Cook to effect the harm to Buchholz. She needed the money, and she knew Cook was borrowing the $64,000.00 from Buchholz, but there is insufficient evidence from which to find that she knew of any intention of Cook at the time not to repay. This is so also as to the defalcation. The loss there took place substantially in May 1998. There is insufficient evidence on which to base a determination that Dewey conspired with Cook with regard to the loss of funds in the investment account. Buchholz has shown that Cook and Dewey had a close relationship and that Dewey was the beneficiary of Cook’s actions. Buchholz has not proven that she joined in an agreement with Cook to accomplish the wrongful acts. Buchholz has failed to prove his claim against Dewey by a preponderance of the evidence, and his complaint should be dismissed.
IT IS ORDERED that the complaint of Martin T. Buchholz against Irene M. Dewey is dismissed. Judgment shall enter accordingly. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493176/ | LEGAL MEMORANDUM
JACK CADDELL, Bankruptcy Judge.*
This matter is before the Court upon an objection to confirmation filed by creditor Mehry Abidi. The objection was presented at the June 11, 2001 hearing to consider confirmation of the Chapter 13 plan proposed by the debtor, Ronald J. Holder. The matter was taken under advisement by the Court.
The debtor, Ronald J. Holder, had filed a petition for relief under Chapter 7 on April 14, 2000. On August 1, 2000, the debtor was granted a discharge by this Court under § 727 of Title 11, United States Code, (the Bankruptcy Code).
On July 24, 2000, creditor Abidi filed a complaint against the debtor with this Court. Plaintiff Abidi filed an amended complaint on August 14, 2000. Both complaints asked the Court to determine the obligation of the debtor to the plaintiff to be nondischargeable pursuant to § 523(a)(2) of the Bankruptcy Code. On December 13, 2000, this Court entered judgment in this adversary proceeding in favor of the plaintiff Abidi in the amount of $20,100.00. This judgment was held to be nondischargeable in the debtor’s Chapter 7 Bankruptcy under 11 U.S.C. § 523(a)(2) because this debt was obtained by actual fraud.
On April 13, 2001 the debtor filed a petition for relief under Chapter 13. On April 25, 2001, creditor Abidi filed the objection to confirmation of Chapter 13 plan and requested that the Court rule that the judgment entered by this Court in the debtor’s Chapter 7 adversary proceeding is nondischargeable in the debtor’s Chapter 13 ease. The creditor argues that the debtor’s Chapter 13 petition is based on bad faith and that the plan proposed by the debtor is not the “best effort” required under a Chapter 13 plan.
*623The debtor maintains that he filed his Chapter 18 plan only as a last resort after failing to reach terms with the creditor Abidi. The debtor also asserts that he owes approximately $6,500.00 in priority taxes to the Internal Revenue Service and has another $5,100.00 worth of debt in addition to the debt owed creditor Abidi.
In addressing whether the debtor has proposed his Chapter 13 plan in good faith, this Court applies a totality of the circumstances test. The Eleventh Circuit in Kitchens v. Georgia R.R. Bank and Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir.1983), delineated sixteen factors that courts should consider in determining a debtor’s good faith under 11 U.S.C. § 1325, including:
1. The amount of the debtor’s income from all sources;
2. The living expenses of the debtor and his dependents;
3. The amount of attorney’s fees;
4. The probable or expected duration of the debtor’s Chapter 13 plan;
5. The motivations and sincerity of the debtor in seeking relief under the provisions of Chapter 13;
6. The debtor’s degree of effort;
7. The debtor’s ability to earn and the likelihood of fluctuation in earnings;
8. Special circumstances such as inordinate medical expenses;
9. The frequency with which the debtor has sought relief under the Bankruptcy Reform Act and its predecessors;
10. The circumstances under which the debtor has contracted debts and has demonstrated bona fides, or lack thereof, in dealings with creditors;
11. The burden which the plan’s administration would place on the Trustee;
12. The extent to which claims are modified and the extent of preferential treatment among classes of creditors;
13. Substantiality of repayment to the unsecured creditors;
14. Consideration of the type of debt to be discharged and whether such debt would be nondischargeable under Chapter 7;
15. The accuracy of the plan’s statements of debts and expenses and whether any inaccuracies are an attempt to mislead the court; and
16. Other factors or exceptional circumstances.
Kitchens, 702 F.2d 885.
Several facts of this case are relevant to the sincerity of the debtor in filing his Chapter 13 Bankruptcy. The debt in question owed to creditor Abidi was the debtor’s primary debt when he filed for Chapter 13 Bankruptcy. He also filed his Chapter 13 petition less than eight and a half months after he was granted a Chapter 7 discharge. The debtor’s proposal in his Chapter 13 Plan to pay only thirty percent of the debt owed to his unsecured creditors in installments of $200 per month over a period of sixty months indicates that the debtor’s Chapter 13 Plan is an insincere attempt to avoid paying a substantial portion of the debt owed to creditor Abidi. Furthermore, the substantial portion of the debts the debtor seeks to discharge were held to be nondischargeable by this Court in an Adversary Proceeding in the debtor’s Chapter 7 Bankruptcy. In In re Davis, a case involving an objection to confirmation of a Chapter 13 plan, the United States Bankruptcy Court for the Eastern District of Oklahoma, 218 B.R. 177 (Bankr.E.D.Okla.1998), held that a debtor seeking to discharge a significant amount of debt which arose from fraud and was held to be nondischargeable in the debtor’s previous Chapter 7 proceeding had not acted in good faith as required by 11 U.S.C. § 1325.
*624The frequency with which the debtor has filed for Bankruptcy is also pertinent in this matter. On August 25, 1994, the debtor filed a petition for relief under Chapter 13, a case that was dismissed on November 26, 1996. On April 14, 2000 the debtor petitioned for relief under Chapter 7 and on August 1, 2000 he had been granted a Chapter 7 discharge. The frequency of these filings suggests that the debtor is not acting in good faith.
The fact that the debt owed to the creditor Abidi was incurred by actions this Court ruled to be obtained by actual fraud on the part of the debtor also indicates that a good faith effort was not put forth by the debtor. Furthermore, the debt obtained through fraud comprises approximately sixty-five percent of the total unsecured claims sought to be discharged in the debtor’s Chapter 13 plan and approximately eighty-two percent of the total unsecured nonpriority claims sought to be discharged.
The substantiality of payment to the unsecured creditors is relevant here because unsecured creditors are receiving a minimal amount of their claims under the debtor’s Chapter 13 plan, only thirty percent of their claims. Whether or not the debts would be dischargeable in a Chapter 7 Bankruptcy is also applicable because this Court has already ruled that the debt owed by the debtor to creditor Abidi would not be dischargeable under 11 U.S.C. § 523(a)(2).
Since this plan was represented to the Court as the debtor’s best possible effort and the debtor cannot propose a greater payback to unsecured creditors, this case will be dismissed.
JUDGMENT
In conformity with and pursuant to the legal memorandum attached hereto, it is hereby ORDERED, ADJUDGED and DECREED that the objection to confirmation filed by Mehry Abidi is hereby sustained.
It is further ORDERED that this Chapter 13 case is hereby dismissed.
Legal Memorandum prepared by Brian B. Okay, Legal Intern to the Hon. Jack Caddell. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493177/ | ORDER ON MOTION FOR TURNOVER
MARK W. VAUGHN, Chief Judge.
The Chapter 7 Trustee (“Trustee”) and the Town of Wolfeboro (“Town”) have submitted competing claims to funds ordered held by the Carroll County Superior Court (“Superior Court”) pending final determination of a dispute between the Town and the Debtor. For the reasons set out below, the Court finds that the Town holds a valid judicial lien on the funds.
Jurisdiction
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,” datéd January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
Background
Prior to his bankruptcy, the Town filed a breach of contract action against the Debt- or and obtained a prejudgment attachment on all of his real estate. Thereafter, his residence was sold for $44,000 and the proceeds were placed in escrow while the Debtor, who believed the proceeds were subject to the real estate attachment, sought a court order releasing the attachment. Although initially denying the motion on an ex parte basis, after holding a hearing the Superior Court partially granted the motion, apparently on the grounds that one-half of the proceeds belonged to the Debtor’s wife, who was not subject to the attachment. The order stated in pertinent part:
[Ojne-half (/£) of the said net proceeds now held in escrow, which total approxi*686mately $22,000.00, shall be transferred to the Clerk of Court — Carroll County, forthwith. The remaining proceeds held in escrow may be released. The Clerk shall place said proceeds in an interest-bearing account pending final disposition of the underlying matter. The attachment earlier granted by the Court is RELEASED, expressly conditioned upon transmittal and receipt of said proceeds, as reviewed above.1
The Superior Court subsequently clarified its order to apply only to the Debtor’s residence and not to other real estate covered by the attachment. The Town’s action against the Debtor was ultimately stayed by the filing of his bankruptcy petition on January 30, 2001. Thus, the Town’s claim was never litigated and judgment has not entered.
On February 28, 2001, the Debtor, still acting on the assumption that funds held by the Superior Court were subject to a judicial attachment, filed a motion in this Court to avoid the lien pursuant to 11 U.S.C. § 522(f) as impairing his homestead exemption. After holding a hearing on the motion, the Court, in a memorandum opinion, Shalebaum v. Town of Wolfeboro, 2001 BNH 016, denied the motion, finding that the Debtor could not claim a homestead exemption in the proceeds of the sale as no homestead right existed at the time of the bankruptcy. However, the Court also ruled in that opinion that the Town’s real estate attachment did not follow the proceeds of the sale because it never attached to the Debtor’s interest in the property due to his then existing homestead right. The Court expressly left open the question of whether the Town could otherwise claim a lien on the proceeds.
Following the Court’s findings, the Trustee brought a motion seeking turnover to the estate of the approximately $22,410 then held by the Superior Court. A hearing on the motion was held on May 14, 2001, at which all parties agreed that the Debtor was entitled to $8,000 of the proceeds under his wildcard exemption. However, the issue of whether the remaining funds belonged to the estate or were subject to a judicial lien remained. The parties were invited to prepare memoran-da on the issue and submit the question to the Court. Both parties filed briefs on June 1,2001.
Discussion
The Town argues that even though this Court found that the attachment did not follow the proceeds of the sale, the Superior Court’s order created a judicial lien on the proceeds within the definition of that term under the Bankruptcy Code. See 11 U.S.C. § 101(36). The Town further argues that because its claim, which is not disputed, exceeds the value of the funds subject to the lien, it is a secured creditor with respect to those funds. The Trustee, on the other hand, claims that the order transferring the funds to the Superi- or Court was effectively a bill of inter-pleader which merely preserved the unencumbered funds pending the resolution of the dispute between the Town and the Debtor and did not create a judicial lien.
The Court rejects the Trustee’s position. New Hampshire courts recognize the right of a party who serves merely as a custodian of property to force rival claimants to such property to litigate between themselves who holds the rightful *687claim. The custodial party is the plaintiff in a bill of interpleader and the competing claimants are the defendants. “The issue presented by the plaintiff in a bill of inter-pleader is the existence of facts which give him the right to require the parties made defendant to interplead and settle the controversy between themselves.” Barrett v. Cady, 78 N.H. 60, 96 A. 325, 326 (1915). By filing a bill of interpleader, the custodian is relieved of the risk of liability to multiple claimants to the same property. Id. After the custodian’s right to inter-plead is established he is permitted to pay the subject funds into the court and is released from the action. Id. Here, there was no party who could serve as the plaintiff in an interpleader action, i.e. there was no disinterested third party holding the proceeds. This Court will not stretch the equitable interpleader doctrine so far as to characterize the Superior Court’s role as that of a plaintiff in an interpleader action.
The better answer, and the only logical conclusion that can be reached based on the evidence before the Court, is that the Superior Court intended to place a judicial lien on the funds in favor of the Town in order to secure any possible judgment the Town would receive on its contract action. It is clear that the Debtor and the Town operated under the assumption that the real estate attachment attached to the sales proceeds, and therefore, the issue of whether the attachment followed the proceeds was never raised before the Superior Court. On the Debtor’s motion to release the attachment, the Superior Court stated: “The Court GRANTS in part and DENIES, in part, the Defendants’ Motion for Release of Attachment.” Thus, it is also clear that the Court was acting under the assumption that there was a valid attachment on the proceeds and intended that the attachment should continue in part. In addition, the order stated that release of the attachment was “expressly conditioned upon transmittal and receipt of said proceeds [by the Superior Court].” This, too, evidences an intent on the part of the Superior Court to protect the Town’s interest by maintaining a lien in favor of the town pending the outcome of the litigation. Although this Court subsequently found that in fact the Town’s attachment did not automatically attach to the proceeds of the sale, absent any contrary evidence, it is impossible to reach any other conclusion than to find that the Superior Court was acting at all times with the intent to maintain a lien in favor of the Town.
A “judicial lien” is defined by the Bankruptcy Code as a “lien obtained by judgment, levy, sequestration, or other legal process or proceeding.” 11 U.S.C. § 101(36) (emphasis added). It is not necessary for there to be an appealable judgment in order to create a judicial lien as any legal process or proceeding can create a judicial lien. See 2 Collier on Bankruptcy, ¶ 101.36 (15th Ed.). Here, there was clearly a legal proceeding before the Superior Court in which it ordered that the funds be placed in escrow to secure any future judgment. This Court finds this sufficient evidence of a judicial lien.
The remaining issue raised by the parties is whether the Town now has a valid secured claim. The Town’s breach of contract action was stayed prior to the entry of final judgment by the Debtor’s bankruptcy. On March 19, 2001, the Town filed three proofs of claim alleging amounts due for payment of rent, electric service, and water/sewer services totaling $30,091.44, representing the amount sought in the Superior Court action. The Debtor and the Trustee both agreed that this was the proper amount due under the Debtor’s contracts with the Town, and therefore, in the absence of objections the claims are allowed pursuant to 11 U.S.C. *688502(a). The Town has an allowed claim in the amount of $30,091.44 secured by the judicial lien on the proceeds remaining in the Superior Court. Pursuant to 11 U.S.C. § 506(a), the Town has a secured claim up to the amount currently held by the Superior Court with the remainder of its claim unsecured.
Conclusion
For the reasons set out above, the Court finds that the Town of Wolfeboro holds a judicial lien on the funds held in the Carroll County Superior Court securing its claims totaling $30,091.44.
This opinion constitutes the Court’s findings and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate order consistent with this opinion.
. None of the pleadings or the Superior Court's orders were attached as exhibits in any of motions before the Court. However, the orders were attached to the proofs of claim filed by the Town, and with the agreement of the parties, the Court took judicial notice of the orders. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493178/ | DECISION AND ORDER
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on confirmation of an Amended Chapter 13 plan wherein the Debtors pro*689pose to separately classify a portion of Sovereign Bank New England’s unsecured claim, and to pay that creditor 100%, while other unsecured creditors receive approximately 2% of their claims. The Chapter 13 Trustee objects on the ground that the proposed classification unfairly discriminates in favor of Sovereign, in violation of 11 U.S.C. § 1322(b)(1).1
In discussing this same issue, we- have recently stated:
In determining whether such classifications discriminate unfairly, courts have considered the following factors:
(1) whether the discrimination has a reasonable basis;
(2) whether the debtor can complete a plan without the discrimination;
(3) whether the discrimination is proposed in good faith; and
(4) whether the degree of discrimination is directly related to the rationale for the discrimination.
In re Whitelock, 122 B.R. 582, 588 (Bankr.D.Utah 1990); In re Bowles, 48 B.R. 502 (Bankr.E.D.Va.1985). These four factors, however, are not exclusive of all other considerations.
No single test or formula provides a satisfactory structure for all contexts. The question, as Judge Ginsberg recognized in In re Chapman, boils down to whether the plan reflects a reasonable balance in “the relative benefits allocated to the debtor and creditors from the proposed discrimination.” 146 B.R. [411] at 419 [(Bankr.N.D.Ill. 1992)].
Finally, any analysis of the relative benefits (and detriments) resulting from the proposed discrimination must be undertaken in light of the impact of the discrimination on Congress’ chosen statutory definition of the legitimate interests and expectations of parties-in-interest to Chapter 13 proceedings.
In re Colfer, 159 B.R. 602, 607-08 (Bankr.D.Me.1993) (footnotes omitted). We believe that the determination should be made based on the totality of circumstances, including balancing the relative benefits to the debtor and creditors from the proposed discrimination ....
It is the Debtors’ burden to demonstrate by a preponderance of the evidence that the proposed classification and treatment of creditors does not discriminate unfairly. Id. at 608.
In re Regine, 234 B.R. 4, 6 (Bankr.D.R.I. 1999).
The reason for the proposed discrimination here is that, pre-petition, the Debtors drew down on their unsecured line of credit with Sovereign, and used those funds to pay priority federal and state income tax obligations. The Trustee readily acknowledges that if the taxing authorities were unpaid on the date of the petition, they would have been entitled to payment ahead of unsecured creditors. The Debtors wish to separately classify only that portion of Sovereign’s claim that was used to pay the priority tax creditors approximately $7,000. The balance of Sovereign’s $22,000 unsecured claim will be paid at the rate of 2%, along with the Fosters’ other unsecured creditors.
Applying the standards referenced above, and because (and only because) *690unsecured creditors are receiving exactly what they would have received even without the Debtors’ strategizing, I find that although the plan might appear to take aim unfairly at nonpriority creditors, in reality there is no effective discrimination here. Accordingly, the Debtors’ Amended Chapter 13 Plan is confirmed, and the Trustee should file a standard order of confirmation within ten (10) days:
Enter judgment consistent with this order.
. This Section states:
(b) Subject to subsections (a) and (c) of this section, the plan may—
(1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated...
11 U.S.C. § 1322(b)(1). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493182/ | KRESSEL, Bankruptcy Judge.
The defendants, Michael Lurie and Ryan Lurie, appeal from the order of the bankruptcy court2 which awarded the defendants restitution for their interest in property that was sold at an execution sale pursuant to a fraudulent transfer judgment which was subsequently reversed. The bankruptcy court determined that, upon a reversal of judgment, an appellant is entitled to restitution in the amount actually received by the appellee, plus interest and taxable costs. Defendants argue that they are entitled to damages in the form of the fair market value of the property sold, plus interest and attorney fees. We affirm the decision of the bankruptcy court.
BACKGROUND
The history of this case is set forth in the court of appeals’ opinion in Blackwell v. Lurie (In re Popkin & Stern), 223 F.3d 764 (8th Cir.2000). In brief, Popkin & Stern was a law firm of which Ronald Lurie was a general partner. In 1992, an involuntary Chapter 7 bankruptcy petition was filed against Popkin & Stern. The case was converted to Chapter 11 and the appellee herein, Robert J. Blackwell, was appointed as the Chapter 11 trustee. In 1993, Blackwell was appointed the liquidating trustee under a Chapter 11 plan confirmed by the court.
On October 20, 1994, the trustee obtained a judgment against Ronald Lurie in the approximate amount of $1.1 million. Subsequently, the trustee brought a fraudulent transfer complaint against Ronald Lurie and his children, Michael Lurie and Ryan Lurie, seeking to avoid the transfer of real estate that Ronald Lurie was to have inherited from his mother, but for his disclaimer of the property which caused it to pass to the appellants instead. On August 18, 1998, the bankruptcy court entered judgment in favor of the trustee and set aside the transfer of the property to the appellants. We affirmed the bankruptcy court’s decision.3 However, the Eighth Circuit Court of Appeals reversed and remanded.4
At no time while the appeal was pending did the appellants seek a stay pending appeal, nor did they seek a supersedeas bond to stay execution on the property.5 Thus, in December 1998, the trustee filed a writ of execution under the $1.1 million judgment against Ronald Lurie, and the sheriff sold his interest in the property to a disinterested third party for $420,500. After the sheriffs commission and expenses ($16,825) were deducted, the trustee received $403,675 from the sale.
The reversal by the Eighth Circuit occurred after the property was sold. In reversing, the court stated that the case was remanded “for further proceedings ... to determine the amount of damages *888owed to Michael and Ryan for the loss” of their interest in the property.6 On remand, the bankruptcy court agreed with the trustee that, under Missouri law, appellants’ “damages” were limited to all benefits the trustee acquired under the erroneous judgment. Therefore, the court awarded appellants the amount the trustee actually received from the sale, $403,675, plus interest and taxable costs. Appellants argue on appeal that the bankruptcy court erred in failing to award them the fair market value of the property and their attorney fees.
DISCUSSION
We review the bankruptcy court’s factual findings for clear error and its conclusions of law de novo. Blackwell v. Lurie (In re Popkin & Stern), 223 F.3d 764, 765 (8th Cir.2000); Wendover Fin. Servs. v. Hervey (In re Hervey), 252 B.R. 763, 765 (8th Cir. BAP 2000).
The trustee’s action against the appellants, and thus the resulting judgment, was brought under Missouri’s Uniform Fraudulent Transfer Act. The bankruptcy court and the parties assumed that Missouri law controls appellants’ remedy for the reversal of that judgment. We need not determine whether federal or Missouri state law applies, as the result under either is the same.
Missouri Law
The bankruptcy court correctly determined that, under Missouri law, “upon reversal of a judgment ... the appellant is entitled to restitution from the respondent of all benefits acquired under the erroneous judgment during the pendency of an appeal.” De Mayo v. Lyons, 360 Mo. 512, 228 S.W.2d 691, 692 (1950); see Chaney v. Cooper, 948 S.W.2d 621, 624 (Mo.Ct.App.1997). This right to restitution exists even if it is not expressly ordered by the appellate court. De Mayo, 228 S.W.2d at 692. However, the “damages” which may be given for restitution “are not open-ended.” Lancaster v. Simmons, 621 S.W.2d 935, 940-41 (Mo.Ct.App.1981). Restitution, as a remedy for reversal of an erroneous judgment, is a proceeding in equity. Int’l Ins. Co. v. Metro. St. Louis Sewer Dist., 938 F.Supp. 568, 571-72 (E.D.Mo.1996); Chaney, 948 S.W.2d at 624. Thus, the appellant is not entitled to receive traditional “legal damages.” See Metro. St. Louis, 938 F.Supp. at 571-72 (granting summary judgment in favor of insurer, whose policy excluded claims arising from non-“money damages,” where the insured sought coverage for a credit-refund it was ordered to pay to customers as a result of a rate-increase ordinance being invalidated by the Missouri Supreme Court).
Accordingly, in ruling that appellants were entitled to the benefits received by the appellees under the erroneous judgment, the Missouri Supreme Court in De Mayo7 held that appellants could recover the amount realized by the appellees from various sales of whiskey obtained under execution, plus interest from the date of the levy under execution, and taxable costs. See De Mayo, 228 S.W.2d at 692, 694. This is what appellants here were awarded (the amount realized by the trustee, plus interest, plus taxable costs), and that award was proper. Appellants erroneously cite De Mayo for the proposition that they are entitled to the fair market value of the property sold. This is a clear misstatement of De Mayo’s holding. The use of a “reasonable market value” by the De Mayo court arose in the context of sales under the execution for which the *889judgment creditor could not establish the actual sale amounts. See id., 228 S.W.2d at 694. For those sales only, the court held that appellants could recover the reasonable market value of the whiskey sold. See id.
Likewise, in Lancaster,8 the appellant was awarded restitution in the amount actually received by the appellee, for rents, while he was in possession of property pursuant to a judgment that was subsequently reversed. See Lancaster, 621 S.W.2d at 937-39. Appellant argued on appeal that the trial court awarded him inadequate damages, asserting that the mandate of the appellate court required that he “be restored to all things lost by reason of [the original] judgment.” Id. at 940. The appellant sought additional damages and the recovery of his attorney fees. Refuting appellant’s arguments and citing De Mayo9 and Hurst Automatic Switch & Signal Co. v. Trust Co.,10 the court held that the appellant was not entitled to recover attorney fees or other litigation expenses which were not taxable as costs, nor was appellant entitled to recover for speculative damages. Lancaster, 621 S.W.2d at 940-41.
Appellants cite one case, Harris v. Desisto, 932 S.W.2d 435 (Mo.Ct.App.1996), in support of the argument that the trustee should pay their attorney fees. That case is inapposite. Harris concerned a party’s remedies upon rescission of a contract, not the remedies available upon reversal of an erroneous judgment. See id. Appellants can point to no case where Missouri courts have awarded attorney fees as part of a restitution award following the reversal of a judgment. Indeed, no such case exists.
There is no support in Missouri law for awarding appellants the fair market value of the property sold. Rather, in accordance with well established Missouri law, they are entitled to the benefits actually received by the trustee under the erroneous judgment, together with interest from the date of the levy under execution and taxable costs. We hold that the bankruptcy court properly determined appellants’ restitution award pursuant to Missouri law.
Federal Law
Under well-established case law, the outcome under federal law is the same. As stated by the Eighth Circuit Court of Appeals: “It is a long-standing legal principle that ‘[a] person who has conferred a benefit upon another in compliance with a judgment, or whose property has been taken thereunder, is entitled to restitution if the judgment is reversed or set aside, unless restitution would be inequitable.... ’” Mohamed v. Kerr, 91 F.3d 1124, 1126 (8th Cir.1996) (alteration in original) (quoting Restatement of Restitution § 74 (1937)).
As indicated in Mohamed, courts have long looked to the Restatement of Restitution § 74 for guidance. See Mohamed, 91 F.3d at 1126. Comment d to the Restatement provides, in pertinent part:
d. Restitution of money from judgment creditor.... If the debtor’s property has been sold to a stranger and the proceeds paid to the judgment creditor, the judgment debtor is entitled to recover the amount thus received by the judgment creditor with interest; unless the judgment was void, he cannot recover the value of the property sold, if the action was brought in good faith and the sale was properly conducted, since the creditor was acting lawfully.
*890Restatement (First) of Restitution § 74 cmt. d (1936) (emphasis added). An Illustration to this Comment provides:
A obtains a judgment against B for $3000. Execution is levied on the judgment and B’s property, to the value of $4000, is sold. Although the sale is properly conducted, the property brings but $3000 which is paid to A. The judgment is reversed for error of law. B is entitled to restitution from A of only $3000 with interest.
Restatement (First) of Restitution § 74 cmt. d, illus. 12 (1936).
Thus, courts have universally held that where a judgment is reversed, appellants are entitled to restitution of the benefits received by the other party (plus costs and interest), but to no more. See, e.g., Kansas City So. Ry. Co. v. S. Trust Co., 279 F. 801 (8th Cir.1922); U.S. Indus., Inc. v. Gregg, 457 F.Supp. 1293, 1298-99 (D.Del.1978), aff'd, 605 F.2d 1199 (3d Cir.1979), cert. denied, 444 U.S. 1076, 100 S.Ct. 1023, 62 L.Ed.2d 758 (1980). Under federal law, restitution is a remedy in equity, it is not a matter of right nor a proceeding for “money damages.”11 See Atlantic Coast Line R.R. Co. v. Florida, 295 U.S. 301, 309-310, 55 S.Ct. 713, 79 L.Ed. 1451 (1935); Mohamed, 91 F.3d at 1126; Metro. St. Louis, 938 F.Supp. at 571.12
In Kansas City So. Ry., 279 F. 801, appellants sought the value of property sold pursuant to a later-reversed court decree. Noting that no supersedeas bond was obtained and that no objections to the sale or appeals therefrom existed, the Eighth Circuit Court of Appeals agreed with the conclusion of the trial judge that the only restitution appellants were entitled to was to apportion the purchase money received according to the parties’ interests. Id. at 804-805. “Litigants cannot be penalized for errors of the court.” Id. at 805.
In Gregg,13 the victorious appellant claimed that he was entitled to recover not only the benefits received by the appellee under the erroneous judgment, but also the value of his interest in stock which was seized and sold under the judgment, plus the expenses he incurred including costs *891and attorney fees. Rejecting this claim, the district court stated:
I have found no case in which a plaintiff, following reversal of an erroneous injunction, judgment, attachment, or other decree has received in restitution an amount greater than the value of the benefit which had been conferred upon his opponent as a result of the erroneous order.
[T]o the extent that Gregg demands restitution of what he lost in the decline of the market value of his stock as a result of the erroneous orders of this Court, without regard to the benefit which USI received, the cases do not support his position.
Gregg, 457 F.Supp. at 1298-99. The court further observed that claims for recovery above the value of the benefit received under the erroneous judgment are generally treated by courts under different standards than claims for restitution. Id., at 1299 (and cases cited therein). Notably, in order to award damages for a reversed judgment, courts generally require proof of malice or lack of probable cause in filing the original action. See id. No such proof, nor even an allegation by appellants, exists here.
Appellants complain that the liquidating trustee violated the Bankruptcy Code because he allegedly failed to sell the property in a commercially reasonable manner (e.g., he sold it at a sheriffs execution sale instead of listing the property with a broker). First, the record is devoid of any indication that this argument was raised or considered by the bankruptcy court, and we will not consider issues raised for the first time on appeal. See Wendover Fin. Servs. v. Hervey (In re Hervey), 252 B.R. 763, 767 (8th Cir. BAP 2000). Second, appellants are simply wrong. The trustee was acting under his powers as a judgment creditor, not an owner of the property. The trustee had no ownership interest in the property. The sheriff properly sold the property under Missouri’s execution laws. Had the trustee failed to execute on the property, where there was no stay pending appeal, it is likely that he may been in breach of a fiduciary duty owed to the creditors of Popkin & Stem.
There is simply no support, under either federal law or Missouri law, for awarding appellants the fair market value of the property sold nor attorney fees. Appellants assert that the result should be different here because appellants are “innocent third parties” who were deprived of their property by the trustee’s execution sale. This is a non sequitur. Appellants were on the losing end of a bankruptcy court fraudulent transfer judgment which avoided the transfer of an interest in property to them. They failed to seek a stay pending appeal nor did the seek a superse-deas bond. The record shows that the trustee, acting as a judgment creditor under a writ of execution, properly sold the property to a disinterested third party at a sheriffs sale. We hold that the bankruptcy court properly determined the correct amount of restitution to be awarded to appellants for the loss of their one-half interest in the property sold pursuant to the judgment.
CONCLUSION
The judgment of the bankruptcy court is affirmed.
. The Honorable Barry S. Schermer, United States Bankruptcy Judge for the Eastern District of Missouri.
. Blackwell v. Lurie (In re Popkin & Stern), 234 B.R. 724 (8th Cir. BAP 1999).
. Blackwell, 223 F.3d 764.
. During oral argument, appellants’ counsel claimed that he thought a stay may have been requested and denied. However, there is nothing in the record to support this claim and in fact, the record is contrary.
. Blackwell, 223 F.3d at 770.
. 228 S.W.2d 691.
. 621 S.W.2d 935.
. 228 S.W.2d 691.
. 291 Mo. 54, 236 S.W. 58 (1921).
. Therefore, unlike Missouri law which views restitution following the reversal of an erroneous judgment as a matter of right, federal law does not. Instead, federal courts will not award restitution unless the appellant shows that equity will be offended if the ap-pellee is allowed to retain what he received under the erroneous judgment. See Mohamed, 91 F.3d at 1126 (citing Atlantic Coast Line R.R. Co. v. Florida, 295 U.S. 301, 309-310, 55 S.Ct. 713, 79 L.Ed. 1451 (1935)).
. Appellants claim that the Eighth Circuit has recognized that restitution extends beyond the benefits received by the appellee, and can include compensatory damages. For this proposition, they cite Kerr v. Charles F. Vatterott & Co., 184 F.3d 938, 944 (8th Cir.1999). However, that decision has nothing to do with the issue in this case; the proper remedy to be awarded upon the reversal and remand of a judgment. The issue in Kerr involved a pension plan participant's remedies for the plan administrator’s breach of fiduciary duty. See id.
Appellants also point to the Eighth Circuit's language in remanding this case “for further proceedings ... to determine the amount of damages owed to [appellants] for the loss” of their interest in the property. See Blackwell, 223 F.3d at 770. Clearly, however, the Eighth Circuit was using the term "damages” in the generic or general sense of the word; as it is plain from Mohamed, supra, and almost 100 years of federal case law, that in the Eighth Circuit it is settled that restitution of the benefits received by the appellee under an erroneous judgment is the proper remedy. See Mohamed, 91 F.3d at 1126. Moreover, the issue of appellants' remedy upon reversal was not an issue before the court in Blackwell. See Blackwell, 223 F.3d 764.
.457 F.Supp. 1293. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493184/ | ORDER RE DEBTOR’S RECAST OBJECTION TO PROOF OF CLAIM FILED BY PHOENIX LEASING INC.
PAUL J. KILBURG, Chief Judge.
On April 26, 2001, this matter came on for hearing on Debtor’s Recast Objection to Proof of Claim. Debtor Brazelton Cedar Rapids Group, L.C. was represented by Attorney David Nadler. Attorney Thomas Tarbox appeared for Creditor Phoenix Leasing Inc. (Phoenix). Evidence was presented and arguments were heard after which the Court took the matter under advisement. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), (K).
*202
STATEMENT OF FACTS
Debtor is a hotel in the process of a reorganization under Chapter 11. During the early stages of its operation Debtor entered into a financing agreement with Phoenix whereby Phoenix would provide Debtor with a loan of $249,340.57 for the purchase of furniture and fixtures necessary for the hotel enterprise. The loan did not expressly list a specific interest rate but rather the interest was calculated into the monthly payments Debtor would make under the terms of the loan. In exchange for the loan, Debtor granted Phoenix a second mortgage on the hotel property as well as a lien on all the personal property purchased with the funds which were advanced to Debtor. Phoenix properly perfected its security interests and Debtor began making monthly payments of $6,049.00 on January 1,1999.
After a number of months Debtor began to experience difficulty in maintaining payments under the agreement. As a result of Debtor’s failure to make the full monthly payment due on May 1, 2000, and various subsequent monthly payments, Debtor went into default. Consequently, on June 15, 2000, Phoenix informed Debtor that the amount due under the loan had been accelerated. Phoenix demanded full payment of the balance plus attorney fees, costs, and all other amounts due under the agreement. Demand was also made for the return of the collateral.
Shortly after it sent Debtor notice of default and acceleration, Phoenix informed Debtor that it would be willing to reinstate the agreement only if Debtor immediately paid the outstanding balance as it existed prior to acceleration and resumed making regular monthly payments. Phoenix went on to state that the proposal to cure the default in no way affected the accelerated status of the loan until Debtor agreed to perform as requested. Further, it stated that the proposal was not a waiver of its rights to collect the accelerated amount. De-acceleration was conditioned on Debt- or’s acceptance of the terms of the proposal. Despite Phoenix’s willingness to reinstate the original terms of the agreement, Debtor did not accept the proposal nor did it attempt to make any more monthly payments.
In September, 2000, Debtor voluntarily filed for relief under Chapter 11 which effectively halted Phoenix’s efforts to collect the amounts owed to it pursuant to the agreement. Phoenix filed a claim of $293,260.58 which constituted the entire amount of the unpaid accelerated balance of the loan plus certain amounts for attorney’s fees and late fees associated with the prepetition debt. Phoenix subsequently reduced the claimed amount to $277,496.29 because it had included accruing postpetition late charges and fees that were improperly added to the balance.
Debtor objects to Phoenix’s claim asserting that the claim consists of postpetition interest, attorney fees, and penalties to which it is not entitled. Debtor also disputes the amount of interest Phoenix has charged under the acceleration provision. Further it asserts that Phoenix is not secured by the real estate because a senior secured creditor holds a claim that far exceeds the value of the property. Thus, Debtor contends Phoenix is only partially secured to the extent of the value of the personal property in which it took a security interest.
During the course of the hearing Phoenix agreed to the contention that it is not secured by the real estate due to the un-dersecured status of the senior mortgage. Phoenix is only partially secured to the extent of the value of the personal property covered in the security agreement. The only remaining issue is whether Phoenix is claiming an amount in excess of what it *203may claim pursuant to the Bankruptcy Code.
CONCLUSIONS OF LAW
If a claim filed under 11 U.S.C. § 501 comports with the procedural requirements of Bankruptcy Rule 3001, the proof of claim constitutes prima facie evidence of the validity and amount of such claim. In re Roberts, 210 B.R. 325, 328 (Bankr.N.D.Iowa 1997); Fed.R.Bankr.P. 3001(f). Unless a party in interest objects to the claim it is deemed allowed. See 11 U.S.C. § 502(a). If an objection to the claim is made, the court, after notice and a hearing, must determine the amount of the claim fixed as of the date of the petition. 11 U.S.C. § 502(b). The presumption provided by Bankruptcy Rule 3001(f) places the burden of producing evidence to rebut the presumption on the objecting party. In re Brown, 82 F.3d 801, 805 (8th Cir.1996); In re Waterman, 248 B.R. 567 (8th Cir. BAP 2000). However, once this burden of production is met, the ultimate risk of nonpersuasion as to the allowability of the claim resides with the creditor. Roberts, 210 B.R. at 328.
In this case, Phoenix filed a proper proof of claim and attached supporting documents as required by Rule 3001(c) and (d). The existence and amount of Phoenix’s claim is presumptively valid. The documents attached to the filed claim set forth the agreement upon which the claim is based. The terms of the contract provide that if Debtor defaults on the loan it is liable for attorney’s fees and penalties in connection with the default. Further, the contract contains an acceleration clause which Phoenix could choose to exercise at will.
Debtor relies on 11 U.S.C. § 502(b)(2) and asserts that Phoenix’s claim is based in part on unmatured interest and it is therefore not allowable. Phoenix counters by stating that the amount due under the contract had been accelerated several months prior to the filing of the petition in bankruptcy. Therefore, Phoenix asserts the interest included in the claim was not unmatured but rather due and owing at the time Debtor filed its petition. Furthermore, Phoenix states the attorney’s fees and penalties included in the claim arose prepetition and are properly allowable under the terms of the contract.
The existence of a claim is a question of state law. Grogan v. Garner, 498 U.S. 279, 283, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (citing Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 161, 67 S.Ct. 237, 91 L.Ed. 162 (1946)). In Iowa, acceleration of the balance of a loan is governed by Iowa Code sec. 554.1208 which states:
A term providing that one party ... may accelerate payment ... “at will” or “when the party deems itself insecure” or in words of similar import shall be construed to mean that that party shall have power to do so only if that party in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against whom the power has been exercised.
Iowa Code § 554.1208.
Debtor does not dispute that acceleration took place prior to the filing of the petition. Further, it does not allege that acceleration was in bad faith nor does it allege that Phoenix did not have a contractual right to accelerate upon Debtor’s default on the loan. Finally, Debtor has presented no evidence to rebut the claim of Phoenix that the penalties and attorney’s fees arose prepetition. This Court finds that Debtor has failed in its burden of production to rebut Phoenix’s presump*204tively valid claim. Therefore, Phoenix’s claim of $277,496.29 is allowed.
WHEREFORE, Debtor has failed to demonstrate that any part of Phoenix’s claim was improper.
FURTHER, Phoenix’s claim for the accelerated balance due under the contract, prepetition attorney’s fees, and prepetition penalties totaling $277,496.29 is allowed.
FURTHER, Phoenix is partially secured only to the extent of the personal property listed in the security agreement. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493185/ | RULING ON CERTAIN DEFENDANTS’ MOTION TO DISMISS ADVERSARY PROCEEDING FOR LACK OF PERSONAL JURISDICTION
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
ISSUE
Stephen John Williams (“Williams”), on June 14, 2000, filed in this court a Chapter 13 petition without schedules, a proposed plan, or a statement of financial affairs. On July 10, 2000, Williams filed a complaint against the Law Society of Hong Kong, Herbert Hak-Kong Tsoi, Patrick Moss, Privacy Commissioner for Personal Data, Stephen Lau Ka-men, Eric Pun, Tony Lam, Deacons, Graham & James, Kevin Bowers, Jonathan Harris and Mimi Leung, all of whom, except Graham & James,1 resided in Hong Kong (together, except for Graham & James, the “Hong Kong defendants”). The complaint seeks damages, pursuant to Bankruptcy Code § 362(h),2 for the defendants’ asserted violation of the automatic stay imposed by § 362(a) upon the filing of a bankruptcy petition.
The Hong Kong defendants have appeared by counsel and filed the instant motion to dismiss the complaint on various grounds pursuant to Fed.R.Civ.P. 12(b)(1) and (2), made applicable in bankruptcy proceedings by Fed.R.Bankr.P. 7012(b). By agreement of the appearing parties, the sole issue for decision in this ruling is whether the court lacks personal jurisdiction over the Hong Kong defendants.3 The basis for the background that follows includes the motion hearing held on April 20, 2001, and the affidavits, pleadings, briefs, and other papers filed by the parties.
II.
BACKGROUND
Williams, an attorney, then present in or a resident of Hong Kong, from December, 1998 through August, 1999, filed three separate complaints with the Hong Kong Privacy Commissioner for Personal Data (“the Commissioner”), alleging violations of Williams’ data access requests, pursuant to the Hong Kong Personal Data (Privacy) Ordinance, CAP. 486 (Def.Ex.A). He complained that three Hong Kong entities— the Law Society of Hong Kong (“the Law Society”), the Director of Immigration, and the Secretary of Security failed to provide him with the data requested in the time and manner prescribed by the ordinance. The Commissioner dismissed the complaints 4 and Williams, between October 26, 1999 and January 14, 2000, filed appeals of these rulings to the Hong Kong Administrative Appeals Board (“the AAB”). On *238May 6, 2000, Williams notified the AAB that he was abandoning all three appeals.
The Administrative Appeals Board Ordinance, CAP. 442 (Def.Ex. A), provides in relevant part:
21. Conduct of proceedings
(1) For the purposes of an appeal, the Board may—
(k) subject to section 22, make an award to any of the parties to the appeal of such sum, if any, in respect of the costs of and relating to the appeal;
22. Provision relating to cost and witness expenses
(1) The Board shall only make an award as to costs under section 21(l)(k)—
(a) against an appellant, if it is satisfied that he has conducted his case in a frivolous or vexatious manner; and
(b) against any other party to the appeal, if it is satisfied that in all the circumstances of the case it would be unjust and inequitable not to do so.
Mimi Leung, a defendant and Secretary of the AAB (“Leung”), on May 16, 2000, wrote to the Commissioner and the Law Society asking whether they sought to recover their costs. Both responded that they did seek costs and the Commissioner, on May 17, 2000, and the Law Society, on May 24, 2000, filed the required materials with the AAB. The AAB scheduled a hearing on the issue of costs for June 15, 2000 at 9:30 a.m. Leung, on May 17, 2000,
mailed to Williams at his Connecticut address a letter notifying him of the hearing and his right to appear either in person or by representative, and requiring that he file with the AAB, before June 1, 2000, a “skeleton submission” of his position. Williams neither filed the requested submission nor appeared. Instead, he filed his Chapter 13 petition and faxed a letter to defendant Kevin Bowers (“Bowers”) at Deacons, the Hong Kong law firm representing the Law Society, informing him that Williams had filed a bankruptcy petition and that, “All proceedings before the Administrative Appeals Board must be immediately discontinued. Any further action whatsoever, including even scheduling or rescheduling a matter, would be a violation of the stay.” (Ex. D, Debtor’s Letter of June 14, 2000.) The AAB held the scheduled hearing on June 15, 2000, and found that Williams “had conducted his appeals in a frivolous and vexatious manner and costs should be awarded to the Commissioner and the Law Society.” (Ex. B, AAB proceedings of June 15, 2000.) The AAB acknowledged Williams’ “letter faxed to the Board at the last minute. In this letter [Williams] tried to inhibit the Board from proceeding with the hearing of the costs applications. He cited various United States statutes seeking to warn the Board that participants in the appeal proceedings would be subject to criminal contempt proceedings. This again demonstrated that [Williams] had clearly no intention to pursue his appeals according to the law but had tried to threaten the Board.” (Id.)
Williams, when he filed the instant adversary proceeding,5 simultaneously dis*239missed his bankruptcy case without having filed the required schedules, statement of financial affairs, or a proposed Chapter 13 plan, and without having paid any portion of the filing fee for his petition.6 When asked by the court at the motion hearing why he dismissed his Chapter 13 bankruptcy case, Williams replied, “I dismissed the Chapter 13, your Honor, because, in fact, it had not worked. They had proceeded with [the AAB proceedings], and the stay had been violated. What was the point of continuing....” (Tr. at 10.)
III.
DISCUSSION
“On a Rule 12(b)(2)7 motion to dismiss for lack of personal jurisdiction, the plaintiff bears the burden of showing that the court has jurisdiction over the defendant. Prior to discovery, a plaintiff may defeat a motion to dismiss based on legally sufficient allegations of jurisdiction.” Metropolitan Life Insurance Co. v. Robertson-Ceco Corp., 84 F.3d 560, 566 (2d Cir.1996). Fed.R.Bankr.P. 7004(f) provides:
(f) Personal Jurisdiction. If the exercise of jurisdiction is consistent with the Constitution and laws of the United States, serving a summons or filing a waiver of service in accordance with this rule or the subdivisions of Rule 4 F.R.Civ.P. made applicable by these rules is effective to establish personal jurisdiction over the person of any defendant with respect to a case under the Code, or arising in or related to a case under the Code.
“To exercise personal jurisdiction over a defendant in a federal question case, a plaintiff must demonstrate that (1) bringing the defendant into federal court accords with the Fifth Amendment due process principles, and (2) the defendant is amenable to process.” See 4 Charles Alan Wright and Arthur R. Miller, Federal Practice and Procedure: Civil 2d, ¶ 1067.1 (2001 Supp.). The Hong Kong defendants do not dispute that service of the complaint upon them was in accordance with the procedures set forth in Fed.R.Bankr.P. 7004 and the applicable provisions of Fed. R.Civ.P. 4. Accordingly, the principal issue before the court, under the parties’ stipulation, is whether the exercise by this court of personal jurisdiction over the Hong Kong defendants comports with the due process requirements of the Fifth Amendment.8 See Chew v. Dietrich, 143 F.3d 24, 28 (2d Cir.1998) (Fifth Amendment due process clause applies in federal question case where defendant was served pursuant *240to Fed.R.Civ.P. 4). Although much of the decisional law concerning personal jurisdiction concerns questions of state law and the due process requirements of the Fourteenth Amendment, rather than those of the Fifth Amendment, the Second Circuit has stated that “the due process analysis is basically the same under both the Fifth and the Fourteenth Amendments. The principal difference is that under the Fifth Amendment the court can consider the defendant’s contacts throughout the United States, while under the Fourteenth Amendment only the contacts with the forum state may be considered.” Id.
The Supreme Court, in International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), held that due process requires (1) that a defendant have “sufficient contacts” with the forum to make it (2) “reasonable and just according to our traditional conception of fair play and substantial justice” for its courts to exercise personal jurisdiction over a defendant not physically present in the forum. Id. at 320, 66 S.Ct. 154. In determining whether minimum contacts exist, the court considers the relationship among the defendant, the forum, and the litigation. Chew, 143 F.3d at 28 (citing Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 775, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984)).
The due process test for personal jurisdiction has two related components: the “minimum contacts” inquiry and the “reasonableness” inquiry. The court must first determine whether the defendant has sufficient contacts with the [United States] to justify the court’s exercise of personal jurisdiction. For purposes of this initial inquiry, a distinction is made between “specific” jurisdiction and “general” jurisdiction. Specific jurisdiction exists when [the United States] exercises personal jurisdiction over a defendant in a suit arising out of or related to the defendant’s contacts with the [United States]; a court’s general jurisdiction, on the other hand, is based on the defendant’s general business contacts with the [United States] and permits a court to exercise its power in a case where the subject matter of the suit is unrelated to those contacts. Because general jurisdiction is not related to the events giving rise to the suit, courts impose a more stringent minimum contacts test, requiring the plaintiff to demonstrate the defendant’s continuous and systematic general business contacts. The second stage of the due process inquiry asks whether the assertion of general jurisdiction comports with traditional notions of fair play and substantial justice — that is, whether it is reasonable under the circumstances of the particular case.
Metropolitan Life, 84 F.3d at 567-68.
To establish the minimum contacts necessary to justify “specific” jurisdiction, the plaintiff first must show that his claim arises out of or relates to defendant’s contacts with the forum state. Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414, 104 S.Ct. 1868, 1872, 80 L.Ed.2d 404 (1984). The plaintiff must also show that the defendant “purposefully availed” himself of the privilege of doing business in the forum state and that the defendant could foresee being “haled into court” there. See World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 567, 62 L.Ed.2d 490 (1980); Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475, 105 S.Ct. 2174, 2183, 85 L.Ed.2d 528 (1985).
Chew, 143 F.3d at 28.
Williams’ complaint alleges two actions during the pendency of Williams’ bankruptcy case that he contends violated *241the automatic stay. The first was the continuation, on June 15, 2000, of the AAB proceedings in Hong Kong. The AAB proceedings concerned only matters of Hong Kong law, arose from complaints and appeals Williams filed in Hong Kong while he was in Hong Kong, and concerned conduct of the Hong Kong defendants and Williams in Hong Kong. These actions do not relate to contacts of any of the Hong Kong defendants with the United States. Accordingly, they do not give rise to specific jurisdiction and Williams therefore must show that the Hong Kong defendants’ contacts with the United States “constitute the kind of continuous and systematic general business contacts” necessary for the court to exercise general jurisdiction over their persons. Helicopteros, 466 U.S. at 416, 104 S.Ct. 1868.
The second alleged violation of the stay was Bowers’ June 19, 2000 letter, as counsel to the Law Society, informing Williams of the AAB’s decision and demanding payment. Williams alleges no contact with the United States other than mailing the letter to Williams at his Connecticut address as giving rise to the alleged violation of stay. The mailing of the letter is not sufficient to satisfy the minimum contact requirement for specific jurisdiction, since the contact with the United States arose solely from Williams’ unilateral decision to return there. See Burger King Corp. v. Rudzewicz, 471 U.S. at 474-76, 105 S.Ct. 2174 (“[A] defendant will not be haled into a jurisdiction solely' as a result of ... the unilateral activity of another party or a third person.”) (citations omitted).
