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https://www.courtlistener.com/api/rest/v3/opinions/8493428/ | *366ORDER SUSTAINING TRUSTEE’S OBJECTION AND DENYING HOMESTEAD EXEMPTION
MARGARET A. MAHONEY, Chief Judge.
This case is before the Court on the objection of the trustee to the homestead exemption of $5,000 claimed by Jimmie Howard Cassity. 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 sustaining the trustee’s objection and is denying the homestead exemption of Jimmie Howard Cassity.
FACTS
Sandra and Jimmie Cassity filed this Chapter 7 case on March 20, 2001. At filing they were husband and wife and resided at 7370 Howells Ferry Road, Mobile, Alabama 36618. The parties claimed the real property as homestead property on their bankruptcy schedules and each claimed a $5, 000 homestead exemption pursuant to Ala.Code § 6-10-2 (Michie 1993).
The real property is owned in fee simple by Ms. Cassity. She received the property in 1985 from her grandmother by deed. At the time of the transfer of the property to Ms. Cassity, she was single. She and Mr. Cassity were married and divorced before 1985 and remarried in 1990. Mr. and Ms. Cassity have both made payments on the mortgages on the property. Mr. Cassity paid through wages he earned; Ms. Cassity through her SSI payments.
The trustee does not dispute the fact that the Howells Ferry property is a homestead or that Ms. Cassity is entitled to claim a homestead exemption.
LAW
The Alabama homestead exemption statute is contained in Title 6, Chapter 10 of the Alabama Code. Title 6 deals with “Civil Practice.” Chapter 10 is entitled “Exemptions from Levy and Sale Under Process.” Section 6-10-2 states:
The homestead of every resident of this state ... not exceeding in value $5,000 ... shall be, to the extent of any interest he or she may have therein, whether a fee or less estate ... exempt from levy and sale under execution or other process for the collection of debts ... when a husband and wife jointly own a homestead each is entitled to claim separately the exemption provided herein ...
Ala.Code § 6-10-2 (Michie 1993).
As the debtors allege, Alabama courts have held that the law is to be liberally construed because preservation of homes is of paramount importance. First Alabama Bank of Dothan v. Renfro, 452 So.2d 464 (Ala.1984); McPherson v. Everett, 277 Ala. 519, 172 So.2d 784 (1965).
Mr. Cassity’s interest in the homestead at the filing of this case was an inchoate interest. Thomas v. Blair, 208 Ala. 48, 93 So. 704 (1922) (“Dower inchoate is not title. It is a mere expectancy.”). He holds no fee interest or interest for a term. His interest is not one upon which any creditor can levy or execute.
The purpose of the homestead exemption statute is to protect all or part of a debtor’s homestead from creditor seizure. If Mr. Cassity’s interest is contingent or inchoate enough that it is not subject to creditor seizure, it is also not choate enough to give rise to a homestead exemption. The key is whether third parties, but *367for the exemption, would have a right to levy or execute on the property interest.
Debtors allege that the fact that Mr. Cassity would have to sign any deed his spouse executes to transfer the property makes this interest a property interest sufficient for homestead purposes. However, this does not change the result. Ala. Code § 6-10-3 (Michie 1993). Section 6-10-3 does not make the interest of the spouse a seizable interest. The statute is a protection for a spouse who does not have an otherwise protectable interest. Without this statute a spouse would have not a right to prevent a sale of the homestead in which he or she is living. E.g., People’s Bank of Red Level v. Barrow, 208 Ala. 433, 94 So. 600 (1922) (pre-1975 reco-dification). If the spouse had a present property interest, such as a joint tenancy or undivided interest or cotenancy, the spouse would not need the protection of Section 6-10-3. Any deed would require that spouse’s signature. Precisely because the spouse with only a dower or inchoate interest has only an expectancy, the statute is necessary. Without it, the spouse’s signature would be required.
This opinion is consistent with the In re Ladnier order sustaining trustee’s objection to exemptions, Case No. 97-13668, p. 2 (Bankr.S.D.Ala. Feb. 3,1998) in which this Court stated that “ownership is an essential element of any exemption claim .... Central Bank of Alabama v. Gillespie, 404 So.2d 35 (Ala.1981).” The main element of a homestead exemption right is an interest, an ownership right, which is choate and seizable. As stated in Beard v. Johnson:
It is manifest that ownership, entire or partial, in fee or for a term, is one of the essentials of rightful claim of homestead exemption. If there is no ownership, there is no liability to execution, and no occasion or field of operation for the claim of exemption.
87 Ala. 729, 6 So. 383, 383-84 (1889).
THEREFORE, IT IS ORDERED that the trustee’s objection to the claim of exemption of Jimmie Howard Cassity is SUSTAINED and the homestead exemption is DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493429/ | *369ORDER DENYING MOTION FOR SANCTIONS AGAINST DEBTOR AND COUNSEL
MARGARET A. MAHONEY, Chief Judge.
This case is before the Court on the motion of Donald R. Seymore, a creditor, for sanctions against the debtor and his counsel. 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)(2) and the Court has the authority to enter a final order.
FACTS
Julian Burke has been in three bankruptcy cases since May 23, 2000-a chapter 13, a chapter 11 and a chapter 7 case. The chapter 13 and 11 cases were filed and dismissed as follows:
Chapter 13 Case No. 00-12008-MAM-13
Filed May 23, 2000
Dismissed August 18, 2000
Chapter 11 Case No. 00-13373-WSS-ll
Filed August 25, 2000
Dismissed March 2, 2001
The chapter 7 case is still pending:
Chapter 7 Case No. 01-11253-MAM-7
Filed March 14, 2001
Pending
Mr. Burke retained Michael B. Smith as his counsel in the chapter 11 and 7 cases. At filing of his chapter 11 case, one form filed was the “Disclosure of Compensation of Attorney for Debtor” certified by Michael Smith on August 14, 2001.
It stated that Mr. Smith had received prior to the signing of the statement $1,200 from the debtor. The form stated that “[t]he source of the compensation paid to me was ... Debtor.” On October 30, 2000, Julian Burke amended his Statement of Affairs, at question 9, to show Michael Smith was paid $500 on August 1, 2000 and $750 on August 18, 2000 or a total of $1,250. The answer also disclosed that “$3,400.00 remains in Trust Account.”
At the first meeting of creditors on January 9, 2001, Mr. Seymore asked Mr. Smith about his fees.
MR. SEYMORE: Three months into our bankruptcy proceeding here—
MR. SMITH: Uh-huh.
MR. SEYMORE: — you listed your fees as $1,200 plus $800 for his filing and signed statements. So money received from Julian Burke.
MR. SMITH: Uh-huh.
MR. SEYMORE: Three months later you come up with thirty-four hundred dollars in the trust fund account. Where did that come from:
MR. SMITH: The amount listed was a total of $5,000. Out of that, we had to pay the court $830.00.
MR. SEYMORE: Uh-huh.
MR. SMITH: I had done about seven or eight hundred dollars worth of work before this was filed. So I paid myself that. The balance that’s listed on the schedules is what’s in the trust account.
MR. SEYMORE: Well, the original that I was looking at listed you showing as $800.00 filing fee.
MR. BEDSOLE: Oh, he had—
MR. SEYMORE: Twelve hundred and something retaining you. And three months later, here comes this thirty-four hundred dollars in a trust account that you missed on your amended schedule.
MR. SMITH: You’ll have to show me what you’re talking about so I can explain it to you.
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*370MR. SMITH: At the very beginning of me representing Mr. Burke, he paid me $500 to get all his stuff together. Then we finally determined that he needed — that we got the injunction from the Chapter 13 listed and got the Court’s permission to actually file a Chapter 11. So we did the — we did the work, the groundwork for getting all the stuff together for the Chapter 11. So that would have been the $700. So those two totals would have been twelve — that would have been the twelve hundred dollars that I listed that he had previously paid me that we put on the original aspect of it. The remainder of the money that he— The remainder of the $5,000, the difference between the — if you subtract out the eight hundred dollar filing fee — Was it eight thirty?
MR. SEYMORE: I believe it is eight thirty.
MR. SMITH: Subtract out the eight thirty and the seven hundred or seven fifty that — from that, yields whatever I’ve got down—
MR. BEDSOLE: That’s the prepetition work was seven fifty?
MR. SMITH: Plus five.
MR. BEDSOLE: Five hundred?
MR. SMITH: He originally came to see me. He gave me — paid me five hundred dollars.
MR. BEDSOLE: Yep.
MR. SMITH: That was when the Chapter 13 had been^ — •
MR. BEDSOLE: I see the twelve hundred in here right at the beginning. Okay.
MR. SMITH: Then he paid me a total of $5,000, of which I paid myself $700.00 for doing all the work for the Chapter 11 before it was filed. And then out of that we took the $830.00 filing fee, and that leaves the balance of whatever it says on — it said on the petition, three thousand, thirty-two hundred.
MR. BEDSOLE: Has he paid you a total of $5,000?
MR. SMITH: $5,000 plus $500.
MR. BEDSOLE: Plus $500. Okay. So he’s paid you fifty-five hundred dollars?
MR. SMITH: I’ve only received twelve hundred.
MR. BEDSOLE: All right.
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MR. SEYMORE: Well, the only question I had is why it was three months after the original filing it appears.
MR. SMITH: Probably because I realized we hadn’t put it in there and it needed to be in there.
The chapter 11 case was dismissed on March 2, 2001. On March 5, 2001, Mr. Smith removed the $3,400 from the trust account and paid his outstanding postpetition bill and used the rest of it to pay Mr. Burke’s chapter 7 filing fee.
In the “Disclosure of Compensation of Attorney for Debtor” filed on March 14, 2001 in the Chapter 7 case, Mr. Smith disclosed that he had been paid no funds and had agreed to accept no fees for the case. Mr. Seymore has filed a motion for sanctions alleging that the first disclosure in the chapter 11 was wrong and Mr. Burke fraudulently and intentionally concealed assets, particularly because, as asserted by Mr. Seymore, Julian Burke shows only $100 in cash on his schedules and negative cash flow. He asserts that Michael Smith did not originally list a $3,400 trust account and at the first meeting of creditors indicated he had been paid only $1,200. Also Mr. Seymore alleges that the trust account was not disclosed in the chapter 7 case when filed and Mr. *371Smith never filed any request for approval of fees from the Court.
LAW
No sections of the Bankruptcy Code or Rules are cited as a basis for Mr. Sey-more’s sanctions request. The Court assumes that the applicable sections must be 11 U.S.C. § 105 and/or Fed. R. Bankr.P. 9011.
Section 105 of the Bankruptcy Code provides:
The Court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.
Fed. R. Bankr.P. 9001 provides:
(a) Signature. Every petition, pleading ... and other paper, except a list, schedule, or statement, or amendments thereto, shall be signed by at least one attorney of record in the attorney’s individual name.
(b) Representations to the Court. By presenting to the Court (whether by signing, submitting, or later advocating) a petition, pleading, ... or other paper, an attorney ... is certifying that to the best of the person’s knowledge, information and belief, formed after an inquiry reasonable under the circumstances,—
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(3)the allegations and other factual contentions have evidentiary support
The Court has reviewed the pleadings in this case and Mr. Smith’s statements at the § 341 meeting held January 9, 2001 and at the trial of the matter and conclude that all of his statements have been true. Mr. Smith did not initially disclose his retainer of $3,400 in the chapter 11 filing which would have been the best way to handle the matter. However, he did disclose it within 77 days of the filing, well before any questions were raised about it.
Mr. Burke was not required to disclose the retainer as cash which he held at the filing of the chapter 11 case. Mr. Smith held it as a retainer and it should be listed as such.
Mr. Smith did not file any fee applications in the chapter 11 case before it was dismissed. Once the case was dismissed, Mr. Smith did not have to file a fee application to be paid from the retainer and, in fact, the Court would not have heard a fee application if filed. The Court no longer had jurisdiction over Mr. Burke or his affairs. Therefore, if Mr. Smith deducted from the retainer for work he did during the chapter 11 case, after the dismissal, that was a matter between Mr. Burke and Mr. Smith.
When the chapter 7 was filed, Mr. Smith held no funds on retainer and the disposition of the money after the chapter 11 dismissal did not have to be disclosed on the chapter 7 petition.
Mr. Seymore asserts that there was something inappropriate about the actions of Mr. Smith. The Court concludes that the evidence showed no impropriety.
Mr. Burke committed no impropriety in regard to the fees because the disclosure was required of Mr. Smith-not him. Mr. Seymore’s pleading, without directly stating it, questions how Mr. Burke even had the money to pay Mr. Smith in the first place. There has been no evidence presented on this point by Mr. Seymore. The Court therefore denies the *372motion to the extent it is based on that theory.
This hearing and several others had made it very evident to the Court that Mr. Seymore and several other creditors and the debtor, Mr. Burke, have a very tense relationship and have had for some time. The Court has tried to tell Mr. Burke and these creditors several things: (1) this Court will not (and properly cannot) resolve ongoing complaints of harassment or postpetition problems of one or the other of them; and (2) the trustee and his counsel are charged with examining the assets and debts of Mr. Burke, and his testimony and sworn statements about the same, and will bring whatever actions are appropriate if Mr. Burke violates the Bankruptcy Code or Rules or titles 28 or 18.1 Bottom line, the Court will not allow individual creditors to impede or rush the trustee’s process of review and action in this or any case without an emergency necessitating quick relief. The trustee is the disinterested party specifically appointed to sort out the types of issues Mr. Seymore is raising. The Court will not allow Mr. Burke or his creditors to use this Court to harass or threaten each other either. If physical or verbal threats are real and actionable, the parties should take them to the state criminal courts. If the creditors disagree with Mr. Burke’s schedules, they should take it to the trustee, not use the threat of a suit by the individual. This Court only deals with Mr. Burke’s assets and debts. If there is an issue about the assets and debts, the first stop for Mr. Burke or the creditors must be the trustee. He is charged with dealing with the assets and reporting to the Court. 11 U.S.C. § 704.
Sanctions under Fed. R. Bankr.P. 9011 would be inappropriate against Mr. Smith and Mr. Burke for two reasons: (1) Mr. Seymore did not give Mr. Smith time to correct or amend any mistake as required by Rule 9011(c); and (2) Mr. Burke did not sign the disclosure of compensation and is not an attorney. As to reason one, Rule 9011 has specific requirements about notice to the alleged sanctionee. Mr. Seymore did not give this notice to allow corrections. Mr. Smith had already, on his own initiative, before any prompting, amended his disclosure anyway; however, Mr. Seymore did not comply with the Rule so the request could not be granted. As to reason two, Rule 9011 requires a signature on the paper which the creditor claims is false. Mr. Burke did not sign the compensation disclosure form.
Section 105 is the section of the Code which gives the Court a civil contempt power. In re Williams, 213 B.R. 189 (Bankr.M.D.Ga.1997); In re A-1 Specialty Gasolines, Inc., 246 B.R. 445 (Bankr.S.D.Fla.2000). A sanction under § 105 is different than a sanction under Rule 9011. The Court can sanction parties *373who have not signed pleadings and can impose sanctions for a broader range of reasons. In re Collins, 250 B.R. 645 (Bankr.N.D.Ill.2000). For sanctions to be imposed, a debtor or attorney’s conduct must be very serious and egregious. E.g., U.S. Trustee v. Bresset (In re Engel), 246 B.R. 784 (Bankr.M.D.Pa.2000) (attorney who never had client properly file schedules was liable for sanctions);2 National Indemnity Co. v. Proia (In re Proia), 35 B.R. 385 (D.R.I.1983) (when extremely inaccurate schedules were corrected only after three hearings and numerous amendments, fees were awarded to creditor counsel).
The Court concludes that there is no evidence either Mr. Burke or his attorney, Mr. Smith, violated 11 U.S.C. § 105 or Fed. R. Bankr.P. 9011 or any other Code sections about disclosure. Unlike the Proia and Engel cases in which the mistakes in schedules were either never corrected or only after numerous hearings, Mr. Smith amended his disclosure before the motion was even filed. A recent case, Schroeder v. Rouse (In re Redding), 263 B.R. 874 (8th Cir. BAP 2001) lists cases in which sanctions and/or fee disgorgements were required when attorneys’ fee disclosures were not properly made. Id. at 880. None of the cases involved situations where disclosure was made prior to the complaint as occurred in this case. See also Jensen v. U.S. Trustee (In re Smitty’s Truck Stop, Inc.), 210 B.R. 844, 849 (10th Cir. BAP 1997) (indicating that supplemental disclosure would be appropriate if error in initial filing).
THEREFORE, IT IS ORDERED that the motion of Donald Seymore for sanctions against Julian Burke and Michael B. Smith is DENIED without prejudice to the issues being raised later by the trustee.
. For instance, this Court heard and granted a motion of Mr. Seymore for sanctions against Mr. Burke only to the extent of compelling Mr. Burke to file complete schedules of assets and debts. Mr. Burke already has that duty, regardless of the motion, and the trustee will seek to deny Mr. Burke’s discharge if he finds that the schedules are incomplete pursuant to 11 U.S.C. § 727. The Court will not grant a motion like Mr. Sey-more's for sanctions prior to the trustee looking at the matter. Mr. Seymore and other creditors are better served giving information to the trustee and coordinating motions like this with him.
Mr. Seymore filed a third motion also seeking sanctions because he disagreed with an asset Mr. Burke listed on his schedules. The proper manner to deal with this is to provide information about the alleged asset to the trustee and let him determine its value and treatment in the case. This Court will not allow creditors to circumvent the trustee's process.
. The case provides case law on Mr. Burke's duty to file correct schedules and Mr. Smith’s duty as his attorney to advise him. Id. at 791-94. The parties should note that the case states, correctly, that "the obligation to file accurate schedules includes a continuing duty to correct errors in filed documents.” (cites omitted). Id. at 794. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493218/ | DECISION GRANTING DISTRICT OF COLUMBIA’S MOTION FOR SUMMARY JUDGMENT
S. MARTIN TEEL, Jr., Bankruptcy Judge.
This is a dispute between the District of Columbia and the Internal Revenue Service (“IRS”) regarding which of those two entities’ tax liens take priority to funds held by the debtor for distribution in accordance with nonbankruptcy law. In claiming priority for its sales tax liens, the District relies upon a congressional enactment now embodied in D.C.Code Ann. § 47-2012 (1997 Repl.) (which the court will refer to as “§ 2012”). In claiming priority for its federal tax liens, the IRS relies upon the. federal doctrine of choateness that generally controls the priority between competing tax liens and that incorporates as an element the general rule of lien law of “first in time, first in right.” The court will rule in favor of the District that § 2012 trumps the choateness doctrine.
I
The debtor holds proceeds of property to which attached liens for taxes owed the United States, which has appeared through its Internal Revenue Service in this case, and liens securing sales taxes owed the District. The parties are in agreement that the proceeds must first be *774applied to postpetition taxes, leaving $15,000 to be applied to the tax liens.1 That $15,000 must be distributed in accordance with the priority of the liens under nonbankruptcy law. See Pearlstein v. U.S. Small Business Admin., 719 F.2d 1169, 1175-76 (D.C.Cir.1983) (“the relative priorities of liens in bankruptcy ... [are] to be determined according to the non-bankruptcy lien law”).2 The District’s sales tax liens, which exceed $15,000, would not have priority under the choateness doctrine, if that doctrine controlled, because the federal tax liens arose before the sales tax liens: the sales tax lien was not asserted until many months after the federal tax liens attached.
II
In deciding which entity’s tax liens take priority to the $15,000, the issue is which of two rules of law — § 2012 and the doctrine of choateness — trumps the other. Both rules are creatures of federal law because Congress enacted § 2012 pursuant to its legislative power over the District of Columbia and because the choateness doctrine is a product of federal common law. Accordingly, the Supremacy Clause of the U.S. Constitution does not supply the answer.
The outcome turns on two decisions of the court of appeals for this circuit, decided less than one year apart, District of Columbia v. Greenbaum, 223 F.2d 633 (D.C.Cir.1955), and United States v. Saidman, 231 F.2d 503 (D.C.Cir.1956). The provision that is now § 20123 was in force in Greenbaum and Saidman. Enacted by Congress, the D.C.Code provision was a federal law (albeit of a highly local nature codified in the D.C.Code, not the U.S.Code). The D.C.Code provision conflicted in Greenbaum and Saidman with U.S.Code provisions that would accord priority (or the same level of priority) to federal tax claims. Accordingly, in both cases the court had to decide whether priority of competing tax claims was governed by the D.C.Code provision or instead by a U.S.Code provision (the Bankruptcy Act in Gi'eenbaum, the federal insolvency statute in Saidman). The court reached opposite conclusions in the two cases. The court held that the U.S.Code provision invoked in Greenbaum trumped the D.C.Code provision, but that the D.C.Code provision trumped the U.S.Code provision invoked in Saidman.
Because a U.S.Code provision does not always trump § 2012, it seems obvious that a federal common law rule of priority, the choateness doctrine, may not neeessar-*775ily trump § 2012. The court concludes that this case is more like Saidman than Greenbaum, such that § 2012 trumps the choateness doctrine generally applicable to deciding priority of competing tax liens.
A.
Section 2012 provides:
§ 47-2012 Tax a preferred claim; priority over property taxes.
Whenever the business or property of any person subject to tax under the terms of this chapter, shall be placed in receivership or bankruptcy, or assignment is made for the benefit of creditors, or if said property is seized under distraint for property taxes, all taxes, penalties, and interest imposed by this chapter for which said person is in any way liable shall be a prior and preferred claim. Neither the United States Marshal, nor a receiver, assignee, or any other officer shall sell the property of any person subject to tax under the terms of this chapter under process or order of any court without first determining from the Collector the amount of any such taxes due and payable by said person, and if there be any such taxes due, owing, or unpaid under this chapter, it shall be the duty of such officer to first pay to the Collector the amount of said taxes out of the proceeds of said sale before making any payment of any moneys to any judgment creditor or other claimants of whatsoever kind or nature. Any person charged with the administration or distribution of any such property as aforesaid who shall violate the provisions of this section shall be personally liable for any taxes accrued and unpaid which are chargeable against the person otherwise liable for tax under the terms of this section.
As observed in Pearlstein, 719 F.2d at 1177, § 2012 gives the District’s claim for sales taxes “a first priority in terms absolute.” [Citation omitted.] Section 2012 trumps the general rule of determining lien priority, the doctrine of “first in time, first in right,” in a contest between D.C. sales taxes and an SBA mortgage. Pearlstein, 719 F.2d at 1177-78. Similarly, D.C. sales taxes are entitled under § 2012 to a priority over a prior perfected security interest. Malakoff v. Washington, 434 A.2d 432, 437 (D.C.1981). The issue is whether Congress intended that nevertheless an exception should exist for federal tax liens, according them a priority over later-arising D.C. sales tax liens, despite § 2012, based on the choateness doctrine and its incorporation of the general rule of “first in time, first in right.”
B.
Greenbaum was a case under the Bankruptcy Act. The court held that the Bankruptcy Act instead of the provision that is now § 2012 controlled distribution of funds in a liquidation case under chapter VII of the Bankruptcy Act even though the D.C.Code provision was a later-enacted provision and specifically applied when a person’s business or property was placed in “receivership or bankruptcy.” The District sought to obtain payment of its pre-petition unsecured tax claims first, ahead of claims of administration and other pre-petition unsecured tax claims, and to include payment of penalties. The Bankruptcy Act, based on a careful assessment by Congress of what claims were entitled to priority because of superior equities, would have denied the District such treatment.
The legislative history revealed that the D.C.Code provision was adapted from a Maryland statute (which similarly contained the word “bankruptcy” but which, as a state statute, could not apply to proceedings under the Bankruptcy Act). The *776court accordingly held that in using the word “bankruptcy” in the provision, Congress meant to refer only to local insolvency proceedings, not cases under the Bankruptcy Act. Greenbaum, 223 F.2d at 635-36. In the part of the decision of importance to the present case, the court went further. It reasoned that although the D.C.Code provision was a later-enacted provision and despite its mention of “bankruptcy,” it did not evidence the clear and manifest intention necessary to repeal by implication the Bankruptcy Act’s distribution scheme for taxes established by Congress in 1926 (23 years before the enactment of the D.C.Code provision in 1949), stating:
It is unrealistic to assume that Congress intended to create an exception sharply altering this long and well-considered policy [reflected in the Bankruptcy Act’s priority scheme] without express reference to the Bankruptcy Act.
Greenbaum, 223 F.2d at 636. It noted that “Congress expressed no reason — and we are aware of none — why the District’s claim for its unpaid sales taxes has any greater equity than claims of other governmental units for such taxes.” Greenbaum, 223 F.2d at 637.
An argument can be made that similar reasoning ought to apply to the issue of whether § 2012 trumps the choateness doctrine. The choateness doctrine is a long and well-considered judge-made doctrine governing the priority of tax liens securing the United States in competition with local tax liens. In enacting § 2012, Congress gave no reason why the District’s tax claims ought to enjoy greater priority than would claims of a state tax collector.
However, the focus of Greenbaum was on the District’s arguments being plainly at odds with equities that Congress had specifically addressed as a matter of bankruptcy policy in setting priorities for cases under chapter VII of the Bankruptcy Act.4 Here, in contrast, the District does not attempt to avoid provisions of the Bankruptcy Code: the distribution is governed by nonbankruptcy law. In that nonbank-ruptcy law arena, there is no evidence that Congress had any concern about the choateness doctrine, a doctrine that Congress has never codified, and a doctrine of broad applicability in contrast to § 2012 in which Congress addressed the specialized issue of priority of D.C. sales taxes.
C.
Saidman was not a bankruptcy case. Instead, it involved an assignment for the benefit of creditors, another type of insolvency proceeding. Under section 3466 of the Revised Statutes, 31 U.S.C. § 191, the United States was entitled to payment first of its debts when the debtor was insolvent. Similarly, D.C.Code § 47-2609 accorded first priority to the District’s taxes. In determining that the D.C.Code provision ought to control, the court acknowledged that the provision was adapted from a Maryland statute, and then stated:
But in legislating for the District of Columbia Congress is not subject to the same limitations as are state legislatures, and we can hardly impute to it without more an intent to have the Dis*777trict taxes occupy a priority status equivalent only to that of state taxes.
Saidman, 231 F.2d at 509 (citation omitted). It further reasoned that:
Section 47-2609 is a more recently enacted statute awarding priority to only one kind of tax claim whereas the Federal statute prescribes a general priority for all kinds of debts. The limited nature of the District’s priority given by a later statute using language just as forceful as that of Section 3466 requires the inference that Congress intended to create an exception from the broad and general Federal priority in this one respect. ...
We conclude that Section 47-2609 as the later, more specific, and more limited enactment creates an exception to Section 3466.... We are reinforced in this conclusion by the consideration that since Congress has the obligation to provide revenues for both the District and the Federal Government, there could have been no real incentive for subordinating the District’s taxes in an insolvency proceeding.
Saidman, 231 F.2d at 509-510.
This case is more like Saidman than Greenbaum. As in Saidman, nothing indicates that, in enacting a provision according the District a first priority, Congress intended that the “first in time, first in right” rule would apply in the case of federal tax liens (but not other liens) to defeat the District’s statutory priority, as though Congress, in legislating regarding District sales taxes, were only a state legislature without power to override the choateness doctrine in the case of federal tax liens. Indeed, the case is a stronger case than Saidman because § 2012 is a specific congressional enactment, unalterable by the courts, whereas the choateness doctrine is but a judge-made rule of law subject to development over time as a matter of federal common law. Finally, § 2012 addresses a specific tax whereas the choateness doctrine is a rule of general applicability to all kinds of debts.
Section 2012 as the later, more specific, and more limited rule of law, and as a congressionally-enacted provision instead of a judge-made rule, creates an exception to the choateness doctrine.
D.
The cases upon which the IRS relies are distinguishable. For example, In re Davis Perry Enterprises, Inc., 110 B.R. 97 (D.D.C.1989), was a case in which the District did not invoke § 2012 in claiming priority and apparently did not argue that under Saidman, the D.C. statutory provision it invoked trumped the choateness doctrine. As another example, In re University Wine & Liquors, Inc., 1991 WL 323425 (D.D.C.1991), was a case in which the District’s claims were unsecured such that the rule of Pearlstein that priority of liens is determined by nonbankruptcy law had no applicability. Greenbaum required that priority of distribution between competing unsecured tax claims was to be determined by the Bankruptcy Code, not § 2012, but this court nevertheless recognized that a lien would have given the District the right to urge priority under § 2012.
A judgment follows.
. Although this case was never converted to chapter 7, the parties apparently recognized that it could be and that in chapter 7 the tax liens would be paid only after the postpetition taxes were paid. 11 U.S.C. § 724(b). A prior order in the main case approving the sale thus directed payment of the postpetition taxes. The court has dismissed the case, retaining jurisdiction over this adversary proceeding, upon the understanding that the postpetition taxes are still to be paid first, with the priority of the tax liens as to the remaining $15,000.00 to be decided under nonbankruptcy law.
. Although the prior order in the main case also provided for pro rata distribution of the $15,000, it also provided that the liens "transferred to the proceeds of the sale without the alteration of priority.” The order was ineffective to determine the priority of the liens because an adversary proceeding was required. F.R.Bankr.P. 7001. Both the IRS and the District have recognized the error of the provision regarding pro rata distribution, and have briefed the issue on the basis that the $15,000 must be distributed in accordance with lien priorities under nonbankrupt-cy law.
.At that time, the provision was codified as D.C.Code Ann. § 47-2609 (1951). See Greenbaum, 223 F.2d at 635 n. 4.
. Congress decided that it would be inequitable in a bankruptcy case for a taxing authority's unsecured prepetition taxes to be paid ahead of the expenses incurred in administering the estate and ahead of other governmental units’ tax claims. Similarly, it decided that it would be inequitable for penalties owed a taxing authority to be paid ahead of or on the same level as other creditors' claims for pecuniary loss: paying the penalty serves to penalize those creditors, not the debtor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493219/ | MEMORANDUM ON MOTION FOR SUMMARY JUDGMENT AND MOTION TO AMEND ANSWER
RICHARD S. STAIR, Jr., Bankruptcy Judge.
On June 22, 2001, First Tennessee Bank National Association (First Tennessee) filed a Complaint to Determine the Validity, Extent and Priority of Liens and Interests in Property (Complaint). By its Complaint, First Tennessee asks the court to determine the extent and priority of various parties’ interests in a commercial Lease Agreement (Lease) executed by the Debtor. Specifically, First Tennessee asks the court to find that it or any subsequent foreclosure transferee under the Lease is not required to comply with the terms of a Supply Agreement also executed by the Debtor. On August 2, 2001, First Tennessee then filed a Motion for Judgment on the Pleadings and/or for Summary Judgment and for Scheduling Order (Summary Judgment Motion).
Defendants Dallas Coffman, Jean Coff-man, Bill Green, Claudine Green, (the Landlord) and Coffman Oil Company1 (Coffman Oil) (collectively, the Coffman Defendants) filed an Answer on July 23, 2001. Coffman Oil then filed a Motion to Amend Answer and File Permissive Counter-Claim (Motion) on August 3, 2001. The Motion asks the court to allow the Coffman Defendants to amend their answer to allow Coffman Oil to assert a permissive counter-claim against First Tennessee to determine the parties’ rights relating to an Incentive Contract and Addendum to Incentive Contract between Coffman Oil, First Tennessee, and Defendant Trotter Enterprises, LLC, d/b/a Trotter Amoco (Trotter Enterprises).
Answers were also filed by the Debtor on July 24, 2001, and by Trotter Enterprises, LLC on July 25, 2001. Additionally, on August 15, 2001, the Debtor filed a Response of John Dale Trotter to Motion for Judgment on the Pleadings and/or for Summary Judgment and a Response of John Dale Trotter to Motion for Motion [sic] to Amend Answer and File Permissive Counter-Claim. Finally, on August 17, 2001, First Tennessee filed a Response and Objection of First Tennessee Bank to Motion to Amend Answer and File Permissive Counterclaim, and the Coffman Defendants filed their Response to First Tennessee Bank National Association’s Motion for Judgment on the Pleadings and/or for Summary Judgment and for Scheduling Order.2
First Tennessee, Trotter Enterprises, the Debtor, and the Coffman Defendants have briefed their respective positions. The court heard oral arguments on First Tennessee’s Summary Judgment Motion and on the Coffman Defendants’ Motion on August 28, 2001.
*820First Tennessee’s Complaint is a core proceeding. 28 U.S.C.A. § 157(b)(2)(K) (West 1993). The core/noncore nature of Coffman Oil’s proposed counterclaim will be discussed herein.
I
On March 10, 1999, by execution of the Lease, the Landlord conveyed to Dean Humphrys and the Debtor, as “Tenant,” a leasehold interest (the Leasehold) in real property (the Leased Premises) located in Sevier County, Tennessee. The Debtor and Humphrys have utilized the Leased Premises to operate, either directly or through closely-held business entities, an A & W restaurant, an Amoco convenience store, and a Subway restaurant.
On February 15, 1999, the Debtor and Humphrys entered into a Supply Agreement with Coffman Oil for the provision of Amoco gasoline. The Supply Agreement references the Lease, providing in material part:
14. This Supply Agreement will run concurrently with [the] 50 year lease negotiated between tenants John Dale Trotter and Dean Humphrys and [the Landlord], dated February 15, 1999, and this Agreement shall in no wise [sic] be terminated or cancelled unless said lease shall be terminated. One of the considerations for Company [Coffman Oil] entering into said lease is Dealer’s agreement to execute this Supply Agreement, and Company [Coffman Oil] would not have agreed to said lease in the absence of this Supply Agreement. [3]
The Supply Agreement is in turn referenced at Section 10.17 of the Lease, which states:
This lease has been executed in conjunction with a Supply Agreement (between Coffman Oil Company and the Lessees, Tenants herein) and a part of the consideration for Dallas Coffman and Jean Coffman entering into this Lease Agreement is the agreement by the Tenants herein entering into said Supply Agreement dated 15 February, 1999, and made between Coffman Oil Co., Inc., and John Dale Trotter and Dean Humphreys [sic], Dealer.
An Agreed Order was entered by the court on June 13, 2001, in the bankruptcy cases of the Debtor and Trotter Enterprises, LLC. Each Order authorized assumption of the Lease by the respective Debtor and provided that the Supply Agreement was also assumed by each Debtor.4 The Orders also provided that the rights of First Tennessee were reserved and unaffected by the assumptions or the Orders.
On July 16, 1999, the Debtor, his wife, Karen Trotter, Dean Humphrys, and his wife, Tanya Humphrys, executed a Tennessee Leasehold Deed of Trust conveying the interest of the Debtor and Humphrys in the Lease and Leasehold as security for obligations of the Trotters and the Hum-phrys to First Tennessee. Contemporaneously with the execution of the Tennessee Leasehold Deed of Trust, First Tennessee and the Landlord executed a Landlord’s Agreement and a Landlord’s Waiver and Subordination. Both documents relate to First Tennessee’s rights relative to the Leasehold and Leased Premises.5 The *821Landlord’s Agreement provides in material part at paragraph 5:
Landlord agrees that as long as Landlord receives in a timely fashion all rental payments as and when due, and as long as the obligations of the tenant to maintain the Premises are being fulfilled[ ] (whether by Borrower or Lessee or, at its option, Lender or any transferee of Lender), Landlord will not terminate the Lease or take any action to require Borrower [or] Lender or Lender’s transferee to surrender possession of the Premises.
The Landlord’s Agreement further recites that it is executed “in order to induce Lender to extend financial accommodations to Borrower,” and does not reference the Supply Agreement.
II
First Tennessee moves for judgment on the pleadings pursuant to Fed.R.CivP. 12(c) and Fed.R.Bankr.P. 7012 or, in the alternative, for summary judgment under Fed.R.Civ.P. 56 and Fed.R.Bankr.P. 7056. Rule 12(c) provides:
After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings. If, on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
Fed.R.Civ.P. 12(c). Because the Affidavit of Dallas Coffman (a “matter outside the pleadings”) has been filed by the Coffman Defendants in opposition to the Motion for Summary Judgment, the court will address the Motion as one for summary judgment.6 See id.
Under Rule 56(c), summary judgment is warranted “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). The nonmovant bears the burden of producing specific facts showing that there is a genuine issue for trial. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (citing Fed.R.Civ.P. 56(e)). The facts, and all inferences to be drawn from them, must be viewed in the light most favorable to the nonmovant. See Matsushita, 106 S.Ct. at 1356, 106 S.Ct. 1348. The court’s function is not to “weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). In so doing, the court must decide whether “the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Id. at 2512, 106 S.Ct. 2505.
Ill
The parties are not in disagreement over the factual issues of this case. Instead, their dispute centers around the interpretation and interplay of the Supply Agreement, the Lease, and the Landlord’s Agreement. The court’s interpretation of a written contract is a question of law. *822See Realty Shop, Inc. v. RR Westminster Holding, Inc., 7 S.W.3d 581, 597 (Tenn.Ct.App.1999).
First Tennessee asserts that in the event it forecloses on the Lease, neither it nor its subsequent transferee should be required to comply with the Supply Agreement or pay attorney’s fees owed by the Debtor to the Landlord as a condition of curing a default or to maintain the existence of the Lease. In support of this theory, First Tennessee points out that the Landlord’s Agreement expressly requires only timely rental payments to the Landlord and fulfillment of “the obligations of the tenant to maintain the Premises.” Because compliance with the Supply Agreement and payment of attorney’s fees are not set forth as conditions of default under the Landlord’s Agreement, First Tennessee contends that it is not bound by either obligation.
The Coffman Defendants counter that First Tennessee was at all times aware of the Supply Agreement and should be required to comply with it in the event of foreclosure. They additionally cite Section 10.03(h) of the Lease, which provides that in the event of foreclosure by a secured party, that party must agree to assume all of the tenant obligations under the Lease. Such obligations, according to the Coffman Defendants, include compliance with the Supply Agreement and payment of their attorney’s fees owed by the Debtor.
Under Tennessee law, a contract is prima facie evidence of “the true intentions of the parties [ ] and shall be enforced as written[.]”. TenN.Code Ann. § 47-50-112(a) (1995). In construing contracts, Tennessee courts give to the words expressing the parties’ intentions their “usual, natural and ordinary meaning.” Ballard v. North Am. Life & Cas. Co., 667 S.W.2d 79, 82 (Tenn.Ct.App.1983). “In the absence of fraud or mistake, a contract must be interpreted and enforced as written even though it contains terms which may be thought harsh and unjust.” Id.
To avoid default, the Landlord’s Agreement expressly requires only that First Tennessee, or its foreclosure transferee, make “in a timely fashion all rental payments” and fulfill “the obligations of the tenant to maintain the Premises.” The Coffman Defendants have offered no plausible theory under which compliance with the Supply Agreement or payment of attorney’s fees would be considered either a “rental payment” or an obligation “to maintain the Premises.”7 Accordingly, the court finds that in the event of foreclosure, neither noncompliance with the Supply Agreement nor failure to pay the Defendants’ attorney’s fees owed by the Debtor would be cause for default by First Tennessee or its subsequent transferees.
However, this finding does not end the court’s inquiry if, as urged by the Coffman Defendants, the Lease and Supply Agreement must be construed together as one contract. For example, while noncompliance with the Supply Agreement would not be a condition of default for First Tennessee, the Coffman Defendants could still bring an action for damages resulting from the breach of the Supply Agreement — but only if the two documents can be construed as a single contract.
The construction of related contracts has been explained as follows;
Generally, absent evidence to the contrary, instruments executed contempora*823neously with commonality of parties, purpose, and transaction will be construed together in the eyes of the law as one contract. Construing contemporaneous instruments together simply means that if there are any provisions of one instrument limiting, explaining, or otherwise affecting the provisions of another, they will be given effect as between the parties; and others charged with notice, so that the intent of the parties may be carried out.
Pyramid Operating Auth., Inc. v. City of Memphis (In re Pyramid Operating Auth., Inc.), 144 B.R. 795, 814 (Bankr.W.D.Tenn.1992) (citing Joy v. City of St. Louis, 138 U.S. 1, 11 S.Ct. 243, 34 L.Ed. 843 (1891)); accord Farmer v. Autorics, Inc. (In re Branam), 247 B.R. 440, 445 (Bankr.E.D.Tenn.2000); cf., Harrell v. Dean Food Co., 619 S.W.2d 528, 533 (Tenn.Ct.App.1981) (Where the parties intend for two separate instruments to constitute a single contract, they should either “say so or draw one instrument”).
“Commonality” is defined as “possession of common features or attributes.” Webster’s New Collegiate Dictionary 225 (1st ed.1979). “Contemporaneously” is defined as “originating during the same time [or] the same period of time.” Id. at 242.
In the present case, the Lease was executed approximately one month after the signing of the Supply Agreement. The parties to the documents are not identical. Although the Coffmans and the Greens, the Landlord, were parties to the Lease, they were not parties to the Supply Agreement. Dallas Coffman, by Affidavit, states that he is president of Coffman Oil and that both the Coffmans and the Greens receive a portion of the Supply Agreement revenue. Nonetheless, Coffman Oil, a corporation, is a separate legal entity. Furthermore, neither the_ Lease nor the Supply Agreement were recorded. However, pursuant to Tenn.Code Ann. § 66-24-101(a)(15) (Supp.2000), a Memorandum of Lease was recorded in the Sevier County Register of Deed’s Office on March 18, 1999. This document contains no mention of the Supply Agreement. That the Lease states that it is executed “in conjunction with” the Supply Agreement is not disposi-tive. See Wright Med. Tech., Inc. v. Orthomatrix, Inc., No. W2000-02744-COA-R3-CV, 2001 WL 523992 at *6 (Tenn.Ct. App. May 17, 2001) (The “conjunction” of two agreements does not amount to a merger.).
The court cannot construe the Lease and Supply Agreement as a single contract. The Landlord is not a party to the Supply Agreement, and the Lease, other than the phrase at Section 10.17 that “the [L]ease has been executed in conjunction with the Supply Agreement,” contains no language that can be construed to incorporate the Supply Agreement into its terms. Furthermore, the lack of the commonality of parties precludes the court from considering the Lease and Supply Agreement together. See Pyramid Operating Auth., 144 B.R. at 814.
In summary, the interest of the Defendants in the Leasehold Premises is subject to the interest of First Tennessee arising under the Tennessee Leasehold Deed of Trust. Additionally, pursuant to the Landlord’s Agreement, First Tennessee and any foreclosure transferee are not required to comply with the Supply Agreement nor are they required to pay the Landlord’s attorney’s fees. The only action required by First Tennessee and its transferees to maintain the existence of the Lease is, as required by paragraph 5 of the Landlord’s Agreement, to make “all rental payments” in a “timely fashion” and to “maintain the Premises.”
*824Because there is no genuine issue of material fact, First Tennessee’s Motion for Summary Judgment will be granted.
IV
Lastly, the Coffman Defendants’ Motion must be denied for lack of subject matter jurisdiction. The proposed counterclaim arises from an Incentive Contract dated November 29, 1999, between Coffman Oil and Trotter Enterprises, along with an Addendum to Incentive Contract dated March 10, 2000, between Coffman Oil, Trotter Enterprises, and First Tennessee. Through the Incentive Contract, Coffman Oil agreed to transfer up to $35,000.00 in Amoco Oil Company rebates to Trotter Enterprises. By the Addendum, the $35,000.00 was instead transferred to First Tennessee.
The Coffman Defendants offer their counterclaim under two theories. First, they assert that First Tennessee, through the Addendum and the receipt of $35,000.00, “impliedly promised to refrain from taking any action which would jeopardize the continued operation of the Amoco franchise.” The Coffman Defendants’ second theory alleges an implied agreement by First Tennessee to act with good faith and fair dealing toward Coffman Oil. The Coffman Defendants assert that First Tennessee’s attempt to avoid the Supply Agreement breaches each of these implied agreements, thereby making the Bank liable for repayment of potentially the entire $35,000.00 to Coffman Oil.
The court’s jurisdiction over matters involving nondebtors is governed by 28 U.S.C.A. § 1334. See Michigan Employment Sec. Comm’n v. Wolverine Radio Co., Inc. (In re Wolverine Radio Co.), 930 F.2d 1132, 1140 (6th Cir.1991). Section 1334 provides in material part:
(a) Except as provided in subsection (b) of this section, the district court shall have original and exclusive jurisdiction of all cases under title 11.
(b) 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.A. § 1334(a)-(b) (West 1993). Section 1334 thereby grants jurisdiction to the district courts over four types of bankruptcy matters: (1) “cases under title 11”; (2) “proceedings arising under title 11”; (3) “proceedings ... arising in ... cases under title 11”; and (4) “proceedings ... related to cases under title 11.” See id.; Wolverine Radio, 930 F.2d at 1141.
If a district court has jurisdiction under § 1334, 28 U.S.C.A. § 157 then defines the bankruptcy court’s jurisdiction over the same matter. Wolverine Radio, 930 F.2d at 1143-44. Section 157(b)(1) provides:
Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.
28 U.S.C.A. § 157(b)(1) (West 1993). Therefore, outside of the bankruptcy case itself, the bankruptcy court may enter final orders and judgments only in “core proceedings arising under title 11, or arising in a case under title 11[.]” Id.; see also Wolverine Radio, 930 F.2d at 1144 (citing Wood v. Wood (In re Wood), 825 F.2d 90, 95 (5th Cir.1987)).
*825The Bankruptcy Code sets forth a nonexclusive list of core proceedings.8 The proposed breach of contract counterclaim, involving two nondebtors, is not a core proceeding. See Wolverine Radio, 930 F.2d at 1144 (“[I]f the proceeding does not invoke a substantive right created by federal bankruptcy law and is one that could exist outside of the bankruptcy, then it is not a core proceeding.”).
Nonetheless, the court may still hear a matter that “is otherwise related to a case under title 11.” 28 U.S.C.A. § 157(c)(1). The Sixth Circuit has adopted the following test for “related to” jurisdiction:
The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or against the debt- or’s property. An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.
Robinson v. Michigan Consol. Gas Co., Inc., 918 F.2d 579, 583 (6th Cir.1990) (quoting Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3rd Cir.1984) (emphasis in original) (citations omitted)). Thus, “related to” jurisdiction may extend to actions involving nondebtor parties, but only where the suit has “an effect on the bankruptcy estate.” Celotex Corp. v. Edwards, 514 U.S. 300, 115 S.Ct. 1493, 1498-99 n. 5, 131 L.Ed.2d 403 (1995).
At oral argument, counsel for the Coff-man Defendants correctly conceded that the proposed counterclaim is not “related to” the Debtor’s bankruptcy case. Accordingly, because the counterclaim is neither a core matter nor “related to” the bankruptcy, the court is without subject matter jurisdiction. 28 U.S.C.A. § 157(b) — (c). The Motion must therefore be denied.
*826An order consistent with this Memorandum will be entered.
ORDER
Pursuant to the Memorandum on Motion for Summary Judgment and Motion to Amend Answer filed this date, the court directs the following:
1. The Motion to Amend Answer and File Permissive Counter-Claim filed by the Defendant Coffman Oil Company on August 3, 2001, is DENIED.
2. The Motion for Judgment on the Pleadings and/or for Summary Judgment and for Scheduling Order filed by the Plaintiff on August 2, 2001, is, to the extent summary judgment is requested, GRANTED.
3. The interest asserted by each of the thirteen Defendants in the leasehold estate described in Article I at Section 1.01 of the Lease Agreement entered into on March 10, 1999, by the Defendants Bill Green, Claudine Green, Dallas Coffman, and Jean Coffman, as “Landlord,” and the Defendants John Dale Trotter and Dean Hum-phrys, as “Tenant,” is subject to the first priority security interest of the Plaintiff arising under the Tennessee Leasehold Deed of Trust executed on July 16, 1999, by the Defendants John Dale Trotter, Karen Tudor Trotter, Dean Humphrys, and Tanya Humphrys, as “Grantor,” and Jason C. Rose, Trustee.
4. Pursuant to the Landlord’s Agreement entered into on July 16, 1999, by the Defendants Dallas Coffman, Jean Coff-man, Bill Green, and Claudine Green, as “Landlord,” and the Plaintiff, as “Lender,” the Plaintiff and/or its transferees are not required to pay the attorney fees called for under Article X, Section 10.09, of the March 10, 1999 Lease Agreement. The Defendants Dallas Coffman, Jean Coff-man, Bill Green, and Claudine Green can terminate their March 10, 1999 Lease Agreement with the Defendants John Dale Trotter and Dean Humphrys only in the event they do not receive from the Defendants John Dale Trotter and Dean Hum-phrys or from the Plaintiff and/or its transferees “in a timely fashion all rental payments as and when due” under Article III of the Lease Agreement and/or the Defendants John Dale Trotter and Dean Humphrys or the Plaintiff and/or its transferees fail to meet the “obligations of the Tenant to maintain the Premises” as required under Article VII of the Lease Agreement.
5.The Supply Agreement entered into on February 15, 1999, by the Defendant Coffman Oil Company, as “Company,” and the Defendants John Dale Trotter and Dean Humphrys as “Dealer,” is not part of the March 10, 1999 Lease Agreement entered into between the Defendants Bill Green, Claudine Green, Dallas Coffman, and Jean Coffman, as “Landlord,” and the Defendants John Dale Trotter and Dean Humphrys, as “Tenant,” and the Plaintiff and/or its transferees are not required to comply with the terms of the Supply Agreement to preserve their interest in the Lease Agreement.
SO ORDERED.
. This Defendant’s correct name is Coffman Oil Company, Inc. It is undisputed that Coff-man Oil is a corporation.
. No response has been filed by Defendants Karen Tudor Trotter, Dean Humphrys, Tanya Humphrys, T & H Enterprises, LLC, Hum-phrys Enterprises, LLC, and Pat Stapleton, Receiver, to First Tennessee's Motion for Summary Judgment. Pursuant to E.D.Tenn. LBR 7007-1, these Defendants are therefore deemed to not oppose this Motion.
. References in this paragraph to the "Company,” i.e., Coffman Oil, entering into the "[L]ease” are erroneous. Coffman Oil was not a party to the March 10, 1999 Lease.