The exercise of the court’s general jurisdiction, where the injury complained of did not arise from and is not related to a defendant’s contacts with the United States, requires a stronger nexus between the defendant and the United States; the defendant must have “continuous and systematic general business contacts with the United States.” Helicopteros, 466 U.S. at 416, 104 S.Ct. 1868. None of the Hong Kong defendants conducts business in or solicits business from the United States. Williams states that several partners of Deacons were educated in the United States, were admitted to practice in New York or California or previously practiced in the United States. However, in his affidavit, Bowers avers that each of the attorneys Williams refers to resides outside the United States and none has had any business contact with the United States for several years. Williams argues that the correspondence sent him via post and fax are sufficient to constitute the continuous and systematic contacts between the Hong Kong defendants and the United States. Williams has submitted and the court has reviewed such correspondence, all of which is either (1) the decision of the AAB and the notices, and copies of filings related to the AAB proceedings or (2) replies to letters Williams sent to the Hong Kong defendants. The only connection between the cited correspondence and the United States arises not from any Hong Kong defendant’s decision to “purposefully avail[ ] itself of the privilege of conducting activities in the [United States],” but from Williams’ unilateral activity in removing to the United States and, in certain instances, his requests for information from certain of the Hong Kong defendants. Burger King, 471 U.S. at 475, 105 S.Ct. 2174 (citing, inter alia, Kulko v. California Superior Court, 436 U.S. 84, 98 S.Ct. 1690, 56 L.Ed.2d 132 (1978) which held that a state court could not exercise personal jurisdiction over “a divorced husband ... whose only affiliation with the forum was created by his former spouse’s decision to settle there.”).
*242Williams also argues that Deacons, through its affiliation with the United States law firm, Graham & James, should be considered as conducting business in the United States. In his affidavit, Bowers avers that Deacons never conducted any business in the United States, either during its affiliation with Graham & James or since; that none of the partners of Graham & James were partners of Deacons and vice-versa; that Deacons never maintained any office in the United States; and that, although Deacons used the name Deacons, Graham & James prior to July 1, 2000, only Graham & James, which did not modify its name to include reference to Deacons, maintained any offices in the United States or conducted any business in the United States. The court finds that Deacons, through its former affiliation with Graham & James, did not establish the contacts with the United States necessary to confer personal jurisdiction.
Williams makes an additional argument that service in New York on a partner of Graham & James was sufficient to confer personal jurisdiction on Deacons and Bowers, and cites First American Corp. v. Price Waterhouse LLP, 154 F.3d 16 (2d Cir.1998). The court finds this authority inapposite to the present proceeding. In Price Waterhouse, a plaintiff personally served a subpoena on a partner of PW-UK (a British partnership) while he was physically present in New York. The court in Price Waterhouse stated:
“There is no dispute that Mr. Newton was a partner in PW-UK in August 1997. And ... Mr. Newton was served by hand in New York at that time.” Id. at 19.
Williams urges the court to analogize his service in New York upon Lawrence Blume, a partner of Graham & James, and find it sufficient to confer personal jurisdiction on Deacons and all of its partners. This argument lacks merit. In the present matter, Williams does not allege that any partner of Deacons was served while physically present anywhere in the United States. Furthermore, service was made after July 1, 2000, the date on which Deacons and Graham & James terminated their affiliation.
The court concludes that the contacts alleged by Williams between the Hong Kong defendants and the United States are insufficient to satisfy the “minimum contacts” prong of the due process inquiry. Although not required to do so in light of this determination, the court further concludes that Williams has also not satisfied the reasonableness inquiry required under the -due process analysis. See Metropolitan Life, 84 F.3d at 568. The circumstances recited in this opinion, including the purpose of the automatic stay,9 Williams’ response to the court at the motion hearing that he filed his bankruptcy petition solely to invoke the stay for the Hong Kong proceeding (and not, therefore, to seek debtor relief and a discharge from debt), and his dismissal of his bankruptcy case underscore the court’s conclusion that it lacks any strong interest in adjudicating this matter.10
*243IV.
CONCLUSION
In accordance with the foregoing discussion, the court concludes that it lacks personal jurisdiction over the Hong Kong defendants. The motion of the Hong Kong defendants to dismiss the adversary proceeding as to them in accordance with Fed.R.Civ.P. 12(b)(2) is granted and a judgment will so enter. It is
SO ORDERED.
. Graham & James is a United States law firm.
. 11 U.S.C. § 362(h) provides:
(h) An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.
. The court may consider the question of personal jurisdiction prior to its consideration of whether it has subject matter jurisdiction. Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 119 S.Ct. 1563, 143 L.Ed.2d 760 (1999).
. With one minor exception, not relevant to the matter at hand.
. The defendants include Kevin Bowers and Jonathan Harris, attorneys in the law firm Deacons, who represented the Law Society; the Law Society of Hong Kong, a corporation; Patrick Moss, general secretary of the Law Society; Herbert Hak-Kong Tsoi, president of the Law Society; the Privacy Commissioner for Personal Data, a corporation with certain duties and powers prescribed under Hong Kong ordinance; Stephen Lau Ka-men, the *239appointed Commissioner at all times relevant to this proceeding; Eric Pun, an attorney employed by the Commissioner; Tony Lam, an employee of the Commissioner; Deacons, a Hong Kong law firm with offices in Asia and Australia; Graham & James, a United States law firm associated with Deacons prior to July 1, 2000; and Mimi Leung, an employee of the Hong Kong government who is Secretary to the AAB.
.Williams had received permission to pay the filing fee of $185 in instalments with the first instalment due July 14, 2000. The full amount of the filing fee became due upon the dismissal of the bankruptcy case, and remains unpaid.
. Fed.R.Civ.P. 12(b)(2) provides that a defense of "lack of jurisdiction over the person” may be made by motion.
. Although the position was created and empowered by Hong Kong ordinance, the Commissioner does not have governmental immunity from the jurisdiction of the court: See Ord. CAP. 486 (Def.Ex.A) (Commissioner is a corporation "capable of suing and being sued,” § 5(2)(b), and the Commissioner "shall not be regarded as a servant or agent of the Government or as enjoying any status, immunity or privilege of the Government,” § 5(8)).
. The automatic stay is intended to provide a breathing spell to debtors and to prevent dissipation of estate assets. See H.R. No. 95-595, 95th Cong., 1st Sess. 340-42 (1977); S.R. No. 95-989, 95th Cong., 2d Sess. 49-51 (1978), U.S.Code & Admin.News 1978, pp. 5963, 5787.
. The interest of the forum in adjudicating the matter at issue is one of the five factors enumerated in Metropolitan Life, 84 F.3d at 568, in addition to (1) the burden on the defendant, (2) convenient, effective relief for the debtor; (3) interest of the judicial system; and (4) substantive social policies. The court has considered each of these factors and finds *243the scales tipped considerably in favor of the Hong Kong defendants. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493186/ | DECISION AND ORDER ON PRIORITY AND EXTENT OF LIENS
JEROME FELLER, Bankruptcy Judge.
Before the Court is a motion for summary judgment by Martin Altchek, as Trustee for the Martin Altchek, M.D., P.C., 401K Pension Plan, F/B/O Martin Altchek, (“Altchek”) for the relief sought in his counterclaim. In essence, Altchek seeks a declaratory judgment, declaring the priorities between the plaintiffs, Allied Capital Corporation and Business Mortgage Investors, Inc. (collectively “Allied”) and the defendants, Altchek and RPT Metro Equities Limited Partnership (“RPT”) (collectively the “Defendants”), to be as set forth in the Amended Plan of Reorganization (the “Plan”), confirmed by this Court on August 31, 1994 and related documents. After the debtor’s (the “Debtor”) default, according to Altchek, the priority of payment ahead of his subordinated debt is a specific and capped sum of $1,600,000, without interest, fees and other charges. After payment of a monetary amount, which is in dispute, to Allied, who is an assignee of RPT’s senior secured claim, it is conceded by all parties that RPT’s small second mortgage obtained for real estate tax advances after confirmation of the Plan and not assigned to Allied maintains a second priority, followed by Altehek’s third mortgage, followed by payment of the balance of Allied’s claim. Allied has cross-moved for partial summary judgment, for the relief sought in Count One of its complaint for declaratory judgment and for this Court to determine, as well, the priority and extent of its liens. Specifically, Allied requests this Court to find that Allied’s right to interest, fees and costs with respect to its $1.6 million priority claim is senior to Altchek’s rights as a junior lienholder.
FACTS AND PROCEDURE
Upon review of the pleadings, submissions, affidavits, and exhibits filed, the following material and relevant facts are found not to be in dispute.
On August 31, 1994, this Court confirmed the Debtor’s Plan in its first Chapter 11 case. Under the Plan, RPT agreed with the Debtor that notwithstanding RPT’s first priority secured claim of more than $3 million, it would subordinate to Altchek that portion of its secured claim that exceeded $2,000,000. Altchek, in turn, agreed to lend the Debtor on a secured basis $675,000 and to subordinate such loan to RPT’s first priority claim. Accordingly, the Plan contains the following relevant language with respect to the order of priority between RPT and Alt-chek:
“The order of priority and payment in the event of a default and failure to cure shall be as follows:
(a) $2,000,000 of RPT’s Secured Claim less any payments made to RPT pursuant to the Plan;
*254(b) Subordinate Loan by Dr. Altehek less any payments made pursuant to the Plan; and
(c) Balance of RPT Secured Claim.”
(Altehek Exhibit A at 8).1
The Plan provided the Debtor with two alternatives for satisfying RPT’s restructured first priority $2 million lien: (1) pay RPT $1.8 million within ten days of entry of the confirmation order; or (2) reduce RPT’s restructured first priority $2 million claim by $400,000 within fifteen days of the effective date of the Plan, and repay RPT’s remaining debt through monthly payments of interest for four years with a balloon payment of $1.6 million at maturity. (Alt-ehek Ex. A at 7-8). The Debtor elected the second option, and in September 1994, reduced RPT’s restructured first priority claim of $2 million to $1.6 million by the payment of $400,000.
Further, under the Plan, the Debtor agreed that it would execute the “RPT Restated Loan Document in form and substance satisfactory to RPT.” {Id. at 11). RPT’s secured claim, which includes both the first priority portion and the portion to be junior to Altchek’s subordinated loan, is defined in the Plan as the “RPT Restated Secured Claim.” {Id. at 5, 11). In September 1994, RPT restated its mortgage (the “RPT Mortgage”) to conform to the Plan. (Altehek Ex. D).2 The RPT Mortgage contains the following relevant language: “Notwithstanding anything to the contrary contained herein, upon the occurrence of an Event of Default and acceleration of the maturity, the priority of repayment of the Debt and Permitted Subordinate Financing shall be as follows:
(i) first, $2,000,000 to Mortgagee less principal payments made under this Agreement;
(ii) second, Permitted Subordinate Financing less principal payments made under the Subordinate Debt Instruments; and
(iii) third, the balance of the Debt.”
(Altehek Ex. D at 21).3
Unlike the wording of the Plan, the RPT Mortgage expressly provided (i) that only principal payments made under the RPT Mortgage would reduce the senior portion of the restructured RPT loan and (ii) any *255payments, whether before or after the Debtor’s default, shall in the mortgagee’s “sole discretion” be applied first to the payment of interest and other costs and charges due, and the balance applied toward the reduction of the principal sum. (Altchek Ex. D at 4). Prepayments, under the RPT Mortgage, whether before or after default, also required the payment of all accrued and unpaid interest, fees, and charges. (Id. at 12,14-15).
The RPT Mortgage “spread, coordinated, combined, consolidated, modified, amended and restated pursuant to the provisions hereof’ all of the prior notes and mortgages held by RPT, (Altchek Ex. D at 1), was incorporated into the Plan. (Alt-cheks’s Ex. A at 5, 7-8, 11). In addition, the RPT Mortgage set forth the Debtor and RPT’s agreement “to modify the time and manner of payment and the terms and provisions of the [prior] Notes and the [prior] Mortgages.” (Id.).4
Allied took the RPT Mortgage by assignment dated March 24, 1995. (Altchek Ex. E). The Debtor defaulted in its mortgage payments to Altchek and, in May 1997, Altchek commenced a state court mortgage foreclosure action. Allied declared a default under its mortgage by letter dated December 8, 1997. (Altchek Ex. F). The Debtor filed its second Chapter 11 petition on July 2, 1998; it was dismissed in January 1999. This Chapter 11 case, the Debtor’s third reorganization effort was filed on July 12, 2000.
On October 2, 2000, Allied filed the instant adversary proceeding seeking a declaratory judgment that its first priority claim includes the unsubordinated principal balance of $1.6 million, plus interest, attorneys’ fees, late charges, and other costs that have accrued or were incurred. On November 2, 2000, Altchek answered the complaint and counterclaimed, requesting a declaratory judgment’that Allied’s priority is fixed at the sum of $1.6 million, less those monies paid by the Debtor or by the state court receiver from the Debtor’s property post-default.5 Both parties concede that RPT’s small second mortgage that was not assigned to Allied, maintains a second priority in payment, followed by the Altchek mortgage, and finally the balance of Allied’s claim.
Altchek and Allied then moved and cross-moved, respectively, for summary judgment based on their respective pleadings, submissions, affidavits, and exhibits. On February 27, 2001, the Court heard oral argument as to whether Allied is entitled to, as a first priority, interest, fees, and costs with respect to its $1.6 million claim.
ANALYSIS
The crux of Altchek’s gripe is that Allied claims it is entitled to be paid, as a first priority, a sum greater than that given precedence under the Plan and the RPT Mortgage. He thus requests this Court to limit Allied to the agreed priority specified in the aforementioned documents. According to Altchek, Allied is free to apply its post-default collections any way it chooses, i.e., to reduce principal or as interest, provided that after receiving *256$1,600,000, the next payments go to RPT and then Altchek. However, Altchek concludes that because Allied has received the sum of approximately $356,650, since default, Allied is only entitled to some $1,243,350 before payments are due to RPT and Altchek on their debts.6 In other words, Altchek’s position is that the post-default payments must reduce principal as opposed to being applied to interest.7
While Allied agrees that the Plan “was poorly worded” insofar as it uses the words “less any payments” as opposed to “less principal payments,” Allied construes “any payments” to per force mean “principal payments” and that both parties necessarily so intended. Allied further points out that the RPT Mortgage references the $2 million to the mortgagee less “principal payments” and that Allied relied upon the express terms of the recorded RPT Mortgage. Moreover, Allied argues that unlike the wording of the Plan, the RPT Mortgage expressly provides that only principal payments reduce the senior portion of the RPT loan and that payments, whether before or after the Debtor’s default, shall in the mortgagee’s sole discretion be applied first to the payment of interest and other costs and charges and the balance applied towards the reduction of the principal sum. Therefore, according to Allied, its priority right to payment of all principal, interest and charges on its $1.6 million senior claim, over Altchek’s subordinate loan, is unmistakenly and unambiguously provided for in the loan documents Allied acquired from RPT. In further support of its position, Allied suggests that the priority provision of the Plan was not written for the purpose of “capping the number.” (Tr. at 25). Instead, it was written to set forth what would occur in the event the waived part of RPT’s claim was to be resuscitated. (Id.).8
*257Upon consideration of all the evidence and argument submitted, we find that the RPT Mortgage expressly provided that RPT or its successor, Allied, has the right to first apply payments to interest, fees and charges, on its senior loan, whether before or after default, and that a fair reading of the Plan is consistent with Allied’s interpretation. We disagree with Altchek’s stance for it strains credulity to believe that the parties could have intended that upon default the senior loan becomes frozen, and that only after Altchek’s expanding debt, including all interest and charges, are paid in full, would the first priority lender have any chance to recover its interest, fees and costs.9 Under closer scrutiny, Altchek’s stance is even more untenable. As post-default payments are applied only to principal, there is an ever decreasing principal balance upon which to accrue interest. Thus, interest is not simply subordinated-it disappears.10 Such a result is antithetical to the usual and customary practices in the lending industry. See, e.g., Spang Industries, Inc. v. Aetna Casualty & Surety Co., 512 F.2d 365, 371 (2d Cir.1975), citing Ohio Savings Bank & Trust Co. v. Willys Corp., 8 F.2d 463, 466-67 (2d Cir.1925) (when partial payments have been made, the payment must be applied first to the interest then due, with the surplus discharging the principal pro tanto); Matter of Froehlich’s Estate, 98 Misc.2d 1, 416 N.Y.S.2d 744 (N.Y.Sur.1979) (normal rule between debtor and creditor is that a payment is applied first to interest and then to principal).11
Although the Plan is not very clear, the RPT Mortgage, which was incorporated into the Plan, unambiguously provides that the priority between the RPT loan and Altchek’s “Permitted Subordinate Financing” placed as first, “$2,000,000 ... less principal payments under this Agreement.” We believe that the RPT Mortgage is consistent with the Plan and that proponents of both the Plan and RPT Mortgage, as a matter of course, intended to reduce RPT or its successor, Allied’s, senior loan only by principal payments made pursuant to the Plan.12
A common sense reading of the document supports Allied’s view that the Plan’s use of the phrase “less any payments made to RPT pursuant to the Plan” necessarily means principal payments for the following reasons. First, the only principal payments “pursuant to the Plan” were the initial payment of $400,000, reducing RPT’s $2 million senior loan to $1.6 mil*258lion, and the balloon payment of the $1.6 million at maturity forty-eight months later. On the other hand, upon default, the entire RPT loan became due. All further payments occurred after acceleration and were either incident to the foreclosure action or after the Debtor’s second and third Chapter 11 cases under cash collateral orders and not “pursuant to the Plan.” Similarly, interest payments “pursuant to the Plan” ceased after acceleration. Interest accrued. It simply was not paid or payable “pursuant to the Plan.”
Therefore, this Court finds that payments “pursuant to the Plan” means the initial payment of $400,000, monthly pre-default interest payments and the $1.6 million balloon payment. After default and acceleration, no payments are “pursuant to the Plan.” Nothing reduces Allied’s senior loan except principal payments. Moreover, Allied, like any other lender, is entitled to its interest, fees and charges as part of its senior loan, as it is ordinary and customary for interest, fees, and other charges to accrue and be paid prior to principal upon default. Indeed, the RPT Mortgage expressly provided for the payment of all accrued and unpaid interest, fees, and charges.
Altchek’s stance is implausible for other reasons and creates anomalous results. RPT was a senior lender and did not surrender that status under the Plan. Under the Plan, RPT merely agreed that, in the event of default, it would subordinate a portion of its debt to Altchek. Altchek is and always was a subordinate lender. Not surprisingly, under the Plan, RPT was to be paid 6% to 9% interest per annum, while Altchek was to receive interest at 11% and up to 50% of stock in the Debt- or.13 Common sense dictates that a subordinate loan carries a higher interest rate than a senior loan to compensate for the increased risk. However, under Altchek’s exposition, the real world is turned topsy turvy and it is the senior lender, RPT, that bear’s the lion’s share of the risk. According to Altchek, upon default, RPT’s senior debt is frozen, while Altchek’s subordinate debt continues to grow. Only after Alt-chek’s expanding debt, increased by interest and other charges, is paid in fall, would the senior lender have any opportunity to recoup interest, fees and costs. The end result, if Altchek is correct, is that Altchek as subordinated lender, assumes substantially less risk than RPT (now Allied) and, in effect, is paid a premium for not taking such a risk. Indeed, under Altchek’s theory, the longer it takes and the more fees and costs Allied must expend to realize on its senior loan, the less Allied recovers. At the same time, Altchek receives more. Such bizarre consequences defy logic and could not have been intended by the parties.
Our ruling is reinforced by the conduct of the parties. While Allied declared a default by the Debtor back in December 1997, the record shows that it was only after the filing of the Debtor’s second Chapter 11 case in 1998 that Altchek articulated any disagreement with the RPT’s Mortgage provisions that the first priority lien would be reduced only by principal payments. It was then that Altchek contended that the senior loan must be reduced by any post-default collections and that, after default and acceleration, Alt-chek’s subordinate loan was to have priority over all interest, fees and charges due under the RPT Mortgage. Furthermore, *259Altchek took positions in proceedings before this Court inconsistent with the position he now asserts. In the Debtor’s second Chapter H case, filed on July 2, 1998, Altchek quickly moved to prohibit the Debtor from using cash collateral and for other relief. (Altchek Ex. G; see Allied Ex. 2).14 In his motion, Altchek identified Allied’s Senior Loan as being $1,680,000, not $1,600,000. (Allied Ex. 2 at 2). This sum includes $80,000 in accrued but unpaid interest and charges. (Id. at 10; Tr. 41-43). If Altchek believed that Allied’s interest, fees and costs did not have priority over his loan, Altchek would not have reflected Allied’s Senior Loan as exceeding $1.6 million.15
Thereafter, the Debtor filed a motion, dated August 21, 1998, for approval of its use of cash collateral in accordance with a proposed Stipulation and Order (“Stipulation”) entered into by the Debtor and Allied. (Grant Ex. 1). In his brief, Altchek contends that the issue of Allied’s entitlement to priority for post-default interest, fees and costs was not raised by Altchek at that time. (Brief Supporting Altchek’s Motion For Summary Judgment at 6 — 7). However, Altchek did implicitly broadcast his views regarding the issue of Allied’s priority entitlement to interest, fees and charges. Altchek initially stated in his objection to the Stipulation: “Contrary to Plan’s [Altchek’s] entitlement as a secured creditor, the Debtor proposes that it will not provide adequate protection to Plan [ie., Altchek] until the Debtor’s pre-petition arrearages (i.e., interest payments) to Allied and RPT are brought current.” (Grant Ex. 2 at 3). Later, Altchek conceded that he was “agreeable to allowing the Cash Collateral to be used to service the interest requirements on the Allied, RPT and Plan [ie., Altchek] liens.” (Id. at 10). Thus, Altchek apparently had no objection to the payment of Allied’s post-petition interest.
At the September 8, 1998 hearing relating to the Stipulation for use of cash collateral, Allied’s counsel advised that Altchek’s objections were addressed by certain amendments:
The two modifications are, first, that Allied is not looking to be paid ahead of the doctor for any amounts which are indeed subordinate to Dr. Altchek, which he complained that the stipulation was unclear, that as to the (sic) what portion of Allied’s first secured position was going to receive interest payments ahead of him.
While Allied has a 2.6 million, or 2.7 million claim only 1.680 million, approximately, is ahead of the Doctor and where we say that the debtor will pay Allied its interest, we want to make it clear it’s only as to that portion which is indeed superior to Dr. Altchek.
(Grant Ex. 3 at 6).
Altchek’s counsel then spoke.16 He agreed that cash collateral could be used to make “mortgage payments on the first mortgage.” (Id. at 8).17 Altchek argued, *260that only Allied’s current monthly interest obligations should be paid and that Allied’s arrearages await payment under a plan or upon liquidation. (Id. at 9). Altchek’s counsel objected to the payment of accrued and unpaid interest, fees and charges on the grounds that they were pre-petition arrearages and not because of a subordination to Altchek’s loan. (Id). In response to an inquiry as to why Allied should not collect its arrearages, Altchek’s counsel never suggested, as his new counsel now does, that Allied had no priority over Alt-chek’s loan.18 (Id). Thus, it was not until long after default that Altchek seized upon his current interpretation of the Plan and the RPT Mortgage.19
CONCLUSION
For all of the foregoing reasons, Allied’s first priority claim consists of the principal balance of $1.6 million, plus interest, attorneys’ fees, late charges and other costs and expenses accruing or incurred with respect to the $1.6 million of senior debt, and that all such amounts have priority over any and all amount owing under the Altchek mortgage.
Consequently, Allied’s cross-motion for summary judgment for the relief sought in Count One of its complaint is granted and Altchek’s motion for summary judgment is denied. Concomitantly, this adversary proceeding is dismissed.
IT IS SO ORDERED.
. The Exhibits appended to Altchek’s Affidavit are referred to as "Altehek Ex.;" the Exhibits appended to Allied’s counsel, Daniel M. Litt's Affidavit, are designated as "Allied Ex.;” and the Exhibits appended to John B. Grant, Jr.’s Affidavit are referred to as "Grant Ex.” John B. Grant, Jr. is Altchek's counsel.
. The RPT Mortgage doubled as both the restated promissory note and the restated mortgage. No new promissory note was prepared or executed. See Affidavit of J. Blaine Atkis-son, dated December 6, 2000. J. Blaine At-kisson is a Vice-President of Allied.
. The Plan’s payment priorities upon default were also described in an Amended Disclosure Statement (Altehek Ex. I) and a Second Amended Payment Agreement between RPT and the Debtor (Altehek Ex. C).
The Amended Disclosure Statement, dated July 13, 1994, described the priority upon default as follows; "... In the event of a default, RPT shall have a first priority for payment up to $2,000,000 less any payments made in accordance with the Plan.” (Altehek Ex. I at 9).
The Second Amended Payment Agreement, dated July 14, 1994, also contained the agreed priority; "If prior to payment in full of the then owing Obligation to RPT Metro, the Debtor defaults in any payments to RPT Metro, without curing such default in the applicable cure period, then all amounts owing to RPT Metro prior to the effectiveness of this agreement (an amount currently in excess of $3 Million) shall be due and owing RPT Metro (less any payments from the date hereof), except that the Permitted Subordinate Lien [Altchek’s mortgage] shall be senior in right and entitlement to any sum in excess of $2,000,000 less any payments from the day hereof.” (Altehek Ex. C at 6).
. Concurrent with the preparation and circulation of the RPT Mortgage, RPT prepared and circulated a Subordination and Intercre-ditor Agreement (the "Subordination Agreement”) to be executed by Altchek and RPT. (Allied Ex. 1). The Subordination Agreement was not signed by the aforementioned parties, (Id.; see Affidavit of Daniel M. Litt, sworn to December 6, 2000), and the record is devoid of any definitive explanation for its non-execution.
. February 27, 2001 Transcript, p. 7. Hereinafter, all references to the transcript will be designated "Tr.”
. Particularly perturbing to the Court were Altchek’s counsel's attempts, in his submissions and oral argument, to obfuscate the issue. See, e.g., Brief Supporting Altchek’s Motion For Summary Judgment at 5, 9-10; Reply Brief Supporting Altchek’s Motion For Summary Judgment And Opposing Allied And BMI’s Cross-Motion at 6-7; Tr. at 15-17; Tr. at 20-22; Tr. at 78-80. For example, when queried as to whether, under Altchek’s interpretation, a default would result in a "process of consistent erosion” for Allied, Altchek’s counsel’s response was "That’s correct. Well, no. Consistent erosion by being paid. Their first priority in that gets paid. It goes down as it gets paid... Whatever you want to call it. Interest gets paid. So the rest of it is subordinate.” (Tr. at 78-79).
. At oral argument, Altchek’s attorney explained the motivation for Altchek’s position as follows: "When he [Allied’s attorney] talked to you about the equity cushion, he says that the debtor estimated the value of the property at 2.3 [million dollars]. The amount that would be paid down would leave about 675[,000]-700[,000] to cover the Altchek principal amount. It would be precisely for that reason that Dr. Altchek would not want that number in front of him to grow. Because that's what Allied argues. Notwithstanding the absence of language in the agreement to this effect, it grows from 1.6 [million] plus interest plus default fees plus late charges plus attorneys' fees. And according to them, it's up to $2.2 million now.” (Tr. at 77).
.Under the Plan, if the Debtor made all of the payments due on the priority portion of RPT's claim, the subordinate portion disappears. (Altchek Ex. A at 7-8). However, as Allied correctly points out, in the event the Debtor defaults in its payment obligations to RPT on the priority portion and such default is not cured, the full RPT secured claim of over $3 million shall become due. (Id. at 8; Tr. at 28). The Plan then provides for the aforementioned order of priority. (Altchek Ex. A at 8; Tr. at 28). Thus, Allied argues that the priority provision was written for the express purpose of assuring Altchek that upon the resurrection of RPT’s entire secured claim, any sum due in excess of RPT's prioritized portion would not "jump” ahead of Alt-chek’s claim. (Tr. at 28-29).
. Under Altchek’s unusual theory, interest payments made prior to default do not reduce principal; but upon default, when no payment is made pursuant to the Plan, interest payments made must reduce the principal balance.
. See Crane v. Craig, 230 N.Y. 452, 130 N.E. 609 (1921) (where interest is not payable by the terms of the contract but is allowable as a mere incident to it, receipt of the principal bars a subsequent claim for interest since the debt is extinguished by the payment of the principal).
. The practice of applying monies first to interest and then to principal dates as far back as the eighteenth century. See Penrose v. Hart, 1 U.S.(Dall) 378, 1 L.Ed. 185 (1788).
.For the Court to rule otherwise, there should have been express language in the Plan and the RPT Mortgage, i.e., that RPT would be paid the finite sum of $1.6 million as a first priority and that all post-default payments must reduce the principal or, at least, extrinsic evidence to show this non-conventional practice. Such an express provision or extrinsic evidence to that effect is warranted as case law shows that this manner of payment is clearly not customary or usual in the lending industry. See Spang Industries, Inc., supra, and cases cited therein. Altchek failed to produce extrinsic proof to support his position.
.. According to Allied, "Altchek later described this as raising his effective annual interest rate to 17%.” Brief In Support Of Allied And BMI’s Cross-Motion For Partial Summary Judgment And Opposition to Alt-chek’s Motion for Summary Judgment at 14 n. 5. Altchek does not dispute this valuation.
. The Court takes judicial notice of the documents filed which relate to or object to the Debtor’s use of cash collateral in this earlier Chapter 11 case. (Allied Exs. 2 & 3; Grant Ex. 4).
. Noteworthy is that the receiver appointed by the state court at the request of Altchek made five "mortgage payments ... on the first mortgage" to Allied without any objection by Altchek or claim that such payments should have reduced Allied's principal claim. (See Receiver's Report to Grant Ex. 7).
. At the time, Altchek was represented by Angel & Frankel, P.C.
. Since "mortgage payments" were interest-only payments, Altchek was tacitly acknowledging that after default, Allied’s interest payments had priority over Altchek's subordinate loan.
. After further argument, the Court held that "the stipulation provides for the payment over to the secured creditors of excess sums in accordance with the order of their contractual priorities.'' (Id. at 19-20). Furthermore, the modifications to the Stipulation and Order made clear that Allied shall be paid all excess income until "Allied's accrued and unpaid interest, charges and fees on its first secured claim in the approximate amount of $1,680,000 are brought current.” (Grant Ex. 4 at 7). In appealing the Court’s order to the District Court, Altchek again objected to the payment of the pre-petition interest and expense arrearages to Allied. (See Allied Ex. 3 — Appellant's Brief on Appeal). Thus, on appeal, Altchek again implicitly conceded that post-petition interest payments to Allied had priority over Altchek. (Id. at 8).
. While the Court has taken judicial notice of the documents filed with respect to the aforementioned cash collateral motion to support its finding that Altchek’s current position is inconsistent with Altchek’s previous conduct, it cannot conclude, as Allied urges, that Altchek’s actions and statements in the prior proceeding should have preclusive effect based on collateral estoppel. See Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979); Rupert v. Krautheimer (In re Krautheimer), 210 B.R. 37 (Bankr.S.D.N.Y.1997) (collateral estoppel treats as final only those questions actually and necessarily decided and fully and fairly litigated in a prior proceeding). In the instant matter, Allied’s entitlement to post-default interest, fees and other charges was neither necessarily decided or fully litigated in any prior proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493187/ | BACKGROUND
MICHAEL J. KAPLAN, Bankruptcy Judge.
This is a Creditors Committee challenge to a business broker’s claim that its “finder’s fee” is entitled to payment out of proceeds of the sale to the buyer it produced. The sale was' post-petition. The production of the buyer was pre-petition. The Committee seeks to relegate the “finder” to general, unsecured, prepetition status.
Although both the brokerage agreement and the purchase and sale agreement contemplated payment of the fee upon closing, the Court permitted the sale to go ahead without payment to the finder, but “without prejudice” to the finder’s rights.1
This matter directly asks “what does that mean?” The Court holds that qualifiers like “without prejudice to,” “subject to the rights of,” “with reservation of,” etc. may have very distinct and different meanings. “Without prejudice to” party X does not necessarily mean “without prejudice to *269the rights of X, such as they are, and such as a later objector might later establish X’s rights to be.” It may at times be error for the court to permit irreversible matters to go forward “without prejudice to” party X, without clearly stating that “this means without prejudice also to adverse interests who might later think up ways to challenge your claim, after the ‘heat is off.’ ” And if that error is made, it may be inequitable for the Court to correct the error (perhaps even if the error was elicited by clever counsel).
It is useful to consider first a non-analogous context that highlights a certain quandary. This writer wrote for the Panel in the B.A.P. decision in In re Pappas, 215 B.R. 646 (2nd Cir. BAP 1998). In that case a creditor sought an extension of time to file a dischargeability complaint and the request was granted. The debtor then sought and was granted leave to appeal that interlocutory decision. He did not, however, seek to stay the extension ruling pending appeal. By the time the appeal was heard, the creditor had filed a complaint that was “timely” under the extension that was argued to have been erroneously granted.
The Panel dismissed the appeal as “equitably moot.” No fair relief could be granted to the debtor/appellant if he were to prevail. He was seeking the striking of the dischargeability complaint, but that relief could not fairly be granted because the creditor/appellee had simply relied on an order that was not stayed.
Now the important point, for purposes of the present case. If the B.A.P. had ruled in the debtor’s favor on the merits but had not adopted the “equitable mootness” standard, and had granted the relief sought — striking of the “late-filed” complaint — the creditor would have ended up worse off than if it had lost the original request to extend the time to file the complaint. Had it lost, it could have asked for just an hour in which to immediately file the complaint, for example.
When a creditor is ruled against on some issues in a bankruptcy case, it often has a panoply of rights in addition to the usual rights to seek review and to seek stay pending review. A creditor may object to proposed dispositions of property, may object to the claims of others (or seek to subordinate specific other claims), may seek to remove a debtor from management and control of assets, etc. Brinksmanship sometimes yields positive results.
But what does a creditor do if the Court says, “Don’t worry. I will let this go forward “Without Prejudice’ to your rights?”
In the Pappas case, what was the successful creditor to have done once it succeeded in getting the time extended? Was it supposed to file a new Motion asking “Do you really mean it, Your Honor? Are we really safe if we file a Complaint before the date you set even though the Debtor says he’s going to seek review?”
In the present case, what was the finder to do? Was it to say, “Do you really mean it? Might we be better off with a ruling that says that our claim of a right to be paid at closing is ‘rejected’? Is your ruling ‘Without Prejudice’ only to us, or is it ‘Without Prejudice’ to anybody who shows up later to take potshots at our claim?”
Hence this writer offers the suggestion that sometimes a party suffers what might be called “the curse of the ruling that is not clearly adverse.”
Given the high quality of representation in any given case (this case included) a court cannot rule-out the possibility that a willingness to accept a “without-prejudice” ruling might be a tactic to parlay such willingness into an eventual “win” from an otherwise losing cause.
*270This writer accepts that possibility and, as explained below, will endeavor not to repeat any mistake that otherwise might be ennobled by the result here. In the future it will be made clear whether or not “without prejudice” means not only “without prejudice to you, the claimant,” but also (in a particular context) “without prejudice to any objections to your claim that someone not currently in court might later raise.”
“EQUITABLE LIEN” ANALYSIS REQUIRES RULING FOR THE “FINDER”
As noted at the outset, the “finder” produced the buyer; the Chapter 11 petition followed; the Court permitted the sale to go ahead “without prejudice” to the “finder’s” claim for the contractual fee, which otherwise was to have been paid “on closing.” The “finder” never suggested that it would not accept such a ruling, as explained below.
The “finder” is Gottesman Company.2 At page 14 of Gottesman’s “Brief in Support of the Imposition ...,” it cites a New Jersey bankruptcy case (In re L.D. Patella Construction Corp., 114 B.R. 53 (Bankr.D.N.J.1990)) as persuasive authority for the granting of an equitable lien in favor of a pre-petition broker. That decision in turn cites two other New Jersey cases. In the case of Cohen v. Estate of Sheridan, 218 N.J.Super. 565, 528 A.2d 101 (1987), a lower New Jersey State Court analyzed an earlier New Jersey Supreme Court decision in the case of Ellsworth Dobbs, Inc. v. Johnson, 50 N.J. 528, 236 A.2d 843 (1967) holding unequivocally that at common law, the right of a real estate broker to a commission to be paid at closing is entitled to the protection of an equitable lien on the property of the seller until closing (to protect against any unscrupulous activity on the part of the seller) and, after closing, to an equitable lien on the fund that is owed to the seller.
The common law principle from which this flows is the maxim that
[EJquity regards as done that which ought to be done in fairness and good conscience ... [Ejquity will treat the subject matter, as to collateral consequences and incidents, in the same manner as if the final acts contemplated by the parties had been executed exactly as they ought to have been.... [T]he court has the power to compel the parties to do that which ought to be done and which was contemplated by the parties at the time of the transaction.
Equity imputes an intention to fulfill an obligation. Where an obligation to perform an act rests on one who has the means of performing it, that person will be presumed to intend to perform through such means, and usually will not be permitted to show the contrary.3 [emphasis added]
Of course, bankruptcy did not exist at common law and so common law does not address the arguments that creditors of “that person” might make. Even so, these persuasive authorities may be a sufficient basis upon which to recognize an equitable lien where, as here, there is no dispute that in fact the “finder” was responsible for the creating of the fund (as opposed to the case, for example, of a mere “exclusive sale” listing in which a listing broker did not in fact produce the buyer).
*271But this Court '«'ill not rest on those grounds.4 Rather, the Court prefers to rule under recognized principles of New York Law as applied to this unusual case. This Court finds that the elements necessary to establish an equitable lien in favor of Gottesman under New York Law all arose after, not before, the Chapter 11 filing of RAMA.5 And Gottesman is correct in pointing out that the Creditors’ Committee’s arguments based on such provisions of the Bankruptcy Code as § 365, § 327, and on cases such as In re Keren Limited, Partnership, 189 F.3d 86 (2nd Cir.1999) are irrelevant. An encumbrance on property of the estate or upon proceeds of property of the estate is precisely that — an encumbrance. Whether the encumbrance is a pre-petition encumbrance or an encumbrance granted by the Court post-petition, such encumbrances have nothing to do with the assumption or rejection of executory contracts under § 365, the appointment of professionals to represent the estate under § 327, or allowance of administrative expenses under § 503.
Day in and day out this Court grants encumbrances of various sorts to various parties upon property of the estate. It is done to provide “adequate protection” under § 361, for example. It is done to permit sales free and clear of liens, with liens to be shifted to other property, under § 363. It is done when other Code provisions require it to be done, such as Code provisions governing confirmation of plans.
The thrust of the Committee’s argument in these regards is that the only way that a pre-petition unsecured creditor can acquire a post-petition lien or elevate its status to administrative expense status is through the operation of the provisions that the Creditors Committee cites and under the cases that the Creditors Committee has elected to discuss. This thrust is rejected.
When this Court approved the sale in this case, it did so under 11 U.S.C. § 105 and § 363. Under 11 U.S.C. § 105(a) this Court may issue “any order, process, or judgment that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code, and this Court finds that the quid pro quo for an equitable lien under New York Law inexorably emerged from the unusual process this case followed after its filing. Under the imprimatur of this Court, there arose “an express or implied [arrangement] concerning specific property wherein there [was] a clear intent [among] the parties that such property be held, given, or transferred as security for an obligation.”6
At the time that the Court approved this process, the Court was not aware that the Gottesman claim could be disputed in any regard other than computation of amount and allocation as among the Debtor and several non-debtor affiliates. Indeed, in an in-chambers conference in which the body of unsecured creditors was presented *272by the Assistant U.S. Trustee, this writer asked why the sale should not proceed under § 365, and was told by Debtor’s counsel that it was thought to be unwise to proceed under § 365 because if, for any reason, the Debtor could not perform after assumption, the Buyer’s damage claims would become an administrative expense. There was no hint or suggestion from anyone present that the § 365 route was thrown out so as not to risk being compelled to assume the Gottesman agreement as part of the “package.”7 This was important. It is well known that this writer has a long-standing custom and practice of making sure that a “broker” is not “stiffed” by a bankruptcy process that permits others to reap the fruits of her labors. The usual procedure is a debtor’s or trustee’s Motion not only to sell property but also to pay the broker’s fee or finder’s fee as a “closing cost.” This writer constantly approves these as “tantamount” to a § 365 assumption of the brokerage agreement, or as “tantamount” to recognition of an equitable lien or other charge upon the property.
With benefit of 20-20 hindsight, this Court should not have presumed in the present case that all of the conceivable challenges were “on the table,” and should not have permitted the completion of the Asset Purchase Agreement without first addressing § 365 and § 327 and any other pertinent statutes. But the fact that the Court may have erred does not mean that Gottesman loses. The Court ruled that the Asset Purchase Agreement — which referenced the Gottesman agreement that called for Gottesman to be paid at closing — could be performed without paying Gottesman but “without prejudice” to Gottesman’s rights. Gottesman had a right to rely on this assurance. To this writer, the connotation was that Gottes-man would not fare worse than it would have fared had it insisted on payment at closing and suffered an adverse ruling, so that it could have appealed, seeking to stay the sale pending appeal. In light of the fact that there is no argument about the fact that Gottesman produced the buyer, there can be little doubt about the fact that Gottesman would have been successful in achieving some settlement with the Committee that would be better than what the Committee seeks now that the assets are sold — relegating Gottesman to pre-petition, general unsecured status.
Doctrines of finality such as “law of the case” exist solely because some erroneous decisions must be permitted to stand. For this Court to have given Gottesman assurance that it would fare no worse for its forbearance in the computation and allocation of its fee may have been a mistake in light of the fact that there was not yet a Committee Counsel to raise the issues it might raise, and the fact that neither this writer nor the U.S. Trustee’s representative were prescient enough to foresee the argument now being advanced. As for this writer, it will not happen again that the respective positions, hypothetical or otherwise, will not be addressed in the decision to proceed “without prejudice.” But as to this case, it was the Court’s clear intent that Gottesman was to be secured by the fund its efforts generated, and the sale went ahead on that basis.
CONCLUSION
Gottesman has an equitable lien. The amount, however, remains subject to challenge, Gottesman’s Motion is restored to *273the Calendar for May 9, 2001 at 10:00 a.m. for further argument in that regard.
SO ORDERED.
Consistent with this Court’s earlier decision, this matter is back before the Court for quantification of Gottesman’s equitable lien. A number of alternative theories and arguments were placed on the record in open court on May 9, 2001, and the Court will not reiterate them in this decision.
After considering all of the arguments, the Court now states the issue to be this: At what dollar amount may it be said that there is no “unjust enrichment” of either Gottesman or of the creditor body?
The Court finds the answer in the form agreement used by Gottesman Company. In that agreement, Gottesman uses a schedule of fees which, though not a model of clarity,1 seems to provide that in a transaction in excess of $10 million (and this, of course, was a transaction for less than $10 million) the Gottesman fee would be 5 percent of the first $10 million plus 4 percent of the excess above $10 million up to $20 million, and then B percent of the excess above $20 million up to $30 million, plus 2 percent of the excess over $30 million up to $40 million, plus 1 percent of any amount over $40 million. Taking a $100 million, transaction, then, for illustration, one sees that Gottesman would receive 2 percent on a $100 million sale: to wit, $500,000 on the first $10 million, $400,000 on the second $10 million, $300,000 on third $10 million, $200,000 on the fourth $10 million, and $600,000 on the last $60 million. That is a $2 million fee on a $100 million transaction, which equals 2 percent. Thus, in response to Gottesman’s counsel’s rhetorical question when Gottesman offered to take $275,000 in full satisfaction of its claim, “Who gets less than 5 percent?” the answer is “Gottesman gets less than 5 percent on its larger deals.”
Focusing only on the RAMA-owned assets sold by RAMA, this was a $5 million transaction. By the fee schedule, that would be $100,000 for the first $1 million and $200,000 for the last $4 million. That is a $300,000 claim, equaling 6 percent of the $5 million selling price.
Of the $5 million, only about $800,000 was. netted for unsecured claims, and that amount is subject to attorneys fees and other administrative expenses yet to be determined.
There is no hint or suggestion that Gottesman ever acted in bad faith toward unsecured creditors of RAMA — Gottesman appears to have been completely “shut out” of dealings that led to a drop in purchase price that is blamed on an Internal Revenue Service investigation, and that brought RAMA from a price at sale that would have left it solvent, to a price at sale that left it grossly insolvent.
Secured creditors enjoyed the benefits of a sale that left them whole, while what is left will pay only priority tax debt and pennies on the dollar for trade and certain other tax debt. Also, certain affiliates of RAMA obtained personal benefits from the sale, though no one has yet suggested that this came at the expense of RAMA’s creditors.
So this Court views the present matter strictly as a matter between Gottesman and RAMA’s non-priority, unsecured creditors. In light of this Court’s analysis in the case of In re Cardon Realty, 172 B.R. 182 (Bankr.W.D.N.Y.1994), regarding the fact that bankruptcy does not change the *274unwise, injudicious, or even frivolous decisions that pre-bankruptcy management made (although principals may be held liable to the estate where appropriate under law), the Court concludes that Gottes-man is entitled to an equitable lien in the amount of $199,000.
That allowance is comprised of two parts. The first represents half the difference between 2 percent (charged by Gottesman on a $100 million transaction) and 6 percent (charged on transactions of just under $10 million). Three point .five percent of $5 million is $175,000. The second element is $24,000 representing the fact that this was a transaction as to which the Gottesman agreement provided for a $50,000 bonus on the first million dollars of a smaller (less than $10 million) transaction.
This amount would appear to be fundamentally fair and equitable as to Gottes-man because it falls in the middle range (as a percentage) of what Gottesman is willing to accept as to larger deals, and also provides half of the “kicker” that Gottesman contractually obtains on deals of less than $10 million.
And the amount appears to be fundamentally fair and equitable to the general unsecured creditor body because this amount is at least $100,000 less than what Gottesman had a right to obtain had this sale occurred and had Gottesman been paid prior to, rather than after, the Chapter 11 filing. Moreover, $199,000 is slightly less than a quarter of the $800,000 remaining after satisfaction of the secured claims: that is not unduly large, in this writer’s opinion, nor is it outside the range of what Gottesman reasonably could have obtained had the Court insisted (as addressed in this Court’s earlier decision) that Gottesman’s rights be adjudicated or settled before the Court would allow the performance of the Asset Purchase Agreement.
The Debtor may pay $199,000 to Gottes-man in satisfaction of its equitable lien. Gottesman may file an unsecured pre-petition claim for the balance of anything it believes to be owed by RAMA.
SO ORDERED.
. More precisely, the finder’s counsel stated, "Just to say the obvious, Your Honor. The [Gottesman] Company is not objecting to the procedure today, but we are doing that on the understanding that the order that comes out ... will ... reflect that those monies are taken subject to whatever claims there may be against them, whether by lien interest, encumbrance, or otherwise." [Transcript of June 13, 2000 proceedings, p. 13, lines 15-21.] And the Court replied, "... I’m ruling that any approval of these terms and conditions are without prejudice to any and all claims that [Gottesman] may have to proceeds." [Id. 13, lines 23-25, pg. 14, lines 1.]
. Not only has the Debtor uniformly recognized that Gottesman produced the buyer, but the President of the buyer, Bernard Brad-pease, also so testified on June 30, 2000.
. 27A Am.Jur.2d, Equity § 116 (1996) [case authorities omitted].
. It must be emphasized that even if the Court were to rule that an equitable lien exists because of the principles cited by the New Jersey courts, that would have no bearing on the amount of the lien. Since the remedy would be equitable, the amount of the lien would also be decided by equity, and not by the terms of the contract.
. Gottesman alleges that the buyer and the seller colluded to cheat Gottesman out of its fee. Of course, if this were to be established as fact, the analysis set forth in In re Religa, 157 B.R. 54 (Bankr.W.D.N.Y.1993) would have no application; it was recognized in the Religa case itself that fraud rectifying devices such as trusts ex malaficio are governed by an analysis different from that presented in Reli-ga where no wrongdoing was alleged by anyone with regard to Mr. Religa.
. Datlof v. Turetsky, 111 A.D.2d 364, 489 N.Y.S.2d 353, 355 (2nd Dep’t 1985), and cases cited therein.
. It is possible that someone else in the in-chambers conference has a different recollection. But if there was any indication that the priority of Gottesman's claim could be challenged, this writer either did not hear it or missed the significance of the indication.
. Compare the schedule with the statement of how trustee commissions are to be computed under 11 U.S.C. § 326. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493188/ | OPINION
JO ANN C. STEVENSON, Bankruptcy Judge.
This matter has come before the Court on an Objection filed by Forbes-Cohen Properties and Newburg-Six Mile, L.P., (Landlords) to Travel 2000’s (Debtor) Motion to Extend Time to Assume or Reject Unexpired Leases of Non-Residential Real Property.
This Court has jurisdiction to decide this Motion under 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (0).
Having filed Chapter 11 on February 2, 2001, the Debtor continues to operate its business as Debtor-in-Possession under *45311 U.S.C. § 1107(a) and § 1108. The Debtor operated retail businesses in approximately 74 shopping malls in 12 states. It has already rejected 46 leases under 11 U.S.C. § 865 and is currently assessing whether to assume or reject the remaining 33 unexpired leases.
Pursuant to 11 U.S.C. § 365(d)(4) the deadline to assume or reject the unexpired leases was April 3, 2001 or 60 days after the petition date. However, the court is authorized to extend the time for debtors to assume or reject the unexpired leases for cause. It states in pertinent part:
... [I]f the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debt- or 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.
The Landlords contend that although the Debtor filed its Motion for an extension of time to assume or reject the leases on day 54 of the 60 day period, the Bankruptcy Code requires that any court order extending the 60 day period must also be entered within that 60 day period. Consequently, because the 60 day period has now passed, the leases are statutorily deemed rejected.1 We disagree.
There has been a split of authority among the courts as to the specific action required within the 60 day period after the order for relief. Several courts have held that the literal language of § 365(d)(4) requires an actual court order within the 60 day period. See Debartolo Properties Management, Inc. v. Devan, 194 B.R. 46 (D.Md.1996); In re House of Deals of Broward, Inc., 67 B.R. 23 (Bankr.E.D.N.Y.1986); In re Coastal Industries, Inc., 58 B.R. 48 (Bankr.D.N.J.1986); In re Taynton Freight System, Inc., 55 B.R. 668 (Bankr.M.D.Pa.1985).2 Other courts have rejected a literal interpretation finding that Congress could not have intended that a debtor would forfeit substantial rights merely because the Bankruptcy Court’s docket was so congested that the matter could not be heard within the mandatory 60 day period. See Southwest Aircraft, Services, Inc. v. City of Long Beach (In re Southwest Aircraft Services, Inc.), 831 F.2d 848 (9th Cir.1987) cert. denied, 487 U.S. 1206, 108 S.Ct. 2848, 101 L.Ed.2d 885 (1988); In re Perfectlite Co., 116 B.R. 84 (Bankr.N.D.Ohio 1990); In re Cook United, Inc., 83 B.R. 456 (Bankr.N.D.Ohio 1988).