. Trotter Enterprises, LLC is a sub-sublessee of a portion of the Leasehold Premises.
. By the Landlord's Waiver and Subordination, the Landlord subordinated its interest in certain goods and fixtures on the Leased Premises to the interest of First Tennessee.
. Additionally, all documents essential to a resolution of First Tennessee’s Motion for Summary Judgment are appended to its Corn-plaint. The authenticity of these documents is not in dispute.
. The Debtor’s and Humphrys’ obligation to pay rent is governed by Article III of the Lease; their obligation to maintain the Leasehold Premises is governed by Article VII at Section 7.03; and their obligation to pay attorney fees is governed by Article X at Section 10.09.
. Core proceedings include, but are not limited to—
(A) matters concerning the administration of the estate;
(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11;
(C) counterclaims by the estate against persons filing claims against the estate;
(D) orders in respect to obtaining credit;
(E) orders to turn over property of the estate;
(F) proceedings to determine, avoid, or recover preferences;
(G) motions to terminate, annul, or modify the automatic stay;
(H) proceedings to determine, avoid, or recover fraudulent conveyances;
(I) determinations as to the dischargeability of particular debts;
(J) objections to discharges;
(K) determinations of the validity, extent, or priority of liens;
(L) confirmations of plans;
(M) orders approving the use or lease of property, including the use of cash collateral;
(N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate; and
(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.
28 U.S.C.A. § 157(b)(2) (West 1993). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493220/ | WILLIAM A. FLETCHER, Circuit Judge:
This case turns on the preclusive effect of a prior state court judgment of conversion. Under 11 U.S.C. § 523(a)(6), a debt for “willful and malicious injury by the debtor to another entity or to the property of another entity” is not dischargeable in bankruptcy. The specific question in this case is whether a civil judgment in California court for conversion under California law necessarily includes a finding that the defendant caused “willful and malicious injury” within the meaning of § 523(a)(6).
Plaintiff-Appellee Lloyd Ikerd (“Ikerd”) filed an adversary proceeding in bankruptcy court seeking to have Defendant-Appellant Ronda Peklar’s (“Peklar”) debt arising out of a state court civil judgment for conversion declared non-disehargeable under § 523(a)(6). The bankruptcy court held the debt dischargeable, and the district court reversed based on collateral estoppel. We now reverse the district court.
I
In 1993, Peklar entered into a lease to rent commercial space in Long Beach, California, from Ikerd. The premises were to be used for a retail beauty and cosmetics salon called “Rachael,” in which Peklar and Todd Winnick (“Winnick”) were general partners. Peklar was a down-line *1037member of Ikerd’s multi-level sales organization for a line of cosmetics, and she planned to sell Ikerd’s cosmetics line at Rachael. Ikerd had stored furniture in the leased premises, and he allowed Peklar and Winnick to use that furniture in Rachael. In January 1994, shortly after the lease was signed, Rachael opened for business.
Sometime in early 1994, the Bank of America foreclosed on the building in which Rachael’s leased space was located because Ikerd was in default on a trust deed. The bank obtained a temporary restraining order against Ikerd, prohibiting him from entering the building. In July 1994, the bank served Peklar with a three-day notice to pay rent or quit, and a thirty-day notice to quit. On advice of counsel, Peklar and Winnick removed all the furniture from Rachael and put it into storage, first in a garage and then in a commercial storage space.
Ikerd successfully sued Peklar and Win-nick for conversion of the furniture in Los Angeles County Superior Court. After Peklar filed a Chapter 7 bankruptcy petition, Ikerd initiated an adversary proceeding in the bankruptcy court, seeking to have Peklar’s debt for conversion held non-dischargeable under 11 U.S.C. § 523(a)(6) based on collateral estoppel resulting from the Superior Court judgment. The bankruptcy court rejected the collateral estoppel argument and, after taking evidence, concluded that Peklar’s debt arising out of the conversion judgment was dischargeable. On appeal, the district court reversed and remanded based on collateral estoppel, holding that Peklar’s debt was not dischargeable. Peklar now appeals the decision of the district court.
II
“ ‘Because this court is in as good a position as the district court to review the findings of the bankruptcy court, it independently reviews the bankruptcy court’s decision.’ ” United Student Aid Funds v. Pena (In re Pena), 155 F.3d 1108, 1110 (9th Cir.1998) (quoting Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986)). Whether a claim is dischargea-ble presents mixed issues of law and fact, which we review de novo. Murray v. Bammer (In re Bammer), 131 F.3d 788, 791-92 (9th Cir.1997) (en banc). We review pure issues of fact for clear error. Diamond v. City of Taft, 215 F.3d 1052, 1055 (9th Cir.2000), cert. denied, 531 U.S. 1072, 121 S.Ct. 763, 148 L.Ed.2d 665 (2001).
Ill
Conversion is defined under California state law as “the wrongful exercise of dominion over the personal property of another.” Taylor v. Forte Hotels Int’l, 235 Cal.App.3d 1119, 1124, 1 Cal.Rptr.2d 189 (1991). “The act must be knowingly or intentionally done, but a wrongful intent is not necessary.” Id. (citing Poggi v. Scott, 167 Cal. 372, 375, 139 P. 815 (1914); 5 Witkin Summary of Cal. Law (9th ed. 1988) Torts § 624, pp. 717-18). Under California law, “a conversion is not per se always a willful and malicious injury to the property of another.” Larsen v. Beekmann, 276 Cal.App.2d 185, 189, 80 Cal. Rptr. 654 (1969).
In holding Peklar’s debt non-dis-chargeable based on collateral estoppel, the district court relied on our decision in Impulsora Del Territorio Sur, S.A v. Cecchini (In re Cecchini), 780 F.2d 1440, 1443 (9th Cir.1986), in which we stated, “When a wrongful act such as conversion, done intentionally, necessarily produces harm and is without just cause or excuse, it is ‘willful and malicious’ even absent proof of a specific intent to injure.” See also Transamerica Commercial Finance Corp. v. Littleton (In re Littleton), 942 F.2d 551, 554 (9th Cir.1991) (quoting and construing *1038Cecchini). However, we believe that the reach of Cecchini was necessarily limited by the Supreme Court’s decision in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). The question in Geiger was whether a debt from a medical malpractice judgment attributable to negligent or reckless conduct was dis-chargeable under § 523(a)(6). The Court stated that “[t]he word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Id. at 61, 118 S.Ct. 974. “[N]ot every tort judgment for conversion is exempt from discharge. Negligent or reckless acts ... do not suffice to establish that a resulting injury is ‘willful and malicious.’ [Djebts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Id. at 64, 118 S.Ct. 974 (internal citation omitted). See Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1207 (9th Cir.), cert. denied,U.S.-, 121 S.Ct. 2552, 150 L.Ed.2d 718 (2001) (relying on Geiger, stating that “it must be shown not only that the debtor acted willfully, but also that the debtor inflicted the injury willfully and maliciously rather than recklessly or negligently” (emphasis in original); see also Spokane Ry. Credit Union v. Endicott (In re Endicott), 254 B.R. 471, 475 (Bankr.D.Idaho 2000) (construing Geiger to hold that in order to except a debt from discharge under § 523(a)(6), “a debtor [must have] commit[ted] more than a reckless or negligent act”); Branch Banking and Trust Co. v. Powers (In re Powers), 227 B.R. 73, 75 (Bankr.E.D.Va.1998) (holding that after Geiger, the exception to dischargeability under § 523(a)(6) is “limited to intentional torts”); Avco Fin. Servs. v. Kidd (In re Kidd), 219 B.R. 278, 283-84) (Bankr.D.Mont.1998) (“In [Geiger), the Supreme Court held that the § 523(a)(6) “willful and malicious injury’ exception to discharge is limited to intentional torts and does not encompass mere negligent or reckless acts.”).
Our holding in Del Bino v. Bailey (In re Bailey), 197 F.3d 997 (9th Cir.1999), is not to the contrary. In that case, defendant Bailey had been substituted for the plaintiff as counsel in a lawsuit. Bailey settled the suit but failed to inform the plaintiff of the settlement and to give him part of the settlement amount. Bailey was accused of conversion and settled with the plaintiff, agreeing to a payment schedule. After making some but not all of the payments, Bailey filed for bankruptcy. Id. at 999. In concluding that Bailey’s debt to the plaintiff was dischargeable, we stated that his “conduct did not constitute conversion and, therefore, that [the plaintiffs] claim for attorney fees did not fall within the meaning of 11 U.S.C. § 523(a)(6).” Id. at 1002. That statement means only that a failure to prove conversion is fatal to an argument that defendant’s conduct caused “willful and malicious injury.” It does not mean the converse-that proof of conversion necessarily establishes such injury.
After rejecting Ikerd’s collateral estoppel argument, the bankruptcy court took evidence. Peklar stated in her declaration in that court that she relied on the advice of her lawyer in removing Ikerd’s furniture from the leased premises:
[A]fter reviewing the lease, the default by Ikerd to [Bank of America] and [Bank of America’s] subsequent foreclosure, the notices of fire code violations served on Ikerd, and a temporary restraining order obtained by [Bank of America] against Ikerd prohibiting him from entering the premises, [her lawyer] advised Peklar and Winnick that he believed Ikerd had breached the lease and that they had legal right to remove all of the fixtures and personal property from the premises, even those items [that] Ikerd claimed an ownership interest in.
She further stated that Winnick contacted Ikerd to inform him of PeHar’s and Win-*1039nick’s intent to move his furniture, and of the name and telephone number of their lawyer. There is no dispute that, after moving the furniture, Peklar and Winnick kept it in a commercial storage space for almost four years. The bankruptcy court was justified in concluding, based on this evidence, that Peklar’s conversion of Ik-erd’s property was at worst negligent, and at best “innocent or technical,” conversion, and that the debt arising from the state court judgment was dischargeable under § 523(a)(6). See Eck v. Schuck (In re Schuck), 13 B.R. 461, 465 (Bankr.M.D.Pa.1980).
IV
A state court judgment is given the same preclusive effect by a federal court as it would be given by a court of the state in which the judgment was rendered. See 28 U.S.C. § 1738; Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). Under California preclusion law, collateral estoppel effect is given to a judgment that “actually and necessarily” decides the issue in question. People v. Howie, 41 Cal. App.4th 729, 736, 48 Cal.Rptr.2d 505 (1995). A judgment for conversion under California substantive law decides only that the defendant has engaged in the “wrongful exercise of dominion” over the personal property of the plaintiff. It does not necessarily decide that the defendant has caused “willful and malicious injury” within the meaning of § 523(a)(6). A judgment for conversion under California law therefore does not, without more, establish that a debt arising out of that judgment is non-dischargeable under § 523(a)(6). Peklar presented evidence in the bankruptcy court from which that court appropriately concluded that she did not cause “willful and malicious injury.” We therefore affirm the bankruptcy court’s holding that Peklar’s debt based on the judgment of conversion was dischargeable.
The judgment of the district court is REVERSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493221/ | ORDER RE SUMMARY JUDGMENT
PAUL J. KILBURG, Chief Judge.
This matter came before the undersigned on July 5, 2001 pursuant to assignment. Plaintiff Trustee Rene Hanrahan is represented by attorney Eric Lam. Defendant Triad Financial Corp. is represented by attorney Wesley Huisinga. The time for filing briefs has now passed and this matter is ready for resolution. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E).
STATEMENT OF FACT
Trustee’s complaint asserts Triad’s lien on Debtor’s vehicle was not properly perfected under the Iowa Code. She seeks a *626determination that the lien is void and unenforceable and requests avoidance of the lien under § 544. The parties filed cross-motions for summary judgment on the issue of the validity of Triad’s lien raised in Count II of Trustee’s complaint.
Pat McGrath Chevyland, an Iowa auto dealer, purchased a 1996 Nissan Quest from Onyx Acceptance Corp on February 4, 2000, receiving assignment of Illinois title. Onyx received it by repossession as lienholder from the Illinois owner, Joe Simmons. Onyx’s Affidavit of Repossession shows McGrath as purchaser.
Debtor purchased the auto and entered into a security agreement with McGrath on February 14, 2000. At that time, Debt- or signed the back of the vehicle’s Illinois title as purchaser as well as an Iowa Application for Certificate of Title and/or Registration for a Vehicle. This application states Triad Financial Corp. holds a first security interest. Trustee asserts ■ Triad’s lien is invalid because it was not noted on the certificate of title within 30 days of February 14, 2000.
McGrath applied for Iowa title in its own name on March 31, 2000. It received the certificate of title from the Linn County Treasurer on April 5, 2000 with no lien-holder noted. McGrath then applied for title in Debtor’s name, with Triad noted as lienholder. The final Iowa certificate of title, in Debtor’s name and with Triad’s lien noted, was issued April 25, 2000.
Triad asserts the lien was properly perfected on the new Iowa title in Debtor’s name even though more than 30 days had elapsed after Debtor purchased the vehicle and entered into the security agreement on February 14. The lien was noted on the title less than 30 days after the initial Iowa certificate of title was issued in McGrath’s name on April 5, 2000. Triad maintains the Linn County, Iowa Treasurer does not accept an assignment of the Illinois title in these circumstances because of Onyx’s repossession. Therefore, McGrath applied for Iowa title in its own name prior to title being transferred to Debtor’s name with Triad noted as lien-holder.
Triad submits an Affidavit of Sharon Gonzalez. She is a Motor Vehicle Deputy in the office of the Linn County Treasurer. Ms. Gonzalez states McGrath could not simply reassign title to Debtor, but instead had to obtain Iowa title in its own name first. This is apparently based on Iowa Code sec. 321.47 concerning ownership of vehicles acquired by operation of law through repossession.
Trustee moved to strike Ms. Gonzalez’ Affidavit. She asserts the Affidavit improperly and incorrectly interprets the law. The Court declines to strike the Affidavit. The Court likewise declines to accept it as a definitive statement of the law. Ms. Gonzalez is apparently merely setting out the procedure her office follows when repossession occurs. The Court will consider her Affidavit in that context.
CONCLUSIONS OF LAW
In In re Lemker, No. 97-00628S, slip op. at 6 (Bankr.N.D. Iowa June 18, 1997) (Edmonds, J.), this Court held that a bank’s security interest was void and unenforceable against the debtor where the bank failed to perfect its interest within the time allowed under Iowa law. Iowa Code sec. 321.50(6) states if a creditor fails to note a security interest on a vehicle certificate of title within 30 days, the security interest is void and unenforceable. Thus, a secured creditor has a limited time within which to perfect its lien on the vehicle. Lemker, No. 97-00628S, slip op. at 6. When a creditor fails to perfect its lien within this limited time, the lien is void. Id.
*627The parties dispute when the sec. 321.50(6) 30-day deadline expired in this case. That section states, in part:
For purposes of determining the commencement date of the thirty-day period provided by this subsection, it shall be presumed that the purported security interest holder received the certificate of title on the date of the creation of the holder’s purported security interest in the vehicle or the date of the issuance of the certificate of title, whichever is the latter.
Iowa Code § 321.50(6). Trustee asserts Triad’s lien is unenforceable because it failed to note the lien on the title within 30 days after Debtor signed the security agreement creating Triad’s purported security interest on February 14, 2000. Triad asserts the 30-day period began when the first Iowa certificate of title was issued on April 5, 2000. At the time Debt- or signed the security agreement, no Iowa certificate of title had been issued for the vehicle. The vehicle had an Illinois title.
The Iowa courts have not published any cases considering similar issues. In Lemker, No. 97-00628S, slip op. at 1, the lienholder noted its lien on the debtor’s vehicle title a week after the debtor filed the Chapter 7 petition, and more than 30 days after the security interest was created. The court allowed the trustee to avoid the lien under § 544, citing section 321.50(6). In this case, Triad’s lien was noted on the title months prior to the commencement of Debtor’s Chapter 7 case on September 28, 2000. Thus, at the time Debtor filed her Chapter 7 petition, Triad’s hen, which was noted on the title, was purportedly perfected but the lien’s enforceability is arguable based on the language of sec. 321.50(6).
Iowa Code section 321.48(2) sets out procedures for dealers who acquire a foreign registered vehicle for resale. It states the dealer shall apply for title within 15 days after the vehicle comes into Iowa. Alternatively, the statute states:
However, a dealer acquiring a vehicle registered in another state which permits Iowa dealers to reassign that state’s certificates of title shall not be required to obtain a new registration or a new certificate of title and upon transferring title or interest to another person shall execute an assignment upon the certificate of title for the vehicle to the person to whom the transfer is made and deliver the assigned certificate of title to the person.
Iowa Code § 321.48(2).
McGrath, an Iowa dealer, did not apply for title within 15 days after it acquired the vehicle from Onyx in Illinois on February 4, 2000. Although McGrath obtained Debtor’s signature on the back of the Illinois certificate of title, it did not transfer title to her under the alternative procedure set out in section 321.48(2), assignment of another state’s certificate of title. The Court notes that section 321.48(4) states: “Nothing in this section shall be construed to prohibit a dealer from obtaining a new certificate of title or new registration in the same manner as other purchasers.”
McGrath applied for title in its own name 46 days after Debtor’s purchase, following the procedure set out in section 321.47. This is the procedure Ms. Gonzalez states would be required by the Linn County Treasurer in these circumstances because of Onyx’ Illinois repossession of the vehicle.
Triad asserts McGrath retitled the vehicle in the only way acceptable under the Iowa Code and to the Linn County Treasurer. Because McGrath acquired the vehicle after repossession by Onyx in Illinois, it followed the procedures required under Iowa Code section 321.47 to receive an *628Iowa title. This section states that “[i]f ownership of a vehicle is transferred by operation of law ... when ... repossession is had upon default in performance of the terms of a security agreement”, the county treasurer may issue a certifícate of title upon presentation of satisfactory proof of ownership and right of possession to the vehicle. Iowa Code § 321.47. The Iowa Administrative Code r. 761-400.4(6) and r. 761-400.22 indicate that a foreclosure sale affidavit is the proper documentation of ownership and the right to possession under section 321.47 in the case of repossession of a vehicle. Triad postulates that it followed this procedure because it was the correct procedure in these circumstances and thus, the 30-day period of sec. 321.50(6) commences when it received the new Iowa title on April 5, 2000.
Trustee asserts Illinois permits Iowa dealers to reassign Illinois certificates of title upon resale under sec. 321.48(2). She cites 625 Ill. Comp. Stat 5/3-113 and 5/1— 115 as support for this assertion. Sec. 3-113 allows a dealer to transfer a vehicle by assignment of the title. Sec. 1-115 defines “dealer” broadly as “Every person engaged in the business of acquiring or disposing of vehicles or their essential parts and who has an established place of business for such purpose.” Trustee argues this indicates Illinois permits Iowa dealers to reassign Illinois titles because the definition of “dealer” is not limited to dealers within the state of Illinois. Trustee postulates that, as McGrath could have reassigned the Illinois title to Debtor on the date she entered into the security agreement, that is the date the 30-day deadline in section 321.50(6) commences.
The Court has extensively reviewed Iowa’s motor vehicle laws regarding titling of vehicles. It appears there are several different procedures generally applicable to dealers titling foreign vehicles in Iowa. McGrath chose the section 321.47 procedure because of Onyx’s repossession in Illinois. Apparently, this was the method that would be required by the Linn County Treasurer’s office in these circumstances.
The problem in this case is that McGrath waited 46 days after Debtor’s purchase of the vehicle to start the process of applying for an Iowa certificate of. title. This delay is improper under the Iowa Code. Under section 321.48, a dealer’s application for title of a foreign registered vehicle “shall be made within fifteen days after the vehicle comes within the border of the state.” Section 321.25 also sets out time limits for dealers to apply for registration and title. It states: “The dealer shall forward the application [for title] to the county treasurer or state office within fifteen days from the date of the delivery of the vehicle.” 1 Further, a buyer may operate a newly purchased vehicle with a temporary card bearing the words “registration applied for” for forty-five days. Iowa Code § 321.25. The Iowa Supreme Court has stated: “Section 321.25 does not suggest that sellers forward applications for registration and title to the county treasurer within fifteen days of purchase. It requires them to do so.” Tim O’Neill Chevrolet v. Forristall, 551 N.W.2d 611, 618 (Iowa 1996) (emphasis in original). The court found a dealer’s failure to comply with the fifteen-day requirement constituted negligence per se, supporting damages payable to the buyer of $20 per day for loss of use of the vehicle while the dealer delayed in applying for title. Id. The court noted the dealer took no action to apply for title until spurred by entreaties from the buyer and the secured creditor. Id.
*629With the foregoing background in mind, the Court returns to Iowa Code section 321.50(6) which controls the validity of security interests in vehicles. As previously noted, the certificate of title must be delivered to the county treasurer within 30 days for notation of a security interest in the vehicle. The thirty-day deadline for perfecting a security interest commences on the date of the creation of the security interest or the date of the issuance of the certificate of title, whichever is the latter.
McGrath failed to timely apply for an Iowa certificate of title, a delay which remains unexplained in the record. It may be, as in Forristall, that McGrath failed to take action until prodded by Debtor upon the expiration of the 45-day temporary tag. At all times McGrath was in control of the process. On February 14, 2000, Debtor signed a security agreement, the back of the Illinois title as purchaser, and an Iowa Application for title and registration. McGrath retained control over all these documents. It should have applied for the Iowa title within 15 days but failed to take any action for 46 days. The result is that Iowa title was not issued, or even applied for, for more than the 45 days allowed for a buyer to use temporary tags under section 321.25. This is in violation of Iowa law.
CONCLUSION
How to properly reconcile these conflicting provisions is the dilemma presented here. Initially, the Court notes that, in order to create consistent applications, the various provisions must be read together in a manner consistent with legislative intent. What is clear is that McGrath as dealer had 15 days from the time the vehicle came into Iowa (February 14, 2000 at the latest) within which to apply for title. Perfection of the security interest must be noted within thirty days thereafter. The legislative intent to create a 45-day window to accomplish these matters is apparent from the legislature’s allowance of a temporary registration card which expires in 45 days. The legislature intended that 45 days would be the outside window for accomplishing all matters necessary to transfer title and perfect any security interests.
The arguments made concerning various methodologies for transfer of title and perfection of liens are ultimately irrelevant to a determination of the appropriate result. At all times, McGrath retained control over the applicable documents and had the ability to take them to the Treasurer’s office for transfer and lien notation literally within hours. The reason for the delay from February 14 until March 31 in applying for title is unexplained. The reasons why McGrath elected to use the U.S. mails to further slow the process is also unexplained.
Triad, to succeed, must defend these delays even though McGrath was in violation of Iowa law. If Triad is to succeed, it must convince this Court that this violation is of no legal significance. This Court, however, concludes that the substantial delay is of consequence. The only logical way to reconcile these various provisions is to find that they allow a dealer 15 days within which to obtain a certificate of title and 30 days within which to note the lien, for a total of 45 days. This is consistent with other provisions of the Iowa Code. To hold otherwise would allow the dealer to delay acquisition of title indefinitely without penalty. This has not been the finding of the Iowa Supreme Court on similar issues. See Forristall, 551 N.W.2d at 618. To accept Triad’s interpretation would also allow McGrath to not only place itself in violation of law without consequence, but also allow it to put the buyer in violation of *630Iowa law through expiration of the temporary 45-day registration.
Finally, allowing no fixed date for acquisition of title would permit a dealer and financer to determine, between themselves, when they would note the Hen. There is nothing in the Iowa laws or legislative history which even remotely implies such a result. Triad’s lien was noted on the application for certifícate of title Debt- or signed on February 14. Triad is presumed to know the provision of the law affecting perfection of its lien. There is no showing in this record to indicate that Triad took any steps to accelerate transfer of title and protect its secured status.
As such, this Court concludes Triad’s security interest is void and unenforceable because it was not timely filed under the Iowa Code. Although this result may seem harsh, Triad and McGrath had control of the process and are responsible for protecting their own interests.
WHEREFORE, the lien of Triad Financial Corporation on Debtor’s 1996 Nissan Quest vehicle is void and unenforceable.
FURTHER, Trustee’s Motion for Summary Judgment (as to Count II) is GRANTED.
FURTHER, Triad’s Cross-Motion for Summary Judgment is DENIED.
FURTHER, Trustee’s Motion to Strike Affidavit filed June 26, 2001 is denied for the reasons set forth herein.
. This sentence was amended effective July 1, 2000, after the purchase in this case, by substituting the word "thirty” for "fifteen”. Iowa Code § 321.25(2001). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493222/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON TRUSTEE’S COMPLAINT FOR CONTRIBUTION AND OTHER RELIEF
ALBERT S. DABROWSKI, Bankruptcy Judge.
I. INTRODUCTION
The captioned adversary proceeding presents another chapter in the sordid history of the financial dealings of Attorneys Carrozzella and Richardson. These Findings of Fact and Conclusions of Law assume familiarity with a pattern of fraud perpetrated by Carrozzella upon scores of clients and other lay-persons over a period spanning two decades. See e.g., Daly v. Biafore (In re Carrozzella & Richardson), 237 B.R. 536 (Bankr.D.Conn.1999).1 The present proceeding, however, does not involve fraud, but rather seeks to untangle the business relationships among certain sophisticated co-adventurers in connection with an investment in a residential condominium unit located in Atlantic City, New Jersey (hereafter, the “Condo”).
Prior matters within this, and a related, adversary proceeding2 have resulted in judgments against Defendants Kowalski and Brandner. The present trial proceedings concern the Plaintiff-Trustee’s claims against Defendant Robert Testo (hereafter, “Testo”) only.
The Trustee’s amended Complaint consists of three separate claims against Tes-to. First, the Trustee alleges that Testo was a partner with Richardson in connection with ownership of the Condo, and is obligated by statute to Richardson’s bankruptcy estate due to his under-contribution, and Richardson’s corresponding over-contribution, to that partnership (hereafter, the “Partnership Contribution Claim”).3 Second and similarly, the Trustee asserts that as a co-obligor on the Mortgage Note, Testo is liable under common-law principles for contribution toward that debt (hereafter, the “Mortgage Contribution Claim”).4 Third, the Trustee claims that Testo was “unjustly enriched” vis-a-vis Richardson by virtue of Partnership tax losses unfairly received and utilized by him over a period of years (hereafter, the “Unjust Enrichment Claim”).5
As set forth in more detail hereafter, a monetary judgment shall enter in favor of the Plaintiff-Trustee on a theory of contribution among partners.
*665II. JURISDICTION
The United States District Court for the District of Connecticut has subject matter jurisdiction over the instant adversary proceeding by virtue of 28 U.S.C. § 1334(b); and this Court derives its authority to hear and determine this proceeding on reference from the District Court pursuant to 28 U.S.C. §§ 157(a), (b)(1). This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(F).
III. FINDINGS OF FACT
This proceeding is before the Court for decision after trial. The Court’s findings of fact are derived from the following sources: (i) the parties’ “Stipulation to Facts and the Admissibility of Documents as Full Exhibits”, (ii) the evidentiary record at trial, and (iii) the Court’s independent examination of the official record of the instant case and adversary proceeding.
1. On July 19, 1995 (hereafter, the “Petition Date”), an involuntary petition (hereafter, the “Petition”) was filed in this Court against the Debtor, Thomas J. Richardson (hereafter, “Richardson” or “Debt- or”), inter alia,6 seeking relief under Chapter 7 of the Bankruptcy Code. On August 21, 1995, an Order for Relief entered upon the Petition, and thereafter the Plaintiff, Michael J. Daly (heretofore and hereafter, the “Plaintiff’ or “Trustee”) was appointed as trustee of Richardson’s Chapter 7 bankruptcy estate.
2. The Trustee brings the claims of this adversary proceeding in his capacity of successor to the rights of the Debtor, Richardson.
3. At all times relevant to this proceeding, Defendant Robert Testo (hereafter, “Testo”) was a lawyer and retired Connecticut Superior Court judge.
4. Testo formed a relationship with Carrozzella as early as 1959, when both were serving as representatives in the Connecticut General Assembly. From that time they enjoyed a relationship which is best characterized as primarily social in nature. Testo’s relationship with Richardson was incidental to his relationship with Carrozzella. He was acquainted, but had extremely little contact, with Richardson over the years.
5. In 1985, Richardson, John A. Car-rozzella (hereafter, “Carrozzella”), and others (hereafter, “Partner(s)”), formed a partnership (hereafter, the “Partnership”) to purchase and hold the Condo. Testo was solicited by Carrozzella to join in that venture. Although Testo had little desire to become involved with the Partnership, he eventually did so, primarily as a favor to Carrozzella.
6. Specifically, Carrozzella asked Testo to “sign a mortgage deed and note with a couple of friends”, and assured him that the endeavor “wouldn’t cost [him] a dime”.
7. At a closing (hereafter, the “Closing”) in Atlantic City Testo executed a mortgage deed and note (hereafter, the “Mortgage Note”) in favor of the Connecticut National Bank in connection with the Partnership’s acquisition of the Condo.
8. Testo was a Partner of the Partnership; and from 1985 through 1991 was entitled to receive a 25% share of Partnership profits (hereafter, the “Profit Percentage”).
9. Richardson’s Profit Percentage was 14% from 1985 through 1990, 18% in 1991, and 30% from 1992 through Partnership dissolution.
10. Testo’s understanding was that Carrozzella had instigated the purchase of *666the Condo for his own purposes, and had sought out Partners only because the transaction lender — Connecticut National Bank — insisted upon having multiple obli-gors if the Condo was to be acquired without a down payment, as was Carrozzella’s intention.
11. Testo never considered his Partnership interest an investment, and he never had an expectation of financial gain from his involvement. He did, however, have some expectation of being able to use the Condo when in Atlantic City. In fact, Testo stayed overnight at the Condo on one or more occasions.
12. On at least two occasions after the Closing, Testo received letters from Car-rozzella which stated that certain amounts of money had been “laid out” on behalf of the Partnership by him and/or Richardson. Testo was concerned about the possible implication of these letters, and questioned Carrozzella about them. Carrozzella replied that the letters were simply a matter of record-keeping, and that Testo should not worry, “it’s not going to cost [you] a dime”.
13. All of Testo’s dealings with and concerning the Partnership were through Carrozzella; Testo had no relevant contact with Richardson concerning such matters.
14. Richardson did not ratify any of Carrozzella’s representations to Testo.
15. Nearly every year of the Partnership’s holding of the Condo, the income generated by it fell short of the expenses associated with it (hereafter, the “Operating Deficits”), creating losses for tax purposes.
16. The Operating Deficits were covered and satisfied by Richardson and Car-rozzella from the funds (hereafter, the “Coverage Funds”) of the law firm in which they both were partners (hereafter, the “Law Firm”).7 The Partnership credited the Coverage Funds as follows: 60% to Carrozzella and 40% to Richardson.
17. Throughout the period of the Partnership’s ownership of the Condo, Testo contributed $10,575.00 to the Partnership costs associated with such ownership.8
18. Through the initiative of his accountant, Testo was allocated a 25% share of the Partnership’s losses for tax years 1985 — 1991.9 Those losses (hereafter, the “Partnership Loss(es)”) were utilized by Testo only in tax years 1985 — 1989.10
IV. CONCLUSIONS OF LAW
The Trustee brings the Claims of this adversary proceeding under the authority of Bankruptcy Code Section 542(b), seek*667ing to collect upon claims allegedly possessed by Richardson prior to the filing of the Petition in this case.
A. Partnership Contribution Claim.
1. For the purposes of claims brought under the authority of Bankruptcy Code Section 542(b), a trustee “steps into the shoes” of his debtor, cum onere. See, e.g., Sender v. Simon, 84 F.3d 1299, 1305 (10th Cir.1996). Thus, in this proceeding the Trustee is bound and limited by any actions taken, and representations made, by Richardson in the pre-Petition period.
2. Although the record reveals that Carrozzella repeatedly assured Testo that his involvement with the Partnership “wouldn’t cost [him] a dime” (hereafter, “Carrozzella’s Assurances”), no similar statements were made by Richardson. At most, Carrozzella’s Assurances were binding on Carrozzella, and perhaps the Partnership, see C.G.S. § 34-47 (1995), but not upon Richardson.
3. There is no basis in the record to determine that Richardson ever ratified Carrozzella’s Assurances. The record is silent on this score; yet it was the Defendant’s burden to produce evidence of ratification.
4. Richardson did not.waive, and was not estopped from pursuing, a claim for a monetary contribution from Testo under Section 34-56(a) of the Connecticut General Statutes.
5. Under Connecticut General Statutes § 34-56 “[e]ach partner... must contribute toward the losses ... sustained by the partnership according to his share in the profits.”
6. To the extent Richardson covered more than his Profit Percentage of the Operating Deficits, he possessed a pre-Petition claim against Partners — including Testo — -who did not contribute toward the Operating Deficits in an amount corresponding to their Profit Percentage for any given year.
7. The spreadsheet titled, “Calculation of Proportionate Share”, appended to Robert J. Testo’s Post-Trial Brief (Doc. Í.D. No. 88), correctly analyzes, calculates, and presents the proportionate share of the Operating Deficits due from Testo for each year, 1985 — 1994. The total share due from Testo over the life of the Partnership was $89,992.50, which after crediting his $10,575.00 contribution, leaves a shortfall of $79,417.50.
8. Since Richardson was credited with coverage of 40% of the Operating Deficits, he is entitled to contribution from Testo in the amount of $31,767.00 ($79,417.50 x .40).
9. Testo has failed to establish that the funds which Richardson was credited with supplying to the Partnership were not funds in which he held an ownership interest. Although this Court has previously recognized that the Law Firm assets may have included funds impressed with an express trust in favor of individual fraud victims, see Daly v. Deptula, et al. (In re Carrozzella & Richardson), 255 B.R. 267 (Bankr.D.Conn.2000),11 Testo has presented no evidence from which the Court could determine that any of the- Coverage Funds were funds in which entities other than Carrozzella and Richardson held title. The only evidence received on the composition of the Coverage Funds was the testi*668mony of the Trustee’s expert, Mr. Finkel, who stated, inter alia, that at least some of the funds in the Law Firm “account” were professional fees earned by Richardson. See footnote 7, supra. The fact that Mr. Finkel acknowledged that the Law Firm Account also contained the funds of so-called “investors” does not in itself lead to a conclusion that Carrozzella and/or Richardson lacked title to any of those “investor” funds. In the absence of proof of trust fund status, such funds must be assumed to be the property of Carrozzella, Richardson and/or their Law Firm — much akin to loan proceeds in the hands of a borrower.
10. The Trustee is not barred by a statute of limitation from bringing a Partnership Contribution Claim under C.G.S. § 34-56.
11. The Trustee is not barred by laches from bringing a Partnership Contribution Claim under C.G.S. § 34-56.
12. The Trustee is entitled to Judgment on his Complaint’s Second Claim for Relief in the amount of $31,767.00.
B. Mortgage Contribution Claim.
Since payments under the Mortgage Note were a component part of the expenses which created the Operating Deficits, and because the Trustee’s Mortgage Contribution Claim is essentially pled in the alternative, it is unnecessary for the Court to rule on that Claim in light of its judgment on the Trustee’s Partnership Contribution Claim.
C. Unjust Enrichment Claim.
The Trustee’s Unjust Enrichment Claim is essentially pled in the alternative. As asserted in the Trustee’s Trial Brief.... (Doc. I.D. No. 83), Testo has been unjustly enriched only if he “is not required to contribute his share of the losses of the Partnership....” (emphasis supplied). Accordingly, it is unnecessary for the Court to rule on the Trustee’s Unjust Enrichment Claim since, through judgment on the Trustee’s Partnership Contribution Claim, Testo is required to contribute toward Partnership Losses.
V. CONCLUSION
For the foregoing reasons, a monetary judgment in the amount of $31,767.00 shall enter in favor of the Plaintiff on his Complaint’s Second Claim for Relief.
IT IS FURTHER ORDERED that each party shall bear its own costs.
. Beginning sometime in the late 1980's, Richardson participated in a criminal enterprise possessing many of the attributes of a "Ponzi” scheme — in which funds placed with an individual or other entity by investors/depositors are secretly and illicitly utilized to pay returns and repay principal to earlier depositors.
. The related proceeding is Adv. Pro. No. 96-3078 in the bankruptcy case of John A. Carrozzella, 267 B.R. 656 (Bankr.D.Conn.2001).
. The Partnership Contribution Claim is pled as the Second Claim for Relief in the Trustee’s Complaint.
. The Mortgage Contribution Claim was not part of the Trustee’s original Complaint. However, by Order dated September 24, 2001 (Doc. I.D. No. 94), this Court granted the Trustee's Motion to Amend Complaint to Conform to the Evidence Introduced at Trial Pursuant to Rule 15(b) of the Federal Rules of Civil Procedure (Doc. I.D. No. 71), adding the Mortgage Contribution Claim.
. The Unjust Enrichment Claim is pled as the Fifth Claim for Relief in the Trustee’s Complaint.
. A petition was also filed against Richardson’s law partner, John A. Carrozzella (hereafter, "Carrozzella”).
. The Plaintiffs expert witness, Richard Fink-el, CPA — a forensic accountant — described the financial structure of the Law Firm as “one big pot”, into which was deposited all manner of receipts by, and revenue of, the Law Firm. Thus at any given time the Law Firm account(s) contained, inter alia, (i) deposited funds of investors and depositors, see, e.g., Biafore, supra, and (ii) the general revenue of the legal practice of the Debtor.
. Testo credibly testified that he never made a contribution of money or other property to the Partnership. However, certain of the documents admitted at trial evidence that Tes-to was credited with a $10,575.00 contribution to the Partnership in its first year.
. At trial, this Court received as evidentiary exhibits Testo’s 1989 — 1995 tax returns. Tax returns for the years 1985 — 1988 were not offered by the Plaintiff.
. Although there is no direct evidence (i.e. tax returns or live testimony) of the fact that Testo utilized Partnership Losses in tax years 1985 — 1987, Mr. Finkel testified persuasively that one could reasonably infer such utilization from other known facts. Testo’s joint individual tax returns for tax years 1988 and 1989 directly evidence a utilization of Partnership Losses. The tax returns for tax years 1990 and 1991 do not evidence utilization but, rather, claim a loss carry-over to future years.
. On only one occasion in the related Car-rozzella and Richardson cases has this Court been presented with sufficient evidence to determine that certain funds were impressed with a trust. Even that determination was reversed by a Bankruptcy Appellate Panel. See Daly v. Radulesco (In re Carrozzella & Richardson), 237 B.R. 544 (Bankr.D.Conn.1999), rev’d 237 B.R. 544 (2d Cir. BAP 2000). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493223/ | OPINION
1
MARY F. WALRATH, Bankruptcy Judge.
Before the Court is the Defendants’ Motion to Dismiss the Amended Third Party Complaint filed by First Union National Bank (“First Union”). For the reasons set forth below, we deny the Motion to Dismiss.
I.FACTUAL AND PROCEDURAL BACKGROUND2
On February 18, 1999, Home Health Care of America (“HHCA”) and its affiliates, which includes HHCA Texas Health Services, L.P. (“the Plaintiff’), filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On January 19, 2000, the Plaintiff filed an adversary complaint against the Defendants seeking reimbursement for $667,955 that the Healthcare Financing Administration (“HCFA”) claims is owed in overpayments on a Medicare provider agreement which the Plaintiff had acquired from the Defendants.
The Defendants assert that they are entitled to offset or recoup against the amounts owed by them to the Plaintiff sums that are due to the Defendants by the Plaintiffs. In our June 29, 2000, Opinion, confirmed today, we denied the Defendants’ Motion for Partial Summary Judgment because we were unable to conclude that the acquisition by the Plaintiff of five companies owned by Mark O’Brien was a single integrated transaction.
The issue presented here by the Defendants’ Motion to Dismiss is whether the Third Party Complaint, which is predicated on a subordination agreement between the Defendants and First Union, must be dismissed because on the face of the subordination agreement it does not require subordination of setoff or recoupment rights.
II. JURISDICTION
This Court has jurisdiction pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (E), (K), and (O).
III. DISCUSSION
A. Standards for a Motion to Dismiss
Where a party has filed a motion to dismiss for failure to state a claim, the Court must accept the allegations of the complaint as true and draw all reasonable factual inferences in favor of the plaintiff. *689See, e.g., Weston v. Commonwealth of Pennsylvania, No. 99-1608, 2001 WL 539470 (3d Cir. May 22, 2001); Semerenko v. Cendant Corp., 223 F.3d 165, 180 (3d Cir.2000). We are required to determine whether First Union can prove any set of facts consistent with its allegations that would entitle it to relief. See, e.g., Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984). We therefore accept all of the allegations of the Amended Third Party Complaint as fact for the purpose of deciding this motion.
In its Amended Third Party Complaint, First Union incorporates paragraphs 9 to 51 of the Complaint filed by the Plaintiff against the Defendants. Those paragraphs contain the bases on which the Plaintiff asserts that the Defendants owe it $667,955. First Union further asserts in its Amended Third Party Complaint that any sums due to the Defendants, including for setoff or recoupment, are subordinated to the claims of the secured lenders pursuant to the terms of a Subordination Agreement between the Defendants and the secured lenders. The Subordination Agreement provides that:
(4) Moratorium on Remedies. Subordinated Creditor [the Defendants] shall not accelerate, demand, sue for, or commence any collection or enforcement action or proceeding, take, receive, accept or retain any payment or distribution of any character, whether in cash, securities or other property, in respect of the principal of, premium on, or interest on or any fees or other amounts in respect of, the Subordinated Debt or any collateral security therefor, until all Senior Debt shall have been paid in full with interest....
(5) Bankruptcy, Insolvency. In the event of the institution ... bankruptcy, ... or other similar proceeding relative to any borrower, or its property, ...
(a) all Senior Debt shall first be paid in full in cash before any payment or distribution of any character, whether in cash, securities or other property, shall be made in respect of any Subordinated Debt [except for the issuance of securities or debt which are subordinated to the senior debt under a plan of reorganization].
The Defendants assert that, by the terms of the Subordination Agreement, the subordination does not apply to setoff or re-coupment rights. Therefore, they assert that the Amended Third Party Complaint must be dismissed.
We disagree. The Subordination Agreement does not expressly except setoff or recoupment rights from the effect of the subordination. We are not prepared, in the context of a Motion to Dismiss in which we must take all pleaded facts and all reasonable inferences therefrom in favor of First Union, to hold that the Subordination Agreement cannot include setoff and recoupment rights in the absence of such an express exclusion.
IV. CONCLUSION
For the reasons set forth above, we deny the Defendants’ Motion to Dismiss.
An appropriate Order is attached.
ORDER
AND NOW, this 4th day of OCTOBER, 2001, upon consideration of the Defendants’ Motion to Dismiss the Amended Third Party Complaint and the Plaintiffs’ Memoranda of Law in Opposition thereto, and for the reasons set forth in the accompanying Opinion, it is hereby
ORDERED that the Defendants’ Motion to Dismiss is DENIED.
. This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Federal Rule of Bankruptcy Procedure 7052.
. We incorporate herein the background facts set forth in our June 29, 2000, Opinion, as well as the decision issued contemporaneously herewith on the Defendants' Motion for Reconsideration of the June 29 decision. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493224/ | MEMORANDUM-OPINION
JOAN LLOYD COOPER, Bankruptcy Judge.
This case consists of two separate lawsuits which involve the claim of Dan and Faith Miller (the “Millers”) for the total fire loss of their home covered under a homeowners’ policy issued by Pacific Indemnity Insurance Company (“Pacific”), one of the Chubb Group of Insurance Companies (“Chubb”), Pacific’s defenses to the claim, and Pacific’s claim for nondis-chargeability of sums advanced under the homeowners’ policy.
Mark Flener, 'the duly appointed and acting Trustee for the Millers’ bankruptcy estate, filed the action against Pacific for *788recovery of the policy proceeds, claiming that it wrongfully denied payment of the proof of loss submitted by the Millers. Pacific claims the Trustee does not have standing to raise these claims since Pacific rescinded the homeowner’s policy, leaving no property to vest in the Trustee, upon discovery that the application for insurance omitted material information, which if included would have resulted in a denial of the application for coverage by Pacific, and/or that the fire loss was the result of owner-arson.
This case has a rather circuitous procedural history which is not relevant to this Court’s opinion, other than to state that the first action was brought by Pacific to recover amounts advanced under the rescinded homeowners’ policy and for a declaration of such sums as a nondischargeable judgment on the basis of the Millers’ alleged fraud. Later, the Trustee sued Pacific and E.M. Ford & Company (“E.M.Ford”), the agent that took the Millers’ application for an automobile policy and the homeowners’ policy, Pacific proceeded as the Plaintiff.
The Court, having considered the pleadings, testimony of the witnesses and documents admitted into evidence relating to the Trustee’s claim for recovery under the homeowners’ insurance policy, Pacific’s defenses thereto and Pacific’s claim for non-dischargeability against the Millers, hereby makes the following Findings of Fact and Conclusions of Law as required by Fed.R.Bankr.P. 52.
I. FINDINGS OF FACT
The Millers are married and have two children, Whitney Miller and Trace Miller. In November 1994, the Millers purchased a home at 17 Stone Creek Park, Owens-boro, Kentucky. The Millers closed the purchase of the home on November 29, 1994, paying approximately $350,000.
The evidence shows that shortly before closing on the home, Mr. Miller contacted E.M. Ford for the purpose of obtaining homeowners’ insurance and automobile insurance. While Mr. Miller knew Steve Ford, a principal of E.M. Ford, for many years and they attended the same church, the Millers had never done business with E.M. Ford prior to this inquiry. Miller spoke with E.M. Ford agent Ann Lovern (“Lovern”) about coverage for the new home and after several telephone conversations regarding the coverage needed, Lovern asked Miller to fax her a copy of the declarations page on his current automobile insurance policy with Meridian. Upon receipt, Lovern filled out the insurance application for both the homeowners’ and automobile insurance based on the telephone discussions with Dan Miller.
It is undisputed that the homeowners’ application filled out by Lovern and submitted to Pacific contained inaccuracies about the Millers’ claims history and an earlier cancellation or nonrenewal. However, neither Mr. or Mrs. Miller ever signed the homeowners’ application and neither E.M. Ford or Pacific ever provided the Millers with a copy of the homeowners’ application or requested them to ratify its contents in writing.
The parties do have a number of disputes, including whether Mr. Miller misled or lied to Lovern on the telephone, whether the inaccuracies were material to Pacific’s decision to bind and issue the policy (two different events, the importance of which will become apparent), whether E.M. Ford acted as agent for the Millers or for Pacific for purposes of the binder and issuance of the policy, whether Mr. Miller ratified the information contained in the application and, finally, whether Mr. Miller caused or had caused the fire which consumed his home in the early morning hours on November 9,1995.
*789Pacific introduced troubling evidence that in the past the Millers had not properly disclosed their claims history to another local agency and had prior losses, which in and of themselves could lead a reasonable person to question that such a set of unfortunate events could occur to anyone, absent fraud. Cumulatively and by themselves, the Millers’ prior claims history seems incredible, yet each occurred and despite the circumstances of Mr. Miller accidentally setting fire to a prior home’s garage with a lawn mower, substantial vandalism to one home, which nearly destroyed the interior, several major thefts from automobile and automobile theft claims, Mr. and Mrs. Miller made appropriate police reports of the incidents, the incidents were investigated, no charges were ever filed against them relating to those events, and the various carriers paid their claims.
Further, Pacific introduced troubling evidence that Mr. Miller was an actor in a series of events that led to investors being bilked out of substantial sums of money, and that he was paid his promised commissions for his services when he had reason to know the innocent victims of the crime were not receiving contemporaneous distributions promised to them. Nevertheless, Mr. Miller was not charged with any crime while Frank Deutsche, the principal wrong-doer in the scheme, was charged, plead guilty to securities fraud, and has served or is still serving his sentence.
While these stated circumstances and events do not cover every cloud upon Mr. Miller, they are illustrative of the evidence introduced by Pacific to show that Mr. Miller lacks credibility and it is more probable than not that he would lie to E.M. Ford and Pacific about his prior claims history and later set fire to his home to make yet another incredible insurance claim and reap a windfall. The Court is cognizant of the evidence introduced at trial and was able to hear the respective witnesses and judge for itself, their credibility. In sum, the Court believes this case must be decided on the issues of owner-arson and agency. If the preponderance of the evidence shows that Mr. Miller caused or had caused the fire which destroyed his home at 17 Stone Creek Park, then under no circumstances should Pacific be required to pay the Millers for the loss, while conversely, if Mr. Miller had no part in the arson, then the Court must determine the agency question. If E.M. Ford was the agent for Mr. and Mrs. Miller at the time of the binder and at the time of the issuance of the policy, the Millers are bound by the inaccuracies in the application. If E.M. Ford was the agent for Pacific at the time of the binder and Mr. Miller did not lie or intentionally mislead Lovern, then Pacific is bound by its agent’s negligence in filling out and submitting the faulty application.
A. Owner-arson.
In this posture the Court first addresses the issue of owner-arson. In order to sustain its claim to rescission of the homeowners’ policy, Pacific was required to prove by a preponderance of the evidence that the Millers or someone on their behalf intentionally set the fire that destroyed their home. In the early morning hours of November 9, 1995, someone deliberately set fire to four homes in the Stone Creek Park subdivision, causing the total destruction of the Millers’ home. With the exception of the point of origin of the fire (and thus whether Mr. Miller caused it), there is little serious dispute about the morning’s events.
On the night before and early morning of the fire, all of the Miller family members were at home in bed asleep. Mr. Miller was the only member of the family not in his bed since he fell asleep on the *790family room couch watching a movie. The evidence of what happened next is quite voluminous but it can be succinctly summarized. Between 2:30 a.m. and 2:40 a.m., Mr. Miller’s dog awakened him with persistent barking at the kitchen door leading to the garage. After opening the wooden door, he saw billowing black smoke through the glass door. He shut the wooden door immediately, ran to the opposite side of this single story ranch to wake his wife, told her to wake their daughter, get the dog and get all of them out of the house while he went to get their son. Mr. Miller then ran back into the kitchen, towards the fire, down the basement stairs to awaken his son who was asleep in his room in the basement. Mr. Miller and his son exited the house by a downstairs door. During all of this, Mr. Miller apparently placed a call to 911 which did not take. Later he called 911 with his cell phone from out on his lawn. While the Mason-ville Fire Department responded quickly to the call, the first truck did not have fire fighting apparatus and it was nearly 15 minutes before a pumper truck arrived and they began their efforts. In the end, the home was completely destroyed. The other homes targeted that night received minor damage as the fires were easily extinguished before serious damage was done.