In determining legislative intent, we look first to the language of the statute. United States v. James, 478 U.S. 597, 106 S.Ct. 3116, 92 L.Ed.2d 483 (1986); Blum v. Stenson, 465 U.S. 886, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984); In re Koenig Sporting Goods, Inc., 203 F.3d 986 (6th Cir .2000). As evidenced by the split among the courts, 11 U.S.C. § 365(d)(4) is not plainly susceptible to only one interpretation. As stated in Southwest:
*454It is not entirely clear whether the second term — “within such 60 day period” — modifies the term that precedes it or the term that follows it ... If we read it as modifying “fixes”, then a bankruptcy court would not under the literal words of the statute have the authority to grant a timely motion to extend after the sixtieth day ... If, however, the 60-day term modifies “for cause,” then while the cause must arise within 60 days (and implicitly the debtor must file its motion to show cause within that period), there is no express limit on when the Bankruptcy Court must hear and decide the motion. This more liberal reading of the statute would allow the bankruptcy courts to operate with greater freedom and flexibility.
Id. at 850.
Having found two interpretations of § 864(d)(4), we turn next to the legislative history.
Before 1984, Chapter 11 debtors were not required to assume or reject unexpired leases by any fixed deadline, although any party could petition the court to set a time limit. 11 U.S.C. § 365(d)(2) (1983). Congress became concerned with the consequences bankruptcy was having on mall operators and other tenants who were facing extended vacancies and increased common area charges while debtors decided whether to assume or reject their leases.
To address these concerns and lessen these problems, Congress added two provisions, 11 U.S.C. § 365(d)(3) and 11 U.S.C. § 365(d)(4). The legislative history also discusses the requirement that the court find “cause” for the extension. There is however, no reference that the courts must make this finding within a certain time frame.
We believe Congress’ failure to mention any deadline within which the court must act is fairly indicative of its intent. “It is frequently the case that if an act must be undertaken within a particular time period a request for an extension must be made before that period has expired.” Southwest, 831 F.2d at 851. However, it is most unusual that a rule would forfeit a party’s rights because the court has failed to act within a particular time frame, especially where the statute does not clearly and unequivocally state that it must do so.
In Logan v. Zimmerman Brush Co., 455 U.S. 422, 102 S.Ct. 1148, 71 L.Ed.2d 265 (1982), the Supreme Court found that it was a violation of due process to terminate a person’s property interest because of an agency’s failure to hear and decide a timely filed claim within a specific deadline. Likewise, we see a Fourteenth Amendment violation in the Landlords’ interpretation of 11 U.S.C. § 365(d)(4). Not only would the Debtor lose the right to an extension of time in which to decide whether to assume or reject a lease, but the Court’s failure to consider the claim before the 60 day deadline, would effectively deprive Travel 2000 of its leasehold interests in the various properties at issue.3
There can be no doubt that Congress intended to give debtors a full 60 days in which to decide whether to assume or reject. Requiring the Court to both consider and rule on the assumption/rejection issue within the same 60 days effectively truncates the time statutorily allotted the debt- or to decide its course of action.
*455The interpretation of 11 U.S.C. § 365(d)(4) which we believe best comports with congressional intent is the one that preserves the authority of the bankruptcy court to rule on timely filed motions. As stated in our previous decision in this bankruptcy case, “the overall purpose and function of the Bankruptcy Code is to strike a balance between creditor protection and debtor relief.” In re Travel 2000, Inc., 264 B.R. 444 (Bankr.W.D.Mich.2001). Retaining for the bankruptcy courts the power to rule on timely filed motions achieves that end.
ORDER
NOW, THEREFORE, IT IS HEREBY ORDERED that:
1. For the reasons stated in the attached opinion, the Objection of Forbes-Cohen Properties and Newburg-Six Mile L.P. to the Debtor’s Motion for an Extension of Time Within Which Debtor May Assume or Reject Unexpired Leases of Non-Residential Real Property is OVERRULED.
2. A telephonic status conference shall be scheduled forthwith so as to set a time and date for hearing arguments on the “cause” issue under 11 U.S.C. § 365(d)(4).
IT IS FURTHER ORDERED that copies of this Opinion and Order shall be served by first-class United States mail, postage prepaid, upon Harold E. Nelson, Esq., Ian I. Allen, Esq. and Daniel M. Katlein, Esq.
. All parties met in chambers prior to the hearing and agreed to reserve arguments regarding cause until the jurisdictional issue was decided.
. Even though the Landlords' counsel heavily relied on Rogers v.. Laurain (In re Laurain), 113 F.3d 595 (6th Cir.1997), claiming that Fed.R.Bankr.P. 4003(b) mirrored the language of 11 U.S.C. § 365(d)(4), we reject this argument. The wording of Fed.R.Bankr.P. 4003(b) was amended effective December 1, 2000, partly due to the harsh result in Lau-rain, which deprived the bankruptcy court of jurisdiction to grant a timely request for an extension if it failed to rule within the allotted time period.
. While we recognize the merit of the argument that the debtors could avoid the harshness of the Landlords' interpretation of § 365(a)(4) by accompanying their motion to extend time with an additional motion to extend the time in which the court must rule, we think that solution is both unwieldy and unnecessary. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493189/ | OPINION
RUSSELL, Bankruptcy Judge.
The appellant filed an administrative claim against a chapter 111 debtor in possession (“DIP”) from whom it had subleased office space. The basis for the claim was an alleged postpetition breach of the sublease by the DIP-sublessor for which liability was premised on § 365(d)(3) and § 503(b). After confirmation, the plan trustee objected to the claim and moved for summary judgment. The bankruptcy court granted summary judgment in the trustee’s favor based on a finding that § 365(d)(3) applied only to debtor-lessees and not to debtor-lessors. This appeal followed. We AFFIRM.
I. FACTS
This appeal involves two restauranteurs, appellant Einstein/Noah Bagel Corporation (“ENBC”), a retailer of bagels and associated foods, and Boston Chicken, Inc., a purveyor of home-style meals. Boston Chicken owns half of ENBC’s outstanding shares and in 1996, the two companies entered into various agreements relating to the infrastructure and operations of ENBC. Two of these agreements were for accounting and computer services to be performed by Boston Chicken on ENBC’s behalf. The third was a five-year lease agreement under which ENBC subleased from Boston Chicken 38,000 square feet of the Golden, Colorado, office building where the latter maintained its headquarters. Boston Chicken itself was leasing the entire building from the Prudential Insurance Company.
Boston Chicken and ENBC amended the sublease agreement in May 1998 so that ENBC retained only 27,000 square feet. Included in the amendment was a provision requiring Boston Chicken to use its “best efforts” to obtain a non-disturbance agreement from Prudential. Such an agreement would serve to prohibit Prudential from disturbing ENBC’s rights under the sublease in the event that ENBC remained current on it and Boston Chicken defaulted on the master lease with Prudential.
In October 1998, Boston Chicken, along with its affiliates, filed a chapter 11 petition and became a debtor in possession. *580According to ENBC, in the time leading up to the petition and thereafter, Boston Chicken became unable to consistently perform its service obligations to ENBC. As a result, ENBC asserts, it began an initiative to ensure its survival in case Boston Chicken abandoned these contractual obligations. This initiative involved the separation of ENBC’s facilities from those of Boston Chicken. Boston Chicken had not obtained the non-disturbance agreement from Prudential and ENBC claims that it feared immediate eviction from its subleased offices in the event that Boston Chicken or Prudential terminated the master lease. To avoid this perceived risk, ENBC relocated its offices at the end of 1999.
In March 2000, Boston Chicken moved for an order authorizing rejection of the ENBC sublease. ENBC did not oppose the motion and the bankruptcy court issued the order that next month. Under the terms of the order, Boston Chicken was deemed to have rejected the ENBC sublease upon the filing of the motion.
Boston Chicken’s third amended plan was approved in May 2000. The plan provided for the sale of most of its assets to a subsidiary of the McDonald’s Corporation. It also provided for the appointment of appellee Gerald K. Smith as plan trustee. Mr. Smith’s duties included the collection, administration, and distribution of the sale proceeds as well as any retained assets.
Before Boston Chicken’s plan was approved, ENBC had filed a “Request for Payment of Administrative Expense.”2 This request was really three administrative claims totaling $1,883,000. The first two claims were based on costs incurred due to Boston Chicken’s alleged failure to perform obligations under the agreements for accounting and computer services. The third and largest one, in the amount of $1.5 million, rested on Boston Chicken’s alleged breach of the sublease provision regarding the non-disturbance agreement. ENBC maintained that Boston Chicken did not use its best efforts to obtain this agreement with Prudential, thereby causing uncertainty regarding ENBC’s continued occupation of its offices and ultimately, the company’s relocation at a cost of $1.5 million.
In a single pleading, Boston Chicken objected to ENBC’s three claims. As for the one relating to the agreement for accounting services, it urged that ENBC had no right to claim damages under the agreement except those resulting from willful misconduct or gross negligence, neither of which ENBC had asserted. As for the claim relating to the agreement for computer services, Boston Chicken maintained that the parties had terminated the agreement in February 2000 and that ENBC had expressly released Boston Chicken from any claims arising under the agreement as of termination. Finally, as for the claim relating to the sublease provision regarding the non-disturbance agreement, Boston Chicken contended that its court-approved rejection of the sublease meant that any claim by ENBC arising from a breach of the sublease would be deemed a prepetition, unsecured one under §§ 365(g) and 502(g).
ENBC disputed the first two objections and responded to the last one with the following:
The Trustee misses the mark. ENBC’s claim is not a rejection claim; it does not assert damages resulting from a breach of prospective obligations under the ... [sjublease or damages arising for termination of that sublease. Rather, ENBC’s claim is for damages resulting *581from [Boston Chicken’s] failure to perform a postpetition obligation to exercise best efforts to obtain a nondisturbance agreement from Prudential.
Einstein/Noah Bagel Corp.’s Response to Trustee’s Objection to Administrative Claim, Aug. 21, 2000, p. 8. Boston Chicken’s liability, it asserted, rested on § 365(d)(3), which requires the trustee (or DIP) to “timely perform all the obligations of the debtor” arising from and after the order for relief under any unexpired lease of nonresidential property. While ENBC acknowledged that § 365(d)(3) was usually invoked by landlords of debtor-lessees to enforce rent obligations, it argued that “debtor” in this section could be read to include debtor-landlords.
The trustee moved for summary judgment on his objections to ENBC’s three administrative claims. Serving as grounds for his motion were the above-mentioned objections themselves. ENBC opposed the motion, restating in large part its § 365(d)(3) argument.
A hearing on the motion was held in September 2000. The bankruptcy court denied summary judgment as to the trustee’s objection to ENBC’s claim relating to the agreement for accounting services and granted summary judgment as to his objection to ENBC’s claim relating to the agreement for computer services. Neither of these dispositions is the subject of this appeal.
On the matter of summary judgment as to the trustee’s objection to ENBC’s claim relating to the sublease, the court deferred ruling in order to allow it, as well as ENBC, to review case law discussed by the trustee at the hearing, but not cited in his pleadings. With the court’s permission, ENBC filed a responsive brief, at which time the matter was taken under advisement. The court subsequently issued an order in which it granted summary judgment in favor of the trustee based on a finding that § 365(d)(3) applied only to debtor-lessees.
Though ENBC timely appealed, the court’s order was not final because it merely granted the trustee’s motion. Therefore, we remanded for the entry of a final, appealable order. Such an order was entered in March 2001 and stated that any claim of ENBC based on the sublease was “not entitled to administrative priority under 11 U.S.C. §§ 503(b), 365(d)(3) or any other provision of the Bankruptcy Code.” ENBC’s notice of appeal then took effect under Rule 8002(a).
II.ISSUE
"Whether the bankruptcy court properly determined that ENBC’s claim relating to the sublease was not entitled to administrative priority.
III.STANDARD OF REVIEW
This appeal presents a question of law. We review such questions under the de novo standard. In re Black, 222 B.R. 896, 899 (9th Cir. BAP 1998) (citing In re Kirsh, 973 F.2d 1454, 1456 (9th Cir.1992)).
IV.DISCUSSION
ENBC argues that its claim relating to the sublease was indeed entitled to administrative priority under § 365(d)(3) and § 503(b). We disagree.
1. Administrative Priority under § 365(d)(3)
Section 365(d)(3) provides in pertinent part:
The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is as*582sumed or rejected, notwithstanding section 503(b)(1) of this title. The court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the date of the order for relief, but the time for performance shall not be extended beyond such 60-day period. This subsection shall not be deemed to affect the trustee’s obligations under the provisions of subsection (b) or (f) of this section. Acceptance of any such performance does not constitute waiver or relinquishment of the lessor’s rights under such lease or under this title.
It is ENBC’s position that this section obligated Boston Chicken, the DIP, to timely perform its contractual obligation to use its “best efforts” to obtain a non-disturbance agreement from Prudential. ENBC contends that it failed to do so and that this failure gives rise to administrative liability as surely as if Boston Chicken were a debtor-lessee who did not pay rent.
The court, however, determined that this was not the case, holding that § 365(d)(3) applied only where the debtor was a lessee, not a lessor like Boston Chicken. It first traced the genesis of this section, added by Congress in 1984, to concerns by commercial landlords that the bankruptcy process held them hostage by requiring them to continue extending credit to debtor-lessees during the pendency of reorganization. Specifically, the court cited the following statement from Sen. Orrin Hatch describing the landlords’ situation:
A second ... problem is that during the time the debtor has vacated space but has not yet decided whether to assume or reject the lease, the trustee has stopped making payments due under the lease. These payments include rent due the landlord and common area charges which are paid by all the tenants according to the amount of space they lease. In this situation, the landlord is forced to provide current services-the use of its property, utilities, security, and other services-without current payment. No other creditor is put in this position.
130 Cong. Rec. S 8891, 8895 (daily ed. June 29, 1984) (statement of Sen. Hatch), reprinted in 1984 U.S.C.C.A.N. 576, 599.
Turning to § 365(d)(3) itself, the court highlighted the last sentence of the section, stating:
Here, the final sentence of section 365(d)(3) very strongly suggests that it is limited to protecting the rights of lessors and the legislative history clearly confirms that conclusion. Indeed, the wording is highly suggestive: “Acceptance ... does not constitute waiver ... of the lessor’s rights.” Had the intent been more limited, the sentence should have referred to “a” lessor’s rights. The use of “the” underscores the conclusion that the entire section is designed to protect lessors’ right to payment and other performance, during the period that they would otherwise have been “held hostage.”
Under Advisement Order re: Motion for Summary Judgment, Oct. 16, 2000, pp. 5-6 (emphases in original).
ENBC attacks the court’s analysis, asserting that the court misconstrued § 365(d)(3). It urges that the plain language of § 365(d)(3) does not limit the application of the section to instances where the debtor is a lessee. Because the plain language is conclusive, ENBC argues, the court’s reliance on legislative history in the form of Sen. Hatch’s statement was erroneous. In its view, the “clear text” of § 365(d)(3) should have ended the court’s inquiry. As authority for this position, ENBC cites the Supreme Court’s decision in United States v. Ron Pair Enters., Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
*583ENBC continues by stating that even if reference to legislative history were proper, such history demonstrates that § 365(d)(3) was not intended to apply only wheré the debtor is a lessee. It chronicles various, unenacted predecessors to § 365(d)(3), which would have required the trustee to timely perform obligations of the “tenant,” rather than the “debtor.” The use of the word “debtor” in the enacted version, ENBC maintains, demonstrates that Congress intended to include not only lessees in the reach of § 365(d)(3), but also lessors.
ENBC’s points are largely academic for the final sentence of § 365(d)(3), as the court noted, indicates that it is limited to instances where the debtor is a lessee. To reiterate, that sentence provides:
Acceptance of ... performance does not constitute waiver or relinquishment of the lessor’s rights under such lease or under this title.
It is clear from this language that it is the rights of the lessor that are being protected, not those of the lessee. Even if the statutory language were not clear, we agree with the bankruptcy court that the legislative history supports that interpretation. As the bankruptcy court pointed out, § 365(d)(3) was intended to address the problems of debtor-tenants who have stopped making rent and other required payments to the landlord. To reiterate, Congress was concerned that, pending the decision whether to assume or reject the lease,
the landlord is forced to provide current serviees-the use of its property, utilities, security, and other services-without current payment. No other creditor is put in this position.
130 Cong. Rec. S 8891, 8895 (daily ed. June 29, 1984) (statement of Sen. Hatch), reprinted in 1984 U.S.C.C.A.N. 576, 599. By requiring the trustee to perform the debtor’s obligations under a lease of nonresidential real property, § 365(d)(3) was viewed as “insuring] that debtor-tenants pay their rent, common area, and other charges on time pending the trustee’s assumption or rejection of the lease.” Id.
Accordingly, ENBC’s .argument that both lessors and lessees are encompassed by § 365(d)(8) must be rejected.
2. Administrative Priority under § 503(b)
The bankruptcy court stated that ENBC “[did] not claim traditional administrative claim priority under section 503(b).” Under Advisement Order re: Motion for Summary Judgment, Oct. 16, 2000, p. 3. Boston Chicken cites this observation and, if true, it is not possible for us to consider ENBC’s 503(b) argument on appeal. As a general rule, we will not consider an issue raised for the first time on appeal. See In re Berg, 186 B.R. 479, 482 (9th Cir. BAP 1995).
ENBC, however, did indeed raise a § 503(b) argument below. The record contains ENBC’s post-hearing responsive brief, filed with permission of the court, to address case law discussed by the trustee at the hearing, but not cited in his pleadings. In this document, ENBC contended that even if § 365(d)(3) did not apply to debtor landlords, its claim relating to the sublease was entitled to administrative treatment. Specifically, it alleged that “a nondebtor party to a contract with a debt- or is entitled to obtain administrative priority treatment for any postpetition benefit provided to the estate under an executory contract prior to assumption or rejection of such contract.” Einstein/Noah Bagel Corp.’s Surresponse in Opposition to Trustee’s Motion for Summary Judgment, Oct. 5, 2000, p. 2. According to ENBC, it had “undisputably conferred a postpetition benefit upon the [Boston Chicken] estate; *584it performed its obligations (mainly by paying rent each month to [Boston Chicken] ).” Einstein/Noah Bagel Corp.’s Sur-response in Opposition to Trustee’s Motion for Summary Judgment, Oct. 5, 2000, p. 3.
We note that counsel for ENBC advanced this position orally in the bankruptcy court as well, stating the following:
I mean we kept on paying rent, we paid every month and they didn’t perform their obligation to exercise best efforts to get this non-disturbance agreement. So either-whether you look at § 365(d)(3), which I think is clearly applicable to debtor/landlords when you take a look at its place in the code and the other provisions that are right next to it and it is also appropriate that this claim survives under a 503(b)(1) analysis, too, as well.
Transcript of Hearing on Motion for Summary Judgment, Sept. 28, 2000, p. 20.
Thus, we are able to address ENBC’s § 503(b) argument, though the court did not do so. Initially, we observe that, as a matter of law, it is true that a non-debtor party (like ENBC) to an executory contract with a debtor is entitled to an administrative claim equal to the value of any postpetition benefit conferred on the estate before assumption or rejection, of that contract. In re El Paso Refinery, L.P., 220 B.R. 37, 45 (Bankr.W.D.Tex.1998) (citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984); United States Postal Serv. v. Dewey Freight Sys., Inc., 31 F.3d 620, 624 (8th Cir.1994)). It does not follow from this proposition, however, that ENBC is entitled to an administrative claim in the amount of its relocation costs.
The flaw in ENBC’s reasoning involves the nature of its claim. It does not seek recovery of rent, which was a benefit conferred on the Boston Chicken estate for which ENBC received the right to use office space under the sublease. Rather, ENBC seeks recovery of its relocation costs, which did not benefit the estate. It was exactly these costs on which ENBC’s claim was based. The proof of claim provided:
[Boston Chicken] failed to exercise best efforts to obtain a nondisturbance agreement from Prudential Insurance Company of America (the “Master Landlord”) to recognize ENBC’s right -to- maintain possession of its former support center facility space, as [Boston Chicken] was required to do under Section 11 of the first amendment to the Support Center Sublease. As a result of this failure, the related uncertainty surrounding whether ENBC would be able to continue to occupy this space, and ENBC’s need to construct data center operations that would not be exposed to a risk of immediate eviction, ENBC was forced to find alternative space for its support center and has paid or expects to pay approximately $1.5 million to move its support center from its former facility into its new space.
Request for Payment of Administrative Expense (Schedule A), Mar. 16, 2000. p. 3.
In the end, then, ENBC’s § 503(b) argument, like its § 365(d)(3) one, must be rejected. The logic gap in the former is simply not bridgeable.
V. CONCLUSION
ENBC’s claim relating to the sublease is not entitled to administrative priority under § 365(d)(3) or § 503(b). The bankruptcy court properly determined such. We AFFIRM.
. Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
. ENBC's own chapter 11 petition followed soon after this filing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493190/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JERRY A. FUNK, Bankruptcy Judge.
This Proceeding is before the Court on the Complaint for Declaratory Judgment and to Determine Validity, Priority or Extent of Lien or Other Interest filed by Annicott Excellence, LLC (“Plaintiff’) on October 17, 2000. (Doc. 1.) Andrew Singer (“Defendant”) filed an Answer to the Complaint on November 27, 2000. (Doc. 5.) On April 10, 2001, the Court held a trial and took the matter under advisement. Upon review of the evidence presented and upon review of the arguments and submissions of counsel, the Court finds it appropriate to abstain from entering a judgment on this Proceeding.
*757FINDINGS OF FACT
Plaintiff, a Delaware limited liability corporation, owns and operates five mobile home parks in the state of Florida. Three of Plaintiffs properties are located in Bro-ward County and two are located in Bre-vard County.
On August 29, 1997, Plaintiff executed a Promissory Note “A” promising to pay $7,070,000.00 to Allied Commercial Capital Corporation, predecessor to Allied Capital Corporation (“Allied”), This obligation ber came Allied Capital Commercial Trust 1998-1, of which LaSalle National Bank (“LaSalle”) serves as indenture trustee and custodian. On the same day, Plaintiff executed a Promissory Note “B” promising to pay Allied’s predecessor a separate $808,000.00.
As security for the loans underlying these notes, Plaintiff granted Allied a lien on all of the mobile home parks, on all improvements and fixtures upon the parks, on all leases and subleases on the parks, and on all income from the parks.
On September 4, 1997, Allied perfected its hen on the Broward properties by filing a mortgage with the Clerk of Court in Broward County. On September 7, 1997, Allied perfected the sécurity interests on the Brevard properties by filing a mortgage with the Clerk of Court in- Brevard County.
On July 16, 1999, Defendant, former manager of Plaintiffs Lakeshore Mobile Home Park (“Lakeshore”), filed a Claim of Lien against Lakeshore with the Clerk of Broward County. Defendant asserts a lien in the amount of $1,585,750.00, his claimed compensation for efforts alleviating flooding at Lakeshore in June 1999.
On September 21, 1999, Allied and La-Salle commenced a foreclosure proceeding in the Seventeenth Judicial Circuit Court in and for Broward County, Florida, Case No. 99-016322 (“the foreclosure action”), against all of Plaintiffs mobile home parks.
' On November 1, 1999, Plaintiff voluntarily filed for Chapter 11 bankruptcy protection, staying the pending foreclosure action.
On January 3, 2000, Defendant filed a Proof of Claim in the amount of $1,585,750.00 for “services performed” and “material and labor.” Defendant contends that this claim is secured by virtue of the Claim of Lien filed against Lakeshore on July 16,1999.
On June 26, 2000, Plaintiff filed an Objection to Defendant’s claim. (Doc. 118.)
On August 28, 2000, Defendant filed a Motion for Change of Venue of the Objection to his claim.’ (Doc. 130.) Defendant sought to have the Objection heard in Bro-ward County.
On October- 17, 2000, Plaintiff initiated the instant Proceeding. (Adv.Doc. 1.)
On October 17, 2000, the Court denied Defendant’s Motion for Change of Venue of the Objection to his claim.
On January 18, 2001, the Court entered Findings of Fact and Conclusions of Law regarding its denial of a Motion for Relief from Stay filed by Allied and LaSalle. See In re Annicott Excellence, LLC, 258 B.R. 278, 285 (Bankr.M.D.Fla.2001). Allied and LaSalle had sought to obtain relief from stay to recommence the foreclosure action begun in Séptember 1999. See id. at 282. The Court found that Plaintiff did not have any equity in the mobile home parks, including Lakeshore, because of the mortgages held by Allied and LaSalle. See id. at 284. The Court denied relief from stay on other grounds. See id. at 285.
On March 28, 2001, the Court entered an Order allowing Allied and LaSalle to intervene in this Proceeding.
On March 28, ,2001, the Court also overruled Plaintiffs Objection to Defendant’s *758claim. See In re Annicott Excellence, LLC, 259 B.R. 782, 794 (Bankr.M.D.Fla.2001). The Court found that Plaintiff and Defendant entered into binding oral contracts for Defendant to drain the Lake-shore flooding and to build a floodwall protecting Lakeshore for a reasonable amount of compensation. See id at 790. The Court found that reasonable compensation for Defendant’s performance amounted to $7,515.53, and granted Defendant a claim in that amount.1 See id. at 794.
Therefore, the only question before the Court at this point is whether or not that $7,515.53 claim is secured by a valid lien against Lakeshore.
On April 10, 2001, the Court held a trial of the instant Proceeding.
On May 16, 2001, Plaintiff, Allied and LaSalle filed a Stipulation Regarding Relief from Automatic Stay in the main Case. (Doc. 217.) In the stipulation Plaintiff conceded that it would not be able to obtain confirmation of any proposed Chapter 11 plan. Plaintiff consented to relief from stay in order to allow Allied and LaSalle to proceed with the state court foreclosure action.
On June 5, 2001, the Court entered an Order granting Allied and LaSalle relief from the automatic stay. (Doc. 223.) The Order provided that the automatic stay was terminated so that Allied and LaSalle could resume the foreclosure action in state court in Broward County.
CONCLUSIONS OF LAW
I. PERMISSIVE ABSTENTION: 28 U.S.C § 1334(c)(1)
Pursuant to 28 U.S.C. § 1334(c)(1), a bankruptcy court may abstain from exercising jurisdiction over a core or non-core adversary proceeding in the interest of justice or comity with a state court. Section 1334(c)(1) provides, in relevant part:
(c)(1) nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
28 U.S.C. § 1334(c)(1) (2001).
Section 1334(c)(1) grants a bankruptcy court broad discretion to permissively abstain from exercising jurisdiction. See Wood v. Ghuste (In re Wood), 216 B.R. 1010, 1014 (Bankr.M.D.Fla.1998). In deciding whether or not to abstain under § 1334(c)(1), a court should consider twelve factors:
(1) The effect of abstention on the efficient administration of an estate;
(2) The extent to which state law issues predominate over bankruptcy issues;
(3) The difficulty or unsettled nature of applicable law;
(4) The presence of a related proceeding pending in a state court or other non-bankruptcy forum;
(5) The existence of any non-bankruptcy basis for federal jurisdiction;
(6) The degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
(7) The substantively “core” or “non-core” nature of the proceeding;
(8) The feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state *759court with enforcement left to the bankruptcy court;
(9) The burden of leaving the proceeding on the bankruptcy court’s docket;
(10) The likelihood that the proceeding ended up in bankruptcy court as the result of forum shopping by one of the parties;
(11) The existence of a right to jury trial; and
(12) The presence of non-debtor parties.
See id.
II. APPLICATION TO THE INSTANT CASE
-The - Court finds it appropriate to abstain from issuing a judgment in the instant Proceeding. The Court finds that the instant Proceeding involves predominantly state law, issues, and that the principle of comity for state courts demands that this Court defer to the state court revested with authority to proceed after the. entry of the Order Granting Relief from Stay. The Court also finds that allowing the state court in Broward County to handle the dispute would result in the most uniform and consistent determination of all parties’ interests in Lakeshore.
First, the Court finds that the instant Proceeding is purely a matter of state law. The validity, priority and extent of a security interest ih real property in Florida aré solely a matter of Florida law. The Court finds it appropriate to allow the Florida court to handle this dispute governed, by Florida law now that it may do so without violating the automatic stay.
Second, this . Court finds that the Bro-ward County Circuit Court deserves comity and should be allowed to proceed with a full disposition of all disputes related to security interests in Lakeshore without this Federal Court’s interference. The Broward County Circuit Court is a state court vested with proper jurisdiction to determine the rights of all parties in Lake-shore. The state court also had jurisdiction over this-matter originally.
Finally, the Court finds that it would run afoul of the principle of consistent and uniform application of the laws if it proceeds to determine the validity, extent and priority of Defendant’s interest in Lake-shore while the state court determines the validity, -extent and priority of other claimant’s interests. Such duplicate adjudica-r tion might result in contradictory findings, in wrestling matches, with the difficult docT trines of collateral estoppel and res judica-ta, and in a jumble of appeals. The Court finds it wise to avoid these common afflictions of parallel litigation by abstaining from issuing a judgment in this Proceeding.
CONCLUSION
The Court finds it appropriate to exercise its discretion to abstain from -entering a judgment on the instant Proceeding,
The Court will enter a separate Order in accordance with these Findings of Fact and Conclusions of Law.
. On April 6, 2001, Defendant filed a Notice of Appeal of the Court’s Order granting him a claim in the amount of $7,515.53. (Pl.Ex. 1.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493191/ | ORDER DISMISSING CASE
JOEL B. ROSENTHAL, Bankruptcy Judge.
This matter came before the Court for a Status Conference and hearing on the Motion of the United States Trustee to Dismiss the Case. After hearing the arguments of all parties present, reviewing all of the papers on file in this case, and taking judicial notice of the various other cases in this district involving either this Debtor or its principals,1 the Court hereby *789dismisses this case with a one year bar to re-filing absent the express leave of this Court. The Court finds that this case and its prosecution constitutes bad faith on the part of the Debtor and has resulted in undue delay to the creditors.
Section 105(a) of the Bankruptcy Code states that “[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders' or rules, or to prevent an abuse of- process.” 11 U.S.C. § 105(a). The Court finds that it is necessary to invoke § 105(a) in this case to prevent the Debtor from attempting to, use the automatic stay to repeatedly delay and/or avoid payment to its creditors as more specifically stated below. See In re Spear, 203 B.R. 349, 353 (Bankr.D.Mass.1996); In re Mitchell, 255 B.R. 345, 365 (Bankr.D.Mass.2000).
This voluntary Chapter 11 case was filed on October 5, 2000. Since the filing no confirmable plan of reorganization has been proposed. James Mitchell, one of the Debtor’s principals, has informed the Court that -no plan of reorganization-will be filed which differs substantially from the efforts made at reorganization thus far. Furthermore, the Court-finds credible, based upon all of the proceedings in this case to date, the assertion made by the Debtor’s primary creditor, Xytest Corporation, that the Debtor has filed this case simply to delay the effect of a judgment, (hereinafter the “Judgment”), against the Debtor and in favor of Xytest Corporation. The Judgment was rendered in California on June 5, 1999 and is currently on appeal. The parties have all acknowledged -that the outcome of that litigation will determine the respective rights- of the parties primarily interested-in the instant-case. James Mitchell has acknowledged to this Court that the Debtor is not currently doing any business aside from pursuing the appeal of the Judgment. No creditor has proposed a plan. Moreover, the Court takes judicial notice of the filings of personal bankruptcy cases in this district by the principals -of the Debtor. Such cases related to the Judgment and culminated in the following finding by Bankruptcy Judge Joan N: Feeney: “The Court finds that this conduct demonstrates the Debtors’ -profound disrespect for and disregard of the Bankruptcy Code 'and Bankruptcy Rules, reveals their intention to manipulate bankruptcy law for purposes other than repayment of debt, and supports the decision of this Court to deny the Debtors’ Verified Motion to Vacate. Indeed, such conduct now warrants modification of the. Court’s order of September 19, 2000 to prohibit the Debtors from refiling under any -Chapter of the Bankruptcy Code for a period longer than 180 days.” In re Mitchell, 255 B.R. 345, 354 (Bankr.D.Mass.2000).
Finally," after hearing testimony in' the instant case on- March 22, 2001 this Court expressed the following concerns to the parties in attendance, including Mr. Mitch-eil: ...
“It’s hereby ordered that the activity in this case is stayed until the conclusion of the California. litigation concerning the appeal by the debtor of a decision in favor of Xytest Corporation, et al.
We will schedule a status conference — June or about four months. Fine. There will be a status conference on July '23rd at two p.m. on whether I should continue -. the. suspension or whether I-should dismiss-the case. I’m also troubled by the testimony I heard *790today. It’s clear to me that Mr. Mitchell' — that you prepared the legal documents for creditors in this case. You’re not licensed to practice law here or anywhere else. You’re not a graduate of law school, and under Massachusetts Law Chapter 221, Section 41, the unauthorized practice of law is prohibited in the Commonwealth. Insofar as admission to the bar of the Commonwealth is a prerequisite to admission before the federal courts of this or any other district of the United States, I find that your preparation of legal pleadings for others is unlawful, and I intend to refer your activities to the appropriate authorities.
But for the threat of another filing in another jurisdiction, I would be dismissing the case today on my own motion. I think the debtor, and particularly Mr. Mitchell, and perhaps his mother, although I’m not sure, has been manipulating and orchestrating this proceeding and manipulating and orchestrating creditors or alleged creditors. I don’t— I’m not satisfied there’s anything here to reorganize, but at this point in time, I will defer that to the dismissal hearing which will be the same time as the status conference.” Tr., March 22, 2001, pg. 75-76.
For all of the foregoing reasons the Court hereby finds that the Debtor in this case has exhibited a pattern of abuse of the Bankruptcy Code and therefore dismisses the above captioned case pursuant to 11 U.S.C. § 109(g) which bars the Debt- or from filing bankruptcy anywhere in the United States for a period of 180 days from today. In addition, pursuant to 11 U.S.C. § 105(a), as a result of the above described findings of bad faith and delay on the part of the Debtor, the Court hereby extends that bar for an additional 185 days, for a total of one year during which the Debtor may not be a bankruptcy debt- or in any court of the United States without express leave of this Court. The Debtor and its principals are hereby advised that any attempt to disobey this Order will result in the imposition of sanctions as well as referrals to appropriate law enforcement authorities.
IT IS SO ORDERED.
. An involuntary Chapter 7 petition was filed as to Somerset Capital Corporation, case # 99-40955 (JFQ/JBR), on February 12, 1999. That case was closed on August 22, 2000, with no distribution available to creditors. The instant case is the subsequent voluntary attempt to reorganize whatever exists of the company under Chapter 11.
An involuntary Chapter 7 petition was filed as to the principals of Somerset Capital Corporation, James and Mary Mitchell, case #94-18204 (JNF), and the Mitchells have subsequently made two voluntary, yet unsuccessful, attempts at Chapter 13, case # 00-15497 (JNF) and case # 00-17437 (JNF). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493192/ | MEMORANDUM OPINION AND ORDER
L. EDWARD FRIEND, II, Bankruptcy Judge.
This matter is before the Court pursuant to the Complaint to Determine Priority of Liens filed by the debtors, Harry K. McCord and Linda Susan McCord (“the McCords”). Defendant United States Department of Treasury, Internal Revenue Service (“IRS”) and Defendant Petland, Inc. (“Petland”) both claim a priority security interest in the same leasehold items, equipment, and inventory. The Court has jurisdiction by virtue of 28 U.S.C. § 1334 and the standing order of reference in this district. The matter before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b).
FACTS
The McCords owned and operated two pet stores in Maryland, initially as a sole proprietorship, and later as a corporation owned wholly by the McCords. The two stores were located in Lavale and in Hag-erstown. Harry McCord obtained the La-vale store by assignment from a previous franchisee on June 1, 1992, and obtained the Hagerstown store by franchise agreement on February 4, 1993. On December *81615, 1997, Harry McCord filed Articles of Incorporation of Brandywine Pets, Inc. (“Brandywine”). The McCords transferred the assets and liabilities of the pet stores to Brandywine sometime in 1998.
Prior to the incorporation, Petland obtained two liens on the McCords’ pet stores. On December 4, 1997, the McCords executed two promissory notes in favor of the defendant Petland, Inc. (“Pet-land”) in the amounts of $95,000 and $60,646.73. The notes were secured by a lien on all accounts, leasehold items, fixtures, inventory, equipment, proceeds, and after acquired collateral of the Hagerstown and Lavale stores, respectively. Petland filed a UCC-1 financing statement for the interest in the Lavale store with the Maryland Department of Assessments and Taxation on January 31, 1997, and filed a financing statement for the interest in the Hagerstown store on May 15, 1997.
Subsequent to Petland’s filing of its UCC financing statements, the IRS filed two Notices of Federal Tax Liens in Berkeley County, West Virginia, the McCords’ county of residence. These liens arose from unpaid federal Insurance Contribution Act (“FICA”) taxes.1 .The notices were filed on November 13, 1998, and on April 15, 1998.
The debtors filed a petition under Chapter 13 of the Bankruptcy Code on May 25, 1999. In their schedules, the McCords claimed to have $60,000 assets in real property and $91,803.05 in personal property. The McCords claim a personal property interest of $1,000 in fixtures and $10,000 in actual liquidation value of inventory in the two stores. During discovery, the McCords admitted that essentially all of the inventory on hand on the date of the bankruptcy filing came into existence after April 14, 1998 (the day before the first tax lien was filed); that there were no accounts receivable on April 14, 1998; and that all leasehold items, fixtures, and equipment were purchased prior to April 14, 1998. The McCords further stated that the fair market value of the leasehold items, fixtures, and equipment was $39,808 but could probably be sold for only $1,000 to $2,000.
Petland maintains that its liens have priority over those of the IRS by virtue of the fact that it perfected its liens before the IRS filed its notices of liens. The IRS contends that Petland’s liens attached to property acquired by the McCords after the IRS filed its notices and that the IRS liens have priority. The IRS filed a secured claim for $70,817.79. Petland filed a secured claim for $237,175.42. On August 7, 2000, the McCords filed this adversary proceeding to determine the relative priority of these secured liens.
DISCUSSION
The United States Supreme Court addressed similar issues in Internal Revenue Service v. McDermott, 507 U.S. 447, 113 S.Ct. 1526, 123 L.Ed.2d 128 (1993), holding that a federal tax lien filed before judgment debtors acquired real property had priority over the judgment creditor’s previously recorded Utah state lien. On December 9, 1986, the IRS assessed the McDermotts for unpaid federal taxes for 1997 through 1981. Id. at 448, 113 S.Ct. *8171526. Upon that assessment, pursuant to 26 U.S.C. § 6321 and § 6322, a lien was created in favor of the IRS on all real and personal property of the McDermotts, including after-acquired property. Id. The IRS filed notice of the lien on September 9, 1987. Id. Prior to that, on July 6, 1987, Zions First National Bank had docketed a Utah state court judgment against the McDermotts, creating a judgment lien under Utah law on all of the McDermotts’ real property then owned or thereafter acquired. Id.
Thereafter, on September 23, 1987, the McDermotts acquired title to a parcel of real property. Id. at 448-449, 113 S.Ct. 1526. The McDermotts brought an inter-pleader action in state court to establish which hen was entitled to priority; the case was removed to District Court where Zions First National Bank was awarded priority. The Tenth Circuit Court of Appeals affirmed, and the United States Supreme Court granted certiorari and reversed and remanded.
The Court began its analysis by noting that “[fjederal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that ‘the first in time is the first in right.’ ” Id. at 449, 113 S.Ct. 1526, quoting United States v. New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L.Ed. 520 (1954). Noting that under 26 U.S.C. § 6323(a) the IRS’ lien was “not valid ... until notice thereof.. .has been filed,” the Court deemed the IRS’ lien “to have commenced no sooner than the filing of notice.” Id. at 449, 113 S.Ct. 1526.
Considering Zions First National Bank’s lien, the Court stated that “[o]ur cases deem a competing state lien to be in existence for ‘first in time’ purposes only when it has been ‘perfected’ in the sense that ‘the identity of the lienor, the property subject to the lien, and the amount of the lien are established.’ ” Id. at 449M:50, 113 S.Ct. 1526, (emphasis in original) quoting United States v. New Britain, 347 U.S. at 84, 74 S.Ct. at 369. As a result, establishment of priority hinged on whether the bank’s judgment lien was “perfected in that sense” before the IRS had filed its tax lien on September 9, 1987. Id. at 450, 113 S.Ct. 1526. The Court concluded that a lien in after-acquired property is not “perfected” until the debtor’s acquisition of that property. Id. at 451-453, 113 S.Ct. 1526. Therefore, the Court reasoned, Zions First National Bank’s lien was not “first in time” even though it was filed prior to the IRS’ filing. Id.
The IRS’ lien in the after-acquired property also attached at the moment the McDermotts acquired the property. The Court noted that the two liens attached at exactly the same instant. Id. at 453, 113 S.Ct. 1526. The Court concluded, however, that “under the language of § 6323(a) (‘shall not be valid as against any ... judgment lien creditor until notice ... has been filed’), the filing of notice renders the federal tax lien extant for ‘first in time’ priority purposes regardless of whether it has yet attached to identifiable property.”2 Id. at 453, 113 S.Ct. 1526.
In the instant case, the McDermott analysis is appropriate. First, the United States has a secured claim in all of *818the McCords’ property, including the property subject to Petland’s interest. A federal tax lien arose upon assessment and attaches to all property of the McCords. 26 U.S.C. §§ 6321,6322. The IRS filed a proof of claim for $70,817.79. Under 11 U.S.C. § 506(a), an allowed claim is secured to the extent of a debtor’s interest in the property of the estate. Since the McCords indicate in their schedules that they have assets in excess of «$70,817.79, the United States has an allowed secured claim. There is no dispute that Petland has a secured interest under Maryland law.
Next, the Court must determine when the relative security interests of the IRS and of Petland were perfected. Pet-land obtained an interest in all accounts, leasehold items, fixtures, inventory, equipment, proceeds, and after-acquired collateral by security agreement, with financing statements filed pursuant to Maryland law on January 31, 1997, and May 15, 1997. The liens on the relevant property already acquired by the McCords were perfected on those dates. However, the liens on any after-acquired property were not perfected until the McCords’ actual acquisition of that property. The United States’ tax lien notices were filed on November 13, 1998, and April 15, 1998. These liens were perfected on those dates as far as property previously acquired by the McCords. The liens on any after-acquired property were not perfected until the McCords actually acquired the property.
CONCLUSION
Under the McDermott analysis, the Court finds that Petland has priority over the IRS liens on any accounts, leasehold items, fixtures, inventory, equipment and proceeds of the two Maryland pet stores according to the security agreement so long as the McCords acquired that property prior to April 15, 1998. The IRS has priority on any accounts, leasehold items, fixtures, inventory, equipment and proceeds of the two Maryland pet stores acquired by the debtors on or after April 15, 1998.
It is accordingly SO ORDERED.
The Clerk is directed to transmit copies of this Order to the parties in interest.
. These taxes were assessed on March 31, 1997; June 30, 1997; October 13, 1997; and April 6, 1998, for the period ending December 31, 1996; March 31, 1997; June 30, 1997; and December 31, 1997, respectively, for a total of $70,817.79. Additionally, the IRS has an unsecured priority claim for the debtors' income taxes for the year ending December 31, 1995, and for Federal Unemployment Tax Act ("FUTA") taxes for the year ending December 31, 1997, and a general unsecured claim for penalties and interest. The income taxes, FUTA taxes, penalties, and interest are not relevant to this adversary proceeding.
. The Supreme Court defends its position in part by noting that while a "first-to-record” ' presumption may be appropriate between two voluntary transactions involving after-acquired property, the Government “cannot indulge the luxury of declining to hold the taxpayer liable for taxes; notice of a previously filed security agreement covering after-acquired property does not enable the Government to protect itself.” McDermott, 507 U.S. 447, 455, 113 S.Ct. 1526, 1531, 123 L.Ed.2d 128. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493194/ | MEMORANDUM OPINION
KEVIN J. CAREY, Bankruptcy Judge.
An involuntary chapter 7 bankruptcy petition was filed against C.F. Foods, L.P. on May 6, 1999.1 An order for relief was *74entered on July 1, 1999 and the chapter 7 trustee was appointed as interim trustee on July 15, 1999. On June 20, 2000, the trustee filed an adversary proceeding against the Internal Revenue Service (“IRS”) to recover pre-petition payments made by the debtor to the IRS on the theory that the payments were fraudulent transfers. The trustee’s complaint was amended twice to add Edward Stillman, Patrick Stillman, Karen Stillman and First Union National Bank (the “Bank”) as defendants. Presently before this Court are cross motions for summary judgment filed by the IRS and the trustee.2 For the reasons which follow, both motions shall be denied.
BACKGROUND
The IRS has admitted the following facts as alleged in the trustee’s Second Amended Complaint3:
1. On January 1, 1994, David Burry and Edward Stillman, formed a limited partnership in Chadds Ford, Pennsylvania known as C.F. Foods, L.P.
2. C.F. Foods was created for the stated purpose of engaging in the purchase, sale and distribution of wholesale candies from large candy manufacturers and wholesale distributors to local purchasers, such as supermarkets, candy stores, and other retailers.
3. David Burry was a general partner who managed and operated C.F. Foods.
4. Edward Stillman was an alleged limited partner and investor in C.F. Foods.
5. David Burry solicited investors in C.F. Foods by promising them that his expertise in the wholesale candy distribution business resulted in high profits for C.F. Foods and, as a result, C.F. Foods could provide returns of 18-30% to investors.
6. The returns paid to C.F. Foods’ early investors were paid for with the proceeds derived from investments made by later investors.
7. Over time, David Burry, Edward Stillman and others eventually attracted over $25 million in investments in C.F. Foods.
8. David Burry represented to investors, Edward Stillman, financial institutions and his accountant that he was very successful at purchasing very large quantities of candy from *75wholesalers and manufacturers at “close-out” prices and then reselling these large quantities in the marketplace for a significant mark-up.
9. C.F. Foods purportedly conducted two types of sales transactions.
10. The portion of the business dubbed by David Burry as “Sales One” was completely fictitious and fraudulent in nature.
11. David Burry was solely responsible for managing Sales One and no one at C.F. Foods other than David Burry had any personal involvement in this aspect of the business.
12. Sales One, essentially, involved the purchase of large quantities of “close out products” and subsequent re-sale to customers through direct shipment orders. In reality, no such transactions ever occurred.
13. The other portion of the business, known as “Sales Two,” was the “legitimate” aspect of C.F. Foods with real employees, real inventory, and real sales deliveries.
14. In 1988, Sales Two reflected actual sales totaling less than $5 million, out of total reported sales of more than $140 million.
15. Using the invoices, shipping documents and related business records acquired from the small amount of real candy business conducted by C.F. Foods, David Burry systemat-ieally created phony “business records” by whiting out old information, typing in new information, and then photocopying the forged records so that it would be indistinguishable from a copy of authentic business records reflecting real transactions.
16. David Burry then logged hundreds and hundreds of fictitious transactions into the computerized general ledger system for C.F. Foods, which generated false balance sheets, income statements, and accounts receivable listings, among others.
17. Based upon the false information provided by David Burry, C.F. Foods reported the following total sales figures to investors and financial institutions:
Year Sales Reported
1994 $ 8,699,152
1995 $ 19,026,265
1996 $ 40,590,990
1997 $ 83,985,013
1998 $142,990,010
Total $295,291,430
18. By David Burry’s own admission, approximately 97% of these sales never actually occurred.
19. Based upon the fraudulent sales figures, David Burry caused C.F. Foods to make tax payments on behalf of its partners as follows:4
*76[[Image here]]
Total Payments to IRS: $3,190,259.38
20. On September 20, 1999, a Guilty Plea Agreement was reached between the government and David Burry in which, among other things, David Burry pled guilty to an Information charging (1) money laundering, in violation of 18 U.S.C. § 1956; (2) wire fraud, in violation of 18 U.S.C. § 1348; (3) bank fraud, in violation of 18 U.S.C. § 1344; and (4) possession of firearms by a convicted felon, in violation of 18 U.S.C. § 922(g).
In his Second Amended Complaint, the trustee asserts the following:
30.Upon information and belief, in September, 1999, Edward Stillman directed Christopher M. Clair, the former accountant of the estate of C.F. Foods to file amended tax returns for the sole purpose of eliminating the fraudulent sales figures mentioned above, with the effect being that the partners would receive a K-l from the Debtor which would allow them to obtain a substantial refund from the Internal Revenue Service based on the above-referenced payments.
31. The filing of said tax return was prepared and filed without the approval of the estate, was illegal because it was not signed by the Trustee who had already been appointed in this matter, and was never, disclosed to the estate or the Trustee.
32. Upon information and belief, Edward Stillman and Karen Stillman, individually or as tenants by the entirety, have received a substantial refund, and have forwarded some, if not all of the funds, to either Patrick Stillman and/or First Union National Bank for the sole purpose of providing collateral security to First Union National Bank for a personal loan of Patrick Stillman.
In its Answer, the IRS denied the allegations in paragraphs 30, 31 and 32, except to admit that the IRS issued a refund to Edward Stillman in excess of $1.4 million *77on or about December 15,1999.5
The IRS Motion for Partial Summary-Judgment seeks judgment in favor of the IRS on the counts related to avoidance of payments made by the debtor for the benefit of Edward Stillman, because the IRS was but a “mere conduit” for transfers from the debtor to Edward Stillman. The Trustee’s Cross-Motion for Summary Judgment seeks judgment in favor of the trustee for all of the payments to the IRS because the IRS admitted in its answer to the Amended Complaint that the payments are avoidable under an “actual fraud” theory of 12 Pa.C.S.A. § 5104(a)(1) of the Pennsylvania Uniform Fraudulent Transfer Act, applicable to this case by virtue of § 544 of the Bankruptcy Code.
LEGAL STANDARD
Summary judgment is appropriate when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c), made applicable to this adversary proceeding by Fed. R. Bankr.P. 7056.
On motion for summary judgment, the moving party “... always bears the initial responsibility of informing the ... court of the basis for its motion, and identifying those portions of ‘the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any,’ which it believes demonstrate the absence of a genuine issue of fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). “[W]hen a properly supported motion for summary judgment is made, the adverse party ‘must set forth specific facts showing that there is a genuine issue for trial.’ ” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (quoting Fed.R.Civ.P. 56(e)). An issue is “genuine” only if a reasonable jury, considering the evidence presented, could find for the nonmoving party. Id., 477 U.S. at 249, 106 S.Ct. 2505.
DISCUSSION
1. The IRS Motion For Partial Summary Judgment.
In its Motion for Partial Summary Judgment, the IRS argues that, even assuming the transfers from the debtor to the IRS for the benefit of Edward Stillman are avoidable under Sections 544 or 548 of the Bankruptcy Code, Section 550 of the Bankruptcy Code does not allow the trustee to recover those transfers from the IRS. Section 550 provides that the trustee may recover avoided transfers only from initial transferees (§ 550(a)(1)) or from immediate or mediate transferees of the initial transferee (§ 550(a)(2)).6 The IRS ar*78gues that it is neither an initial transferee nor a immediate or mediate transferee because Edward Stillman is the initial transferee and the funds passed through the IRS as a “mere conduit” before reaching Edward Stillman.
As other courts have noted, the term “initial transferee” is not defined in the Bankruptcy Code and there is no legislative history offering guidance. Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890, 893 (7th Cir.1988). Most courts that have examined the issue of whether an entity is an “initial transferee” have adopted a “dominion and control test,” which defines an initial transferee as one who has “dominion over the money or other asset, the right to put the money to one’s own purposes.” Bonded Financial, 838 F.2d at 893. Other entities that may receive a transfer for the limited purpose of allowing the funds to “pass through” to another recipient are “mere conduits” that enable the funds to be delivered to the “initial transferee.”
The leading case on the dominion and control test is Bonded Financial, supra, decided by the Seventh Circuit Court of Appeals. In that case, the debtor sent the defendant bank a check made payable to the bank in the amount of $200,000 with written instructions directing the bank to deposit the check into an account belonging to an individual owner of the debtor, Mr. Ryan. Bonded Financial, 838 F.2d at 891. The bank deposited the check into Mr. Ryan’s account. Id. Ten days later, Mr. Ryan instructed the bank to debit his account in the same amount and apply the money to reduce an outstanding loan from the bank to the individual. Id. After Bonded Financial filed bankruptcy, the trustee sought to recover $200,000 from the bank under Bankruptcy Code Section 548(a). Id. The court found that at the time the debtor delivered the check to the bank with instructions to deposit the check into Mr. Ryan’s account, the bank was not the initial transferee of the check, because:
The Bank acted as a financial intermediary. It received no benefit. Ryan’s loan was fully secured and not in arrears, so the Bank did not even acquire a valuable right to offset its loan against the funds in Ryan’s account. Under the law of contracts, the Bank had to follow the instructions that came with the check. The Uniform Commercial Code treats such instructions as binding to the extent any contract binds (see UCC § 3-119). The Bank therefore was no different from a courier or an intermediary on a wire transfer; it held the check only for the purpose of fulfilling an instruction to make the funds available to someone else.
The Bank had no dominion over the $200,000 until January 31 [ten days after the initial deposit], when Ryan instructed the Bank to debit the account to reduce the loan; in the interim, so far as the Bank was concerned, Ryan was free to invest the whole $200,000 in lottery tickets or uranium stocks.
Bonded Financial, 838 F.2d at 893, 894. A number of courts of appeals have adopted the dominion and control test of *79Bonded Financial or of similar decisions, and I do so here.7
Based on the admitted facts in this case, the sequence of events concerning the relevant transfers is as follows: the debtor transferred funds in the total amount of $1,658,737.00 to the IRS by three checks made payable to the IRS for income tax payments on behalf of Edward Stillman. (Paragraph 19 in the Background, above.) The income tax payments were based on the debtor’s sales figures as reported by David Burry, the vast majority of which were admittedly fraudulent. As a result of having the debtor’s former accountant file amended tax returns, Edward and Karen Stillman (the “Stillmans”) later obtained a refund from the IRS in an amount of more than $1.4 million.
The IRS relies upon 26 U.S.C. § 6402(a) in support of its contention that it had no dominion and control over the payments it received. Section 6402 provides:
§ 6402. Authority to make credits and refunds
(a) General rule — In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall, subject to subsections (c) [offset of past-due support against overpayments]; (d) [collection of debts owed to Federal agencies]; and (e) [collection of past-due, legally enforceable state income tax obligations], refund any balance to such person.
The IRS argues that once the Stillmans demonstrated their entitlement to a refund, the IRS was required to refund the overpayment to the Stillmans pursuant to 26 U.S.C. § 6402. The trustee points out, however, that § 6402 gives the IRS discretion to setoff overpayments against other tax liabilities, obligations to the United States, support payments, or state income tax obligations and, therefore gives the IRS “dominion and control” over the funds. But the statutory grant of setoff authority contained in of 26 U.S.C. § 6402 is not enough to give the IRS dominion and control over the funds. There also must be some outstanding liabilities actually owing by the taxpayer at the time the refund is requested that enables the IRS to exercise a current right to setoff. The Bonded Financial Court found that the bank did not have a right to setoff at the. time it received the transfer.8 Therefore, the question is not whether the recipient of a transfer had a possible, inchoate right to exercise dominion and control over such funds, but whether it had an actual right *80and ability to do so at the time it received the transfer.9 If no outstanding liabilities existed during the time in which the IRS held the funds, then the IRS is obligated by statute to refund the moneys and does not have dominion and control over the funds.
In this case, however, the IRS did, in fact, exercise dominion and control over the funds paid by the debtor on account of Edward Stillman’s income tax liability. The IRS attached to its Motion for Partial Summary Judgment a Declaration of Regina Monell, an IRS bankruptcy specialist, in which Ms. Monell states, in part:
2. On or about December 15, 1999, the IRS refunded to the [sic] Edward and Karen Stillman $533,946.13 for the 1996 tax year. That amount includes the taxes paid by (or on behalf of) Edward and Karen Still-man ($439,665.00), and statutory interest of $94,281.13 from the date of payment. The IRS did not refund the $19,121.00 penalty paid for the underpayment of estimated tax. [Emphasis added.]
4. On or about December 15, 1999, the IRS refunded to Edward and Karen Stillman $900,190.13 for the 1997 tax year. That amount includes the taxes paid by (or on behalf of) Edward and Karen Stillman ($858,711.00), and statutory interest ($41,479.13) from the date of payment. The IRS did not refund the $29,808.00 penalty paid for the underpayment of estimated tax. [Emphasis added.]
6. The IRS did not setoff any amounts refunded to Edward and Karen Still-man against tax liabilities owed by either Edward or Karen Stillman.
Despite the statement in paragraph 6, other parts of the Declaration show that the IRS exercised dominion and control over the funds by withholding any “penalty paid for the underpayment of estimated tax” from its refund to the Stillmans. Accordingly, the IRS was not a “mere conduit” through which funds passed to an initial transferee, because the IRS did exercise its prerogative not to release some portion of the funds before transferring the balance of the funds to the Stillmans.
In the IRS Motion for Partial Summary Judgment, the IRS raises an alternative argument that, even if it is not a “mere conduit,” it cannot be considered the initial transferee of the debtor’s funds at issue in this matter because “in substance, the payments made by Burry were partnership distributions to Stillman and Burry and [then] a payment from Stillman and Burry to the United States.” 10 When deciding which entity is the initial transferee of the funds in question, the court *81should “step back and evaluate a transaction in its entirety.” In re Orange County Sanitation, Inc., 221 B.R. 32B, 328 (Bankr. S.D.N.Y.1997) (citations omitted). As discussed above, the initial transferee is one who first exercises dominion and control over the debtor’s property. Other courts have found that “the requisite dominion or control [to be deemed the initial transferee] is present when a corporate officer or shareholder causes the corporation to make payments on his personal debts or for his personal benefit.” Id. at 327.11
Burry, as general partner of the debtor, took control of the debtor’s funds and used them to satisfy income tax liabilities (albeit, liabilities based upon fraudulently reported income) for the benefit of himself and Edward Stillman. At the time he made the payments to the IRS, Burry exercised dominion and control over the debtor’s funds in a manner that earned him the status of an initial transferee. Whether Edward Stillman also exercised sufficient dominion and control over the funds at the time the debtor transferred the funds to the IRS to be considered an initial transferee cannot be ascertained from the admitted facts and, is a genuine issue of material fact left for trial. Accordingly, if Burry (and possibly Edward Stillman) are initial transferees of the transfers in question, then the IRS cannot be the initial transferee and is an immediate or mediate transferee of the initial transferee. Whether voidable transfers can be recovered from the IRS as a mediate or immediate transferee under Section 550(b)(1), i.e. whether the IRS received the transfer of funds for value, and in good faith, without knowledge of the voidability (if appropriate) of the transfer in issue, are genuine issues of material fact left for trial. The IRS Motion for Partial Summary Judgment will be denied.
II. The Trustee’s Cross-Motion for Summary Judgment.
In the Trustee’s Cross-Motion for Summary Judgment, the trustee argues that all of the necessary elements to establish “actual fraud” under the Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa. C.S.A. § 5104(a)(1),12 which is made applicable to the bankruptcy proceeding pursuant to Bankruptcy Code § 544, have been admitted by the IRS in its answer to the amended complaint.13 Therefore, the trustee argues that there are no genuine issues of material fact and that summary *82judgment should be granted in his favor. The IRS’s response to the trustee’s motion asserts (1) that sovereign immunity prevents the trustee from bringing an action against the IRS under Bankruptcy Code § 544; and (2) that a genuine issue of material fact exists because the IRS modified its admissions in its answer to the Second Amended Complaint.
A.
The IRS challenges this court’s jurisdiction 14 over the trustee’s § 544(b) claims on the grounds that it is immune from suit. Because the IRS has already raised sovereign immunity in this proceeding, I must first decide whether it can again assert sovereign immunity before addressing the merits of its defense.
(1)
The IRS previously asserted sovereign immunity in the context of its prior motion to dismiss this adversary proceeding. There, the IRS argued, among other things, that the trustee’s claims under 11 U.S.C. § 544 are barred by sovereign immunity, relying on In re Anton Motors, Inc., 177 B.R. 58 (Bankr.D.Md.1995). The motion to dismiss was denied in an Order/Memorandum dated August 14, 2000 (In re C.F. Foods, L.P., 2000 WL 1160847 (Bankr.E.D.Pa.2000)) by my predecessor, then Judge David A. Scholl. In that Order/Memorandum, then Judge Scholl wrote:
11 U.S.C. § 106(a) effects a complete waiver of sovereign immunity as to the federal government in actions under 11 U.S.C. § 544. The Anton Motors court, while appreciating this fact, 177 B.R. at 61-64, nevertheless held that a separate analysis of a state governmental unit’s potential immunity under applicable state law was necessary, Id. at 64-67. Here, however, the governmental entity is the federal government itself, and no applicable state law creating any immunity for the federal government is cited. Rather, the Defendant returns to its earlier argument... that the Trustee’s purported need to exhaust administrative remedies renders the government “immune” from such claims until the necessary exhaustion of remedies is effected. We have already indicated, however. . .that we believe that the exhaustion argument is overcome by effect of 11 U.S.C. § 505(a).
C.F. Foods, L.P., 2000 WL 1160847 at *2.
The sovereign immunity argument raised in response to the Trustee’s Cross-Motion for Summary Judgment presents a view through a prism different from that addressed in the August 14, 2000 decision of my predecessor. The IRS now argues that the trustee cannot bring an action under 12 Pa.C.S.A. § 5104(a), made applicable to this case by 11 U.S.C. § 544, because § 544 permits the trustee to avoid only a transfer of an interest in a debtor’s property that is voidable under applicable law by an unsecured creditor.15 An unse*83cured creditor could not bring a suit against the IRS under 12 Pa.C.S.A. § 5104(a) outside of bankruptcy court because the unsecured creditor would be barred from doing so by the sovereign immunity doctrine (unless it could show that the government waived sovereign immunity). Without the existence of an unsecured creditor who has the right to commence such an action, the IRS argues, there is no cause of action that the trustee can pursue through the use of § 544 of the Bankruptcy Code. In other words, § 544 should not be read to confer upon the bankruptcy trustee a right not available to an unsecured creditor under the state law the trustee is attempting to employ.
The trustee asserts that I am precluded from considering this issue by virtue of the “law of the case doctrine,” since sovereign immunity has already been raised and decided. While I have been (and remain) reluctant to accept invitations to revisit decisions of my predecessor, the law of the case doctrine does not prevent this Court from considering the IRS’s revised sovereign immunity argument. The Third Circuit’s view on the law of the case doctrine was recently summarized by the District Court for New Jersey as follows:
The law of the case doctrine “limits the extent to which an issue will be reconsidered once the court has made a ruling on it.” Fagan v. City of Vineland, 22 F.3d 1283, 1290 (3d Cir.1994) ... The law of the case doctrine is not jurisdictional, but rather recognizes that “as a matter of comity a successor judge should not lightly overturn decisions of his predecessors in a given case.” Fagan, 22 F.3d at 1290. The doctrine applies both to transfers from judge to judge in the same district.. .and to transfers from district to district... For intra-district transfers, the decision to follow the law of the case is within the district court’s discretion....
In Fagan, the Third Circuit held that “[t]he law of the case doctrine operates only to limit reconsideration of the same issue.” 22 F.3d at 1290. Fagan involved the liability of a municipality and individual police officers for injuries caused during the course of a high-speed police chase. The original judge denied the summary judgment motion of the municipality and the officers. The case was then transferred to another judge within the same district, and the municipality and officers once again moved for summary judgment. The second judge granted this motion. On appeal, plaintiffs argued that the second judge’s action violated the law of the case doctrine. The Third Circuit held that the second judge had discretion to revisit the issue. The court noted that while the original judge addressed the issue under a “reckless or callous indifference” standard, the second judge applied a “shocks the conscience” standard, a standard that the Third Circuit adopted. Therefore, the court held that because the second judge “did not reconsider the same issue decided by [the original judge], the law of the case doctrine posed no obstacle to [the second judgej’s action.” 22 F.3d at 1290.
Waste Conversion, Inc. v. Sims, 868 F.Supp. 643, 649 (D.N.J.1994). Likewise, in this case, I am not considering the same sovereign immunity argument that was before then Judge Scholl, because the IRS is asserting a different basis for its alleged sovereign immunity. Moreover, questions of jurisdiction are a threshold matter (In re Grace Community, Inc., 262 B.R. 625, 629 (Bankr.E.D.Pa.2001)) and can be raised at any time (In re Custom Distribution Services, Inc., 224 F.3d 235, 240 n. 3 (3d Cir.2000)). Accordingly, I will address *84the substance of the IRS’s sovereign immunity claim.
(2)
The doctrine of sovereign immunity prevents suits against the United States except when Congress has “unequivocally expressed” its consent to be sued. United States v. Nordic Village, Inc., 503 U.S. 30, 33-34, 112 S.Ct. 1011, 1014-15, 117 L.Ed.2d 181 (1992). Bankruptcy Code Section 10616 was amended by Section 113 of the Bankruptcy Reform Act of 1994 to state unequivocally Congress’ “... intention to abrogate sovereign immunity from bankruptcy causes of action for both the United States and the states, as to both nonmonetary and monetary judgments, except punitive damages.” In re Anton Motors, Inc., 177 B.R. 58, 63 (Bankr.D.Md.1995). The purpose of amending § 106 was, at least in part, in response to two United States Supreme Court decisions17 holding that the previous version of § 106 did not unambiguously waive sovereign immunity with respect to allowing monetary recovery against governmental units. HR Rep 103-834, 103rd Cong., 2nd Sess 13-16 (Oct. 4, 1994), U.S.Code Cong. & Admin.News 1994, p. 3323; 140 Cong. Rec. H10766 (Oct. 4, 1994). The House Report for the Reform Act of 1994 further explains the reasons behind the amendment as follows:
This amendment expressly provides for a waiver of sovereign immunity by governmental units with respect to monetary recoveries as well as declaratory and injunctive relief. It is the Committee’s intent to make section 106 conform to the Congressional intent of the Bankruptcy Reform Act of 1978 waiving sovereign immunity of the States and Federal Government in this regard. Of course the entire Bankruptcy Code is applicable to governmental units where sovereign immunity is not or cannot be *85asserted. As suggested by the Supreme Court, section 106(a)(1) specifically lists those sections of title 11 with respect to which sovereign immunity is abrogated. This allows the assertion of bankruptcy causes of action, but specifically excludes causes of action belonging to the debtor that become property of the estate under section 541.
Id.
Accordingly, Congress amended § 106(a) by setting forth specific Bankruptcy Code sections, including § 544, to express, clearly and unequivocally, its intent that governmental units be subject to monetary judgments under those sections. Further, as recognized by the court in Anton Motors, the amended Section 106(a):
abrogates, not just waives, the sovereign immunity of governmental unit... .The significance of abrogation, excluding constitutional issues that are not raised here, is that it constitutes a total override of Eleventh Amendment immunity and federal sovereign immunity, to the extent that Congress has made its intent unmistakably clear.... Waiver, by contrast, is triggered by some activity of a state or federal governmental entity by which it consents to be sued in a federal court.
Anton Motors, 177 B.R. at 62. Although the constitutionality of § 106 may sometimes be in dispute with respect to abrogating a state governmental unit’s sovereign immunity defense,18 there is no question that Congress can abrogate the federal government’s sovereign immunity. See In re Thibodaux, 201 B.R. 827, 832 (Bankr.N.D.Ala.1996). Since the governmental unit involved in this matter is the IRS, I need not address the thornier issues regarding the interplay between the Eleventh Amendment and § 106.19
By including § 544 in the list of Bankruptcy Code sections set forth in § 106(a), Congress knowingly included state law causes of action within the category of suits to which a sovereign immunity defense could no longer be asserted. Section 544, together with its predecessor section in the Bankruptcy Act (§ 70e), have long had the primary effect of granting the trustee the power to avoid transfers under state law provisions concerning fraudulent transfers. See 3 Norton Bankr. L. & PRAC.2d § 54:6 (1997).
The effect of including § 544 in § 106(a) grants the trustee rights that are more broad than those possessed by an unsecured creditor pursuing a similar state law cause of action. However, there is precedent for Congress granting to a bankruptcy trustee such broad rights under § 544.
*86When enacting the Bankruptcy Code of 1978, the Committee Report for § 544 stated that Congress’s intent was to retain the controversial rule of a 1931 U.S. Supreme Court case, Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931), which held that a trustee could avoid an entire transfer under § 544(b) without regard to the size of the claim of the unsecured creditor whose rights and powers the trustee was asserting.20 “In other words, an entire transfer can be set aside even though the creditor’s claim is nominal and, moreover, the recovery of the trustee is for the benefit of all creditors including those who had no right to avoid the transfer.” 5 CollieR on BaNKRuptoy ¶ 544.09[5] (1998).
There is some allure to the logic of the IRS’s argument that because an unsecured creditor has no right to sue the IRS on a state law fraudulent transfer claim, the trustee is left with no right to which he may succeed. However, even if there was any ambiguity to § 106(a) — and I find that there is none — other considerations still weigh heavily against the result sought by the IRS. Any recovery by the bankruptcy trustee will benefit all of the debtor’s creditors, including the IRS. Moreover, enhancement of the rights of others to the detriment of the federal government, particularly in the government’s capacity as tax collector, is commonplace, including within the Bankruptcy Code itself. See, e.g., 11 U.S.C. §§ 724, 726. See also 26 U.S.C. §§ 6321, 6323.
Accordingly, in light of the unambiguous language of § 106, as supported by the legislative history; the specific inclusion of § 544 in § 106(a); the precedent for Congress providing a trustee with rights that are greater than those possessed by the unsecured creditor upon whom a § 544(b) claim is based; and the policy reasons favoring recovery for the benefit of all creditors, the IRS’s sovereign immunity argument must fail.
B.
The IRS also argues that summary judgment in favor of the trustee cannot be granted because a genuine issue of material fact exists. Counts I, IV, VII, X, XIII, XVI, XIX, XXII, and XXV of the trustee’s complaint21 each contain a paragraph which avers as follows:
This transfer was made with the actual intent to delay, hinder or defraud entities to which C.F. Foods was indebted, or became indebted, on or after the date that said transfer was made.
In its answer to the Amended Complaint, the IRS admitted these allegations. However, in its answer to the Second Amended Complaint, the IRS clarified its admissions to those paragraphs as follows:
The United States admits the allegations contained in paragraph 3522 with clarifi*87cation. While some portion of the transfer was made with the actual intent to delay, hinder or defraud entities to which C.F. Foods was indebted, or became indebted, some portion of the transfer was made to pay taxes legitimately owed by the debtor.
Generally, factual assertions admitted by a party in an answer or response are considered judicial admissions which are conclusively binding upon the party who made them. White v. ARCO/Polymers, Inc., 720 F.2d 1391, 1396 (5th Cir.1983). Once a pleading is super-ceded by an amended answer or response, however, the admissions in the superceded pleading, as a general rule, lose their binding force. Id. at 1396, n. 5. A party may introduce superceded admissions into evidence to be considered as adverse evidentiary admissions by the fact-finder. Id. at 1396; See also Borel v. United States Casualty Co., 233 F.2d 385, 387-88 (5th Cir. 1956).23
Because the IRS has amended its answer, a genuine issue of material fact arises, i.e. whether some of the funds transferred from the debtor to the IRS represented legitimate income tax payments on behalf of the partners for the “Sales Two” portion of the debtor’s business which the trustee admits operated with “real employees, real inventory, and real sales deliveries” and possibly $5 million of sales. (See Background, supra., paragraphs 13 and 14). The trustee’s request for summary judgment must be denied.
Accordingly, both the IRS’s Motion for Partial Summary Judgment and the Trustee’s Cross-Motion for Summary Judgment will be denied.24
. Some of the dates and information set forth in this Background (other than the numbered paragraphs which contain factual averments that were set forth in the trustee’s Second Amended Complaint and admitted by the Internal Revenue Service, as noted below) are taken from the main case and adversary proceeding dockets. This Court may take judicial notice of docket entries since "Federal Rule of Evidence 201 authorizes a court to take judicial notice of an adjudicative fact 'not subject to reasonable dispute’ ... [and] so long as it is not unfair to a party to do so and does not undermine the trial court’s fact finding authority.” In re Indian Palms Assoc., 61 F.3d 197, 205 (3d Cir.1995).
. The IRS filed the "United States’ Motion For Partial Summary Judgment” and memorandum of law in support thereof on November 22, 2000 (the “IRS Motion for Partial Summary Judgment”). The trustee filed the "Trustee’s Memorandum of Points and Authorities in Response To the Motion of the Internal Revenue Service for Partial Summary Judgment” on December 20, 2000. The trustee filed the "Trustee’s Cross-Motion For Summary Judgment Against the Answer Of the Internal Revenue Service to Trustee’s Amended Complaint to Recover Fraudulently Conveyed Income Taxes” and a Memorandum of Points and Authorities in support thereof on December 6, 2000 (the "Trustee’s Cross-Motion for Summary Judgment”). (It appears that the trustee also filed an identical Cross-Motion for Summary Judgment and Memorandum of Points and Authorities on December 13, 2000.) The IRS filed its response to the Trustee’s Cross-Motion for Summary Judgment on January 5, 2001. Hearings were held on February 26, 2001 to consider the IRS Motion for Partial Summary Judgment and the Trustee's Cross-Motion for Summary Judgment.
. The Plaintiff’s Second Amended Complaint To Recover Fraudulently Conveyed Income Taxes (the "Second Amended Complaint”) was filed in this adversary proceeding on November 16, 2000. The United States’ Answer to the Second Amended Complaint was filed on January 5, 2001.
. This chart is reproduced from the "Factual and Procedural History” section of the Trustee's Memorandum of Points and Authorities in Support of Cross-Motion For Summary Judgment filed on December 6, 2000. In its answer to the Second Amended Complaint, the IRS denied the trustee's factual allegations regarding the dates and amounts of payments to the IRS, stating "[T]he United States avers that the payments by C.F. Foods to the IRS were partnership distributions to its partners, David Burry and Edward Stillman, and then payments from these partners over to the IRS for their own personal tax liability.” (IRS Answer to Second Amended Complaint, ¶ 28). See also the discussion of this issue in Section I, infra. However, at the February 26, 2001 hearing on the IRS and trustee cross motions for summary judgment, the trustee stated that the IRS had admitted to the amount and dates of the payments in a Request for Admissions (Tr. at p. 33). It appears that the trustee’s Request for Admissions was supposed to be attached as Exhibit *76"D” to the Trustee’s Cross-Motion for Summary Judgment, but the Requests for Admission were neither attached to the Trustee's Cross-Motion for Summary Judgment nor the Memorandum of Points and Authorities in support thereof. Because the IRS includes a similar table listing the dates and amounts of payments in the background sections of its Memorandum of Law in Support of United States’ Motion for Partial Summary Judgment (at p. 3) and the United States’ Opposition to Trustee's Cross-Motion For Summary Judgment (at p. 4-5), I will accept the amount and timing of the payments as set forth in the above chart for purposes of considering the cross-motions for summary judgment.
. In the Declaration of Regina Monell, IRS Bankruptcy Specialist, attached to the Motion for Partial Summary Judgment, (discussed in Section I, infra.), Ms. Monell states that the IRS refunded the funds in issue to Edward and Karen Stillman.
. Section 550 of the Bankruptcy Code (11 U.S.C. § 550) provides, in part, as follows:
550. Liability of transferee of avoided transfer.
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under section (a)(2) of this section from—
*78(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee of such transferee.
(d) The trustee is entitled to only a single satisfaction under subsection (a) of this section.
. See, e.g., In re Reeves, 65 F.3d 670 (8th Cir. 1995) (corporation was not an initial transferee of funds transferred by debtor into a corporate bank account fraudulently established and controlled by debtor); In re First Security Mortgage Co., 33 F.3d 42 (10th Cir. 1994) (bank which received funds from debt- or with directions to deposit the funds into a customer’s business trust checking account was not an initial transferee); In re Coutee, 984 F.2d 138 (5th Cir. 1993) (law firm was not an initial transferee of funds from debtors that were deposited in firm’s trust account and paid to creditors (including firm’s legal fees) at direction of debtors); and In re Montross, 209 B.R. 943 (9th Cir. BAP 1997) (partnership, which held an apartment house managed by debtor, was not an initial transferee of debtor's funds that were laundered by debt- or through the partnership’s accounts). It appears that this issue has not been decided by the Third Circuit Court of Appeals.
. The Bonded Financial Court wrote: "Ryan's loan was fully secured and not in arrears, so the Bank did not even acquire a valuable right to offset its loan against the funds in Ryan's account.” Bonded Financial, 838 F.2d at 893.
. It is also important to note that the failure of the IRS to exercise an actual, current right to setoff does not change the analysis. In its Partial Motion for Summary Judgment, the IRS wrote: "And, even though the IRS had the statutory right to setoff any moneys owed to it from Stillman, like the bank in Bonded Financial Services, Inc. which had a similar right, it did not exercise this right.” (IRS Motion for Partial Summary Judgment, pp. 11-12). This statement implies that if liabilities existed, the IRS could choose not to exercise any right to setoff and escape eligibility as an initial transferee. I reject such an inl-plication. The question is whether the recipient of the funds has the ability to exercise dominion and control at the time the transfer is made. If the right to setoff existed at the time the debtor’s funds were being held by the IRS, the IRS is deemed to have dominion and control over the funds, regardless of whether it actually exercises any right to setoff. See In re Blatstein, 260 B.R. 698, 717-18 (E.D.Pa. 2001).
. IRS Motion for Partial Summary Judgment, p. 10, n. 4.
. See also In re Auto-Pak, Inc., 73 B.R. 52 (D.D.C.1987)(When debtor corporation's president took debtor’s check made payable to the IRS and had it transformed into a cashier’s check made payable to the IRS and applied to taxes owed by a second company he controlled, the debtor’s president, and not the IRS, was the initial transferee); In re Kenitra, Inc., 53 B.R. 150 (Bankr.D.Or.1985)(Employee, not the IRS, was the initial transferee of debtor's check made payable to the IRS for payment of income taxes on employee’s bonus).
. 12 Pa.C.S.A. § 5104(a) provides, in pertinent part, as follows:
(a) General Rule — A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with the actual intent to hinder, delay or defraud any creditor of the debtor.
. The trustee filed his amended complaint on August 21, 2000. The IRS filed an answer to the amended complaint on September 20, 2000. As noted in footnote 4, supra., the trustee filed a Second Amended Complaint on November 16, 2000 and the IRS filed its answer to the Second Amended Complaint on January 5, 2001. The Trustee’s Cross-Motion for Summary Judgment was filed on December 6, 2000, prior to the IRS's answer to the Second Amended Complaint.
. The United States' sovereign immunity is based upon the well-settled principle that "the United States is immune from suit save as it consents to be sued..., and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit.” Koss v. United States, 69 F.3d 705, 707 (3d Cir.1995) quoting United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 953, 47 L.Ed.2d 114 (1976), in turn quoting United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 769, 85 L.Ed. 1058 (1941).
. Section 544(b)(1) states:
(b)(1) Except as provided in paragraph (2) [applicable to charitable contributions], the trustee may void any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
. Section 106(a) of the Bankruptcy Code provides as follows:
§ 106. Waiver of sovereign immunity.
(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:
(1) Sections 105, 106, 107, 108, 303, 346, 362, 363, 364, 365, 366, 502, 505, 506, 510, 522, 523, 524, 525, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551, 552, 553, 722, 724, 726, 728, 744, 749, 764, 901, 928, 929, 944, 1107, 1141, 1142, 1143, 1201, 1203, 1205, 1206, 1227, 1231, 1301, 1303, 1305, and 1327 of this title, [emphasis added]
(2) The court may hear and determine any issue arising with respect to the application of such sections to governmental units.
(3) The court may issue against a governmental unit an order, process, or judgment under such sections or the Federal Rules of Bankruptcy Procedure, including an order or judgment awarding a money recovery, but not including an award of punitive damages. Such order or judgment for costs or fees under this title or the Federal Rules of Bankruptcy Procedure against any governmental unit shall be consistent with provisions and limitations of section 2412(d)(2)(A) of title 28.
(4) The enforcement of any such order, process, or judgment against any governmental unit shall be consistent with appropriate nonbankruptcy law applicable to such governmental unit and, in the case of a money judgment against the United States, shall be paid as if it is a judgment rendered by a district court of the United States.
(5) Nothing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.
. United States v. Nordic Village, Inc., 503 U.S. 30, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992); Hoffman v. Connecticut Dept. of Income Maintenance, 492 U.S. 96, 109 S.Ct. 2818, 106 L.Ed.2d 76 (1989).
. Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996)(holding that Section 2710(d)(7) of the Indian Gaming Regulatory Act (25 U.S.C. § 2710(d)(7)) cannot grant jurisdiction over a state that does not consent to be sued, despite Congress’s clear intent in that section to abrogate the states’ sovereign immunity, because the Indian Commerce Clause (U.S. Const., Art. I, § 8, cl. 3), pursuant to which the Indian Gaming Regulatory Act was enacted, does not grant Congress the power to abrogate the states’ sovereign immunity); In re Sacred Heart Hosp. of Norristown, 133 F.3d 237 (3d Cir.1998), as amended, (Feb. 19, 1998)(hold-ing that Congress cannot abrogate state sovereign immunity pursuant to any of its Article I powers and, because Bankruptcy Code § 106(a) was enacted pursuant to the Bankruptcy Clause in Article I of the U.S. Constitution, it is unconstitutional to the extent that it purports to abrogate state sovereign immunity, despite Congress’s clear intent to do so).
. It should be noted that the main case relied upon by the IRS (Anton Motors, supra.), involves a state governmental unit and, therefore, its sovereign immunity analysis can be distinguished from this case.
.The Report of the Commission on the Bankruptcy Laws of the United States recommended overruling Moore v. Bay when working on drafts of the 1978 Bankruptcy Code. The National Conference of Bankruptcy Judges sought to retain the rule of Moore v. Bay. For three years, this rule was the subject of much debate. When the Bankruptcy Code was enacted, it was silent with regard to the rule. However, the Committee Reports state that the intention of Congress was to retain the rule of Moore v. Bay. 5 Collier on Bankruptcy ¶ 544.09[5] (1998).
. In the Trustee’s Amended Complaint, paragraphs 34, 48, 62, 76, 90, 104, 118, 132, and 146 set forth this averment. In the Trustee’s Second Amended Complaint, paragraphs 35, 49, 63, 77, 91, 105, 119, 133, and 147 set forth this averment.
. The IRS presented the same answer for paragraphs 49, 63, 77, 91, 105, 119, 133, and 147 of the Second Amended Complaint.
. The IRS's amended answer at this stage does not cause delay or prejudice to the trustee and, in that respect, is quite different from cases in this Circuit in which defendants were not permitted to amend substantially their answers (1) by adding counterclaims just days before trial that would require new rounds of discovery Owens-Illinois, Inc. v. Lake Shore Land Co., Inc., 610 F.2d 1185 (3rd Cir. 1979); or (2) that, in response to an amended complaint which added two defendants, added numerous new parties as counterclaim defendants and pages of new allegations that were already being addressed in related litigation. Regent National Bank v. Dealers Choice Automotive Planning, Inc., 1998 WL 961377 (E.D.Pa.1998).
. I also note from review of the docket that no comprehensive scheduling order has been entered in this adversary matter, so the accompanying order will also fix a date for a scheduling conference at which the parties should be prepared to discuss their remaining pre-trial needs in anticipation of the entry of a comprehensive pre-trial order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493195/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This case came before the Court upon Debtor’s Objection to Claim 4 filed by Frank Hierl. The Court held a hearing on December 13, 2000. Upon the evidence and the submissions of the parties, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
1. On August 4, 1999 Peter Darios (“Debtor”) filed a Chapter 7 bankruptcy petition. (Doc. 1.)
2. Frank Hierl (“Hierl”) filed Claim 4 in the amount of $51,167.61. The claim is based on a judgment obtained by Hierl against Debtor, Michael Rosa (“Rosa”) and John David (“David”). On March 24, 1998 the Circuit Court entered a judgment in the amount of $43,733.00 ($39,462.00 joint*281ly and individually against Debtor, Rosa, and David and $4,271.00 against Debtor only). (Joint Ex. 1.)
3. The Clerk of the Circuit Court entered two writs of execution. (Joint Comp. Ex. 2.)
4. Hierl obtained a lien against all nonexempt real property of Debtor, Rosa, and David as a result of the recorded judgment and filed an affidavit to that effect pursuant to Fla.Stat. ch. 55.10. Included with the affidavit is a copy of a consent order which provides an additional award of attorney’s fees in favor of Hierl as to Rosa and David only, in the amount of $1,843.50. (Joint Ex. 3.)
5. On January 5, 2000, as a result of one of the writs of execution issued on March 24, 1998, a sheriffs bill of sale conveyed to Hierl for $1.00 a parcel of real property previously owned by Rosa.1 (Joint Ex. 4.)
6. On January 16, 2000 Hierl entered into a handwritten contract to sell the parcel of real property to Lisa and Andrew Puttick (the “Putticks”) for $95,000.00. (Joint Ex. 5.)
7. Hierl and the Putticks executed a more formal “Vacant Land Contract” on January 30, 2000. (Joint Ex. 6.)
8. On March 22, 2000 the case was converted to Chapter 13. (Doc. 25.)
9. On June 9, 2000 a closing took place at which Hierl conveyed the property to the Putticks for $95,000.00. After closing costs and the payoff of-a first mortgage on the property, Hierl received net proceeds of $56,179.76. (Joint Ex. 7.)
10. Hierl credited the $1.00 sheriffs sale price against the judgment. (Hierl’s Test. December 13, 2000.) Claim 4 reflects the $1.00 credit.
CONCLUSIONS OF LAW
A proper proof of claim is presumed valid, and is prima facie evidence of the validity of both the claim and its amount. In re St. Augustine Gun Works, 75 B.R. 495, 498 (Bankr.M.D.Fla.1987). Consequently, the objecting party has the burden of coming forward with sufficient evidence to rebut the prima facie validity of the claim. In re Haack, 165 B.R. 501, 503 (Bankr.M.D.Fla.1994) (citing St. Augustine Gun Works, 75 B.R. at 496). Once the objecting party meets this burden, the claimant has the ultimate burden of proving the validity and amount of the claim. Id.
Debtor objects to Claim 4 on the basis that the value of the real property, rather than the $1.00 sheriffs sale price, should be credited against the judgment. Debtor points out that such a credit would fully satisfy the judgment, and the claim should therefore be disallowed in its entirety. Debtor argues that any other finding would result in a windfall to Hierl and an injustice. Hierl argues that only the $1.00 sheriffs sale price should be credited against the judgment. Hierl contends that Debtor’s failure to complain or object to the foreclosure sale in state court constitutes a waiver of his rights and precludes him from objecting to the claim on the basis that the sale price was inadequate. Furthermore, Hierl asserts that inadequacy of price, standing alone, is not a ground for setting aside a judicial sale. Finally, Hierl argues that the interest of finality mandates that a determination be made as to what is owed on a judgment after a *282sheriffs sale and that his eventual sale of the property at a profit is irrelevant.
In support of his objection, Debtor relies on Six v. OB/GYN Solutions, L.C. (In re Six), 220 B.R. 479 (Bankr.M.D.Fla.1994). In Six the debtor was a general partner in a partnership which was the mortgagor of commercial real property. The debtor also personally guaranteed the note. When the note fell into default, the mortgagee foreclosed on the property. The state court entered a final judgment of foreclosure in the amount of $1,888,196.02. The mortgagee purchased the property at the foreclosure sale for $1,200,000.00. The subsequent final judgment for damages did not reflect a credit for the sale price or for the fair market value of the property.
Thereafter, the mortgagee assigned the judgment and conveyed the property to Ob/Gyn. In response to Ob/Gyn’s levy on stock he owned, the debtor filed a motion to satisfy judgment in the state court. The debtor then filed a Chapter 11 bankruptcy petition. Ob/Gyn filed a proof of claim which reflected a credit of the $1,200,000.00 sale price. The debtor objected to the claim contending that the liability should have been reduced by the fair market value of the property rather than the sale price. The court concluded that the amount of the credit was an issue that should have been addressed by the state court and was therefore res judicata. Invoking an equitable exception to res ju-dicata, however, the court held that the fair market value of the property, rather than its sale price, should have been credited to the liability. Finding that the fan-market value of the property exceeded the amount of the liability, the court held that the judgment was satisfied and disallowed the claim.
The case was appealed to the district court. Six v. Ob/Gyn Solutions, L.C., 174 B.R. 339 (M.D.Fla.1994). Noting that the application of res judicata to the issue (of what amount should have been credited to the judgment) would have resulted in a windfall to the creditor, the district court affirmed the bankruptcy court’s decision. “In accordance with this broad [equitable] power, the bankruptcy court may adjust claims to avoid injustice or unfairness.” Id. at 341 (citing Shapiro v. Saybrook Mfg. Co., Inc. (In re Saybrook Mfg. Co., Inc.), 963 F.2d 1490, 1495 (11th Cir.1992)).
The case was appealed to the Eleventh Circuit Court of Appeals, which affirmed the district court’s decision. Six v. Ob/Gyn Solutions, L.C. (In re Six), 80 F.3d 452, 457 (11th Cir.1996). However, the Court noted that the parties’ emphasis on res judicata overlooked the procedural posture of the proceeding in the bankruptcy court. Instead, the court focused on the fact that Ob/Gyn’s failure to obtain a proper deficiency adjudication in state court followed by its placement at issue of the offset in the bankruptcy court enabled the bankruptcy court to properly invoke equitable principles. “By making the previously unadjudicated offset part of its claim, Ob/Gyn submitted the proper valuation of the real estate to the bankruptcy judge to be weighed in its determination of whether all, part, or none of the claim should be allowed.” Id. at 456. However, the court pointed out that its reasoning was not an indication that the outcome of the case would have been different if OB/ Gyn had not raised the offset issue in its claim.
In the instant case, Hierl is not attempting to make a “previously unadjudicated” offset part of his claim. Hierl has consistently maintained the position that Debtor was entitled to only a $1.00 credit against the judgment. The Eleventh Circuit’s reasoning is therefore unavailing. However, the reasoning of both the bankruptcy and the district court provides guidance.
While the Court recognizes the importance of finality, the Court declines to ap*283ply res judicata to the amount of the offset. Offsetting the judgment by the $1.00 purchase price and allowing Hierl’s claim to stand as filed would provide a windfall to Hierl and would work an injustice. In effect, Hierl asks the Court to ensure that he gets paid twice. The Court declines to do so. Although Hierl points out that he made a calculated business decision to levy on the property and that there was no guarantee he would ever sell it, his entry into a Vacant Land Contract a mere 25 days after the sheriffs sale and the actual sale of the property approximately four months later, render such protestations meaningless.
The Court holds that the amount of the judgment must be offset by the fair market value of the property on the date of the sheriffs sale reduced by closing costs and the first mortgage on the property.2 Hierl offers no estimate of the fair market value of the property on the date of the sheriffs sale. Debtor contends that the property’s fair market value on the date of the sale was $95,000.00, the price set forth in the Vacant Land Contract and the price for which Hierl later sold the property. The Court agrees with Debtor’s valuation and finds that the fair market value on the date of the sheriffs sale was $95,000.00. After subtracting closing costs and the first mortgage on the property, Hierl received net proceeds of $56,179.76. Accordingly, Debtor is entitled to an offset of the judgment in that amount.
As of August 4, 1999, the date of the filing of the petition, the amount of the judgment plus accrued interest was $51,167.61, as reflected by Claim 4. The interest accrual from August 4, 1999 until the June 9, 2000 sale date was $4,398.90. Thus the amount of the judgment plus accrued interest as of June 9, 2000 was $55,566.61. Because the net proceeds from the sale exceeded the amount of the judgment debt as of the date of the sale, Hierl was paid in full.
CONCLUSION
The application of res judicata to an offset against the judgment of the $1.00 sheriffs sale price would provide a windfall to Hierl and would produce an inequitable result. Accordingly, Debtor is entitled to an offset against the judgment in the amount of the fair market value of the property on the date of the sheriffs sale, reduced by closing costs and the first mortgage on the property. Because the net proceeds from the sale exceeded the amount of the judgment debt as of the date of the sale, Hierl was paid in full. The Court will therefore disallow Claim 4 in its entirety and will enter a separate order consistent with these Findings of Fact and Conclusions of Law.
. The legal description of the property is: Lot 8, Matanzas Cut Subdivision, According to the Plat Thereof Recorded in Map Book 21, Pages 11 and 12, Public Records of St. Johns County, Florida.
. Fair market value is "[t]he price that a seller is willing to accept and a buyer is willing to pay on the open market and in an arm's length transaction; the point at which supply and demand intersect.” Black's Law Dictionary 1549 (7th ed.1999). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493196/ | *295ORDER ON MOTION FOR REHEARING AND RECONSIDERATION OF ORDER ON MOTION FOR SUMMARY JUDGMENT AS TO COUNT II
ALEXANDER L. PASKAY, Bankruptcy Judge.
PRIOR TO the commencement of this case, Diamax Auto Repair, Inc. (Diamax) filed a suit against Alen Jerry Taylor, d/b/a T & T Roofing (Debtor). On October 20, 1998, the County Court in and for Sarasota County, Florida entered a final judgment in favor of Diamax in the principal sum of $1,669.20, costs of $71 and attorney’s fees in the amount of $600 for a subtotal of $2,340.20. The final judgment further provided that this sum shall bear interest at the rate of 10% per year in addition to pre-judgment interest of $36.13.
On April 23, 1999, the Debtor filed his Petition for Relief under Chapter 7. On July 17, 1999, Diamax filed a Complaint in this Court consisting of two counts. In Count I Diamax sought a determination that the judgment entered in the County Court for Sarasota should be excepted from the overall protection of the general bankruptcy discharge pursuant to § 523(sic) of the Bankruptcy Code. In Count II Diamax sought a money judgment against the Debtor for costs attributable to the representation of Diamax and such attorney’s fees which are attributable for representation of Diamax in this adversary proceeding.
In due course the Debtor was served and on July 20, 1999 filed his Answer in which he admitted some and denied some of the allegations. The Answer also included affirmative defenses in which the Debtor contended the judgment obtained by Diamax in the County Court was not based on fraud or any conduct which would render the debt to be non-dischargeable. In addition, the Debtor contended that he was never properly served in the County Court and, therefore, the judgment is void or voidable. The Answer was filed by the Debtor pro se. On May 11, 2000, this Court dismissed the adversary proceeding for counsel for Diamax’s failure to appear at the duly scheduled pre-trial conference. On July 5, 2000, this Court entered an Order and vacated the Order of Dismissal and rescheduled the matter to consider a motion for summary judgment filed by counsel for Diamax.
In the Motion counsel for Diamax contended that the judgment entered in the County Court was final and based on the doctrine of res judicata this Court must recognize the judgment. The Motion for Summary Judgment was heard in due course and the Debtor having failed to appear the Court reviewed the record, heard argument of counsel for Diamax and having found that there were no genuine issues of material fact granted the Motion for Summary Judgment filed by Diamax. The final judgment entered on March 6, 2001 determined that the final judgment in the amount entered by the County Court of Sarasota was within the exception of discharge, which judgment included not only the principal amount but costs and attorney’s fees. The judgment did not specifically rule on the claim asserted in Count II of the Complaint filed by Diamax.
On March 15, 2001, Diamax filed a Motion for Rehearing or Reconsideration concerning the claim set forth in Count II of the Complaint. The Court considered the record and is satisfied that the final judgment entered by the County Court has been accepted as entered under the Full Faith and Credit Clause, Article IV, § 1 of the Constitution, and based on the doctrine of collateral estoppel the final judgment resolved all issues between the parties, the *296non-dischargeability of the judgment, including the right of Diamax to attorney’s fees.
The claim in Count II is based on Fla.Stat. 772.11. It is clear that attorney’s fees pursuant to this Statute was available to Diamax in the County Court and it was considered by the County Court and granted in the amount of $600. For this reason this Court has no jurisdiction to reconsider and amend that amount concerning Diamax’s costs for pursing the action against the Debtor in the County Court. Concerning the claim for attorney’s fees for services rendered by counsel in connection with this adversary proceeding filed in this Court, there is no provision in the Bankruptcy Code that in connection with a dischargeability litigation the prevailing creditor is entitled to any attorney’s fees if the attorney’s fees were already determined in pre-bankruptcy litigation.
Based on the foregoing, this Court is satisfied that the Motion for Reconsideration should be granted because the final judgment did not cover the claim in Count II of the Complaint. Upon reconsideration, this Court is satisfied that the final judgment shall be amended to reflect that final judgment is entered in favor of the Debtor and against Diamax and the claim in that count shall be dismissed with prejudice.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Reconsideration be, and the same is hereby granted. It is further
ORDERED, ADJUDGED AND DECREED that the final judgment shall be amended to reflect that judgment is entered in favor of the Debtor and against Diamax on Count II. It is further
ORDERED, ADJUDGED AND DECREED that Count II be, and the same is hereby, dismissed with prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493198/ | DECISION AND ORDER
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on the Debtor’s Motion to adjudge the law firm of Paravati, Kari, Green & DeBella (hereinafter “PKGD”) and Attorneys Vincent DeBella and Gerald Green in contempt for violation of the automatic stay, 11 U.S.C. § 362. The Debtor contends that the respondents’ filing of a request to conduct a Rule 2004 examination of her in a corporate Chapter 7 bankruptcy case pending in the District of Pennsylvania is a violation of the automatic stay in her personal Chapter 7 bankruptcy case filed in this District. For the reasons set forth below and also because there appears to be no authority to support the relief sought, I find that no stay violation occurred, and DENY the Debtor’s Motion.
*347
BACKGROUND
In June 1999, Perfection Oil Company (“Perfection”), of which Carlson is the majority shareholder and President, filed a voluntary Chapter 7 case in the District of Pennsylvania. PKGD and Attorneys De-Bella and Green represent the New York State Teamsters Conference Pension & Retirement Fund, a creditor in the Perfection bankruptcy case.
On December 5, 2000, Margot Carlson filed a personal Chapter 7 petition in the District of Rhode Island, and on January 4, 2001, the Trustee convened the Section 341 meeting of creditors, which DeBella attended. After the meeting, according to the Debtor, DeBella stated that he intended to take her deposition, and also “threatened” to pursue a fraud claim against her. DeBella denies making any “threats”, but states that he did inform Carlson of the potential for a fraud action.1
On February 8, 2001, Green filed with the bankruptcy court in Pennsylvania a “Notice of Motion of a 2004 Examination” of Mrs. Carlson in the Perfection case. See Exhibit A. In support of his motion, Green attached an affidavit stating:
13. At the First Meeting of Creditors in Rhode Island, it was learned that Margot H. Carlson now resides in an affluent section of Rhode Island and operates her own retail sales business.
14. All of this information gives rise to various issues concerning the pre-pe-tition sale of real property and the distribution of the proceeds realized therefrom. In addition, unanswered questions remain about the debtor’s expenditures for “Officer’s Payroll” and “Officer’s Life Insurance”, along with a host of other financial concerns.
Therefore, it is essential that the Pension and Health Funds conduct a 2004 examination of Margot H. Carlson concerning her affairs and the affairs of Perfection Oil Company, Inc. This 2004 exam will not only benefit the Pension and Health Funds but also the U.S. Trustee and other creditors of the estate.
Exhibit B, Affidavit of Gerald Green, Esq., p. 3.
On February 20, 2001, Perfection, filed a motion in Pennsylvania to quash the “Notice of Motion for 2004 examination,” see Exhibit C, on the ground that Green violated Pennsylvania Local Bankruptcy Rule 2004(a)-l by failing to confer prior to filing the request for a 2004 examination. Id. Perfection also alleged that the scope of the examination was unclear and too broad. Id. On February 28, 2001, Carlson filed the instant motion to adjudge PKGD and Attorneys Green and DeBella in contempt in her Rhode Island bankruptcy case. On March 2, 2001, Green withdrew the 2004 Motion, without prejudice. See Exhibit D.