Pacific introduced evidence regarding the Millers’ motive, opportunity, and the incendiary device used to start the fire at their home. It should be noted that Pacific argues that the other fires were started to make the Millers’ fire seem a result of vandalism as opposed to owner-arson, yet it introduced no evidence of any elements of arson respecting those other fires other than the incendiary device used. There is no dispute that charcoal was the primary accelerant used at all four homes. The principal dispute concerns the place of origin of the fire that consumed the Millers’ home.
Pacific theorized that if the fire at the Millers’ residence started in the locked garage, under the exclusive control of the Millers, then they had the greatest opportunity to cause the fire. Pacific and the Trustee each placed substantial evidence into the record regarding the place of origin of the fire. Pacific used two experts to opine that the fire originated in the garage. The first was Carl Richards of the State Fire Marshall’s office, who testified that based upon the burn patterns on the automobiles, the fire started in the trunk of the Mercedes parked in the garage. This testimony conflicts with another official of the State Fire Marshall’s office, Carvon Hudson, and Mr. Richard’s own written Fire Investigative Report which states that the fire began either at the garage door or in the vehicles in the garage. (See Plaintiffs Exhibit 4). Pacific also introduced testimony from John Hoffman, Ph.D., who opined that the fire must have begun in the garage because of testimony by Mr. Miller regarding flame involvement of the van parked within one foot of the garage door, flames Miller observed coming out of the garage windows when he exited the home, and the rapid burn rate of the fire which resulted in the total destruction of the home within minutes of its ignition. Dr. Hoffman essentially equated the time of ignition with the discovery of the fire.
The Trustee has no theory as to who started the fire except Miller did not start it or cause it to be started and that when it started, it began outside the garage by placement of an incendiary device on one of the van tires and by placing a pile of charcoal against the garage door. The Trustee called Jack Flowers as its expert regarding the place of origin and he stated that the fire definitely started in two places, on the van tire and at the pile of charcoal against the garage. His theory is based upon burn patterns on the driveway *791where the van was located, the lack of definite burn patterns (spalling) on the floor of the garage, his understanding that the wind that night was blowing from the rear of the van towards the garage door, and that the attic space over the garage, which ran the entire length of the home, included vents or louvers.
The Court finds Mr. Flowers’ testimony to be most credible and persuasive. While Dr. Hoffman has extensive fire design and testing experience, Mr. Flowers has investigated thousands of arson fires in the Commonwealth of Kentucky for many years. He also provided what the Court deemed to be the most plausible explanation for the total destruction of the house. Mr. Flowers more than satisfactorily rebutted Pacific’s evidence that the fire began in the trunk of the Mercedes automobile in the garage and that the fire could not have reached the intensity necessary to cause total destruction of the home. If the fire began outside the garage, then the Millers did not have any greater opportunity than anyone else to start it.
To shore up the paucity of even circumstantial evidence supporting a finding that Mr. Miller caused or had caused the fire at his home, whether in the garage or outside, Pacific introduced testimony from a number of neighbors and the respective authorities responding to and investigating the fires. While Pacific points to evidence of odd behavior by Mr. Miller on the evening before and the morning of the fire, the evidence introduced at trial showed that on the morning of the fires, Dan Miller consented to a search of his home. About one week after the fire, he also submitted to a lengthy interview by the Kentucky State Police without counsel.
The Court has reviewed the extensive evidence and notes that little if nothing about that night in Stone Creek Park was normal. As if four distinct arson fires on the same sleepy, well-to-do-street in one night were not strange enough, Pacific introduced into evidence documents from the files of the Masonville Fire Department, the Kentucky State Police and the Daviess County Sheriffs Office, admitted as Pacific’s Exhibits 5, 6 and 7, which indicate far stranger incidents than Mr. Miller seeming upbeat the night his home was destroyed. While this list is by no means exhaustive those documents indicate the following: (1) at approximately 1:30 a.m. on that morning, one of Millers’ neighbors reported seeing a beige car, in the neighborhood, with two unidentified people inside smoking. Investigators later discovered empty cigarette packages in the area; (2) another neighbor saw an unidentified man walking in the neighborhood on the morning following the fire; (3) Gene Bowlds, a neighbor living on the same street but at some distance around a bend in the street, reported to the Masonville Fire Department that he was awakened that evening by a possible intruder in his home. Mr. Bowlds also place a 911 call at 2:49 a.m.; (4) Another neighbor, Donald Gipe, gave a statement to police that states, among other things, “A neighbor, Gene Bowlds, had been on the way to the Millers’ house, and had seen Gipe’s garage door on fire in the car’s rearview mirror, and thought it was a reflection of the Millers’ fire ...”
The Court finds it strange given the time lines of the various events described by numerous witnesses that a neighbor around the corner would be awakened by noises like an intruder, call 911 and then wind up in his car on his way to the Millers’ home. Perhaps it can be explained by the manifestations of the intensity of the fire at that point, yet the Court is convinced that during the early morning hours of November 9, 1995, a plethora of inexplicable events occurred in this otherwise peaceful neighborhood.
*792Further, Pacific never provided any testimony or evidence that Mr. Miller could have physically accomplished the task committed that night in that neighborhood, which by anyone’s estimation based upon the layout of the large yards and homes and the timing of the fires would have required an extraordinary logistical achievement and strenuous effort by any person. This Court finds that it is unlikely at best that Mr. Miller could have successfully undertaken the activities required that night to cause all of the fires. Again, Pacific made no showing of any other person working under Mr. Miller’s control or at his suggestion that could even give rise to this Court making this inference. It is significant that there are many unanswered questions and unexplained events of that evening, much of which does not even directly involve the Millers.
The Court takes special note that Mr. and Mrs. Miller’s wedding pictures and some other valuables were stored in a shed on the property that was not damaged by the fire. While this fact alone is enough to warrant suspicion, the Court found Mrs. Miller’s testimony, that the boxes in which those items were stored had been in the shed since they moved into the home, credible and persuasive. It is also significant that no one, including the Millers, was ever charged with a crime from the events of that night.
The Court was unpersuaded by Pacific’s evidence to the effect that the Millers’ financial condition was so bad that Mr. Miller would destroy his home. First, while the Millers did not have a great degree of liquidity at the time of the fire, Mr. Miller had maintained the family for a long period of time as his income sagged and Mrs. Miller was still earning more than enough money from teaching to feed the family. Second, Mr. Miller had little to gain from burning down his home and destroying his cars particularly because there was some evidence that the late model Mercedes was unencumbered. The Pacific homeowners’ policy was a repair or replace policy. The $300,000 in equity he had in the home would not go in his pocket under any circumstances. In so far as the contents, the Court finds it implausible that Mr. Miller would destroy his home and automobiles to get cash flow from the proceeds of the policy for the contents of the home, the unencumbered vehicle, and for living expenses. It is clear that at the time of the fire, Mr. Miller had reason to believe that the impediments to the sale of his home and use of his line of credit due to a wrongly lodged lien on his home were at least partly removed and that the settlement already agreed to would free the home up for sale, if necessary.
B. Agency.
At this point, the Court shall turn its attention to the agency issue. Pacific sought to have the homeowners’ policy rescinded based on material inaccuracies in the application. The Court must first determine under the facts whether Lovern was the agent of Pacific or the agent of the Millers and then if she was the agent for Pacific, who was responsible for the inaccuracies.
On this point Pacific introduced a copy of the homeowners’ policy and the Agency Agreement between Chubb, Pacific’s parent, and E.M. Ford. E.M. Ford had signed an Agency Agreement with Chubb, that was in effect at the time the homeowners’ application was received by Lovern and submitted to Pacific. The Agency Agreement set forth E.M. Ford’s authority as follows:
Applications.
You may receive applications for insurance risks you are licensed to solicit (as authorized in the addenda attached to this Agreement), and submit them to us *793for approval. You may bind insurance only as authorized by attached addenda, or by other authority delegated by us. This authority is subject to the laws and regulations and to instructions provided by us from time to time.
Pacific admits in its post-trial brief, as it must given the terms of the Agency Agreement, that E.M. Ford was its agent for solicitation and issuance of a binder of insurance. Further, a clear reading of the Agency Agreement indicates E.M. Ford was authorized to receive applications for risks they were licensed to solicit and submit to Chubb. Pacific, however, makes a distinction between agency for the purposes of the binder and agency for the purposes of issuance of the policy, both of which require completion of the application.
At trial, the evidence showed that on November 28,1994, Lovern faxed a note to Maureen Eggleton of Chubb stating, “We have coverage bound on Mr. Miller’s $350,000 home effective 11-28-94.” The homeowner’s application, however, was not actually sent to Pacific by Lovern until the next day, November 29, 1994, the date that Miller met with Lovern at the agency to sign the automobile insurance application. Lovern told Miller by telephone that coverage on the home had been bound on the afternoon of November 28, 1994. She also stated she had to submit the application to Chubb to get the rate, but that the insurance coverage was bound.
The Trustee argues that Pacific/Chubb did not rely on the information or omissions of information in the application since coverage was bound before Chubb’s underwriters could make a decision on coverage. Pacific introduced evidence that the information contained in or omitted from the application was material to its acceptance of the risk in issuing the policy. The Court accepts this testimony.
Finally, the Court turns to what occurred between Mr. Miller and Ms. Lo-vern. The parties agree that conversations between the two occurred primarily by telephone and that all information used to prepare the application was received over the phone and with the help of the declarations page of the Millers’ automobile policy. The essential dispute focuses on whether Lovern asked Mr. Miller» the questions contained in the homeowners’ policy that was tendered to Pacific/Chubb and then marked the answers correctly.
Lovern testified that she asked Miller for information relating to the automobile policy and that Miller told Lovern, that his wife had been involved in a no fault automobile accident. Lovern made notes of the discussion on the facsimile transmittal sheet of Miller’s declarations page from the Meridian policy. Lovern also told Miller she could get a better rate on the insurance if she submitted both applications together for a rate quote.
The homeowners’ application requested prior claims information for a five year period. The auto application asked for a prior claims history of only three years. The homeowners’ application included the following two questions:
Any Property or Liability Claims in the Past 5 Years?
Has Any Coverage Ever Been Cancelled or Non-Renewed?
The “no” box next to each question was checked. Both answers were incorrect. The answer to the first question was wrong for two reasons. Just beyond three (3) years prior to the date of the application, the Millers had submitted a claim and were paid a substantial sum by the prior carrier under their homeowners’ insurance for property damage to their home located on Secretariat Drive which had been caused by vandals. The Millers had also made a claim and were paid another sub*794stantial sum by a prior carrier in March of 1994 for theft from an auto owned by Dan Miller that occurred while the vehicle was parked at a hotel in Nashville, Tennessee.
Lovern, who did not appear at trial but testified by deposition, stated she had no specific recollection of having asked Miller whether he had claims in the past five years, but that her normal practice was to ask the questions that are on the application. She testified it was her “belief’ that she asked those questions.
The Court finds it significant that Ms. Lovern does not recall specifically asking each question on both applications. Miller testified that he did not tell Lovern about the vandalism to his home on Secretariat because it occurred prior to the three years she asked him about. He also testified he told Lovern about the Nashville break-in, but testified that Lovern stated “car claims don’t count.” There is no testimony or evidence that Lovern probed Miller any further about this claim. Lo-vern did not list it or provide that information on the application she submitted to Pacific.
The homeowners’ application also incorrectly states that the Millers had not had any insurance cancelled or nonrenewed. In fact, the Millers’ homeowners’ insurance had been nonrenewed because the property to be insured was vacant. Miller testified that Lovern did not ask him about cancellations or renewals.
Both Miller and Lovern’s testimony is consistent that Miller did not review the homeowners’ application or sign it. Further, at no point during the process, either upon the securing of the binder or the issuance of the policy of insurance, did Pacific require Miller’s review or signature on the homeowners’ insurance application. Miller did meet with Lovern at E.M. Ford on the day after Thanksgiving in 1994, which was the same day the Millers closed on the Stone Creek property. Lovern testified that she showed Miller the homeowners’ application, and told Miller he did not need to sign it. She then gave him the automobile insurance application which he reviewed and signed. This is consistent with Miller’s testimony. There was no testimony from Lovern that Miller read the homeowners’ application and Miller testified that he did not read it.
After the fire, the Millers submitted proofs of loss to Pacific in the amount of $680,634.05, plus an undetermined claim for loss of use. Pacific paid $21,725.00 for debris removal, $31,287.16 for personal property replacement and $19,850.00 to the Millers for living expenses. Pacific ultimately denied the unpaid claim of $607,771.89 contending the loss was caused by owner-arson excluding coverage under the homeowners’ policy. Vigilante Insurance Company, the company that had insured the automobiles, paid $89,272.21 under the automobile insurance policy. Pacific filed a Proof of Claim in the Millers’ bankruptcy, but Vigilante has not filed a Proof of Claim in this bankruptcy. Just prior to trial, Pacific moved to amend its Complaint to include recovery for sums paid by Vigilante on its automobile policy for the four (4) automobiles destroyed the night of the fire.
II. CONCLUSIONS OF LAW
A. Owner-Arson.
In order to justify its rescission of the homeowners’ policy on its defense of owner-arson, Pacific needed to prove by a preponderance of the evidence that the Millers or someone on their behalf brought about the destruction of their property by fire. Westchester Fire Ins. Co. of New York v. Bowen, 219 Ky. 41, 292 S.W. 504 (1927). In a civil trial, the proponent of an arson theory must show evidence of motive, opportunity and the use of an incendiary device. Arms v. State *795Farm, Fire and Casualty Co., 731 F.2d 1245, 1249 (6th Cir.1984). Kentucky courts have recognized that arson cases are typically difficult to prove and in civil cases, may therefore, be established by circumstantial evidence. Twin City Fire Ins. Co. v. Lonas, 255 Ky. 717, 75 S.W.2d 348, 350 (Ky.1934). The fact that circumstantial evidence may be used does not relieve Pacific from its burden of proof. Circumstantial evidence must do more than suggest liability as a matter of conjecture, surmise or speculation. City of Louisville v. LaFollette, 470 S.W.2d 599, 600 (Ky.1971).
Circumstantial evidence must go far enough to induce reasonable conviction that the facts sought to be proved are true and must tend to eliminate other rational theories. Id. “It is an inference of a fact from other facts proved, and the fact thus inferred and assented to by the mind is said to be presumed, that is, it is taken for granted until the contrary is proved.” Twin City Fire, 75 S.W.2d at 350, quoting Perry’s Adm’x v. Inter-Southern Life Ins. Co., 248 Ky. 491, 58 S.W.2d 906, 907 (1933).
The Court concludes based upon the evidence presented at trial that Pacific failed to carry its burden of proof on this issue. While the fire was started by use of an incendiary device and the Millers had the opportunity to set the fire, the Court finds that due to the origin of the fire at the van and the garage door, this opportunity was no greater than any other person in the area that night. Further, the preponderance of evidence rebutted the circumstantial evidence presented by Pacific, particularly regarding opportunity and motive, establishing that it was more likely than not that this was not a case of owner-arson.
The evidence established that on the evening of November 9, 1995, four fires were set in the Stone Creek Subdivision. Pacific argues that Dan Miller started the fire at his home because it alleges the fire started in his locked garage and he had the exclusive opportunity to cause a fire of that destruction. On this point, Pacific relies on Dr. John Hoffman’s testimony, a fire engineer, and Carl Richards, a fire investigator in the state fire marshal’s office, both of whom opined that the main fire began in the garage. Neither of these gentlemen are classic arson investigators, however. The evidence presented by the Millers through Jack Flowers, a career fire investigator and arson unit supervisor with well over 10,000 fire investigations, is more plausible as to how the fire began and the reason for its swift destruction of the home. In short, Pacific’s circumstantial evidence of opportunity was effectively rebutted with credible and persuasive evidence that tended to prove that Miller had no greater opportunity to start the fire than anyone else in the area that night.
The Court is also convinced that there were other unidentified people in the vicinity around the time of the fire and suspicious circumstances that override the suspicious background of the Millers. Neighbors had noted strangérs in the neighborhood on the early morning prior to the fire, on the morning following the fire and one neighbor was apparently awakened by an intruder in his home. (See Plaintiffs Exhibit 5). None of these leads appear to have been vigorously pursued by the investigating aúthorities and no conclusions to those suspicious events were evidenced in testimony or the Kentucky State Police file. This Court concludes that the preponderance of the evidence did not establish a motive on the part of the Millers to commit arson. It makes no sense from any perspective for the Millers to set fire to a house in which the entire family was asleep, risking serious injury or death. Pacific did not carry its burden of proof that the level of the Millers’ debt was so overwhelming as to *796overcome Mr. Miller’s sense of survival and that of his family. Further, the evidence of Mrs. Millers’ teaching income, the equity in the home, one unencumbered automobile, and settlement of the lawsuit regarding the wrongful lien on the home all mitigate against owner-arson. Finally, the Court notes that the homeowners’ policy was for repair or replacement of the structure and would not have resulted in a financial windfall for the Millers as Pacific argues. While the Millers received living expense money from Pacific after the fire, such funds would not have been necessary in the absence of the fire. The Millers would have received funds to replace personal items destroyed in the fire, but there is no indication that they would have not replaced those items. In other words, the windfall did not exist and there were numerous, reasonable, less drastic solutions available to the Millers’ debt problems than arson.
B. Agency.
Pacific also rescinded the homeowners’ policy on the basis of alleged material inaccuracies by Miller in the application process. In order to prevail on this argument, Pacific needed to establish that E.M. Ford acted as agent for the Millers or that Mr. Miller made material misstatements of fact when providing information to Lovern on the telephone. The Court first determines that E.M. Ford was the agent for Pacific/Chubb in the application, binder, and policy issuance process.
In determining whether a party is an agent for an insurer, it is necessary to consider the facts and circumstances of each case. No one factor is determinative of the agency issue. 3 Lee R. Russ, et al, Couch on Insurance 3D § 44.46 (1997). All parties agree that E.M. Ford and its agents’ authority was governed by the Agency Agreement. With respect to applications, the Agreement provides:
You may receive applications for insurance risks you are licensed to solicit (as authorized in the addenda attached to this Agreement), and submit them to us for approval. You may bind insurance only as authorized by attached addenda, or by other authority delegated by us....
The Court notes that neither party submitted the “attached addenda” referenced on the authority to bind so the Court will interpret the document on its face. Under the Agency Agreement, Lovern had full authority to solicit, receive the application, and bind insurance. This is precisely what she did in this case. In fact, Lovern notified Pacific on November 28th, the day before Miller met her at the E.M. Ford Agency to sign the automobile insurance application, that coverage was bound. Lo-vern stated in her fax to Maureen Eggle-ton of Chubb, “We have coverage bound on Mr. Miller’s $350,000 home effective 11-28-94.” Pacific never challenged Lovern’s 'authority to bind.
Kentucky courts have placed great weight on the fact that an agent has the authority to bind in determining the capacity of an agent. In Cincinnati Insurance Co. v. Clary, 435 S.W.2d 88 (Ky.1968), the court held the homeowners’ insurance company liable under the provisions of a fire insurance policy binder. The company contended that it was not liable under the policy because the agent had not notified the company that the coverage had been placed with it. The court determined first that the insurance broker was a general agent for the company based on the written Agency Agreement between the agency and the company which provided the agent with authority to receive and accept applications and issue binders without pri- or consideration and approval of the company. The court in Clary placed great emphasis on the fact that the agent had the authority to accept the application and *797bind insurance without prior approval of the company. Similarly, in this case, Lo-vern did not need prior approval of Pacific to bind coverage for the Millers.
Pacific states that E.M. Ford only had the authority to receive applications. On this point Pacific states in its brief, “the authority to bind was also subject to the subsequent approval of Chubb.” (Brief of Pacific, p. 12). Actually, the Agency Agreement provides it is the application that is subject to approval. The authority to bind is not so limited by the Agency Agreement. In fact, it states that the authority to bind is as “authorized by attached addenda, or by other authority delegated by us.” It is the authority to bind along with the fact that Pacific did not require prior review of the application by the insured, the insured’s signature or any subsequent affirmation of the contents of the application or even review of same that leads the Court to conclude, as in Clary, that Lovern was Pacific’s agent and not Miller’s agent during the application process.
While a finding of agency for the insurance binder process may not require a finding of agency for the policy issuance process, a change of agency status, ie., from E.M. Ford as agent for Pacific to agent for the Millers, requires some subsequent event, such as Pacific’s requirement that the Millers provide it written ratification of the application, or special pre-exist-ing factual conditions or circumstances, such as a long-standing agency relationship between the Millers and E.M. Ford. No such circumstance exists in this case.
KRS 304.9-020 provides further support for the Court’s finding on agency. The statute states:
An “agent” is an individual, firm, partnership, limited partnership, corporation, or limited liability company appointed by an insurer to solicit applications for insurance or annuity contracts or to negotiate insurance or annuity contracts on its behalf, and if authorized to do so by the insurer, to effectuate and countersign insurance contracts.
The Agency Agreement authorized Lovern to solicit applications and bind insurance. Kentucky provides for the liability of insurers for the acts of its agents as follows:
Any insurance company shall be liable for the acts of its agents when the agents are acting in their capacity as representatives of the insurance company and are acting within the scope of their authority.
KRS 304.9-9-035. Clearly, filling out Miller’s application for submission to Pacific was within the scope of Lovern’s authority, a fact never questioned by Pacific.
Pacific relies on J. Inmon Insurance Agency, Inc. v. Kentucky Farm Bureau Mutual Ins. Co., 549 S.W.2d 516 (Ky.App.1977), in support of its claim that Lovern was a broker, not an agent and should, therefore, be considered a broker for the insured and not the insurer. Inmon, however, clearly states that the general rule that brokers are the agents of the insured applies “in the absence of statutory or some special indicia of authority ...” Id. at 518. The authority to solicit applications and to bind Pacific to coverage on an unsigned and unreviewed application, make Lovern the agent of Pacific, rather than the Millers. This finding is consistent with Kentucky judicial opinions that place the burden for errors such as the ones in this case on the company whose agent took the application. See Motorists Mut. Ins. Co. v. Richmond, 676 S.W.2d 478, 481 (Ky.App.1984).
Pacific’s attempts to disclaim liability for Lovern’s actions because the Agency Agreement provides that Ford is an independent contractor, does not change the Court’s findings. Limitations *798on an agent’s authority or status are not effective against innocent third parties who had no knowledge or notice thereof. See 3 Lee R. Russ, et al., Couch on Insurance 3D § 48:27 and 48:28 (1997) and Kentucky Macaroni Co. v. London & Provincial Marine & General Ins. Co., 83 F.2d 126, 128 (6th Cir.1936). There is nothing in the policy or the application, even if Miller had reviewed it, that would have alerted him to this limitation on Lovern’s capacity.
At one time the general rule in Kentucky was that as between the applicant and the insurance company it was the applicant’s responsibility to see that the application was correctly filled out. See Paxton v. Lincoln Income Life Ins. Co., 433 S.W.2d 636, 638 (Ky.1968). Subsequent to Paxton, Kentucky’s highest court stated that it would no longer place the full responsibility on the applicant to see that the application was correctly filled out, “except where the applicant, or his agent, inserts the answers on the application form signed by or for him.” Pennsylvania Life Ins. Co. v. McReynolds, 440 S.W.2d 275, 277 (Ky.1969). The application at issue was not filled out by the applicant or his agent, nor was it signed by or for him.
Pacific’s reliance on State Farm Mutual Automobile Ins. Co. v. Crouch, 706 S.W.2d 203 (Ky.App.1986), is also misplaced. In that case, coverage under a binder was denied where the insured made misrepresentations in the application. The court held the insured was responsible for the inaccuracies where she had signed the application and had supplied inaccurate information on the insured’s driving record. Here, Miller did not sign or have an opportunity to review the application before coverage was bound. Further, the inaccuracies were not a result of the insured’s affirmative misstatements.
The Court now turns to whether Miller made material inaccuracies of fact to Lo-vern upon which Pacific relied. If Miller made such material inaccuracies to Pacific’s agent, then Pacific’s defense that the homeowners’ policy was rescinded should be sustained. The Court finds, however, that the evidence presented at trial established that the inaccuracies in the application resulted from the manner in which Lovern gathered for the application, filled out the form, and submitted it to Chubb.
Lovern’s testimony was basic and nonspecific as to the questions she asked Miller in the application process. Her deposition testimony established that she did not have a specific recollection of asking Miller each question, but only that it was her customary practice to do so. The Court also finds it significant that Lovern asked Miller for information on the automobile insurance application at the same time as the homeowner’s application. The automobile application only asked for a claims history of three years as opposed to five years.
If Miller acted in bad faith, errors in the passage of information should be construed against him since an applicant’s good faith is an issue that should be reviewed. Osborne v. American Select Risk Ins. Co., 414 F.2d 118, 121 (6th Cir.1969). Under the facts and evidence presented, the Court concludes that Pacific failed to establish that Dan Miller acted in bad faith during the application process. He informed Lovern of the Meridian claim, but Lovern decided not to pursue the matter further and told him simply that “car claims don’t count.” Without being required to review and sign the application, the Court cannot hold Miller responsible for inaccuracies contained therein. Had Pacific had in place a procedure assuring that a potential insured reviewed and authenticated the accuracy of the application, as was required by Vigilante, the result would have likely been different.
Based on the testimony of both Lovern and Miller, the Court concludes that Miller *799did not provide Lovern with false information, rather that Lovern either asked only for a three year claims history or neglected to ask the question at all and answered it herself incorrectly. The quality of Lo-vern’s testimony also leads the Court to conclude as Miller testified that Lovern did not ask him for information on cancellations or nonrenewals. The Court was in a position to evaluate Mr. Miller’s credibility in person over several hours of testimony and cross-examination. The Court found his demeanor and the substance of his testimony credible. The Court did not have a similar opportunity with respect to Lovern, yet each party was satisfied with using her deposition as dispositive on the substance of her knowledge.
Since Lovern was acting as Pacific’s agent during the application process, her acts are attributable to Pacific and it cannot rescind and thus void the policy.
Pacific makes much of statements made by the Millers’ counsel in closing arguments that Miller “didn’t come in to review the application until the next day, November 29th.” (Tr. at 199). Pacific contends that this statement constitutes an admission that Miller reviewed the application before it was submitted to Pacific.. Miller’s testimony on this point was unequivocal that he did not review the application. He testified as follows:
I went into the office, and Ms. Lovern had a stack of papers in a folder and opened it up, looked at the first one and said, ‘It is the homeowners’. You don’t need to sign that. ‘Put it over here.’ She said, ‘Here’s the automobile policy. Sign it right there.’ We did that.
(Tr. at 191).
While an admission of counsel during trial is binding on the client, any such “admission” when taken in context, must be clear, deliberate and unambiguous. MacDonald v. General Motors Corp., 110 F.3d 337, 340 (6th Cir.1997). The Court does not construe the Millers counsels statement as a clear, deliberate, unambiguous statement equaling such an admission. Millers’ counsel’s statement was made in an effort to emphasize the fact that coverage was bound before Mr. Miller met with Lovern at the E.M. Ford Agency and before she even sent the application to Pacific. Miller saw the application when he signed the auto application but he did not review it in the sense that he read each and every question and answer. It is important to note that Lovern’s testimony does not conflict with Mr. Miller’s testimony on this point. Thus, the Court rejects Pacific’s argument that Miller ratified the acts of Lovern.
Therefore, the Court finds in favor of the Trustee on his claim to coverage under the homeowners’ policy and disallows Pacific’s defense that the homeowners’ policy, was rescinded on the basis of owner-arson and/or material misrepresentations of fact in the insurance application. Pacific’s claim for nondischargeability is dismissed. The Court denies the motion to amend the complaint to include the claims of Vigilant, consistent with its rulings herein.
By separate Order, the Court will schedule a pretrial conference on the Trustee’s claim against Pacific for bad faith in failing to settle this claim.
III. CONCLUSION
For the above stated reasons, Judgment will be entered for the Trustee in the amount of $607,771.89 plus interest and against Pacific Indemnity Insurance Company on its claim to have the debt declared nondisehargeable. The Court has entered a judgment of this same date incorporating by reference the findings of this Memorandum-Opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493225/ | MEMORANDUM DECISION AND ORDER GRANTING TRUSTEE’S MOTION FOR SUMMARY JUDGMENT
PAUL G. HYMAN, Jr., Bankruptcy Judge.
THIS MATTER came before the Court on June 1, 2001, upon Trustee, Daniel Bakst’s (the “Trustee”) Motion for Summary Judgment against WRH Mortgage, Inc. (the “Defendant”). On July 3, 2001, the Defendant filed a Memorandum in Opposition to Plaintiffs Motion for Summary Judgment (the “Response”). On July 9, 2001, the Trustee filed a Reply to Defendant’s Memorandum in Opposition to Plaintiffs Motion for Summary Judgment (the “Reply”). On July 11, 2001, the Trustee and the Defendant filed a Joint Stipulation of Facts (the “Stipulation of Facts”).
The Court finds that because there are no material facts in dispute, summary judgment is appropriate. See Clemons v. Dougherty County, 684 F.2d 1365, 1368 (11th Cir.1982) (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970)). Having reviewed the Motion for Summary Judgment, the Response, the Reply, and the Stipulation of Facts, the Court hereby enters the following findings of fact and conclusions of law.
FINDINGS OF FACT
The Debtor herein, Jackie C. Johns, DMD, P.A. (the “Debtor”), filed a petition for relief under chapter 11 of the Bankruptcy Code on February 23, 1998. The case was later converted to a Chapter 7 Bankruptcy Case on November 3, 1998. Daniel Bakst, Trustee (the “Trustee”) is the duly appointed and qualified chapter 7 trustee for the Debtor’s bankruptcy estate.
On November 15, 1989, the Debtor purchased a piece of real property located in West Palm Beach, Florida (hereinafter the “Subject Real Property”). Subsequently, on December 4, 1996, the Defendant obtained a judgment against the Debtor in state court. In an attempt to place a lien on the Subject Real Property, a certified copy of the Defendant’s state court judgment was recorded in the land records for Palm Beach County on January 6, 1997. All parties agree that the certified copy of the judgment did not contain the Defendant’s address. On February 5, 1997, the Defendant filed a separate Affidavit of Lienholder, pursuant to Florida Statute § 55.10. The Affidavit of Lienholder did contain the Defendant’s address. In the instant case, the Defendant has filed a secured claim based on a perfected security interest in personal property, and a judgment lien ,on the Subject Real Property-
On March 7, 2001, the Trastee filed a Complaint to Determine Validity, Priority, and Amount of Interest in Property to Quiet Title and for Declaratory Relief pursuant to Bankruptcy Rules 7001(2), (7), and (9) (the “Complaint”), instituting the instant Adversary Proceeding. In the Complaint, the Trustee asserts that the Trustee has superior right, title and interest to the Subject Real Property over the Defendant, and that the Trustee is the owner of the property free and clear of any right, lien, title and interest of the Defendant.
The Motion for Summary Judgment seeks a determination that the Defendant does not have a secured interest as to a judgnent lien in the Subject Real Property. In his Motion for Summary Judgment, the Trustee argues that the Defendant failed to comply with Florida Statute *903§ 55.10(1) which requires that when filing a judgment in the land records, the judgment either contain the lienholder’s address or be filed simultaneously with an affidavit that contains such address. Therefore, it is the Trustee’s position that the Defendant does not have a judgment lien on the Subject Real Property.
The Response argues that although the Defendant failed to meet the precise requirements of § 55.10(1), the Defendant has nonetheless met the legislatures purpose in enacting § 55.10. In complying with the “spirit” of § 55.10, the Defendant argues that it should have a judgment lien on the Subject Real Property.
CONCLUSIONS OF LAW
The Court has jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. §§ 1384(b), 157(b)(1), and 157(b)(2)(I). This is a core proceeding in accordance with 28 U.S.C. § 157(b)(2)(I).
Federal Rule of Civil Procedure 56(c), made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056(c), provides that “[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R. Crv. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Rice v. Branigar Org., Inc., 922 F.2d 788 (11th Cir.1991); Rollins v. TechSouth, Inc., 833 F.2d 1525 (11th Cir.1987); In re Pierre, 198 B.R. 389 (Bankr.S.D.Fla.1996). Rule 56 is based upon the principle that if the court is made aware of the absence of genuine issues of material fact, the court should, upon motion, promptly adjudicate the legal questions which remain and terminate the case, thus avoiding the delay and expense associated with a trial. See United States v. Feinstein, 717 F.Supp. 1552 (S.D.Fla.1989). In considering a motion for summary judgment, “the court’s responsibility is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party.” 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) (citing Anderson, 477 U.S. at 248, 106 S.Ct. 2505). “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 Corporation v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (citing Fed R. Crv. P. 1). “Summary judgment is appropriate when, after drawing all reasonable inference in favor of the party against whom summary judgment is sought, no reasonable trier of fact could find in favor of the non-moving party.” Murray v. National Broadcasting Co., 844 F.2d 988, 992 (2d Cir.1988).
The legal standard governing the entry of summary judgment has been articulated by the United States Supreme Court in Celotex and Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In Celotex and Anderson, the Supreme Court focused on the question of what constitutes a genuine issue of material fact within the meaning of Rule 56. In Celotex, the Court held that the moving party may satisfy the burden imposed by Rule 56 in two ways: the moving party may submit affidavit evidence that negates an essential element of the non-moving party’s claim and/or the *904moving party may demonstrate that the non-moving party’s evidence is insufficient to establish an essential element of the non-moving party’s claim. See Celotex, 477 U.S. at 328, 106 S.Ct. 2548.
In Anderson, the Court stated that the standard for summary judgment mirrors the standard for a directed verdict under Federal Rule of Civil Procedure 50(a), which provides that the trial judge must direct a verdict if there can be but one reasonable conclusion as to the verdict. See Anderson, 477 U.S. at 250, 106 S.Ct. 2505. The Court explained that the inquiry under summary judgment and directed verdict are the same: “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Id. at 251-52, 106 S.Ct. 2505.
In order to defeat a motion for summary judgment under this standard, the non-moving party must do more than simply show that there is some doubt as to the facts of the case. See id. at 252, 106 S.Ct. 2505. Rule 56 must be construed not only with regard to the party moving for summary judgment but also with regard to the non-moving party and that party’s duty to demonstrate that the movant’s claims have no factual basis. See id. “The mere existence of a scintilla of evidence in support of the [non-moving party’s] position will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party].” Id. Thus, the non-moving party must establish the existence of a genuine issue of material fact and may not rest upon its pleadings or mere assertions of disputed fact to prevent a court’s entry of summary judgment. See First National Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968); Resolution Trust Corp. by the FDIC v. Clark, 741 F.Supp. 896 (S.D.Fla.1990); In re Pierre, 198 B.R. 389 (Bankr.S.D.Fla.1996).
I. The Defendant has Failed to Comply with the Statutory Requirements of Florida Statute § 55.10(1).
In the Motion for Summary Judgment, Trustee argues that the Defendant has failed to comply with Florida Statute § 55.10(1). As amended on July 1, 2001, § 55.10(1) states:
A judgment, order, or decree becomes a lien on real property in any county when a certified copy of it is recorded in the official records or judgment lien record of the county, whichever is maintained at the time of recordation, provided that the judgment, order, or decree contains the address of the person who has a lien as a result of such judgment, order, or decree or a separate affidavit is recorded simultaneously with the judgment, order, or decree stating the address of the person who has a lien as a result of such judgment, order, or decree. A judgment, order, or decree does not become a lien on real property unless the address of the person who has a lien as a result of such judgment, order, or decree is contained in the judgment, order, or decree or an affidavit with such address is simultaneously recorded with the judgment, order, or decree. If the certified copy was first recorded in a county in accordance with this subsection between July 1, 1987, and June 30, 1994, then the judgment, order, or decree shall be a lien in that county for an initial period of 7 years from the date of the recording. If the certified copy is first recorded in accordance with this subsection on or after July 1, 1994, then the judgment, order, or decree shall be a lien in that county for an initial period of 10 years from the date of the recording.
*905Fla. Stat. ch. 55.10(1) (2001) (emphasis added). The procedure for obtaining a lien under § 55.10 is remarkably simple. In order to attach a lien to real property, one must file a certified copy of a final judgment in the land records of the county where the real property is located. This final judgment must either contain the address of the person who has the lien, or be attached to an affidavit which contains this information.
As previously noted, the Defendant filed a certified copy of its final judgment in the land records for Palm Beach County on January 6, 1997. It is an uncontested fact that the Defendant failed to place the address of the Defendant on the final judgment. On February 5, 1997, the Defendant filed a separate Affidavit of Lien-holder in the land records. Although the Affidavit of Lienholder did contain the Defendant’s address, it is likewise an uncontested fact that the Affidavit of Lienholder was not filed simultaneously with the final judgment. It is therefore quite clear to this Court that the Defendant has failed to comply with the statutory requirements of § 55.10(1).
The Defendant first argues that the lien should attach because the Affidavit of Lienholder was filed less than a month after the certified copy of the judgment was recorded, resulting in a minimal delay. Attached as an exhibit to the Response, the Defendant includes a name search of the Official Records of Palm Beach County for the name “Jackie Johns.” The name search reveals that the recorded judgment and the Affidavit of Lienholder are separated by only one entry. The Defendant argues that in performing a title search, a title agent would inevitably be provided with notice of the Defendant’s lien. In essence, the Defendant is arguing that the Court should view its failure to comply with § 55.10 as “harmless error.” This argument is simply not persuasive.
The wording of § 55.10(1) is clear and concise. Under Florida law, “when the language of the statute is clear and unambiguous and conveys a clear and definite meaning, there is no occasion for resorting to the rules of statutory interpretation and construction; the statute must be given its plain and obvious meaning.” Hott Interiors, Inc. v. Fostock, 721 So.2d 1236, 1238 (Fla.4th DCA 1998) (quoting Modder v. American Nat’l Life Ins. Co. of Tex., 688 So.2d 330, 333 (Fla.1997)). This Court has stated in the past that “[b]ankruptcy judges have no more power than any others to ignore the plain language of a statute in order to reach a result more in keeping with their notions of equity.” In re Bertolami, 235 B.R. 493, 498 (Bankr.S.D.Fla.1999). Applying the plain meaning of § 55.10(1) the Court finds that the Defendant did not properly attach a lien to the Subject Real Property.
The Defendant next argues that although the final judgment did not contain the Defendant’s address, it did contain the Defendant’s attorney’s address. As such, the Defendant asks this Court to give effect to its lien filing. This argument too must fail. In Hott Interiors, Inc. v. Fostock, 721 So.2d 1236 (Fla.4th DCA 1998), the Florida Fourth District Court of Appeal interpreted Florida Statute § 55.10(1). The court held that § 55.10(1) requires that a final judgment contain the judgment holder’s address to become a lien on real estate. Id. at 1238. An alternative method to create a lien on real property is to record an affidavit in compliance with § 55.10(1). Id. As in the case sub judice, in Hott Interiors only the address of the judgment creditor’s attorney was included on the final judgment. Ruling that no lien on real estate had been created by such a judgment, the court stated that “[w]e cannot expand this clear statutory directive to say that the address of the judgment holder’s attorneys may be substituted for that of the judgment hold*906er.” Id. Section 55.10(1) unambiguously requires that the judgment holder’s address be contained in the judgment for it to become a lien on real property.
As the Fourth District Court of Appeal aptly stated, “[jjudgment liens on land are statutory liens and their existence depends upon the legal effect of the statute by which they are created.” Id. at 1239 (quoting Smith v. Venus Condominium Ass’n, Inc., 352 So.2d 1169, 1170-71 (Fla.1977)). Section 55.10(1) specifically requires either that a final judgment contain the judgment holder’s address, or that the final judgment is filed simultaneously with an affidavit containing the judgment holder’s address. Having failed to carry out either one of these procedures, this Court finds that as a matter of law the Defendant failed to attach a lien to the Subject Real Property.
Accordingly, the Court enters Summary Judgment in favor of the Trustee.
ORDER
In accordance with the foregoing analysis and being otherwise fully advised in the premises, the Court hereby ORDERS AND ADJUDGES as follows:
1. Summary Judgment is entered in favor of the Trustee and against the Defendant.
2. The Defendant does not have a secured interest as to a judgment lien in the Subject Real Property.
3.Pursuant to Federal Rule of Bankruptcy Procedure 9021, a separate Final Judgment incorporating these findings of fact and conclusions of law will be entered contemporaneously herewith.
FINAL JUDGMENT
THIS MATTER came before the Court on June 1, 2001, upon Trustee, Daniel Bakst’s (the “Trustee”) Motion for Summary Judgment against WRH Mortgage, Inc. (the “Defendant”). The Court finds that there are no material facts in dispute and that summary judgment is appropriate. Clemons v. Dougherty Co., 684 F.2d 1365, 1368 (11th Cir.1982) citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142. 157 (1970).
In accordance with Federal Rule of Bankruptcy Procedure 9021 and this Court’s Order Granting Trustee’s Motion for Summary Judgment entered contemporaneously herewith, it is hereby ORDERED AND ADJUDGED that:
1. Summary Judgment is entered in favor of the Trustee and against the Defendant.
2. The Defendant does not have a secured interest as to a judgment lien in the Subject Real Property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493227/ | MEMORANDUM OPINION
1
JOHN T. FLANNAGAN, Bankruptcy Judge.
This dispute calls for the court to decide whether under § 522(f) a hen is nonposses-*269sory and avoidable or whether it is posses-sory and nonavoidable. The court holds that the lien here is possessory and nonavoidable because § 349(b) leads to that conclusion and because the parties agreed that the lien’s possessory status would be preserved.
I. Background
The First Case.
In January 1998, debtor Randall Ray Beeman petitioned for Chapter 13 bankruptcy relief in the Wichita Division of this court.2 Before filing the petition, he had pledged his 1973 Chevrolet pickup and 1996 mobile box trailer (with air compressor) to Jack R. Klotz d/b/a Trailer and Equipment Sales3 to secure a debt. Consequently, when Beeman commenced the Chapter 13 case, Klotz possessed the pickup and trailer.4
To regain possession of this property, Beeman moved the court for turnover. Negotiations resulted in Klotz agreeing to redeliver the vehicles if Beeman would assure that Klotz’s status as a prepetition possessory hen holder would be preserved for later litigation, if necessary. Beeman agreed, and their accord was memorialized in the following order, which they presented to the court for approval:
THEREUPON the parties announce to the Court that they have reached an agreement with regard to the Motion for Turnover the essence of which is as follows:
2. As Mr. Klotz is claiming a posses-sory lien in and to the subject property, the turnover of the property to the Debtor pursuant to this Order shall in no way impair Klotz’s secured claim and any issues relating to perfection or the nature and/or extent of Klotz’s lien are hereby preserved by Klotz for determination at a future date and time in the event litigation of such issues become [sic] necessary .5
The Honorable John K. Pearson signed the order, which bore the approval signatures of Steven L. Speth, Beeman’s attorney; James M. Immel, Klotz’s attorney; and Royce E. Wallace, the standing Chapter 13 trustee.
However, Beeman’s plan failed confirmation, and on October 7, 1998, Judge Pearson dismissed the Chapter 13 case. At that time the parties had not litigated the validity of Klotz’s hen in the Chapter 13 case.
This case.
Approximately two weeks later, on October 22, 1998, Beeman commenced this Chapter 7 case. In his schedules, Beeman listed the 1973 Chevrolet pickup and the 1996 mobile box trailer (with air compressor) as exempt “tools of the trade.”
*270II. Discussion
The question now before the court arises from Beeman’s amended motion for summary judgment to avoid Klotz’s lien under § 522(f).6 The procedural trail leading to the motion for summary judgment is buried in a confusing series of duplicative pleadings and briefs. The details of that trail are unnecessary to an understanding of this decision, but they could be helpful to a reviewing court. Therefore, those details appear in the attached Appendix “A.”
Section 522(f).
Holding physical possession of the vehicles and claiming them exempt as tools of his trade, Beeman now relies on § 522(f) to avoid Klotz’s lien. Indeed, this statute would avoid the lien if (1) the lien impairs an exemption to which Beeman would have been entitled, and (2) the lien is nonposses-sory:
[T]he 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 — ...
(B) a nonpossessory, nonpurchase-money security interest in any...
(ii) implements, professional books, or tools, of the trade of the debtor 7
Section 349(b).
Beeman argues that § 349(b) establishes the nonpossessory prong of § 522(f). He claims § 349(b) invested him with possession of the pickup and trailer when Judge Pearson dismissed the Chapter 13 case. If Beeman were correct, Klotz’s lien would have been nonpossessory at the commencement of this Chapter 7 case and therefore avoidable under § 522(f).
To the contrary, however, upon dismissal of a case, § 349(b)(3) revests property of the estate in the person in whom it was vested before the case began:
(b) Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title'—
(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.
As the legislative history of the subsection confirms, its purpose was to put the parties back in the legal position they occupied before the case was filed:
The basic purpose of the subsection is to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.8
The 1983 Kansas bankruptcy case of In re Groves9 followed this reasoning. In that case, the Honorable James A. Pusa-teri held that a creditor’s security interest is a property right that § 349(b) revested in the creditor when the debtors’ Chapter *27113 case was dismissed before completion of a confirmed plan and discharge.10
Thus, rather than destroying Klotz’s property right to possession of the vehicles, § 349(b) revested him with that right when Judge Pearson dismissed the Chapter 13 case.
The Agreement.
Another reason for finding that Klotz holds an unavoidable possessory lien is the parties’ agreement.
When Beeman filed for Chapter 13 relief, he moved the court for turnover of the vehicles. He apparently felt they were necessary to the success of his Chapter 13 plan. Somehow Beeman convinced Klotz to turn over the vehicles voluntarily, perhaps by promising to repay Klotz’s secured claim liberally under the plan. But Klotz would only cooperate if an order proclaimed that the turnover would “... in no way impair [his] secured claim.”11 Beeman agreed and, according to customary bankruptcy practice and the requirements of Fed. R. Bankr. P. 9019, the parties memorialized the settlement in an order that Judge Pearson approved.12
Yet, approximately two weeks after Judge Pearson dismissed the Wichita Chapter 13 case, disregarding the agreement, Beeman traveled the approximately 200 miles from Wichita to Kansas City, hired a new lawyer, filed this Chapter 7 case, and claimed the collateral as exempt. When Klotz sought stay relief to foreclose his security interest, Beeman’s new attorney asserted Klotz’s lien was nonpossesso-ry and avoidable under § 522(f).
Would Klotz’s lien be possessory outside of bankruptcy? Probably so. The Kansas Court of Appeals has endorsed in the 1979 decision entitled Weatherhead v. Boettcher 13 the preservation of possessory lien rights by agreement:
A common-law lien or a statutory hen that is dependent on possession continues only so long as possession is voluntarily retained; it is extinguished when the lienor voluntarily parts therewith .... However, as between the parties a possessory lien is not necessarily waived or destroyed by parting with possession, if there is an intention to preserve the lien and the lienholder only conditionally parts with the property, as where by special agreement he allows the owner to take the property into his possession without prejudice to the lien.14
Weatherhead declares this proposition consistent with the Kansas statute it was considering, a statute perfecting an auto repairman’s possessory lien.15 Although speaking in dicta, the court states: “Upon the voluntary relinquishment of the car, the parties could have agreed that the defendant’s hen would remain in existence as between the parties.”16 However, in Weatherhead, the parties made no such agreement, although they did agree that *272the surrender of the vehicle was made pending a judicial determination. Thus, although Weatherhead does not decide the point, it suggests that possessory lienhold-ers who voluntarily surrender collateral to their debtors can retain their lien rights if the debtors agree that the liens will be preserved.
The same result should prevail in a bankruptcy case. As in this case, rehabilitating debtors may need to use pledged property to assure the success of their debt adjustment efforts. To foster this result, possessory lienholders must be assured that, notwithstanding voluntary turnover, agreements preserving their liens will be enforced.
Therefore, under the clear terms of the agreement between Klotz and Beeman, Klotz is hereby deemed in possession of the pickup and mobile box trailer (with air compressor) and his lien is declared unavoidable under § 522(f)(1)(B).
Since the court decides that the lien is not avoidable under § 522(f), it is unnecessary to address whether the vehicles are exemptible tools of Beeman’s trade.
IT IS THEREFORE ORDERED that debtor Randall Ray Beeman’s Amended Motion for Summary Judgment on Debt- or’s Application to Avoid Liens of Jack R. Klotz d/b/a/ Trailer and Equipment Sales be DENIED. The Bankruptcy Clerk is directed to schedule Klotz’s pending motion for stay relief to a status conference forthwith.
APPENDIX “A”
When Beeman filed his motion for turnover in this Chapter 7 case, Jack Klotz, who had initiated a state court action to foreclose his lien, responded with a motion for relief from the automatic stay. Bee-man’s response noted that more than 30 days had passed since the date first set for the § 341 meeting. He claimed this fact made his exemption unassailable under the 1992 United States Supreme Court decision of Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992) (Debtor’s Objection to Motion for Relief from Automatic Stay filed June 30, 1999, Doc. # 39). Beeman then filed a motion to avoid Klotz’s lien under § 522(f) on the theory that the lien is nonpossesso-ry and impairs his exemption (Debtor’s Application to Avoid Liens of Jack R. Klotz filed June 30, 1999, Doc. # 40). Klotz countered that his lien is possessory (Notice of Objection to Debtors [sic] Application to Avoid Liens filed July 21, 1999, Doc. # 49). Beeman responded with a memorandum stating that § 349(b)(2) re-vested him with possession of the vehicle and trailer when Judge Pearson dismissed the Chapter 13 case (Debtor’s Memorandum in Support of Application to Avoid Liens of Jack R. Klotz filed August 23, 1999, Doc. # 55). The parties agreed to continue the motion for stay relief pending resolution of the lien avoidance dispute (Order on Motion for Relief from Automatic Stay filed September 2,1999, Doc. # 58). And Klotz replied by brief to the issues raised in Beeman’s lien avoidance motion (Brief of Creditor filed November 4, 1999, Doc. # 66). Beeman then moved for summary judgment on his lien avoidance motion (Debtor’s Motion for Summary Judgment filed November 5, 1999, Doc. # 68). Both parties approved and filed a final pretrial order on June 1, 2000 (Doc. # 77). Although Beeman’s original motion for summary judgment failed to comply with D. Kan. Rule 56.1, which sets out the requirements for filing a motion for summary judgment, the court granted him leave to amend the motion. He complied by filing an amended motion for summary judgment on June 2, 2000 (Doc. # 78), and on June 21, 2000, Klotz responded to the *273motion, thereby ending the duplicative trail of pleadings and briefs (Doc. #81).
. The debtor, Randall Ray Beeman, appears by his attorney, John J. Cruciani of Lentz & Clark, P.A., Overland Park, Kansas. The creditor, Jack Klotz, appears by his attorney, *269Bret A. Heim of Immel, Immel & Works, P.A., Iola, Kansas.
. Case No. 98-10171-13 Med January 15, 1998.
. Certain pleadings refer to "Jack Klotz d/b/a Trailer and Equipment Sales, Inc.” Because an individual cannot do business as an incorporated entity, the court assumes this designation is in error. Therefore, in this opinion Jack Klotz d/b/a Trailer and Equipment Sales will be referred to as Jack Klotz or simply Klotz.
. Final Pre-Trial Conference Order on Debt- or’s Application to Avoid Liens of Jack R. Klotz d/b/a Trailer and Equipment Sales, Inc. [sic], filed June 1, 2000 (Doc. # 77), at 2, Stipulation B.
. Order on Motion for Turnover filed February 5, 1998, in Case No. 98-10171-13 at 1-2 (emphasis added), attached as Exhibit A to Final Pre-Trial Conference Order filed June 1, 2000 (Doc. # 77).
. Debtor’s Amended Motion for Summary Judgment on Debtor’s Application to Avoid Liens of Jack R. Klotz d/b/a Trailer and Equipment Sales, Inc. [sic], filed June 2, 2000 (Doc. # 78).
. 11 U.S.C. § 522(£)(l)(B)(ii).
. House and Senate Committee Reports, H.R.Rep. No. 95-595, at 338 (1977), reprinted in 1978 U.S.C.C.A.N. 510-511; S.Rep. No. 95-989 at 48-49 (1978), reprinted in 1978 U.S.C.C.A.N. 50-5, Pub.L. 95-598, Nov. 6, 1978.
. In re Groves, 27 B.R. 866 (Bankr.D.Kan. 1983).
. Id. at 868.
. Order on Motion for Turnover filed February 5, 1998, in Case No. 98-10171-13 at 1, attached as Exhibit A to Final Pre-Trial Conference Order filed June 1, 2000 (Doc. # 77).
. For a discussion of various issues involving bankruptcy court approval of settlements and compromises, see Reynaldo Anaya Valencia, The Sanctity of Settlements and the Significance of Court Approval: Discerning Clarity from Bankruptcy Rule 9019, 78 Or L. Rev. 425 (1999).
. Weatherhead v. Boettcher, 3 Kan.App.2d 261, 593 P.2d 420, 423 (1979).
. Id. at 263, 593 P.2d 420 citing 15 Am. Jur. 2D, Liens § 42, p. 181 (emphasis added).
. K.S.A. § 58-201.
. Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493229/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING THE DETERMINATION OF REASONABLE FEES OF BANKRUPTCY PETITION PREPARER
KAREN S. JENNEMANN, Bankruptcy Judge.
On June 5, 2001, the Court heard evidence on what constitutes a reasonable fee *304to pay a bankruptcy petition preparer for preparing bankruptcy pleadings in a consumer Chapter 7 bankruptcy case and to establish guidelines for the determination of reasonable fees for similar cases in the future. These combined cases involve one bankruptcy petition preparer, Stacey Burnworth, and her company, Paralegal Paperworks, Inc. (“Paperworks”). Paper-works prepares bankruptcy petitions and related pleadings for prospective debtors, including the debtors in these cases, Ms. Landry and Mr. and Mrs. Pearson.
The Court previously ruled that Ms. Burnworth was entitled to a fee of $50 for her services on behalf of the debtors. Ms. Burnworth appealed this decision, among others, and the United States District Court for the Middle District of Florida remanded both cases “for an independent finding of what constitutes an appropriate fee for services rendered by Appellant [Burnworth and Paperworks] based on current evidence both for and against any such award of fee, and for the establishment of guidelines which will assist the Bankruptcy Court in the future in carrying out its responsibility under Section 110 [of the Bankruptcy Code] to disallow unreasonable fees.” (Adv. No. 99-00174, Doc. No. 49).
Relying to a large extent on the analysis of the District Court, this Court recognizes that in 1994, the Bankruptcy Code was amended, in part, to recognize and to regulate the role of a bankruptcy petition preparer. A petition preparer is defined as “a person, other than an attorney, who prepares for compensation a document for filing.” 11 U.S.C. § 110(a)(1). Section 110(h)(1) of the Bankruptcy Code1 further provides that the bankruptcy court is required to disallow any bankruptcy petition preparer’s fee found to be “in excess of the value of services rendered for the documents prepared.” 11 U.S.C. § 110(h)(2).
The type of compensable services that a bankruptcy petition preparer can render are extremely limited. Petition preparers, who by definition are not attorneys, cannot give legal advice or otherwise engage in the unauthorized practice of law. In re Guttierez, 248 B.R. 287, 296, n. 25 (Bankr.W.D.Tex.2000) (See cases cited therein). Clearly, as recognized by the District Court, a bankruptcy petition preparer cannot assist the debtor in completing forms, provide legal advice that would assist a prospective debtor in making determinations as to which type of bankruptcy to file or which exemptions to take, or direct clients to particular legal publications or specific pages so that they can attempt to find legal answers on their own. The very act of directing a prospective debtor to review a particular section of a legal book in and of itself constitutes legal advice. By focusing on one answer and excluding others, the bankruptcy petition preparer steps over the line. As stated by the District Court, “Legal advice is legal advice, whether it comes directly from the petition preparer or indirectly via, for example, a bankruptcy treatise being recited by that preparer. Persons seeking legal assistance tend to place their trust in an individual purporting to have expertise in that area.” Florida Bar v. Brumbaugh, 355 So.2d 1186 (Fla.1978).
Therefore, a bankruptcy petition preparer can expect to receive compensation only for secretarial-type services. As stated by the United States for the Western District of Texas in Guttierez :
*305So what does § 110 tacitly permit? The answer in a nutshell is “not much.” Section 110 itself proscribes virtually all conduct falling into the category of guidance or advice, effectively restricting “petition preparers” to rendering only “scrivening/typing” services. Anything else — be it suggesting bankruptcy as an available remedy for a debtor’s financial problems, merely explaining how to fill out the schedules, or answering questions about exemptions or whether a claim is or is not secured will invariably contravene either state laws proscribing the unauthorized practice of law or other more specific provisions of § 110. The only service that a bankruptcy petition preparer can safely offer and complete on behalf of a pro se debtor after the enactment of § 110 is the “transcription” of dictated or handwritten notes prepared by the debtor prior to the debtor having sought out the petition preparer’s service. Any other service provided on behalf of the debtor by a non-attorney (even telling the debtor where the information goes on the form) is not permitted under state unauthorized practice of law statutes, and so is also not authorized by § 110.
Guttierez, 248 B.R. at 297-98. Thus, under § 110, the services a bankruptcy petition preparer can provide are extremely limited.
A bankruptcy petition preparer can meet a prospective debtor, provide forms or questionnaires for the debtor to complete without any assistance from the bankruptcy petition preparer, transcribe the information supplied by the prospective debtor on the applicable bankruptcy forms without change, correction, or alteration, copy the pleadings, and gather all necessary related pleadings to file with the bankruptcy court. The bankruptcy petition preparer cannot improve upon the prospective debtor’s answers, cannot counsel the client on options, and cannot otherwise provide legal assistance to the prospective debtor, directly or indirectly. However, to the extent the bankruptcy petition preparer provides the limited secretarial-type services, the preparer is entitled to receive reasonable compensation.
In light of this standard, the Court next must examine the work performed by Ms. Burnworth and Paperworks in these two cases. The pleadings filed in both cases are very similar. In the Chapter 7 case filed by Pamela Landry, Ms. Burnworth prepared a petition, Schedules, Statement of Assistance, Disclosure of Compensation of the Bankruptcy Petition Preparer, Statement of Financial Affairs, and Statement of Intentions. ' The total package included 29 pages. Pleadings were prepared using specialized template forms contained on computer software. Most pages required no customization other than to check a box or to add very minimal information. For example, Schedule A required the insertion only of the debtor’s name and the word “none.” A few pages in the package filed by Ms. Landry required the insertion of additional, more detailed information such as the items and value of the debtor’s personal property listed on Schedule B, and the debtor’s secured and unsecured creditors listed on Schedules D and F. However, the debt- or’s assets were very limited, totaling $6,655.00 in value, and the number of creditors was very small. Ms. Landry had three secured creditors with claims totaling $15,048.20, and only five unsecured creditors with claims totaling $9,797.78. The mailing matrix accompanying each bankruptcy filing is generated from the information contained in the schedules themselves and requires no substantial additional information other than the inclusion of a few additional parties, such as the debtor, the Chapter 7 trustee, and, inter*306estingly, Ms. Burnworth herself. Apparently, Ms. Burnworth attempts to monitor each bankruptcy case she files. Ms. Landry paid Ms. Burnworth $275.00 to prepare these pleadings.
The pleadings prepared by Ms. Burnworth on behalf of Mr. and Mrs. Pearson were similar except that all the initial pleadings totaled 33 pages, instead of 29 pages.2 Mr. and Mrs. Pearson listed several additional unsecured creditors on their Schedule F, which accounts for the slight addition in page numbers. Otherwise, the difference is that in the Pearson case, the debtors actually paid Ms. Burn-worth less for her services, $250 as opposed to $275.
During the evidentiary hearing, Ms. Burnworth could not remember these particular debtors or the specific services she performed for them. She maintains no time record or log of actual services provided to any of her clients and could only guess in very broad estimates the amount of time she actually spends on any particular case. (Transcript, page 39.) She had no independent recollection of the work she prepared in either of these two specific cases.
Indeed, the Court finds that Ms. Burn-worth’s testimony lacked credibility in many instances and appeared designed to inflate the time she spent on an imaginary case in order to obtain a larger fee. For example, Ms. Burnworth testified that she meets extensively with prospective debtors to review and correct their answers and that she and her staff obsessively check and recheck the accuracy of their work. These types of “services” seem designed more to increase the time Ms. Burnworth spends on a case than a legitimate role performed by a bankruptcy petition preparer. Moreover, even ignoring Ms. Burnworth’s inflated estimates, her testimony was inconsistent in terms of the time that she spent on a simple Chapter 7 consumer case. Ms. Burnworth testified that she spends anywhere from between five and eight hours on every simple bankruptcy case she prepares. The Court finds that amount of time greatly exceeds the time needed to complete the limited tasks a bankruptcy petition preparer can perform. Therefore, the Court must reject the vast majority of Ms. Burnworth’s testimony relating to time estimates.
Rather, the competent evidence presented at the evidentiary hearing was supplied by two paralegals employed by law firms specializing in bankruptcy law. The testimony was consistent and clear that the secretarial typing and copying functions performed by them in the preparation of a simple consumer Chapter 7 bankruptcy took approximately one and one-half hours to complete. The time included instructing prospective debtors on how to complete the bankruptcy questionnaire, receiving and reviewing the questionnaire completed by the debtor, inserting the information on the computerized bankruptcy forms, making the necessary copies and otherwise preparing the pack*307age for filing with the Bankruptcy Court. (Transcript, pages 8-10, 19-21.) The time estimate was generous and included additional time to communicate with the debtors and to ask them limited questions. However, the time estimate of one and one-half hours does not include time for many of the additional tasks appropriately performed by these paralegals employed by and under the supervision of an attorney.
Nor does the one and one-half hours include an allowance for all the inappropriate, non-compensable services provided by Ms. Burnworth. For example, Ms. Burn-worth testified that she would review and interpret credit reports of prospective debtors to help them complete their bankruptcy schedules. (Transcript, page 26.) At other times, Ms. Burnworth would sit with prospective debtors and read legal treatises together to jointly determine which exemptions the prospective debtors can claim. (Transcript, pages 23, 48, 45-46.) As Ms. Burnworth testified:
I sit with them. I go through the bankruptcy book with them. I let them read that sheet regarding all the different chapters. Again, if they have any questions regarding that, I refer back to the bankruptcy book and I answer any questions as we look at it together.
These are the types of services that are not compensable when performed by a bankruptcy petition preparer. To the extent Ms. Burnworth actually performs these services, she is giving unauthorized legal advice and cannot expect to receive compensation for her time. Rather, a qualified bankruptcy petition preparer who performs tasks within the guidelines of Section 110 of the Bankruptcy Code should spend no more than one and one-half hours on the allowed secretarial tasks.
At the evidentiary hearing, Ms. Burn-worth argued that she is more than a bankruptcy petition preparer; she is a “para-professional.” First, Section 110 limits compensation to non-attorneys for only those services allowed under Section 110 of the Bankruptcy Code. Second, Florida law is clear that a non-lawyer who is not supervised by a lawyer has a very limited role. “The Florida Supreme Court and the Florida bankruptcy courts have made it clear that persons wanting to provide services in the bankruptcy area are limited to typing and transcribing written information provided to them by a consumer onto pre-prepared forms.” Samuels v. American Legal Clinic, Inc. (In re Samuels), 176 B.R. 616, 621 (Bankr.M.D.Fla. 1994).
Ms. Burnworth cannot argue that she should get paid for additional work or services performed because she fits into some new category. She is a bankruptcy petition preparer assisting a debtor in preparing documents for filing before bankruptcy court. Her role is limited to that of a secretarial copier and transcriptionist.
Ms. Burnworth is not working with an attorney who supervises her actions. The relevance of the testimony of the paralegals, who are supervised by attorneys, is that they were able to credibly quantify and estimate the time needed to complete jobs for which a bankruptcy petition preparer, like Ms. Burnworth, can expect to receive reasonable compensation. They estimated that they spent no more than one and one-half hours on these services. The Court accepts that testimony. Without the showing of extraordinary circumstances supported by contemporaneous time records, the Court finds that a bankruptcy petition preparer would spend one and one-half hours associated with all allowable and compensable tasks necessary to file a consumer Chapter 7 bankruptcy case.
*308Therefore, the next question is the proper hourly rate at which to compensate Ms. Burnworth for the assumed one and one-half hours of time she spent on allowable compensable work in the cases of these two debtors. The paralegals that testified have an hourly billable rate of $75.00 to $85.00. (Transcript, pages 27-28.) The billable rate includes the law firm’s overhead and other expenses. Ms. Burnworth testified that her hourly billable rate, including all overhead expenses, is $75.00 per hour. Ms. Burnworth provided no support or evidence to substantiate her estimate of a $75.00 per hour rate; however, because the estimate is consistent with the hourly billing rate of paralegals who perform some of the same services and because the rates billed by these law firms clearly include overhead expenses, the Court will accept the average hourly billing rate for paralegals as a benchmark for the determination of a reasonable rate. The advantage of such a benchmark is that, for future allowance purposes, the Court can determine reasonable fees by determining the relevant market rate for paralegals in the area.3
The Court recognizes that paralegals perform many more services than Ms. Burnworth can provide. Paralegals work under the supervision of an attorney. However, the Court cannot ignore the fact that paralegals also perform services similar, to a limited extent, to those which Ms. Burnworth can legally provide as a bankruptcy petition preparer.
In conclusion, in these two cases and in future cases, the Court holds that a bankruptcy petition preparer can spend one and one-half hours completing a consumer Chapter 7 bankruptcy case, subject to any showing of exceptional circumstances, and the production of detailed, contemporaneous time records. The allowable hourly rate will be determined by the average hourly billable charge for paralegals in the market area, here, $75.00 per hour. The Court holds that a reasonable fee for Ms. Burnworth’s services in each case is $112.50 (1.5 hours x $75.00/ hour). Therefore, in the case of Ms. Landry, Ms. Burnworth is entitled to a reasonable fee of $112.50 and must return to the debtor $162.50 ($275.00 - $112.50 = $162.50), the amount overpaid by the debt- or. In the case of Mr. and Mrs. Pearson, *309Ms. Burnworth similarly is entitled to a reasonable fee of $112.50 and must return to the debtor $137.50 ($250.00 — $112.50 = $137.50), the amount overpaid by the debtors. A separate order consistent with this ruling will be entered.
. Unless otherwise slated, all references to the Bankruptcy Code refer to Title 11 of the United States Code.
. After filing the initial pleadings on behalf of Mr. and Mrs. Pearson, Ms. Burnworth prepared motions for the debtors seeking to avoid liens under Section 522(0 of the Bankruptcy Code. Motions to avoid liens are complicated legal documents well beyond the scope of tasks a bankruptcy petition preparer legitimately can complete. The Court cannot imagine a scenario in which such a form could be considered a simple legal form that the debtors could independently complete and then hand to a bankruptcy petition preparer for typing. Thus, to the extent that Ms. Burn-worth prepared motions to avoid liens, she exceeded the permitted scope of her authorized services under Section 110 of the Bankruptcy Code and shall receive no compensation for these subsequent pleadings filed on behalf of Mr. and Mrs. Pearson.
. Courts have employed a variety of methods for determining and computing bankruptcy petition preparer fees. See In re Moran, 256 B.R. 842, 849-51 (Bankr.D.N.H.2000) and Guttierez, 248 B.R. at 298-99 (compiling a summary of cases on the issue). For example, some courts have capped fees or limited fees to a flat rate. See In re Cochran, 164 B.R. 366, 369 (Bankr.M.D.Fla.1994) ($50.00 is a reasonable fee where no evidence was offered justifying a higher fee); (Guttierez, 248 B.R. at 299 (limiting fees to $50.00)); In re Wagner, 241 B.R. 112, 122 (Bankr.E.D.Pa. 1999) (same); In re Mullikin, 231 B.R. 750, 753 (Bankr.W.D.Mo.1999) ("absent special or extraordinary circumstances” petition preparers could charge a maximum of $150.00). Other courts have regulated or limited petition preparers’ hourly rates. See In re Hartman, 208 B.R. 768, 780 (Bankr.D.Mass.1997) ($20.00 per hour); In re Kassa, 198 B.R. 790, 792 (Bankr.D.Ariz.l 996) ($16.82 per hour). Some courts have chosen to limit hourly rates and the allowable number of hours a petition preparer can spend. See In re Moffett, 263 B.R. 805 (Bankr.W.D.Ky.2001) (hourly fee of $20.00 with maximum fee not to exceed $100.00); Moran 256 B.R. at 850-51 (allowing $20.00 per hour plus $10.00 per hour for overhead, not to exceed five hours; however, amounts may change subject to evidence presented on overhead, inflation, or other economic considerations). Finally "[ojther courts have declined to adopt a blanket rule regarding petition preparer fees,” preferring to "monitor petition preparers’ practices and fees ... on a case by case basis.” Moran, 256 B.R. at 849-50 (citing Consolidated Memorandum Regarding Bankruptcy Petition Preparers, 1997 WL 615657 (Bankr.D.Me. Sept. 19, 1997)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493230/ | MEMORANDUM OPINION
MARK W. VAUGHN, Chief Judge.
Before the Court is the Chapter 7 Trustee’s (“Trustee”) complaint seeking to recover $10,566.46 from the law firm of Thomas, Utell, Van De Water and Raiche, P.A. (“Defendant” or “firm”), constituting legal fees paid to the Defendant from assets of the OFS Pension Plan and Trust (“OFSPPT”). The Trustee alleges that the fees were improperly paid without court approval and in contravention of an agreement not to dissipate assets of the pension fund pending the outcome of an adversary in this Court to determine whether the pension fund was property of the Debtor’s bankruptcy estate. For the reasons following, the Court finds for the Trustee.
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 Proceed*323ings 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).
BACKGROUND
On June 11, 1999, this Court ruled that the assets of the OFSPPT were not exempt and were part of the bankruptcy estate of Reginald Gaudette. See Erricola v. Gaudette (In re Gaudette), 240 B.R. 649 (Bankr.D.N.H.1999). The Defendant represented Mr. Gaudette in connection with the adversary proceeding on some level. After the trial was held on April 8, 1998, but before the Court’s decision was rendered, the Defendant withdrew as counsel in all matters related to Mr. Gaudette’s bankruptcy case. See Defendant’s Trial Brief at 2. The Defendant’s fees in the amount of $10,566.46 were paid from assets of the OFSPPT without authorization from the Court on October 5,1998.
Following the Court’s decision finding that the OFSPPT was part of Mr. Gau-dette’s bankruptcy estate, the Trustee brought this adversary against the Defendant and the law firm of McLane, Graf, Raulerson & Middleton, P.A.1, which served as successor counsel to Mr. Gau-dette. The adversary seeks to recover all fees paid to the firms from the assets of the OFSPPT.
There are no facts in dispute in this matter. At trial, the only evidence presented by the Trustee consisted of two pieces of correspondence dated December 7, 1997:(1) a letter by the Trustee to Atty. Van De Water seeking confirmation that the assets of the OFSPPT would not be dissipated pending the outcome of the litigation, and (2) a reply letter by Atty. Van De Water confirming that the pension plan assets were not being dissipated and that the assets would continue to be invested prudently. The Court also took judicial notice of the fact that the firm did not seek authorization to represent Mr. Gaudette and that no authorization for the fees paid was sought.
For its part, the Defendant offered no evidence other than the testimony of Atty. Van De Water. Atty. Van De Water testified that the firm represented Mr. Gau-dette in his individual capacity only at the outset of his bankruptcy case by helping to put together schedules. However, by the time the “341 Meeting” occurred, the firm had stopped representing Mr. Gau-dette individually and represented only related Gaudette entities such as the pension plan. Thus, Atty. Van De Water apparently considered his representation involving the OFSPPT to be only of the pension plan and trust and not Mr. Gaudette individually. Atty. Van De Water recalled the substance of the December 2, 1997 correspondence with the Trustee. However, he testified that he did not believe that they were agreeing that no funds whatsoever would be taken from the pension plan, but only that the assets would not be unnecessarily wasted and that the pension plan trustee, Louise Gaudette, would continue to make prudent investments. He pointed out that at that time he believed there was credible evidence that the pension plan was not property of the estate and that he was representing the pension plan against attack in the regular course of business. Atty. Van De Water also testified that the fees were incurred in dealing with discovery requests pertaining to the adversary proceeding.
*324
DISCUSSION
The Trustee seeks to recover the fees paid to the Defendant pursuant to 11 U.S.C. § 549(a)(2)(B)2, which permits a trustee to recover a transfer not authorized by the Bankruptcy Code or by the Court. According to the Trustee, because the Defendant did not receive authorization from the court to represent the estate pursuant to § 327, the postpetition transfer of assets of the estate is avoidable. The Defendant argued at trial and in his brief that the firm was merely representing the OFSPPT, which at that time had not been determined to be an asset of Mr. Gaudette’s bankruptcy estate. Furthermore, the fees were paid prior to the decision finding the OFSPPT estate property. Thus, the Defendant reasons that no court approval was necessary as at that time the OFSPPT was not property of the estate.
At the outset, the Court notes that its decision is not based upon a finding that the Defendant breeched the agreement between Atty. Van De Water and the Trustee regarding the dissipation of the OFSPPT assets. Atty. Van De Water testified at trial that he understood that the agreement was intended to ensure that funds of the estate would not be squandered or removed outside of the ordinary course of business. He also testified that at the time of the litigation, the assets of OFSPPT were in fact greater than when the case was filed. He believed that he was defending the OFSPPT against attack by the Trustee and considered the fees to be an expense in the ordinary course of business and not a dissipation of its funds. The Court believes that Atty. Van De Water’s interpretation of the agreement was reasonable, and does not find that the Defendant was acting in contravention of the specific agreement with the Trustee. Furthermore, there has been no allegation, and thus the Court makes no finding that the fees were unreasonable. However, the real issue here is not whether the payment of the fees amounted to a dissipation the OFSPPT assets, but whether the Defendant was paid from assets of Reginald Gaudette’s Chapter 7 bankruptcy estate.
This Court’s opinion in Erricola v. Gaudette found that Reginald Gaudette was the sole beneficiary of the OFSPPT. As such, all of the assets of the OFSPPT were part of the bankruptcy estate as of the commencement of the case. See § 541(a)(property of the estate includes any interest in property of the debtor wherever located and by whomever held). On his schedules, the Debtor properly listed the OFSPPT as property, but claimed the assets as exempt. The Trustee successfully objected to the exemption preserving the assets for the estate. At no time can it be said that the assets of the OFSPPT were not property of Mr. Gau-dette’s bankruptcy estate.
Nor can it be said that the Defendant was not representing Mr. Gaudette, but was solely representing the interest of the OFSPPT. As previously noted, Mr. Gau-dette was the sole beneficiary of the OFSPPT. The Defendant’s own trial brief admits that the firm represented Mr. Gau-dette in connection with the adversary proceeding. See Defendant’s Trial Brief at 2. Atty. Van De Water also testified at the trial that the Defendant represented Mr. Gaudette personally regarding his bankruptcy case to some degree. Thus, the question becomes whether the Defendant can receive payment for his services on behalf of the Debtor in this case from *325property of the estate. The answer to that question must be no.
Generally, professional persons may be awarded as an administrative expense “reasonable compensation for actual, necessary services ... and reimbursement for actual necessary expenses.” 11 U.S.C. § 330(a)(1). However, there is a split among bankruptcy courts over the question of whether an attorney for a Chapter 7 Debtor may be awarded compensation from property of the estate. Most cases, such as In re Fassinger, 191 B.R. 864 (Banrkr.D.Or.1996), have held that the 1994 amendments to the Bankruptcy Code, which eliminated the term “debtor’s attorney” from the list of those who may receive compensation from the estate pursuant to § 330, removed the opportunity for Chapter 7 debtors’ attorneys to seek compensation from the estate. However, a minority of courts have rejected that view and have held that the deletion of the term “debtor’s attorney” must have been inadvertent and have continued to permit a debtor’s attorney to seek compensation from the estate under limited circumstances. See In re Bottone, 226 B.R. 290 (Bankr.D.Mass.1998); In re Miller, 211 B.R. 399 (Bankr.D.Kan.1997). This Court need not wade directly into this issue, however, for even if it were to rule that an attorney for a Chapter 7 debtor can seek compensation from property of the estate, such fees may only be awarded for services that actually benefit the estate. See Bottone, 226 B.R. at 296 (Counsel to Chapter 7 debtor is entitled to compensation from estate only if services are limited, not duplicative, in good faith and of benefit to the estate). Furthermore, where an attorney represents a Chapter 7 debtor in an adversary proceeding, courts have almost universally held that the representation does not benefit the estate. See Jensen v. Gantz (In re Gantz), 209 B.R. 999, 1003 (10th Cir. BAP 1997)(“In general, fees for defense of § 523 and § 727 actions and other contested matters that affect the debtor post discharge are allowed but not against the estate.”). The case of Mayer, Glassman & Gaines v. Washam (In re Hanson), 172 B.R. 67 (9th Cir. BAP 1994) presented an issue similar to the one before this court. In that case, the Chapter 7 debtor’s attorney sought compensation from the estate for time spent attempting to protect the debtor’s homestead exemption. After conducting a thorough review of cases considering the issue, the panel found that the defense of exemptions could not benefit the Chapter 7 estate, but actually obstructs the administration of the estate. Id. at 72.
This Court agrees with the Hanson court and finds that the Defendant’s representation of Mr. Gaudette, although perfectly appropriate, did not benefit the bankruptcy estate. Although it was entitled to seek compensation for its services, such compensation should have come from exempt property or property obtained postpetition. Instead, however, the Defendant’s fees were improperly paid from funds that were property of the estate.
CONCLUSION
The OFSPPT assets were property of the estate at the time the Defendant’s fees were paid. Therefore, the Defendant was not entitled to receive payment from that asset for fees incurred in connection with the adversary proceeding. The Trustee may recover those fees pursuant to § 549. This opinion and order constitutes the Court’s findings of facts and conclusions of law in accordance with Federal Rule of Procedure 7052.
. The Trustee alleged that $164,915.91 was paid to the McLane law firm. The parties settled the matter prior to trial.
. Unless otherwise identified, all statutory references are to Title 11 of the United States Code. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493233/ | MICHAEL J. KAPLAN, Bankruptcy Judge.
The “ordinary course of business” defense (11 U.S.C. § 547(c)(2)) that defeats a trustee’s effort to avoid a preferential transfer under 11 U.S.C. § 547 usually involves multiple transactions between a debtor and a supplier of goods or services on credit to debtor. Typically one encounters a number of purchase orders issuing from a debtor to a trade supplier, a succession of goods or services delivered on credit by the trade supplier, and a succession of payments made by the debtor. If the debtor paid for these goods or services within the usual time for doing so as between the debtor and the trade supplier, and if that “usual” time is also typical in the industry, then the “ordinary course of business” defense would prevail even if the billing invoices called for prompter payment. If all these facts are known to a trustee, the trustee would not even commence suit in the face of such a defense. But if the payments were later than usual or would be viewed as extraordinary in the relevant industry, then payments made within 90 days before bankruptcy while insolvent would be recovered to benefit all creditors, with a pro-rata share to the defendant/transferee.
This pattern is so customary that any significant departure from it might end up before the United States Supreme Court, as occurred in Union Bank v. Wolas (In re Wolas), 502 U.S. 151, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991). The High Court there held that an “ordinary course of business” defense could be discerned within the context of a single long-term installment loan transaction. Making installment payments on a single loan can establish an “ordinary course of business or financial affairs” for purposes of the § 547(c)(2) defense.
The several Adversary Proceedings currently before this Court are consolidated for purposes of this decision only. The facts are not in dispute, and the cross motions for summary judgment present a single dispositive question. The Defendants would like that question to be one *347which, like Wolas, would present a new “twist” on the “ordinary course” defense, if successful. The “twist” they would like to present asks the Court to assume arguen-do that a given debtor (here a candy maker whose main business was production for the Christmas, Valentine and Easter seasons) has a business cycle that necessitates annual short term loans, and that someone who provides one or two of those loans can establish the “ordinary course” defense even though such a lender has never made business loans to anyone before and might never do so again. It is argued that there needs to be “a first time for anything,” and that if one is a first-time lender in what is the ordinary borrowing cycle for such a debtor, it would not be appropriate for the outcome to rest on whether the defendant was experienced in making these loans or, instead, was making that kind of loan for the first time.
As interesting a question as that argument presents, this Court declines the invitation to address it. The undisputed facts are too far removed from the hypothetical.
The Court is willing to assume arguendo that the Debtor here needed a short term loan each autumn when entering into the manufacturing cycle for its seasonal products, and that its business cycle in the pre-bankruptcy past had always permitted it to repay those loans each March. The Court is also willing to assume arguendo that in the fall of 1996 (the fall preceding the August, 1997 filing of this involuntary Chapter 7 case), the Debtor could have obtained its annual short term borrowing from a commercial lender, at a 25% interest rate. If the Debtor had found a single, “novice,” arms-length lender willing to loan at that rate or less, then the hypothetical argued by counsel might be presented.
But what actually happened in this case is that the Debtor sought a quarter million dollar loan from a quasi-public development authority. That authority decided that the Debtor needed a half million dollars in working capital rather than a quarter million dollars in working capital, and it promised to loan the Debtor a quarter million dollars only if the Debtor could obtain a loan from someone else for the other quarter million dollars. It seems that any such additional debt was required to be subordinated to the agency loan. The Defendants have made an offer of proof that the Debtor could have obtained that other quarter million subordinated dollar loan from a commercial lender at . 25% interest; the Court will assume this to be true for the sake of argument only. Rather than borrowing the quarter million dollars from the commercial lender, the Debtor borrowed it from “insiders.” 11 U.S.C. § 101(31). The Debtor’s principal, various of the principal’s family members, and a family-owned limited-liability corporation1 each made one or more loans or “advances” to the Debtor, in varying amounts, but all of these were payable on the same date in March 1997, a few months later. These are referred to by the Defendants as “grid loans.” To the Court, however, these were mere promissory notes because even if more than one “advance” was made by one of the insiders, the dates due did not vary at all; “grid loans” connote (to this writer) multiple loans and satisfactions thereof using a single instrument plus a “grid” on which to record each advance and the satisfaction thereof. Multiplicity is, thus, a feature of “grid loans,” and multiplicity presupposes a “course” of dealing. Use of the term seems to presume the answer to the ques*348tion before the Court, and the Court will not accept the Defendants’ usage of the term here.
Obviously, each of the lenders knew that the others were lending and knew the purpose and the aggregate amount of the loans. They all surely knew that this lending was necessary to permit the Debtor to borrow $250,000 more from the development authority. Even if short-term borrowing by the Debtor and by others in the industry was “ordinary” and even if the insiders wished to become regular lenders, there is nothing “ordinary” about what the insider lenders did here. By no means may one equate their collective action with the hypothetical “first time” commercial lender that is the focus of the novel argument advanced here. Again, after the Debtor went to the development agency seeking a quarter million dollars and received the response it received, it went to a number of commercial lenders who said that they would lend the other $250,000 at 25%. Had one insider of the Debtor then agreed to loan the quarter million dollars at 25% or less and leave out the agency altogether, even though she or he had never loaned any significant sum to anyone before or since, then the hypothetical might well then be before the Court, and the Court would rule upon it one way or the other. (The Court declines to suggest how it might rule.)2
Instead, the Debtor thought it needed only a quarter of a million dollars. The development agency disagreed. But it should have required the extra quarter million to be raised by the Debtor as equity, not as debt. (That would have better served all of the Debtor’s creditors, as it turns out with benefit of hindsight.) Told by its prospective lender that the Debtor needs to borrow twice as much as the Debtor thought it needed, the Debtor and its insiders certainly felt that borrowing a second quarter million dollars from family members was safe for them, because the Debtor didn’t need that second quarter million dollars anyway and would be able to promptly pay all the lenders back.
So it seems clear that the family members agreed to individual arrangements which, collectively, were somewhat akin to “participations” in a single loan for which the Debtor had no genuine need, in the Debtor’s view.
Just as the family expected, these were promptly paid back. In fact, they were paid back several weeks before the due date. But what no one ever told the participants, perhaps, was that lenders who are “insiders” suffer an enormous burden that lenders who are not “insiders” do not suffer. That is the one-year (rather than 90-day) “look back” period for preferential transfers.
The insiders were paid in March, 1997 and the involuntary petition was filed about 180 days later. Even if it were stipulated that these transactions and the payments thereon were extraordinary, they would have been wow-avoidable if they did not occur among “insiders,” because they were made prior to the ninety-day preference period.
Interesting, but not material to this decision, is the fact that the development authority eventually suffered a loss. The Debtor claims to have had verbal permission from the development authority to repay the family loans before repaying the development authority because the Debtor was supposedly negotiating for a new or rollover loan at the time. The Debtor eventually repaid the development authority but that was within what became the *349ninety-day preference period.3 The authority had to disgorge a compromised amount to the bankruptcy estate. (The compromise lay in uncertainty regarding proof of insolvency.)
In sum, this is not the proper case to address the interesting hypothetical posed by the Defendants through counsel. What the Defendants did here was no more “ordinary” a “loan transaction” than an L.B.O. is as an acquisition transaction. In an L.B.O. the buyers of the company cause the company to bear the purchase price as debt. Here the insiders could simply have loaned the Debtor the $250,000 it needed. Instead, they loaned it $250,000 solely to enable it to qualify for a second $250,000, and then they took their $250,000 back, with interest.
When that is a guileless result achieved by a lender who does not control the Debt- or, the lender might be safe, 90 days later. When that is achieved by an “insider” less than 1 year before the bankruptcy, guileless or not, the purpose of the preference statute — equality of distribution — is brought to bear in favor of those creditors who are not relatives of the Debtor’s principal officer-owner-director.
. The record does not disclose whether this was an already-existing L.L.C., or whether it was formed for this specific purpose.
. The hypothetical might also be presented if a non-insider, novice extended the subordinated loan that enabled borrowing from the agency.
. As noted above, this was an involuntary filing. Consequently, there should be no inference that the Debtor had any knowledge that the authority might be at risk to disgorge or that the Debtor planned the timing of the filing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493234/ | MEMORANDUM OPINION
ROBERT G. MAYER, Bankruptcy Judge.
THIS CASE was before the court on September 10, 2001, on the motion of the United States Trustee to convert or dismiss this case and for a post-confirmation status hearing. The motion was originally filed on January 11, 2001. The debtor filed an opposition on February 1, 2001. Frank Bove of the United States Trustee’s Office was present as was Leslie Millman and his attorney, Alan S. Toppelberg. Barbara J. Grasso did not appear. Ms. Grasso did file a document entitled “Answer to September 10, 2001 Status Hearing” on September 7, 2001. While this was filed on September 7, 2001, it had not been filed with the court papers prior to hearing. The court, in reviewing Ms. Grasso’s response, has reconsidered its oral ruling on September 10, 2001, and in the process of reconsideration has fully considered Ms. Grasso’s September 7, 2001 answer.
Ms. Grasso filed the petition in this case on January 13, 2000. Her principal assets were her farm in Fauquier County and her Burmese Mountain dogs which she breeds. The principal creditor activity was by Leslie and Donna Millman. Mr. and Mrs. Millman and Ms. Grasso were at one time friends. They are all Burmese Mountain dog enthusiasts. There are three dogs that both Ms. Grasso and Ms. Millman have a joint interest. They have been the source of substantial controversy in this court and in the state court.
The court confirmed Ms. Grasso’s chapter 11 plan on February 26, 2001. The debtor’s second amended plan of reorganization as modified and confirmed by the court provided that the balance of her farm, after the sale of an 10-acre parcel, would be sold at foreclosure. A joint ownership of a Burmese Mountain dog with Diana Jaeger was resolved by transferring full ownership and possession of the dog to the debtor. All administrative claims, including the United States Trustee’s for quarterly fees were to be paid as they *465became due. Claims not exceeding $1,000.00 were to be paid in full. One-half of the allowed claims were to be paid within six months after the effective date of the plan with the balance within 12 months after the effective date of the plan. All other claims, except the two mortgage deficiency claims, were to be paid 65 percent of the allowed claims. The payments were to be made in semi-annual installments commencing six months after the effective date of the plan. The semi-annual installments were to be $5,633.50 and be shared pro-rata among all creditors of the class. The two deficiency claims were to be paid 18 percent of their allowed claims in semi-annual installments commencing six months after the effective date of the plan. The first two installments were to be $566.50 each with subsequent installments increasing, ultimately to $4,750.00. The sale of the 10-acre parcel was accomplished prior to the confirmation of the plan by separate motion.
Ms. Grasso was successful in selling a 10-acre parcel of land from her farm for which she received $20,000.00. She moved to New York where she is presently residing and leased a farm which is suitable for her activities as a dog breeder. She also paid the United State Trustee’s fee for the first quarter of 2001 in May, 2001, after confirmation of this plan.
Since confirmation, Ms. Grasso objected to various proofs of claims. All of the objections have been adjudicated. Ms. Grasso’s counsel filed an application for compensation which has been approved. There are no motions, adversary proceedings or appeals pending. There are no other actions necessary in this ease except completion of the payments under the confirmed chapter 11 plan.
There is litigation pending in state court between the Millmans and Ms. Grasso over their ownership interests in three Burmese Mountain dogs.1 Ms. Grasso fully participated in that litigation until recently. That litigation has reached the point where the circuit court has ordered the sale of the dogs. Ms. Millman’s attorney, Alan S. Toppelberg, has been appointed special commissioner of sale. The proceeds from the sale, after any costs and expenses, will be divided between the parties in accordance with any order entered by the circuit court. Consequently, there does not appear to be any significant activity left with respect to disposition of the ownership of the three dogs in which the Mill-mans and Ms. Grasso have a joint interest.
The debtor, in her answer with respect to the status hearing, raises various issues. The debtor suggests that her chapter 11 plan was set up for failure. Answer ¶ 6(H)(2). In support of this, she cites various matters which were before the court prior to confirmation. All these matters were considered previously by the court as were her circumstances at the time of confirmation. None is new.
The debtor also complains about the court’s ruling denying her motion to transfer this case to New York, various discovery matters, and Mr. Millman’s attorney. She concludes by requesting the court to dismiss the chapter 11 proceeding so that she can “wait the required time to file Chapter 11 bankruptcy in the proper district in New York”. Answer ¶ 7.2 These matters have also been previously considered and in at least one case affirmed on appeal. They present nothing new.
*466The court is frequently faced with similar motions by the United States Trustee in other chapter 11 cases. A chapter 11 plan is confirmed. Some activity is undertaken, but after several months, the debtor appears not to want to or be able to proceed further. Typically, the United States Trustee files a motion to convert or dismiss the proceeding. The options at that time are to convert the proceeding to chapter 7, dismiss the case, or enter a final decree.
The Millmans strenuously argue that the case should be converted to a proceeding under chapter 7. They believe that if it is converted, a chapter 7 trustee would be appointed who would be able to resolve the issue of the jointly owned dogs. They would make an offer to the chapter 7 trustee to purchase the debtor’s interest in the dogs. The dogs are in the possession of Mr. and Mrs. Millman. Mr. Toppel-berg, counsel for Mr. and Mrs. Millman, also wants the case converted to a proceeding under chapter 7 because he claims that Ms. Grasso has threatened to sue him. He stated that he would like an opportunity to propose a settlement to a chapter 7 trustee. While he strenuously denies any liability, he argues that it is cheaper to pay the chapter 7 trustee a nominal amount to protect himself from vindictive law suits that could be brought in New York or other courts far from Virginia.
A conversion to chapter 7 is not appealing in this case. The purposes that the Millmans and Mr. Toppelberg have put forward are not sufficient. While they would provide a convenient way for them to vindicate their interests, the court must consider the interests of all creditors. If the case were converted to chapter 7, the creditors whose claims have been litigated and approved would probably receive no significant distribution from the estate. It is also likely that the debt- or would be granted a discharge and the debts due to these creditors would be discharged. While Mr. and Mrs. Millman would receive a benefit from the conversion if the trustee accepted their proposal, as would Mr. Toppelberg, the other creditors would not. For example, there is a deficiency claim in favor of the debtor’s former mortgage company of $72,208.04. This amount was litigated and is the subject of an order entered by the court on June 15, 2001. This creditor and other unsecured creditors would be disadvantaged by a conversion to a chapter 7 because of the insufficient assets to make any meaningful distribution to them from the current assets of the debtor and the discharge that would probably be granted to the debtor. As matters stand, they are entitled to a distribution under the chapter 11 plan and Ms. Grasso cannot obtain a second discharge under chapter 11 or a discharge under chapter 7 for six years.3 In reviewing the interests of all the creditors, it does not appear that it is in their best interests to convert his proceeding to a proceeding under chapter 7, particularly, in fight of Ms. Grasso’s expressed intention to re-file chapter 11 in New York..
A second common disposition of cases in this posture is to dismiss the case. This essentially puts the parties back to where they were prior to the filing of the chapter 11 case. The difficulty with this approach in this particular case is that Ms. Grasso has disposed of her Virginia real estate and has moved to New York. Her principal creditors are in Virginia. It would be burdensome for them to be *467hauled into bankruptcy court in New York to vindicate their rights when Ms. Grasso re-files there. While Ms. Grasso complains in her answer that she was burdened by moving to New York, that was a decision she voluntarily made herself during the course of this case. The creditors have not made a similar voluntary choice. Moreover, a dismissal of the case may place in jeopardy rights that have accrued to parties by virtue of the reorganization proceeding. Dismissal may unravel various actions already taken. Particularly in this case where Ms. Grasso has achieved confirmation and all claims have been adjudicated, no benefit accrues to the creditors from dismissal of the case. Dismissal would, in fact, permit Ms. Grasso to re-file a second chapter 11 case as is her stated intention. To restart the process after having achieved confirmation is not appropriate in these circumstances.4
The remaining option is to issue a final decree and close this case. There are drawbacks to this procedure. Normally, a final report is prepared and filed by the chapter 11 debtor which reflects the debt- or’s actions in the case. Upon approval of the final report, the final decree is entered. The final decree is not normally entered until all United States Trustee’s fees are paid. In this case, sanctions have been issued against Ms. Grasso. A final decree could be withheld to enforce the payment of the fees and sanctions.5 On the other hand, the court is well aware of the actions that have transpired, the properties that have been sold, and presumes that the debtor has not made substantial payments to the creditors under her confirmed plan. The plan does provide a remedy in the event of a post-petition default, that is, to file suit in state court for the amounts due under the plan. Those suits can be filed in whichever state court has jurisdiction, which in the case of the Virginia creditors may well be in Virginia. Inasmuch as there are no assets in Virginia, enforcement would probably be necessary in another state.
Federal Rule of Bankruptcy Procedure 3022 permits the court to enter a final decree on its motion or on the motion of a party in interest. The Advisory Committee Note to the 1991 amendment states in part as follows:
Entry of a final decree closing a chapter 11 case should not be delayed solely because the payments required by the plan have not been completed. Factors that the court should consider in determining whether the estate has been fully administered include (1) whether the order confirming the plan has become final, (2) whether deposits required by the plan have been distributed, (3) whether the property proposed by the plan to be transferred has been transferred, (4) whether the debtor or the successor of the debtor under the plan has assumed the business or the management of the property dealt with by the plan, (5) whether payments under the plan have commenced, and (6) whether all motions, contested matters, and adversary proceedings have been finally resolved.
*468In this case, the elements for entering the final decree have been made. The confirmation order is final. No deposits were required to be met. Property of the debtor that was anticipated to be sold has been sold. In particular, the debtor sold a parcel of land from her farm. The balance of the farm was sold at foreclosure, as anticipated. The fourth criteria has also been met. The debtor has assumed her business and the management of her property dealt with by the plan. The fifth element has also been satisfied. Payments under the plan have been commenced. At least one payment was made, this to the United States Trustee for first quarter fees. The first quarter included a portion of time prior to confirmation and a portion of time after confirmation. This obligation has been paid. It may well be that other payments have been made since February, although the record does not document them. The sixth element has also been satisfied. All motions, contested matters and adversary proceedings have been finally resolved. While these conditions are not ideal for entering a final decree, taking into account the relationship of the debtor to the creditors involved, the availability of state remedies, and the advanced stage of the Millman suit in state court, it appears that entering a final decree is the best of three poor alternatives available to the court. All litigation must come to an end sometime and in some manner.6
. Relief from the automatic stay was granted to enable the parties to resolve their contractual matters and to seek partition of the dogs in stale court.
. Her February 1, 2001, response to the motion to convert or dismiss objected to conversion or dismissal. That was before her plan was confirmed later that month.
. This does not preclude Ms. Grasso from obtaining a chapter 13 discharge in the appropriate circumstances.
. In appropriate circumstances, Ms. Grasso can still file a new petition under chapter 13. If there is a new filing, chapter 13 is preferable because of the presence of the chapter 13 trustee who may more closely supervise and enforce her obligations. However, in light of her multiple filings, further relief may be unavailable without regard to whether this case is dismissed or a final decree entered. See footnote 6, below.
. The sanctions were entered in favor of Mr. and Mrs. Millman for discovery abuses. They total less than $1,000.00, and may, as the United States Trustee’s fee may, be enforced by execution after the case is closed.
. The court notes that Barbara J. Grasso has filed bankruptcy in this court on three prior occasions. The first bankruptcy was filed on May 13, 1999, case number 99-12538-SSM. It was a chapter 13 proceeding. That case was dismissed on June 4, 1999, because the debtor failed to file schedules and a plan. The second case was filed on July 23, 1999, case number 99-13798-RGM. This was also a chapter 13 case. The debtor requested voluntary dismissal on August 27, 1999. The order dismissing the case was entered September 3, 1999. The debtor had a right to dismissal pursuant to § 1307(b). The debt- or's third chapter 13 case was filed on October 28, 1999, case number 99-15350-SSM. This case was dismissed on November 22, 1999, on the debtor's request, again pursuant to § 1307(b). In both the second and the third cases, the debtor requested an extension of time within which to file her chapter 13 lists, schedules and chapter 13 plan. The docket does not reflect that they were filed in either case. This case is the fourth petition filed by the debtor. It was filed pursuant to chapter 11 on January 13, 2000. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493235/ | AMENDED ORDER DENYING DEBTORS’ MOTION TO CONFIRM SECOND AMENDED CHAPTER 13 PLAN AND DENYING MOTION TO VALUE COLLATERAL
W. RICHARD LEE, Bankruptcy Judge.
The Debtors’ motions to confirm their second amended chapter 13 plan and to value the collateral of R & N Enterprises were argued before the court and taken under submission on September 5, 2001. D. Max Gardner, Esq. appeared on behalf of the Debtors. Frank P. Samples, Esq. appeared on behalf of objecting creditor R & N Enterprises (“R & N”). Also present was the chapter 13 trustee, M. Nelson Enmark. The trustee’s separate objection to confirmation and motion to dismiss, based on the Debtors’ failure to file their *5721999 and 2000 tax returns, were withdrawn at the hearing upon the Debtors’ representation that those tax returns have now been filed. The trustee supports confirmation on the condition that the term of the proposed plan be extended from 36 months to 60 months. For reasons set forth below, both of the Debtors’ motions are denied. This order contains the court’s findings of fact and conclusions of law.
Objection to Confirmation
R & N objects to confirmation of the second amended chapter 13 plan on the grounds, inter alia, that (1) the plan is not feasible and (2) the trustee did not separately notice and conduct a meeting of creditors under Bankruptcy Code section 341 for the second amended plan.1 The original meeting of creditors was concluded on July 11, 2001.