DISCUSSION
The automatic stay provided for in 11 U.S.C. § 362 operates, inter alia, as a stay against:
the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title and any act to collect, assess, or recover a claim against the *348debtor that arose before the commencement of the case under this title.
11 U.S.C. § 362(a)(1). Section 362(h) also provides that “[a]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(h).
The First Circuit has stated that “A willful violation does not require a specific intent to violate the automatic stay. The standard for a willful violation of the automatic stay under § 362(h) is met if there is knowledge of the stay and the defendant intended the actions which constituted the violation.” Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d 265, 269 (1st Cir.1999).
In this case, it is undisputed that the putative contemnors had knowledge of Carlson’s pending Rhode Island bankruptcy case, and that they knowingly filed the 2004 motion in the Perfection bankruptcy case in Pennsylvania. It is also clear, however, as a matter of law that said action does not constitute a stay violation in the Rhode Island bankruptcy case.
Section 362(a)(1) stays actions or proceedings against the debtor. The requested 2004 examination was not an action against the Debtor. It was a discovery proceeding in the Perfection bankruptcy case, wherein PKGD was attempting to conduct an examination of the majority shareholder and president of Perfection. Carlson clearly is an appropriate person to be examined under Rule 2004 in the Perfection bankruptcy case. Bankruptcy Rule 9001(5) provides:
When any act is required by these rules to be performed by a debtor or when it is necessary to compel attendance of a debtor for examination and the debtor is not a natural person: (A) if the debtor is a corporation, “debtor” includes, if designated by the court, any or all of its officers, members of its board of directors or trustees or of a similar controlling body, a controlling stockholder or member, or any other person in control.
Fed. R. Bankr.P. 9001(5). Although Section 362 does not preclude litigating with a debtor in the debtor’s bankruptcy forum, see In re Roxford Foods, Inc., 12 F.3d 875, 878 (9th Cir.1993); In re Toyota of Yonkers, Inc., 135 B.R. 471, 477 (Bankr. S.D.N.Y.1992), under 11 U.S.C. § 101(31)(B), Carlson is an “insider” of Perfection, and to equate or translate a request to examine the principal of the company in the corporate bankruptcy case with contempt in the principal’s foreign Chapter 7 proceedings is a leap this Court is neither willing nor authorized to take.
Carlson argues that DeBella and Green sought the examination in Pennsylvania merely to harass and cause her unnecessary expense, but this allegation is not supported by the evidence. Based on Green’s affidavit attached to the Motion for 2004 exam (Exhibit A), together with the live testimony, I find that DeBella and Green had a legitimate and reasonable basis for requesting a 2004 examination in the Perfection bankruptcy case, and that Carlson’s claim that the request was too broad is (or was) an issue for the Pennsylvania bankruptcy court.
For the foregoing reasons, Carlson’s Motion to adjudge Paravati, Kari, Green & DeBella and Attorneys Green and DeBella in contempt is DENIED.
I also find for appellate purposes that, based on this record the actions of DeBella and Green, if determined to be in technical violation of Section 362, do not warrant the imposition of punitive damages.
*349Enter judgment consistent with this opinion.
. A precise characterization of the nature of this conversation is not necessary to determine the issue before me. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493199/ | *421
MEMORANDUM OPINION
BERNARD MARKOVITZ, Bankruptcy Judge.
This is not the first time the question has arisen in this court whether State Employees Retirement Board (“SERB”), an agency created by the Commonwealth of Pennsylvania, should turn over to the chapter 7 trustee a debtor’s interest in a voluntary deferred compensation plan (“DCP”) established for employees of the Commonwealth.
We previously determined in another case that debtor’s interest in the DCP was not excluded from his bankruptcy estate under the version of 72 P.S. § 4521.2 then in effect. In re Kingsley, 181 B.R. 225 (Bankr.W.D.Pa.1995). After SERB appealed and the district affirmed our decision, SERB relented and turned over debt- or’s interest in the DCP to the chapter 7 trustee. Subsequent to our decision in Kingsley but prior to commencement of this bankruptcy case, the Pennsylvania General Assembly amended 72 P.S. § 4521.2.
We previously determined in this bankruptcy case that, notwithstanding the amendments to 72 P.S. § 4521.2, the interest of debtor Jeffrey Schoeneweis in the same DCP was included in his bankruptcy estate. In response to the present adversary action brought by the chapter 7 trustee to recover debtor’s interest in the DCP, SERB brought a motion to dismiss the complaint on the theory that the action against it in this court is barred by the Eleventh Amendment to the United States Constitution. It also seeks to re-litigate issue decided in the previous adversary action wherein they participated.
We are left to wonder why SERB has decided in this instance to adamantly oppose the effort of the chapter 7 trustee to have SERB turn over debtor’s interest in this same DCP when debtor himself has voiced no objection. In particular, we are left to wonder whether the Commonwealth’s opposition is animated more by the desire to curry favor with its employees and their representatives at the expense of debtor’s pre-petition creditors than by the desire to protect its sovereign immunity. We wonder whether this self-styled agency of the Commonwealth has any interest in protecting creditors who reside in the Commonwealth, who will have the debts owed to them discharged while debtor keeps his job, his salary, his pension benefits and this voluntary savings account.
For reasons set forth in this memorandum opinion, we will deny SERB’S motion to dismiss the complaint in this adversary action at this time.
FACTS
Debtors are husband and wife. Debtor Jeffrey Schoeneweis has been employed by the Commonwealth of Pennsylvania as a police officer earning in excess of $50,000 annually for more than a decade. Debtor Cammie Schoeneweis primarily works at home.
In addition to participating in a mandatory pension plan established for employees of the Commonwealth, debtor Jeffrey Schoeneweis participates in a voluntary DCP established for employees of the Commonwealth in accordance with 72 P.S. § 4521.2.
Debtors filed a voluntary chapter 7 petition on November 12, 1998. A chapter 7 trustee was appointed shortly thereafter. The original bankruptcy schedules referred to the above mandatory pension plan but characterized it as “excluded under ERISA”. The DCP, however, was not disclosed in the original bankruptcy schedules. Shortly after the § 341 meeting, the chapter 7 trustee objected, averring that *422debtor’s interest in the above pension plan was not excluded from the bankruptcy estate and was not exemptible by debtor under any theory.
Debtors responded to the objection of the chapter 7 trustee by amending their bankruptcy schedules. Thereafter, they disclosed the existence of debtor Jeffrey Schoeneweis’ interest in the DCP and declared that it had an approximate value of $16,000. According to debtors, his interests in the pension plan and in the DCP were excluded from their bankruptcy estate. Alternatively, debtors asserted that the DCP was “marital property” and that each of them could exempt a portion of it pursuant to § 522(d)(5) of the Bankruptcy Code, thereby exempting it in its entirety.
The chapter 7 trustee withdrew his objection to debtors’ exclusion of the pension plan from the bankruptcy estate pursuant to § 541(c)(2) of the Bankruptcy Code. He did, however, object to the attempted exclusion of the interest in the DCP from the bankruptcy estate by this same provision and to the exemption of a portion thereof by debtor Cammie Schoeneweis pursuant to § 522(d)(5) of the Bankruptcy Code.
Debtors responded by bringing a “motion for summary judgment” with respect to the objections of the chapter 7 trustee. The recent amendments to 72 P.S. § 4521.2, debtors asserted, made the DCP a spendthrift trust, thereby excluding it from the bankruptcy estate in accordance with § 541(c)(2) of the Bankruptcy Code.
A hearing on the objections of the chapter 7 trustee and debtors’ “motion for summary judgment” was held on May 22, 2000.
While the matter still was under advisement, another member of the panel of chapter 7 trustees requested and was granted leave to file an amicus brief in support of the position of the chapter 7 trustee. In addition, SERB, by and through attorneys from the Office of the Attorney General of the Commonwealth of Pennsylvania requested and was granted leave to file an amicus brief in support of debtors’ position.
A second hearing was held on September 22, 2000, to give these amici an opportunity to argue their respective positions. Although we had anticipated that SERB would notify and formally represent to the Attorney General of the Commonwealth of Pennsylvania that the constitutionality of portions of 72 P.S. § 4521.2 had been called into question, the Attorney General, as an officer of the Commonwealth, did not participate.
In a memorandum opinion and order issued on November 9, 2000, we determined that the DCP was not excluded from the bankruptcy estate by § 541(c)(2) because those portions of 72 P.S. § 4521.2 which declared the DCP to be a spendthrift trust were in violation of the Pennsylvania Constitution and therefore were unenforceable. In addition, we determined that debtor Jeffrey Schoeneweis was permitted to utilize § 522(d)(5) of the Bankruptcy Code to exempt a portion of his interest in the DCP but that debtor Cammie Schoeneweis was not permitted to do so. Out of an abundance of caution, we directed the chapter 7 trustee to give notice of our decision to the Attorney General of Pennsylvania and gave the Attorney General thirty days thereafter to intervene and to request reconsideration of our decision.
Debtors did not appeal the order of November 9, 2000. In addition, the Attorney General of Pennsylvania did not file a motion to intervene or for reconsideration of the order. That order became final and the questions answered appear to be the law of the case and binding upon the participants.
*423On February 25, 2001, the chapter 7 trustee commenced the above adversary action against debtors, SERB, and the board members of SERB. The chapter 7 trustee asserts in Count I of the complaint that the interest of Jeffrey Schoeneweis in the DCP is property of the bankruptcy estate and, pursuant to § 542 of the Bankruptcy Code, requests an order directing SERB to turn over to the chapter 7 trustee the proceeds representing debtor’s interest in the DCP. He alleges in Count II that the transfer of the funds belonging to Jeffrey Schoeneweis into the DCP within one year of the bankruptcy filing was fraudulent for purposes of § 548 of the Bankruptcy Code and seeks to avoid and to recover the transfers for the bankruptcy estate.
SERB responded by bringing a motion to dismiss the complaint on May 21, 2001. According to SERB, the Eleventh Amendment prohibits this court from exercising jurisdiction over SERB because it is an alter ego or arm of the Commonwealth of Pennsylvania.
A hearing on SERB’S motion and the opposition thereto of the chapter 7 trustee was held on June 20, 2001.
DISCUSSION
SERB maintains that it is an alter ego or arm of the Commonwealth of Pennsylvania and, as such, is immune from the present lawsuit under the Eleventh Amendment to the United States Constitution.
The Eleventh Amendment provides as follows:
The Judicial power of the United States shall not be construed to extend to any suit in law or equity commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.
The Eleventh Amendment is understood not so much for what it says as for the presupposition which it confirms: that each State is a sovereign entity in our federal system and immunity to suit by an individual absent the consent of the sovereign is inherent in the concept of sovereignty. Seminole Tribe of Florida v. Florida, 517 U.S. 44, 54, 116 S.Ct. 1114, 1122, 134 L.Ed.2d 252 (1996). Federal jurisdiction over such lawsuits in the absence of consent by the State was not contemplated by the United States Constitution when the judicial power of the United States was established. Id.
Its text notwithstanding, the Eleventh Amendment immunizes an unconsenting state from suits brought in federal court not only by citizens of another state, but also by its own citizens. Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, 100, 104 S.Ct. 900, 908, 79 L.Ed.2d 67 (1984). It also bars such suits brought in federal court even though the state is not named as a party defendant if the state is the real, substantial party in interest. Edelman v. Jordan, 415 U.S. 651, 663, 94 S.Ct. 1347, 1356, 39 L.Ed.2d 662 (1974). The Eleventh Amendment also applies when a named defendant is an alter ego or arm of a state. Peters v. Delaware River Port Authority, 16 F.3d 1346, 1350 (3d Cir.), cert. denied, 513 U.S. 811, 115 S.Ct. 62, 130 L.Ed.2d 20 (1994).
The question whether an entity is an alter ego or arm of a state in a given case must be answered in the affirmative before the bar of the Eleventh Amendment applies. Urbano v. Board of Managers, 415 F.2d 247, 250 (3d Cir.1969), cert. denied, 397 U.S. 948, 90 S.Ct. 967, 25 L.Ed.2d 128 (1970). If the answer to the question is in the negative, our inquiry need not proceed any further.
*424Whether an entity is an alter ego or arm of a state for Eleventh Amendment purposes is a question of federal rather than state law. Christy v. Pennsylvania Turnpike Commission, 54 F.3d 1140, 1144 (3d Cür.), cert. denied, 516 U.S. 932, 116 S.Ct. 340, 133 L.Ed.2d 238 (1995). The burden of' proving that the Eleventh Amendment applies in a particular case lies with the party standing to benefit from its application, in this instance SERB. Id.
Three distinct inquiries are involved in determining whether a defendant is an alter ego or arm of a state. They are: (1) whether payment of any judgment in favor of the plaintiff would come from the state’s treasury; (2) the status of the entity under state law; and (3) the degree of its autonomy from state regulation. Fitchik v. New Jersey Transit Rail Operations, Inc., 873 F.2d 655, 659 (3d Cir.), cert. denied, 493 U.S. 850, 110 S.Ct. 148, 107 L.Ed.2d 107 (1989).
No single factor is dispositive. Id. They are not, however, equal in weight or importance. The answer to the first inquiry is “most important” when determining the status of an entity for Eleventh Amendment purposes. Bolden v. Southeastern Pennsylvania Transportation Authority, 953 F.2d 807, 816 (3d Cir.1991), cert. denied, 504 U.S. 943, 112 S.Ct. 2281, 119 L.Ed.2d 206 (1992); Fitchik, 873 F.2d at 659. The “special emphasis” placed upon the first of these inquiries derives from the “central goal” of the Eleventh Amendment: preventing federal court judgments that will have to be paid out of the state’s treasury. Christy, 54 F.3d at 1145.
I.) Payment Of Judgment From State Treasury.
We are not prepared in light of the present record in this case to conclude at this time that a judgment in favor of the chapter 7 trustee in this adversary action would deplete the treasury of the Commonwealth of Pennsylvania in a manner that is relevant for Eleventh Amendment purposes.
The Commonwealth is authorized to establish eligible DCPs pursuant to § 457 of the United States Revenue Code for employees who perform services for the Commonwealth. 72 P.S. § 4521.2(a).
Compensation deferred under such a plan is not included in the computation of federal income taxes to be withheld but does constitute taxable income for state and local earned income taxes. 72 P.S. §§ 4521.2(e)(5) and (f).
Assets and income deferred by the Commonwealth are held in tmst in a funding vehicle permitted by § 457 of the Internal Revenue Code for the exclusive benefit of plan participants and their beneficiaries until the funds are distributed to the participant or to a named beneficiary. 72 P.S. § 4521.2(h)(1). All such assets and income are “held in trust ... in a special fund within the State Treasury of which the State Treasurer shall be the custodian”. Id.
The members of the board of SERB are the trustees of any DCP established by the Commonwealth for its employees. 72 P.S. § 4521.2(h)(2).
Any trust established by the Commonwealth is “declared to be a spendthrift trust”. Construal of a participant’s plan account as self-settled “shall not cause the plan or account to be treated as other than a spendthrift trust”. 72 P.S. § 4521.2(h)(3).
Except as expressly provided by the DCP, any benefit or interest available, any right to receive or direct payments, or any distribution of payments made under the plan “shall not be subject to assignment, *425alienation, garnishment, attachment, transfer, anticipation, sale, mortgage, pledge, hypothecation, commutation, execution or levy, whether by voluntary or involuntary act of any interested person”. 72 P.S. § 4521.2(h)(4).
It is hornbook law that, as trustee, SERB has bare legal title to the amounts in the account of debtor Jeffrey Schoeneweis in the DCP. As the cestui que trust, debtor Jeffrey Schoeneweis has the beneficial interest therein, which interest is included in his bankruptcy estate pursuant to 11 U.S.C. § 541(a)(1).
In addition, a Commonwealth employee must provide services prior to the funds being inserted in the trust. Thereafter, a sum is deducted from the earned salary of the employee and the exact amount is inserted in the trust. Should the employee fail to earn any sums during his employment period, then obviously no sums will be inserted in the trust.
The Eleventh Amendment was an immediate response to fears that “federal courts would force ... [states] to pay their Revolutionary War debts, leading to their financial ruin”. Hess v. Port Authority Trans-Hudson Corporation, 513 U.S. 30, 39, 115 S.Ct. 394, 400, 130 L.Ed.2d 245 (1994) (citing Pennhurst, 465 U.S. at 151, 104 S.Ct. at 935).
Although a judgment in favor of the chapter 7 trustee in this adversary action unquestionably would be satisfied from funds held in the trust account, we are not prepared at this time to conclude on this basis alone that such an “invasion” of the Commonwealth’s treasury has occurred and is dispositive when determining whether SERB is an alter ego or arm of the Commonwealth when the beneficial interest in the deferred income resides in debtor Jeffrey Schoeneweis.
The Eleventh Amendment applies to suits brought by private parties in federal court which seek to “impose a liability which must be paid from public funds in the State treasury” (emphasis added). Hafer v. Melo, 502 U.S. 21, 29, 112 S.Ct. 358, 364, 116 L.Ed.2d 301 (1991) (quoting Edelman, 415 U.S. at 663, 94 S.Ct. at 1355).
The chapter 7 trustee has brought an action requiring SERB to turn over what is alleged to be property of the bankruptcy estate of debtor Jeffrey Schoeneweis. The equitable interest in the funds in his account in the DCP administered by SERB, we have noted, previously resided in debt- or Jeffrey Schoeneweis, not in SERB, and now resides in his bankruptcy estate.
Although these funds are kept in the fisc of the Commonwealth of Pennsylvania, we are not prepared at this stage of the case to conclude on that basis alone that the funds are public funds and that requiring SERB to turn them over to the chapter 7 trustee, should he prevail in this case, would result in a depletion of public funds. The mere fact that the Commonwealth keeps the funds in a separate account in its treasury does not necessarily entail that they are “public” in the requisite manner. The funds represent compensation earned by debtor Jeffrey Schoeneweis from his employment by the Commonwealth which he elected to defer receiving along with any earnings derived from the investment of the funds.
Our unwillingness to conclude at this time that SERB is an arm of the Commonwealth of Pennsylvania when administering a DCP established for its employees does not preclude the possibility that SERB is an arm of the Commonwealth when it performs some other function. An agency may qualify as an arm of the state when it performs one function but not when it performs another function. *426See Carter v. City of Philadelphia, 181 F.3d 339, 351 (3d Cir.), cert. denied, 528 U.S. 1005, 120 S.Ct. 499, 145 L.Ed.2d 385 (1999).
II.) Status Of SERB Under State Law.
The second inquiry involved in determining whether SERB is an alter ego or arm of the Commonwealth of Pennsylvania is whether state law treats it as an independent entity or as a surrogate for the Commonwealth.
Pennsylvania case law indicates that SERB is a surrogate for the Commonwealth. The Commonwealth Court of Pennsylvania, not the highest court in Pennsylvania, concluded after reviewing the statutory provisions which created SERB that it was “sufficiently integrated with the Commonwealth” so as to be shielded from liability under Pennsylvania’s doctrine of sovereign immunity. United Brokers Mortgage Co. v. Fidelity Philadelphia Trust Company, 26 Pa. Cmwlth. 260, 264, 363 A.2d 817, 820 (1976).
We are satisfied that United Brokers remains viable even though it was decided more than a quarter of a century ago and conclude that the Commonwealth Court of Pennsylvania law regards SERB as an arm of the Commonwealth. We will await the decision of the Supreme Court of the Commonwealth of Pennsylvania on this question or the evidence offered at trial in this matter.
III.) Autonomy From State Control.
SERB has presented little, if anything, concerning the degree of autonomy, if any, from Commonwealth control SERB enjoys.
Our own review of relevant statutes indicates that it is not fully autonomous but instead is subject to some control by the Commonwealth. Although it is characterized as an independent administrative board, for instance, a majority of the board members of SERB are appointed by the Governor of Pennsylvania. 71 Pa.C.S.A. § 5901(a). Gubernatorial authority over the appointment of board members of an agency lends support to a finding of sovereignty for an agency. Peters, 16 F.3d at 1351-52. However, by definition they are (and consider themselves to be) an independent administrative board. They can’t have it both ways and we will await the evidence.
IV.) Weighing Of The Factors.
Determining whether SERB is an alter ego or arm of the Commonwealth requires us to consider the answers to the above three general inquiries in their totality. Bolden, 953 F.2d at 821.
Although the SERB’S status under existing appellate Pennsylvania law and the extent of its autonomy from the Commonwealth might appear to indicate that SERB is an alter ego or arm of the Commonwealth, we are not confident at this stage of the case that these considerations inure to the benefit of SERB. Additionally, the most important consideration — i.e., whether a judgment in favor of the chapter 7 trustee would have to be paid from the Commonwealth’s treasury — does not point to a definite conclusion. Should it turn out that any such judgment in reality would not adversely affect the public fisc, a strong case may be made for the conclusion that SERB is not an alter ego or arm of the Commonwealth and therefore is not protected by the Eleventh Amendment.
Such a determination, one way or the other, can be made only after the record in this case has been more fully developed. Consequently, we will deny SERB’S motion to dismiss this adversary action at this time. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493200/ | ORDER ON MOTION FOR REHEARING OR RECONSIDERATION
ALEXANDER L. PASKAY, Bankruptcy Judge.
In this Chapter 11 case the matter under consideration is a Motion for Rehearing or Reconsideration, filed by Capitol Indemnity Corporation (Capitol). The Motion is filed in the general case and technically was directed to an Order entered by this Court allowing a secured claim and determining the right to distribution of Claim No. 78 filed by Capitol. On April 5, 2001, this Court entered an Order granting the Motion for Reconsideration (Doc. # 256 in Main Case and Doc. # 14 in above-captioned Adversary) and vacating the Order Allowing Secured Claim and Determining the Right to Distribution (Doc. 243). The Order further provided that the issues raised by the Order determining the right to distribution of Claim No. 78 shall be deferred pending the outcome of the above-captioned adversary proceeding.
The Complaint filed by Capitol on July 17, 2000, sought an order compelling the Trustee to turn over certain funds which, according to Capitol, are not properties of the estate, thus not subject to a turnover pursuant to Section 542 of the Code. The claim in Count I involved the funds relating to a construction project described as Force Main Project, or the Manatee County Contract. It is based on allegations that the Trustee is currently holding the sum of $95,702.04 and, according to Capitol, these funds are not property of the estate. Therefore, Capitol is entitled to *462the funds held by the Trastee, which should be turned over to Capitol.
The Claim in Count II relates to funds involved in the Harbor Boulevard Project, or the Charlotte County Contract, and is based on the allegation that the sum of $80,324.00 was paid to the Trustee and these funds are also subject to turnover to Capitol because they are not properties of the estate.
This Order is limited to the Claims in Counts I and II of the Complaint. Not dealt with is the claim in Count III, which is a suit for Declaratory Relief in which Capitol seeks a determination by this Court that in a certain adversary proceeding commenced by the Trustee against Phillip Kurt Maenner, Adversary Proceeding No. 00-67, in which the Trustee seeks to recover the payments made to Maenner as an avoidable preference, that these funds are also not property of the estate. And if and when these funds are to be recovered by the Trustee, they should be turned over to Capitol.
In due course, the Trustee filed a denial in his Answer to the claims asserted by Capitol but also pled affirmative defenses to the effect that the funds in question represented contract payments earned by Steve A. Clapper and Associates of Florida (Debtor) while the Debtor was still in a Chapter 11 reorganization case. Therefore, the funds are property of the Estate under Section 541 of the Bankruptcy Code.
On January 10, 2001, Capitol filed a Motion for Summary Judgment, and on the same day, the Trustee also filed his Motion for Summary Judgment as to the claims set forth in Count I and II of the Complaint. Both parties contend there are no genuine issues of material facts and each is entitled to a judgment in their respective favor as a matter of law.
On February 20, 2001, this Court, after having reviewed the submission of the parties and heard argument of counsel, entered an order and denied both Motions for Summary Judgment and rescheduled the adversary proceeding for a pretrial conference for the purpose of preparing the controversy for trial. Although the Motion for Reconsideration was not addressed directly to the Order which denied the Motions for Summary Judgment, it did so indirectly by seeking a reconsideration of the Order allowing the secured Claim No. 78 of Capitol and determining the right to distribution. On April 5, 2001, this Court entered an Order granting the Motion for Rehearing or Reconsideration (Doc. #256 in the Main case and Doc. # 14 in the above-captioned Adversary). Upon reconsideration of the Order denying both Motions for Summary Judgment (Doc. # 13), this Court now finds and concludes as follows.
In order to put the controversy in the proper posture, a recap of the relevant facts as they appear from the record and particularly from the Joint Stipulation of Facts filed by the parties can be summarized as follows.
At the time relevant, Steve A. Clapper & Associates of Florida, Inc. (Debtor) was engaged in the business of underground utility construction performing mostly subterranean piping and site work, primarily for public construction projects. Capitol is the bonding company and was the surety on the payment and performance bonds on several construction projects of the Debtor in the State of Florida. Particularly, Capitol was the surety on the payment and performance bonds issued on both the Manatee County Force Main % D project, and the Charlotte County-Harbor Boulevard project.
On August 25, 1998, the Debtor executed the General Indemnity Agreement *463(GIA) (Exh. A). Section 11 of the GIA Agreement states:
Right of Surety to have Principal treated as trustee and contract funds treated as trust funds. It is understood, agreed and hereby expressly declared that all monies due or to become due under the contract or contracts covered by such bond or bonds are trust funds, whether in the possession of the Principal or otherwise, for the benefit of and for payment of all obligations for labor and material furnished in connection with such contract or contracts for which the Surety would be liable under said bond or bonds; and which said trust also inures to the benefit of the Surety for any liability and loss it may have or sustain under said bond or bonds; and this agreement and declaration shall also constitute notice of such trust.
(emphasis added).
On January 5, 1999, the Debtor entered into a contract with Manatee County pursuant to its bid no. 98-5358-DC, for water main rehabilitation in the Palma Sola area in Manatee County, Florida. The total contract price for this project was $982,640.80. As a result of agreed change orders, the original contract was reduced by $35,584.91. It is without dispute that Manatee County paid the Debtor $523,029.32, leaving a contract balance of $424,070.57.
On August 11, 1999, the Debtor filed its Voluntary Petition for Relief under Chapter 11. On August 17, 1999, this Court entered an Order and authorized the Debt- or-in-Possession to continue to operate its business. At the time of the commencement of this case the Force Main project was not yet completed. On September 30, 1999, the Debtor-in-Possession (DIP) submitted a payment application to Manatee County seeking a payment in the amount of $95,702.04 for work performed on the Force Main Project between May 15, 1999 up to including September 30, 1999. The requested payment (Exh. B) was accompanied by a certificate by the Debtor that the work for which payment was sought was completed. Based on the submission by the Debtor, Manatee County had accepted the request for payment.
It appears that on October 21, 1999, Manatee County declared a default by the Debtor and terminated the Debtor’s right to complete the project. (Exh. D.) The Debtor had not been able to proceed with its Chapter 11 case; the case was converted on November 17, 1999, to a Chapter 7 liquidation case. In due course, Thomas S. Heidkamp was appointed the Trustee for the estate of the Debtor. It is without dispute that on March 31, 2000, Manatee County paid to the Trustee the amount of $95,702.04, the amount requested by the Debtor on September 30, 1999, for work performed on the project between May 1, 1999 and September 30, 1999, or prior to the conversion of the Chapter 11 case to a Chapter 7 case. The Trustee is currently holding this sum in escrow pending a resolution of the claim to the funds in this adversary proceeding.
It is stipulated by the parties that Capitol paid $595,799.59 on its payment and performance bond obligations the following subcontractors:
a. Rental Service Corporation— $2,884.56 on March 1, 2000;
b. APAC, Inc. — $64,471.01 on January 12, 2000;
c. SMR Aggregates — $2,368.23 on January 4, 2000;
d. Hughes Supply — $224.194.32 on December 2, 1999;
e. Forsberg/Manatee County— $301,881.47 on April 18, 2000.
*464The Affidavit of Andy Anderson (Exh. E) filed in support of Capitol’s Motion for Summary Judgment includes detailed schedules and relevant correspondence in support of its entitlement to the funds. It is also stipulated by the parties that the claims filed in this case by several subcontractors and suppliers are true and accurate and are still due and owing and outstanding. There is no dispute that there is an outstanding contract balance owed on the Force Main project of $328,368.58 representing unearned contract proceeds and retainage under the Manatee County contract which was paid toward completion of the project.
The controversy also involves the Charlotte County contract referred to as the Harbor Boulevard project, which is a claim asserted in Count II of the Complaint. The Joint Stipulation of the Parties also set forth numerous relevant facts concerning this project which are as follows:
On January 25, 1999, the Debtor entered into a contract with Charlotte County for the installation of a force main at Harbor Boulevard and U.S. 41 in Charlotte County, Florida. The original contract price was $376,898.50 and with approved change orders the price increased to $395,236.50. It is without dispute that the Debtor received prior to the commencement of the Bankruptcy $230,031.51. As noted earlier, on August 11, 1999, the Debtor filed its Petition for Relief under Chapter 11 and continued to operate its business as a Debtor-in-Possession.
On September 24, 1999, the Debtor-in-Possession submitted a payment requisition to Charlotte County for work done between July 17, 1999, and September 3, 1999, in the amount of $78,990.53. (Exh. F) The work set forth on the payment application was completed by the DIP and was certified by Charlotte County as being complete and accepted by Charlotte County. The DIP was not able to continue to operate its business and as a result on October 8, 1999, Charlotte County declared a default of the contract and terminated its contract with the Debtor. Charlotte County employed a replacement contractor who ultimately completed the project and was paid directly by Charlotte County $38,920.00 out of the remaining contract proceeds. It is without dispute that on January 24, 2000, Charlotte County paid the Trustee $80,324.00 pursuant to the request for payment submitted September 24, 1999, which sum also is kept in escrow by the Trustee pending outcome of this litigation.
It is without dispute that pursuant to the payment of the performance bond, Capitol paid on the Harbor Boulevard project a total of $137,459.08 to the following subcontractors and suppliers:
a. Sentry Barricades — $10,250.61 ($5,361.40 on March 14, 2000 and $4,889.21 on October 27,1999);
b. SEMSCO — $32,756.86 on March 14, 2000;
c. Other Side Sod — $3,792.00 on March 2, 2000;
d. Charlotte Co. Mining — $2,412.31 on December 10,1999;
e. Hughes Supply — $11,144.92 on December 2,1999;
f. Communications by Poire, Inc.— $9,567.70 on November 3,1999;
g. W.C. Róese Contracting — $48,209.43 on November 1,1999;
h. Coast Construction — $13,358.00 on October 12,1999;
i. John Bunch Concrete — $4,047.75 on October 12,1999;
j. King Excavating — $1,920.00 on October 12,1999.
Capitol also attached to its Motion for Summary Judgment the Affidavit of Andy *465Anderson together with the copy of all documentation relating to this project. The parties agreed that the documents attached as Exhibit I are authentic, including the Stipulation that all the dates in the subcontractors and suppliers proofs of claim filed are true and accurate.
It its Motion for Summary Judgment, Capitol states that as Clapper’s surety on the vast majority of Debtor’s bonded jobs, it has satisfied nearly one million dollars in payment and performance bond claims. Because its payments on the Manatee and Charlotte County far exceed the amount of the Disputed Funds, Capitol has a paramount right to those funds and is entitled to summary judgment as a matter of law on Counts I and II.
Capitol’s Motion for Summary Judgment further states that Paragraph 11 of the GIA makes all funds paid to Debtor on the Projects trust funds for the benefit of the surety and those permitted to make claims under the bonds. It seeks Manatee County disputed funds of $95,702.04 as a minimal offset to its bond payments and claims a superior interest in these funds based upon equitable subrogation rights. Like the Manatee County project, Capitol also requested summary judgment in the amount of $80,324.00 for the amount of disputed funds on the Charlotte County project under its equitable subrogation rights.
In contrast, in his Motion for Summary Judgment, Trustee states that he is entitled to judgment as a matter of law since the disputed funds are property of the bankruptcy Estate under section 541 of the Bankruptcy Code which includes all legal and equitable interests of the debtor in property as of the commencement of the case. United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). That under 11 U.S.C. § 541(a), funds due and owing to a debtor as of the date of commencement of the case, even if unpaid, represent a chose of action of the debtor which is property of the estate. In re G & R Builders, Inc., 123 B.R. 654 (Bankr.M.D.Fla.1990).
These are basically the uncontested facts which are relevant to the contention of the parties. This Court is satisfied that upon reconsideration, it is appropriate to dispose of the claims raised in Counts I and II as a matter of law without a need for a trial.
In support of its Motion for Summary Judgment, Capitol primarily relies first on the provisions of its General Indemnity Agreement and second, on the doctrine of equitable subrogation.
In support of its positions Capitol cites Pearlman v. Reliance Insurance Co., 371 U.S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962). In Pearlman, the dispute under consideration was over the remaining undisputed contract proceeds and the contract of retainage after a contractor filed bankruptcy. The contractor failed to pay laborers and materialmen, and the surety was forced to pay $350,000 to discharge the contractor’s debts. The surety claimed that it was entitled to the funds withheld' by the owner in the amount of $87,737.35.
In considering the dispute between the Trustee and the Surety, the Supreme Court held that “the laborers and material-men had a right to be paid out of the fund; that the contractor, had he completed his job and paid his laborers and materialmen, would have become entitled to the fund; and that the surety, having paid the laborers and materialmen, is entitled to the benefit of all these rights to the extent necessary to reimburse it. Consequently, since the surety in this case has paid out more than the amount of the existing fund, it has a right to all of it.” Pearlman, 371 *466U.S. at 141-42, 83 S.Ct. 232. Based on this, the Court held that under the doctrine of equitable subrogation, the funds were not property of the estate and the Trustee was not entitled to the remaining funds not yet disbursed. Relying on Pearlman, Capitol asserts that its position is also supported by additional authorities, particularly the case decided by this Court, MCA Ins. Co. v. Genson (In re Caddie Constr. Co.), 125 B.R. 674 (Bankr.M.D.Fla. 1991).
In Caddie, this Court, relying on Pearlman, concluded that when the contractor defaulted on the contract, the surety who completes the performance of a contract is entitled to recover the balance of the contract price “free from setoff.” In re Caddie Constr. Co., 125 B.R. at 678 (citing Aetna Casualty & Sur. Co. v. United States, 435 F.2d 1082 (5th Cir.1970), and Trinity Universal Ins. Co. v. United States, 382 F.2d 317 (5th Cir.1967)). The Court in Caddie also concluded that in addition, under the principle of equitable subrogation, one who has the liability to pay the debt of another and does so is in equity entitled to the security or obligation held by the creditor whom he has paid. Id.
In opposing the position advanced by Capitol and its own Motion for Summary Judgment, the Trustee concedes that Pearlman and its progeny clearly support the proposition that the surety who completes a construction job of the Debtor which was bonded by the surety after default is entitled to the unpaid monies of the contract proceeds. The Trustee also agrees that the doctrine of equitable sub-rogation is a valid doctrine and clearly must be taken into consideration when warranted by the facts. But that is the extent of the concessions by the Trustee with regard to the propositions urged by Capitol, and, according to the Trustee, the facts in this case should produce a different result.
The Trustee points to the undisputed facts that at the time Debtor submitted its payment requests, neither contracts were in default and they were not terminated until after the period for which payment was requested. Thus, the payments requested have been earned and thus became and are properties of the estate subject to turnover pursuant to Section 542 of the Code.
The Courts dealing with this issue focused on the owner’s contractual duty to pay. American States Ins. Co. v. Glover Constr. Co. (In re Glover Constr. Co.), 30 B.R. 873, 879 (Bankr.W.D.Ky.1983). They indicated that not receiving payment would put in jeopardy the contractor’s ability to continue to perform the contract and would entail an entanglement in construction disputes between the owner and the surety which would negatively impact the timely completion of the project with the minimum cost. Id. In re Glover Constr, Co., supra, concluded that absent a showing of bad faith or an abuse of discretion, the owner’s payment to a financially troubled contractor will be upheld in the face of a surety challenge. Id. Typical of the decisions is the critical difference between payments during performance and those made after performance, noting that the owner’s discretion over a final payment is much more limited. Id. (citing United States v. Cont’l Cas. Co., 346 F.Supp. 1239, 1243 (N.D.I11.1972)).
The Trustee also cites the case of Newkirk Constr. Corp. v. Gulf County, 366 So.2d 813 (Fla. 1st DCA 1979). In Newkirk, Judge Ervin, speaking for the Court, held that progress payments for work already performed by the contractor are wholly the property of the contractor since no right arises in the surety until it comes *467in and performs following the contractor’s breach. Id. at 816.
Although there is no proof in this record, it is intimated that the monies the Trustee received on both the Manatee and the Charlotte County projects were not fully earned by the Debtor because the Debtor, in its request for payment submitted to Manatee County, fraudulently certified that it had “paid for work or materials for which previous payments were issued and received from the County.” Based on this false representation, Manatee County certified the work as completed which was based on the fraudulent submission. Therefore, the funds which the Trustee received on the Manatee County project were not earned. Capitol asserts the identical allegation concerning the Charlotte County project. This record is devoid of any competent evidence to support even indirectly these allegations.
Based on the foregoing, this Court is satisfied that the issues involved here are not controlled by Pearlman and the funds paid to the Trustee on both the Manatee and Charlotte County projects before these contracts were declared to be in default were fully earned by the Debtor and the Trustee is entitled to retain the funds in dispute.
This leaves for consideration the applicability of the doctrine of equitable subrogation. Assuming without conceding that the doctrine is applicable, it is clear that one who seeks subrogation must establish that the right matured only after the contractor defaulted and the surety makes payments thereafter on a performance bond. See In re Larbar Corp., 177 F.3d 439 (6th Cir.1999); Newkirk Constr. Corp. v. Gulf County, 366 So.2d 813 (Fla. 1st DCA 1979). Thus, the facts in this case form no basis for the application of the doctrine.
In sum, this Court is satisfied that the relevant facts are not in dispute and the Trustee is entitled to the resolution of the controversy in his favor.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment as to Counts I and II filed by Plaintiff, Capitol Indemnity Corporation (Doc. #11) be, and the same is hereby, denied. It is further
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment as to Counts I and II filed by Defendant, Thomas S. Heidkamp, Trustee (Doc. # 12) be, and the same is hereby, granted.
A separate final judgment will be entered in accordance with the foregoing.
FINAL JUDGMENT
THIS CAUSE came on for consideration upon the Court’s own Motion for the purpose of entering a Final Judgment in the above-captioned adversary proceeding. The Court has considered the record and finds that this Court has entered a Motion for Summary Judgment in favor of the Defendant. Therefore, it appears appropriate to enter Final Judgment.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Final Judgment be, and the same is hereby, entered in favor of the Defendant, Thomas S. Heidkamp, Trustee, and against the Plaintiff, Capitol Indemnity Corporation (Capitol) in the amount of $176,026.04 ($95,702.04 [Manatee Disputed Funds] + $80,324.00 [Charlotte Disputed Funds]), or for which let execution issue. These funds are hereby property of the estate and free and clear of any lien or encumbrance by Capitol. It is further
ORDERED, ADJUDGED AND DECREED that Capitol be, and the same is *468hereby, permitted to file an unsecured claim for any funds if paid out on behalf of Debtor to Debtor’s creditors in connection with the Manatee County and Charlotte County projects. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493201/ | DECISION GRANTING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
ADLAI S. HARDIN, Jr., Bankruptcy Judge.
In this adversary proceeding, the Chapter 11 Trustee seeks payment on the full value of certain real property conveyed by the debtor. The defendant-transferees have moved for summary judgment, contending that the Trustee, by this action, seeks to appropriate for the debtor the value of improvements which the defendants had made on the land at the time of the conveyance.
The resolution of the motion for summary judgment turns on the question of “reasonably equivalent value” and “fair consideration” — the comparison of what the debtor gave with what the debtor received. This opinion focuses specifically on the “interest of the debtor” which was conveyed in the transaction. Under this analysis, as set forth below, the defendants’ motion for summary judgment is granted.
Jurisdiction
This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 157(a) and 1334 and the Standing Order of Referral of Cases to Bankruptcy Judges of the Southern District of New York, dated July 10, 1984 (Ward, Acting C.J.). This adversary proceeding is a “core” proceeding under 28 U.S.C. § 157(b)(2)(A) and (H) in that they are proceedings concerning the administration of the Debtors’ estates and to determine, avoid and recover alleged fraudulent conveyances.
*526Background1
In 1994 the Debtor, Duke & Benedict, Inc., and Benedict Dairy Farms (collectively “D & B”) owned approximately 457 acres of undeveloped land in the Towns of Carmel and Southeast, in Putnam County, New York (the “Property”)-2 In 1994, D & B began negotiating with the Peter D. Leibowits Company, Inc. and Centennial Golf Club of New York (collectively, “Lei-bowits”), to develop a golf course and residential housing on the Property.
The 1994 Agreement
Pursuant to an agreement dated November 11, 1994 (the “1994 Agreement”), D & B entered into a joint venture with Lei-bowits. Under the 1994 Agreement, Lei-bowits would select 340 acres from the Property and within 48 months obtain the necessary government approvals for the construction of a 27-hole golf course. Lei-bowits would bear all costs in connection with obtaining the approvals. Within 30 days after Leibowits obtained the necessary approvals, D & B and Leibowits would conduct a “closing” at which D & B would convey title to the 340 acres (the “Golf Course Land”) to a limited liability company (the “LLC”) to be formed by D & B and Leibowits. D & B would retain the remainder of the Property (the “Excess Acreage”), on which it would develop housing adjacent to the Golf Course Land. Leibowits would develop the Golf Course Land and manage it on behalf of the LLC with all operating and development costs to be paid by Leibowits. The net operating income of the LLC would be distributed 25 percent to D & B and 75 percent to Leibowits. The 1994 Agreement further provided: “The net proceeds of any sale of the [Golf Course Land] shall be distributed twenty-five percent (25%) to D & B and seventy-five percent (75%) to Leibowits.”
In short, if Leibowits performed under the 1994 Agreement D & B would be obligated to convey clear title to the Golf Course Land to the LLC in exchange for a 25-pereent interest in the LLC.
Development of the Golf Course Land
Leibowits did perform under the 1994 Agreement. He retained the renowned designer Larry Nelson who drafted architectural drawings for the golf course.
Because the Golf Course Land was situated in the Putnam County towns of Car-mel and Southeast, Leibowits needed site-plan approvals from each municipality. On May 11, 1995, Centennial submitted its site-plan applications, based on the Larry Nelson design, to the Carmel and Southeast planning boards. The applicant listed was “Centennial Golf Properties, Inc.,” a corporation owned by Leibowits.
In March 1996, Leibowits obtained conditional site-plan approvals from the Town of Carmel and the Town of Southeast. The conditional approvals were specific to the applicant, which was listed as “Centennial Golf Properties, Inc.” The conditional site-plan approvals imposed substantial conditions on Centennial Golf Properties, Inc., such as the requirement of posting a bond for design implementations which might be required by the towns.
Leibowits estimates the cost of obtaining the Nelson design and conditional site-plan approvals at more than $1.2 million.
*527
The 1996 Modification Agreement, Over-conveyance Agreement and Sale
Unfortunately, D & B was unable to perform its end of the 1994 Agreement — it could not convey clear title. As the Trustee states at paragraph 42 of his Opposing Statement Pursuant to Rule 7056-1:
42. After the 1994 Agreement was signed, D & B’s financial condition, already unsolvent [sic], further deteriorated. Barnett Bank had commenced a foreclosure proceeding against D & B’s major real estate project and major asset, a development in Florida known as University Commons. In addition, Putnam County was threatening to take the Property because of [D & B’s] failure to pay real estate taxes. D & B was in default under a mortgage encumbering the Property, which was held by Summit Bank. TSNY Realty Corp., which also held a mortgage on the Property, had commenced a foreclosure proceeding. C & C Realty Associates had filed a lis pendens against the Property. All of D & B’s real property was encumbered, and D & B had no reliable source of income and no ability to borrow funds. Leibowits knew about these liens, foreclosure proceedings, encumbrances and the real estate tax arrearages.
By April 1996, Leibowits had obtained virtually all of the required approvals and was ready to effectuate the closing contemplated in the 1994 Agreement. However, D & B’s financial paralysis would have prevented it from meeting its obligation to convey clear title to the Golf Course Land under the 1994 Agreement. Fearing that the site-plan approval would lapse if the conditions were not fulfilled in a timely manner, Leibowits sued D & B in New York State Supreme Court in April 1996 to compel D & B to contribute legal title to the Golf Course Land free and clear of all encumbrances.
On September 13, 1996, D & B and Leibowits entered into a “Modification Agreement” by which Leibowits agreed to drop its state court suit, and D & B agreed to transfer legal title to the Property— including the Golf Course Land — to Lei-bowits.3 The Modification Agreement provided immediate funding to D & B so that it could fulfill its obligation under the 1994 Agreement.
The Modification Agreement not only modified but superseded the 1994 Agreement and changed the basic character of the transaction between the parties from a joint venture to an outright sale of the Golf Course Land by D & B to Leibowits. The Modification Agreement recited that “[t]he parties no longer intend to form a limited liability company and all provisions in the contract relating thereto shall have no further force and effect.” The Property, including the Golf Course Land, was sold to Leibowits for $2,250,000, but Leibowits agreed to reconvey the Excess Acreage to D & B “in accordance with a separate letter agreement,” which the parties refer to as the “Overconveyance Agreement”.
In the Overconveyance Agreement, also dated September 13, 1996, D & B conveyed the Excess Acreage to Leibowits. The parties intended the conveyance to be a “nominal transfer to [Leibowits] only and [D & B] shall retain full beneficial ownership of the Excess Acreage”. The Overcon-veyance Agreement provided for an immediate 99-year, renewable, rent-free leaseback to D & B. The purpose of the Over-conveyance Agreement was to facilitate transfer of development rights from the *528Golf Course Land to the Excess Acreage. The Excess Acreage would then be recon-veyed to D & B.
Summarizing the Modification Agreement and Overconveyance Agreement, D & B received $2,250,000 for the conveyance of the Property and the relinquishment of a right to a 25-percent share in the LLC. In addition, Leibowits agreed to pay a broker’s commission of approximately $180,000, and D & B agreed to pay unpaid real-estate taxes of approximately $100,000. D & B retained beneficial ownership of the Excess Acreage and conveyed that land to Leibowits for the sole purpose of acquiring, to the extent possible, development rights for the Excess Acreage from the Golf Course Land.
The essence of the dispute in this adversary proceeding is over the sufficiency of the price paid by Leibowits to D & B for the Golf Course Land (the “1996 Sale”).4
Appraisals of the Golf Course Land
The Trustee submitted an appraisal by Eugene Albert which estimated the gross value of the Property as of September 13, 1996 to be “at least $6,370,000, discounted to $5,450,000.” (Affidavit of Eugene Albert, ¶ 10). Albert appraised the Golf Course Land, with the site-plan approvals and the Larry Nelson design, at a value of “at least $5,500,000, before any discount for lack of final subdivision approval or for bulk purchase.” (Id.)
Edward R. Heelan, president of a real-estate brokerage and development company located in Putnam County, estimated the value of the Property at “approximately $8,000,000 to $9,000,000” on September 13, 1996. (Affidavit of Edward Heelan, ¶ 13). Heelan reached this total because he estimated that at least 200 residential units could have been built on the Property as of right under the existing zoning, for a value of $5,000,000 to $6,000,000, and that the remaining land, enough to build a 27-hole golf course, had a value of $3,000,000. (Id.) Heelan’s estimate did not consider the value of the site-plan approvals or Larry Nelson design; instead, it estimated the value of the property required to build a hypothetical 27-hole golf course.
The appraisal by Edward Ferrarone, which was submitted by Leibowits evaluates the Property as “Vacant Land, Now Developed as Centennial Golf Course”. Ferrarone’s appraisal stated that the Excess Acreage “essentially had no value” as to Leibowits. The Ferrarone appraisal states:
The purpose of this appraisal is to estimate the Market Value of the Fee Simple Estate to a buyer. At the time of the sale, September 13, 1996, the Centennial Development plan was nearly approved for development with a 27-hole public golf course. The approvals were obtained solely by the buyer, at the buyer’s expense. The agreement to purchase the land was based on its condition and status at the time of contract as vacant land, without special approvals of any kind. The approved site plan was specific to the developer, Centennial *529Golf Properties, and to the plan which was completed by the architect, Larry Nelson. The site plan and approvals were not the property of[D & B],
(emphasis in original). Based on these assumptions, Ferrarone estimated the value of the Property on September 13, 1996 to be $2,100,000.
Bankruptcy Proceedings
On January 24, 1997, D & B filed a Chapter 11 bankruptcy petition. The Trustee brought a fraudulent conveyance action under 11 U.S.C. § 548 and § 550 to recover the full value of the Golf Course Land as estimated by Albert and, indirectly, by Heelan. The Trustee alleges that the 1996 Sale was made with “actual intent to hinder, delay, or defraud” D & B’s creditors under Section 548(a)(1)(A), and was constructively fraudulent under Section 548(a)(1)(B). The Trustee also asserts causes of action for actual and constructive fraud under the New York Debtor & Creditor Law (D & CL) §§ 273, 274, 275 and 276.5
The Standard for Summary Judgment
Federal Rule of Civil Procedure 56(c), made applicable to this adversary proceeding by Fed. R. Bankr.P. 7056, governs summary judgment motions. Initially, the moving party must show that no genuine material issues of fact exist, and that he is entitled to judgment as a matter of law. Accord Cargill, Inc. v. Charles Kowsky Resources, Inc., 949 F.2d 51, 55 (2d Cir. 1991). A court cannot decide disputed issues of fact, but instead, must assess whether any factual issues exist, and resolve any ambiguities or inferences against the moving party. Lopez v. S.B. Thomas, Inc., 831 F.2d 1184, 1187 (2d Cir.1987); Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir.1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987).