On August 8, 2001, this court sustained R & N’s objection to the Debtors’ first amended chapter 13 plan on various grounds. On August 15, 2001, the Debtors filed the second amended plan now before the court (the “Plan”). The Plan requires monthly payments to the trustee in the amount of $1,200 for 36 months. It includes a motion to value the collateral of R & N (accounts receivable) at $4,220 which will be paid as a secured claim under the Plan. Also on August 15, 2001, the Debtors filed amended schedules I & J which now show that the Debtors have excess monthly income of $1,370 — an amount that is sufficient to make the proposed payments of $1,200 under the Plan. (See note 5, infra).
Feasibility: Bankruptcy Code section 1325(a)(6) requires a showing that debtors will be able to make all payments under their plan and to comply with the plan. However, when debtors file a plan which is internally inconsistent, in conflict with the schedules, and patently uncon-firmable, the issue also becomes one of good faith. Bankruptcy Code section 1325(a)(3) requires that a plan be filed in good faith. “Good faith” is not statutorily defined and must be determined on a case-by-case basis and on the totality of the circumstances and the particular features of each chapter 13 plan. In re Padilla, 213 B.R. 349, 352 (9th Cir. BAP 1997) (citing In re Goeb, 675 F.2d 1386 (9th Cir.1982)). “The burden of establishing good faith is on the debtor. This burden is particularly heavy when a ‘superdischarge’ is sought — i.e., the discharge of debts that would not be dischargeable in a chapter 7 case.” Id. (quoting In re Warren, 89 B.R. 87 (9th Cir. BAP 1988)).
The accuracy of a plan, and the statements contained in the plan, is one of the “Warren Factors” that the court can consider in deciding whether a plan was filed in good faith. Id. at 353.
R & N argues that the funding required for the Plan (36 months x $1,200 = $43,200) is insufficient to fund the creditor payments provided for in the Plan. R & N’s objection is well taken. On its face, the Plan contemplates the full payment of priority and secured claims alone of almost $70,000 as follows:
Mortgage arrears: $19,500 plus 10% interest
Vehicles (market value): 5,000 plus 3.9% interest
R & N’s secured claim: 4,220 plus 10% interest
Kern Co. Tax Collector: 425 plus 10% interest
IRS — Tax Debt: 30,000
EDD — Tax Debt: 9,608
Franchise Tax Board — Tax
Debt: 1,184
Total: $69,937
In addition, the Debtors will have to provide for payment of the above-refer*573enced interest, the statutory trustee fees, and an estimated 8% dividend to unsecured creditors. The Plan erroneously estimates that the unsecured claims, including the under-collateralized portion of the secured claims, total $41,147.2 However, the debtors’ reply brief states that the scheduled unsecured claims, including claims added by amendment, total $256,769.3 The scheduled unsecured claims, if filed, could result in additional creditor payments of as much as $20,541. Assuming that the estimated tax claims are correct, the amount of priority and secured claims provided for on the face of the Plan already exceed the funding commitment by more than $26,000.4 Adding in the potential distribution to unsecured creditors, the Plan could require more than $90,000 to fully fund, over twice the funding provided for in the Plan, phis the interest and chapter 13 trustee fees.
Clearly, the Plan on its face does not come close to being feasible and the court cannot find that it was filed in good faith. The magnitude of the feasibility problem in this Plan is readily ascertainable with the use of a simple calculator which suggests to the court that the Plan was never reviewed for feasibility before it was submitted for confirmation. The court views the submission of this Plan for confirmation as potentially sanctionable under Rule 9011(b) which compels the professionals who file pleadings and appear in this court to certify after reasonable inquiry that the pleadings and factual contentions have merit.5
At the hearing, the trustee proposed that the term of the Plan should be extended to 60 months thereby increasing the total amount to be paid into the Plan to $72,000. This is still insufficient to cover the priority and secured obligations, the trustee’s fees, interest to the secured creditors and the 8% distribution to unsecured creditors. In their reply brief, the Debtors propose to increase the Plan payments, in an unstated amount, in future years to pay the unsecured creditors. This proposal is contingent on the Debtors actually having additional funds to contribute in the future. This proposal is too vague and uncertain and it still does not satisfy the shortfall in funding for the priority and secured claims. Even if the Debtors’ total excess monthly income as reflected in their amended schedules I & J ($1,370) was committed to fund this Plan for 60 months (total $82,200), the court still could not make a finding that the Plan is likely to be completed in 5 years in compliance with Bankruptcy Code section 1322(d).
The Debtors also offer to submit to “annual reviews” by the trustee, presum*574ably to evaluate the Debtors’ progress toward plan completion. An “annual review” does not bind the Debtors to anything nor does it automatically result in additional funding for the Plan. A chapter 13 plan which on its face fails to comply with Bankruptcy Code sections 1325(a)(3) and 1325(a)(6) at the time of confirmation cannot be cured with “annual reviews” and illusory promises to “pay more” in the future.
Finally, the Debtors’ offer to “... turn over damages received from the adversary proceeding brought against Mr. Frisbee.” 6 Unless and until the adversary proceeding is settled or reduced to a judgment in favor of the Debtors, the likelihood of actually recovering anything from the adversary proceeding is simply too speculative to be considered by the court for the purpose of a feasibility analysis.
Based on the foregoing, R & N’s objection to confirmation of the second amended Plan is sustained.
New 341 Meeting of Creditors: R & N contends that the trustee should notice and conduct a new meeting of creditors under Bankruptcy Code section 341 for each amended plan. This Plan was noticed for confirmation as a general law and motion matter. R & N’s argument is supported by an analysis of the notice requirements set forth in this court’s General Order 01-02 relating to confirmation of chapter 13 plans. The fixed notice periods in General Order 01-02 are triggered by the 341 meeting and are intended to expedite the process of plan confirmation. However, there is nothing in the Bankruptcy Code to require that a new 341 meeting be conducted in conjunction with each amendment of a plan. The 341 meeting in this case has been concluded. The Debtors were unsuccessful in their original attempt to confirm a plan. As such, the Debtors no longer benefit from the notice periods proscribed in General Order 01-02. If the Debtors file a third amended plan, a confirmation hearing will have to be set and noticed to creditors under the general law and motion rules of this court. A new 341 meeting is not required and R & N’s objection on this ground is overruled.
Motion to Value Collateral
[10] The debtors’ motion to value collateral is denied without prejudice. Any order valuing R & N’s secured claim is only relevant to the treatment of that claim under a confirmed chapter 13 plan. Here, the Debtors do not have a confirma-ble plan before this court. Accordingly, the Debtors’ motion to value R & N’s collateral is premature.
Conclusion
Based on the foregoing, the Debtors’ motions to confirm their second amended chapter 13 Plan and to value the collateral of R & N Enterprises are denied without prejudice.
. R & N also prays that the case be dismissed for unreasonable delay. However, R & N’s opposition was not separately noticed and pled as a counter motion for dismissal and the court has not considered the dismissal issue here.
. The Debtors’ motion to value the collateral of R & N shows that R & N alone will have an estimated unsecured deficiency of $45,780 if the motion is granted. The court questions how the Debtors calculated the estimated figure for unsecured claims stated in the Plan.
. The claims docket of this date reflects that more than $121,000 of unsecured claims have already been filed.
. The Internal Revenue Service has filed a priority and unsecured claim for more than $71,000 based the "un-assessed” 1999 and 2000 income tax liability. This exceeds the amount provided for the IRS in the Plan by more than $40,000. The Debtors did not file their 1999 and 2000 tax returns until just prior to the hearing, and the record does not reflect the actual tax liability. For purposes of this analysis, the court is looking solely to the face of the Plan and the schedules filed to date in this case.
.The problem of feasibility and good faith did not start with the second amended Plan. The Debtors’ original plan called for monthly payments of $1,470. Their original schedules I & J showed that the Debtors had a negative monthly income of $348.96. Based on the original schedules, the Debtors did not have the ability to fund any chapter 13 plan.
. The record suggests that Robert Frisbee is affiliated with R & N Enterprises, the only creditor objecting to confirmation of this Plan. On September 14, 2001, after R & N filed its objection to the Plan, the Debtors commenced adversary proceeding #01-1218 against Robert Frisbee seeking damages for alleged violations of the automatic stay. The complaint seeks compensatory and punitive damages in an amount "according to proof." | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493236/ | MEMORANDUM OPINION
DWIGHT H. WILLIAMS, Jr., Bankruptcy Judge.
The chapter 7 trustee filed a complaint under 11 U.S.C. § 363(h) on August 21, 2000 to sell real property located at 108 Breckenridge Lane, Dothan, Alabama.
The trustee claims a one-half interest in the property. The trustee does not dispute that Debra Marchman Davis, former wife of the debtor, owns the other one-half interest nor that the estate of Edna Bragg Babcock holds a valid and properly perfected first mortgage on the property. Debra Marchman Davis, Susan B. Snider, Hilda B. Jackson, Marilyn B. Jinks and Norman R. Williams are co-executrices and executor of the estate of Edna Bragg Babcock.
Debra Marchman Davis disputes the trustee’s interest in the property. Following a pretrial conference, Debra March-man Davis and the trustee submitted the issue to the court on briefs and stipulated facts. The court treats the parties’ submission as cross motions for summary judgment.
JURISDICTION
The court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. 157(b)(N) and (O).
FINDINGS OF FACT
The following facts are stipulated:
1. Dennis Byron Marchman (“debtor”) and Debra Marchman Davis (“Davis”) jointly owned the real property located at 108 Breckenridge Lane, Dothan, Alabama which served as their marital residence.
2. The debtor and Davis were divorced on March 18, 1999 by a Judgment of Divorce entered in the Circuit Court of Houston County, Alabama.1 The judgment of divorce provides as follows: “The Plaintiff [Davis] is awarded the full title and ownership, and use of the parties’ marital home at 108 Breckenridge Lane, Dothan AL, and the Defendant [debtor] is divested of any interest in the same.”
3. At the time of the divorce, the marital residence was subject to a valid and properly perfected, and recorded, first mortgage now held by the Estate of Edna Bragg Babcock. The judgment of divorce required Davis to assume and pay the outstanding mortgage.
4. The Circuit Court of Houston County entered a subsequent order2 on October 21, 1999 which, inter alia, addressed the subject real property as follows:
Upon [Davis] tendering to the [debt- or] the sum of $5,652.85 representing the [debtor’s] salary in the business known as Floors, Doors, & More and equity in said business, land, and home, then [Davis] would be entitled to a deed from the [debtor] conveying to her all of his right, title, and interest in said home *861located on Breckenridge Lane, Dothan, Alabama.
5. The debtor filed a petition under chapter 7 of the Bankruptcy Code on December 7, 1999 by which time Davis had not paid $5,652.85 to the debtor, and the debtor had not executed a deed conveying his one-half interest to Davis. The mortgage had an estimated balance of $100,000.00.
CONCLUSIONS OF LAW
The chapter 7 trustee seeks authority to sell the Breckenridge Lane property under § 363(h) which provides:
(h) Notwithstanding subsection (f) of this section, the trustee may sell both the estate’s interest, under subsection (b) or (c) of this section, and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety, only if—
(1) partition in kind of such property among the estate and such co-owners is impracticable;
(2) sale of the estate’s undivided interest in such property would realize significantly less for the estate than sale of such property free of the interests of such co-owners;
(3) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs the detriment, if any, to such co-owners; and
(4) such property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.
Davis contends that the trustee does not have an interest in the property to sell under 11 U.S.C. § 363(h). Davis contends that the debtor “merely held an undivided equitable interest in the marital residence subject to” the receipt of $5,652.85.3
The trustee claims a one-half interest in the property contending that the judgment of divorce did not effect a transfer of the debtor’s interest. The trustee contends that payment of the $5,652.85 was a condition precedent to the debtor’s obligation to issue a deed. Because the condition was not fulfilled, the debtor retained title to his one-half interest in the property.
The trustee relies on Grass v. Ward, 451 So.2d 803 (Ala.1984). In Grass, a husband and wife owned real property jointly. The divorce decree awarded possession of the property to the wife as long as she made the mortgage payments. The court required the husband to execute a quitclaim deed upon her satisfaction of the mortgage (on which he was liable).
The wife satisfied the mortgage, but the husband failed to execute a deed conveying his interest in the property. When years later a dispute arose over entitlement to the property, the Supreme Court held that under the doctrine of equitable conversion, equitable title transferred to the wife upon her fulfillment of the condition precedent; that is, upon her satisfaction of the mortgage.
The trustee compares Grass to the facts of the case at bar contending that payment of the $5,652.85 was a condition precedent to the debtor’s obligation to execute a *862deed.4 Because the condition precedent was not fulfilled, the trustee contends that equitable conversion did not occur, and the debtor retained both legal and equitable title to the property. The court disagrees.
The March 1999 state court judgment of divorce unequivocally and unconditionally awards “full title and ownership” of the marital residence to Davis and divests the debtor of “any interest” in the property.5 This court concludes that the judgment of divorce transferred title to the debtor’s one-half interest in the property to Davis. Therefore, the debtor owned no interest in the property when he filed the chapter 7 petition.
This court construes the October 1999 state court order differently from the trustee. The order was the result of complaints by both parties of noncompliance with the judgment of divorce.6 The order was in effect an accounting of the liabilities of the parties under the judgment of divorce. The net result was that Davis owed the debtor $5,652.85.
The intent and purpose of the divorce court, evidenced from the proceedings and decree as a whole, must control. Burnett v. Roy Martin Construction, Inc., 847 F.2d 704, 706 (11th Cir.1988) (citing Martin v. Magnolia Terrace, 366 So.2d 275 (Ala.1979)).
Reading the March and October orders together, the court concludes that the state court intended for the debtor’s execution of a deed to serve as a type of security for the payment of Davis’ monetary obligation. Nowhere in either of the state court orders is there any indication that the court meant for the debtor to retain any interest in the subject property or for Davis to withhold payment of the $5,652.85.
Therefore, the court finds that at the time of the filing of the bankruptcy, the debtor had no interest in the property which could become property of the estate under 11 U.S.C. § 541. At best, the estate held bare legal title in trust for Davis under the doctrine of equitable conversion. The trustee, of course, succeeds to that legal interest only. 11 U.S.C. § 541(d).
The trustee further contends the transfer of the debtor’s one-half interest in the property under the judgment of divorce is avoidable by the trustee’s “strong-arm” powers under 11 U.S.C. § 544(a):7
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the 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;
(2) a creditor that extends credit to the debtor at the time of the com*863mencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists [and has perfected such transfer].
The issue is whether the transfer of the debtor’s interest would be avoidable by a hypothetical judgment creditor or purchaser from the debtor at the time of the commencement of the case.
The trustee contends that the transfer would be avoidable under 11 U.S.C. § 544(a) because the judgment of divorce was not recorded pursuant to Ala. Code 35-4-90 (1975).8
The question arises whether the recording statute is applicable to judgments of divorce. The recording statute in Alabama is very broad and includes all conveyances of real property:
All conveyances of real property, deeds, mortgages, deeds of trust or instruments in the nature of mortgages to secure any debts are inoperative and void as to purchasers for a valuable consideration, mortgagees and judgment creditors without notice, unless the same have been recorded before the accrual of the right of such purchasers, mortgagees or judgment creditors.9
The trustee contends that the recording statute covers conveyances made by judgments of divorce.10 The court was unable to find any authority which directly decides the issue.11 However, the Eleventh Circuit has held that a party who had actual notice of a claim arising from an unrecorded divorce decree was not protected by the recording statute. Burnett v. Roy Martin Construction, Inc., 847 F.2d 704 (11th Cir.1988). The Eleventh Circuit did not hold that the recording statute was not applicable.12 Id.
Assuming the recording statute is applicable, the statute only protects “purchasers for a valuable consideration .. and judgment creditors without notice ...” Ala.Code 35-4-90(a) (1975). Although 11 U.S.C. § 544 renders any actual knowledge of the trustee immaterial, the trustee is charged with constructive notice provided by the real property records in the office of the judge of probate:13
The recording in the proper office of any conveyance of property or other instrument which may be legally admitted to record operates as a notice of the con*864tents of such conveyance or instrument without any acknowledgment or probate thereof as required by law.
Ala.Code § 35-4-68. In other words, “the proper recordation of an instrument constitutes ‘conclusive notice to all the world of everything that appears from the face’ of the instrument.” Lott v. Tarver, 741 So.2d 394, 398 (Ala.1999) (quoting Christopher v. Shockley, 199 Ala. 681, 682, 75 So. 158, 158 (1917)). Therefore, purchasers of real estate are “presumed to have examined the title records and knowledge of the contents of those records is imputed [to them].” Tarver, 741 So.2d at 398 (quoting Walker v. Wilson, 469 So.2d 580, 582 (Ala. 1985)).
Indeed, “whatever is sufficient to put one on inquiry as to the titleholder is enough to charge him with notice. Means of knowledge may be equivalent to knowledge. Whatever is sufficient to put one on guard, and call for inquiry, is notice of everything to which inquiry would lead.” First Alabama Bank of Huntsville v. Key, 394 So.2d 67, 68 (Ala.Civ.App.1981).
The Fifth Circuit recently examined the issue of constructive notice in a case with facts very similar to the case at bar. Anderson v. Conine (In re Robertson) 203 F.3d 855 (5th Cir.2000).14 In that case, the husband and wife owned the marital residence as community property. One month following their divorce, they entered into a “voluntary partition” in the form of a consent judgment. The consent judgment awarded the marital residence to the wife. The consent judgment was not recorded. The husband filed a petition under chapter 7, and the trustee filed a complaint under 11 U.S.C. § 363(h) to sell the residence as property of the estate.
A Louisiana statute prohibited the transfer of former community real property (until partitioned) without the concurrence of both spouses. The Fifth Circuit held that a hypothetical purchaser from the husband at the time of the commencement of the case would be charged with constructive notice from the real property records that the residence was former community property. Therefore, no hypothetical purchaser from the husband alone could achieve bona fide purchaser status.15 The trustee could not avoid the transfer under 11 U.S.C. § 544(a). See Costell v. Costell (In re Costell), 75 B.R. 348 (Bankr. N.D.Ohio 1987).16
In the instant case, the parties owned the property jointly. The briefs do not reveal whether the parties owned the property as tenants in common or as joint tenants with the right of survivorship. However, under Alabama law, a party may transfer his interest in property held under either form of ownership without the consent of the other.17
*865Nevertheless, Alabama law does contain an anti-alienation provision respecting the homestead of married persons. That provision provides:
No mortgage, deed or other conveyance of the homestead by a married person shall be valid without the voluntary signature and assent of the husband or wife, which must be shown by his or her examination before an officer authorized by law to take acknowledgments of deeds, and the certificate of such officer upon, or attached to, such mortgage, deed, or other conveyance, which certificate must be substantially in the form of acknowledgment for individuals prescribed by Section 35-4-29.
Ala.Code § 6-10-3 (1975). “The requirement of a spouse’s signature on a conveyance is intended to protect that spouse from a conveyance of the homeplace without his or her consent.” Sims v. Cox, 611 So.2d 339, 341 (Ala.1992).18
In the instant case, no hypothetical purchaser from the debtor at the time of the commencement of the case could have achieved bona fide purchaser status. Although the judgment of divorce was not recorded, any purchaser would be charged with constructive notice of what was revealed in the records of the probate office. At that time, a search of the public records (in the probate court of Houston County) would have shown the record owners of 108 Breckenridge Lane as Dennis Byron Marchman and Debra Bragg Marchman. A prospective purchaser would then have had an obligation to determine the marital status of the joint owners and whether the realty constituted the homestead. An inquiry, based upon the constructive notice that was available through public records, would have led a hypothetical purchaser to actual notice of Davis’ interest and March-man’s inability to convey an interest in the property.19
Because the trustee is charged with constructive notice, he cannot achieve the status of a bona fide purchaser or judgment creditor without notice. Therefore, the transfer of the debtor’s interest to Davis under the judgment of divorce is not avoidable under 11 U.S.C. § 544(a), and the trustee has no interest in the property to sell under 11 U.S.C. § 363(h).
CONCLUSION
For the foregoing reasons the court concludes that summary judgment should enter in favor of the defendants. A separate order consistent with this opinion will enter.
. The Judgment of Divorce is attached to the Davis brief.
. The order is attached to the Davis brief.
. Davis also argues that "the Debtor’s interest should be classified only as an equitable interest to the amount of $5,652.85.” This argument would be consistent with a contention that, under the doctrine of equitable conversion, Davis received equitable title to the residence. However, the argument is inconsistent with argument of Davis stated in text that the debtor had equitable title to the residence.
.Grass is distinguishable from the case at bar. In Grass, the wife received only possession under the divorce decree. Her right to receive title was conditioned on her satisfaction of the mortgage. In the case at bar, the state court awarded "full title and ownership” of the property tp the wife.
. Bankruptcy courts must give deference to state courts in the domestic law arena. Carver v. Carver, 954 F.2d 1573 (11th Cir.1992).
. Debtor's Brief, p. 1.
. The Davis brief does not address this issue at all.
. The recording or nonrecording of the judgment of divorce is not a fact to which the parties have stipulated. However, the ruling of the court in this matter renders a stipulation of that fact unnecessary.
. The conveyances must be recorded in the office of the judge of probate. Ala.Code § 35-4-50 (1975).
. The trustee cites to Garrett v. Garrett, 628 So.2d 659 (Ala.Civ.App.1993) as authority for the proposition. However, Garrett does not support that proposition.
. However, the ruling in this case renders a decision on that issue unnecessary.
. The court notes that orders of condemnation are covered by the recording statute. State v. Abbott, 476 So.2d 1224 (Ala.1985). In addition, the Alabama Code requires judgments quieting title to land to be recorded. Ala.Code 6-6-544 (1975).
. Anderson v. Conine (In re Robertson), 203 F.3d 855, 864 (5th Cir.2000).
. The Fifth Circuit also addressed the interrelationship between 11 U.S.C. § 544 and the state's recording statute. The court explained that trustee's power to avoid transfers under § 544 is a power created by federal law, but that the extent of trustee's rights as a bona fide purchaser of real property is a matter of state law. Robertson, 203 F.3d at 864.
. The irregularity or “inconsistency, between the Debtor's hypothetical conveyance and the record title, would be constructive notice which may be used against the Trustee.” Costell v. Costell, 75 B.R. 348, 353 (Bankr.N.D.Ohio 1987).
. Ohio law does not permit the transfer of entireties property without the signature of both spouses. The Costell court held that a material fact, whether the parties owned the property as tenants by the entireties, precluded entry of summary judgment under 11 U.S.C. § 544. Costell, 75 B.R. at 353.
. See Nettles v. Matthews, 627 So.2d 870 (1993).
. Temporaiy absence from the property will not be construed as abandonment of the homestead. Gowens v. Goss, 561 So.2d 519 (Ala. 1990).
. If the facts were as indicated by the records of the probate office, no purchase of the debtor's one-half interest would have been valid without the consent of his spouse. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493237/ | ORDER ON CROSS-MOTION FOR SUMMARY JUDGMENT BY UNITED STATES OF AMERICA
PAUL M. GLENN, Bankruptcy Judge.
THIS CASE came before the Court for hearing to consider the Cross-Motion for Summary Judgment filed by the United States of America.
The Department of the Treasury — Internal Revenue Service (IRS) filed a Proof of Claim (Claim No. 6) in this chapter 11 case in the total amount of $2,991,771.11. The total amount claimed includes an income tax for the 1993 tax year in the principal amount of $1,722,536.00, plus interest and penalties on the tax.
The Debtors filed a written Objection to the Claim, and assert that Claim No. 6 should be disallowed in its entirety. Generally, the Debtors acknowledge that they received the sum of $4,360,417.00 in 1993 in connection with the settlement of certain claims that they held against a corporation known as Southeast Toyota Distributors, Inc. and other parties. The Debtors contend, however, that the settlement amount is excluded from their gross income for tax purposes by virtue of § 104(a)(2) of the Internal Revenue Code, because it was received “on account of personal injuries or sickness.”
The IRS asserts that the settlement funds were not received by the Debtors on account of personal injuries or sickness, as required by § 104(a)(2), and that the funds therefore were not excluded from the Debtors’ income in 1993. The IRS further asserts that there is no genuine issue as to any material fact with respect to this question, and that it is entitled to an order allowing Claim No. 6 as a matter of law.
Background
On April 4, 2001, the Court entered an Order denying a Motion for Summary Judgment that had been filed by the Debtors. The factual record in this case has not been supplemented since the entry of that Order.
The Debtor, David B. Jones, was involved in the automobile industry since approximately 1971. In the late 1980’s, Mr. Jones owned 100% of the shares of a South Carolina corporation known as Magic Toyota, Inc. (Magic Toyota). In 1986, Mr. Jones or Magic Toyota purchased a Toyota dealership in Beauford, South Carolina, and contracted with Southeast Toyota Distributors, Inc. to serve as a Toyota dealer. The dealership closed on March 31,1989.
On April 17,1991, Magic Toyota and Mr. Jones filed a Complaint against Southeast Toyota Distributors, Inc. (Southeast Toyota) and other Defendants in the United States District Court. On May 2, 1991, Magic Toyota and Mr. Jones filed an Amended Complaint. (Debtors’ Exhibit 1, *868submitted in connection with their Motion for Summary Judgment). The Amended Complaint, which was eighty pages in length, contained six Counts.
1. Count I was an action for Breach of Contract. In Count I, Magic Toyota and Mr. Jones alleged that (1) they had entered into a contract with the Defendants to become a Toyota dealer; (2) that the Defendants breached their contractual duty to exercise good faith and fair dealing; and (3) that Magic Toyota and Mr. Jones “sustained enormous financial damages” as a result of the breaches. Specifically, Magic Toyota and Mr. Jones alleged that they “had fewer cars to sell, had less desirable models available, had little or no control over the accessories that were provided on their vehicles, lost profits on new car sales, lost warranty and service business, lost finance and insurance business, lost used car business, lost repeat business, lost customer goodwill, and had to sell the business at a greatly reduced price.” (Amended Complaint, ¶ 166).
2. Count II was an action for “Violation of South Carolina Code Section 39-5-10, Et Seq.” In Count II, Magic Toyota and Mr. Jones alleged that the Defendants engaged in numerous acts of unfair methods of competition and unfair and deceptive trade practices in violation of the South Carolina statute. Magic Toyota and Mr. Jones claimed that they were entitled to the full damages permitted under the statute. (Amended Complaint, ¶ 245).
3. Count III was an action for “Violations of the Racketeer Influenced and Corrupt Organizations Act.” In Count III, Magic Toyota and Mr. Jones alleged that they “were injured in their business and property by reason of the violations,” and that they were therefore “pursuant to 18 U.S.C. section 1964(c), entitled to recover threefold the damages they sustained.” (Amended Complaint, ¶ 267).
4. Count IV was an action for fraud. In Count IV, Magic Toyota and Mr. Jones alleged that the Defendants made false representations to them, and knew that the representations were false at the time that they were made. Magic Toyota and Mr. Jones further alleged that they were damaged by the false representations “in that they received less than their fair allocation of new vehicles, suffered allocation penalties, lost sales, incurred business expenses related to their inability to obtain and therefore sell new cars,” and that they were further damaged “in that they were not able to conduct business and were forced out of business, and otherwise suffered economic devastation.” (Amended Complaint, ¶¶ 286, 287).
5. Count V was an action for “Actual and Punitive Damages against the Defendants for Violation of South Carolina Statute Section 56-15-30, et seq.” In Count V, Magic Toyota and Mr. Jones alleged that the Defendants engaged in unfair methods of competition and unfair or deceptive acts or practices in violation of the statute, and further alleged that they were therefore “entitled to recover double their actual damages and punitive damages against the Defendants, pursuant to South Carolina Statute section 56-15-110.” (Amended Complaint, ¶ 299).
6. Count VI was an action for injunc-tive relief against the Defendants. In Count VI, Magic Toyota and Mr. Jones requested that the Defendants be permanently enjoined from engaging in the sale and distribution of vehicles in the state of South Carolina, and also requested other injunctive relief. (Amended Complaint, ¶ 305).
*869In the Amended Complaint, Magic Toyota and Mr. Jones sought actual and punitive damages “in excess of $150,000,000.00.” (Amended Complaint, p. 79).
Linda Jones was not named as a plaintiff in the District Court action.
Mr. Jones did not allege any personal injuries in the Amended Complaint, and did not seek damages for personal injuries or illness in the District Court action. (Doc. 85, Deposition Transcript of David Jones, p. 58; Doc. 83, Deposition Transcript of Donald Strickland, p. 54).
In August of 1991, Mr. Jones verified the Answers to certain Interrogatories propounded by a Defendant in the District Court action. (Debtors’ Exhibit 3, Deposition Transcript of Donald Strickland, Exhibit 22). In response to a request to identify all expert witnesses whom the Debtor proposed to call at trial, Mr. Jones listed only two individuals, and stated that the individuals were “expected to testify concerning the economic damages sustained by the Plaintiffs.” In response to a request to identify and itemize each element of damage that Magic Toyota and Mr. Jones were claiming in the lawsuit, Mr. Jones replied:
The calculations of damages in this case will be complex and will by necessity involve expert testimony, as well as testimony from the Plaintiff, David B. Jones. The Plaintiffs are entitled to economic damages and losses for the breach of contract, fraud, unfair and deceptive trade practices and RICO violations of the Defendants. The actual damages are calculated based upon the profits available to the Plaintiffs, but for the breach of contract of the Defendants.
(Debtors’ Exhibit 3, Deposition Transcript of Donald Strickland, Exhibit 22, Interrogatory No. 4). These responses duplicate the Answers to the Court’s Interrogatories that Mr. Jones had furnished earlier in the case. (Debtors’ Exhibit 3, Deposition Transcript of Donald Strickland, Exhibit 20, Interrogatories (d) and (e)).
At approximately the same time that the discovery responses were furnished, or shortly thereafter, Mr. Jones sent his attorney a handwritten “Statement of Damages through September 1, 1991.” (Debtors’ Exhibit 3, Deposition Transcript of Donald Strickland, Exhibit 13). The damages calculated by Mr. Jones included the following components: (1) Magic Toyota’s losses in 1987, 1988, and 1989; (2) Mr. Jones’ stock loss; (3) the purchase money loan owed to the seller of the dealership; (4) the loss of Mr. Jones’ personal income; (5) interest; (6) a Judgment owed to World Omni Financial Corp.; (7) Mr. Jones’ future earnings; and (8) Mr. Jones’ loss of the name of his business.
The District Court action remained pending for approximately two years, until the parties settled the litigation on May 28, 1993. On that date, the Defendants’ attorney confirmed the settlement by letter to counsel for Magic Toyota and Mr. Jones. (Debtors’ Exhibit 5). The letter confirming the settlement essentially stated only that the parties had “agreed to settle the lawsuit on the same terms and conditions as the settlement of the Toyota of Wilson lawsuit,” and that the parties would execute mutual general releases.
On June 24, 1993, the Debtors executed a General Release in favor of the Defendants named in the District Court action. The Release provided in part:
David and Linda Jones and Magic Toyota, Inc .... for and in consideration of the payment of $4,360,417.00 to David and Linda Jones and $1,389,583.00 to Magic Toyota, Inc. the receipt and sufficiency of which is here*870by acknowledged, do hereby release and forever discharge [the Defendants],
(Debtors’ Exhibit 3, Deposition Transcript of Donald Strickland, Exhibit 6). The author of the General Release cannot be determined from the record.
On various dates between July 9, 1993, and July 16, 1993, the Defendants’ representatives executed a Settlement Agreement. (Debtors’ Exhibit 6). The Settlement Agreement provided that it was “an Agreement of Settlement between David B. and Linda Jones and Magic Toyota, Inc.,” on one hand, and Southeast Toyota and the other Defendants on the other hand. The Agreement further provided that Southeast Toyota would pay to David and Linda Jones and their attorneys the sum of $4,360,417.00 no later than June 28, 1993. The Settlement Agreement also contained provisions regarding the confidentiality of the Agreement, the disposition of documents, and the execution of the mutual releases.
On August 11, 1993, the Debtors’ attorney forwarded a second, revised Release to the Debtors for their signature. (Debtors’ Exhibit 8)., The attorney, Donald Strickland, stated in the cover letter:
I spoke with Taylor Ward [the Defendants’ attorney] today who approved the change of language in your General Release to incorporate language that the payment to you and Linda was for your personal injuries, which was always the intent of the settlement and original release. This change of language does not modify the release agreement at all, it simply states expressly what was otherwise implied from the language of “all claims, causes of action, suits and demands whatsoever in law or in equity.”
The Debtors executed the revised Release on August 12, 1993. The revised General Release provided:
David and Linda Jones and Magic Toyota, Inc. ... for and in consideration of the payment of $4,360,417.00 to David and Linda Jones for their personal injuries and $1,389,583.00 to Magic Toyota, Inc. the receipt and sufficiency of which is hereby acknowledged, do hereby release and forever discharge [the Defendants].
(Debtors’ Exhibit 7)(Emphasis supplied). The Debtors also signed the Settlement Agreement on August 12, 1993, and the executed documents were forwarded to the Defendants’ attorney on August 16, 1993. (Debtors’ Exhibit 9).
A Notice of the Settlement was filed in the District Court, and the action was dismissed with prejudice.
The settlement payment to the Debtors was reported to the IRS on a Form 1099 prepared by Southeast Toyota. (Debtors’ Exhibit 17, Deposition Transcript of George Fender, p. 6; Deposition Transcript of Colin W. Brown, Doc. 92 filed by the IRS, p. 51).
The Debtors filed a tax return for the 1993 tax year, and disclosed the receipt of the settlement amount on the return. The Debtors claimed, however, that the payment was excluded from their gross income pursuant to § 104 of the Internal Revenue Code.
On April 7, 1997, the IRS issued a Notice of Deficiency to the Debtors for the tax year ending on December 31, 1993. The tax deficiency asserted by the IRS relates to the Debtors’ receipt of the settlement payment. The Debtors disputed the determination that a tax deficiency existed, and a petition was filed in the United States Tax Court. Prior to the trial in the Tax Court, however, the Debtors filed a petition under Chapter 11 of the Bankruptcy Code.
*871As set forth above, the IRS filed Proof of Claim No. 6 in the Debtors’ Chapter 11 case in the total amount of $2,991,771.11. The total amount claimed includes income tax for the 1993 tax year in the principal amount of $1,772,536.00, plus interest and penalties on the tax.
The Debtors object to the Claim, and assert that the settlement was received “on account of personal injuries or sickness,” and therefore is excluded from their income under § 104(a)(2) of the Internal Revenue Code.
Discussion
A. The Statute
Section 104(a)(2) of the Internal Revenue Code, as effective in 1993, provided as follows:
TITLE 26. INTERNAL REVENUE CODE
Subtitle A — Income Taxes
§ 104. Compensation for injuries or sickness
(a) In general. — Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include—
(2)the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness.
(Emphasis supplied). The term “gross income” is broadly defined in § 61(a) of the Internal Revenue Code as “all income from whatever source derived,” subject only to the exceptions specifically set forth in the Code. The scope of § 61(a) is purposefully broad to promote Congress’ intent to exert the full measure of its taxing power to bring any accession to wealth within the definition of income. United States v. Burke, 504 U.S. 229, 233, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992).
Section 104(a)(2), as quoted above, authorizes taxpayers to exclude -certain recoveries from their gross income. It is well-established, however, that statutes creating such exclusions from income are narrowly construed. Commissioner of Internal Revenue v. Schleier, 515 U.S. 323, 328, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995)(“Exclusions from income must be narrowly construed.”); Pipitone v. United States, 180 F.3d 859, 861 (7th Cir.1999)(“In contrast to the liberal construction afforded to § 61(a), exclusions from income are narrowly construed.”); Abbott v. United States, 76 F.Supp.2d 236, 241 (N.D.N.Y.1999)(“Inclusions in income must be broadly construed, while exclusions from income must be narrowly construed.”).
It is also well-established that the taxpayer bears the burden of proving that a particular recovery falls within a specific statutory exclusion from income. “A taxpayer claiming an exclusion from income bears the burden of proving that his claim falls within an exclusionary provision of the Code.” Taggi v. United States, 35 F.3d 93, 95 (2d Cir.1994), quoted in Elpi v. United States, 968 F.Supp. 54, 57 (D.Conn. 1997). “[T]he burden of proving that a claim falls within an exclusionary provision rests upon the party claiming the exclusion.” Abbott v. United States, 76 F.Supp.2d at 242.
In Commissioner of Internal Revenue v. Schleier, 515 U.S. 323, 324-25, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995), the United States' Supreme Court addressed the question of whether the settlement of a claim under the Age Discrimination in Employment Act was excluded from income *872under § 104(a)(2). In evaluating the issue, the Supreme Court established a two-part test that a taxpayer must satisfy to exclude an item from income under § 104(a)(2).
In sum, the plain language of § 104(a)(2), the text of the applicable regulation, and our decision in Burke establish two independent requirements that a taxpayer must meet before a recovery may be excluded under § 104(a)(2). First, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is “based upon tort or tort type rights”; and second, the taxpayer must show that the damages were received “on account of personal injuries or sickness.”
Schleier, 515 U.S. at 336-37, 115 S.Ct. 2159(Emphasis supplied). In Schleier, the Supreme Court concluded that no portion of the taxpayer’s recovery was excludable from income. Id. at 337, 115 S.Ct. 2159.
In applying the two-part test, Courts have emphasized the necessity that a clear connection must exist between the personal injuries experienced by the taxpayer and his recovery of damages. According to the Sixth Circuit Court of Appeals, for example, the personal injuries must constitute the motivation behind the settlement. Greer v. United States, 207 F.3d 322, 329 (6th Cir.2000). “In other words, there must be a link between the personal injury and the amount of damages.” Abbott, 76 F.Supp.2d at 242.
Courts look to a variety of factors to determine whether an adequate connection exists between any personal injuries claimed and the settlement.
We first look to the agreement itself for indicia of its purpose. If the agreement lacks express language of purpose, we look beyond the agreement to other evidence that may shed light on “the intent of the payor as to the purpose in making the payment.”
Greer v. United States, 207 F.3d at 329. Similarly, in Pipitone v. United States, 180 F.3d at 863-64, the Seventh Circuit Court of Appeals found that the most important factor to consider was the intent of the payor, where a settlement agreement lacks any express language explaining what the settlement proceeds were paid to settle.
The payor’s intent in making the settlement is a critical factor under § 104(a)(2).
If the payor’s intent cannot be clearly discerned from the settlement agreement, his or her intent must be determined from all the facts and circumstances of the case in issue there. Factors to consider include the details surrounding the litigation in the underlying proceeding, the allegations contained in the payee’s complaint and amended complaint in the underlying proceeding, and the arguments made in the underlying proceeding by each party there.
Robinson v. Commissioner of Internal Revenue, 102 T.C. 116, 127, 1994 WL 26303 (U.S.T.C.1994). See also Villaume v. United States, 616 F.Supp. 185, 187 (D.Minn.1985). In determining the intent of the payor in making the settlement, Courts should consider whether the payor had been adequately notified of the personal injury claims. Abbott, 76 F.Supp.2d at 243; Elpi v. United States, 968 F.Supp. 54, 57-58 (D.Conn.1997).
B. The April 4, 2001, Order on Debtors’ Motion for Summary Judgment
In the Order entered on April 4, 2001, the Court denied the Debtors’ Motion for Summary Judgment. As it applied the facts to the prevailing legal principles under § 104, the Court discussed several fac*873tors indicating that the Debtors’ recovery was not “on account of personal injuries or sickness.”
First, the Settlement Agreement does not allocate any portion of the settlement amount to personal injury claims. In the Settlement Agreement, Southeast Toyota agreed to pay the Debtors and their attorneys the sum of $4,360,417.00. No additional information is set forth in the Agreement regarding the nature or origin of the claims being settled. The Agreement provides only for the payment of a fixed sum, and does not identify the purpose for the payment or the claims to which the payment relates. Consequently, the Agreement does not indicate that the payment to the Debtors was “on account of personal injuries or sickness.” (Order on Motion for Summary Judgment dated April 4, 2001, p. 12).
Second, the Debtors did not allege any personal injuries in the Amended Complaint, and did not seek any damages for personal injury or illness in the District Court action. The requests for relief in the Amended Complaint are based only on the financial or economic damage suffered by the Debtors and Magic Toyota. The Debtors concede that no allegations of personal injury or sickness appear in the Amended Complaint. (Order, p. 13).
Third, in response to discovery initiated by the Defendants in the District Court action, the only damages disclosed by Mr. Jones were economic damages based upon lost profits. No discovery was taken or furnished regarding the physical condition of the Debtors. (Order, p. 13).
Fourth, during the parties’ negotiations to settle the case, no discussions occurred concerning any claims for personal injuries asserted by the Debtors. The discussions focused only on the dollar amount of the settlement, and the merits of the underlying claims were not discussed. (Order, pp. 13-14).
Finally, the attorney who conducted the settlement negotiations on behalf of Southeast Toyota believed that he was settling the case for economic damages, and did not consider personal injuries at all in the settlement of the case. (Order, p. 14).
The factual record has not been supplemented since the entry of the Order on thé Debtors’ Motion.
C. Recent authorities
At least two decisions arising under § 104(a)(2) recently have been issued by the Tax Court.
In Griffin v. Commissioner of Internal Revenue, 2001 WL 20924 (U.S.Tax Ct.), the taxpayer sued certain defendants for fraud, breach of contract, and various other causes of action arising from a financing and distribution agreement involving the taxpayer’s automobile dealership. Neither the original complaint nor the amended complaint contained any allegations that the taxpayer had suffered any mental distress, and the taxpayer did not seek any damages for mental distress. The Complaint focused on the commercial losses of the taxpayer. The litigation was settled for the total sum of $6 million. The settlement agreement provided that the payment was to cover all claims, including mental anguish claims, that were pending or that might have been brought by the taxpayer.
An issue before the Tax Court was whether any portion of the settlement received by the taxpayer was excluded from income under § 104(a)(2). The Tax Court first looked to the settlement agreement to determine whether it contained any express language identifying the claims that were covered by the settlement. The Court then looked to other factors for *874evidence of the intent of the payor in making the settlement. The Court concluded:
Although there is a tangential reference to “mental anguish” in the settlement agreement as an example of potential claims “that might have been brought”, there is no specific amount allocated to any of the 13 counts or any potential claims that petitioner might have had or that he might have subsequently attempted to perfect. Under these circumstances, petitioner has not shown that there was a direct link between the harm and the recovery; i.e., petitioner has not shown that the recovery was attributable to his personal injuries.
Since the settlement was “global” and the taxpayer did not show what portion of the settlement was attributable to personal injuries, the Tax Court held that the taxpayer failed to satisfy the second prong of the Schleier test. Accordingly, the recovery was not excluded from income under § 104(a)(2) of the Internal Revenue Code.
In Dickerson v. Commissioner of Internal Revenue, 2001 WL 233961 (U.S.Tax Ct.), a taxpayer filed a complaint against an insurance company alleging misrepresentation, conversion, and breach of fiduciary duty. The litigation was settled for the sum of $40,000.00. The issue was whether the taxpayer could exclude the settlement proceeds from her gross income under § 104(a)(2).
The Court first stated the general rule: “If the settlement agreement does not expressly state the purpose for which payment was made, the most important factor is the intent of the payor.” In Dickerson, the release signed in connection with the settlement did not allocate the recovery among the various counts of the complaint.
Consequently, the Court then focused on the intent of the payor, and concluded that the insurance company in that case did not intend to compensate the taxpayer on account of personal injury. In reaching this conclusion, the Court considered the following factors:
1. The taxpayer’s amended complaint against the insurance company contained no specific allegations regarding personal injury or sickness.
2. The negotiations leading to the settlement did not involve any discussion regarding any personal injuries suffered by the taxpayer.
3. Nothing in the record indicated that the insurance company was aware of any personal injury that the taxpayer may have suffered.
4. In agreeing to the settlement, the insurance company was motivated primarily by the risk that an award of punitive damages may be entered against it.
The Court concluded that no portion of the settlement proceeds were excluded from the taxpayer’s gross income under § 104(a)(2).
D. Application
The Court entered an Order on the Debtors’ Motion for Summary Judgment on April 4, 2001. The legal principles set forth in that Order, and set forth again in this Order, remain the controlling law under § 104(a)(2) of the Internal Revenue Code. A recovery received by a taxpayer is excluded from income under that section only where the payment is “on account of personal injuries or sickness.” Courts generally look first to the settlement agreement itself to determine the purpose of the recovery. If the agreement does not contain an express statement of the purpose, courts look to other factors to determine whether the payor under the settlement intended to compensate the taxpayer for personal injuries or sickness.
*875In the Order entered on April 4, 2001, the Court also found that certain factors were present in the record. These factors have not been refuted in this case:
1. The written settlement agreement does not allocate any portion of the total settlement amount to personal injury claims. Instead, the agreement provides only for the payment of a lump sum amount, and does not identify any particular claims to which the payment relates.
2. The Debtors did not allege any personal injuries in their Amended Complaint against Southeast Toyota, and did not seek any damages for personal injury or illness in the action filed in the District Court. The requests for relief in the Amended Complaint are based only on economic damages.
3. No discovery was taken regarding the physical condition of the Debtors, and the only information disclosed by the Debtors in response to the discovery propounded to them related to their economic damages.
4. No discussions regarding any personal injury claims occurred during the negotiations leading to the settlement. The discussions centered only on the dollar amount for which the ease could be settled.
5. Counsel for the payor, Southeast Toyota, stated that he believed that he was settling the case for economic damages, and that he had neither heard of nor considered personal injuries in connection with the settlement.
The Court considers these factors in view of Schleier and its progeny, including Greer, Griffin, and Dickerson.
The settlement agreement does not allocate any portion of the recovery to personal injury claims, and other factors present in this case indicate that the payor did not intend to compensate the Debtors for any personal injuries. Consequently, the Court finds that the recovery received by the Debtors in 1993 was not “on account of personal injuries or sickness,” and therefore is not excluded from income under § 104(a)(2) of the Internal Revenue Code.
Accordingly:
IT IS ORDERED that:
1. The Cross-Motion for Summary Judgment filed by the United States of America is granted.
2. The Objection to Claim No. 6 of the Internal Revenue Service filed by the Debtors, David B. Jones and Linda S. Jones, is overruled.
3. Claim No. 6 of the Department of the Treasury — Internal Revenue Service is allowed as filed in the amount of $2,991,771.11. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493238/ | Memorandum re Attorneys’ Fees
ALAN JAROSLOVSKY, Bankruptcy Judge.
After several hearings, the court granted the Chapter 7 trustee’s motion to assume a real property lease. The lessors asserted, as part of the cost of curing defaults, that they recover their reasonable attorneys’ fees. The trustee has objected, arguing that there is no basis for the award of attorneys’ fees as part of the cost of assumption. The notion that a landlord must always be compensated for attorneys’ fees upon assumption of a lease has been soundly rejected. In re Westside Print Works, Inc., 180 B.R. 557, 563-64 (9th Cir. BAP 1995); In re Shangra-La, Inc., 167 F.3d 843, 849 (4th Cir.1999). On the other hand, the landlord is entitled to recovery of its attorneys’ fees if the lease clearly provides for them. Thus, if the lease contained a provision requiring the lessee to pay a reasonable attorney’s fee if the lessor employs an attorney by reason of the lessee’s default, then the lessors would be entitled to recover their attorneys’ fees. In re Bullock, 17 B.R. 438, 439 (9th Cir. BAP 1982). Unfortunately for the lessors in this case, the attorneys’ fee provision in their lease was not drafted broadly enough to allow recovery of their fees from the estate. The lease provides:
In case suit or arbitration is brought by either party because of the breach of any term, covenant or condition herein contained, the prevailing party shall be entitled to recover against the other party reasonable attorneys’ fees and costs such amount as may be fixed by the court.
The lessors here are not entitled to recover attorney’s fees because there was no suit or arbitration, and because neither their motion for relief from the automatic stay nor the trustee’s motion to assume the lease was an action for breach of contract, and because the lessors were not a prevailing party. Provisions granting creditor’s attorney’s fees must be strictly construed to not contradict the traditional American Rule that parties bear their own fees and costs. In re Kudlacek, 109 B.R. 424, 427 (Bankr.D.Nev.1989); In re Roberts, 20 B.R. 914, 920 (Bankr.E.D.N.Y.1982). The court is not aware of any case *49which has called a motion for relief from the automatic stay or a motion to assume a lease a “suit.” In fact, some courts have found such motions to not even qualify when a more generic term such as “action” is made the basis for recovery of attorneys’ fees. See, e.g., In re Schwartz, 68 B.R. 376, 384 (Bankr.E.D.Pa.1986).
Neither a motion for relief from the stay nor a motion to assume a lease is a suit on a contract. They are both governed purely by federal law. As such, state laws awarding attorneys’ fees for successful litigation on a contract áre entirely irrelevant. In re Johnson, 756 F.2d 738, 741 (9th Cir.1985). Even if the court found that state law was somehow applicable, the lessors still would not be entitled to recover their attorneys’ fees because they were not, by any stretch of the imagination, the prevailing parties to anything. While the court did make interim orders on their relief from stay motion, they never received the full relief they sought. If there was any prevailing party as to the motion to assume the lease, it was the trustee. The attorneys’ fee provision in the lease was not drafted with enough scope or precision to permit the lessors to recover their attorneys’ fees from the bankruptcy estate. Accordingly, their request to include their attorneys’ fees as part of the cure upon assumption must be denied. 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/8493239/ | RULING ON PLAINTIFF’S MOTION TO BIFURCATE
ROBERT L. KRECHEYSKY, Bankruptcy Judge.
I.
Linda McMasters (“the debtor”), on June 26, 1996, filed a Chapter 7 petition, and Neal Ossen, Esq. (“the trustee”) became the trustee of her estate. The debt- or scheduled, as an exempt asset, a personal-injury action arising out of a 1994 accident. The trustee, on September 4, 1996, filed an objection to this exemption claim. On March 9, 1999, the court entered an order, on the trustee’s motion, approving a settlement of the debtor’s personal-injury action in the amount of $130,000. The trustee, after payment of litigation costs and fees, presently retains approximately $67,000 of the proceeds of such settlement (“the settlement proceeds”). The trustee, in January 2001, withdrew his objection to the debtor’s claim of exemption, based upon Bankruptcy Code § 522(d)(ll)(E) (compensation for loss of future earnings partially exempti-ble), thereby entitling the debtor to an exemption of $55,000.
Prior to her bankruptcy petition, the debtor had become indebted to a law firm, Gordon & Hiller (“the plaintiff’), for legal services rendered to her. To secure payment of this obligation, the debtor, who is a lawyer, on October 13, 1995, executed a document entitled “Assignment” (“the Assignment”) which purported to “assign and transfer” to the plaintiff “as collateral security” for the unpaid legal fees “the proceeds of my personal injury case arising out of my 1994 accident.” In an amended complaint filed August 9, 2001,1 the plain*88tiff seeks recovery from the debtor and from the trustee its legal fee of $30,000 (plus interest) out of the settlement proceeds. The complaint asserts the Assignment gave the plaintiff either an ownership interest or a “fully-enforeeable” security interest in the settlement proceeds and requests an order so “declaring.” (Compl. at 6).2
II.
In the present motion before the court, the plaintiff requests that its adversary proceeding be bifurcated to allow the plaintiff “to pursue its interest in the Debt- or’s exempt property” prior to proceeding against the estate assets. (Mot. at 1). The motion lists the following three reasons to support bifurcation:
(i) The Exempt Property totaling $55,000 is large enough to satisfy the [plaintiffs] claim in full; 1 and
(ii) The legal case against the Exempt Property is less complicated; 2 Bifurcation may save the Court (and the Trustee) considerable time.
(iii) By allowing the [plaintiff] to proceed against the Exempt Property first, the Court may preserve assets of the Debtor’s Estate for unsecured creditors. For instance, if the [plaintiff] is successful in its efforts to collect from the Exempt Property, then no further litigation would be necessary, and the entire Estate Property ($12,000) could be distributed to unsecured creditors (after payment of administrative expense claims). Also, the estate would not have to incur the expense of defending the adversary proceeding.
1 The Estate Property totals only $12,000. Clearly not enough to satisfy the [plaintiffs] claim of $30,000, plus interest. Another hearing/proceeding would be necessary.
2 Because of the Trustee’s strong-arm powers, the [plaintiff], in order to prevail against the Estate’s Property, must establish either an ownership interest, or a valid fully-perfected security interest in the Estate Property. However, in order to prevail against the Exempt Property, the [plaintiff] need only establish either an ownership interest, or a valid security interest as between the [plaintiff] and the Debtor. Perfection is not necessary to enforce the [plaintiffs] interest in the Exempt Property.
(Id-¶ 6.)
The debtor, but not the trustee, objects to the plaintiffs motion for bifurcation. She primarily contends that the undistributed proceeds exempted by the debtor remain property of the debtor’s estate, and the plaintiffs claim should be defended by the estate’s trustee and not by the debtor at her sole expense. She asserts this is mandated to protect the debtor’s fresh start.
The court finds these arguments unpersuasive. Once the debtor’s exemption claim to the $55,000 became noncontestable, the exempted property no longer constituted estate property, notwithstanding the agreement of the parties as stated in note 2 supra. See, e.g., In re Bell, 225 F.3d 203, 215-18 (2d Cir.2000) (“It is well-settled law that the effect of [a] self-executing exemption is to remove property from the estate and to vest it in the debt- or.”); In re Gamble, 168 F.3d 442, 444 (11th Cir.1999) (same). See also Bankruptcy Code § 522(c)(2) (“property ex*89empted ... is not liable” for prepetition debt, except “a debt secured by a lien _”); In re Scarpino, 113 F.3d 338, 340 (2d Cir.1997) (explaining that while exempted property is generally “not liable” for prepetition debt, 11 U.S.C. § 522(c), there is “no such immunization with respect to any of the debtor’s liabilities that were secured by hens on the exempt property ....”).
III.
Fed.R.Civ.P. 42(b), made applicable by Fed.R.Bankr.P. 7042, provides, in pertinent part: “The court, in furtherance of convenience or ... when separate trials will be conducive to expedition and economy, may order a separate trial of any claim ... or of any separate issue.... ” “The interests served by bifurcated trials are convenience, negation of prejudice, and judicial efficiency.... Bifurcation may therefore be appropriate where the evidence offered on two different issues will be wholly distinct ... or where litigation of one issue may obviate the need to try another issue.” Vichare v. AMBAC Inc., 106 F.3d 457, 466 (2d Cir.1996) (citation omitted). “The decision to bifurcate is within the discretion of the trial judge.” Johnson v. Celotex Corp., 899 F.2d 1281, 1289 (2d Cir.1990). After due consideration of the parties’ arguments, the court grants the plaintiffs motion to bifurcate, and the court will first conduct a trial on the plaintiffs claim to payment out of the settlement proceeds which the debtor has exempted.
The clerk shall schedule a pretrial conference. It is
SO ORDERED.
. The plaintiff filed the original turnover complaint on September 2, 1999.
. The parties have agreed that the trustee retain possession of the debtor's $55,000 exemption and that the plaintiffs right, if any, to a portion of the settlement proceeds be resolved in the Bankruptcy Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493240/ | ORDER RE PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
PAUL J. KILBURG, Chief Judge.
This matter came before the undersigned on October 5, 2001 on a Motion for Summary Judgment filed by Plain-tiffDebtor Danny L. Thies. Debtor was represented by Joseph Peiffer. Defendant Iowa Department of Revenue (the “Department”) was represented by John Waters. After the presentation of evidence and argument, the Court took the matter under advisement. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
STATEMENT OF THE CASE
Debtor seeks a determination that certain taxes owed to the State of Iowa are discharged. Both parties have filed Motions for Summary Judgment and concede there are no genuine issues of material fact. The issue is whether Debtor failed to file required tax returns under 11 U.S.C. § 523(a)(1)(B)®.
FINDINGS OF FACT
The Department agrees Debtor’s Motion for Summary Judgment should be considered although it was not filed within the time set out in the Scheduling Order. The Department has also filed a Motion for Summary Judgment which is now considered fully submitted. The Court will decide both motions in this ruling.
Debtor filed his Chapter 7 petition on July 16, 1999 and received his discharge on October 27,1999. This adversary proceeding seeks a determination that unpaid taxes for tax years 1990, 1991,1992, and 1993, *214including penalties and interest, are discharged. The Department does not contest the dischargeability of 1992 and 1993 taxes. In addition, the Department concedes that all penalties have been discharged. In the event some taxes are excepted from discharge, Debtor requests the Department recalculate the nondis-chargeable portion of the tax after subtracting the dischargeable tax, interest and penalties.
The taxes at issue were assessed for tax years 1990 and 1991. According to the Department, tax and interest due for 1990 is $42,615.28. For 1991, Debtor failed to pay the amount shown on his return. The Department concedes that portion of the 1991 tax liability is discharged. It asserts, however, tax and interest of $19,952.55 due for a subsequent 1991 tax assessment is not discharged.
Debtor filed Iowa income tax returns for 1990 and 1991. Subsequently, the IRS conducted an audit which concluded Debt- or had underreported 1990 income by $212,642 and 1991 income by $107,640. On January 15, 1995, the Department received copies of the federal income tax audit report from the IRS. Based on the IRS audit, the Department recomputed Debt- or’s tax liabilities and assessed additional taxes for the 1990 and 1991 tax years in March 1996. Debtor has not filed amended returns with the Department to report the additional income discovered in the IRS audit. The Department never specifically requested a supplemental return from Debtor.
The Department asserts the 1990 and 1991 tax liability arising from Debtor’s understated income, including interest, is nondischargeable because Debtor’s original tax returns failed to report all his income and Debtor did not file amended returns. It states that, even if these taxes are discharged, it retains a valid tax lien securing all unpaid taxes for 1990, 1991, 1992 and 1993 in the total amount of $201,873.23.
The Department filed Notices of Tax Liens with the Linn County Recorder on February 3, 1997 which cover all of Debt- or’s tax Labilities for 1990, 1991, 1992 and 1993. Debtor points out that he owns no real estate and the Department has previously released its lien on Debtor’s car. Thus, Debtor questions the effectiveness of the Department’s tax liens. The Department requests the court determine the impact of Debtor’s discharge on the Iowa tax liens securing the tax liabilities for 1990 through 1993.
CONCLUSIONS OF LAW
Certain taxes are excepted from discharge pursuant to § 523(a)(1). The relevant provision states, in pertinent part: “A discharge under section 727 ... does not discharge an individual debtor from any debt ... for a tax ... with respect to which a return, if required[,] was not filed.” 11 U.S.C. § 523(a)(1)(B)®. Individual Iowa residents with sufficient net income are required to “make a return, signed in accordance with forms and rules prescribed.” Iowa Code § 422.13. Debtor is an individual Iowa resident with sufficient net income under this statute.
This Court first focuses on Debt- or’s failure to include all of his income in his 1990 and 1991 tax returns. Debtor filed required Iowa tax returns for the 1990 and 1991 tax years. He failed, however, to report a substantial portion of his taxable income. By such inaction, a debt- or forfeits the right to discharge the related tax liability in bankruptcy. In re Walsh, 260 B.R. 142, 151 (Bankr.D.Minn. 2001). The debtor must file some return at some time which discloses all taxable income in order to overcome *215§ 523(a)(l)(B)(i). In re Dyer, 158 B.R. 904, 906 (Bankr.W.D.N.Y.1993). Courts have, noted that “[m]erely because the State caught up to the taxpayer through its diligence does not free that person from the consequences of § 523(a)(l)(B)(i).” In re Blutter, 177 B.R. 209, 211 (Bankr.S.D.N.Y.1995); see also In re Kempf, Adv. No. 86-0154, slip op. at 10 (Bankr.S.D.Iowa Sept. 23, 1988) (concluding taxes are nondischargeable because debtor’s filed returns failed to report self-employment income). Thus, the tax arising from Debtor’s unreported income from 1990 and 1991 is a tax with respect to which a return was required but was not filed.
Debtor argues that the Department was aware of all pertinent facts relating to his additional, unreported income for 1990 and 1991 without the need for filed returns. The IRS reported the results of the IRS audit for those tax years to the Department and the Department was able to assess taxes based on that information. The Department counters that Debtor was required to file an amended return in the circumstances and the IRS report does not constitute a return, which must be filed by Debtor himself.
Iowa Code § 422.22 states, in pertinent part,:
If the director shall be of the opinion that any taxpayer required under this division to file a return has failed to file such a return or to include in a return filed, either intentionally or through error, items of taxable income, the director may require from such taxpayer a return or supplementary return in such form as the director shall prescribe, of all the items of income which the taxpayer received during the year for which the return is made, whether or not taxable under the provisions of this division.
Also relevant is Iowa Administrative Code § 701-39.3(4).' At the time the Department received notice of the IRS audit of Debtor’s 1990 and 1991 income, this section stated as follows:
Amended returns. If it becomes known to the taxpayer that the amount of income reported to be federal net income or Iowa taxable income was erroneously stated on the Iowa return, or changed by an Internal Revenue audit, or otherwise, the taxpayer shall file an amended Iowa return along with supporting schedules, to include the amended federal return if applicable. A copy of the federal revenue agent’s report will be acceptable in lieu of an amended return.
Iowa Admin. Code § 701-39.3(4).1
This Court considered these provisions in In re Dangler, Adv. No. 94-5139XS, slip op. at 23-26 (Bankr.N.D.Iowa October 2, 1995) (Edmonds, J.). In that case, the Department assessed taxes after it learned of embezzlement from a newspaper article. Id. at 5. The Court found that § 701-39.3(4) of the Iowa Administrative Code requires a taxpayer to amend a return after learning income was erroneously reported. Id. at 23; contra In re Duncan, Adv. No. 92-92020, slip op at 8 (Bankr.S.D.Iowa August 5, 1992) (finding Iowa law does not require amended returns, relying on counsel’s professional statement and without mention of Iowa Admin. Code § 701-39.3(4)). An assessment or substitute return filed by the Department does not fulfill the taxpayer’s obligation to file a required amended return. Dangler, slip op. at 25. The Court noted the policy *216underlying § 523(a)(1)(B) is to encourage voluntary self-reporting of income by taxpayers. Id. In Dangler, the debtors filed amended returns reporting the embezzled income and thus the Court concluded the tax debt was discharged. Id. at 26.
Courts have noted that a taxpayer’s obligation to file a return is not satisfied by a State’s knowledge from an IRS report of reassessment of taxes. Blutter, 177 B.R. at 211. Similarly, a substitute return or tax assessment prepared by a taxing entity after learning of a change in the taxpayer’s net income does not satisfy the taxpayer’s duty to file a return. In re Olson, 174 B.R. 543, 546 (Bankr.D.N.D.1994); In re Jones, 158 B.R. 535, 538 (Bankr.N.D.Ga.1993). This Court has stated, in the context of a federal tax dischargeability issue, that a document is a return only if it purports to be a return, is signed and sworn to as such by the taxpayer and evinces an honest and genuine attempt to satisfy the law. In re Pierce, 184 B.R. 338, 342 (Bankr.N.D.Iowa 1995).
Courts disagree about whether filing a subsequent amended return, required by some states, can relieve a debtor from § 523(a)(1)(B)® nondischargeability. Most courts considering the issue have examined the requirements of state law to determine whether a debtor has failed to file a required return after an IRS audit. Compare In re Jackson, 184 F.3d 1046, 1052 (9th Cir.1999) (concluding California statute does not “require” filing of a “return”, but rather a “report”), within re Giacci, 213 B.R. 517, 520 (Bankr.S.D.Ohio 1997) (finding debtor was required to file amended state return under Ohio law to reflect federal adjustment after IRS audit). Some courts have determined that once a taxing authority makes an involuntary assessment, additional amended returns serve no purpose and cannot cure a debtor’s failure to initially and voluntarily file a complete return. See, e.g., In re Walsh, 260 B.R. 142, 151 (Bankr.D.Minn.2001). This Court need not make a determination regarding whether filing an amended return following an IRS audit would absolve Debtor from the consequences of § 523(a)(1)(B)®. This issue is not before the Court since Debtor did not file an amended return to disclose the underreported income for 1990 and 1991, just as he failed to include this income in the initial returns he filed for these tax years.
The Court concludes the tax debt arising from Debtor’s unreported income from 1990 and 1991 is excepted from discharge pursuant to § 523(a)(1)(B)®. This is a tax debt with respect to which a return was required but was not filed. Debtor’s initial returns did not disclose this income. Debtor did not file amended returns pursuant to Iowa Admin. Code § 701-39.3(4) to report this previously undisclosed income. Debtor never self-reported this income on any return. The related tax is nondischargeable.
The Department states Debtor’s nondis-chargeable 1990 tax liability is $42,615.28 and the 1991 tax liability is $19,952.55, including interest through September 24, 2001. As Debtor has requested the Department recompute the amounts due, an issue of fact precludes a final determination at this time of the total amount of tax debt which is nondischargeable under § 523(a)(1)(B)®. The Court will also postpone any consideration of the effect of the Department’s liens until that issue is more fully formulated and the amount of the nondischargeable tax is determined.
WHEREFORE, Debtor’s Motion for Summary Judgment is DENIED.
FURTHER, the Motion for Summary Judgment filed by the Iowa Department of Revenue and Finance is GRANTED.
*217FURTHER, tax debt, including interest, from income Debtor failed to report for the 1990 and 1991 tax years is excepted from discharge under 11 U.S.C. § 628(a)(1)(B)®.
FURTHER, all other tax debt, including interest, for tax years 1990 through 1993 and all penalties are discharged as conceded by the Department.
FURTHER, the total amount of nondis-ehargeable tax and interest and the effect of the Department’s liens remain to be determined.
SO ORDERED this 5th day of November, 2001.
. New language was subsequently added to this provision. The last sentence cited above was changed to: "A copy of the federal revenue agent’s report and notification of final federal adjustments provided by the taxpayer will be acceptable in lieu of an amended return.” Iowa Admin. Code § 701-39.3(4) (text added by amendment underlined). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493242/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER FOR ' JUDGMENT
NANCY C. DREHER, Bankruptcy Judge.
The above-entitled matter came on for trial before the undersigned on August 13, *3942001. Appearances were as follows: Patrick Hennessy for the Plaintiff (“Trustee”); Cass Weil for Defendant Jeffrey Charles Mack, individually (“Debtor”); Ted Chees-ebrough for The Minneapolis Foundation; and Ralph Mitchell for the remaining Defendants. The court has heard the evidence and makes the following:
FINDINGS OF FACTS
A. THE PARTIES
Trustee is the Chapter 7 Trustee in the bankruptcy case of Jeffrey Charles Mack, Debtor. Debtor is settlor of the Jeffrey C. Mack Charitable Remainder Unitrust dated January 17, 1997 (the “CRUT”). Debt- or and Dave F. Senger, his business lawyer, are the Trustees. Defendant Cyndi-Lee Mack is the spouse of Debtor, and Defendants Kara Mack and Erica Mack are the adult children of the Debtor. The Defendant, The Minneapolis Foundation, is a Minnesota nonprofit corporation.
All defendants are and were at all significant times residents of the State of Minnesota.
B. THE ISSUES
Debtor is named as the income beneficiary of the CRUT for his life. This case requires me to determine whether Debt- or’s income interest in the CRUT, which he self-settled on January 17, 1997, as well as his rights as an income beneficiary to remove and replace trustees and to amend the trust to protect its tax benefit status, are property of the bankruptcy estate. The Trustee has, by agreement of the parties, withdrawn all other claims in this case. Specifically, the Trustee does not seek an order finding the trust itself void and awarding the Trustee the assets of the trust. Further, the Trustee does not seek avoidance and preservation of the future income interests of the Debtor’s spouse and two adult children. Moreover, the Trustee does not seek a determination that Debtor’s power, as settlor of the trust, to revoke the income interests of the spouse and children, exercisable only in his last will and testament, is property of the bankruptcy estate. Thus, the only issues before me are 1) who gets the income the trust is required by law, and by its terms, to distribute annually to the Debtor over Debtor’s life and 2) whether the Trustee can step into the Debtor’s shoes as income beneficiary and control who manages the trust assets.
The answer to these questions requires an analysis of the CRUT itself, as well as the law of CRUTs, both state and federal.
C.THE CHARITABLE REMAINDER TRUST (“CRUT”)
Simplistically speaking, a CRUT is a legal device pursuant to which a taxpayer can transfer assets to a trust (in this case a high value/low basis asset), take an immediate charitable tax deduction on his personal income taxes, insure himself a guaranteed stream of income generated by the trust assets (on which he must pay income taxes), defer the taxes on the transactions by and accumulations in the trust, control the manner in which trust assets are invested, and control who gets the remainder interest in the trust assets when the taxpayer and named future income beneficiaries die. The only hitch is that at some point down the line, when the settlor and all individuals whom he has named to follow him as income beneficiaries leave this earth, what’s left in the trust must go to a qualified charitable organization. To make sure that this happens, in order to qualify for favorable tax treatment, a CRUT must be irrevocable and is subject to rigid rules of operation. It goes without saying that a CRUT is a tax planning tool for the rich. CRUTs are legitimate and, indeed, sound *395in the sense that a charity gets something. They are also extremely attractive to wealthy people, like Debtor used to be, who want to defer or avoid taxes altogether while maintaining control of what happens to their money.
Debtor was the settlor of the CRUT and also was the initial Trustee. Debtor funded the CRUT by contributing 100,000 shares of common stock of Olympic Financial, Ltd. (“Olympic”). No other property has been contributed to the CRUT by Debtor or any other person. The Olympic stock was sold by the CRUT in January and February, 1997 for $1,655,188.60. Debtor’s tax basis in the contributed Olympic stock was $10,000.00.
Debtor created the CRUT as part of a financial planning package recommended to him by professionals. At the time, virtually all of his net worth was tied up in Olympic stock. He had formed, successfully managed and then sold the company. He needed to diversify. The creation of the CRUT allowed him to 1) escape capital gains taxes on the CRUT’s sale of Olympic stock; 2) take an immediate charitable tax deduction on his 1997 income taxes; 3) diversify his portfolio; 4) guarantee a steady stream of income for himself and his spouse and children for their life; and 5) in what must be viewed as an afterthought, give a gift to charity which would not vest for decades.1
The parties agree that the Debtor had significant tax reasons for creation of the CRUT. They further agree that, at the time, the creation of the CRUT was a legitimate tax deferral device, even though currently the CRUT would not qualify for favorable tax treatment because it provides so little to charity. Debtor saved several hundreds of thousands of dollars in capital gains taxes he would otherwise have paid had he sold Olympic stock in his own name. He also took a charitable deduction in 1997 of $27,209, which is the value of the charitable remainder interest calculated according to Internal Revenue Service guidelines. The value of the remainder interest awarded to charity was less than 2 percent of the value of the assets contributed to the trust.2
Debtor was not insolvent, as that term is defined in 11 U.S.C. § 101(32),3 before or immediately after the transfer of the Olympic stock to the CRUT, even if the Debtor’s interest in the CRUT was not included as an asset on his balance sheet. Indeed, at the time, his net worth was in the many millions of dollars.
The Trust Declaration states that it was intended to comply with section 4 of Revenue Procedure 90-30,1990-1 C.B. 534, and section 664(d)(2) of the Internal Revenue *396Code. I.R.C. § 664(d)(2). The Debtor retained the right to receive all distributions of a “Unitrust Amount,” as defined by the Trust Declaration, during his lifetime. The Unitrust Amount, further defined in paragraph 2.2 of the Trust Declaration, is, with certain adjustments, equal to 7 percent of the net fair market value of the CRUT assets each year, based on a valuation on the first business day of the taxable year of the CRUT. In accordance with the terms of the CRUT, after Debtor’s death, the Unitrust Amount is to be distributed to Cyndi-Lee Mack, if she survived the Debtor, for her lifetime, and then to Kara Mack and Erica Mack for their lifetimes. Upon the expiration of all of the income interests, the remainder interest in the CRUT is to be distributed to a charitable organization, presently designated to be The Minneapolis Foundation. Distribution of the Unitrust Amount, in the amounts and at the times provided for by the Trust Declaration (quarterly), are mandatory.
Debtor, in his capacity as settlor of the trust also retained the right, in his last will and testament, to revoke the interests of Cyndi-Lee Mack, Kara Mack, and/or Erica Mack in the CRUT. He also retained the right, as the income recipient of the CRUT, to remove or appoint any trustee of the CRUT with or without cause. Finally, the Trust Declaration allowed Debt- or to amend, alter or revoke the designation of The Minneapolis Foundation as the charitable organization which would receive the charitable remainder.
The CRUT provided that the Trustee would have all powers designated in the instrument itself as well as the powers set forth in Minnesota Statute section 501B.81. The Trustee retained the power to invest and reinvest trust assets, subject to compliance with section 664 of the Internal Revenue Code and the Treasury Regulations promulgated thereunder. The Trust Declaration specifically provided that it was irrevocable, except that the Trustee retained the right to amend the Trust Declaration so as to bring it into compliance with section 664 and to revoke the charitable remainder beneficiary designation as referenced above.
The Trust Declaration also provided that it was to be interpreted in accordance with Minnesota law, except that federal law would control if the two were in conflict. Finally, and importantly for our purposes, Article 18 of the CRUT provided:
The interest of a beneficiary in this trust shall not be subject to the claims of any creditor, any spouse for alimony or support, or others, or to legal process, and may not be voluntarily or involuntarily encumbered or alienated, other than by assignment by all recipients (both current and contingent) of the interests defined in Article 2 to the Qualified Organizations designated in or in accordance with Article 3.
Shortly after the sale of the Olympic stock, Debtor decided to get into a new business. As Trustee he arranged to have the CRUT invest over $700,000 in his new company, Emerald First Financial, a Delaware limited liability company engaged in a high tech internet-based business. As arranged by himself and his financial planner, Debtor, not the CRUT, held the controlling voting interest in Emerald First Financial. The CRUT also invested, at Debtor’s direction, in a mortgage on real estate owned by friends. Pursuant to advice from a financial planner, the CRUT also invested in certain publicly traded equities. Emerald First Financial failed and, accordingly, the CRUT has performed poorly. The trust assets were valued at $1,655,188.60 as of December 31, 1997; $2,171,429 as of December 31, 1998; $2,093,038 as of December 31, 1999; and *397$1,129,505 as of December 31, 2000. The CRUT distributed the following Unitrust Amounts to Debtor: 1997, $117,130; 1998, $124,029; 1999, $147,564; and 2000, $146,513.
The Trust and the Debtor utilized the accounting firm of Lurie, Besikof, Lapidus & Company LLP and Douglas R. Wag-man, CPA to compute the Unitrust Amount each year. For calendar years 1999, 2000 and 2001 the CRUT held units of Class A and Class B membership in Emerald First Financial, which units did not have an objectively and readily ascertainable fair market value. On March 16, 1999, Mr. Wagman computed the 1999 Un-itrust Amount at $152,000.00,4 utilizing a $714,500.00 value for the Emerald First Financial units as of December 31, 1998, provided by Mr. Senger, which value amounted to about 35% of the CRUT’s portfolio. On March 23, 2000 Mr. Wag-man computed the 2000 Unitrust Amount at $146,512.66, utilizing a value, as of December 31, 1999, of $714,500 for the Emerald First Financial units owned by the CRUT. By March 14, 2001, Mr. Wagman computed the Unitrust Amount for 2001 to be $79,065.35, based on a CRUT asset value as of December 31, 2000, of $1,129,505.00. In calculating the value of the Unitrust Amount for 2001 Mr. Wag-man placed no value on the Emerald First Financial Units. The CRUT’s investment in Emerald First Financial was worthless. In less than three years, the CRUT lost all of the money it had invested in Emerald First Financial and its asset value had declined from around $1.7 million in 1997 to about $1.1 million in 2001.
D. POSTPETITION PAYMENTS
Debtor filed his bankruptcy case on February 16, 2001. By this time Debtor was insolvent. The Debtor’s fortunes had crashed along with those of Emerald First Financial. On March 22, 2001, the Trustee, through his counsel, made demand upon Debtor and Debtor’s counsel for turnover of any payments from the CRUT distributed to Debtor after the date of filing this bankruptcy case or for escrow of the same pending resolution of ownership.
On March 30, 2001, and June 30, 2001, the CRUT distributed payments of the Unitrust Amount to Debtor, each payment in the amount of $19,744.29. Debtor has retained such funds and has refused to turn over such funds, or any part thereof, to the Trustee, asserting such payments are not property of the bankruptcy estate.5
Accordingly, the Trustee commenced this action seeking a determination of the bankruptcy estate’s right in the CRUT.
E. CONCLUSION
In conclusion, the CRUT was wholly self-settled by Debtor and funded exclusively with assets from the Debtor’s Olympic stock. No other property has been contributed to the trust. Debtor retained a lifetime interest in the CRUT to receive the Unitrust Amount and the distributions of the Unitrust Amount are nondiscretion-ary. The CRUT, by its terms, was formed to qualify as a CRUT within the provisions of section 664 of the Internal Revenue Code and the related regulations. The CRUT is a Minnesota trust and Article 12 of the CRUT provides that Minnesota law shall govern its validity and interpretation. The CRUT further provides that the re*398quirements of section 664 and the regulations promulgated thereunder shall also apply in construing the trust and that where state and federal law conflict, federal law controls.
CONCLUSIONS OF LAW
A. JURISDICTION
This court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(a). This adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(A), (E), (H) and (0). Venue is proper under 28 U.S.C. § 1409(a).
All defendants were served and appeared in this matter. This court has personal jurisdiction over all parties in this adversary proceeding. Pursuant to Minnesota Statute section 501B.41, subd. 2, the Minnesota Attorney general is bound by the determinations of this court in this adversary proceeding, having been duly served with the Summons and Complaint and having not participated further.
B. PROPERTY OF THE BANKRUPTCY ESTATE
Section 541(a) of the Bankruptcy Code provides, in relevant part, that property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case....” 11 U.S.C. § 541(a). The sweep of this section is quite broad. All property interests of the Debtor, with narrow exceptions defined in section 541, are included as property of the bankruptcy estate. See United States v. Whiting Pools, Inc., 462 U.S. 198, 205-206, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983); Humphrey v. Buckley (In re Swanson), 873 F.2d 1121, 1122 (8th Cir.1989); Iannacone v. Trustees of Pillsbury Co. Stock Purchase & Inv. Plan (In re Hansen), 84 B.R. 598, 600 (Bankr.D.Minn.1987). Debtor’s income interest in the CRUT is clearly a property interest encompassed by the broad scope of section 541(a).
The breadth of section 541(a) is further expanded by section 541(e)(1), which invalidates many contractual restrictions on transfer of the Debtor’s interest as well as restrictions provided by other applicable law. Section 541(c)(1)(A) provides:
except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law—
(A) That restricts or conditions transfer of such interest by the debtor....
11 U.S.C. § 541(c)(1)(A).
Section 541(c)(2) provides a narrow exception to the rule of section 541(c)(1), and is applicable only to beneficial interests in a trust. Section 541(c)(2) provides:
A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbank-ruptcy law is enforceable in a case under this title.
11 U.S.C. § 541(c)(2).
As previously noted, Article 18 of the CRUT provides a restriction on transfer of Debtor’s income interests. In order to exclude the Debtor’s income interest from property of the estate, however, this “spendthrift” provision must be enforceable under “applicable nonbankruptcy law.” “Applicable non-bankruptcy law” includes both state and federal law. Patterson v. Shumate, 504 U.S. 753, 762, 112 S.Ct. 2242,119 L.Ed.2d 519 (1992).
There are only three scenarios under which the restrictions in Article 18 could remove Debtor’s interest in the *399CRUT from the bankruptcy estate: 1) if Minnesota state common law would enforce this provision; 2) if the Internal Revenue Code or regulations promulgated thereunder mandate the inalienability of Debtor’s life income interest, or 3) if a Minnesota statute so mandates.
As the Trustee correctly points out, no other interest in the CRUT is inalienable. The rights of Cyndi-Lee, Kara and Erica Mack are alienable, as are the rights of The Minneapolis Foundation. They can all be written out of the CRUT. Thus, if state or federal law mandates that the settlor’s interest in the CRUT is inalienable, the Debtor, as settlor and initial income beneficiary, is in a very unique and favored position. Moreover, as the Trustee also correctly points out, he is not attempting to reach or in any way affect the rights of income beneficiaries, other than the Debt- or-Settlor, or the rights of the charitable remainder. Nothing I decide here will in any way impact on the rights of the charitable remainder. The only issue is whether Congress or the State of Minnesota, in passing CRUT-governing statutes, intended not only to encourage charitable giving by allowing tax avoidance or deferral, but also to create a new protection from creditors for those wealthy enough to give away the remainder interests in assets. In other words, do we have a new bankruptcy planning tool for the wealthy? In passing section 664 of the Internal Revenue Code and Minnesota Statute sections 501B.31 and .32, did Congress and/or the Minnesota Legislature intend to create, not only a way for taxpayers to defer or avoid federal and state taxes, but also a way for settlors of these trusts to avoid paying their creditors. The question appears to be one of first impression and the answer to the question is no.
C. MINNESOTA COMMON LAW
It is clearly established that section 541(c)(2) of the Bankruptcy Code was intended to preserve the status of a spendthrift trust which would be recognized by state law. Patterson v. Shumate, 504 U.S. at 758, 112 S.Ct. 2242; Iannacone v. Trustees of Pillsbury Co., 84 B.R. at 601. In Minnesota, the validity of spendthrift trust provisions is governed by common law, there being no Minnesota statute which expressly deals with spendthrift provisions. Id. However, as I have previous held, Minnesota common law renders void and unenforceable an anti-alienation provision in a self-settled trust. In re Simmonds, No. 98-48019 (Bankr.D. Minn. April 28, 1999), affd Simmonds v. Larison, 240 B.R. 897 (8th Cir. BAP 1998).
Minnesota courts have clearly recognized a settlor’s right, in creating a trust as a gift, without receipt of consideration, to suspend the beneficiary’s ability to assign or alienate the beneficiary’s equitable interest in the trust. The seminal case in Minnesota is First National Bank of Canby v. Olufson, 181 Minn. 289, 232 N.W. 337 (1930). In Olufson the bank had challenged the spendthrift protection of the debtor’s interest in a trust created by the debtor’s father. The bank asserted such spendthrift provisions conflicted with common law restrictions on the suspension of the power to transfer or alienate property. The court determined that, with regard to an equitable interest in property, as opposed to legal title, it was willing to diverge from the English common law forbidding restraints on alienation. The court was willing to recognize such a restraint in furtherance of an overriding principal, that the power of a testator to direct the disposition of his gift, and to prescribe the purposes and object of its benefit, would predominate over the claim of a creditor of a beneficiary, not the testator. Olufson, 181 Minn. at 293, 232 N.W. *400at 339. However, even while recognizing this restraint on alienation, founded on the preeminence of the benefactor’s will over the rights of the beneficiary’s creditors, the court recognized that a materially different question was presented when the benefactor and the beneficiary were one and the same person. “Neither do we for a moment question the rule that one may not by his own act preserve to himself the enjoyment of property in such manner that it shall not be subject to the claims of creditors, or placed beyond his own power of alienation.” Id.
The Minnesota Supreme Court’s enforcement of spendthrift provisions in trusts since Olufson, although clear and expansive, has always involved protection of the interest of a beneficiary who is not the settlor of the trust. See, Morrison v. Doyle, 582 N.W.2d 237, 240 (Minn.1998); Van Dyke v. First Nat’l Bank (In re Moulton’s Estate), 233 Minn. 286, 296, 46 N.W.2d 667, 672-673 (1951); Erickson v. Erickson, 197 Minn. 71, 78-79, 266 N.W. 161, 162-163 (1936). In each of these cases, the court has recognized the preeminence of the testator’s will in making a gift over the rights of the beneficiary’s creditors in reaching the object of such gift. However, the very statement of this principal in each of these cases recognizes that a materially different question is presented when the settlor and beneficiary are the same person:
The validity of a spendthrift trust is upheld on the theory that the owner of property, in the free exercise of his will in disposing of it, may secure such benefits to the objects of his bounty as he sees fit and may, if he so desires, limit its benefits to persons of his choice, who part with nothing in return, to the exclusion of creditors and others.
Morrison, 582 N.W.2d at 240 (citing In re Moulton’s Estate, 233 Minn, at 290-91, 46 N.W.2d at 670). See also, Erickson, 197 Minn. at 75, 266 N.W. at 162.
While Minnesota’s highest court has not spoken directly on the subject, federal courts have consistently concluded that Minnesota courts would not recognize a spendthrift trust where the trust was self settled. Drewes v. Schonteich, 31 F.3d 674, 677 (8th Cir.1994); Humphrey v. Buckley (In re Swanson), 873 F.2d 1121, 1123-24 (8th Cir.1989); Simmonds, 240 B.R. at 898.
The rule that a settlor cannot protect his interest in a trust through use of a spendthrift provision was also clear in the common law:
(1) Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest. (2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.
The Restatement (Seoond) of Trusts § 156; see also 1 Scott, Trusts ¶ 156. The principal that a settlor cannot protect his property by transfer to a trust, retaining an interest in the trust is, thus, well settled.6
*401D. FEDERAL LAW
1. Applicable Nonbankruptcy Law
The Defendants argue, however, that since Patterson, it makes no difference whether an anti-alienation ’provision is valid and enforceable under state law if federal law furnishes such a prohibition on alienation. In Patterson, the Supreme Court did hold that “applicable nonbank-ruptcy law” referenced in section 541(c)(2) of the Bankruptcy Code is not limited to state law and can include federal law. Patterson v. Shumate, 504 U.S. at 758, 112 S.Ct. 2242. Applicable nonbankruptcy law means any applicable law, state or federal, aside from the Bankruptcy Code, that would prevent ordinary creditors of the debtor from reaching the asset. In re Mueller, 256 B.R. 445 (Bankr.D.Md.2000).
Patterson concerned an ERISA7 qualified employer pension plan that did not qualify as a spendthrift trust under state law. Nonetheless, the Court held that the debtor’s beneficial interest therein was not property of the estate. The Court looked first at section 1053 of ERISA. That section provides in pertinent part: “[e]ach pension plan shall provide that benefits provided under the plan may not be assigned or alienated.” 29 U.S.C. § 1053(a)(1).
The Court next looked at the coordinate section of the Internal Revenue Code, entitled Qualified pension, profit sharing, and stock bonus plans, which stated the general rule that “[a] trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that the benefits provided under the plan may not be assigned or alienated.” I.R.C. § 401(a)(13).
Finally, the Court reviewed the applicable Treasury Regulation that provides in pertinent part that “benefits provided under the [ERISA] plan may not be assigned or alienated.” Treas. Reg. § 1.401(a)-13(b)(1). The Supreme Court found these *402sections to be “applicable nonbankruptcy law” for purposes of Bankruptcy Code section 541(c)(2). The question I must answer is whether section 664 of the Internal Revenue Code and the regulations thereunder, similarly provide applicable non-bankruptcy law which prohibits alienation of a Debtor’s noncharitable income interest in the CRUT.
In ERISA Congress enacted an entirely new body of law and coupled it with provisions in the Internal Revenue Code granting qualifying retirement accounts favorable tax treatment. There is no affirmative law counterpart to ERISA dealing with CRUTs. Here, all applicable federal law is contained in the Internal Revenue Code and Treasury Regulations.8 Moreover, the analysis of federal law on this issue is distinctively different than the analysis of state law. It is state law, not federal law, which dictates the substantive property rights of the grantor and beneficiaries of a trust and the rights of their respective creditors. See Sim-monds, 240 B.R. at 898. As discussed earlier, Minnesota law not only does not authorize, but prohibits the settlor of a self-settled trust from suspending the alienation of his retained interest in the trust. Simmonds, 240 B.R. at 899. In contrast, the Internal Revenue Code dictates the taxation of the trust and its beneficiaries, not substantive property rights. Failure to comply with requirements of the Internal Revenue Code will alter the taxation of the trust, but would not override state law regarding substantive rights in the trust. Thus, in examining the Internal Revenue Code it is not enough that it does not explicitly prohibit an anti-alienation clause. Rather for the Defendants to be successful, they must show that section 664 and the regulations affirmatively require an anti-alienation restriction on the Debtor’s interest in the CRUT.
2. Internal Revenue Code Section 664
Congress passed section 664 to curb abuses that had developed in the use of split interest trusts with charitable remainders. Estate of Reddert v. U.S., 925 F.Supp. 261, 266 (D.N.J.1996). If qualified, the grantor receives certain tax benefits, including an income tax charitable deduction for the present value of the charitable remainder interest created. Additionally, the qualified trust is income tax exempt, except for certain business income.9
Section 664(a) provides, in general, that notwithstanding other provisions of the Internal Revenue Code, taxation of a charitable remainder unitrust is governed by section 664 and regulations promulgated thereunder. Subdivision (b) specifies how distributions to a “beneficiary” shall be taxed. “Beneficiary” is defined to include an heir, legatee, or devisee. I.R.C. § 643(c). Subdivision (c) relieves a CRUT from payment of taxes, except with respect to limited business income. Subdivisions (e) and (f) specify how the charitable contribution to a CRUT is to be valued. Most importantly, subdivision (d) sets limits on the amounts that must or may be distributed to income beneficiaries, to whom such *403distributions can be made, the outside limit on the trust’s duration, and a minimum value that the charitable remainder interest must have to qualify for favorable treatment:
I.R.C. § 664(d)(2) provides as follows:
(2) CHARITABLE REMAINDER UN-ITRUST. — For purposes of this section, a charitable remainder unitrust is a trust—
(A) from which a fixed percentage (which is not less than 5% nor more than 50%) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in § 170(c) and, in the case of individuals, to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals.
(B) from which no amount other than the payments described in subparagraph (A) ... may be paid to or for the use of any person other than an organization described in section 170(c).
(C) following the termination of the payments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use ...
(D) with respect to each contribution of property to the trust, the value (determined under section 7520) of such remainder interest in such property is at least 10 percent of the net fair market value of such property as of the date such property is contributed to the trust.
This section sets forth the basic requirements of a qualified charitable remainder unitrust. Subsection (A) of section 664(d)(2) defines the unitrust amount which can be paid to noncharitable beneficiaries as no more than 50% nor less than 5% of the net fair market value of that asset, valued annually. Subsection (B) provides that no amount other than the unitrust amount or a qualified gift to a charity may be paid by the trust. Subsection (C) provides requirements for the disposition of a charitable remainder interest.10
Conspicuously absent from Internal Revenue Code section 664 is any mandate that the noncharitable beneficiary’s interest in a charitable remainder unitrust be unalienable. Presumably, if Congress had wished to impose such a requirement, it knew how to draft such language.11 In fact, the language of section 664 suggests that Congress had no such intention. Congress used the word “beneficiary” to refer to the recipient of distributions from a CRUT. I.R.C. § 664(b). This term is broadly defined in section 643(c) to “include” (a nonlimiting word) certain types of transferees. The term has also been interpreted by the United States Supreme Court to include an assignee of the original taxpayer. See Blair v. C.I.R., 300 U.S. 5, 12, 57 S.Ct. 330, 81 L.Ed. 465 (1937).12
*404Defendants, however, emphasize the language of section 664(d)(2)(A) which requires distribution of a fixed percentage of the value of Trust assets annually to one or more “individuals” who must be living at the time of the creation of the trust. From this language, coupled with that in section 664(d)(2)(B) which prohibits distributions other than to recipients of the Unitrust Amounts and to the charitable remainder, they argue that Congress clearly indicated that the Unitrust Amount must be paid only to Debtor. As the Trustee correctly points out, however, this is far too literal a reading of the statutory language. The purpose of requiring a specific designation of beneficiaries, and that they be living persons, is clear, at least when the Unitrust Amount is payable for the lives of the beneficiaries. Unless there is a requirement that the beneficiaries be specifically identified, it would be impossible to value the charitable remainder interest. See Treas. Reg. § 1.664.4(1997) (valuation of the remainder interest). Such language gives no hint that it was intended to do more than facilitate valuation of the charitable remainder interest.
3. Treasury Regulations
This is borne out in the regulations. In trying to resolve any ambiguity in the statutes, courts have consistently deferred to the Treasury Department’s interpretive regulations so long as they “implement the congressional mandate in some reasonable manner.” United States v. Cartwright, 411 U.S. 546, 550, 93 S.Ct. 1713, 36 L.Ed.2d 528 (1973)(quoting United States v. Corred, 389 U.S. 299, 307, 88 S.Ct. 445, 19 L.Ed.2d 537 (1967)). Of particular importance in this case are portions of Treasury Regulation 1.664-1 which deals generally with charitable remainder trusts and Treasury Regulation 1.664-3 which provides rules relating specifically to charitable remainder unitrusts.
Treasury Regulation 1.664-1 sets forth general information on charitable remainder trusts. It provides that “[g]enerally, a charitable remainder trust is a trust which provides for a specified distribution, at least annually, to one or more beneficiaries, at least one of which is not a charity, for life or for a term of years, with an irrevocable remainder interest to be held for the benefit of, or paid over to, charity.” Treas. Reg. § 1.664-l(a)(l)(i)(1997). The regulation also contains definitions applicable to Treasury Regulation 1.664-1 as well as Treasury Regulation 1.664-3. Included are a definition of “unitrust amount” (“The term ‘unitrust amount’ means the amount described in Paragraph (a)(1) of Treasury Regulation 1.664-3 which is payable, at least annually, to the beneficiary of a charitable remainder unitrust”) and “recipient” (“the term ‘recipient’ means the beneficiary who receives the possession or beneficial enjoyment of the ... unitrust amount”). Treas. Reg. § 1.661-l(a)(l)(iii)(c) and (d) respectively. Internal Revenue Code section 664-l(a)(2) provides that a trust must be either a charitable remainder annuity trust or a charitable remainder unitrust and that a trust is a charitable remainder trust only if it is either a charitable remainder annuity trust in every respect or a charitable remainder unitrust in every respect. Treasury Regulation 1.664-l(a)(4) states that, in order for a trust to be a charitable remainder trust it must meet the definition of and function exclusively as a charitable remainder trust from inception. It also makes clear that one does not become the “owner” of a trust merely because one is both the grantor and a recipient of distributions.
*405More specific to charitable remainder unitrusts and the issue of whether the income interest of Debtor is inalienable is Treasury Regulation 1.664-3. Treasury Regulation 1.664-3(a)(l) describes a charitable remainder unitrust as a:
trust which complies with the applicable provisions of section 1 .664-1 and meets all of the following requirements — (a) General Rule. The governing instrument provides that the trust will pay not less often than annually a fixed percentage of the net fair market value of the trust assets determined annually to a person or persons described in paragraph (a)(3) of this section for each taxable year of the period specified in (a)(5) of this section.
Treas. Reg. § l-664-3(a)(l).
Treasury Regulation 1.664 — 3(a)(3), in turn, addresses who may receive distribution of the Unitrust Amount:
(3) Permissible recipients
(i) General rule. The amount described in subparagraph (1) of this paragraph is payable to or for the use of a named person or persons, at least one of which is not an organization described in Section 170(c). If the amount described in subparagraph (1) of this paragraph is to be paid to an individual or individuals, all such individuals must be living at the time of creation of the trust. A named person or person may include members of a named class except in the case of a class which includes any individual, all such individuals must be alive and ascertainable at the time of the creation of the trust unless the period for which the unitrust amount is to be paid to such class consists solely of a term of years. For example, in the case of a testamentary trust, the testators will may provide that the required amount shall be paid to his children living at his death.
(ii) Power to alter amount paid to recipients. A trust is not a charitable remainder unitrust if any person has the power to alter the amount to be paid to any named person other than an organization described in section 170(c) if such power would cause any person to be treated as the owner of the trust, or any portion thereof, if Subpart E, part 1, subchapter J, Chapter 1, Subtitle A of the Code were applicable to such trust ... For example, the governing instrument may not grant the trustee the power to allocate the fixed percentage among members of a class unless such power falls within one of the exceptions to section 674(a).
Treas. Reg. § 1.664-3(a)(3).
Treasury Regulation 1.664-3(a)(4) deals with payments other than the payments made to recipients of the Unitrust Amount:
Other payments. No amount other than the amount described in subparagraph (1) of this paragraph may be paid to or for the use of any person other than an organization described in section 170(c). An amount is not paid to or for the use of any person other than an organization described in section 170(c) if the amount is transferred for full and adequate consideration. The trust may not be subject to a power to invade, alter, amend or revoke for the beneficial use of a person other than an organization described in section 170(c).
Treas. Reg. § 1.664-3(a)(4).
And Treasury Regulation 1.664-5 deals with how long the Trust has to vest the remainder interest in a charitable organization. Subparagraph (5) provides:
Period of payment of unitrust amount—
(i) General rules. The period for which an amount described in subpara-graph (1) of this paragraph is payable begins with the first year of the charita*406ble remainder trust and continues either for the life or lives of a named individual or individuals or for a term of years not to exceed 20 years. Only an individual or an organization described in section 170(c) may receive an amount for the life of an individual ....
Treas. Reg. § 1.664-5.
Treasury Regulation 1.664 — 3(a)(3) by its title and its terms focuses on who may be a recipient of payments from the trust and is therefore most pertinent to the question before me. Once again, there is no explicit anti-alienation prohibition mentioned. If this Regulation prohibits alienation of the noncharitable interest, it only does so implicitly, and I find no such implication.
To the contrary, Treasury Regulation 1.664-3(a)(3) provides that the Unitrust Amount may be payable “to or for the use of” a named person or persons. A person, as defined by the Internal Revenue Code, includes, among others, an individual, a trust, or an estate. I.R.C. § 7701(a)(1). The term “estate” is not limited and would include a bankruptcy estate as well as a testamentary estate. If the trust provides for the payment to an individual, that individual must be living at the time of the creation of the trust. In permitting distribution of the Unitrust Amount to a person, this section contemplates that someone other than a living individual may receive a distribution. If distributions are initially made to a person and not an individual living at the time of the creation of the trust, Internal Revenue Code section 664 allows for payment of benefits for a term of years.
Again, as in the statute, this regulation focuses on restrictions which allow valuation of the charitable remainder interest. However, from the requirement that specific beneficiaries be designated, it cannot be reasonably implied that such beneficiaries are forbidden from assigning their interests. So long as someone’s life (in this case that of the Debtor) serves to facilitate valuation of the remainder interest, it is of no consequence to the statutory scheme or its purposes that some other person, including the Debtor’s bankruptcy estate, receives the benefits.
Defendants, however, argue that although there is no explicit anti-alienation language, taken as a whole, the regulations implicitly prohibit such alienation. This is incorrect. The Treasury Regulation construing Internal Revenue Code section 674 recognizes the rights of a beneficiary to assign or substitute its interest. Section 674 of the Internal Revenue Code provides that a grantor of a trust would be treated as an owner if the grantor has the power to dispose of a beneficial interest. I.R.C. § 674. The companion regulation clarifies this power. The regulation states, in part:
This limitation does not apply to a power held by a beneficiary to substitute other beneficiaries to succeed to his interest in the trust (so that he would be an adverse party as to the exercise or nonex-ercise of that power). For example, the limitation does not apply to a power in a beneficiary of a nonspendthrift trust to assign his interest.
Treas. Reg. § 1.674(d)-2(b).
If the CRUT does not qualify as a spendthrift trust, the regulation specifically provides for the alienation of the beneficiaries interest.
Defendants argue that Congress assumed CRUTs would be self settled,13 and they rely principally on certain language in Treasury Regulation 1.664-3(a)(3), (4) and (5). As noted, however, Treasury Regula*407tion 1.664 — 3(a)(3)(i) actually refutes Defendants’ position because it allows distributions “to or for the use of’ a recipient and designations by class. Insofar as it refers to living individuals, there is no mandate that such living individuals be the sole recipients of benefits. Nor does the mandate, in Treasury Regulation 1.664-3(a)(3)(ii), to the effect that a trust loses its beneficial tax status if any person has the power to alter the amount to be paid to any named person if such power would cause any person to be treated as the owner of the trust, support Defendants’ argument. The Trustee, on behalf of the estate, will receive the same Unitrust Amount the Debtor would have received and, in doing so, the Trustee, like the Debtor before him, will not be treated as the owner of the trust. See I.R.C. § 678.14
Treasury Regulation l-664-3(a)(4) is also not of help to Defendants. It addresses “other payments” and merely emphasizes that the charitable trust remainder must be protected from invasion and reduction, other than payments to persons in return for value. It expands upon the statutory dictate that payments of the uni-trust amount and payments of the charitable remainder are the only types of payments that can be made. In essence, new beneficiaries may not be added if the effect would be to invade or alter the remainder. Substituting a bankruptcy trustee for Debtor, a noncharitable income beneficiary, does not invade or alter the charitable remainder.