If the movant carries this initial burden, the nonmoving party must set forth specific facts that show triable issues, and cannot rely on pleadings containing mere allegations or denials. Fed.R.Civ.P. 56(e). Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); see Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The nonmoving party must show that there is more than a metaphysical doubt regarding a material fact, Matsushita Elec. v. Zenith, 475 U.S. at 586; Brass v. American Film Technologies, Inc., 987 F.2d 142, 146 (2d Cir.1993), and may not rely solely on self-serving conclusory statements. Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir.1993); Wyler v. U.S., 725 F.2d 156, 160 (2d Cir.1983).
At oral argument, the parties agreed that no triable factual issue exists, and that the only relevant dispute between the parties is which valuation should be accepted for the purposes of assessing whether D & B received “reasonably equivalent value” in return for the September 13, 1996 conveyance of the Property to Leibowits. (Transcript 28)
Discussion
Under both Section 548(a)(1)(B) and the D & CL, a trustee must prove that a “transfer of an interest of the debtor” occurred at a time when the debtor was insolvent, and that the debtor received less *530than “fair consideration” or “reasonably equivalent value” from the transfer.6
The parties agree that D & B was insolvent as early as 1991. Thus, the only issue is whether D & B received “fair consideration” or “reasonably equivalent value” in the 1996 Sale.7
Reasonably equivalent value is present if the debtor receives a fair equivalent in exchange for its property or obligation. HBE Leasing Corp. v. Frank, 48 F.3d 623, 638 (2d Cir.1995). Defined quantitatively, the debtor should receive “a fair equivalent” or an “amount not disproportionately small” as compared with the value of the property or obligation the debtor has given up. Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979, *531993 (2d Cir.1981); In re 375 Park Avenue Associates, Inc., 182 B.R. 690, 695-696 (Bankr.S.D.N.Y.1995); Coan v. Fleet Credit Card Services (In re Guerrera), 225 B.R. 32, 35-36 (Bankr.D.Conn.1998). “The determination of whether reasonably equivalent value was received by the debtor requires the court to compare what was given with what was received.” In re Guerrera, 225 B.R. at 36. This standard has been described as a “measurement test.” Yoder v. T.E.L. Leasing, Inc. (In re Suburban Motor Freight, Inc.), 124 B.R. 984, 997 (Bankr.S.D.Ohio 1990).
The court may only avoid a “transfer of an interest of the debtor.” See, e.g., Gaudet v. Babin (In re Zedda), 103 F.3d 1195, 1204 (5th Cir.1997). Therefore, before applying the measuring test to see if the debtor received reasonably equivalent value, a court must determine the “interest of the debtor” that was transferred. In other words, the measuring test does not examine the value of the property that was conveyed, but the value of the debtor’s interest in the property conveyed.
It is not disputed that D & B conveyed the Golf Course Land to Leibowits for $2,250,000. However, the parties disagree as to the extent D & B had rights in the Golf Course Land. This dispute is reflected in the three estimates submitted by the parties. Those estimates do not necessarily conflict with one another as to the value of the Golf Course Land; rather, they begin the evaluation of what was conveyed by D & B in the 1996 Sale from different premises. The Albert estimate values the Property as a whole, and the Golf Course Land with site-plan approvals and the Larry Nelson design. Heelan estimates the value of the Property if 200 residential units had been constructed and the remaining land had been used to construct a comparable golf course. The Fer-rarone appraisal values only the Golf Course Land minus the site-plan approvals and Larry Nelson design.
Thus, the crucial disagreement is not over the value of the Golf Course Land, but over the nature and extent of the interest conveyed by D & B in the 1996 Sale. Both parties fail to properly assess the interest transferred by D & B in the 1996 Sale.
The Trustee argues that the Debtor was entitled to the full value of the Golf Course Land at the time of the 1996 Sale, as improved by the Larry Nelson design and the site-plan approvals. In the Trustee’s view the Modification Agreement nullified the 1994 Agreement. Thus, the Trustee contends that the lack of reasonably equivalent value is clear on the face of the 1996 Sale: the Golf Course Land was worth at least $5,450,000 and D & B received only $2,250,000. The Trustee’s theory is flawed because it assesses the full value of the property transferred, rather than D & B’s interest in the property. To be correct, the Trustee would have to show that D & B had an unimpaired right to the full, improved value of the Golf Course Land at the time of the 1996 Sale. Yet the Trustee does not dispute that the 1994 Agreement was a valid, enforceable contract until superseded by the Modification Agreement. Obviously, D & B could not have sold the Property or Golf Course Land, as improved by the Larry Nelson design and site-plan approvals, in the open market because D & B was obligated to convey the Golf Course Land to an LLC under the 1994 Agreement.
Leibowits argues that the Trustee improperly seeks entitlement to improvements which were created exclusively by Leibowits. As Leibowits sees it, D & B was entitled to no more than the value of the “raw land,” which Leibowits’ appraiser valued at $2,100,000. Leibowits expended *532the efforts and funds needed to enhance the value of the Property. Leibowits posits that D & B had no interest in the value attributable to the Nelson design or the site-plan approvals because Leibowits alone held the proprietary rights to the Larry Nelson design and the site-plan approvals. The flaw in Leibowits’ argument is its failure to allocate value to D & B for anything other than the raw land D & B owned prior to the 1994 Agreement. While acknowledging its own rights under the 1994 Agreement, Leibowits seeks to strip D & B of any benefit under the same agreement. Leibowits claims absolute ownership of the site-plan approvals and Nelson design, but those items were obtained in furtherance of a joint venture with D & B and not for a proprietary purpose exclusive to Leibowits.
To determine what interest was transferred by D & B in the 1996 Sale, D & B’s rights and obligations as they existed immediately before the transaction must be ascertained. Those rights are determined by reference to the 1994 Agreement, which both parties agree was valid and enforceable until the Modification Agreement was made. Under the 1994 Agreement, D & B was obligated to contribute the Golf Course Land to an LLC if Leibowits timely obtained the site-plan approvals. When Leibowits obtained the necessary requirements in March 1996, D & B became contractually obligated to convey the Golf Course Land in return for 25 percent of the LLC. Thus, immediately before the 1996 Sale, D & B had the right to a 25 percent interest in the Golf Course Land as improved by the Larry Nelson design and the site-plan approvals. This was the “interest of the debtor” which D & B transferred in the 1996 Sale.
The Trustee agreed at oral argument that the $2,250,000 received by D & B in the 1996 Sale was at least 25 percent of the enhanced value of the Golf Course Land:
THE COURT: Were you paid at least 25 percent of the value of the improved real estate? I take it that you were — at least 25 percent.
MR. KITTAY: Yes.
THE COURT: What did you pay? A lot more than 25 percent?
MR. KITTAY: Well, Mr. Heelan says it’s worth between $8 million and $9 million. That would be about 25 percent and Mr. Albert says it’s worth about $5.5 million. That certainly would be close to 50 percent.
(Transcript 45) This is determinative because the focus of the reasonably equivalent value analysis is the value of the property at the time of the transaction. Breeden v. L.I. Bridge Fund, LLC (In re Bennett Funding Group, Inc.), 282 B.R. 565, 570 (Bankr.N.D.N.Y.1999); Butler Aviation Intl., Inc. v. Whyte (In re Fairchild Aircraft Corp.), 6 F.3d 1119, 1127 (5th Cir.1993); Cooper v. Ashley Communications, Inc., (In re Morris Communications), 914 F.2d 458, 466 (4th Cir.1990); 5 L. King, COLLIER ON BANKRUPTCY ¶ 548.05[l][b] at 548-38 (15th Ed.1998) (“The critical time is when the transfer is ‘made.’ Neither subsequent depreciation nor appreciation in the value of the consideration affects the question of whether reasonably equivalent value was given.”) Therefore, in the 1996 Sale D & B received at least 25 percent of the value of the Golf Course Land under each of the three estimates submitted by the parties. This was at least equivalent to what D & B would have been entitled to receive immediately prior to the 1996 Sale. Accordingly, D & B received reasonably equivalent value in the 1996 Sale.
*533
Conclusion
Counsel for defendants Peter D. Leibowits Company, Inc. and Centennial Golf Club of New York, LLC is requested to prepare and circulate a proposed order consistent with this decision granting summary judgment to the moving defendants.
. Unless otherwise indicated, the recitation of facts herein is drawn from the Movant’s Motion for Summary Judgment and Statement Pursuant to Local Rule 7056-1 and the Trustee’s "Affirmation in Opposition” to the Motion for Summary Judgment and Opposing Statement Pursuant to Local Rule 7056-1.
. Of these 457 acres, approximately 277 acres was owned by Duke & Benedict, Inc., and the remainder belonged to Benedict Dairy Farms.
. At the direction of Peter D. Leibowits Company, Inc., D & B conveyed title to Centennial Golf Club of New York, LLC.
. There parties are in disagreement as to whether, in addition to the $2,250,000 paid in cash for the Golf Course Land, additional value should be attributed to D & B or Lei-bowits for their respective undertakings to pay unpaid real-estate taxes and broker commission. Leibowits estimates the total consideration paid to be at least $2,430,000 and D & B estimates the total consideration to be no more than $2,230,000. Under the analysis which follows, whatever the actual consideration paid, be it $2,230,000 or $2,430,000, would be reasonably equivalent to D & B’s interest in the Golf Course Land at the time of the 1996 Sale. Therefore, the disagreement as to this additional consideration is not a material fact for the purposes of this summary judgment motion.
. The Trustee also asserts claims for breach of fiduciary duty, constructive trust, the right to an accounting, and for a declaratory judgment. However, those claims are being dealt with in Adversary Proceeding 99-2263. That action is not subject to this motion for summary judgment.
. Section 548(a)(1)(B) states:
(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
* * * * * *
(B)(1) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured.
The parallel provisions are found in four sections of the D & CL:
§ 272. Fair Consideration
Fair consideration is given for property, or obligation,
a. When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, or
b. When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property, or obligation obtained.
§ 273. Conveyances by insolvent
Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.
§ 274. Conveyances by persons in business
Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent.
§ 275. Conveyances by a person about to incur debts
Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors.
. Because the D & CL parallels Section 548, the two statutes are interpreted similarly by the courts. HBE Leasing Corp. v. Frank, 48 F.3d 623, 638 (2d Cir.1995); SIPC v. Ensminger (In re Adler, Coleman Clearing Corp.), 247 B.R. 51, 116 (Bankr.S.D.N.Y.1999); European American Bank v. Sackman Mortgage Corp. (In re Sackman Mortgage Corp.), 158 B.R. 926, 938 (Bankr.S.D.N.Y.1993); Scherling v. Pan Trading Corp., S.A. (In re Chadborne Industries, Ltd.), 71 B.R. 86, 89 (Bankr. S.D.N.Y.1987); Murdock v. Plymouth Enterprises, Inc. (In re Curtina Int'l, Inc.), 23 B.R. 969, 974 (Bankr.S.D.N.Y.1982); Pereira v. Checkmate Communications Co. (In re Checkmate Stereo & Electronics), 9 B.R. 585, 591 (Bankr.E.D.N.Y.1981), aff’d, 21 B.R. 402 (E.D.N.Y.1982); In re The Bennett Funding Group, Inc., 220 B.R. 743, 754 (Bankr. N.D.N.Y.1997). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493202/ | *602ORDER ON MOTION FOR REHEARING
The attorney for the debtors appealed an order directing him to disgorge $10,011.40 of the $11,011.40 fees he received for his costs and services in the bankruptcy case. Upon affirmance of the bankruptcy court’s order, the appellant has moved for a rehearing or, alternatively, to alter or amend the judgment. For the reasons set forth below, we grant, in part, the alternative request for amendment of the judgment.
The appellant’s motion first asserts that the court incorrectly reported that he failed to obtain authorization for his employment of the chapter 11 debtor. In this he is correct. While it is true that the appellant failed to obtain approval for the payments he received while the debtors were in a chapter 13 case, he did, as is demonstrated by the record, obtain an order approving his employment after the case converted to chapter 11. Thus, the court shall amend its opinion to reflect that fact. Upon this alteration of fact to be reported, the appellant merely asserts, without support, that he is therefore entitled to a judgment in his favor. We do not believe the amendment of this fact alters in any manner our conclusion that the bankruptcy court did not err it is findings or in the imposition of the sanction against the attorney. Thus, in all other respects, the appellant’s motion for rehearing or alteration of the judgment will be denied.
The appellant’s second contention is that the sanction imposed upon him was not, as this court concluded, “in keep*603ing with that imposed by other courts and consistent with the important policies underlying the disclosure provisions.... ” Appellant attempts to reargue.that the sanction imposed upon him was the first and only instance of enforcement of the particular local rule at issue. The case authority in this regard is clear and in keeping with the court’s original judgment. The sanction imposed by the bankruptcy court was consistent with that imposed by other courts and, indeed, was less harsh than many. The fact that the courts in one district have not heretofore enforced, had occasion to enforce, or found sanctions appropriate under a particular rule does not obviate the appellant’s failure to comply with the rules. It is well settled that selective prosecution or enforcement under the law does not excuse an individual from the consequences of his actions unless some unjustifiable factor, such as race, is present in enforcing the rule against the individual. Cf. United States v. Deering, 179 F.3d 592, 595 (8th Cir.), cert. denied, 528 U.S. 945, 120 S.Ct. 361, 145 L.Ed.2d 283 (1999); United States v. Swanson, 509 F.2d 1205 (8th Cir.1975); LeClair v. Saunders, 627 F.2d 606 (2d Cir.1980), cert. denied, 450 U.S. 959, 101 S.Ct. 1418, 67 L.Ed.2d 383 (1981). The mere fact that the bankruptcy court may not have had other violations brought to its attention or may not have deemed it appropriate to sanction other violators does not excuse appellant’s failure to comply with the local rule or the Federal Rules of Bankruptcy Procedure. A bankruptcy court must have the authority not only to require compliance with the rules, but must also be accorded the discretion to issue sanctions where appropriate, and decline to do so if the circumstances warrant.
Finally, the appellant attempts to reargue his belief that the bankruptcy court impermissibly subordinated his claim. In effect, however, the bankruptcy court granted the appellant an opportunity to recover some of his fees through the claims process. We do not believe that the bankruptcy court’s fashioning of this remedy was an abuse of discretion. By affording this relief, the bankruptcy court enforced the provisions in the local rules and Federal Rules of Bankruptcy Procedure governing attorney conduct before the bankruptcy court, preserved the rights of creditors in the case, and yet afforded the appellant an opportunity to obtain some remuneration for his services should there be sufficient assets in the estate. We cannot say that in enforcing the Code and rules, the bankruptcy court erred in performing its independent obligation, Shareholders v. Sound Radio, Inc., 109 F.3d 873, 881 (3d Cir.1997), to oversee the fee process in the bankruptcy court, even in the absence of objections by any interested party.
An amended order of the Bankruptcy Appellate Panel will issue noting that the appellant properly filed an application for employment. In all other respects, the Motion for Rehearing Or, In the Alternative, To Alter or Amend the Judgment, is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493203/ | *790
MEMORANDUM OPINION
R. THOMAS STINNETT, Bankruptcy Judge.
Chase Manhattan Bank (“Chase”) commenced this adversary proceeding to determine the dischargeability of a portion of the credit card debt owed to it by the debtor, Claudine Pantelias. Chase issued the debtor a credit card many years before the debtor’s bankruptcy, but within three months before bankruptcy, she charged several thousand dollars. Chase alleges that the debtor charged about $4,900 when she did not have the intent to pay Chase, and as a result, the debt cannot be discharged in the debtor’s bankruptcy case. The debtor denies this and alleges that if she wins this dispute, then she should recover costs and attorney’s fees from Chase because its position was not substantially justified. 11 U.S.C. § 523(d).
Chase’s complaint relied on Bankruptcy Code § 523(a)(2)(A) and § 523(a)(6), but the trial briefs completely ignored § 523(a)(6), and the case was tried solely under § 523(a)(2)(A). Thus, the only relevant provision is § 523(a)(2)(A), which provides:
(a) A discharge ... does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
11 U.S.C. § 523(a)(2)(A).
The charges made by the debtor fall into three categories: (1) purchases from merchants, (2) cash from automatic teller machines, and (3) checks written on the credit card account. The debtor does not dispute that all of these were extensions of credit by Chase. The parties have focused their arguments on the question of intent. When the debtor made a particular charge, did she intend to repay Chase?
The debtor moved to this country in 1972. She was married for about six years and then single for about ten years. The debtor applied for and received the credit card from Chase in 1984 when she was not married.
In 1988, the debtor married again, to a man named Robinson. During the marriage to Mr. Robinson, the debtor accompanied him on visits to sell hearing aids. According to the debtor, Mr. Robinson made about $150,000 per year while they were together. During this time the debt- or had about fifteen other credit cards, in addition to the card from Chase. She had no problem making the required minimum payments on those accounts until shortly before her bankruptcy petition.
The debtor and Mr. Robinson separated in 1996, and she filed suit for divorce. The divorce did not become final until May 2000. Between the separation and the divorce, the debtor did not receive any support payments from Mr. Robinson.
After she separated from Mr. Robinson, the debtor had some money left by her first husband. She used that money to pay bills, but it ran out when she had to pay her lawyer in the divorce case. After it ran out, her son would help her.
The debtor also operated a small dress shop, Claudine’s Boutique, for about two years; she closed it in 1997 due to poor health.
The debtor testified that in October 1998 she began using cash advances on some credit cards to make payments on other credit cards. In May 1999 the debtor filed an income and expense statement in the divorce proceeding. According to this *791statement, the debtor had no income, but she had expenses of about $2,500 per month. The expenses included $500 per month for payments on credit cards. At the time she was making some credit card payments by using other credit cards.
The debtor filed an amended statement with the state court in March 2000. The amended statement showed net income of about $750 per month and expenses of about $1,000 per month. The expenses included credit card payments of $400 per month. The debtor testified that she kept using the Chase card at the time even though she was going deeper in debt. She also continued to make some credit card payments by getting money on other credit cards.
The debtor testified that in the • 18 months before bankruptcy she made credit card payments with help from her son and with advances on other credit cards.
In May 2000, the debtor filed her bankruptcy petition with the accompanying schedules and statements. According to schedules I and J, the debtor had been employed by National Car Rental for 11 months before the bankruptcy, her net income was about $700 per month, and her expenses were about $1,300 per month.
Chase’s attorney asked the debtor which of her other 15 credit cards were over the credit limit when she filed bankruptcy. The debtor first testified that all of them were over the credit limits. She then testified that she misunderstood the question; not everyone of them was over the credit limit before her bankruptcy.
Chase put into evidence the statements for the debtor’s credit card account for the period from June 1998 through the debt- or’s bankruptcy filing in May 2000. The debtor’s credit limit was $9,800 when the first of these statements was sent in July 1998. It was increased to $13,000 with the next statement, the one for July — August 1998. The statement for September — October 1998 increased it again to $13,700; it stayed at that level until the debtor’s bankruptcy in May 2000.
Mr. Garcia, the witness from Chase, testified that Chase increases the credit limit periodically based on a review of the account history. The payment history is important to the decision on whether to increase the credit limit. This includes consideration of whether the account has been kept current and whether charges have ever exceeded the credit limit. The records in Mr. Garcia’s possession did not show that the debtor requested the increases in the credit limit.
From his review of the records, Mr. Garcia concluded the debtor was a good customer even though she had several payment checks returned. He defined a good customer as one who makes regular monthly payments. The debtor’s card was not cancelled because she failed to make payments. It was cancelled because she exceeded the credit limit.
Chase apparently decided in April 2000 to “emboss” the debtor’s card. (Exhibit 7). Mr. Garcia explained that embossing a card means issuing a new card. He testified that a new card was going to be issued for some reason and that the records showed that' the debtor was due a new card. In this regard, the first page of Exhibit 7 shows the card’s expiration date as May 1. Mr. Garcia was questioned about the wisdom of issuing the debtor a new card. Mr. Garcia pointed out that the last billing date, April 12, had just passed. Chase had no way of knowing that the debtor would not make any more payments on the account. The court notes that the debtor had made the minimum monthly payments through March, but quite a few of them were late. The April *792payment was the first one she completely missed.
The following table is taken from the credit card statements. It shows new charges the debtor made from mid-June 1998 through mid-April 2000. The new charges shown in the table do not include fees imposed by Chase for late payments, returned checks, or exceeding the credit limit.
Statement Period Due Date New Charges Balance
Jun. 11 — Jul. 12.1998 Aug. 7, 1998 0 6874
Jul. 13 — Aug. 11,1998 Sep. 6,1998 6713
Aug. 12 — Sep. 10,1998 Oct. 6, 1998 6656
Sep. 11 — Oct. 11,1998 Nov. 6,1998 442 7236
Oct. 12 — Nov. 10,1998 Dec. 6,1998 7098
Nov. 11 — Dec. 10,1998 Jan. 5,1999 7539
Dec. 11, 1998 — Jan. 12. 1999 Feb. 7,1999 7079
Jan. 13 — Feb. 10,1999 Mar. 8, 1999 1000 8092
Feb. 11 — Mar. 10.1999 Apr. 5,1999 242 8530
Mar. 11 — Apr. 11,1999 May 7,1999 8781
Apr. 12 — May 11,1999 Jun. 6,1999 8724
May. 12 — Jun. 9,1999 Jul. 5, 1999 8577
Jun. 10 — Jul. 12.1999 Aug. 6,1999 100 8583
Jul. 13 — Aug. 10,1999 Sep. 5,1999 8768
Aug. 11 — Sep. 12,1999 Oct. 8,1999 8574
Sep. 13 — Oct. 11,1999 Nov. 5, 1999 8762
Oct. 12 — Nov. 9,1999 Dec. 5.1999 8605
Nov. 10 — Dec. 9,1999 Jan. 4, 2000 8597
Dec. 10. 1999 — Jan. 11, 2000 Feb. 6. 2000 8609
Jan. 12 — Feb. 9, 2000 Mar. 6, 2000 1337 9952
Feb. 10 — Mar. 12, 2000 Apr. 7. 2000 3492 13464
Mar. 13 — Apr. 11. 2000 May 7, 2000 142 13930
The charges in September — October 1998 were eight balance transfer checks, the largest being $190. The $1,000 charge in January — February 1999 was a cash advance. The debtor testified that she used it to pay her lawyer in the divorce case. The charges in February — March 1999 were a restaurant charge of about $25, a disputed charge of $12 for a magazine subscription, and three balance transfer checks, the largest of which was $150. The $100 charge in June — July 1999 was a cash advance. Except for money she paid her lawyer, the debtor did not remember exactly how she spent cash advances.
The charges in January — February 2000 were:
Big Lots 855.10
Big Lots 19.47
Food Lion 141.59
K-Mart 214.41
Rio Bravo 18.22
Bi-Lo 59.29
Racetrac 16.50
Golf Magazine 12.00.
The charges in February — March 2000 were:
FTNB 1000.00
Wal-Mart 325.85 (total of two charges)
Bi-Lo 201.65
K-Mart 112.93
Target 228.26
Big Lots 182.66
Lowe’s 251.42
Rhodes Furn. 659.05
Waccamaw 219.11 (total of two charges)
Ace Hdwe. 67.88
Hwy. 58 Liquors 93.69
Bi-Lo 25.10
Rio Bravo 9.20
*793Ocean Ave. Café 5.75
Mr. T’s Place 17.00
CVS 7.99
Westside Grill 17.34
Jet 20.00
The final charge of $141.50 in March— April 2000 was at Suddenly Slimmer Wraps.
The $855.10 charge at Big Lots was for a couch the debtor bought in mid-January 2000. The $659.05 charge at Rhodes was for a chair the debtor bought in early March 2000. The debtor sold both items shortly after she bought them. She explained the sales as follows. When she bought these items she thought there was a place where she could stay and establish her situation. But she was required to move because her landlord was selling the property where she rented. She did not have any place to store the property. As a result, she sold both of these items shortly after she bought them. She testified that she did not buy them to resell. She did not intend to have a yard sale of the items. She did not sell them through Claudine’s Boutique because it had closed in 1997. She did not schedule the income from the sales in her bankruptcy case because she sold the items at a loss.
The debtor’s testimony was unclear as to whether she actually had to move or when she moved. She stated that all of her addresses for the two years before bankruptcy were not listed in the statement of affairs filed with bankruptcy petition, but she gave them to her attorney. The debtor also testified as follows. At the end of 1999 she was living between the rental place in Chattanooga and her son’s home in Georgia. She had to move to her son’s home and could not move the furniture herself. In May 2000, when she filed her bankruptcy case, she was living in more than one place.
The debtor testified that she sold some of the items she bought at Waccamaw, Walmart, Lowe’s, Target, and K-Mart. She denied that she was just buying and reselling. She said it was not her intent to do so. She further testified that she bought necessary items, not things to furnish a home. She did not buy a television or VCR at K-Mart. The debtor testified that she used the $1,000 from First Tennessee Bank (FTNB) to pay her divorce lawyer.
The debtor testified that she intended to pay her credit card debts with her alimony after the divorce. She wanted alimony, and she wanted the court to order her ex-husband to pay the credit card debts because he had sufficient income to pay them. The divorce complaint did not specifically request that he be required to pay the credit card debt, but it did ask for a reasonable amount of alimony and an equitable distribution of property. Exhibit 6, Prayer 3 & 4. The state court awarded her temporary alimony at $1,400 per month. It did not order her ex-husband to pay her credit card debts.
The debtor filed bankruptcy within a week after the divorce decree was entered. She did not list alimony in schedule I because she had not received any; she didn’t have any in hand. She filed her first contempt complaint against her ex-husband to collect the alimony after she had filed bankruptcy.
The debtor testified that she did not consider bankruptcy until her divorce. Bankruptcy was mentioned by the state court judge, not before then. She found her bankruptcy attorney by looking in the telephone book and called her the day after the divorce. She knew nothing about bankruptcy before May 2000, the month of her filing. When the debtor filed bankruptcy, she owed more than $96,000 in credit card debt.
*794DISCUSSION
As the court mentioned before, the primary question is whether the debtor intended to pay Chase at the time she made the charges in question. The Sixth Circuit and other courts have set out a number of factors that can help when attempting to determine the debtor’s intent. Rembert v. AT & T Universal Card Services, Inc. (In re Rembert), 141 F.3d 277, 282 (6th Cir.1998). The factors are: (1) the length of time between the charges and the filing of bankruptcy, (2) whether the debtor consulted an attorney about bankruptcy before making the charges, (3) the number of charges made, (4) the amount of the charges, (5) the debtor’s financial condition at the time of the charges (ability to pay), (6) whether the charges exceeded the credit limit, (7) whether the debtor made multiple charges on the same day, (8) whether the debtor was employed at the time of the charges, (9) the debtor’s prospects for employment at the time of the charges, (10) the debt- or’s financial sophistication, (11) whether there was a sudden change in the debtor’s buying habits, and (12) whether the purchases were made for luxuries or necessities. Rembert, 141 F.3d 277, note 3.
When the debtor made the charges in question she was employed, but she had a relatively huge amount of credit card debt that she could not possibly pay from her income. She could make the regular minimum payments only with financial help from her son and by using credit cards to pay other credit cards.
In the 18 months from July 1998 through December 1999, the debtor charged about $1,800 on the Chase card. From January through March 2000 she charged almost $5,000 on the Chase card, and then she filed bankruptcy on May 23, 2000.
Creditors sometimes attempt to show that the debtor did not intend to pay the charges by proving that the debtor was already planning to file bankruptcy when the charges were made. That will not work in this case. The evidence does not show that the debtor intended to file bankruptcy at the time she made the charges. Indeed, the evidence shows that the debtor did not consider bankruptcy until the time of her divorce, when she realized that alimony or a divorce settlement would not allow her to pay the credit card debts.
The facts show an increase in purchases shortly before bankruptcy. The purchases were not entirely or mostly luxury items. At the time of the large purchases, the debtor thought she had a place where she could establish herself. The purchased items also were not the type of items that people usually buy to resell as a method of raising money. Furthermore, the evidence does not show that when the debtor made the purchases, she knew or suspected the divorce would not help her get out from under the mountain of credit card debt. The evidence suggests the debtor was expecting a change in her financial circumstances as a result of the divorce or other events, but it did not come out as she expected.
The debtor’s testimony and other facts also left the court with an impression of the debtor’s financial vision. First, the debtor generally did not think about liability for the entire amount of the credit card debts. The debtor was focused on making the required monthly payments. The court cannot say how the other credit card companies operated, but Chase apparently would let a large amount of debt accumulate and remain if the customer continued to make the required payments. The court is not critical of this method of operation. The point is that it fit with the attitude of this particular debtor; it allowed her to focus on the short term as her basic obligation. Second, the debtor did not think she would end up having to *795pay the credit card debts herself. During the marriage, she relied on Mr. Robinson’s income. She expected the same result from the divorce. She expected he would end up making the payments directly or she would receive sufficient alimony to solve the problem. When this did not happen, the debtor was forced to face her real financial situation, in particular almost $97,000 of credit card debt. Apparently, the state court judge made statements that helped the debtor to see the light. The debtor then realized the need to file bankruptcy.
Considering the objective facts, the court or the creditor may think the debt- or’s financial expectations at the time she made the charges were unrealistic. But that does not mean the debtor’s expectations can be ignored; the court must determine the debtor’s subjective intent— whether she in fact intended to pay the charges. Of course, the court must consider the degree to which the debtor’s expectations were supported by the objective facts she knew — the less support, the more difficult it is for the court to believe the debtor had the intent to pay. The court finds that the debtor in this case intended to pay the charges, or at the least, she intended to continue paying her debt to Chase whether she ever paid it in full or not.
The facts in this case are more like the facts in cases that have held credit card debts to be dischargeable under § 523(a)(2)(A). Providian Bancorp. v. Shartz (In re Shartz), 221 B.R. 397 (6th Cir. BAP 1998); Huntington National Bank v. Lippert (In re Lippert), 206 B.R. 136 (Bankr.N.D.Ohio 1997); Anastas v. American Savings Bank (In re Anastas), 94 F.3d 1280 (9th Cir.1996). The facts are less like the facts in cases that have excepted credit card debts from discharge under § 523(a)(2)(A). American Express Travel Related Services Co. v. Hashemi (In re Hashemi), 104 F.3d 1122 (9th Cir. 1996); Chase Manhattan Bank v. Robinson (In re Robinson), 238 B.R. 681 (Bankr. N.D.Ohio 1999). The court will enter an order that the debt be discharged.
Having decided in the debtor’s favor, the court must decide whether she should recover costs, including attorney’s fees, under § 523(d). The statute allows fees to be recovered only if Chase’s position was not substantially justified. 11 U.S.C. § 523(d). The evidence certainly justified Chase in bringing suit and continuing to trial. The debtor’s pattern of spending, her financial condition at the time of the charges, and her sale of several of the items she bought, including the most expensive items, was enough to raise the suspicion that the debtor never intended to pay the charges. Furthermore, pre-trial investigation could not have dispelled Chase’s suspicions as to the debtor’s intent. This was a very close case with regard to whether the debtor intended to pay the charges at the time she made them. The court concludes that Chase’s position was substantially justified, and therefore, the debtor cannot recover attorney’s fees and costs. Compare AT & T Universal Card Services Gorp. v. Duplante (In re Duplante), 215 B.R. 444 (9th Cir. BAP 1997)(substantially justified); Star Bank v. Stearns (In re Stearns), 241 B.R. 611 (Bankr.D.Minn.l999)(substantially justified); and First Card v. Hunt (In re Hunt), 238 F.3d 1098 (9th Cir.2001)(not substantially justified); Bank of America v. Miller (In re Miller), 250 B.R. 294 (Bankr.E.D.Ky.2000)(not substantially justified). The court will enter an order.
This memorandum constitutes the court’s findings of fact and conclusions of law as required by Fed. R. Bankr.P. 7052.
ORDER
In accordance with the court’s Memorandum Opinion entered this date,
*796It is ORDERED that the debt owed by the defendant to Chase Manhattan Bank is dischargeable;
It is FURTHER ORDERED that the counterclaim of the defendant is DENIED; and
It is FURTHER ORDERED that this complaint is dismissed with each party bearing their own costs. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493205/ | DECISION AND ORDER
RICHARD L. SPEER, Chief Judge.
In the above captioned case, the Debtor, in conformance with Bankruptcy Rule 4003(d), has filed a Motion to avoid a judgment hen held by James Tonjes and Sonja Tonjes (hereinafter referred to as the Ton-jes). The statutory authority upon which the Debtor relies for her Motion is 11 U.S.C. § 522(f) which generally permits a debtor to avoid the fixing of a lien to the extent that such a lien impairs an exemption to which the debtor would have otherwise been entitled to claim. Specifically, § 522(f), provides, in relevant part:
Notwithstanding any waiver of exemptions but subject to paragraph (3), 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, ...
(2)(A) For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that the sum of-
(i) the lien,
(ii) all other liens on the property; and
(iii) the amount of the exemption that the debtor could claim if there were no liens on the property;
exceeds the value that the debtor’s interest in the property would have in the absence of any liens.
On April 3, 2000, the Tonjes filed an objection to the Debtor’s Motion to Avoid Lien. In their Objection, the Tonjes, while recognizing that a portion of their judgment lien impairs the Debtor’s exemption and thus should be avoided in accordance with the formula provided for in § 522(f), argue that sufficient equity exists in the Debtor’s residence to prevent the avoidance of their judgment lien in full. Simply put, the Tonjes argue that their lien is not fully impaired within the meaning of § 522(f), and therefore their judgment lien *889against the Debtor’s property should remain intact, albeit at a reduced value. In support thereof, the Tonjes related to the Court this factual information:
The Debtor has a one-half (¡6) interest in certain real property located in Defiance County, Ohio. The Debtor, along with her husband, use this property as their principal place of residence;
according to the Auditor of Defiance County, Ohio, the appraised value of the Debtor’s residence is $65,890.00. Of this amount, $82,945.00 represents the Debt- or’s one-half 06) interest in the property; the Debtor’s residence is encumbered by a first and second mortgage, both of which are owed to Mid-Am Bank;
the total amount owed on the first and second mortgages to Mid-Am Bank is $47,991.80. The Debtor’s one-half interest in these mortgages is $23,995.90;
against her one-half interest in the residence, the Debtor, in accordance with O.R.C. § 2329.66(A)(b), has claimed a $5,000.00 dollar exemption;
the Tonjes have a judgment lien against the Debtor’s interest in her residence in the amount of $27,489.63.
As to the present value of the judgment lien at issue, the Tonjes argue that the lien should be valued at Three Thousand Nine Hundred Forty-nine and 10/100 dollars ($3,949.10). This dollar amount was determined as follows:
Judicial lien $27,489.63
Other hens $23,995.90
Exemption $ 5,000.00
Total $56,485.53
$56,485.53 then exceeds the Debtor’s interest of $32,945.00 in the property by $23,540.53. As a consequence, the Tonjes’ judgment lien of $27,489.63 against the Debtor’s property may be avoided by $23,540.53, thus leaving the Tonjes with a $3,949.10 dollar judgment lien against the Debtor’s property.
The Debtor, while not challenging the substantive application of 11 U.S.C. § 522(f) to the above-mentioned facts, has contested the use of the Defiance County Auditor’s appraisal of her residence. Specifically, the Debtor argues that, at most, her one-half 0&) interest in the residence should be valued at Twenty-seven Thousand dollars ($27,000.00), instead of Thirty-two Thousand Nine Hundred Forty-five dollars ($32,945.00), and therefore, in accordance with the formula set forth above in 11 U.S.C. § 522(f), no equity would exist in her house for the judgment lien held by the Tonjes to attach — i.e., the judgment lien held by the Tonjes may be avoided in full.
Based upon the Debtor’s point of contention, the Court, on December 18, 2000, conducted an Evidentiary Hearing to determine the value of the Debtor’s residence. At this Hearing, at which time the Parties were afforded the opportunity to present evidence in support of their respective positions, the following factual information was presented to the Court concerning the value of the Debtor’s residence:
In 1993, the Debtor, along with her husband, purchased their residence for Thirty-eight Thousand Nine Hundred dollars ($38,900.00). The residence itself, which is located in an old neighborhood in Defiance, Ohio, sits on a very small lot and has one (1) small garage and one and one-half (1/6) bathrooms. While the owners of the property, the Debtor and her husband, in addition to making some minor improvements to the property, installed new windows in the property at a cost of Six Thousand Three Hundred dollars ($6,300.00). With respect to these new windows, it was related to the Court that as a condition to *890obtaining financing for the windows, an appraisal was conducted of the property. This appraisal, which was performed in June of 1999, estimated the value of the Debtor’s residence to be Fifty-four Thousand dollars ($54,000.00). With regards to this value, the person actually responsible for conducting the appraisal related to the Court two additional pieces of information: First, the installation of the new windows would increase, by an indeterminate amount, the value of the property. Second, since the time the appraisal of the Debtor’s residence was performed, the overall value of homes in Defiance County, Ohio, has increased, and thus it is likely that the Debtor’s property has also appreciated in value. It is along this line that the Tonjes argue that this Court should accept the Sixty-five Thousand Eight Hundred Ninety dollar ($65,890.00) appraisal value reached by the Auditor of Defiance County, Ohio. In opposition to this argument, however, the Debtor testified that she and her husband have recently attempted, without success, to sell their home. In this regard, it was shown that the Debtor originally listed her house for sale at Sixty-four Thousand Nine Hundred dollars ($64,900.00), but eventually lowered the asking-price, in incremental steps, to Forty-eight Thousand Nine Hundred dollars ($48,900.00). With respect to the Forty-eight Thousand Nine Hundred dollar ($48,900.00) asking price, the Debtor testified that she kept her property on the market at this price for approximately six (6) months.
After evaluating the foregoing considerations, as they relate to the different figures put forth by the Parties concerning the value of the Debtor’s residence, the Court finds that for purposes of § 522(f), the appropriate valuation of the Debtor’s residence is the Forty-eight Thousand Nine Hundred dollar ($48,-900.00) asking price the Debtor and her husband sought from the property. Accordingly, in conformance with the formula set forth in § 522(f), the judgment lien held by the Tonjes against the Debtor’s interest in the subject property may be avoided in full. In coming to this conclusion, the Court relied upon the fact that market exposure, rather than an auditor’s appraisal or an appraisal undertaken for refinancing purposes, is the best indicator as to the true value of a debtor’s residence. See In re Kerbs, 207 B.R. 211, 214-15 (Bankr.D.Mont.1997) (the value of property for purposes of § 522(f) is the price a willing seller and a willing buyer would agree upon after a reasonable period of exposure to the market). Simply put, since property is only worth what another person is willing to pay for it, the Debtor’s residence-even after considering some minor appreciation to the property-cannot be worth more than the property’s lowest listing price of Forty-eight Thousand Nine Hundred dollars ($48,900.00). With respect to this decision, the Court makes a couple of observations: First, appraisals undertaken by a county auditor, although not completely irrelevant with respect to the value of a debtor’s residence, tend to be skewed, as the appraisal’s primary purpose is not necessarily to ascertain the true value of a debtor’s residence, but is rather a device used to generate revenue for the county. Similarly, an appraisal undertaken for refinancing purposes, although probably a better indicator as to the actual value of a debtor’s residence, does not always reflect the true worth of a debtor’s property, as such an appraisal cannot factor in the offer of a ready, willing and able buyer.
Accordingly, for the foregoing reasons, the Court holds the value of the Debtor’s residence is Forty-eight Thousand Nine Hundred dollars ($48,900.00). Therefore, given the undisputed value of the other *891liens against the Debtor’s property, and the Debtor’s claim of a Five Thousand dollar ($5,000.00) exemption in her residence, the Court finds that, in conformance with the formula set forth in 11 U.S.C. § 522(f), the judgment lien held by James and Sonja Tonjes against the one-half (/&) interest the Debtor maintains in her residence may be avoided in full. In this regard, however, it should be noted that the Court does not have jurisdiction over the Debtor’s husband, James Cores-sel; thus to the extent the Tonjes maintain a judgment lien against his interest in the subject property, this interest is not avoided.
In reaching the conclusions 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 Decision.
Accordingly, it is
ORDERED that the Motion of the Debtor, Betty Coressel, to Avoid the Judgment Lien of James and Sonja Tonjes be, and is hereby, GRANTED; and that the Judgment Lien of James and Sonja Tonjes against the one-half(/é) interest the Debtor, Betty Coressel, maintains in her residential property located at 110 Main Street, Defiance, Ohio, legal description being: Lot number Twenty-eight (28) in the Highland Park Addition to the City of Defiance, County of Defiance, and State of Ohio, as shown on the Plat Records Volume 4, Page 15, of the Plat Record for the Highland Park Addition, to the City of Defiance, County of Defiance, and State of Ohio; be, and is hereby, AVOIDED IN FULL. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493207/ | MEMORANDUM OPINION AND DECISION
RICHARD L. SPEER, Chief Judge..
This cause comes before the Court upon Trustee’s Motion for Summary Judgment, and Memorandum in Support; and the Plaintiffs Motion for Summary Judgment, Memorandum in Support, and Response to the Trustee’s Motion for Summary Judgment. In addition, Robert K. Holmes, Clerk of Courts for the Municipal Court of Lima, as a third-party defendant, submitted a Response to the Trustee’s Motion for Summary Judgment. This Court has now had the opportunity to review the arguments of Counsel, the exhibits, as well as the entire record of the case. Based upon that review, and for the following reasons, the Court finds that the Trustee’s Motion for Summary Judgment should be Denied; and that the Plaintiffs Motion for Summary Judgment should be Granted.
FACTS
The relevant facts of this case, which are not in dispute, are very straightforward. In 1998 the Debtors, Charles Cummings and Tammy Cummings (hereinafter referred to collectively as the “Debtors”) were sued by two separate creditors for unpaid debts. These creditors were the Plaintiff, Van Wert County Hospital, and Anesthesia Associates of Lima, Inc. Attorney Hearn served as legal counsel for both of these creditors.
In July of 1998, the Van Wert County Hospital obtained a default judgment in the amount of Six Hundred Forty-seven and °9ioo dollars ($647.08) against the Debtors after they failed to appear in the state court proceeding. In order to enforce this judgment, Attorney Hearn, obtained on August 21, 1998, an order of garnishment against the Debtor, Charles Cummings (hereinafter referred to individually as the “Debtor”) which was then served on the garnishee (the Debtor’s employer) on August 24, 1998. On August 5, 1999, almost one (1) year after service of the Plaintiffs garnishment order was perfected on the garnishee, it appears that in accordance with the garnishment order, the garnishee paid to the Lima Municipal Clerk of Courts an amount of slightly less than Three Hundred dollars ($300.00). However, before these funds were disbursed, the Debtors, on August 23, 1999, filed a petition in this Court for relief under Chapter 7 of the United States Bankruptcy Code.
On August 25, 1999, the Lima Municipal Court received notice of the Debtors’ bankruptcy petition. In addition, on that same day, the Debtors, by and through their attorney, filed a Motion to release the garnished funds to the Trustee. This motion was then granted by an order entered on September 1, 1999, by the Honorable Rickard Workman. However, just before this order was entered, the Lima Municipal Clerk of Courts, on August 29, 1999, processed and mailed the approximately Three Hundred dollars ($300.00) in garnished funds to Attorney Hearn, who has since refused to turnover the funds to the Trustee. The reason given by the Clerk of Courts for issuing the garnished funds to Attorney Hearn, in opposition to Judge Workman’s order, was that the release of the garnished funds, in addition to being done in accordance with state law, was done before the turnover order was received.
On October 20, 1999, the Trustee filed a Motion, which was subsequently granted, to intervene in the state court proceedings, the purpose of which was to allow the *141Trustee to protect those funds which Judge Workman had ordered be turned over. The Trustee then, after the occurrence of some interim events which included the consolidation of the Creditors’ cases, filed a Notice of Removal to this Court in accordance with 28 U.S.C. § 1452 and Bankruptcy Rule 9027. Thereafter, pursuant to Bankruptcy Rule 7056, the Trustee filed a Motion for Summary Judgment in which he asked' for the following relief:
—An Order directing the turnover of the garnished funds to the Trustee; and
—an Order finding that the garnished funds are property of the estate subject to any exemptions which the Trustee may assert.
—In the alternative, the Trustee seeks an Order directing that the state court turnover any moneys that it may have had in its possession at the time that the Debtors filed their bankruptcy petition.
In support of his requests for relief, the Trustee asserts that the garnished wages turned over by the Debtor’s employer to the Lima Municipal Clerk of Courts constituted property of the Debtors’ bankruptcy estate under 11 U.S.C. § 541(a). On this issue, the Trustee also asserts that the turnover of funds by the Clerk of Courts to Attorney Hearn violated the automatic stay as contained in 11 U.S.C. § 362(a). In addition, the Trustee contends that the funds transferred by the Clerk of Courts was a preference, and thus is avoidable pursuant to 11 U.S.C. § 547(b). On these issues, Attorney Hearn, on behalf of the Van Wert County Hospital, filed a Summary Judgment Motion, asking that it be determined that the garnished funds at issue in this case are solely the property of the Creditor, Van Wert County Hospital, and not property of the Debtors’ bankruptcy estate.
LAW
Section 541 of the Bankruptcy Code provides in pertinent part:
(a) The commencement of a case .. creates an estate. Such an estate is comprised of all the following property, wherever located and by whomever held:
(1) ... [A]ll legal or equitable interests of the debtor in property as of the commencement of the case.
DISCUSSION
Determinations concerning the administration of the debtor’s estate, orders to turn over property of the estate, and other proceedings affecting the liquidation of the assets of the estate are core proceedings pursuant to 28 U.S.C. § 157. Thus, this case is a core proceeding.
The instant case has been brought before the Court upon the Parties’ cross-motions for summary judgment. Under the Federal Rules of Civil Procedure, which are made applicable to this proceeding by Bankruptcy Rule 7056, a party will prevail on a motion for summary judgment when, “[t]he pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Fed.R.Civ.P. 56(c). In order to prevail, the movant must demonstrate all elements of the cause of action, but once that burden is established, the opposing party must set forth specific facts showing that there is a genuine issue for trial.R.E Cruise, Inc. v. Bruggeman, 508 F.2d 415, 416 (6th Cir.1975); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-51, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). Inferences drawn from the underlying facts must be viewed in a light most *142favorable to the party opposing the motion. Matsushita v. Zenith Radio Corp., 475 U.S. 574, 586-88, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). In addition, in cases such as this, where the Parties have filed cross-motions for summary judgment, the Court must consider each motion separately, since each party, as a movant for summary judgment, bears the burden to establish the nonexistence of genuine issues of material fact, and that party’s entitlement to judgment as a matter of law. Thus, the fact that both parties simultaneously argue that there are no genuine factual issues does not in itself establish that a trial is unnecessary, and the fact that one party has failed to sustain its burden under Fed. R.Civ.P. 56 does not automatically entitle the opposing party to summary judgment. Charles Alan Wright, Arthur R. Miller & Mary Kaye Kane, 10A Federal Practice and Procedure § 2720, at 16-17 (1983).
When a debtor files for bankruptcy relief, any and all property that the debtor has a legal or equitable interest in, wherever located, becomes property of an estate. 11 U.S.C. § 541(a). Thereafter, any property encompassed within the scope of estate property is subject to an action for turnover by the bankruptcy trustee. In re Iferd, 225 B.R. 501, 502 (Bankr.N.D.Fla.1998). Conversely, property in which the debtor no longer has any ownership interest in, at the time the bankruptcy petition is filed, may be held free from the claims of both the debtor and the bankruptcy trustee. In conformance with this latter principle, Attorney Hearn, on behalf of the Van Wert County Hospital, contends that the funds garnished by the Debtor’s employer are not subject to turnover because the Debtors, upon filing for bankruptcy, had no interest in such funds-the funds having been transferred by the Debtor’s employer to the Lima Municipal Clerk of Courts prior to the time the Debtors filed for bankruptcy relief. In addition, Attorney Hearn asserts that even if the Debtors’ bankruptcy estate has an interest in the garnished funds, the disbursement of the funds to the Lima Clerk of Courts and then to him would not, as the Trustee contends, constitute an avoidable preference as there exists a statutory defense thereto under 11 U.S.C. § 547(c)(8). In addressing these arguments, the Court begins with Attorney Hearn’s contention that the Debtors, and thus by implication the Trustee, had no interest in the garnished funds once those funds were transferred to the Lima Municipal Clerk of Courts.
For purposes of § 541(a), a person’s interest (or lack thereof) is determined by reference to applicable state law, which for purposes of this case means that Ohio law will be applicable since all the events which give rise to this proceeding transpired in Ohio. In re Greer, 242 B.R. 389, 394 (Bankr.N.D.Ohio 1999); In re Sielaff, 164 B.R. 560, 566 (Bankr.W.D.Mich. 1994). In State ex rel. Auto Loan Co. v. Jennings, the Ohio Supreme Court in interpreting Ohio law, and under factual circumstances similar to this case, stated in its syllabus that:
Where a garnishee, under a garnishment order issued by a Municipal Court, pays the garnished funds to the clerk of the court, the garnished funds are not shielded from a trustee in bankruptcy where the judgment debtor is insolvent at the time the garnishment order is issued by the court.
14 Ohio St.2d 152, 237 N.E.2d 305, 307 (Ohio 1968). The reason for this holding was explained by the Ohio Supreme Court in its opinion as this:
Upon the issuance of a garnishment order, the judgment creditor obtains a chose in action against the garnishee. When the garnishee pays the funds into *143court pursuant to the garnishment order and is discharged, the judgment creditor obtains a lien upon the funds and a chose in action against the public official holding the funds to compel payment to the creditor pursuant to the court order.
Therefore, the order of the Municipal Court, in the instant case, directing the garnishee to pay the funds into court, did not give the [creditor] a clear legal right to the funds, nor did it impose upon the [Municipal Court] a clear legal duty to transfer funds to the [creditor].
Id. at 159-60, 237 N.E.2d 305, 310-11. In this case, although not actually stated, it appears that the Debtors were insolvent at the time the garnishment order was issued. Thus, in accordance with the above decision, the Plaintiff, at most, has a lien interest in the garnished funds held by the Lima Municipal Clerk of Courts. It is axiomatic, however, that lien interests held by a creditor do not eliminate a debtor’s ownership interest in the property. See State ex rel. v. Davis, 111 Ohio St. 569, 574, 146 N.E. 82, 84 (Ohio 1924) (defining a lien as a hold or claim which one person has upon the property of another as a security for some debt or charge). Therefore, in accordance with the above decision, it can be stated that under Ohio law, until a court actually disburses a debtor’s garnished funds to a judgment-creditor, the debtor retains an interest in those funds, which, upon the debtor filing for bankruptcy, would pass to the bankruptcy trustee under 11 U.S.C. § 541(a). Further supporting this position is the decision of Poon v. Todd (In re Corbin), 8 Ohio Misc. 26, 350 F.2d 514 (6th Cir.1965), which was rendered by the Sixth Circuit Court of Appeals.