Finally, defendants point to Treasury Regulation 1.664-3(a)(5) as the “most direct restriction” on a transfer of debtor’s beneficial interest in the trust. This regulation is entitled “Period of payment of unitrust amount.” It does not purport to deal with who may be a recipient, as does Treasury Regulation 1.664-3. The first sentence of Treasury Regulation 1.664-3(a)(5)(i) merely reiterates the statutory dictate that a trust may extend either for the life or lives of a named individual or individuals or for a term of fixed years, not to exceed 20. The second sentence then goes on to state that “[o]nly an individual or an organization described in section 170(c) may receive an amount for the life of an individual.” Treas. Reg. § 1.664-3(a)(5)(i). According to the Defendants, “The bankruptcy estate is neither an individual nor a section 170(c) organization. The legal restriction on a transfer of Mack’s beneficial interest could not be clearer.” Defendants take sentence two out of context. It is merely meant to clarify how long payments may be made (for the life of an individual), not to limit the person who can receive a unitrust distribution. So long as someone’s life is the defining life for purposes of determining the trust duration (in this case Debtor’s life), who actually makes use of the distribution is of no consequence.
4. Revenue Procedures
In conclusion, neither federal statute nor Treasury Regulations mandate that Debt- or’s noncharitable income interest be pro*408tected from his creditors. Applicable revenue procedures support this conclusion.
Because of the significant role tax consequences play in the creation of charitable remainder unitrusts, requests for private letter rulings regarding the qualification of proposed trusts are common. In 1989 and again in 1990, the IRS issued revenue procedures, Revenue Procedure 89-20, 1989-1 C.B. 841 and Revenue Procedure 90-30, 1990-1 C.B. 534. Each of these revenue procedures set out sample trust instruments which, if enforceable under local law, meet the requirements of a qualified charitable remainder unitrust. Absent from any of the sample trust instruments is any anti-alienation provision for the benefits to be paid by the trust to noncharitable beneficiaries.
5. Excise Taxes
Defendants also argue that if the bankruptcy estate takes control of the Debtor’s interest in the Trust and receives payment of the Unitrust Amount, the CRUT will be' treated as a private foundation and that certain excise taxes will be imposed. Once again, I disagree.
Defendants argument fails because CRUTs are subject to certain statutes that govern private foundations, including Internal Revenue Code section 4941 (prohibition against self dealing) and section 4945 (prohibition against taxable expenditures). I.R.C. §§ 4947(a)(2), 4947(b)(3). In Minnesota, section 501B.32, subd. 1, provides for automatic incorporation of the private foundation prohibitions into the governing agreement of any “split interest trust” as defined in section 4947(a)(2) of the Internal Revenue Code, to the extent such provisions apply. Minn. Stat. § 501B.32 (1).
Defendants argue that the bankruptcy Trustee is a “disqualified person” and that payment of any amount to the bankruptcy estate, including the Unitrust Amount, would be an act of self dealing. Pursuant to Internal Revenue Code section 4941(a)(1) a tax is imposed on any act of self dealing between a private foundation and a disqualified person as defined in Internal Revenue Code section 4946. That section does provide that a private foundation manager is a disqualified person. However, it further provides that the Debtor is himself a “disqualified person” as the Debtor is a “substantial contributor” to the trust. I.R.C. § 4946(a)(1)(A). However, Treasury Regulation 53.4947-1(c)(2)® of the excise tax regulations provides that, under Internal Revenue Code section 4947(a)(2)(A), the self dealing provision of section 4941 and certain other private foundation rules do not apply to amounts payable under the terms of a split interest trust to income beneficiaries. Treas. Reg. § 53.4947-(c)(2)(i). In other words, payment of the Unitrust Amount to a person entitled to receive the same, is not an act of self dealing, even if the person is an otherwise “disqualified person” as defined in Internal Revenue section 4946.
Section 1398 further clarifies that no tax, including an excise tax, will be payable by reason of the transfer of the Debtor’s beneficial interest in the CRUT to the bankruptcy estate. Internal Revenue Code section 1398(f)(1) provides:
a transfer (other than by sale or exchange) of an asset from the debtor to the estate shall not be treated as a disposition for purposes of any provision of this title assigning tax consequences to a disposition, and the estate shall be treated as the debtor would be treated with respect to such asset.
I.R.C. § 1398(f)(1).
This section is extremely broad. It overrides any other provision of the *409Internal Revenue Code. The transfer from Debtor to the bankruptcy estate is not a disposition for purposes of any provision of the Internal Revenue Code, including the excise tax provisions of Internal Revenue Code sections 4941-4947. The bankruptcy estate also succeeds to the tax attributes of the Debtor under Internal Revenue Code section 1398(g). Courts have broadly construed this later provision to find that the bankruptcy trustee succeeds to the taxable “character of the asset itself.” For example, in In re Godwin, 230 B.R. 341 (Bankr.S.D.Ohio 1999), the court held that the bankruptcy estate qualified for the section 121 exclusion from recognition of capital gain on the sale of a principal residence, because the estate succeeded to the “character of the asset.” 230 B.R. at 345. The bankruptcy estate’s receipt of the Unitrust Amount is clearly, under Internal Revenue Code section 1398, to be taxed the same as such amount would have been taxed in the hands of the Debtor.
Accordingly, the CRUT is not subject to excise taxes merely because a bankruptcy trustee replaces Debtor as the income beneficiary of the trust.
E. MINNESOTA STATUTES §§ 501B.31 AND 501B.32
Defendants urge that Minnesota Statute sections 501B.31 and 501B.32 provide the statutory prohibition on alienability, if Minnesota common law and federal statutes do not.
Again, we need to begin with the basics.
First, there is no Minnesota act specially applicable to CRUTs, just as there is no such separate federal law. CRUTs are referenced, instead, in section 510B.32 of Minnesota Statutes. Second, the Legislature has not explicitly stated that the interest of the income beneficiary in a charitable trust is inalienable. It has done so on other occasions and clearly knows how to legislate such protections. ■ See, e.g., State Retirement System, Minn. Stat. § 352.15(1)(2000) (providing that retirement benefits are nonassignable); State Troopers, Retirement, Minn. Stat. § 352B.071(2000) (same); Public Employees Retirement Association, Minn. Stat. § 353.15(2000) (same).
Minnesota Statute section 501B.31 does evince a Legislative intent to treat charitable trusts generously. This statute provides that charitable trusts are not to fail simply because their language is unclear, that no charitable trust may limit the free alienation of title to any of the trust estate by the trustee, and that the Attorney General of the State of Minnesota is an interested party in litigation involving the construction and enforcement of charitable trusts. None of these provisions has anything to do with the question of whether the interest of an income beneficiary is alienable. The Trustee did, however, notify the Attorney General of the pendency of this action in accordance with the provisions of the statute.
Minnesota Statute section 501B.32 deals more specifically with “[pjrivate foundations, charitable trusts and split interest trusts.” The trust involved in this proceeding is a “split interest trust” as that term is defined in section 4947(a)(2) of the Internal Revenue Code. Minnesota Statute section 501B.32 is a savings statute which reads into any Minnesota charitable trust provisions of the Internal Revenue Code which deal with administration of charitable remainder trusts. These are as follows:
(A) The trustee shall distribute for each taxable year of the trust amounts at least sufficient to avoid liability for the tax imposed by section 4942(a) of the Internal Revenue Code of 1986.
*410(B) The trustee shall not engage in an act of “self dealing” as defined in section 4941(d) of the Internal Revenue Code of 1986 which would give rise to liability for the tax imposed by section 4941(a) of the Code.
(C) The trustee shall not keep “excess business holdings” as defined in section 4943 of the Code that would give rise to liability for the tax imposed by section
4943 of the Code.
(D) The trustee may not make investments that would jeopardize the carrying out of any of the exempt purposes of the trust, within the meaning of section 4944 of the Code so as to give rise to liability for the tax imposed by section 4944(a) of the Code.
(E) The trustee shall not make a “taxable expenditure,” as defined in section 4945(d) of the Code that would give rise to liability for the tax imposed by section 4945(a) of the Code.
Minn. Stat. § 501B.32
These provisions of Minnesota law are taken directly from the safe harbor provisions of Revenue Procedure 90-30, 1990-1 C.B. 534. The CRUT contains these and all other requirements necessary to qualify it as a charitable remainder unitrust under federal law and as a charitable trust under Minnesota law.
Defendants argue that the tax under Internal Revenue Code section 4941 is imposed for self dealing which is defined in Internal Revenue Code section 4941(d) as including a “sale or exchange, or leasing, or property between a private foundation (charitable remainder trust) and a disqualified person.” A charitable person, they argue, includes a “foundation manager” and the trustor. I.R.C. § 4946. A foundation manager includes an individual having powers similar to those of officers, directors, or trustee of the foundation (charitable remainder trust). I.R.C. § 4946. The Defendants argue that to the extent the bankruptcy trustee assumes control of Debtor’s unitrust interest, he would be a foundation manager and the trustee of the Trust would be prohibited by Minnesota Statute section 501B.32(b) from distributing any portion of the Mack Trust’s assets to him. As previously discussed, however, while the trustee, and indeed the Debtor, are not disinterested parties, the activities complained of are exempt from the application of section 4946. of the Internal Revenue Code. This argument fails for the same reason that the argument failed under federal law.
Next, Defendants argue that the tax under Internal Revenue Code section 4945(d) is imposed for a “taxable expenditure” which includes a payment “for any purpose other than one specified in section 170(c)(2)(B).” I.R.C. § 4945(d). Section 170(c)(2)(B) lists the following purposes: religious, charitable, scientific, literary or educational purposes or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals. By definition a “ ‘taxable expenditure’ means any amount paid or incurred by a private foundation.” I.R.C. § 4945(d). The CRUT is not a “private foundation” as contemplated by the statute.
Additionally, Defendants argue that the bankruptcy trustee has the status of a creditor and the trustees of the Mack Trust are prohibited by Minnesota Statute section 501(B).32 Subd. 1(e) from distributing any portion of the trust assets to Mack’s creditors as being “taxable expenditures.” As also previously discussed, the bankruptcy estate is a person as defined under the Internal Revenue Code, and as such is a proper beneficiary of the CRUT. A distribution to the beneficiary is not a taxable expenditure as defined by section 4945(d) of the Internal Revenue Code and *411therefore not prohibited by Minnesota Statute section 501B.32 Subd. 1(e).
Defendants also make an assumption not supported by the record. Although the Trustee of the bankruptcy estate believes the Debtor’s power to appoint the Trustee of the CRUT is property of the estate, that does not mean, and it is in fact unlikely, that the bankruptcy Trustee will seek to act as Trustee of the CRUT. The bankruptcy Trustee will not exercise any of the powers granted by Minnesota Statute 501B.32 and thus will not engage in any of the conduct complained of by Defendants.
F. POWERS
Under Article 13.3 of the CRUT, “The current Recipient (of the trust) may at any time, with or without cause, remove any Trustee (other than an Independent Special Trustee) upon written notice to the Trustee.” Article 2.2 provides that in each taxable year of the Trust, the Trustee shall pay to the Recipients certain unitrust amounts and defines the “current recipient” as the recipient currently entitled to receive the unitrust amount. Debtor is a Trustee of the Trust.
Article 11 deals with limited powers of amendment to the trust. It provides in relevant part that “the provisions of this Trust Declaration are irrevocable and shall not be subject to amendment, alteration, or revocation by anyone, except as follows: (A) the Trustee shall have the power and duty, acting alone and without the ’approval of any court, Trustor, recipient or re-mainderman, to amend the Trust Declaration in any manner required for the sole purpose of ensuring that the trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Internal Revenue Code and the corresponding regulation.”
The Trustee has many other powers under the Trust Declaration, including the power to amend, alter or revoke the charitable remainder beneficiary designation (Article 11) and the power to modify the income interests of his spouse and his children.
All legal and equitable interests in the Trust Declaration of the Debtor became property of the bankruptcy estate, except as excluded by Bankruptcy Code section 541(b)(1): “Property of the estate does not include — (1) any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” The trustee seeks only a declaration that two of the powers given to the Debtor as Trustee become property of the estate: his powers under Article 13.3 to remove a Trustee and the power under Article 11 to amend the Trust Declaration to conform it to preserve its tax favored status under federal law. Neither of these two powers is a power “that the debtor may exercise solely for the benefit of an entity other than the debtor.” Replacement of a Trustee with a Trustee of the Bankruptcy Trustee’s choice and protection of the trust tax deferred status both benefit the estate, as representative of the Debtor. Neither, as defendants argue, meets the criteria of Bankruptcy Code section 541(b)(1) for exclusion from the estate.
Accordingly, the two powers specified by the Trustee are included in the bankruptcy estate.
G. PUBLIC POLICY
The main thrust of Defendants’ evidence at trial and one of their main arguments was that the result reached in this case will discourage charitable giving. One of the defendants’ witnesses testified that, if the Trustee receives a distribution that the IRS subsequently determines will disqualify the trust from favorable tax treatment, capital gains taxes on the sale of the Olym*412pic stock as well as penalties of close to $850,000 will come due, virtually consuming the trust value as of June 1, 2001 of $960,000. Thus, the charitable remainder will be severely affected. A second witness, a financial planner, testified as to expected values of the charitable remainder over a period of 80 years or more and to the fact that, if the trust were disqualified and could not defer taxes by reason of the distributions made to the trustee, there would be a significant reduction in expected rates of return to the trust. This witness also testified that he regularly recommends use of a charitable remainder trust to his wealthy clients, that not all of them take his advice to part with some of their money in favor of charity, and that if the trustee wins this case the witness would need to advise his wealthy clients of the risk that their charitable remainder trust might be subject to collapse and adverse tax consequences if they subsequently go broke.
All of this assumes, however, that the CRUT would lose its tax favored treatment if the Trustee steps into the shoes of the Debtor with respect to receipt of the unitrust distributions during the life of the Debtor. As previously determined, however, neither state nor federal law prohibit alienation of the noncharitable interest of the Debtor-Settlor and thus the doomsday scenario outlined by the Debtor will not occur.
Basically, the Defendants contend that this court should interpret section 664 and the regulations, or alternatively Minnesota Statute section 501B.32, as creating a new form of unlimited exemption from creditor attack for the settlor’s retained noncharita-ble interest in a self settled trust. Congress did create such a new form of exemption in ERISA but its purpose in doing so was to increase retirement savings and accordingly it was necessary to protect such savings from attack by creditors. The same public policy reasons do not apply here. Whether the Debtor can or cannot protect the income stream of a noncharitable recipient is of no consequence to the purpose of encouraging the formation of CRUTs, that is charitable giving. Nothing said in this opinion will in any way impact on the charitable remainder of the CRUT and there is a total disconnect between protecting the charitable and noncharitable interests.
ORDER FOR JUDGMENT
ACCORDINGLY, IT IS HEREBY ORDERED THAT judgment shall be entered in favor of the Plaintiff and against the Defendants as follows:
1. Judgment in favor of the Trustee and against Defendant Jeffrey C. Mack, in the amount of $39,488.58, together with interest on the amount of $19,744.29 from March 30, 2001 to the date of entry of judgment, and on the other $19,744.29 from June 30, 2001 to the date of entry of judgment. If the CRUT made a further postpetition distribution to the Debtor at the end of the third quarter of 2001, judgment in favor of the Trustee and against Defendant Jeffrey C. Mack in such amount, together with interest from the date of such distribution to the date of entry of judgment.
2. It is hereby determined that the income interest of the Debtor Jeffrey C. Mack in the Jeffrey C. Mack Charitable Remainder Unitrust dated January 17, 1997 is property of the bankruptcy estate, together with the power to appoint or discharge trustees of the trust and the power to amend the trust to preserve its tax qualified status.
3. Jeffrey C. Mack and Dave F. Sen-ger, as trustees of the CRUT, together with any other or successor trustee, are hereby directed to recognize the bankrupt*413cy estate as the holder of such lifetime income interest and powers and to pay future distributions of the Unitrust Amount, otherwise payable to Jeffrey C. Mack, to the bankruptcy Trustee.
4. This holding shall be binding upon all Defendants and the Minnesota Attorney General in accordance with the standing under Minnesota Statute § 501B.41.
LET JUDGMENT BE ENTERED ACCORDINGLY.
. Debtor was not in the habit of charitable giving. In 1998, the year following creation of the trust, his taxable income was $1,220,624, including wages of $664,710, $155,343 in capital gains and $345,111 in other income. That year the Macks contributed a whopping $411 to charity.
. Actually, the true value of the charitable remainder interest was even smaller, $21,263, the difference being attributable to differing, but legitimate, ways of making the charitable deduction calculation.
. 11 U.S.C. § 101(32) provides, in part:
''insolvent” means—
(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of—
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and
(ii) property that may be exempted from property of the estate under section 522 of this title;
11 U.S.C. § 101(32).
. There were minor adjustments in each year as a consequence of which slightly different amounts were actually distributed to the Debtor.
. It is not clear whether the CRUT distributed an additional $19,744.29 to Debtor on September 30, 2001, while this case was under advisement.
. This rule is widely recognized in other jurisdictions. See In re Spenlinhauer, 182 B.R. 361 (Bankr.D.Me.1995), aff’d 195 B.R. 543 (D.Me.1996), aff'd 101 F.3d 106 (1st Cir.1996) (holding that entire value of settlor/beneficia-ry's one-third interest in trust income and principal, and not just the income distribu-lions that settlor/beneficiary was presently entitled to receive, were included in property of the estate); Markmueller v. Case (In re Markmueller), 51 F.3d 775, 776 (8th Cir.1995) (applying Missouri law, interest in self settled trust included in bankruptcy estate); Aylward v. Landry (In re Landry), 226 B.R. 507, 510 *401(Bankr.D.Mass.1998) (spendthrift trust is ineffective against creditors if the settlor creates a trust for the settlor’s own benefit); Kaplan v. Primerit Bank (In re Kaplan), 97 B.R. 572 (9th Cir. BAP 1989)(a person cannot secrete and insulate his property from his creditors by temporarily placing that property in what he styles a spendthrift trust while the income and corpus of the trust remain payable to him); In re Hartman, 115 B.R. 171 (Bankr.W.D.Ark. 1990)(a person may not establish a trust under which he is to receive income as a beneficiary, while at the same time attempting to protect the trust assets from his creditors by the simple inclusion of a spendthrift clause); Dery v. U.S. (In re Bridge), 90 B.R. 839 (Bankr.E.D.Mich.1988), on reh’g 106 B.R. 474 (Bankr.E.D.Mich.1989)(in bankruptcy action, discretionary spendthrift trust created for benefit of debtors was invalid where, among other things, debtors were both settlors and beneficiaries of trust); Williams v. Threet (In re Threet), 118 B.R. 805 (Bankr.N.D.Okla.1990)(under the law of spendthrift trusts, including the statutory law of Oklahoma, a self-settled trust cannot be spendthrift); Murphey v. C.I.T. Corp., 347 Pa. 591, 33 A.2d 16, 18 (1943) (spendthrift provision in trust created by husband and wife for their benefit was invalid); Farmers State Bank v. Janish, 410 N.W.2d 188 (S.D.1987) (debtor who was both a beneficiary and a settlor of the trust rendered spendthrift provision invalid); Brown v. Westvaco Corp. (In re Cassada), 86 B.R. 541 (Bankr.E.D.Tenn.l988)(the rationale for the rule prohibiting a person from putting his own property in a spendthrift trust with himself as beneficiary is that a person cannot put his property beyond the reach of his creditors and still have the use of it for his personal benefit); Citizens Nat’l Bank v. Taylor (In re Goff), 812 F.2d 931, 933 (5th Cir.1987)(if a settlor creates a trust for his own benefit, a spendthrift clause restraining alienation or assignment is void); Bank of Dallas v. Republic Nat’l Bank of Dallas, 540 S.W.2d 499, 502 (Tex.Civ.App.1976) (creditors were allowed to reach the debtor's interest in spendthrift trust in which he was one of two settlors and one of three beneficiaries).
. Employer Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et. seq.
. "Affirmative law” may not be required. See In re Mueller, 256 B.R. 445, 456 (Bankr.D.Md.2000) (a debtor's interest in a non-ERISA plan can nonetheless be excluded from property of the estate based solely on the IRC). But, its absence bears on Congressional intent.
. The Debtor, taking advantage of these tax rules, received a charitable contribution deduction in 1997 when the CRUT was created. Additionally, capital gain on the sale of the Olympic stock contributed to the CRUT of approximately $1,645,000 was not recognized by the CRUT in 1997.
.Subsection (D), added subsequent to the creation of this CRUT and not applicable in this case, requires that the charitable remainder interest have a value of at least 10% of the net fair market value of the property contributed. The Debtor's CRUT would not meet the requirements of Subd. (D) as the charitable remainder interest had a value of less than 2% of the assets.
. See, e.g., ERISA, 29 U.S.C. § 1053(d)(1).
. In Blair, the Supreme Court found the term "beneficiary” to be "merely descriptive of the one entitled to the beneficial interest.” Provisions that the beneficiary was responsible for payment of taxes on income distributions to it could not be taken to "preclude valid assignments of the beneficial interest or to affect the duty of the trustee to distribute *404income to the owner of the beneficial interest, whether he was such initially or became such by valid assignment.” Blair, 300 U.S. at 12, 57 S.Ct. 330.
. "[N]either the grantor nor his spouse shall be treated as the owner of the trust ... merely because the grantor or his spouse is named as a recipient.” Treas. Reg. § 1.664-1 (a)(4).
. I.R.C. § 678 provides that a person other than grantor would be treated as substantial owner, if:
(1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or (2) such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of sections 671 to 677, inclusive, subject a grantor of a trust to treatment as the owner thereof.
The Debtor’s bankruptcy estate will not obtain the power to vest the corpus or income in itself, nor has the estate previously released or modified such power. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493246/ | MEMORANDUM AND ORDER
WILLIAM A. HILL, Bankruptcy Judge.
This adversary proceeding was commenced by Plaintiff United States of America, acting on behalf of the United States Department of Agriculture, Farm Service Agency, formerly known as the Farmers Home Administration, (“FSA”) by Complaint filed April 30, 2001. As amended, FSA seeks a determination that it holds an equitable lien in property purchased by Debtors Larry and Tammy Wilson (“the Wilsons”). Further, FSA seeks a determination that its claim is secured to the extent of the equitable lien under section 506 of the Bankruptcy Code. By Answer filed May 25, 2001, and Amended Answer filed September 13, 2001, the Wil-sons deny that FSA is entitled to the equitable hen it requests.
The parties agreed to submit the matter to the Court on briefs and stipulated facts. The parties also stipulated as to the legal questions involved. From the stipulated facts and the exhibits attached thereto, the Court makes the following findings of fact and conclusions of law:
I. FINDINGS OF FACT
A. Background,
The Wilsons owned a ranch in McKenzie County, North Dakota, on which they had their personal residence, a single-family house. FSA held two mortgages against the real property including the house (collectively, “the ranch”), which secured a $74,489.70 debt.1 On January 28, 1997, the Wilsons’ house was destroyed by fire. The house was insured under a casualty insurance policy, under which the Wilsons filed a claim. The insurance company issued a $55,000.00 payment to cover the damages to the Wilsons’ house, and the Wilsons ultimately used the $55,000.00 to purchase a new mobile home. The new mobile home is the property at issue in this proceeding.
B. The Wilsons’ Lending History with FSA
From December 5, 1985, through December 2, 1996, the Wilsons executed eleven promissory notes in favor of FSA, which FSA still owns and holds. On July 31, 1996, the Wilsons submitted to FSA an application for Farmers Home Administration services. FSA offered to consolidate the Wilsons’ debt and to defer certain loan repayments. On December 2, 1996, the Wilsons’ debt to FSA was consolidated into *832two promissory notes. FSA’s claim in this proceeding represents the unpaid balance of the promissory notes. To secure the balance due and owing to FSA, the Wil-sons executed two separate real estate mortgages against the ranch. The mortgages were recorded on July 15, 1993, and December 9, 1996. The property mortgaged included the Wilsons’ former house which was lost to fire. The mortgages include the following term:
Borrower agrees that the Government will not be bound by any present or future State laws, (a) providing for valuation, appraisal, homestead or exemption of the property, (b) prohibiting maintenance of an action for a deficiency judgment or limiting the amount thereof or the time within which such action may be brought, (c) prescribing any other statute of limitations, (d) allowing any right of redemption or possession following any foreclosure sale, or (e) limiting the conditions which the Government may by regulation impose, including the interest rate it may charge, as a condition of approving a transfer of the property to a new Borrower. Borrower expressly waives the benefit of any such State law. Borrower hereby relinquishes, waives, and conveys all rights, inchoate or consummate, of descent, dower, and courtesy.
The mortgages also include a covenant requiring the Wilsons:
To keep the property insured as required by and under insurance policies approved by the Government and, at its request, to deliver such policies to the Government.
Under the mortgages, the Wilsons are required to comply with all regulations affecting the property.
C. The Wilsons’ Other Lending History
The Wilsons executed a promissory note in the amount of $60,000.00 in favor of Cecil and Lettie Wilson on January 27, 1984. On the same day, they executed a real estate mortgage in favor of Cecil and Lettie Wilson to secure the balance due and owing under the note, and the mortgage was recorded on March 6, 1985. The mortgaged property included the Wilsons’ former house. On October 27, 2000, the unpaid balance on the promissory note was $60,000.00, as represented by the Wilsons’ bankruptcy petition, and no payments were made toward the reduction of this debt on or after October 27, 2000.
The Wilsons also executed one or more promissory notes to AgriBank or Federal Land Bank (“AgriBank”) between October 28, 1982, and June 13, 1988. The Wilsons executed a real estate mortgage in favor of AgriBank on October 28, 1982. The mortgaged property included the Wilsons’ former house. With respect to the Wilsons’ real property, the parties agree that the mortgage held by AgriBank was superior to the interests of FSA. As of the date of the Wilsons’ bankruptcy petition, the unpaid balance of the notes in favor of Agri-Bank, according to the Wilsons’ bankruptcy petition, was $132,134.20.
D. The Insurance Policy and Payments for Fire Losses
Milwaukee Mutual Insurance Company (“Milwaukee Mutual”) issued the casualty policy insuring the Wilsons’ former house. Neither FSA nor Cecil and Lettie Wilson were named insureds in the policy, nor were they named in the mortgage clause of the policy as loss payees. AgriBank and McKenzie County Bank were named in the mortgage clause of the policy.
On May 1, 1997, after the fire destroyed their house, the Wilsons signed a sworn statement as to their losses and submitted it to Milwaukee Mutual. The statement lists the following as having an interest in *833the insured property or an encumbrance thereon: Farm Credit Services, AgriBank of Grand Forks, and Farmers Home Bank of Williston. FSA was omitted. The Wil-sons listed the actual cash value of their house and other personal property at the time of the loss as $97,679.00.
On April 27, 1997, Milwaukee Mutual issued a draft for $55,000.00 to cover physical damage to the Wilsons’ house from the fire. On the same day, Milwaukee Mutual issued a second draft, this one for $27,500.00, to cover personal property damage from the fire. Only the $55,000.00 draft is at issue in this proceeding. Both drafts were payable to the Wilsons, Agri-Bank, and the McKenzie County Bank. The Wilsons did not notify FSA of the house fire or of the insurance proceeds they received for damage to the house from the fire.
E. The Wilsons’ Use of the Insurance Proceeds
On May 6, 1997, the Wilsons submitted the insurance proceeds to AgriBank and permitted the $55,000.00 payment to be deposited in an escrow account controlled by AgriBank. At that time, the Wilsons’ indebtedness to AgriBank was $139,917.70. On December 3, 1997, AgriBank refunded the insurance payment, plus interest, to the Wilsons and Countryside Homes, Inc., in the amount of $56,384.00. The Wilsons used the money to purchase a 1997 Ho-mark Royal American 28'x60' mobile home from Countryside Homes, Inc. FSA did not receive any portion of the insurance proceeds. The Wilsons did not seek or receive authorization from FSA to spend the insurance proceeds, nor was FSA notified that AgriBank released the insurance proceeds to purchase the new mobile home. The Wilsons placed their new mobile home on a parcel of real property in McKenzie County, North Dakota, described as:
A tract of land located in the SE/4SE% of Section 6, Township 150 North, Range 98 West of the Fifth Principal Meridian described as: Beginning at a point 1106.8 feet due North, on Section line, and 560.0 feet due West of the Southeast corner of Section 6, Township 150 North, Range 98 West to the true point of beginning: Thence South 16°31' East a distance of 151.7 feet; thence due East a distance of 250.0 feet to the point of beginning, said tract containing 0.9 acres, more or less.
The Wilsons own this real property, but it was not part of the ranch against which FSA held a mortgage.
Contemporaneous with AgriBank’s refund of the insurance payment, the Wil-sons granted AgriBank a UCC security interest in the new mobile home and a real estate mortgage covering the parcel of real property upon which the new mobile home was placed. Prior to executing the mortgage in favor of AgriBank, the Wilsons owned this real estate as joint tenants in fee simple free and clear of any liens or encumbrances. The Wilsons did not grant FSA or any other entity other than Agri-Bank a security interest or mortgage on the new mobile home or upon the real estate on which it was placed.
F. The Sale of the Wilsons’ Ranch
The fair market value of the ranch was appraised on at least four separate occasions. At the request of Farm Credit Services, the ranch was appraised by Shawn Weishaar and Steven W. Tomac on October 1, 1996. Weishaar and - Tomac estimated the value of the ranch at $191,000.00. The contributory value of the Wilsons’ former house was estimated at $5,280.00. At the request of FSA, the ranch was appraised by Donald D. Bintliff *834on October 8, 1996. Bintliff estimated the value of the ranch at $228,000.00. The contributory value of the Wilsons’ former house was estimated at $19,500.00. At the request of AgriBank, the ranch, less the Wilsons’ former house, was appraised by Timothy L. Kreft on February 18, 2000. Kreft estimated the value of the ranch at $180,000.00. At the request of FSA, the ranch, less the Wilsons’ former house, was appraised by G.T. Geiszler & Associates on June 30, 2000. Geiszler estimated the value of the ranch at $198,000.00.
The Wilsons’ ranch, which, after the fire on January 28, 1997, did not include the Wilsons’ former house, was sold pursuant to this Court’s Order dated December 12, 2000. The proceeds from the sale of the ranch, in the amount of $140,000.00, were received by AgriBank and applied toward the Wilsons’ debt. After repayment through the proceeds from the sale of the ranch and the retirement of AgriBank stock the Wilsons had held, the Wilsons’ debt was fully satisfied, and AgriBank released its security interest and mortgage in the Wilsons’ new mobile home and the real property upon which it was placed. Thus, the Wilsons currently own the new mobile home and the real property on which it was placed free and clear of any legal liens, mortgages, security interests, or encumbrances except for any applicable utility easements.
The Wilsons filed a Chapter 13 petition on October 27, 2000. As of that date, FSA had a claim against the Wilsons for $74,489.70. The case was converted to Chapter 7 on January 29, 2001. FSA commenced this adversary proceeding seeking a determination that it holds an equitable lien in the new mobile home purchased by the Wilsons with the insurance proceeds.
II. CONCLUSIONS OF LAW
FSA argues it is entitled to an equitable lien against the new mobile home because the Wilsons covenanted to insure their former house for the benefit of FSA and breached that covenant, they converted the insurance proceeds to their own use, and they were unjustly enriched. The Wilsons raise various theories to counter FSA’s asserted right to an equitable lien against the new mobile home, principally that FSA is not entitled to an equitable lien because FSA had no interest in the ranch to which an equitable lien could attach. The Wilsons also argue that the imposition of an equitable lien is inappropriate because FSA was not vigilant about its rights and because FSA could bring a cause of action against AgriBank for inappropriately receiving the proceeds from the insurance policy, providing FSA an adequate remedy at law.
A. The Property at Issue
The Wilsons argue that in order for an equitable lien to be an appropriate remedy a creditor must have an interest in a debtor’s property to which an equitable lien can attach and that FSA did not have an interest in their property. Specifically, the Wilsons assert that their total debt to AgriBank and Cecil and Lettie Wilson was approximately $200,000.00, which exceeded the value of the ranch, and therefore, following the fire, there being no remaining equity, there was nothing left to which FSA’s lien could attach.
The property at issue in this proceeding is not the Wilsons’ ranch, but rather, the $55,000.00 in insurance proceeds paid under the Milwaukee Mutual policy for damage to their former house as a result of the fire and the new mobile home purchased with those cash proceeds. ‘Where the mortgagor agrees in the mortgage to keep the buildings on the mortgaged premises insured for the benefit of the mortgagee, the insurance pro*835ceeds stand as security for the mortgage debt in lieu of the property destroyed.” 4 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 65:13 (1998). FSA has an interest in the insurance proceeds in lieu of the Wilsons’ destroyed house. The extent of the Wilsons’ indebtedness to AgriBank or Cecil and Lettie Wilson as compared to the value of the ranch is irrelevant to this determination.
B. Equity Considerations
1. Unjust Enrichment
FSA contends the Wilsons would be unjustly enriched if FSA is not granted an equitable lien against the Wilsons’ new mobile home.
Unjust enrichment is a question of law. Struksnes v. Kevin’s Plumbing & Heating, Inc., 1997 ND 245, ¶ 13, 572 N.W.2d 815. It is an equitable doctrine applied in the absence of a contract and used to prevent one person from being unjustly enriched at another’s expense. Schroeder v. Buchholz, 2001 ND 36, ¶ 14, 622 N.W.2d 202. The essential element in recovering under a theory of unjust enrichment is the defendant’s receipt of a benefit from the plaintiff which would be inequitable for the defendant to retain without paying for the value of the benefit. Id. Five elements must be established to prove unjust enrichment: an enrichment, an impoverishment, a connection between the enrichment and the impoverishment, absence of a justification for the enrichment and impoverishment, an absence of a remedy provided by law. Id. at ¶ 15. “A determination of unjust enrichment ‘holds that a certain state of facts is contrary to equity.’ ” Albrecht v. Walter, 1997 ND 238, ¶ 23, 572 N.W.2d 809 (quoting In re Estate of Zent, 459 N.W.2d 795, 798 (N.D.1990)).
The only element of unjust enrichment the Wilsons assert is lacking is the absence of a remedy provided by law. The Wilsons argue that FSA could bring a cause of action against AgriBank for inappropriately receiving the proceeds from the insurance policy, and, therefore, FSA has an adequate remedy at law. The Wilsons fail to acknowledge, however, that AgriBank was merely a conduit: it had custody of the insurance proceeds temporarily, but it did not ultimately retain any portion of the insurance proceeds. The Wilsons have exclusive possession of the new mobile home they purchased with the entire insurance proceeds. An action against AgriBank would be inadequate to remedy this situation, and accordingly, FSA does not have an adequate remedy at law.
The other elements of unjust enrichment are also satisfied. The Wilsons have been enriched because they presently own the new mobile home free and clear of any hens or encumbrances, whereas previously their house was subject to FSA’s mortgage. FSA has been impoverished because the Wilsons’ former house, against which it held a mortgage, was destroyed by fire, FSA did not receive any of the insurance proceeds, and FSA does not have a mortgage against the Wilsons’ new mobile home. Clearly there is a connection between the enrichment and the impoverishment, and there is no reasonable justification for the enrichment in this case. To allow the Wilsons to keep the property they acquired with the insurance proceeds for their exclusive benefit, free and clear of any lien or encumbrance, would be contrary to equity. Accordingly, equitable relief against the Wilsons is appropriate in this case.
2. Equitable lien
An equitable lien is a restitution concept imposed to prevent unjust enrich*836ment. Schroeder v. Buchholz, 2001 ND 36, ¶ 26, 622 N.W.2d 202 (citing Dan B. Dobbs, Law of Remedies § 4.3(3) (2d ed.1993)). It arises where property of one person can be reached by another as security for a claim on the ground that otherwise the former would be unjustly enriched. Roen Land Trust v. Frederick, 530 N.W.2d 355, 358 (N.D.1995). An equitable lien gives a claimant a security interest in property, which can then be used to satisfy a money claim. Id.
As a general rule, an insurance policy is a personal contract between an insurer and an insured, and therefore the mortgagee of an insured property has no interest in a policy obtained by a mortgagor in the mortgagor’s name. 4 Lee R. Russ & Thomas F. Segalla, Couch on Insurance Sd § 65:82 (1998). “However, if the mortgagor covenants to keep property insured as further security for payment of mortgage debt, the mortgagee may be entitled to an equitable hen upon the insurance proceeds, even where the policy is in the name of the mortgagor alone.” Id. (footnote omitted); accord Fruehauf Corp. v. Royal Exch. Assurance of Am., Inc., 704 F.2d 1168, 1171-72 (9th Cir.1983); Brown v. First Nat’l Bank of Dewey, 617 F.2d 581, 583 (10th Cir.1980); In re Gilley, 236 B.R. 448, 454-55 (Bankr.M.D.Fla.1999); Pare v. Natale (In re Nótale), 174 B.R. 362, 365 (Bankr.D.R.I.1994); Clemons v. Am. Cas. Co., 841 F.Supp. 160, 164 (D.Md.1993); In re Terra Villa Apartments, Ltd., 101 B.R. 755, 757-58 (Bankr.N.D.Fla.1989); Hovis v. New Hampshire Ins. Co. (In re Larymore), 82 B.R. 409, 413 (Bankr.D.S.C.1987); In re Island Helicopter Corp., 63 B.R. 515, 522 (Bankr.E.D.N.Y.1986); Williams v. Rutherford (In re Rutherford), 73 B.R. 665, 668 (Bankr.W.D.Mo.1986); Ormond Wholesale Co., Inc. v. Moore (In re Moore), 54 B.R. 781, 783 (Bankr.E.D.N.C.1985); Aztex Energy Co. v. State (In re Sexton), 16 B.R. 240, 245 (Bankr.E.D.Tenn.1981). Here, it is undisputed that the Wilsons agreed to insure the property under the mortgage with FSA. Accordingly, FSA may be entitled to an equitable lien in the insurance proceeds. Because the insurance proceeds were used directly to purchase the new mobile home, by extension, FSA may be entitled to an equitable lien in the new mobile home.2
The Court has considered the Wilsons’ other arguments and deems them to be without merit. Accordingly, FSA has an equitable lien in the mobile home purchased by the Wilsons with the insurance proceeds.
C. Extent of the Lien
The Wilsons argue that the lien should only be on $5,280.00, the amount of the contributory value of their former residence to the total value of the real estate. FSA argues that the lien should extend to the entire amount of the insurance proceeds, plus interest. FSA also asks the Court to incorporate certain terms into the equitable lien.
“As a general rule, if the mortgagor covenants to keep the mortgaged property insured for the better security of the mortgagee, the latter will have an equitable lien upon the proceeds of insurance carried by the mortgagor, in case of a loss, to the extent of his or her interest in the property destroyed[.]” 4 Lee R. Russ & Thomas F. Segalla, Couch on Insurance Sd § 65:83 (1998). The Wilsons do not cite, nor was the Court able to find, any authority supporting the proposition that the extent of an equitable lien should be *837limited to the contributory value of the destroyed property to the value of the mortgaged real estate. The debt owed to FSA as of the date of the Wilsons’ bankruptcy petition is $74,789.70. Thus, FSA had a $74,789.80 interest in the ranch, the originally mortgaged property, which included the Wilsons’ former house. The $55,000.00 insurance payment issued for the destruction of the Wilsons’ former house, plus interest, was used to purchase the Wilsons’ new mobile home.
For the foregoing reasons, judgment may be entered in favor of the Plaintiff United States of America and against the Debtors Larry and Tammy Wilson as follows: FSA has an equitable lien in the Wilsons’ 1997 Homark Royal American 28'x60' mobile home currently situated on a parcel of real property described as:
A tract of land located in the SE/4SE-S4 of Section 6, Township 150 North, Range 98 West of the Fifth Principal Meridian described as: Beginning at a point 1106.8 feet due North, on Section line, and 560.0 feet due West of the Southeast corner of Section 6, Township 150 North, Range 98 West to the true point of beginning: Thence South 16°31' East a distance of 151.7 feet; thence due East a distance of 250.0 feet to the point of beginning, said tract containing 0.9 acres, more or less.
The equitable lien in the Wilsons’ new mobile home is in the amount of $56,384.00, the entire amount of the insurance proceeds, plus interest. Additionally, the following term is incorporated into and made a part of the equitable lien:
Borrower agrees that the Government will not be bound by any present or future State laws, (a) providing for valuation, appraisal, homestead or exemption of the property, (b) prohibiting maintenance of an action for a deficiency judgment or limiting the amount thereof or the time within which such action may be brought, (e) prescribing any other statute of limitations, (d) allowing any right of redemption or possession following any foreclosure sale, or (e) limiting the conditions which the Government may by regulation impose, including the interest rate it may charge, as a condition of approving a transfer of the property to a new Borrower. Borrower expressly waives the benefit of any such State law. Borrower hereby relinquishes, waives, and conveys all rights, inchoate or consummate, of descent, dower, and courtesy.
SO ORDERED.
JUDGMENT MAY BE ENTERED ACCORDINGLY.
. This is the amount of the Wilsons’ debt to FSA as of the date of their bankruptcy petition, October 27, 2000.
. The Wilsons do not object to the imposition of an equitable lien against the new mobile home under the theory that the new mobile home does not constitute insurance proceeds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493248/ | DECISION ON SUMMARY JUDGMENT MOTION
AD LAI S. HARDIN, Jr., Bankruptcy Judge.
At issue before me is whether the liens of the mortgage and confession of judgment that secure defendant-creditor Eugene Erickson’s claims against plaintiffs-debtors Kevin and Sue Higgins are subject to avoidance. Specifically, the Higginses assert that the mortgage and judgment liens constitute preferences under 11 U.S.C. § 547 and impair their homestead exemption under 11 U.S.C. § 522. The Higginses also claim that one of their notes payable to Erickson is usurious and void under New York State law. Another issue presented is whether Erickson can belatedly challenge the dischargeability of his claim under 11 U.S.C. § 523(a). For the reasons set forth below, I conclude as follows: (1) the Higginses do not have standing to avoid pre-petition transfers as preferences under Section 547(b); (2) the lien of the Confession of Judgement is avoidable under Section 522(f)(1)(A) because it impairs the debtors’ homestead exemptions; (3) the defense of usury has been waived; and (4) Erickson’s right to contest the dischargeability of his claim under Section 523(a) is time-barred.
The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a). This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2).
Background
There are no genuine issues of material fact requiring a trial. The following is a summary of the important facts.
The Higginses borrowed $150,000 from Erickson on February 4, 1998, evidenced by a promissory note (“Note 1”) due on February 4, 2000, with an interest rate of 18% per annum secured by a mortgage (the “Mortgage”) on their home. Six months later, on August 10, 1998, the Hig-ginses borrowed an additional $50,000 from Erickson and signed another promissory note (“Note 2”) with an interest rate of 8% per annum.
In May 1999, the Higginses defaulted on both Notes. On December 30, 1999, the Higginses signed a confession of judgment (the “Confession of Judgment” or “Judgment”) in favor of Erickson in the amount *151of $181,263.33, being the aggregate amount then owed on both Notes.1
At the Higginses’ request, Erickson refrained from recording the Mortgage and Confession of Judgment until June 30, 2000 and July 10, 2000, respectively.
Unbeknownst to Erickson, however, in August 1998 the Higginses borrowed $360,000 from Northeastern Mortgage Investment Corp. (“Northeastern”) secured by a mortgage on their home, which the mortgagee recorded in October 1998, long before the Higginses defaulted on Erickson’s loans. Thus, the Northeastern mortgage, although second in time, was recorded first and effectively wiped out any equity which would otherwise have secured Erickson’s Notes under his Mortgage and Judgment. The Northeastern mortgage is now held by Household Financial Services (“HFS”).
The Higginses filed their voluntary “no asset” Chapter 7 petition on September 20, 2000. Their home was appraised on August 29, 2000 at a value of $395,000. HFS’ secured claim is scheduled at $375,617.25.2 The Higginses’ claimed homestead exemptions total $20,000.
Discussion
I. Avoidance of Preferences
The Higginses’ claim to avoid the liens of the Mortgage and Confession of Judgment as preferences under 11 U.S.C. § 547(b) requires analysis of two quite separate issues. The first is whether the recording of the Mortgage and Confession of Judgment within ninety days of the Higginses’ September 20, 2000 bankruptcy filing date constituted preferences under the terms of the statute.
Section 547(b) states in pertinent part:
(b) Except ..., 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) ...; 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.
*152There is no dispute that the requirements of the first four subsections are met on the facts in this case. The issue arises with respect to subsection (5). The question focuses on the premise that the objective of avoidance under Section 547(b) is to bring the property transferred pre-petition back into the estate so that all unsecured creditors of the debtor receive equal, pro rata distribution of that property. The argument seems to be that subsection (5) should be construed narrowly to apply only if the avoidance of the prepetition transfer would bring property back into the estate for distribution to creditors. Here, avoidance of the transfers would not benefit the estate because all of the equity in the Higginses’ home was consumed by the HFS mortgage and the debtors’ combined homestead exemptions. Accordingly, it is argued, the policy objective of Section 547(b) would not be served by a holding that the pre-petition recording of the Mortgage and Confession of Judgment constituted avoidable preferences. See Nielsen v. United States (In re Nielsen), 143 B.R. 93, 99 (Bankr.N.D.Tex.1992); Karnes v. Rakers Elevator, Inc. (In re Woker), 120 B.R. 454, 460 (Bankr. S.D.Ill.1990).
I reject this argument because it turns not upon a fair interpretation of the statutory language employed in subsection (b), but upon the fact that in this particular case other unsecured creditors are unaffected by the pre-petition transfers of security interests to Erickson because there is no available equity in the Higginses’ home for unsecured creditors with or without the pre-petition transfers. Statutory provisions should be construed in accordance with the language employed by Congress in the statute itself, not by reference to the facts presented in a particular case. The fallacy of such fact-based, result-oriented statutory analysis is evident when one considers what the outcome would/ ought to be in an hypothetical case where there was substantial equity in the Hig-ginses’ home which was eliminated by the pre-petition transfers to Erickson of security interests by the recording of the Mortgage and the Judgment. In such an hypothetical case, the provisions of subsection (5) clearly would apply. The transfers would enable Erickson “to receive more than” he would have received if the transfers had not been made and he had “received payment of such debt to the extent provided by the provisions of this title,” i.e., his pro rata portion of the equity in the Higginses’ home, as opposed to having received a security interest in the entire hypothetical equity by reason of the pre-petition transfer liens. But the same analysis applies equally, although somewhat differently, in the actual facts of the case: the pre-petition transfers enabled Erickson “to receive more” than Erickson would have received if the transfers had not been made, because by the transfers he received two separate security interests in the debtors’ home (which may have real value in the future), whereas if the transfers had not been made he would have received nothing in this no asset Chapter 7 case. It is true that in the hypothetical case other unsecured creditors would benefit from the avoidance of the pre-petition transfers, whereas on the actual facts unsecured creditors do not stand to benefit. But nothing in Section 547(b) makes the right of avoidance dependent upon the benefit vel non to other unsecured creditors, even though the statute was undoubtedly intended to benefit unsecured creditors. See Orth-O-Vision, Inc. v. Wometco Home Theatre, Inc. (In re Orth-O-Vision, Inc.), 49 B.R. 943, 945 (Bankr.E.D.N.Y.1985); Deel Rent-A-Car, Inc. v. Levine, 16 B.R. 873 (S.D.Fla.1982), aff'd, 721 F.2d 750, 754-55 (11th Cir.1983).
*153The second issue is whether the Higginses, as Chapter 7 debtors, have standing to assert a preference claim. This issue also must be resolved by reference to the relevant provisions of the Bankruptcy Code, which make it quite clear that the Higginses do not have standing to assert a preference claim.
Section 547(b) states that “the trustee may avoid any transfer ...” (emphasis supplied). Section 1107 of the Code states that “a debtor in possession shall have all the rights ... and powers, and shall perform all the functions and duties ... of a trustee serving in a case under this chapter,” but there is no analogous provision applicable in Chapter 7. Accordingly, absent a specific statutory authorization in the Bankruptcy Code, a Chapter 7 debtor does not have the power to exercise the avoidance power in section 547(b). This is consistent with the theory and purpose of preference avoidance, which is designed not to benefit a debtor but to protect the rights of general unsecured creditors. The statute makes it the trustee’s responsibility to see that all property that may have been transferred to creditors during the preference period is recovered by the estate, to be divided equally among all unsecured creditors. The avoidance power is granted to the trustee so that the avoidance of transfers benefits the estate, and ultimately the remaining creditors, to the end that all creditors may recover on an equal, pro rata basis. 5 COLLIER ON BANKRUPTCY, ¶547.11[2] at 547-95 (Lawrence P. King ed. 15th Edition Rev. 1996) (“A debtor who is not a debtor in possession cannot maintain an action to set aside his or her own transfer as preferential under section 547.”); Northeast Alliance Federal Credit Union v. Garcia (In re Garcia), 260 B.R. 622, 635-36 (Bankr.D.Conn.2001); In re White, 258 B.R. 129, 131 (Bankr.D.N.J.2001) (“Bankruptcy Code section 547(b), however, does not confer standing upon a debtor to avoid such transfers. Instead, section 547(b) grants the avoidance power solely to the bankruptcy trustee.”)