In the In re Corbin case, a judgment-creditor received monies from the Cincinnati Municipal Court which had been paid into the Court by a garnishee. That same day, the judgment-debtor filed a petition for bankruptcy relief. Following this action, the bankruptcy trustee appointed to the debtor’s case sought and eventually received an order for turnover which required the creditor to pay over the funds received by the way of the garnishment order. Id. at 515. Within the context of these facts, the Sixth Circuit set about determining whether the debtor, and thus the trustee, had a right to the funds, framing the issue as this: “whether title to the money on deposit with the Cincinnati Municipal Court had actually passed to the judgment creditor or whether the judgment creditor merely had a lien on the money which lien was null and void under the provisions of § 67 of the Bankruptcy Act.” Id. at 516. In addressing this issue, the Court stated that the issue could be resolved by ascertaining “whether the [creditor’s] title had become so complete and absolute at [the time of the bankruptcy so] as to make it paramount to the claim of the trustee in bankruptcy.” Id. To this question, the Sixth Circuit Court of Appeals, after reviewing a number of Ohio cases, held that a debtor’s legal and equitable rights in property are not extinguished in a garnishment action when the funds are held in the custody of the court. Id. at 517. As explained by the Court in In re Corbin:
The payments made to a county or Municipal Court trusteeship prior to the filing of petition in bankruptcy and not distributed prior to bankruptcy are in custodia legis. This is true also of funds held by sheriff who sold personal property and held the proceeds of such sale at the time of the filing of a voluntary petition in bankruptcy. The claim of the creditor cannot be perfected by the payment to him thereafter. The power to *144consummate inchoate rights ceases upon the filing of a petition in bankruptcy.
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Funds in the hands of a Municipal Court trustee represent only an attempt to transfer assets of a debtor and they remain in custodia legis.
Id. (internal quotations and citations omitted). Since the In re Corbin decision, other courts interpreting Ohio law have similarly found that a debtor’s legal and equitable rights in property are not extinguished upon garnishment. In re Evans, 78 B.R. 145, 146 (Bankr.N.D.Ohio 1987) (a judgment-debtor’s interest in garnished funds are not extinguished upon garnishment); In re Dodds, 147 B.R. 719, 720 (Bankr.S.D.Ohio 1992) (funds withheld prepetition from a Chapter 7 debtor’s paycheck by her employer under a garnishment notice were estate property, and thus had to be turned over to the debtor); Sininger v. Fulton (In re Sininger), 84 B.R. 115, 117 (Bankr.S.D.Ohio 1988) (when wages are paid into court pursuant to a garnishment order, the interest of the employee is not divested).
Attorney Hearn, on behalf of the Plaintiff, however, argues that notwithstanding the foregoing decisions, the Debtors had no legal or equitable interest in the garnished funds held by the Lima Municipal Clerk of Courts because pursuant to § 2716.06 of the Ohio Revised Code, a debtor has only five (5) days from the receipt of the notice of the order of garnishment to contest the validity of the garnishment. Simply put, Attorney Hearn argues that if a debtor fails to contest a garnishment order within the five (5) day time-frame provided in O.R.C. § 2716.06, as seems to be the situation in this case, the debtor thereafter relinquishes all legal and/or equitable interest in the garnished funds. The difficulty however, the Court has with this argument, is that in addition to going against the above stated decision, substantively speaking the five (5) day prohibition against contesting the validity of a garnishment contained in O.R.C. § 2716.06 only applies in the situation where the debtor contests the amount of wages to be garnished, and does not apply when the debtor actually contests the creditor’s right in the underlying judgment. Specifically, O.R.C. § 2716.06(C) provides that a hearing thereunder “shall be limited to a consideration of the amount of the personal earnings of the judgment debtor, if any, that can be used in satisfaction of the debt owed by the judgment debtor to the judgment creditor.” Moreover, in the sample notice provided in O.R.C. § 2716.06, it is specifically provided that “no objections to the judgment itself will be heard or considered at the hearing.” Accordingly, the Court must reject Attorney Hearn’s argument, and thus for purposes of this case, the Court holds that when the Debtors petitioned this Court for bankruptcy relief, they still retained an interest in the garnished funds held by the Lima County Municipal Clerk of Courts, and that upon the Debtors filing for bankruptcy relief, this interest passed to the Trustee in accordance with 11 U.S.C. § 541(a). This holding, however, raises an additional question: with respect to the garnished funds, exactly what interest passed to the Trustee when the Debtors petitioned this Court for bankruptcy relief?
It is black-letter bankruptcy law that a bankruptcy trustee generally cannot acquire a greater interest in property than what was held by the debtor upon the commencement of a bankruptcy case. See generally Mayer v. United States (In re Reasonover), 236 B.R. 219, 226 (Bankr.E.D.Va.1999). In addition, and as partially delineated above, it is clear that with respect to garnished funds held by a court, a judgment-creditor retains a *145lien interest in such funds. Poon v. Todd (In re Corbin), 8 Ohio Misc. 26, 350 F.2d 514 (6th Cir.1965); State ex rel. Auto. Loan Co. v. Jennings, 14 Ohio St.2d 152, 237 N.E.2d 305 (Ohio 1968). Furthermore, such a lien is considered perfected, at the very latest, when the funds are taken into custody by the court. Battery One-Stop Ltd. v. Atari Corp. (In re Battery One-Stop Ltd.), 36 F.3d 498, 494 (6th Cir.1994) (in a non-wage garnishment, perfection under Ohio law occurs at the time notice of the garnishment is served on the garnishee); Ducker v. First Nat’l Bank of Southwestern Ohio (In re Gray), 41 B.R. 374, 377-78 (Bankr.S.D.Ohio 1984) (garnishment lien perfected when garnishment paid to court). As a consequence, the Plaintiff in this case has since August 5, 1999, held a perfected lien in the funds garnished by the Debtor’s employer; the August 5th date being the prepetition date on which the Lima Municipal Clerk of Courts took possession of the garnished funds. The significance of this fact is that since a creditor’s interest in a perfected lien is generally superior to that of the bankruptcy trustee’s interest in that same property, the Trustee must point to some statutory authority by which he may defeat (or at least subordinate), the Plaintiffs interest in the garnished funds which are now held by Attorney Hearn. In this respect, the Trustee cites to 11 U.S.C. § 547(b)1 which permits, under certain conditions, a trustee to avoid a transfer of property if the transfer of the property was made within ninety (90) days before the date of the filing of the bankruptcy petition.
In this case, there is no dispute between the Parties that the transfer by the Debtor’s employer of the garnished funds to the Lima Municipal Clerk of Courts clearly falls within the ninety (90) day preference period provided for in § 547(b). Moreover, it is clear that a transfer for purposes of § 547(b) includes both the obtainment of a security interest and the subsequent perfection thereof. Schreiber v. Emerson (In re Emerson), 244 B.R. 1, 36 (Bankr.D.N.H.1999); Hunter v. Snap-on Credit Corp. (In re Fox), 229 B.R. 160, 167 (Bankr.N.D.Ohio 1998). However, in defense to the Trustee’s claim of a preferential transfer, the Plaintiff contends that paragraph (c)(8) of § 547 provides a defense thereto.
Section 547(c)(8), which is frequently referred to as the “small preference” exception, provides that:
(c) The trustee may not avoid under this section a transfer—
(8) if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600.
Thus under this section, a transfer, despite being preferential for purposes of § 547(b), cannot be avoided if: (1) the case is filed by an individual debtor; (2) the debts held by that individual debtor are *146primarily consumer debts; and (3) the aggregate value of all the property transferred is less than $600.00. In this case, the facts presented by the Parties clearly show that these requirements have been met. Accordingly, as the Trustee has cited to no other statutory section under which he could obtain a superior interest in the garnished funds, the Court must find that the Plaintiff, having a validly perfected lien in the garnished funds, has a superior interest in those funds for purposes of bankruptcy law. As a consequence, the Plaintiff is entitled to keep the garnished funds free from any claims of the Trustee. Moreover, as a result of this decision, the Court can see no purpose which would be furthered in finding that the automatic stay has been violated, or that the Lima Municipal Clerk of Courts should be held liable for the garnished funds which were transferred to Attorney Hearn.
However, notwithstanding the foregoing holding, the Court is troubled by one aspect of this case; namely why Attorney Hearn, in contravention to the state court order, kept the funds at issue in this case from the Trustee. In this respect, the Court, although not presented with all the circumstances surrounding Attorney Hearn’s actions, strongly believes that Attorney Hearn, besides apparently breaching his duty as an officer of the court, was in violation of the state court order. The Court also observes that Attorney Hearn would not have compromised his client’s position by turning over the funds to the Trustee, as the Trustee would have been required to keep the funds until the issues presented herein had been determined. The Court, however, given that it comes to this case late, and given that Judge Workman refrained from taking any action against Attorney Hearn, declines at this time to carry this issue any further.
In reaching the conclusions 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 the Motion for Summary Judgment submitted by the Trustee, Bruce French, be, and is hereby, DENIED; and that the Motion for Summary Judgment submitted by Attorney Hearn on behalf of the Plaintiff, Van Wert Co. Hospital, be, and is hereby, GRANTED.
. This section provides that, "[e]xcept 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.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493209/ | Memorandum of Decision
ALAN JAROSLOVSKY, Bankruptcy Judge.
In the spring of 2000, plaintiff Dawn Baker was the on-site sales agent for a residential real estate subdivision. She was also in contract to buy one of the homes. Debtor Fawzi Al-Ruwaished was interested in purchasing one of the homes, but could not afford an outright purchase. Dawn and Fawzi entered into a written “Equity Share Agreement” whereby they would purchase the home at Dawn’s favorable purchase price and commission credit. For finance purposes, the property had to be originally deeded to Fawzi and his wife. The parties agreed that as soon as escrow closed Dawn would pay Fawzi $21,900.00, less a credit of $6,580.00, and Fawzi would place Dawn on record title as a 50% owner. Thereafter, Dawn would make payment on a second deed of trust and Fawzi would pay the first. The property was to be sold in three years and the profits shared.
As soon as the sale escrow closed, the relations between Fawzi and Dawn fell apart. Fawzi decided that Dawn had failed to pay him as agreed, so he was free to repudiate the agreement and own the home free and clear of any claim by Dawn, even though he had purchased the property at her special price and with her credits. Dawn took the position that she had always been ready to pay the money as agreed, and that she did not do so only because Fawzi refused to give her a deed. She filed a lawsuit against Fawzi and recorded a lis pendens. On November 9, 2000, Fawzi and his wife filed a Chapter 7 petition.
In this adversary proceeding, Dawn seeks a declaration that she has a nondis-chargeable claim against Fawzi for fraud and breach of fiduciary duty. She seeks a money judgment or a declaration that she is a 50% owner of the property. Fawzi denies any wrongdoing, and alleges that his bankruptcy discharge has erased Dawn’s interest in the property.
Dawn did not prove that Fawzi ever intended to defraud her. She correctly argues that the equity share agreement made them partners and created a fiduciary relationship, but has not shown any sort of defalcation. Mere breach of a partnership agreement does not create a nondischargeable debt under § 523(a)(4); there must be misappropriation of partnership property. In re Niles, 106 F.3d 1456, 1463 (9th Cir.1997). Since the property has not gone anywhere, nor is there any evidence that Fawzi encumbered it or otherwise alienated it, there has been no defalcation.
Fawzi argues that once this court decides there is no nondischargeable debt it must dismiss the case. However, there is another dischargeability issue: the effect of Fawzi’s discharge on the joint venture he and Dawn created to purchase the property. Fawzi is wrong in arguing that his bankruptcy discharge transmuted equitable ownership of the property from the joint venture to him.
Equitable remedies arising out of a debtor-creditor relationship are barred by the bankruptcy discharge in cases where monetary relief is an alternative remedy. However, some sorts of equitable remedies may be imposed outside the debtor-credi*196tor relationship and are not affected by the discharge. In re Golden Triangle Capital, Inc., 171 B.R. 79, 82 (9th Cir. BAP 1994). These may include resulting trusts, partition, and deed reformation. 2 Collier on Bankruptcy (15th Ed. Rev.) ¶ 101.05[5], p. 101-36.1. Where there is a claim that a trust arises out of intended ownership rights in property, the person claiming the ownership rights does not do so as a creditor and is not barred by the discharge.
In this case, Fawzi is acting like he had a contract to sell an interest in his property to Dawn. If that were so, then his obligation to perform might be discharged. However, what actually happened is that Fawzi and Dawn created a joint venture for the purchase and eventual resale of the property. The property is in fact owned by the joint venture. This claim does not arise out of a debtor-creditor relationship and accordingly is not barred by Fawzi’s discharge.
For the foregoing reasons, the court will enter judgment as follows:
1. Dawn will take nothing on her claims that Fawzi owes her a debt which is nondischargeable pursuant to § 523(a)(2) or § 523(a)(4) of the Bankruptcy Code.
2. The court will decree that, notwithstanding record title, the real property at 316 Toscana Circle, Cloverdale, California, is in fact owned by the joint venture created by Fawzi and Dawn.
3. Fawzi and his wife shall be ordered to execute a grant deed to a 50% ownership in said property to Dawn, as a tenant in common, in a form acceptable to Dawn, and shall be directed to deposit said deed with their attorney, who shall deliver the deed to Dawn when Dawn has paid to said attorney, in trust, in cash or certified funds, the sum of $14,923.00.1
4. Failure of either side to comply with paragraph 3 shall not affect the decree in paragraph 2.
5. Each side shall bear its own attorneys’ fees and costs.
6. The obligations created in paragraph 3 shall be enforced by way of contempt proceedings in this court. Any other disputes arising out of the equity share agreement shall be freely enforceable in state court, except that no money judgment may be entered against Fawzi arising out of any act prior to his bankruptcy filing.
This memorandum constitutes the court’s findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for Dawn shall submit an appropriate form of judgment forthwith.
. This sum constitutes the $21,900.00 Dawn was to pay after the close of escrow, plus 13 monthly payments of $161.00 each on the second deed of trust, less a $6,570.00 credit for closing costs per the agreement, and less $2,500.00 for a bounced check which Fawzi gave to Dawn which the parties agreed could be deducted from Dawn’s contribution. If Fawzi has not actually made the payments on the second, Dawn may make the payments directly to the lender. No interest will be added to Dawn's obligations. Either side may seek modification if he or she believes the court's mathematical calculation to be in error. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493210/ | ORDER DENYING MOTION FOR RELIEF FROM STAY
CATHARINE R. CARRUTHERS, Bankruptcy Judge.
This matter came on for hearing before the undersigned Bankruptcy Judge on February 1, 2001, in Greensboro, North Carolina, after due and proper notice, upon the Motion for Relief from Stay filed by CIT Group Equipment Financing, Inc., as servicing agent for Hyster Credit Compa*339ny, (the “Creditor”). Appearing before the court were Gregory Chocklett, on behalf of the Creditor, and Bruce Magers, the Chapter 7 Trustee.
This court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 1334 and 157(a) and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (G), (K) and (0) which this court may hear and determine.
After reviewing the file and considering the arguments of counsel for the Creditor and the Chapter 7 Trustee, this court makes the following:
FINDINGS OF FACT
1. On or about May 30, 2000, A & N Lumber Co. (the “Debtor”) filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. On November 7, 2000, an Order was entered converting the case from Chapter 11 to Chapter 7 and appointing Bruce Magers as the Chapter 7 Trustee.
2. On or about June 17, 1997, the Debt- or entered into a Retail Installment Contract (the “Contract”), whereby the Creditor’s predecessor in interest financed the purchase of a Hyster Model H2880XL fork lift, with attachments and accessories (the “Collateral”), Serial No. E007D01686P. The Contract gave the Creditor’s predecessor in interest a security interest in the Collateral.
3. When the Contract was executed, the Debtor’s address was 8811 New Hope Road, Denton, North Carolina 27239. The address was included on the top left-hand corner of the Contract.
4. Although a portion of New Hope Road in Denton, North Carolina lies in Davidson County, the Debtor’s location at 8811 New Hope Road lies in Randolph County.
5. On or about August 28, 1997, the Creditor filed a UCC-1 financing statement with the Register of Deeds for Davidson County, North Carolina and the North Carolina Secretary of State.
6. The Debtor was in default on payments under the Contract when the bankruptcy petition was filed, and the Debtor has not made any payments since the filing.
7. The Creditor filed a proof of claim on September 12, 2000, asserting a secured claim in the amount of $27,942.65 and that the wholesale value of the collateral in its present condition is $20,000.00.
8. On January 4, 2001, the Creditor filed a Motion for Relief from Stay as to the Collateral alleging that the Debtor has no equity in the collateral.
9. The Debtor did not oppose the relief sought in the Creditor’s motion. However, the Chapter 7 Trustee opposed the relief sought on the grounds that the Debtor is located in Randolph County, not Davidson County, and that the filing of UCC-1 financing statement with the Davidson County Register of Deeds and the North Carolina Secretary of State did not perfect the Creditor’s security interest in the Collateral in the manner required by Article 9 — 401(l)(c) of the Uniform Commercial Code. N.C.G.S. § 25-9-401(l)(c).
DISCUSSION
Section 544(a) of the Bankruptcy Code, referred to as the “strong arm clause”, gives the Chapter 7 Trustee the rights and powers of (1) a creditor on a simple contract with a judicial lien on the debtor’s property as of the date of the petition; (2) a creditor with a writ of execution against the property of the debtor that is unsatisfied as of the date of the *340petition; and (3) a bona fide purchaser of the debtor’s real property as of the date of the petition. 11 U.S.C. § 544(a). The substance of the Trustee’s rights and powers under section 544(a), which may result in the avoidance of liens, is determined by applicable state law. In re Surplus Furniture Liquidators, Inc. of High Point, 199 B.R. 136, 144 (Bankr.M.D.N.C.1995). Specifically, the Trustee’s strong-arm powers are defined “by the law of the situs where the subject property is located.” In re White, 183 B.R. 713, 715 (Bankr.M.D.N.C.1995) (quoting Rinn v. First Union National Bank of Maryland, 176 B.R. 401, 408 (D.Md.1995)); see also American Bankers Ins. Co. of Florida v. Maness, 101 F.3d 358, 363 (4th Cir.1996) (in bankruptcy cases, the nature and extent of property interests held by debtors and creditors is normally a matter of state law).
The property at issue is located in North Carolina. It is the Trustee’s position that under the law of North Carolina, the Trustee’s rights and powers are superior to those of the Creditor.
Pursuant to North Carolina law, the Creditor failed to perfect its security interest in the collateral. N.C.G.S. § 25-9-401 provides that except in certain narrow exceptions set forth in §§ 25-9-401(l)(a) and (b), the proper place to file financing statements to perfect a security interest in collateral is “... in the office of the Secretary of State and in addition, if the debtor has a place of business in only one county of this State, also in the office of the register of deeds of such county.” The Creditor erroneously filed its UCC-1 financing statement in Davidson County when the Debtor’s business was actually located in Randolph County; therefore, the Creditor’s security interest in the Collateral was unperfected when the Debtor’s petition was filed.
N.C.G.S. § 25-9-301, entitled “Persons who take priority over unperfected security interests; rights of ‘lien creditor,’ ” states that, subject to an exception not relevant here, an unperfected security interest is subordinate to the rights of “a person who becomes a lien creditor before the security interest is perfected.” N.C.G.S. § 25 — 9—301(l)(b). Section 25-9-301(3) defines “lien creditor” as follows:
A “lien creditor” means a creditor who has acquired a lien on the property involved by attachment, levy or the like and includes ... a trustee in bankruptcy from the date of the filing of the petition
N.C.G.S. § 25-9-301(3).
It has been consistently held that where a financing statement is filed in the wrong place, a security interest in a bankrupt’s property is not perfected and is subordinate to a bankruptcy trustee’s rights. In re Jerome, 31 B.R. 266, 268 (Bankr.D.Vt.1983) (citing In Re Baker, 4 U.C.C.Rep. 723, 1967 WL 8842 (Ref. in Bankruptcy, E.D.Wis.1967); In Re Scholl, 6 U.C.C.Rep. 1116, 1969 WL 11092 (Ref. in Bankruptcy, W.D.Wis.1969); In Re Roy, 21 U.C.C.Rep. 325, 1977 WL 25555 (Ref. in Bankruptcy, N.D.Ala.1977); In Re Pelletier, 5 U.C.C.Rep. 327, 1968 WL 9235 (Ref. in Bankruptcy, 1968)).
The Creditor contends that pursuant to N.C.G.S. § 25-9-401(2), since the improper filing was made in good faith, it is nevertheless effective with regard to collateral covered by the financing statement against any person who has knowledge of the contents of the financing statement. While that may be true as between the Creditor and the Debtor, or other parties taking a security interest with knowledge of the filing, the filing is not effective against a Chapter 7 Trustee. Section 544(a) of the Bankruptcy Code expressly provides that the status of a lien creditor is *341granted to the trustee “without regard to any knowledge of the trustee or of any creditor.” 11 U.S.C. § 544(a); see Ganje v. Telford (In re Rhine), 22 B.R. 42, 44 (Bankr.D.S.D.1982); Togut v. Wapnick (In re Karachi Cab Corp.), 21 B.R. 822 (Bankr.S.D.N.Y.1982) (trustee in bankruptcy has the status of a lien creditor without notice).
Likewise, the Creditor’s argument that it “substantially complied” with the filing requirements by filing with the Secretary of State is not persuasive. N.C.G.S. § 25-9-402(8) states that “[a] financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading.” However, the court believes that this “substantial compliance” provision refers to errors in the contents of the financial statement (e.g., description of collateral, name and signature of debtor) rather than the place of filing. Filing in the wrong county is not a “minor error” in the court’s view. North Carolina has adopted a “notice filing” system. Evans v. Everett, 279 N.C. 352, 183 S.E.2d 109 (1971). The purpose of a financing statement is to provide notice to third parties of the relationship between the debtor and creditor. Mountain Farm Credit Serv. v. Purina Mills, Inc., 119 N.C.App. 508, 459 S.E.2d 75 (1995). Allowing a creditor to “substantially comply” with the statutory requirements by filing in the wrong county would defeat the underlying purpose of the “notice filing” system.
N.C.G.S. § 25-9-401 clearly required the Creditor to file the financing statement with both the Secretary of State and the Register of Deeds for Randolph County. The Creditor failed to comply with the statutory requirements and therefore did not have a perfected security interest when the Debtor filed its petition.1 If the Trustee takes the appropriate steps to assert its interest in the Collateral, the Trustee’s lien will be superior to the Creditor’s security interest and the Creditor will not be entitled the relief requested. The Trustee shall have sixty (60) days within which to commence an adversary proceeding.2
Therefore, it is ORDERED, ADJUDGED AND DECREED that the Creditor’s Motion for Relief from Stay is hereby denied and the Trustee shall have sixty (60) days within which to commence an adversary proceeding.
. Creditor further contends that it is entitled to the Collateral because it holds an "equitable lien" or is entitled to a "constructive trust” under North Carolina law. While these equitable remedies are recognized in North Carolina, the court does not believe the facts and circumstances in this case warrant the imposition of an "equitable lien” or a "constructive trust” so as to allow the Creditor to prevail over the Trustee. See In re Surplus Furniture Liquidators, Inc. of High Point, 199 B.R. 136 (Bankr.M.D.N.C.1995) (recognizing existence of equitable liens and constructive trusts in North Carolina in limited circumstances).
. The Trustee has authority under section 544 to avoid the transfer of the unperfected security interest from the Debtor to Hyster Credit. An adversary proceeding is required under Rule 7001. See In re Reasonover, 236 B.R. 219 (Bankr.E.D.Va.1999) (Bankruptcy trustees routinely use their avoidance powers to set aside unperfected security interests and unrecorded conveyances, even though such security interests and conveyances could be enforced against the debtor under state law.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493212/ | DECISION
ROBERT E. GRANT, Bankruptcy Judge.
The complaint in this adversary proceeding asks the court to equitably subordinate a portion of the Internal Revenue Service’s priority tax claim because it has failed to pursue the collection of those taxes from a third party who, allegedly, is also responsible for their payment. The United States contends that the complaint fails to state a claim upon which relief can be granted and seeks dismissal pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The matter has been submitted to the court for a decision on the briefs of counsel.
The debtor was a manufacturer of semitrailers. A 12 percent tax is imposed upon the first retail sale of these trailers, see, 26 U.S.C. § 4051(a), which the debtor failed to pay. As a result, the IRS has filed a *392priority claim for more than $2,230,000 1 on account of this excise tax. There has been no objection to this portion of the IRS’s claim, so that it is deemed allowed. 11 U.S.C. § 502(a). By this adversary proceeding, the trustee seeks to equitably subordinate the amounts due the IRS on account of the § 4051 taxes to the claims of the debtor’s other creditors. The Trustee argues that the claim should be subordinated because the IRS has refused to pursue the collection of those taxes from a third party, Congress Financial, who the trustee contends is also liable for their payment.
Congress Financial loaned money to the debtor under a lockbox arrangement. This arrangement required all the proceeds from the debtor’s sales to be remitted to a lockbox controlled by Congress Financial. The collections would be applied to the outstanding balance on the debtor’s loan and the resulting reductions in the loan balance would produce an increase in the available credit. It had been the debtor’s practice to pass the § 4051 excise tax on to its customers. Consequently, when the customers remitted the invoiced amount to the lockbox, Congress Financial would receive not only the purchase price of the trailers but also the additional excise tax. Congress Financial did not forward any of the amounts collected on account of the excise tax on to the IRS (or remit them to the debtor so that it could do so); instead, it applied all the funds it received to the debtor’s outstanding loan balance.
Dismissal under Rule 12(b)(6) is appropriate if, after accepting all of the plaintiffs well pleaded allegations as true2 and drawing all reasonable inferences in the light most favorable to the plaintiff, Bethlehem Steel Corp. v. Bush, 918 F.2d 1323, 1326 (7th Cir.1990), “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” McLain v. Real Estate Board of New Orleans, Inc., 444 U.S. 232, 246, 100 S.Ct. 502, 62 L.Ed.2d 441 (1980) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). Consequently, for the purposes of the defendant’s motion, the court accepts as true the trustee’s allegations that the debtor imposed a 12% surcharge upon the buyers of its trailers on account of the § 4051 tax, that these customers remitted this amount to Congress Financial under the lockbox arrangement, and that Congress Financial applied the amounts collected to the debtor’s outstanding loan balance. The court also accepts as true the fact that the IRS has not pursued Congress Financial for these funds, but has, instead, filed a claim to collect the taxes from the estate. The issue for the court to decide is whether these facts state a claim for equitable subordination.
The Trustee argues that once the proceeds of Debtor’s sales were remitted to Congress Financial a trust was created under § 7501 of the Internal Revenue Code, with the result that Congress Financial held the tax portion of the sale proceeds as trustee for the benefit of the United States. The Trustee contends that this caused Congress Financial to become a responsible party, see, 26 U.S.C. *393§ 6672(a), whose duty it was to pay the collected funds to the IRS. Under these circumstances, the Trustee believes that the IRS has a separate avenue for the collection of the amounts due it, apart from its claim against the estate, which it has failed to pursue and that this inaction constitutes inequitable conduct such that the claim should be subordinated to the claims of the debtor’s other creditors, who can look only to estate for payment of their debt.
The Bankruptcy Code authorizes the court, “under principles of equitable subordination, [to] subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim....” 11 U.S.C. § 510(c)(1). Congress did not identify what the “principles of equitable subordination” might be because it intended that the courts would be allowed to continue to develop the doctrine. See, United States v. Noland, 517 U.S. 535, 539, 116 S.Ct. 1524, 1526-27, 134 L.Ed.2d 748 (1996). It is clear, however, that equitable subordination must be “justified by particular facts,” id., 517 U.S. at 540, 116 S.Ct. at 1527, so that the determination must be made on a case-by-case basis.
The fundamental principle upon which this action rests is the proposition that a creditor’s failure to pursue the collection of its claim from a third party, who may, along with the debtor, also be liable for the obligation, constitutes a sufficient reason to equitably subordinate the creditor’s claim against the estate. The validity of this proposition seems to be a question of first impression. Although both the trustee and the IRS have extensively briefed issues such as “categorical” subordination, whether subordination without fault continues to exist, and how much or how little the creditor must do for there to be fault, neither of them has directed the court’s attention to a single decision which has discussed the proposition on which this case turns. This dearth of authority is surprising since the basic scenario giving rise to the issue will, at least potentially, exist any time a third party may also be liable for payment of a creditor’s claim against the debtor. Given the frequency with which there are guarantors, sureties, co-makers, responsible parties and potentially responsible parties who may also be liable for the payment of a debtor’s obligation, one would have thought that someone would have raised the issue before now. Apparently not.
Because of conflicting decisions on the issue, the parties differ over whether the possibility of subordination without fault still exists in the Seventh Circuit. Compare In re Virtual Network Services Corp., 902 F.2d 1246, 1250 (7th Cir.1990) (“equitable subordination no longer requires ... some inequitable conduct”)3 with Matter of Lifschultz Fast Freight, 132 F.3d 339, 349 (7th Cir.1997) (“inequitable conduct is still the general rule for equitable subordination”). The court does not need to enter this particular debate because misconduct (or the lack thereof) is only one of several factors the court is to consider in deciding whether subordination is appropriate. In addition to the issue of misconduct, “equitable subordination ... must not be inconsistent with the provisions of the Bankruptcy [Code].” In re Mobile Steel Co., 563 F.2d 692, 700 (5th *394Cir.1977). See also, Matter of Vitreous Steel Products Co., 911 F.2d 1223, 1237 (7th Cir.1990); Lifschultz, 132 F.3d at 344. Virtual Network and similar decisions concluded only that misconduct was not required; it left the other considerations intact. See, Vitreous Steel Products, 911 F.2d at 1237. Indeed, in Noland the Supreme Court reaffirmed the vitality of this particular requirement when it noted that:
This last requirement [that subordination not be inconsistent with the requirements of the Code] has been read as a reminder to the bankruptcy court that although it is a court of equity, it is not free to adjust the legally valid claim of an innocent party who asserts the claim in good faith merely because the court perceives that the result is inequitable. Noland, 517 U.S. at 539, 116 S.Ct. at 1526 (citations and internal quotation marks omitted).
Consequently, subordination is inappropriate when it is based, “not on individual equities,” but, instead, “on the supposedly general unfairness of satisfying” a claim in the manner prescribed by the Bankruptcy Code. Noland, 517 U.S. at 541, 116 S.Ct. at 1528. In other words, “the circumstances that prompt a court to order equitable subordination must not occur at the level of policy choice at which Congress itself operated in drafting the Code.” Noland, 517 U.S. at 543, 116 S.Ct. at 1528.
The Court’s admonition that the circumstances prompting subordination may not include the same type of policy considerations Congress would have evaluated in drafting the Bankruptcy Code is of significance here because Congress has already considered how to deal with claims on which an entity other than the debtor is also liable and its solution does not contemplate subordinating the primary creditor’s claim. Quite to the contrary, the Bankruptcy Code specifically contemplates allowing the claim of the primary creditor. It is the claim of the codebtor that must be disallowed or subordinated.
Claims for contribution or reimbursement asserted by codebtors are not allowed unless the codebtor has actually paid something to the primary creditor, either before or after the petition. 11 U.S.C. § 502(e)(1)(B), (e)(2). Until then they are contingent. To the extent the codebtor actually pays the primary creditor, either in whole or in part, the codebt- or’s claim may be allowed, either by way of contribution or reimbursement, through § 502(e), or subrogation through § 509(a). Nonetheless, any distribution on the co-debtor’s claim must be subordinated until the primary creditor’s claim is paid in full. 11 U.S.C. § 509(c) (“The court shall subordinate ... ”). See also, 4 Collier on Bankruptcy, ¶ 502.06[6]; ¶ 509.04 (15th Ed. Revised 2000).
To accept the trustee’s argument would stand the statutory regimen on its head. Rather than paying the primary creditor and subordinating the claim of the codebt- or, the trustee would have the court subordinate the claim of the primary creditor, unless it proceeds against the codebtor. Furthermore, the argument the trustee relies upon — that it is unfair to reduce the funds that are available to pay creditors by paying the IRS’s priority claim when there is a solvent third party from which it could also collect — is not unique to the IRS. The same “unfairness” that the trustee sees in the current situation will, at least to some extent, be present anytime the estate is confronted with paying a claim where there is a third party to whom the creditor could also look for payment. The fact that the IRS’s claim is entitled to a priority, while most other claims with codebtors would not be, changes nothing. See, United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 229, 116 *395S.Ct. 2106, 2115, 135 L.Ed.2d 506 (1996) (“[T]he principle of Noland has nothing to do with transfer between classes, as distinct from ranking within one of them”). Although the trustee is not suggesting that the court should subordinate the claim of every creditor who could look to a codebt- or for payment, that would be the inevitable result of accepting his position. When the argument is taken to its logical conclusion, it becomes apparent that the trustee is advocating the same kind of categorical approach to subordination that the Court prohibited in Noland.
In considering how to deal with the claims of creditors who can also look to an entity other than the debtor for payment, Congress could have, but did not, change the priority such claims are otherwise given. This court may not do so under the guise of equitable subordination. Noland, 517 U.S. at 543, 116 S.Ct. at 1528. See also, Reorganized CF & I Fabricators, 518 U.S. at 229, 116 S.Ct. at 2115. Cf., Matter of Ahlswede, 516 F.2d 784 (9th Cir.1975) (that a trust of which the debtor was a beneficiary might be able to offset debtor’s future distributions against its claim did not justify equitable subordination.).
The Trustee’s argument also rests upon the proposition that the IRS may collect the debtor’s unpaid excise taxes from Congress Financial, through 26 U.S.C. § 7501. This portion of the tax code provides:
Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States. 26 U.S.C. § 7501(a).
Section 6672 of the Internal Revenue Code gives teeth to this “trust” by effectively imposing personal liability upon those responsible for seeing that the taxes collected or withheld from others are actually paid to the United States.4 See, 26 U.S.C. § 6672(a). The trustee argues because of § 7501, Congress Financial held in trust the amounts it received from debtor’s customers on account of the § 4051 excise tax. To the extent Congress Financial is still in possession of those trust funds, the United States should be able recover them. If, on the other hand, the funds no longer exist, § 6672 makes Congress Financial personally liable for their payment.
Section 7501 creates a trust only where a “person is required to collect or withhold” a tax “from any other person.” 26 U.S.C. § 7501(a) (emphasis added). Its applicability to the funds Congress Financial received rests upon whether the debt- or had an obligation to collect the § 4051 taxes from its customers, as opposed to an obligation to pay a 12% tax on each sale. In the first instance, the tax would be imposed upon the buyer, and the seller would be the vehicle through which the tax is collected and remitted to the IRS. In the second, the tax would be imposed upon the seller, and whether or how the consequences of the tax are passed on to the customer is up to the seller.
The language of § 4051 contains no indication that it imposes a tax upon the buyer which the seller is required to collect and remit to the IRS. It states only that “[tjhere is hereby imposed on the first retail sale of the following articles ... a tax of 12 percent of the amount for which the article is so sold.” 26 U.S.C. § 4051. Similarly, the remaining portions of the *396subchapter say nothing that could be construed as imposing an obligation upon the seller to collect this tax from the buyer. See, 26 U.S.C. §§ 4052, 4053. The absence of such language casts doubt upon the Trustee’s argument that the debtor’s unpaid § 4051 taxes are trust fund taxes. This doubt becomes conclusive when § 4051 is compared with more commonly encountered trust fund taxes, such as employee withholding. Social Security (FICA) taxes are “imposed on the income of every individual,” 26 U.S.C. § 3101(a), (b), yet, they are to be “collected by the employer of the taxpayer, by deducting the amount of the tax from the wages ...” 26 U.S.C. § 3102(a). Similarly, although incomes taxes are imposed on the individual actually earning taxable income, 26 U.S.C. § 1(a) -(d), an “employer making payment of wages shall deduct and withhold [from] such wages a tax ...” 26 U.S.C. § 3402(a)(1). Less commonly encountered examples can be found in the taxes associated with the use of various services and facilities. These excise taxes are imposed upon the amount paid and the tax is to be borne by the payor. See, 26 U.S.C. §§ 4251(a); 4261(a) -(d). Nonetheless, the responsibility for collecting the tax is imposed upon the person receiving the payment on which the tax is imposed. 26 U.S.C. § 4291.
Where Congress wished to ensure that certain taxes were held in trust for the United States, it specifically imposed an obligation to collect them from a third party. It did not do so in connection with the tax imposed by § 4051. In the absence of a statutory obligation to collect the tax imposed by § 4051 from its buyers, the fact that the debtor chose to pass that tax on to its customers, in the form of a surcharge, is not sufficient to render the resulting proceeds “a special fund in trust for the United States” under 26 U.S.C. § 7501. Consequently, the IRS may not use § 7501 to collect those proceeds from Congress Financial.
Without a trust, there is no basis to impose liability on Congress Financial through § 6672. The predicate for liability under that section is that a person must first be “required to collect, truthfully account for, and pay over any tax imposed by [title 26] ...” 26 U.S.C. § 6672. The Trustee’s reliance upon cases such as Mercantile Bank of Kansas City v. United States, 856 F.Supp. 1355 (W.D.Mo.1994), Merchants Natl. Bank of Mobile v. United States, 878 F.2d 1382 (11th Cir.1989), and United States v. Security Pacific Business Credit, Inc., 956 F.2d 703 (7th Cir.1992), for the proposition that the IRS can pursue Congress Financial, as a responsible party, because it exercised power and control over which of the debtor’s creditors were paid, is misplaced. Admittedly, those cases stand for the proposition that a lender who exercises control over payments to a debtor’s creditors may be liable, as a responsible party under § 6672, for unpaid trust fund taxes. Nonetheless, each of those decisions involved a lender’s liability for the borrower’s unpaid trust fund taxes. They do not stand for the proposition that a lender who exercises control over a debt- or’s payments can be held liable for any unpaid tax. Since the § 4051 tax components included in the debtor’s sale proceeds are not “a special fund in trust for the United States,” Congress Financial is not a responsible party under 26 U.S.C. § 6672.
The trustee’s final argument is that the IRS could seek the imposition of a constructive trust over the amounts Congress Financial received on account of the § 4051 taxes. To do so, however, requires unjust enrichment, see, Hunter v. Hunter, 152 Ind.App. 365, 283 N.E.2d 775, 779 (1972); Doolittle v. Kunschik, 134 Ind. *397App. 125, 186 N.E.2d 803, 807 (1962) (Pfaff, J. concurring); In re Nova Tool & Engineering, Inc., 228 B.R. 678, 685 (Bankr.N.D.Ind.1998), and the allegations contained in the complaint do not lead to that conclusion. The complaint alleges only that Congress Financial received the amounts attributable to the § 4051 taxes from the debtor’s customers and applied them to the debtor’s outstanding loan balance. There is no suggestion that Congress Financial has been overpaid or that it received more than what the debtor owed. Admittedly, these circumstances may lead to the conclusion that it was enriched — because it was paid — but the court cannot conclude that it was unjustly so. If there is an injustice in a creditor receiving payment of its debt when others do not, righting that wrong is the function of preference law, see, e.g., 11 U.S.C. § 547(b), and not a constructive trust. Cf., Matter of Iowa Railroad Co., 840 F.2d 535, 545 (7th Cir.1988) (“No case of which we are aware employs the idea of the ‘constructive trust’ to settle priorities among bona fide business suppliers.”).
The Internal Revenue Service’s failure to pursue the collection of § 4051 taxes from Congress Financial does not justify the equitable subordination of its claim. Consequently, the Trustee’s complaint does not state a claim upon which relief may be granted and this adversary proceeding should be dismissed. An order doing so will be entered.
. This amount is taken from the IRS's proof of claim, number 868, filed' on June 27, 1997.
. Legal conclusions, cast in the form of factual allegations, are not accepted as true. Mescall v. Burrus, 603 F.2d 1266, 1269 (7th Cir.1979) (court is not required to accept as true legal conclusions either alleged or inferred from the pleaded facts). See also, 5A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1357 (2d. ed.1990). Rather, the court may undertake its own analysis.
. Noland, no longer permits the result reached by decisions such as Virtual Network that, at the appellate level, represent the genesis of the concept of subordination without fault. Nonetheless, the Court specifically declined to decide "whether a bankruptcy court must always find creditor misconduct before a claim may be equitably subordinated,” Noland, 517 U.S. at 543, 116 S.Ct. at 1528, so the issue seems to remain open for discussion.
. Section 6672 actually imposes a penalty, equal to the amount of the tax, upon "[a]ny person required to collect, truthfully account for, and pay over any tax imposed by [title 26] who willfully fails” to do so. 11 U.S.C. § 6672(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493213/ | ORDER
MARY DAVIES SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon several motions filed by the debtor, to wit:
1. The Motion for Summary Judgment, filed on August 14, 2001;
2. The Motion for Protective Order, filed on August 28, 2001;
3. The Motion to Strike Answer, filed on August 28, 2001; and
4. Request for Hearing, filed on August 28, 2001.
The defendant has responded to each of the motions.
This adversary proceeding was commenced on April 11, 2001, upon the debt- or’s complaint to determine the discharge-ability of his 1996 income tax obligations owing to the State of Arkansas. The complaint asserts that the obligations are dis-chargeable in this chapter 7 case because *420the taxes were assessed more than 240 days prior to the filing of the chapter 7 case and the tax return was due more than 3 years before the filing of the chapter 7 case. 11 U.S.C. §§ 523(a)(1), 507(a)(8). In addition, the debtor seeks to void the state’s lien in its entirety because, the debtor asserts, the values of the assets are insufficient to render the state, in a second lien priority position to the IRS, in any measure secured. The state filed its answer which denied the allegations of the complaint, and, with regard to the dis-chargeability issue, asserted only the conclusion that the obligations were excepted from discharge under section 523(a)(1)(C).
In accord with its usual procedure, on May 22, 2001, the Court issued a Preliminary Pretrial Order which directed the parties to state, among numerous other requirements, the theory of their respective positions in the case, the facts in support of their positions, and their requirements for discovery. The parties timely submitted their statements, each setting out statements of law and fact. Thereafter, on June 21, 2001, the Court issued its Pretrial Order which established, among other matters, specific deadlines for discovery. Under that Order, discovery was to be completed by September 21, 2001. This period was extended, upon the state’s motion, to October 31, 2001. In keeping with the Court’s scheduling Order, the state served interrogatories and other discovery on August 14, 2001. The debtor did not respond to the discovery but, instead, filed a motion for summary judgment and a motion for protective order.
The Motion for Summary Judgment
The debtor seeks summary judgment on both issues raised in the complaint: that the 1996 income tax obligation is dischargeable and that the value of the state’s lien is zero such that the lien may be avoided in its entirety. The state does not dispute that the statutory time requirements for dischargeability are met. Rather, the state asserts that the debtor willfully evaded payment of the obligation so that the taxes are not dischargeable. In addition, the state calls into question the veracity or completeness of the debt- or’s bankruptcy schedules with specific queries so that, at a minimum, it is entitled to discovery regarding the debtor’s assets and liabilities.
The Court believes that the state has met its burden in responding to the motion for summary judgment. While the Court agrees with the debtor that the state’s burden of proof on an assertion that the obligation is nondisehargeable under section 523(a)(1)(C) may not be met solely by the fact that the debtor waited 240 days after assessment to file the chapter 7 case, the state points to additional factors from which it can make its assertion that the debtor willfully evaded payment of the tax obligation. The Court has reviewed the Answer, the state’s pretrial statement, and its response to debtor’s motion for summary judgment and believes that sufficient disputed facts have been presented so that summary judgment is not appropriate.
Motion To Strike Answer
The debtor asserts that the state has failed to plead fraud with sufficient particularity pursuant to Rule 9(b) so that the answer should be stricken and default entered. Pursuant to Rule 9(b), applicable to this proceeding pursuant to Rule 7009, any party averring fraud must state the circumstances with particularity. In this instance, although the debtor commenced the adversary proceeding, and, thus, has the burden of demonstrating that the tax obligation falls within the time parameters of 11 U.S.C. § 523(a)(1)(A), (B), it is the state creditor who objects to the dischargeability of the obligation and raises the specter of debtor fraud under 11 *421U.S.C. § 523(a)(1)(C). It is well settled that the creditor has the burden of demonstrating by a preponderance of the evidence that a debt is nondischargeable. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Thus, is the state’s burden, as the party opposing dis-chargeability, to demonstrate that the debtor willfully evaded payment of the tax obligation. Cox v. United States (In re Cox), 156 B.R. 323 (Bankr.M.D.Fla.1993), aff'd, 189 B.R. 214 (M.D.Fla.1995); Boch v. United States (In re Booh), 154 B.R. 647 (Bankr.M.D.Pa.1993). Moreover, as the party raising an issue which is essentially one of fraud, and objecting to discharge-ability on that basis, the state’s is required to plead the basis for its assertion that the debtor willfully evaded the tax obligation with specificity. Its general statement that the obligation is nondischargeable pursuant to section 523(a)(1)(C) does not comply with that requirement.
That is not to say, however, that the Court is required to dismiss the answer with prejudice and enter default. Rather, a review of the Court file, including the state’s pretrial statement and response to summary judgment, indicate that the state has, at a minimum, some basis for asserting its position. Accordingly, the Court deems it appropriate that the state be given an opportunity to amend its answer to plead its allegations under section 523(a)(1)(C) with greater particularity.
The Motion for Protective Order
In response to the state’s discovery requests, the debtor filed a motion for summary judgment and a motion for protective order. The motion for a protective order does not object to any particular request for information but asserts that compliance will not be required if the Court grants his motion for summary judgment, and that the state has failed to comply with Rule 7026. Specifically, the state has failed to make any initial disclosures as required by Rule 26(a), Federal Rules of Civil Procedure, has failed to meet and confer as required by Rule 26(f), and served discovery requests prior to entry of a scheduling order, Rule 26(d). In addition to the request for a protective order regarding discovery in this adversary proceeding, the debtor also requests that the Court stay all requests by the state in its ongoing audit of the debtor’s state income tax returns for various years, including the 1996 year at issue in this proceeding.1
Rule 7026 incorporates the provisions of Rule 26, Federal Rules of Civil Procedure, which requires parties to make initial disclosures of information, requires the parties to meet and confer to discuss settlement, the theories of their respective claims and defenses, to arrange for the disclosures required by subdivision (a)(1) and to develop a discovery plan, and also prohibits the parties from serving discovery until the parties have met and conferred.2 Fed.R.Civ.P. 26(a), (d), (f). Ap*422parently, the state has not complied with these requirements. The Court does not believe that this is a basis for a protective order, in this situation, however, because, although Rule 7026(d) operated to preclude serving discovery, the state was, at the same time, confronted with a Court ordered limitation on the time by which it was required to complete discovery. Moreover, the parties could read the pretrial order as permission, or, indeed, a directive, to conduct discovery outside the time limits of Rule 26(d) because that rule limits service of discovery “except when authorized, ... by ... order.” (Emphasis added.)
Inasmuch as the Court will deny the motion for summary judgment, the defendant is entitled to serve and receive responses to its discovery requests. It is, however, under an obligation to comply with Rule 26(a)(1) and expects that it will do so in a timely fashion, without the necessity of Court Order.
ORDERED as follows:
1. The Motion for Summary Judgment, filed on August 14, 2001, is Denied.
2. The Motion for Protective Order, filed on August 28, 2001, is Denied. The debtor shall respond to the discovery requests within twenty (20) days of entry of this Order.
3. The Motion to Strike Answer, filed on August 28, 2001, is granted in part and denied in part. The portion of the answer objecting to dischargeability of the tax obligation for the 1996 taxable year is stricken, without prejudice to the filing of an amended answer which alleges the facts and circumstances of the willful evasion of payment of the taxes, or other basis for nondischargeability under section 523(a)(1)(C) with greater particularity, pursuant to Fed.R.Civ.P. 9(b). The amended answer shall be filed within twenty (20) days of entry of this Order.
4. Request for Hearing, filed on August 28, 2001, is Denied.
5. The deadline for discovery is hereby extended to November 30, 2001.
6. Inasmuch as the Court has issued its pretrial order which governs exchange of witness and exhibit information, the parties are excused from compliance with Rule 7026(a)(3). The date by which the parties are to exchange exhibit and witness information, as detailed in the Pretrial Order filed on June 21, 2001, is extended to December 21, 2001.
IT IS SO ORDERED.
. The Court does not believe it has jurisdiction to issue such a stay. In any event, if jurisdiction exists, the debtor is seeking a separate injunction against the state regarding its audit function which is more properly brought as a separate adversary proceeding.
. Rule 26 creates numerous difficulties in the bankruptcy context. While the rule is helpful in large adversary proceedings such as these, it is virtually unworkable in many contexts. For example, Rule 26 is also applicable in contested matters, Fed. R. Bankr.P. 9014, including motions for relief from stay. However, motions for relief from stay are required to be heard within thirty days of their filing so that there is insufficient time for a party to comply with the requirements of Rule 26. Further, in contested matters, although Rule 26 is applicable, Rule 16, governing the scheduling order, is not. Thus, in a contested matter, the discovery Rule 26 which is appli*422cable, references and requires compliance with a rule which is not applicable. Complications also arise in adversary proceedings because often they are not only set for trial, they are actually heard within a short period of time after the filing of the complaint. The requirements of Rule 26 contemplate a longer period of litigation than actually takes place in the bankruptcy context and, thus, are often too burdensome and cumbersome in most contested matters and, indeed, in many adversary proceedings. It is, thus, not surprising that attorneys whose practice is largely confined to the bankruptcy court have paid scant attention to the requirements of Rule 7026— they simply do not come into play in the vast majority of bankruptcy cases and proceedings. That is not to say that the parties, or the Court, for that matter, are entitled to ignore the rules. Rather, some accommodation within the rules, Local Rules, court orders, and practice is necessary to comply with the civil rules yet conduct the speedy litigation and crowded trial calendars that are unique to bankruptcy in the federal system. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493214/ | Memorandum on Objection to Claim
ALAN JAROSLOVSKY, Bankruptcy Judge.
In this case, claimant Brigid Mulligan seeks allowance of an administrative claim in the amount of $74,632.00. She is the former CEO of a wholly-owned subsidiary of the debtor. The claim is for six months’ severance pay, based on a contract between Mulligan and the subsidiary entered into before the debtor filed its bankruptcy petition. The Chapter 7 trustee objects.
The court sees no basis in law or in equity for Mulligan’s claim. She only worked for a total of ten months, for which she was paid a handsome salary of over $11,000.00 per month. She now wants an additional six months’ pay for doing no work at all, based on a prepetition contract which was never assumed by the debtor. The debtor was not even a party to the contract.
The slim legal basis for the claim is Mulligan’s assertion that the debtor is liable for the salary of employees of its wholly-owned subsidiary. In support of this position, she cites a footnote in a Pennsylvania bankruptcy court case and a provision of the California Labor Code, neither of which remotely supports the assertion. In essence, Mulligan is seeking to pierce the corporate veil without any factual basis.
Even if the debtor’s estate were legally liable to Mulligan, her claim is contrary to every notion of equity. Administrative claims are paid at the expense of other creditors, so allowance is narrowly construed and strictly limited to the actual, necessary costs and expenses of preserving the estate. In re Palau Corp., 139 B.R. 942, 944 (9th Cir. BAP 1992), aff'd 18 F.3d 746 (9th Cir.1994). The claimant must show that the debt asserted to be an administrative expense arose from a transaction with the debtor in possession or gave consideration to the debtor in possession and directly and substantially benefited the estate. In re DAK Industries, 66 F.3d 1091, 1094 (9th Cir.1995). The burden of proving an administrative expense is on the claimant. Id.
Mulligan correctly points out that severance pay may be allowed as an administrative expense under certain equitable circumstances. However, there is a huge difference in equity between low-paid taxi drivers seeking two weeks severance pay, Matter of Tucson Yellow Cab Co., Inc., 789 F.2d 701 (9th Cir.1986), and a six-figure salaried CEO seeking six months’ pay. This case is much closer factually to In re Selectors, Inc., 85 B.R. 843 (9th Cir. BAP 1988), in which severance pay provided in the “parachute clause” of an attorney’s prepetition employment contract was not allowed priority status. As the court noted in Yellow Cab, equity is the over*457riding consideration in such cases, and must be directed to the care and preservation of the estate. 789 F.2d at 704.
To summarize, Mulligan has not established that the debtor or its estate is legally liable for her severance pay. Even if it were liable, she has not come close to establishing that the value of her services exceeds the amount she was paid in salary. Accordingly, the trustee’s objection to her claim will be sustained. Counsel for the trustee shall submit an appropriate form of order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493215/ | MEMORANDUM OPINION
JOHN T. LANEY, III, Bankruptcy Judge.
On August 15, 2001, the court held a hearing on the motion of GATX Capital Corporation (“GATX”) to quash a subpoena and the cross-motion of Fred P. Ayers (“Ayers”) to compel GATX to comply with the subpoena. The parties filed briefs and response briefs. After considering the parties’ briefs and the applicable statutory and case law, the court will deny the motion of GATX and will grant the motion of Ayers.
FACTS
On July 20, 2001, Ayers filed a motion for the examination of GATX pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure (“Rule 2004”). An order was entered that same day which provided that the examination would take place at a time and place mutually agreed upon by the parties. Service of the motion on GATX’s counsel was defective due to an error in the service address for GATX’s counsel. However, Ayers alleged that counsel for GATX was notified by telephone on July 20, 2001 that the ordered had been entered. Ayers further alleged that a copy of the order was submitted to GATX’s counsel via facsimile on that same day.
Although the parties dispute whether counsel for Ayers attempted to “reach an agreement” regarding the location and time of the examination as contemplated in the order, neither party disputes that counsel for Ayers notified GATX’s counsel *559that the examination would take place in GATX’s San Francisco offices on August 2, 2001 and August 3, 2001.
On July 23, 2001, counsel for Ayers issued a subpoena showing this court as the issuing court. The subpoena provided that the Rule 2004 examination would take place in GATX’s San Francisco office on August 2, 2001 at 9:00 am. The subpoena was forwarded to the San Francisco’s Sheriff Department to be served on GATX. On July 25, 2001, Ayers’ counsel forwarded a copy of the subpoena to counsel for GATX. GATX was served with the subpoena on July 27, 2001.
On July 31, 2001, GATX filed a Motion to Quash Subpoena and Protective Order. GATX requested an Emergency Hearing which the court held that same day by telephone. At the hearing, GATX contended that because the Rule 2004 examination was scheduled to take place in California, a subpoena issued by this court was improper; a bankruptcy court in California should issue the subpoena. Based on the order entered on July 20, 2001 and Rule 45(c)(2)(B) of the Federal Rules of Civil Procedure (“Rule 45”), the court suspended the Rule 2004 examination until a final hearing could take place. Ayers expressed concern about the destruction of documents, therefore, the court directed GATX to preserve the records which were subject to the Rule 2004 examination.
On August 2, 2001, Ayers filed his response to GATX’s Motion to Quash. Ayers also filed a cross-motion to compel GATX to comply with the subpoena. Ayers also filed a brief in support his position. On August 14, 2001, GATX filed its Brief in Support of its Motion to Quash. After the hearing, GATX discovered additional authority and filed a supplemental brief on August 22, 2001. On August 24, 2001, Ayers filed a response brief to GATX’s supplemental brief.
DISCUSSION
The primary issue in this case is whether a subpoena issued in connection with a court order entered pursuant to Rule 2004 must be issued from the court for the district in which the case is pending or from the court for the district where the Rule 2004 examination is to take place. This issue requires the court to conduct an analysis into the language of the applicable rules as they read when this case was filed.
Rule 2004(c) provides:
(c) COMPELLING ATTENDANCE AND PRODUCTION OF DOCUMENTARY EVIDENCE. The attendance of an entity for examination and the production of documentary evidence may be compelled in the manner provided in Rule 9016 for the attendance of witnesses at a hearing or trial.
Fed. R. BankrP. 2004(c) (emphasis added).
Rule 9016 of the Federal Rules of Bankruptcy Procedure incorporates Rule 45 of the Federal Rules Civil Procedure, which in turn provides, in pertinent part:
(2) A subpoena commanding attendance at a trial or hearing shall issue from the court for the district in which the hearing or trial is to be held. A subpoena for attendance at a deposition shall issue from the court for the district designated by the notice of deposition as the district in which the deposition is to be taken. If separate from a subpoena commanding the attendance of a person, a subpoena for production or inspection shall issue from the court for the district in which the production or inspection is made.
Fed.R.Civ.P. 45(a)(2).
GATX contends that the subpoena must be issued by a California bankruptcy court *560because that is where the examination is to take place. GATX relies on the case of In re Texas International, 97 B.R. 582 (Bankr.C.D.Cal.1989). See also In re Symington, 209 B.R. 678 (Bankr.D.Md.1997); In re Mantolesky, 14 B.R. 973 (Bankr.D.Mass.1981). GATX further relies on the language in Rule 45(a)(2), which provides “[a] subpoena for attendance at a deposition shall issue from the court for the district ... in which the deposition is to be taken.” Id. GATX argues that reading subsection (c)(3)(A) of Rule 45 in pan materia with Rule 45(a)(2) commands a finding that a California court is the proper court to issue the subpoena.
Ayers, on the other hand, discredits GATX’s reliance on Texas Int’l because the portion of that case on which GATX relies is dicta. Ayers further asserts that the reasoning of Texas Int’l is flawed. As to GATX’s reliance on the language of Rule 45(a)(2), Ayers argues that GATX’s position is misplaced because a Rule 2004 examination is not the same as a deposition. Ayers asserts that the first sentence of Rule 45(a)(2), which provides that a “subpoena commanding attendance at a trial or hearing shall issue from the court for the district in which the hearing or trial is to be held[,]” is the operative language. Therefore, Ayers contends that the second and third sentences of Rule 45(a)(2) are inoperative as to Rule 2004(c). In fact, Rule 2004(c) tracks the “hearing or trial” language in the first sentence of Rule 45(a)(2).
“The starting point for interpreting a statute is the language of the statute itself.” Consumer Prod. Safety Comm’n v. GTE Sylvania, 447 U.S. 102, 108, 100 S.Ct. 2051, 64 L.Ed.2d 766 (1980). When interpreting the words of a statute, courts generally “do not look at one word or term in isolation, but instead, look to the entire statutory context.” United States v. McLemore, 28 F.3d 1160, 1162 (11th Cir.1994). “The plain meaning canon of statutory construction applies with equal force when interpreting the Bankruptcy Code.” Inglesby, Falligant, Horne, Courington & Nash, P.C. v. Moore (In re Am. Steel Prod., Inc.), 197 F.3d 1354, 1356 (11th Cir.1999); See also CBS, Inc. v. Prime-Time 24 Joint Venture, 245 F.3d 1217, 1226-29 (11th Cir.2001) (explaining that a court should not apply the plain meaning of a statute when doing so would produce an absurd result). Although the language at issue in this case is a federal rule of procedure, such rules have the force and effect of a statute. See United States v. St. Paul Mercury Insurance Co., 361 F.2d 838, 839 (5th. Cir.1966); see also Rumsey v. George E. Failing Co., 333 F.2d 960, 962 (10th Cir.1964).
Applying these principles, the court first turns to the language in Rule 2004(c) and Rule 9016 which incorporates Rule 45(a)(2). The court agrees with Ayers that Rule 2004 provides for an examination broader in scope than a deposition. See In re Valley Forge Plaza Associates, 109 B.R. 669, 674 (Bankr.E.D.Pa.1990) (explaining that the “scope of a Rule 2004 examination is even broader than that of discovery under the F.R.Civ.P., [sic] which themselves contemplate broad, easy access to discovery.”); see also Moore v. Lang (In re Lang), 107 B.R. 130, 132 (Bankr.N.D.Ohio 1989) (holding that Rule 2004 examinations differ from depositions because they are broader in scope and have fewer protections).
The court also agrees with Ayers and finds that the second and third sentences of Rule 45(a)(2) are inapplicable to examinations ■ conducted pursuant to Rule 2004(c). The second sentence pertains solely to depositions. Given the broader scope of a Rule 2004 examination, this sentence is inapplicable. The third sen*561tence is operative in instances where a separate subpoena is issued requiring only the production of documents. Given the limited scope for which this sentence provides, it is also inapplicable to Rule 2004 examinations.
Turning to the first sentence of Rule 45(a)(2), the court finds this sentence to be the operative language as it applies to Rule 2004(c). Although Rule 2004(c) tracks the “hearing or trial” language in Rule in 45(a)(2), the analysis does not stop there. The court must look to the text surrounding the “hearing or trial” language in each rule.
In pertinent part, Rule 2004(c) provides that “[t]he attendance ... may be compelled in the manner provided in Rule 9016 [incorporating Rule 45] for the attendance of witnesses at a hearing or trial.” (emphasis added). Rule 45(a)(2) provides that “[a] subpoena commanding attendance at a trial or hearing shall issue from court for the district in which the hearing or trial is to be held.” (emphasis added). Reading these rules together, the court finds them to be clear and unambiguous. The attendance at a Rule 2004 examination is compelled in the same “manner” as the attendance at a hearing or trial would be compelled. Just as a witness at a trial or hearing is compelled by a subpoena issued by the court in which the case is pending, compulsion of a witness to attend a Rule 2004 examination is done in the same manner. Therefore, the proper court to issue a subpoena is the court where the underlying bankruptcy case is pending.
The court acknowledges the case of In re Texas Int’l Co., 97 B.R. 582 (Bankr.C.D.Cal.1989), decided on facts similar to the case before the court, which held to the contrary. However, the court disagrees with the reasoning of that case.
In Texas Int’l, the underlying Chapter 11 case was pending in the Western District of Oklahoma. The equity holders’ committee (“Committee”) moved to conduct a Rule 2004 examination of Drexel, a nonparty entity. The Western District of Oklahoma entered a Rule 2004(c) order permitting the examination. The Committee caused the Bankruptcy Court for the Central District of California to issue a subpoena duces tecum which contained the terms specified in the Rule 2004(c) order. Los Angeles, located in the Central District, is where Drexel resided and is also where the Rule 2004 examination was to be taken.
Drexel moved to quash the subpoena. In its motion, Drexel raised the procedural issue of whether a nondebtor can be subpoenaed requiring it to attend a Rule 2004 examination to be held in the Central District of California based on a Rule 2004 order issued by a bankruptcy court in a different district. Id. at 584. The court held that “a nondebtor can be properly subpoenaed to attend a Rule 2004(c) examination in the district where the witness resides, based on a Rule 2004(c) order issued in a different district.” 1 Id. The court explained that the proper procedure is to obtain the Rule 2004(c) Order from the court in which the underlying proceeding is pending, then obtain a subpoena from the court in the district where the witness resides which compels the witness *562to attend the Rule 2004 examination where the witness resides. Id. at 585.
At the time of Texas Int’l, Rule 2004 read the same as it does now. However, Rule 45(d) and 45(e), the portions of Rule 45 which the court held applicable to Rule 2004, were changed by the 1991 amendments. The former Rule 45(d) dealt with the taking of depositions and was to some extent, similar to the second sentence of the present version of Rule 45(a)(2). Therefore, as already stated, this court disagrees with the applicability of Rule 2004 to the deposition language in Rule 45.
This court similarly disagrees with the court’s analysis under the former version of Rule 45(e)(1). A portion of that rule is similar to the first sentence of Rule 45(a)(2). Significantly, the former rule provided that the clerk shall issue the subpoena and now, the subpoena is issued by the attorney. More importantly, this court disagrees with the reasoning employed by the Texas Int’l court. The court reasoned that because “hearing and trial” was used in both Rule 2004(c) and the former Rule 45(e)(1), the application of Rule 2004(c) to Rule 45 required replacing “hearing and trial” with “Rule 2004(c) examination.” Id. at 585. This court finds that a plain reading of both rules does not require such a result. Furthermore, this rewriting of the rules is at odds with Supreme Court and Eleventh Circuit precedent. See Blount v. Rizzi, 400 U.S. 410, 419, 91 S.Ct. 428, 27 L.Ed.2d 498 (1971) (holding that “it is for Congress, not this Court, to rewrite the statute.”). See also Korman v. HBC Florida, Inc., 182 F.3d 1291, 1296 (11th Cir.1999) (“It is not the business of courts to rewrite statutes.”).
As indicated above, Rule 2004(c) provides that a witness may be compelled to attend a Rule 2004 examination in the same manner that a witness is compelled to attend a hearing or trial. Under Rule 45, this is done by having a subpoena issued by the court in which the hearing or trial is to take place. This straightforward reading of the two rules is a less strained interpretation than replacing “hearing or trial” with “Rule 2004(c) examination” as suggested by the Texas Int’l court. Furthermore, this interpretation does not require the court to rewrite the language of the rule. Therefore, this court finds that the court in Texas Int’l ignored the plain meaning of Rule 2004(c) as applied to’Rule 45. Accordingly, this court rejects its conclusion.
GATX further relies on Texas Int’l for its analysis of the history of Rule 2004(c). In its analysis, the court held that subdivision (c) of Rule 2004 “is substantially declaratory of the practice that had developed under Section 21a of the [Bankruptcy] Act.” Texas Int’l at 586 (citing Fed. R. BaNKR.P 2004 Advisory Committee’s Note (1983)). The court cited the Supreme Court cases of Abram I. Elkus (In the Matter of the Madison Steele Co.), 216 U.S. 115, 30 S.Ct. 377, 54 L.Ed. 407 (1910) and Babbitt v. Dutcher, 216 U.S. 102, 30 S.Ct. 372, 54 L.Ed. 402 (1910). The court concluded Elkus and Babbitt confirmed the practice under Section 21a of the Act that a court other than the one where the underlying bankruptcy case was pending had ancillary jurisdiction to aid the court where the case was pending. Id.
However, the court acknowledged that the result in Elkus and Babbitt “was not based on or dependent on the language of Section 21a of the prior Bankruptcy Act[,] but was instead based on the interpretation of the bankruptcy jurisdictional statute in effect at that time.” Id. Therefore, as indicated in note 1, supra, the focus in Texas Int’l was whether the Central District of California had jurisdiction based on an order issued by the Western District of *563Oklahoma. The historical analysis performed by the court in Texas Int’l is specific to this jurisdictional focus.
The issue in the case before the court, whether a “foreign” court or the “home” court is the proper court to issue the subpoena, was never raised in Texas Int’l. Accordingly, the court finds this historical analysis inapplicable to the facts of this case. Even if this analysis were applicable, it would require the court to deviate from the plain meaning of the rules and look to the circumstances that gave rise to the rules, which is contrary to controlling precedent. See CBS, 245 F.3d at 1224 (holding that “[t]he ‘plain’ in ‘plain meaning’ requires that we look to the actual language used in a statute, not to the circumstances that gave rise to that language.”).
Turning to the other cases cited by GATX, the court agrees with Ayers that neither of these cases is good authority for GATX’s position. See In re Symington, 209 B.R. at 682; In re Mantolesky, 14 B.R. at 973. Like Texas Int’l, the court in Symington was not presented with the issue of which court should issue the subpoena. Although the court stated that the proper procedure was to have the court for the district in which the witness resides issue the subpoena, this was not a issue of dispute. Therefore, that statement which cited Texas Int’l in support, was dicta.
Similarly, the court in Mantolesky was not faced with the issue of whether the court which issued the subpoena was the proper court. Under former Rules 205 and 916 of the Bankruptcy Act, the witness in Mantolesky was subpoenaed to attend an examination which was to be held at a location greater than 100 miles from the residence of the witness. The court held that the subpoena was not enforceable and therefore, the witness could not be compelled to attend an examination outside a 100 miles radius of the residence of the witness. See Mantolesky at 979. Significantly, it appears that the subpoena was issued by the bankruptcy court where the underlying case was pending and the propriety of the issuance by that court was never raised. The court did state that the proper procedure would be to have a subpoena issued by the court where the examination was to be held. This court disagrees.
GATX also argues that subpara-graph(c)(3) of Rule 45 dictates that a California bankruptcy court is the proper court to issue the subpoena. GATX asserts that the purpose of these sections is to protect the witness from having to travel outside its district to move to quash a subpoena. The court agrees with GATX to the extent that the purpose of this section is to protect the persons subject to a subpoena. However, the court finds that its purpose is to ensure that a subpoena does not impose “undue burden or expense,” substantial travel, and that it “allow[s] reasonable time for compliance.” The issue is whether complying with the subpoena imposes a burden. Although the court acknowledges that having to appear in a foreign court to prosecute a motion to quash may require expense and in some cases, undue burden, not every case will require the person subject to the subpoena to move for such relief. Clearly, in this case, the examination does not require an undue burden or substantial travel because it is to be held in GATX’s offices. Applying a plain reading of this provision, the court finds that it does not require that a subpoena be issued by the court within the district where the Rule 2004 examination is to take place.
CONCLUSION
The court in which the bankruptcy proceeding is pending is the proper court to *564issue the subpoena rather than the court where the Rule 2004 examination is to be taken. Accordingly, this court was the proper court to issue the subpoena which was issued in connection with the Rule 2004 examination of GATX. Therefore, the court will deny GATX’s Motion to Quash and will grant the Motion of Ayers to compel GATX to comply with the subpoena. The court will direct the parties to confer to agree on a date and time for the examination. The court will, however, sustain GATX’s Motion to Quash the subpoena to the extent that the court will not compel the witness to appear for an examination earlier than September 17, 2001, except upon agreement of GATX.
An order in accordance with this Memorandum Opinion will be entered.
. The court notes that the issue in Texas Int’l is subtly different than that in the case before the court. Unlike here, the parties in Texas Int’l did not dispute whether the Central District of California was the proper courL to issue the subpoena. The dispute was whether the nonparty witness could be compelled subject to a Rule 2004 order issued in another district. In reaching its decision, the court did, however, state that the Central District was the proper court to issue the subpoena. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493216/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
HAROLD C. ABRAMSON, Bankruptcy Judge.
Came before the Court for trial on June 27 and June 29, 2001, the above named reorganized debtor’s (“Coho’s”) Amended Objection to the Claim of Deborah Gaye Locke, filed on January 3, 2001 and Coho’s Motion to Dismiss, filed on June 25, 2001. The Court makes the following findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014:
I. Findings of Fact
1. All findings of fact that may be deemed conclusions of law shall be considered conclusions of law.
*6332. Coho Oil and Gas, Inc., one of the reorganized debtors, was formed in December, 1997 to acquire certain oil producing properties in Oklahoma from Amoco Production Company (“Amoco”).
3. The purchase agreement between Coho and Amoco provided that Coho “reasonably expects to make offers of employment to many” of the Amoco employees who worked on the Oklahoma properties.
4. During the period from late 1997 through early 1998, Coho Oil and Gas, Inc. had to create and staff its entire organization. The hiring process was not a formal process.
5. Coho was a much smaller company than Amoco and, therefore, was to be organized and operated differently and staffed more thinly than Amoco.
6. As part of the agreement between Coho and Amoco, Coho agreed to employ a portion of Amoco employees who worked on the properties.
7. At that time, Coho did not have an established “maintenance crew” whose duties solely related to the maintenance and repair of wells and related equipment. Nor did Coho utilize an “automation system” in its Oklahoma operations.
8. Deborah Gaye Locke (“Locke”) is a female over the age of 40. Her date of birth is May 11,1952.
9. Locke worked for Amoco Production Co. (“Amoco”) in various oil fields in Oklahoma for approximately sixteen (16) years. From about August 1981 through 1997, Locke held the position of Field Technician/Pumper. She had previously worked for Amoco as a Roustabout.
10. Locke had worked for many years on a portion of the properties that Coho purchased from Amoco.
11. On December 16, 1997, all Amoco employees desiring employment with Coho in the Oklahoma properties were provided employment applications by Coho.
12. The form of employment application provided by Coho to job applicants on December 16, 1997 did not ask for the applicant’s date of birth.
13. Coho expected each “Pumper” employed by Coho to handle all of the duties and responsibilities of that position, including maintenance and repair work, without assistance from other employees.
14. Several Field Technicians from Amoco applied for employment at Coho.
15. Locke applied for employment at Coho on or about December 16,1997.
16. On December 17, 1997, numerous candidates were interviewed by Coho, including Locke.
17. Coho did not ask the age of any job applicant, including Locke, during the interviews that took place in Oklahoma on December 17, 1997.
18. As part of the hiring process, Coho conducted informal “reference investigations” by requesting Amoco supervisors, managers, and others to recommend suitable candidates to staff Coho’s operations.
19. Locke’s supervisor at Amoco was Fred Edens, (“Edens”), an engineer.
20. Mr. Edens did not recommend Locke as a possible hire by Coho in his December 17, 1997 interview with Coho.
21. On January 9, 1998, after consideration of each application, the interviews and the “reference investigations,” Coho sent offer letters to some but not all applicants.
22. Although Locke had applied, was interviewed, and was considered for a “Pumper” position with Coho, she did not receive an offer of employment.
23. In January and February of 1998, Coho hired three females to work in its *634newly acquired Oklahoma operations. The only other female to apply for a “Pumper” position with Coho withdrew her application during her December 17, 1997 interview.
24. Coho chose not to hire five males who applied for an oilfield position with Coho on December 17,1997.
25. Two thirds of the “Pumpers” hired by Coho in January and February of 1998 were 40 years of age or older.
26. The Court accepts Mr. Ruley’s testimony that Coho based its decision not to hire Locke on the following facts:
(a) Locke had not been recommended by any employees of Amoco during the “reference investigations,” including her direct supervisor and her co-workers;
(b) Unlike Amoco, Coho would require its pumpers to perform most if not all of the manual labor necessary to maintain and repair wells and production, water and gas lines. The maintenance and repair duties would often involve heavy lifting and other manual labor;
(c) Coho’s “reference investigations” revealed that Locke had required assistance from other employees in the performance of her maintenance and repair duties and responsibilities in a similar position for Amoco;
(d) It appeared from Locke’s written application, resume and interview that she did not have sufficient maintenance and repair experience to satisfy Coho’s needs.
27. The testimony of Ms. Locke was difficult to find credible in light of her using fabricated photographs of her handling electrical fuses without gloves and erroneously placing coverings on an oil pipe, while on the property of Coho without permission to enter the property.
28. The testimony of Mr. Ruley and Mr. Guillory, former human resource personnel at Coho, was credible. Neither had an axe to grind or liability in this matter. Mr Guillory is now with another employer.
29. Coho did not fail or refuse to hire, or otherwise discriminate against Locke on the basis of her sex when it did not extend an offer of employment to her in January, 1998.
30. Coho did not fail or refuse to hire, or otherwise discriminate against Locke on the basis of her age when it did not extend an offer of employment to her in January, 1998.
The Equal Employment Opportunity Commission (“EEOC”) Charge
31. On or about January 9, 1998, Locke learned that she would not be receiving a job offer from Coho.
32. In May 1998, Locke retained counsel to represent her in a claim of discrimination against Coho. Locke sent various discrimination forms and affidavits to the EEOC on or about May 29, 1998. However, Locke’s attorney learned in October 1998 that the EEOC had no record of her case.
33. Locke’s discrimination forms and affidavits were re-mailed to the EEOC on or about October 22,1998.
34. On or around November 6, 1998, 300 days had passed since Locke learned that she would not be hired by Coho.
35. On or about December 23, 1998, Locke signed her charge of discrimination, and on or about January 7, 1999, filed same with the EEOC alleging age and sex discrimination under Title VII.
36. There was no evidence presented that the EEOC treated Locke’s intake questionnaire as a Charge, nor was there evidence presented that the EEOC relied on the questionnaire to inform the employer that a charge had been filed.
*63537. Locke filed her Charge more than 300 days after she learned that she would not be hired.
38. However, due to the confusion with the EEOC regarding Ms. Locke’s original filing and based on Counsel’s diligence in immediately re-sending the appropriate forms to the EEOC upon his discovery of the error before the 300 days expired, the Court finds that equitable tolling of the statutes’ time limits is warranted and Locke’s Charge should be deemed as timely filed.
II. Conclusions of Law
1. All conclusions of law that may be deemed findings of fact shall be considered findings of fact.
2. This is a core proceeding arising under 11 U.S.C. § 157(b)(2)(B) & (O).
3. This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334 and 157.
4. Title VII of the Civil Rights Act of 1964, as amended (“Title VII”), 42 U.S.C. § 2000e-2(a)(l), states that:
It shall be an unlawful employment practice for an employer ... to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin.
5. The Age Discrimination in Employment Act (“ADEA”), 29 U.S.C. § 623(a)(1), states that:
It shall be unlawful for an employer ... to fail or refuse to hire or to discharge any individual or otherwise discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s age.
6.Section 631(a) of the ADEA limits the age to individuals who are at least 40 years old.
Title VII and ADEA Time Limitations for Filing a Charge
7. Section 2000e-5(e)(l) of Title VII provides that:
A charge under this section shall be filed within one hundred and eighty days after the alleged unlawful employment practice occurred ..., except that in a case of an unlawful employment practice with respect to which the person aggrieved has initially instituted proceedings with a State or local agency with authority to grant or seek relief from such practice or to institute criminal proceedings with respect thereto upon receiving notice thereof, such charge shall be filed by or on behalf of the person aggrieved within three hundred days after the alleged unlawful employment practice occurred ...
8. Section 626(d) of the ADEA provides that:
No civil action may be commenced by an individual under this section until 60 days after a charge alleging unlawful discrimination has been filed with the Equal Employment Opportunity Commission. Such a charge shall be filed—
(1) within 180 days after the alleged unlawful practice occurred; or
(2) in a case to which section 633(b) of this title applies, within 300 days after the alleged unlawful practice occurred
9. There is a split among the circuits as to whether the timely filing of an unverified intake questionnaire with the EEOC is sufficient to constitute the plaintiffs charge. See, e.g., Downes v. Volkswagen of America, Inc., 41 F.3d 1132, 1138 (7th Cir.1994) (holding that an intake question*636naire constituted a charge, despite the fact that the EEOC failed to assign a charge number to the case, process the charge, investigate the allegations or notify the employer of the action); but see, e.g., Whitmore v. O’Connor Mgmt., Inc., 156 F.3d 796, 799 (8th Cir.1998) (stating that the general rule in Title VII cases is that unverified intake questionnaires do not constitute a formal charge.).
10. The Fifth Circuit construes “employment discrimination charges with the ‘utmost liberality,’ bearing in mind that such charges are generally prepared by laymen untutored in the rules of pleading.” Price v. Southwestern Bell Telephone Co., 687 F.2d 74, 78 (5th Cir.1982). The principal function of the administrative charge is to provide an adequate factual basis for the Commission to initiate investigatory and conciliatory procedures contemplated by Title VII. Id.
11. In Price, the Fifth Circuit held that the EEOC’s treatment of a pro se claimant’s unverified intake questionnaire was relevant to the determination of whether it may be viewed as a charge for purposes of meeting the filing limitation’s period. 687 F.2d at 78-79. The Court found it relevant that the EEOC treated the filing as a charge and notified the employer that a charge had been filed, thereby fulfilling the Congressional purpose for imposing a filing limitation; the provision of “prompt notice to the employer.” Id.
12. In contrast, in this case, Locke had an attorney to assist in the preparation and sending of the appropriate forms to the EEOC. More importantly, Locke did not put on evidence to indicate that the EEOC treated her unverified intake questionnaire as a Charge, or whether the EEOC relied on the questionnaire to notify the employer that a Charge had been filed. Therefore, this Court holds that Locke’s unverified intake questionnaire does not constitute a Charge.
13. However, the 300 days proscribed by Title VII and ADEA operates as a statute of limitations and is, thus, subject to equitable tolling. Zipes v. Trans World Airlines, Inc., 455 U.S. 385, 393-95, 102 S.Ct. 1127, 71 L.Ed.2d 234 (1982); Blumberg v. HCA Management Co., Inc., 848 F.2d 642, 644 (5th Cir.1988).
14. The claimant bears the burden of justifying equitable tolling. Hood v. Sears Roebuck & Co., 168 F.3d 231, 232 (5th Cir.1999) (claimant bears the burden in Title VII cases); Blumberg, 848 F.2d at 644 (plaintiff bears the burden in ADEA cases).
15. Under Fifth Circuit law, equitable tolling applies in the following situations;
(a) during the pendency of an action before a state court that has jurisdiction over the subject matter of the suit, but that is the wrong forum under state law;
(b) until the claimant' knows or should know the facts giving rise to her claim; or
(c) when the EEOC misleads the claimant about the nature of her rights.
Hood, 168 F.3d at 232 and Blumberg, 848 F.2d at 644
16. In addition to the factors delineated above, the courts take into account other circumstances when equitable tolling may be appropriate. Hood, 168 F.3d at 232. Several courts have tolled the time limits in instances where the EEOC failed to maintain its own records.1
*63717. Locke sent in her discrimination forms and affidavits to the EEOC before the time limits for the ADEA and Title VII had expired. However, the Charge was not prepared within the proscribed 300 days of the alleged acts of discrimination. Nevertheless, based on the confusion with the EEOC concerning Locke’s original record sent in May 1998, and the diligence of Locke’s counsel in sending in the appropriate forms immediately upon learning that the EEOC had no record of Ms. Locke’s claim before the 300 days expired, the Court holds that the time limit for the EEOC charge should be tolled and Locke’s Charge is deemed as timely filed.
Burden of Proof
18. Both Title VII and the ADEA have the same evidentiary procedures for allocating the burden of proof in discrimination claims. Brown v. Bunge Corp., 207 F.3d 776, 781 (5th Cir.2000).
19. The burden is on the plaintiff to establish a prima facie case of discrimination. Brown, 207 F.3d at 781. Therefore, in this case, Locke must prove that she was:
(a) a member of a protected class;
(b) qualified for the pumper position with Coho2;
(c) denied the position;
(d) and the position was given to a person who was not a member of the protected class3.
See Brown, 207 F.3d at 781; see also Cardinal Towing & Auto Repair, Inc. v. City of Bedford, Texas, 180 F.3d 686, 697 (5th Cir.1999).
20. In addition, to the factors above, the ADEA requires a showing that Locke was:
(a) replaced by someone outside the protected class;
(b) replaced by someone younger; or
(c) otherwise discharged because of her age.4
See Brown, 207 F.3d at 781.
21. Once the plaintiff establishes a prima facie case, a presumption is created that the employer unlawfully discriminated against her. Brown, 207 F.3d at 781 (citing to St. Mary’s Honor Center v. Hicks, 509 U.S. 502, 525, 113 S.Ct. 2742, 125 L.Ed.2d 407 (1993)).
22. This presumption places on the employer the burden of producing admissible evidence that the challenged employment action was taken for a legitimate, non-diseriminatory reason. Brown, 207 F.3d at 781 (citing to Hicks, 509 U.S. at 507, 113 S.Ct. 2742).
23. If the employer carries its burden of production, the presumption of unlawful discrimination “drops out.” The trier of fact then decides the “ultimate question” of whether the Plaintiff has proven that the employer intentionally dis-*638criminated against her. Brown, 207 F.3d at 781 (citing to Hicks, 509 U.S. at 511, 113 S.Ct. 2742).
24. The plaintiff must then have the “full and fair opportunity” to demonstrate that the proffered reason is not the true reason for the employment decision, and that unlawful discrimination was the real reason for the decision. Brown, 207 F.3d at 781 (citing to Hicks, 509 U.S. at 507-08, 113 S.Ct. 2742).
25. To prove that the reason was a pretext for discrimination, the plaintiff must show that the reason was false and that discrimination was the real reason for the employment decision. Hicks, 509 U.S. at 515, 113 S.Ct. 2742. “[T]here is nothing unlawful about an employer’s basing its hiring decision on subjective criteria, such as the impression an individual makes during an interview.” Byrnie v. Town of Cromwell, Bd. of Educ., 243 F.3d 93, 104 (2nd Cir.2001). However, the employer may not use “wholly subjective and unarticulated standards” to evaluate the employee’s performance. Id. The employer’s explanation for its reasons must “be clear and specific in order to afford the employee a full and fair opportunity to demonstrate pretext.” Id at 105. “Where an employer’s explanation, offered in clear and specific terms, ‘is reasonably attributable to an honest even though partially subjective evaluation of ... qualifications, no inference of discrimination can be drawn.’ ” Id.
26. Having given the claimant, Ms. Locke, the benefit of her having shown a prima facie case of discrimination, the Court now considers the presumption placed on the employer as to its burden of producing admissible evidence that the employee action was taken for a legitimate, non-discriminatory reason. The Court has previously found that based upon the testimony of Mr. Ruley and Mr. Guillory, the actions of Coho were for legitimate, non-discriminatory reasons. There was no intent to discriminate against Ms. Locke, nor did she prove discrimination against her.
27. Locke had a full and fair opportunity to demonstrate that the proffered reasons by Coho were not the true reasons for the employment decision. In effect, Locke had the burden and opportunity to show that Coho’s reasons for not hiring her were false, a pretext, and that discrimination was the real reason behind the employment decision. The Court can find no pretext or falsity in the testimony of Mr. Ruley and Mr. Guillory. Mr. Ruley, on behalf of Coho, had legitimate concerns that were clear. Locke did not produce proof of any pretext or falsity on Mr Ru-ley’s part or the part of others at Coho. A separate order will be entered consistent with these findings.
.The Court has doubts that Ms. Locke was wholly qualified for the position she sought based on the testimony offered by. Mr. Ruley, on behalf of Coho, who indicated that, unlike Amoco, the position at Coho required Pumpers to perform most if not all of the manual labor necessary to maintain and repair wells and production, water and gas lines. However, for the purpose of carrying her burden to establish a prima facie case and to shift the burden of production to the Defendant, the Court will assume that she was.
. While this is true, the Court gives little weight to this factor considering that the only other female that applied for the position withdrew her application before the hiring process was completed. Ms. Locke was, therefore, the only female who applied for the position.
. Discharge is not relevant here. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493424/ | ORDER AMENDING FINDINGS OF FACT AND AMENDING CONCLUSIONS OF LAW AND ORDER FOR JUDGMENT IN BOTH CASES
MARGARET A. MAHONEY, Chief Judge.
This matter is before the Court on debt- or’s motion to alter, amend or vacate judgment and to amend findings of fact. This Court has jurisdiction to hear these cases pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and the Court has the authority to issue a final order. For the reasons indicated below, the Court is amending the orders dated December 29, 2000, granting summary judgment in each of the cases listed above.
FACTS
The facts stated in the orders of December 29, 2000, are incorporated by reference and will not be repeated in this order. Plaintiffs Miller and Harris ask that the Court amend its findings to include certain facts in each opinion. The Court will do so. Roland Harris objected to First Union National Bank’s proof of claim prior to any payment on the claim by the Veterans Administration. This fact is added to the Harris opinion. Corliss and Franklin Miller objected to the fee charged by First Union National Bank when it filed this adversary case. Although not requested to be added as a fact, another debtor has filed a motion to intervene in this adversary case. These facts are added to the Miller opinion.
LAW
The plaintiffs assert that their cases should not be dismissed due to the claim objections incorporated in their lawsuits or, alternatively, that other plaintiffs should be allowed to intervene in their stead to preserve the class action suits. There are three issues to be considered:(l) If the Court considers the adversary cases as a motion to reconsider First Union’s claim in the Harris case and an objection to claim in the Miller case, should the *325dismissal of the cases be vacated? ( 2) If the dismissals are vacated, do either of the debtors have standing to be a class representative as to the class claims? (3) If not, should another plaintiff be allowed to intervene?
A.
If the adversary cases are treated as a motion to reconsider First Union’s claim in Harris and an objection to claim in Miller, it does change the judgment in each case. The Court should not dismiss the cases without a final determination as to, the propriety of the fee in each case according to 11 U.S.C. § 502(j) and Fed. R. Bankr.P. 3007 and 3008 as applicable. That relief has not been accorded to either debtor by the Court’s determination to date.
The Court erred in dismissing the cases on the grounds that Miller and Harris were given adequate notice of the postpetition confirmation claims of First Union. The Court has limited the class action suits to First Union claims which did not give adequate notice, but that fact does not satisfy or eliminate or extinguish Miller and Harris’ requests for consideration of the amount of the fee charged to each.
B.
Even with this reinstatement of the cases, Miller and Harris’ standing to be class representatives does not change. Their claims are not the type of claims for which class relief is available. Their claims are the reasonableness and propriety of the fee charged. As stated in the December 29, 2000 opinions, these issues involve local concerns as to fees and possible involvement of prior orders of this court (and for other debtors, other courts). This Court will not certify a class as to cases in which notice of the fee charged was given to the proper parties in a manner which indicated the fee involved the bankruptcy case, e.g. “ Bankruptcy Attorney Fee,” “Proof of Claim Fee,” “Bankruptcy Fees.”
C.
If Miller and Harris are not plaintiffs with standing to pursue the class claims, should the class actions be dismissed? Eleventh Circuit precedent pertinent to this issue starts with U.S. Parole Commission v. Geraghty, 445 U.S. 388, 100 S.Ct. 1202, 63 L.Ed.2d 479 (1980), which held: [T]he named representative of an uncerti-fied class could continue to appeal the issue of class certification even though the named representative’s individual claim had been rendered moot so long as the controversy continues to the “live” and the named representative has a legally cognizable interest or personal stake in the litigation.
Armour v. City of Anniston, 654 F.2d 382 (5th Cir.1981) (describing the Ger-aghty holding).
The Supreme Court held that whenever mootness of a claim occurs, it is not a determining factor as to whether a class action may continue. Geraghty at 398, 100 S.Ct. 1202 (“the timing [of class certification] is not crucial”). The main issues are whether there is a “live controversy” and whether a party has a personal stake in the outcome of the suit. Geraghty at 396,100 S.Ct. 1202.
After Geraghty, two Fifth Circuit cases interpreted and expanded upon the Geraghty ruling. Armour v. City of Anniston, 654 F.2d 382 (5th Cir.1981); Satterwhite v. City of Greenville, Texas, 634 F.2d 231 (5th Cir.1981). Both these decisions are binding precedent in the Eleventh Circuit per Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981).
In the Armour and Satterwhite cases, class certification was denied and then the *326individual cases of the named class representatives were tried. In both cases, the plaintiffs had judgments entered against them as to all causes of action. The Fifth Circuit indicated that motions to intervene should be allowed to determine whether there is a live controversy and a plaintiff with a personal stake in the outcome of these cases regardless of the initial plaintiffs’ dismissals. Amour at 384; Satter-white at 231.
The Miller and Harris cases are very similar to the Amour and Satterwhite controversies. All of the matters involve situations in which the named class representative has no personal stake left in the class action suit after a ruling on the merits. Miller and Harris had personal stakes in the litigation in the manner the plaintiffs initially sought the relief.1 Miller and Harris have no class claims as the Court has now framed the issues through various summary judgment motions in the pending actions. However, a live controversy remains as to other class members. Therefore, like in Armour and Satterwhite, this Court should grant the plaintiff time to seek intervenors who are proper class representatives for the classes as now defined.
First Union Mortgage and First Union Bank urged the Court to adopt the reasoning of Goodman v. Schlesinger, 584 F.2d 1325 (4th Cir.1978) and of Judge Thomas Gee’s dissent in Satterwhite. Satterwhite at 232-36. This Court believes it is bound by the majority opinions in Satterwhite and Armour and therefore does not adopt the dissent’s rationale. Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (adopting as precedent decisions all Fifth Circuit decisions rendered prior to October 1,1981).
CONCLUSION
Harris and Miller are not proper class representatives for the classes as outlined by the Court in its order of December 29, 2000. However, per the Geraghty, Satter-white and Armour cases, the class action cases may still be live cases if a proper class representative plaintiff is available to intervené in these cases. The Court will allowed 60 days for a motion of intervention to be filed in Harris. Such a motion has already been filed in Miller.
THEREFORE, IT IS ORDERED:
1.» The plaintiffs’ motion to alter, amend or vacate judgment and to amend findings of fact in the case of Ronald E. Harris v. First Union Mortgage Corporation is GRANTED to the extent of adding the facts stated in the opinion and vacating the judgment of dismissal without prejudice.
2. Trial of the claim reconsideration in Harris will be held at a time to be determined at a status conference to be held on May 11, 2001 at 9:00 a.m.
3. Any motion to intervene in the Harris case shall be filed by April 15, 2001.
4. The motion to alter, amend or vacate judgment in the case of Corliss Miller and Franklin L. Miller v. First Union National Bank is GRANTED to the extent that the judgment of dismissal without prejudice is vacated.
5. Trial on the merits of the objection to claim will be set at a status conference to be held on May 11, 2001 at 9:00 a.m.
6. A hearing on the motion of Betty Ann Dean to intervene will be held on May 11, 2001 at 9:00 a.m.
. This contrasts sharply with Walters v. Edgar, 163 F.3d 430 (7th Cir.1998) in which the named plaintiffs’ claims were frivolous. Miller and Harris' claims were not frivolous. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493425/ | ORDER AMENDING FINDINGS OF FACT AND AMENDING CONCLUSIONS OF LAW AND ORDER FOR JUDGMENT IN BOTH CASES
MARGARET A. MAHONEY, Chief Judge.
This matter is before the Court on debt- or’s motion to alter, amend or vacate judg*328ment and to amend findings of fact. This Court has jurisdiction to hear these cases pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and the Court has the authority to issue a final order. For the reasons indicated below, the Court is amending the orders dated December 29, 2000, granting summary judgment in each of the cases listed above.
FACTS
The facts stated in the orders of December 29, 2000, are incorporated by reference and will not be repeated in this order. Plaintiffs Miller and Harris ask that the Court amend its findings to include certain facts in each opinion. The Court will do so. Roland Harris objected to First Union National Bank’s proof of claim prior to any payment on the claim by the Veterans Administration. This fact is added to the Harris opinion. Corliss and Franklin Miller objected to the fee charged by First Union National Bank when it filed this adversary case. Although not requested to be added as a fact, another debtor has filed a motion to intervene in this adversary case. These facts are added to the Miller opinion.
LAW
The plaintiffs assert that their cases should not be dismissed due to the claim objections incorporated in their lawsuits or, alternatively, that other plaintiffs should be allowed to intervene in their stead to preserve the class action suits. There are three issues to be considered:!!.) If the Court considers the adversary cases as a motion to reconsider First Union’s claim in the Harris case and an objection to claim in the Miller case, should the dismissal of the cases be vacated? (2) If the dismissals are vacated, do either of the debtors have standing to be a class representative as to the class claims? (3) If not, should another plaintiff be allowed to intervene?
A.
If the adversary cases are treated as a motion to reconsider First Union’s claim in Harris and an objection to claim in Miller, it does change the judgment in each case. The Court should not dismiss the eases without a final determination as to the propriety of the fee in each case according to 11 U.S.C. § 502(j) and Fed. R. Bankr.P. 3007 and 3008 as applicable. That relief has not been accorded to either debtor by the Court’s determination to date.
The Court erred in dismissing the cases on the grounds that Miller and Harris were given adequate notice of the postpetition confirmation claims of First Union. The Court has limited the class action suits to First Union claims which did not give adequate notice, but that fact does not satisfy or eliminate or extinguish Miller and Harris’ requests for consideration of the amount of the fee charged to each.
B.
Even with this reinstatement of the cases, Miller and Harris’ standing to be class representatives does not change. Their claims are not the type of claims for which class relief is available. Their claims are the reasonableness and propriety of the fee charged. As stated in the December 29, 2000 opinions, these issues involve local concerns as to fees and possible involvement of prior orders of this court (and for other debtors, other courts). This Court will not certify a class as to cases in which notice of the fee charged was given to the proper parties in a manner which indicated the fee involved the bankruptcy case, e.g. “ Bankruptcy Attor*329ney Fee,” “Proof of Claim Fee,” “Bankruptcy Fees.”
C.
If Miller and Harris are not plaintiffs with standing to pursue the class claims, should the class actions be dismissed? Eleventh Circuit precedent pertinent to this issue starts with U.S. Parole Commission v. Geraghty, 445 U.S. 388, 100 S.Ct. 1202, 63 L.Ed.2d 479 (1980), which held: [T]he named representative of an uncerti-fied class could continue to appeal the issue of class certification even though the named representative’s individual claim had been rendered moot so long as the controversy continues to the “live” and the named representative has a legally cognizable interest or personal stake in the litigation.
Armour v. City of Anniston, 654 F.2d 382 (5th Cir.1981) (describing the Ger-aghty holding).
The Supreme Court held that whenever mootness of a claim occurs, it is not a determining factor as to whether a class action may continue. Geraghty at 398, 100 S.Ct. 1202 (“the timing [of class certification] is not crucial”). The main issues are whether there is a “live controversy” and whether a party has a personal stake in the outcome of the suit. Geraghty at 396, 100 S.Ct. 1202.
After Geraghty, two Fifth Circuit cases interpreted and expanded upon the Geraghty ruling. Armour v. City of Anniston, 654 F.2d 382 (5th Cir.1981); Satterwhite v. City of Greenville, Texas, 634 F.2d 231 (5th Cir.1981). Both these decisions are binding precedent in the Eleventh Circuit per Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981).
In the Armour and Satterwhite cases, class certification was denied and then the individual cases of the named class representatives were tried. In both cases, the plaintiffs had judgments entered against them as to all causes of action. The Fifth Circuit indicated that motions to intervene should be allowed to determine whether there is a live controversy and a plaintiff with a personal stake in the outcome of these cases regardless of the initial plaintiffs’ dismissals. Armour at 384; Satter-white at 231.
The Miller and Harris cases are very similar to the Armour and Satterwhite controversies. All of the matters involve situations in which the named class representative has no personal stake left in the class action suit after a ruling on the merits. Miller and Harris had personal stakes in the litigation in the manner the plaintiffs initially sought the relief.1 Miller and Harris have no class claims as the Court has now framed the issues through various summary judgment motions in the pending actions. However, a live controversy remains as to other class members. Therefore, like in Armour and Satterwhite, this Court should grant the plaintiff time to seek intervenors who are proper class representatives for the classes as now defined.
First Union Mortgage and First Union Bank urged the Court to adopt the reasoning of Goodman v. Schlesinger, 584 F.2d 1325 (4th Cir.1978) and of Judge Thomas Gee’s dissent in Satterwhite. Satterwhite at 232-36. This Court believes it is bound by the majority opinions in Satterwhite and Armour and therefore does not adopt the dissent’s rationale. Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (adopting as precedent decisions all *330Fifth Circuit decisions rendered prior to October 1,1981).
CONCLUSION
Harris and Miller are not proper class representatives for the classes as outlined by the Court in its order of December 29, 2000. However, per the Geraghty, Satter-white and Armour cases, the class action cases may still be live cases if a proper class representative plaintiff is available to intervene in these cases. The Court will allowed 60 days for a motion of intervention to be filed in Harris. Such a motion has already been filed in Miller.
THEREFORE, IT IS ORDERED:
1. The plaintiffs’ motion to alter, amend or vacate judgment and to amend findings of fact in the case of Ronald E. Harris v. First Union Mortgage Corporation is GRANTED to the extent of adding the facts stated in the opinion and vacating the judgment of dismissal without prejudice.
2. Trial of the claim reconsideration in Harris will be held at a time to be determined at a status conference to be held on May 11, 2001 at 9:00 a.m.
3. Any motion to intervene in the Harris case shall be filed by April 15, 2001.
4. The motion to alter, amend or vacate judgment in the case of Corliss Miller and Franklin L. Miller v. First Union National Bank is GRANTED to the extent that the judgment of dismissal without prejudice is vacated.
5. Trial on the merits of the objection to claim will be set at a status conference to be held on May 11, 2001 at 9:00 a.m.
6. A hearing on the motion of Betty Ann Dean to intervene will be held on May 11, 2001 at 9:00 a.m.
. This contrasts sharply with Walters v. Edgar, 163 F.3d 430 (7th Cir.1998) in which the named plaintiffs’ claims were frivolous. Miller and Harris' claims were not frivolous. | 01-04-2023 | 11-22-2022 |
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