The Bankruptcy Code provides only one statutory basis for a Chapter 7 debtor to exercise the avoidance power of Section 547(b), namely, Section 522, which is designed to give limited protection to a debt- or’s exemptions. See, generally, Price v. Manufacturers and Traders Trust Co. (In re Price), 260 B.R. 653, 654-55 (Bankr. W.D.N.Y.2001), In re White, 258 B.R. at 131-34 and Humphrey v. Herridge (In re Humphrey), 165 B.R. 578, 579-80 (Bankr. D.Md.1993). The relevant provisions of Section 522 are subsections (h), (g), (b) and (f)(2), in that order. Subsection (h) provides as follows, in relevant part:
(h) The debtor may avoid a transfer of property of the debtor ... to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if—
(1) such transfer is avoidable by the trustee under section ... 547 ...; and
(2) the trustee does not attempt to avoid such transfer.
The requirements of both subsections (1) and (2) of subsection (h) are met in this case. The question then is whether the conditions of subsection (g)(1) have been met. The condition set forth in subsection (g)(1)(A) is that “such transfer was not a voluntary transfer of such property by the debtor ...” (emphasis supplied). This condition cannot be met in this case, because both the Mortgage and the Confession of Judgment constituted voluntary transfers. Accordingly, the Higginses as Chapter 7 debtors do not have standing and have no power to assert a preference *154claim under the express provisions of Sections 547(b), 522(h) and 522(g)(1)(A).
II.. Avoidance to Protect the Homestead Exemption
The Higginses seek to avoid the hen of the Confession of Judgment under 11 U.S.C. § 522(f)(1)(A). The statute provides, in relevant part, as follows:
(f)(1) 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 ....
The law is clear that a confession of judgment is a judgment which when duly recorded, creates a judicial lien. See Gardner v. Commonwealth of Pennsylvania, Dept. of Public Welfare (Appeal of Commonwealth of Pennsylvania, Dept. of Public Welfare), 685 F.2d 106 (3d Cir.1982), cert. denied, 459 U.S. 1092, 103 S.Ct. 580, 74 L.Ed.2d 939 (1982); Commonwealth National Bank v. United States (In re Ashe), 712 F.2d 864, 868 (3d Cir.1983), cert. denied, 465 U.S. 1024, 104 S.Ct. 1279, 79 L.Ed.2d 683 (1984); In re Matrone, 183 B.R. 41, 42 (Bankr.N.D.N.Y.1995). The Bankruptcy Code defines a judicial lien as a “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding” 11 U.S.C. § 101(36). A lien obtained by the recording of a confession of judgment is unquestionably a lien obtained “by judgment” and by “legal ... process.” Section 3218 of the New York Civil Practice Law and Rules sets forth the procedure in New York for filing and recording a confession of judgment resulting’ in the Clerk of the Court entering “judgment in the Supreme Court for the sum confessed.” N.Y. CPLR § 3218(b) (McKinney Supp.2000). A judgment by confession has all the “qualities, incidents and attributes of a judgment on a verdict” and so it becomes a judicial lien that is docketed and enforced in the same manner and with the same effect as a judgment in an action in the Supreme Court. Giryluk v. Giryluk, 30 A.D.2d 22, 289 N.Y.S.2d 458, 459 (1st Dep’t 1968), aff'd, 23 N.Y.2d 894, 245 N.E.2d 818, 298 N.Y.S.2d 91 (1969). It appears that “every court that has addressed this issue has found that a confession of judgment is a judicial lien subject to avoidance under § 522(f).” In re Matrone, 183 B.R. at 42, citing In re Gardner, supra and In re Ashe, supra; Clifton v. Tavares (Matter of Clifton), 35 B.R. 785, 789 (Bankr.D.N.J.1983); Branton v. General Electric Auto Lease, Inc. (In re Branton), 24 B.R. 44, 46 (Bankr.D.Vt.1982).
Erickson argues that the confession of judgment created a voluntary or consensual lien and, therefore, that avoidance should not be permitted under Section 522(f)(1)(A). It is true that a confession of judgment is voluntary and consensual. But unlike Section 522(g)(1)(A), where the test is whether the transfer was voluntary, nothing in Section 522(f)(1)(A) discriminates between a judicial hen that is voluntary and one that is not voluntary. On its face, this Section applies to any judicial lien, whether voluntary or not, and it is not for the Court to exclude consensual or voluntary judicial liens from Section 522(f)(1)(A) when Congress did not do so.
Once it is established that the Confession of Judgment is a judicial hen, it must be determined whether it is avoidable because it impairs the Higginses’ homestead exemption. Courts divided prior to 1994 over how a judicial lien impairs an exemption. See In re Freeman, 259 B.R. 104, 107-08 (Bankr.D.S.C.2001). In response, *155Congress amended the Bankruptcy Code to include a simple arithmetic test to utilize in calculating when a lien impairs an exemption under Section 522(f)(1). Id. The amendment is contained in 11 U.S.C. § 522(f)(2)(A) and provides that:
(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.
See the formula articulated in East Cambridge Savings Bank v. Silveira (In re Silveira), 141 F.3d 34, 38 (1st Cir.1998); In re Plott, 220 B.R. 596, 597 (Bankr.N.D.Ohio 1998); In re Whitehead, 226 B.R. 539, 540-41 (Bankr.W.D.N.Y.1998); Jones v. Mellon Bank (In re Jones), 183 B.R. 93, 95 (Bankr.W.D.Pa.1995).
In the case at bar,
(i) the lien sought to be avoided is $181,-000
(ii) the other liens on the property are $375,000 — -the first mortgage held by HFS
$141,000 — the second mortgage held by Erickson
(iii) homestead exemption of $20,000.3
The sum of the above figures is $717,000. The value of the property is $395,000, and thus the sum of the liens and exemptions exceeds the value of the property by $322,000, meaning that the exemption is impaired by $322,000. Following the above-stated rule, since the impairment exceeds the value of the judicial hen of $181,448 the entire judicial lien is avoided.
The parties’ dispute centers around the value of the first mortgage, which both have argued, determines to what extent the lien is avoided. The Higginses contend that the HFS mortgage is $375,617.25 and that when inserted into the formula, results in a total of the liens and exemption that exceed the value of the property. Erickson maintains that the HFS mortgage is $372,105.96 based upon the June 2001 mortgage statement, and when calculated in the formula results in only partial impairment of the exemption by the Confession of Judgment and so the lien can only be partially avoided. Both parties however, have neglected to include the Erickson Mortgage as a second mortgage on the property that must be calculated under subsection 522(f)(2)(A)(ii), as part of “all other liens.” When the Erickson Mortgage is added the formula results in a substantial impairment of the Higginses’ exemption, and therefore the judicial lien must be entirely avoided.
III. Usury
A. Waiver of usury defense
The Higginses next argue that Note 1 is usurious because it bears an interest rate of 18% per annum, exceeding the legal rate in New York State of 16%. As such, the Higginses seek to avoid payment of the note and its securing Mortgage and Confession of Judgment. Erickson responds that the Higginses waived their usury defense when they gave him a Confession of Judgment, and that the doctrine of res judicata bars review of the Confession of Judgment.
*156Note 1 bears an interest rate above that permitted by New York General Obligations Law § 5-501. General Obligations Law § 5-511 provides that a usurious note and all of its securing documents “shall be void.” However, in New York State courts “[i]t has been established that usury is a personal defense which may be waived by the borrower.” Reyes v. Carver Federal Savings and Loan Ass’n, 74 Misc.2d 323, 326, 344 N.Y.S.2d 501 (N.Y.Sup.1973) (citing Howard v. Kirkpatrick, 263 A.D. 776, 31 N.Y.S.2d 182 [3d Dep’t 1941]). In Barrett v. Conley, 35 Misc.2d 47, 48, 228 N.Y.S.2d 992 (N.Y.Sup.1962), the defendant failed to appear at a proceeding that finalized the rights of the parties concerning an allegedly usurious mortgage. In holding that the defendant’s failure to appear constituted a waiver of the defense that the mortgage was usurious, the court observed that “there seems to be no dispute as to the right of a borrower to waive the defense of usury or be estopped from asserting it.” See Schreiner v. Feichtmayr, 234 N.Y.S.2d 631 (N.Y.Sup.1962) (default for failure to plead defense of usury constitutes a waiver of the defense); In re Bocker, 123 B.R. 164 (E.D.N.Y.1991) (debtor who defaulted in appearance in prior state court proceeding was precluded from raising usury defense in bankruptcy proceedings because debtor “clearly had the opportunity to appear in the state court action and raise the usury defense”).
In this case, the allegedly usurious Note 1 was merged into the Confession of Judgment. A confession of judgment is regarded by New York law as a type of consent judgment, and when given without unlawful inducement a consent judgment is deemed to have been given consensually and voluntarily. See, generally, Luboch v. Sidey’s, Inc., 35 Misc.2d 410, 230 N.Y.S.2d 860 (N.Y.Sup.1962) (for a confession of judgment to be invalid it must be shown that it was given under duress, coercion or undue restraint).
The Higginses do not contend that they were caused to sign the Confession of Judgment under duress, coercion or by any other maneuver which would give this Court cause to question its voluntariness. By signing the Confession of Judgment the Higginses acknowledge their debt to Erickson and recite that the loans constitute “lawful debts.” Thus executing a valid Confession of Judgment, the Higginses waived their defense that the interest rate on Note 1 was usurious.
B. Res judicata
The doctrine of res judicata bars the Higginses from challenging the Confession of Judgment and its underlying Notes in this Court.
As discussed in part II, supra, a valid confession of judgment is a judicial lien that “may be docketed and enforced in the same manner and with the same effect as a judgment in an action in the supreme court.” N.Y. CPLR 3281(b) (McKinney Supp.2000). A confession of judgment “[s]tands in much the same position as one by stipulation or consent and is a conclusive adjudication of all matters embraced in it and a bar to any subsequent action on the same claim.” Canfield v. Elmer E. Harris & Co., 252 N.Y. 502, 170 N.E. 121 (1930). A confession of judgment is therefore treated as any other judgment rendered by a state court, and the Full Faith and Credit Act requires federal courts to give state court judgments the same “preclusive effect it would be accorded by the rendering state.” Nissan v. Weiss (In re Weiss), 235 B.R. 349, 354 (Bankr.S.D.N.Y. 1999); see also Kelleran v. Andrijevic, 825 F.2d 692 (2d Cir.1987) (bankruptcy courts must respect lawfully-obtained state court judgments, even if the underlying claims are meritless).
*157A prior judgment will normally preclude further litigation of those issues which were actually litigated and determined, as well as matters which “although not expressly determined, are comprehended and involved in the thing expressly stated and decided, whether they were or were not actually litigated or considered.” Joseph Rubin & Sons, Inc. v. Waverly Construction Co., Inc., 97 N.Y.S.2d 753, 756 (N.Y.Sup.1950) (quoting Pray v. Hegeman, 98 N.Y. 351 [1885]).
When the Higginses signed the Confession of Judgment in the amount of $181,448.33, they explicitly agreed to the validity of Note 1 and Note 2. The Affidavit of Confession of Judgment signed by the Higginses states in part:
This confession of judgment is for a debt justly due to the plaintiff arising from the following facts:
This sum represents the aggregate net balance of two loans made to defendants by plaintiff dated February 4, 1998 and August 10, 1998. These loans represent lawful debts of the defendants for consideration actually received.
(emphasis supplied).
The Confession of Judgment given by the Higginses serves as a final judgment on Note 1 and Note 2, which were acknowledged in the text of the Confession of Judgment as “lawful debts.” When the Higginses gave a signed Confession of Judgment confirming their liability on Note 1 and Note 2, the Confession of Judgment also “comprehended” that they would be required to pay 18% interest on Note 1 as comprising part of a lawful debt. As a result, this Court is prohibited under the Full Faith and Credit Act from looking behind an enforceable judgment to consider the usury defense asserted by the Hig-ginses.4
IV. Dischargeability
The fourth issue before the Court is whether Erickson can contest the dischargeability of his claim once the applicable statute of limitations has expired. Essentially, Erickson asserts that the Higginses acted with “unclean hands” in their dealings with him and that, accordingly, he should be granted additional time to litigate this issue. In their motion for summary judgment, the Higginses argue that this counterclaim must be dismissed as it is time-barred.
In accord with the principles of the Bankruptcy Rules, deadlines that are set forth therein “are to be interpreted strictly and in a manner consistent with the Code’s policies in favor of providing a fresh start for the debtor and prompt administration of the case.” Dombroff v. Greene (In re Dombroff), 192 B.R. 615, 621 (S.D.N.Y.1996) (citing Taylor v. Freeland & Kronz, 938 F.2d 420 [3d Cir.1991], aff'd, 503 U.S. 638, 112 S.Ct. 1644 [1992]). If the burden of establishing a cause for extension of a time limit is not met by the moving party, the motion shall be denied. In re Weinstein, 234 B.R. 862, 866 (Bankr.E.D.N.Y.1999).
The time for filing complaints asserting non-dischargeability of debts under Section 523(c) is limited to 60 days from the first date set for the meeting of credi-*158tcrs. Fed. R. Bankr.P. 4007(c). Rule 4007(c) also provides for an extension of this time period so long as a motion is made after a hearing on notice and before the time period has expired. Id. A court may extend time to file a complaint under Section 523(c) only insofar as Rule 4007(c) provides. Fed. R. Bankr.P. 9006(b)(3). The Second Circuit has embraced the theory that an extension of the time period imposed by Rule 4007(c) may be granted “if equity so requires.” European Amencan Bank v. Benedict (In re Benedict), 90 F.3d 50, 54 (2d Cir.1996). The Second Circuit relied upon United States v. Locke, 471 U.S. 84, 89 n. 10, 105 S.Ct. 1785, 85 L.Ed.2d 64 (1985), where the Supreme Court stated that “statutory filing deadlines are generally subject to the defenses of waiver, estoppel, and equitable tolling.”
Erickson has not asserted that there is any issue as to waiver so it need not be evaluated with respect to the facts of the instant case. At this juncture, the question is whether equity requires sustaining the defenses of estoppel and equitable tolling that have been posed.
The rationale behind the doctrine of equitable tolling is that a statute of limitations should not start running until the plaintiff is aware she may have a cause of action. See Cerbone v. International Ladies’ Garment Workers’ Union, 768 F.2d 45, 48 (2d Cir.1985). Federal courts have exercised this doctrine where the movant had been misled or where evidence had been fraudulently concealed but have not been so generous where one does not ac; diligently in protecting his legal rights. See State of New York v. Hendrickson Bros., Inc., 840 F.2d 1065, 1083 (2d Cir.1988) (tolled statute of limitations where plaintiff acted diligently and failed to discover existence of claim as a result of defendant’s intentional fraudulent concealment); Baldwin County Welcome Ctr. v. Brown, 466 U.S. 147, 151, 104 S.Ct. 1723, 80 L.Ed.2d 196 (1984) (“One who fails to act diligently cannot invoke equitable principles to excuse that lack of diligence.”). Only where there is a fiduciary relationship can a plaintiff claim that a defendant had an obligation to inform him of the claim. Zola v. Gordon, 685 F.Supp. 354, 364 (S.D.N.Y.1988). Because Erickson has not submitted any evidence of a fiduciary relationship, the Court must assume that the relationship in this case is nothing more than an arm’s length business transaction. Regardless, a movant must show that he has not “slept on his rights” before the court will use its equity power to toll the limitations period. Holmberg v. Armbrecht, 327 U.S. 392, 396, 66 S.Ct. 582, 90 L.Ed. 743 (1946).
Unlike equitable tolling, equitable estoppel is available when a plaintiff knows of his potential cause of action but delays filing suit as a result of the defendant’s conduct. See Cerbone, 768 F.2d at 50. The rationale behind this equitable doctrine is to protect the person who brings their action after it would normally be barred because she was “lulled” into believing that she should delay pursuing her cause of action. Cerbone, 768 F.2d at 50; see, e.g., Simcuski v. Saeli, 44 N.Y.2d 442, 406 N.Y.S.2d 259, 377 N.E.2d 713 (1978). This doctrine is most often invoked when the relationship between the parties is of a fiduciary nature such as employee/employer. Erbe v. Lincoln Rochester Trust Co., 13 A.D.2d 211, 213, 214 N.Y.S.2d 849 (4th Dep’t 1961).
To equitably estop a party from interposing the defense that an action is time-barred, “a [movant] must show that: (1) the [non-movant] made a definite misrepresentation of fact, and had reason to believe that the [movant] would rely on it; and (2) the [movant] reasonably relied on that misrepresentation to his detriment.” *159Buttry v. General Signal Corp., 68 F.3d 1488, 1493 (2d Cir.1995); see also Bennett v. United States Lines, Inc., 64 F.3d 62, 65 (2d Cir.1995).
Erickson does not state clearly which facts he claims give rise to a cause to invoke equitable tolling or estoppel. Both equitable tolling and equitable estoppel address situations where a valid claim exists but is not pursued by the plaintiff within the statutory period because of the defendant’s behavior. Erickson does not allege fraud or other misconduct which would have prevented the timely filing of an adversary proceeding objecting to discharge-ability. The Higginses did not conceal or misrepresent their intent to claim that the Mortgage and Confession of Judgment impaired the Higginses’ homestead exemption and were avoidable as preferences. In fact, the Higginses’ attorney sent two letters to Erickson’s counsel, the first letter dated less than one month after the petition was filed and the second dated 21 days before the last day to oppose dis-chargeability, stating with documentation that the Mortgage and Confession of Judgment impaired the Higginses’ homestead exemptions, were avoidable as preferences and “should be vacated.”
Erickson was aware of the deadline for filing an adversary proceeding objecting to discharge and was also aware that the Higginses would attempt to avoid the Mortgage and Confession of Judgment. Accordingly, neither equitable tolling nor equitable estoppel can be applied. Given the date of the petition, it is easily discernible that the instruments securing the debt were recorded within the preference period. Erickson could have filed his objection to dischargeability within the period set by the Rules or requested an extension of the period prior to its expiration. There is no basis for the Court to use its equity power to extend the time in which Erickson may file a complaint objecting to discharge of a debt under Section 523.
Counsel for the parties are directed to confer together to submit an order consistent with this decision agreed to as to form (without prejudice to any party’s right to appeal).
. On its face, this document lists two different judgment amounts, $181,448.33 and $186,263.33. The Higginses' petition lists the lower amount. Erickson asserts that the judgment amount should have been $186,775.99 based on his records of the payments made and interest accrued on both Notes. Since the exact amount does not affect the outcome of the issues before this Court, I shall assume (without deciding) that the amount listed on the petition is the value of the Judgment.
. The parties dispute the exact amount of the mortgage held by HFS. The Higginses claim the amount of $375,617.25 that was due as of the petition date is the value of the HFS mortgage. Erickson maintains that the amount of $372,105.96 listed on the June 14, 2001 HFS account statement is the value of the mortgage. Since the exact amount of the HFS mortgage does not affect the outcome of the issues before this Court, I shall assume (without deciding) that $375,617.25, the number listed on the petition, is the value of the HFS mortgage.
. All numbers are rounded to the nearest thousand.
. Facility Planning, Inc. v. King (In re King), 68 B.R. 569 (Bankr.D.Minn.1986), cited by the debtors, is inapplicable to these facts. King held that a usury defense was not barred where the borrower gave a confession of judgment on a loan bearing an interest rate of 162% per annum. The decision in King was based on Minnesota law, and the high interest rate (more than eight times higher than the interest rate in this case) shocked the conscience of the Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493249/ | OPINION AND ORDER ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on a motion for summary judgment filed by plaintiff Michael T. Gunner, trustee for the chapter 7 bankruptcy estate of Scott W. Silver (“debtor”).
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the General Order of Reference entered in this district. This is a core matter which *220this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(A), (E) & (0).
Rule 56(c) of the Federal Rules of Civil Procedure, which is made applicable to this adversary proceeding by Bankruptcy Rule 7056, provides in part:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law....
Fed.R.Civ.P. 56(c).
In considering a motion for summary judgment, the Court must view any inferences from the underlying facts in the light most favorable to the non-moving party. Cox v. Kentucky Dept. of Transportation, 53 F.3d 146, 150 (6th Cir.1995).
The plaintiff filed this adversary for an accounting and to recover certain rents from real estate located at 426-28 South Ohio Avenue in Columbus, Ohio (the “Property”). Defendant Onyango Bashir Muhammad collected those rents during the pendency of this chapter 7 case and disputes the plaintiffs claims to them.
The parties have stipulated certain facts. Those stipulations and the legal documents attached thereto are the basis for the plaintiffs motion for summary judgment.
The debtor filed his petition under chapter 7 of the Bankruptcy Code on March 6, 2000. Shortly prior to that filing he attempted to quit-claim an interest in the Property to the defendant. That deed was not recorded, and therefore, the debtor was the record owner of the Property at the time he filed bankruptcy. The defendant later attempted to record a deed in his favor over a forged signature of the debtor. At the request of the trustee, however, the defendant reconveyed the Property to the debtor.
The defendant believes the Property is not property of the debtor’s bankruptcy estate which the trustee may use and sell. He argues that, at best, the debtor had only bare legal title and not any equitable interest. The defendant, who owned the Property prior to the transfer to the debt- or, maintains that the transfer was made only to facilitate the debtor’s ability to obtain financing to purchase the Property under an executed Agreement to Purchase. When the debtor was unable to obtain financing, he retransferred the Property to the defendant. It was the title agency that neglected to submit that deed for recording in the public records. The defendant has remained in possession of the rental property and has continued to collect the rents. He wants this Court to impose a constructive trust on the Property in his favor or find that the trustee is not a bona fide purchaser pursuant to § 544 of the Bankruptcy Code because of the defendant’s open possession of the Property.
At the time of the bankruptcy filing, as between the debtor and the defendant, the defendant was the owner of the Property. Therefore, under § 541 of the Bankruptcy Code, the debtor had no legal interest in the Property on his bankruptcy filing date. The trustee, however, is entitled to avoid the prepetition transfer of the Property from the debtor to the defendant because the deed was not recorded. The lack of such recording and the trustee’s status as a bona fide purchaser of real property, without regard to any knowledge under 11 U.S.C. § 544(a)(3), compel that result. Under Ohio law, the trustee, on behalf of unsecured creditors, prevails against that unrecorded interest. Ohio Rev.Code § 5301.25(A).
*221Once that unrecorded transfer is avoided, the debtor’s resulting interest becomes property of his bankruptcy estate pursuant to 11 U.S.C. §§ 541(a)(3) and 550(a). Even though this adversary proceeding does not specifically seek such avoidance, that right has been recognized and accomplished by the defendant’s reconveyance of the Property to the debtor pursuant to the trustee’s earlier request.
The only issue that remains therefore is whether the debtor’s interest, brought into the bankruptcy estate by the powers conferred on the trustee by 11 U.S.C. § 544(a)(3), should be limited by the imposition of a constructive trust. Such trust would give the defendant an equitable interest in the Property. As the equitable owner, he could claim entitlement to the postpetition rents collected from the Property. Without such a limitation, 11 U.S.C. § 541(a)(6) would require that the rents become part of the bankruptcy estate.
Under the rationale of XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443 (6th Cir.1994), there is no right of the defendant, under the facts of this case, to benefit from a constructive trust not imposed prepetition. Further, there are no allegations here of facts that would cause this case to come within the exception to that rule set out in Kitchen v. Boyd (In re Newpower), 233 F.3d 922 (6th Cir.2000). Although the defendant argues that the debtor obtained the Property without consideration, the written agreement between the parties obligated the debtor to pay $60,000 for the Property.
Based upon the foregoing, the Court finds that the trustee is entitled to an accounting and to a turnover of postpetition rents collected by the defendant. The defendant may, of course, have other remedies for expenses he incurred related to the Property.
Accordingly, the plaintiff-trustee is entitled to summary judgment on his motion. A' judgment to that effect will be entered forthwith.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493250/ | MEMORANDUM DECISION AND ORDER DENYING PLAINTIFFS’ MOTION FOR EXTENSION OF TIME TO FILE NOTICE OF APPEAL
MICHAEL G. WILLIAMSON, Bankruptcy Judge.
THIS CASE came on for hearing on November 15, 2001, on the motion for extension of time to file a notice of appeal (“Motion”) filed by Salvador and Rosabel Cavazos and 294 other individuals who are the plaintiffs in this adversary proceeding (“Plaintiffs”). In the Motion, the Plaintiffs seek an extension of time pursuant to Rule 8002(c)(2) of the Federal Rules of Bankruptcy Procedure1 to file an appeal of this court’s decision entered September 28, 2001, granting summary judgment in favor of the defendants (“Decision”).2
Procedural Background
The Motion was filed on October 10, 2001, one day after the deadline for filing a notice of appeal under Rule 8002(a).3 In *308the Motion, Plaintiffs’ counsel asserts that his failure to timely file a notice of appeal was due to “excusable neglect” and, accordingly, the court should extend the time to file a notice of appeal pursuant to Rule 8002(a)(2). The facts and circumstances leading up to the untimely Motion are not in dispute. They are as follows:
After the entry of the Decision on September 28th, the clerk served it that same day by mail on lead counsel for the Plaintiffs (“Lead Counsel”) whose office is located in Corpus, Christi, Texas, and on local counsel for Plaintiffs (“Local Counsel”) whose office is located in Tampa, Florida. Lead Counsel received it on Wednesday, October 8, 2001. On that date, Lead Counsel, while in mediation in Houston, Texas, received word that the Decision had been rendered. However, even though Lead Counsel returned to his office on Thursday, October 4th, he did not read the Decision until the weekend of October 6th. As stated in the Motion: “Monday, October 8, 2001 was a Federal Holiday. The earliest counsel could file a Notice would have been [Wednesday] October 10, 2001.” Motion, ¶ 3.
There are no other facts contained in the Motion or that were proffered at the Hearing to support the claim that the failure to timely file the notice of appeal was due to excusable neglect. There is no explanation why a notice of appeal was not filed on Tuesday, October 9th. There is also no explanation as to why Local Counsel, who resides in the same city as the court, did not file by hand delivery a notice of appeal on October 9th. Nor is there an explanation as to why Lead Counsel did not utilize the court’s after-hours filing procedure that permits papers to be filed by facsimile transmission.4
Conclusions of Law
Rule 8002(a) requires that a notice of appeal “shall be filed with the clerk within 10 days of the date of the entry of the judgment, order, or decree appealed from.... ” The deadline to file a notice of appeal may be extended pursuant to Rule 8002(c)(2) “upon a showing of excusable neglect.” “Excusable neglect” is not a defined term in the Rules.
The Supreme Court in Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership (“Pioneer”), 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) interpreted this term in the context of Rule 9006(b). The Eleventh Circuit has held that Pioneer applies in determining “excusable neglect” under the similar provisions of Rule 4(a)(5) of the Federal Rules of Appellate Procedure which rule applies to appeals from the district court to the circuit court. Advanced Estimating System, Inc. v. Riney, 77 F.3d 1322, 1324 (11th Cir.1996). It appears, therefore, that Pioneer is equally relevant in an analysis of Rule 8002(c)(2). See also In re Van Houweling (“Houweling”), 258 B.R. 173, 175-76 (8th Cir. BAP 2001) (citations omitted). In Pioneer, the Supreme Court *309held that the determination of “excusable neglect” is,
... at bottom an equitable one, taking account of all relevant circumstances surrounding the party’s omission. These include ... the danger of prejudice to the debtor, the length of delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.
Pioneer, 507 U.S. at 395, 113 S.Ct. 1489. The burden is on the movant to make a showing of “excusable neglect.” In re Schultz, 254 B.R. 149 at 153 (6th Cir. BAP 2000).
The only “excuse” advanced by counsel for the untimely filing in this case related to counsel’s work schedule and other matters. As set out in the Motion, counsel was preoccupied with other litigation and did not receive the Decision until October 3, 2001, or four days after the Decision was entered. He admits, without explanation, that he did not read the Decision thoroughly until October 6th. Accordingly, on that date counsel was aware that he only had four days to file a timely notice of appeal. While the 6th and 7th fell on the weekend, and the following Monday, the 8th, was a federal holiday, counsel could have timely filed the notice of appeal on the next day and day of the deadline — • October 9th.
Counsel’s assertion that the earliest counsel could have filed a notice of appeal would have been October 10th is completely misplaced. The 9th was not a holiday. Counsel faded to provide any explanation for not filing on the 9th. Admittedly, counsel’s office is located in Corpus Christi, Texas. However, the Plaintiffs have local counsel, located in Tampa. Additionally, the Bankruptcy Courts for the Middle District of Florida even permit after-hours filing, and counsel could have filed his notice up until midnight of October 9th.
The court’s review of the cases involving counsel’s delay in meeting this deadline reveals that there is a line of cases holding that “law office upheaval” or “clerical or office problems” do not constitute excusable neglect. Pioneer, 507 U.S. at 398, 113 S.Ct. 1489 (“[i]n assessing the culpability of respondents’ counsel, we give little weight to the fact that counsel was experiencing upheaval in his law practice ...”); Schultz, 254 B.R. at 154 (citing inter alia Schmidt v. Boggs (In re Boggs), 246 B.R. 265, 268 (6th Cir. BAP 2000)); Belfance v. Black River Petroleum, Inc. (In re Hess), 209 B.R. 79, 83 (6th Cir. BAP 1997) (lawyer’s practice interfering with compliance with deadline is not “excusable neglect”); In re Mizisin, 165 B.R. 834, 835 (Bankr.N.D.Ohio 1994) (misunderstanding of Bankruptcy Code and Rules and counsel’s heavy workload is not “excusable neglect”); In re GF Furniture Sys., Inc., 127 B.R. 382, 383-84 (Bankr.N.D.Ohio)(solo practitioner’s preoccupation with other litigation is not grounds for “excusable neglect”).
In this regard, this case is factually similar to In re Herdmann, 242 B.R. 163 (Bankr.S.D.Ohio 1999) (“Herdmann”). In Herdmann, the Chapter 7 Trustee filed a motion for extension to file a notice of appeal but failed to meet his burden of showing excusable neglect. The court there found that the Trustee faded to provide any explanation for failing to act when there was time to take timely action. Id. at 167. The other clerical and procedural problems in his office cited as excuses did not amount to “excusable neglect” since they fell within the line of cases which hold that office turmoil does not amount to excusable neglect. See also Houweling, *310258 B.R. at 176-77 (movant “offers no explanation” of his failure to act).
Viewing this case in light of the other relevant factors, it is clear that the length of delay was slight but the court believes there is prejudice to the Debtor if the Motion were to be granted. While it is true that the plan was confirmed some time ago, this litigation in this adversary proceeding has been ongoing since July 30, 1999, and is predicated upon a settlement agreement filed in the Debtors’ cases dated July 1995. Thus, there is a substantially lengthy history of litigation between the parties that tilts in favor of the Debtors and makes finality a premium in this case.5
Conclusion
Pioneer stands for the proposition that in determining whether the neglect is “excusable,” a court must make an equitable determination “taking account of all relevant circumstances surrounding the party’s omission.” In this case, the only circumstances advanced as constituting “excusable neglect” relate to counsel’s inattention over the span of five days to the need to file a timely notice of appeal. Under such circumstances, where the only basis for a claim of excusable neglect is inattention of counsel because of preoccupation with other litigation, there is no basis for a finding of excusable neglect.
Accordingly, for the reasons set forth above, it is
ORDERED that the Motion is denied.
. References to a "Rule” as used herein shall be to the Federal Rules of Bankruptcy Procedure unless otherwise indicated.
. Cavazos v. Mid State Trust II (In re Hillsborough Holdings Corp.), 267 B.R. 882 (Bankr. M.D.Fla.2001).
.Rule 8002 requires that a notice of appeal or a motion to extend the time to file a notice of appeal be filed within 10 days of the date of the entry of the order or judgment appealed from or the order disposing of a motion to extend time to file a notice of appeal. In this case, the tenth day was Monday, October 8, *3082001, a legal holiday. Accordingly, in accordance with Rule 9006(a), the deadline to file a notice of appeal or motion for order extending the time to file a notice of appeal was October 9, 2001.
. The court’s After Hours Filing Procedures are the subject of the court's General Order 01-00002-MIS-TPA which is available at the court or the court's website (www.flmb.usc-ourts.gov/procedures.htm). These procedures permit filing by facsimile after 4:00 p.m. and until 11:59 p.m. that day. Documents filed via this method will be deemed to have been filed "on the date and at the time printed on the document by the facsimile machine in the Clerk’s Office.” The court takes judicial notice of the fact that parties in numerous other proceedings have utilized these after-hours filing procedures to include filing notices of appeal.
. There is no issue as to the Plaintiffs' good faith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493251/ | MEMORANDUM OF DECISION ON COMPLAINT TO AVOID PREFERENTIAL TRANSFERS
ALBERT S. DABROWSKI, Bankruptcy Judge.
I.INTRODUCTION
This adversary proceeding follows in the tragic wake of a pattern of fraud perpetrated by the Debtor’s principals. Due to gross mismanagement and misappropriation of funds by its principals, the Debtor has ended up hopelessly insolvent and in liquidation in this Court. The present Defendants, like scores of other individuals over a period spanning two decades, placed significant personal funds in the Debtor’s care. In an effort to create some measure of distributional equality among innocent fraud victims, the Plaintiff-Trustee has commenced, inter alia, a series of avoidance actions against individuals, such as the present Defendants, who withdrew funds from the Debtor within the preferential transfer “look-back window” of Bankruptcy Code Section 547(b)(4).
As detailed in this Memorandum of Decision, the unique facts underlying this adversary proceeding support the Trustee’s avoidance and recovery of the transferred funds.
II.JURISDICTION
The United States District Court for the District of Connecticut has subject matter jurisdiction over the instant adversary proceeding by virtue of 28 U.S.C. § 1334(b); and this Court derives its authority to hear and determine this proceeding on reference from the District Court pursuant to 28 U.S.C. §§ 157(a), (b)(1). This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(F).
III.FACTUAL BACKGROUND
This proceeding is before the Court for decision after trial. The Court’s findings of fact are derived from the following sources: (i) the parties’ “Stipulation to Facts and the Admissibility of Documents as Full Exhibits”, (ii) the eviden-tiary record at trial, and (iii) the Court’s independent examination and noticing of the official record of the instant case and adversary proceeding.
On July 19, 1995 (hereafter, the “Petition Date”), an involuntary petition (hereafter, the “Petition”) was filed in this Court against the Debtor, Carrozzella & Richardson, seeking relief under Chapter 7 of the Bankruptcy Code. On August 21, 1995, an Order for Relief entered upon the Petition, and thereafter the Plaintiff, Michael J. Daly, was appointed as trustee of the Debtor’s Chapter 7 bankruptcy estate.
The Defendants, Francis J. Simeone (hereafter, “Francis”) and Josephine Si-meone (hereafter, “Josephine”), were two of many individuals who from time to time placed personal funds with the Debtor. However, because the evidentiary record in this proceeding was not developed with adequate precision, the nature and history of their financial dealings with the Debtor are somewhat murky. Despite the state of *328the record, the Court finds the following facts.
Attorney John A. Carrozzella (hereafter, “Attorney Carrozzella”) first provided legal representation for the Defendants in the 1970’s; and it appears that he then represented Josephine, commencing in 1992 or 1993, in connection with her fiduciary duties with respect to her mother’s estate.1 The Defendants’ depository relationship with the Debtor appears to have begun in 1993, growing out of Josephine’s fiduciary duties. Josephine’s mother held certain bonds, which Attorney Carrozzella agreed to liquidate for Josephine. The proceeds were deposited with the Debtor (hereafter, the “Fiduciary Deposit”), and an “account” was established thereby (hereafter, the “Account”). Over subsequent months, Josephine and/or Francis made additional deposits from their own funds (hereafter, the “Non-Fiduciary Deposits”), including the proceeds of the liquidation of certain certificates of deposit. The Fiduciary and Non-Fiduciary Deposits are hereafter collectively referred to as the “Deposited Funds”.
All correspondence from the Debtor regarding the Account2 was addressed to “Mr. Francis J. Simeone and Mrs. Josephine Simeone or the Survivor thereof for the Benefit of Debrah Gejda”. Computer-generated accounting sheets attached to these letters were titled, “Francis J. Si-meone and Josephine Simeone” through November 1994, and thereafter titled, “Francis J. Simeone and/or Josephine Si-meone, for the Benefit of Debrah Gejda”.3
Within the 90 days preceding the Petition Date a withdrawal was processed from the Account via the following transaction: Check No. 857 (hereafter, the “Check”), in the amount of $5,000.00, dated May 11, 1995, drawn on the “Carrozzella and Richardson Clients Fund Account”, and made payable to the order of “Francis J. Si-meone and/or Josephine Simeone” (hereafter, the “Transfer”). The Check was endorsed in blank by Josephine alone, and subsequently endorsed by Harte Chevrolet to the order of Shawmut Bank for deposit.4 The Check finally cleared the drawee bank on May 15,1995.
The Debtor’s records indicate that at all times after the Transfer, the Account maintained a balance of not less than $120,000.00. Those funds have never been paid to the Defendants, individually or jointly, personally or in a fiduciary capacity.
At a point in time not determined in this proceeding, the Debtor became involved, through the fraudulent activity of Attorney Carrozzella, in a criminal enterprise possessing many of the attributes of a “Ponzi” scheme — in which funds placed with a debtor by later depositors are secretly and illicitly utilized to pay returns, and repay principal, to earlier depositors. At all times relevant to this adversary proceeding, the Debtor commingled the Deposited Funds in a single bank account together with, inter alia, (i) funds deposited with the Debtor by other entities, (ii) income derived from investments, and (iii) the *329general revenue of the legal practice of the Debtor.5
IV. DISCUSSION
The Plaintiff-Trustee seeks to avoid the Transfer under the authority of Bankruptcy Code Section 547, which provides in relevant part as follows:
•Jc 'H V V
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A)on or within 90 days before the date of the filing of the petition; ... and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title....
11 U.S.C. § 547(b) (1995) (emphasis supplied).
The Plaintiff bears the ultimate burden of proof by a preponderance of the evidence on all of the elements of a preferential transfer as set out in subsection (b) of Section 547. See 11 U.S.C. § 547(g) (1995). The Court concludes that the Plaintiff has met that burden, at least as to Josephine. The Transfer was made from the Debtor’s bank account to Josephine6 within the 90 days prior to the Petition Date, at a time when, as the parties have stipulated, the Debtor was insolvent. At all relevant times Josephine was a “creditor” of the Debtor, in that she had a “right to payment” of the balance in the Account.7 See 11 U.S.C. § 101(5), (10) (1995). The Court further concludes that the Debtor was hable to Josephine in her personal capacity in an amount exceeding $5000.00,8 and therefore, the Transfer was made on account of an antecedent “debt”. See 11 U.S.C. § 101(12) (1995). Finally, the Transfer enabled Josephine to receive more than she would receive in a hypothetical liquidation of the Debtor under Chapter 7 had the Transfer not been made.
Despite the foregoing conclusions, the Defendants argue that the Transfer did not consist of “an interest of the debtor in property”, as required by the prefatory language of Section 547(b), because the funds transferred were previously placed *330with and/or held by the Debtor in trust for the Defendants’ benefit.
It is axiomatic that funds held in trust by one entity for another do not constitute the beneficial property of the former. Rather, title to the trust property is held by the former as trustee for the benefit of the latter.9 Consequently, property transferred by a trustee to its beneficiary pursuant to, or consistent with, a trust is not voidable as a preferential transfer should the trustee later become a bankruptcy debtor.10 Thus, a court must determine whether the course of conduct between a debtor and the alleged preference recipient created a trust relationship — expressly or by operation of law— with respect to the subject property. That inquiry in this proceeding ultimately asks whether the funds comprising the Transfer were trust funds at the time of their transfer from the Debtor to the Defendants.
A. Creation of an Express Trust.
An individual “settlor” can declare an express trust by making an inter vivos transfer of property to a “trustee” and “manifesting” an intention to create a trust. See Restatement (Second) of Trusts §§ 2, 23 (1959); cf. Marzahl v. Colonial Bank & Trust Co., 170 Conn. 62, 64, 364 A.2d 173 (1976); Goytizolo v. Moore, 27 Conn.App. 22, 25, 604 A.2d 362 (1992). A trust may be created even though the settlor does not use the word “trust”. Restatement (Second) of Trusts § 24 cmt. b (1959).' And although the intention of the settlor must be “externally expressed”, id. at § 24 cmt. c, it need not be evidenced by words, whether written or spoken. Rather, it may be discerned solely from the conduct of the settlor in light of all the circumstances. Id. at §§ 4 cmt. a, 24(1). In litigation such as that at bar, all circumstances throwing light upon a settlor’s intention are relevant to the interpretation of her words and/or conduct. See id. at § 24 cmt. b.
The Court concludes from the entire evidentiary record of this proceeding, and in particular, from the testimony of Francis, that the Defendants manifested no intention to create an express trust at the time they made the Non-Fiduciary Deposits. In analyzing the circumstances surrounding the Defendants’ placement of such funds with the Debtor, the Court notes that the Defendants never stated, orally or in writing, that they intended to create a trust with the Non-Fiduciary Deposits. Nor is there conduct or circumstantial background from which the Court might infer that the Defendants intended to create, or assumed they were creating, a trust. Finally, although there is evidence that Josephine had an attorney-client relationship with Attorney Carrozzella in relation to the Fiduciary Deposits, the Non-Fiduciary Deposits were never held by the Debtor as the proceeds, product, or subject of any of its legal work.11
What the evidence demonstrates with regard to the Non-Fiduciary Deposits is not the creation of a trust relation*331ship, but rather, a type of banking relationship. On direct examination, Francis admitted that he viewed the Deposited Funds as a “deposit” account. A deposit account with a banking institution does not generally create a trust relationship unless it is explicitly denominated as such. See e.g., 10 Am.Jur.2d Banks § 339 (1963). Rather, a deposit creates a debt owed by the bank to the depositor. Id. It is the potential insecurity of this non-trust arrangement which has spawned much present-day banking regulation, including the provision of deposit insurance through entities such as the Federal Deposit Insurance Corporation. The Defendants knew, or should have known, that the funds they placed with the Debtor were uninsured. With eyes wide open, they forewent the relative security of an insured account with a banking institution.
B. Implication of a Constructive Trust
Failing to establish the creation of an express trust relationship at the time the Deposited Funds were placed "with the Debtor, the Defendants attempt to have this Court retroactively imply a constructive trust in the Deposited Funds based upon the Debtor’s alleged fraud in the solicitation of those funds. This alternative tact possesses a solid legal basis in this Circuit. See Sanyo Electric, Inc. v. Howard’s Appliance Corp. (In re Howard’s Appliance Corp.), 874 F.2d 88 (2d Cir.1989) (recognizing the existence of a constructive trust under New Jersey law, and applying that trust retroactively to exclude from a bankruptcy estate property in which a creditor’s security interest had been lost through the pre-petition misconduct of the debtor).12 Whether the grounds for a constructive trust existed at the time the Deposited Funds were placed with the Debtor, however, is purely a matter of state law. Id.
The implication of a constructive trust in this ease is governed by Connecticut common law. Although Connecticut case law does not provide clear precedent under the specific facts of this adversary proceeding, the Connecticut Supreme Court has articulated generally the circumstances under which a constructive trust will be recognized:
... a constructive trust arises... against one, who by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in any way against equity and good conscience, either has obtained or holds legal title to property which he ought not, in equity and good conscience, hold and enjoy.
Zack v. Guzauskas, 171 Conn. 98, 103, 368 A.2d 193 (1976) (quoting 76 Am.Jur.2d, Trusts § 221). More specifically, commentary to the Restatement of Trusts points out that if one entity induces another by fraud to deposit funds with it, then it becomes a constructive trustee of the money deposited. Restatement of Trusts (Second) § 12, cmt. I (1959). Thus, if the Defendants here were able to demonstrate that certain critical deposits were fraudulently solicited from them, they might well be deemed to be the beneficiaries of a *332constructive trust arising at the time of such deposit(s).
Yet, even if the Defendants can establish that they were fraudulently induced to deposit funds13, they must also be able to identify the funds that are the subject of their constructive trust claim. See 76 Am.Jur.2d, Trusts § 252 (1975). In the context and parlance of the present litigation, this requirement compels the Defendants to trace the Deposited Funds through to the Transfer.14 Id. This is a difficult burden because, as noted and found supra, the Deposited Funds were commingled by the Debtor in a unitary bank account (hereafter, the “Commingled Account”), together with, inter alia, (i) funds of other “depositors”, (ii) income derived from investments, and (iii) the general revenue of the legal practice of the Debtor. Further, the Commingled Account was actively utilized by the Debtor for the payment of its obligations. Although the law indulges certain presumptions and fictions which aid constructive trust claimants in tracing funds into and through a commingled account, see id. at §§ 266-268, the Defendants have failed at a basic level to present facts from which this Court could trace the funds they deposited. Thus the constructive trust claim must fail for lack of proof.
C. Statutory Defenses.
The Defendants argue, alternatively, that even if the Transfer is deemed avoidable preferences under Section 547(b), it nonetheless constitutes an “ordinary course” transfer, and thus qualifies for an exception to a bankruptcy trustee’s avoiding powers under the terms of Section 547(c)(2). That statutory defense provides in pertinent part as follows:
(c) The trustee may not avoid under this section a transfer—
í¡í jji }-5
(2) to the extent that such transfer was—
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and transferee;
(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms ....
11 U.S.C. § 547(c) (1995).
A defendant in a preference action bears the burden of proving his entitlement to a Section 547(c) defense. 11 U.S.C. § 547(g) (1995). In the instant case the Defendants have failed to meet that burden.
Courts routinely reject the “ordinary course” defense in the context of a Ponzi scheme, e.g., Danning v. Bozek (In re Bullion Reserve of North America), 836 F.2d 1214, (9th Cir.1988), at least as to preference recipients who are investors or depositors in the Ponzi scheme. E.g., Sender v. Heggland Family Trust (In re Hedged-Invs. Assocs., Inc.), 48. F.3d 470, 474-76 *333(10th Cir.1995). The fundamental analysis of these courts was that a transfer by a Ponzi scheme debtor to a depositor or investor is not in the ordinary course of the business of the debtor, and/or does not follow ordinary business terms, since no lawful entity ordinarily pays fraudulently-obtained revenue to early investors. This Court concurs generally with that reasoning.15
In the instant case the Court finds that although there is insufficient evidence in the record to establish that the Debtor was engaged in a Ponzi scheme throughout the entire period of the Defendants’ depository relationship with the Debtor, sufficient evidence has been adduced for the Court to find that a Ponzi or Ponzi-like scheme was in operation at the time of the Transfer. Hence the Transfer was made neither “in the ordinary course of business or financial affairs of the debtor” nor “according to ordinary business terms”, as required by Section 547(c)(2)(B) and (C). Accordingly, the shelter of Section 547(c)(2) is unavailable to the Defendants.
y. CONCLUSION
For the foregoing reasons, judgment shall enter in favor of the Plaintiff against the Defendant Josephine Simeone. This Memorandum of Decision shall constitute the Court’s findings of fact and conclusions of law for the purposes of Fed. R. Bank. P. 7052.
JUDGMENT
This adversary proceeding having been submitted to the Court after trial; and the Court having this day issued its Memorandum of Decision on Complaint to Avoid Preferential Transfer, in accordance with which it is hereby
ORDERED that a monetary judgment of $5,000.00 shall enter in favor of the Plaintiff against the Defendant Josephine Simeone; and
IT IS FURTHER ORDERED that judgment shall enter in favor of the Defendant Francis Simeone.
. It appears that this was not a decedent’s estate; but that Josephine’s duties may have been in the nature of a conservatorship.
. Francis testified that the Defendants established two "accounts” with the Debtor; yet there was no documentary support for that assertion.
. The Court assumes, without finding, that Debrah Gejda is Josephine’s mother.
. The subject funds were utilized in the purchase of a Chevrolet Blazer for the personal use of Francis and/or Josephine.
. The Plaintiffs expert witness, Richard Fink-el, CPA — a forensic accountant — testified credibly that separate bank accounts were not established for funds placed with the Debtor by individual depositors. Indeed, Mr. Finkel described the banking structure of the Debtor as "one big pot”, into which was deposited all of the Debtor's receipts and revenue.
. Although the Check was made payable to Josephine and/or Francis, because it was endorsed by Josephine alone, she became the sole transferee.
. In light of the fiduciary nature of the Fiduciary Deposits, Josephine may not have had a personal right to payment of the entire balance of the Account. However, the Court concludes that she had a right to payment of some (>$5000.00) of the balance, owing to her Non-Fiduciary Deposits.
. See fn. 7.
. A trust is generally described as “a fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person. ...” Restatement (Second) of Trusts § 2 (1959).
. See, e.g., Daly v. Deptula, et al., 255 B.R. 267 (Bankr.D.Conn.2000).
. Consequently, the Defendant's express trust argument cannot be aided by Connecticut Rule of Professional Conduct 1.15(a), which establishes the general rule that whenever an attorney receives property from a client, he holds it in trust.
. In at least one other Circuit federal courts decline to give retroactive effect to findings of circumstances giving rise to a constructive trust, at least when assessing the asset composition of a bankruptcy estate relative to the constructive trust claim of a third party. See, e.g., XL/Datacomp v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443 (6th Cir.1994). That Court's view springs from its belief that under common law a constructive trust is not really a trust at all, but rather a remedy, which can only have prospective effect from the time a court issues it.
. The Defendants have introduced no evidence of the Debtor’s fraudulent intent as of the time of solicitation of any specific deposit.
. Despite the fact that the Defendants are using the constructive trust claim as a "shield” rather than a "sword”, see Daly v. Deptula, supra, at 275-76, tracing is a required element of their defense. This is because the implication of a constructive trust— as opposed to the recognition of an express trust — is a remedial action in contravention of the intentions of the parties, i.e. the proposed constructive trustee never intended to hold the subject funds in trust. Thus, his subsequent payment of funds to the alleged constructive trust beneficiary cannot be construed as the trustee’s identification of those funds as trust assets.
. Such analysis has even greater force in the instance of a law firm, such as the Debtor here, which does not traditionally or legitimately engage in the provision of investment or banking services. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493253/ | MEMORANDUM-OPINION
JOAN LLOYD COOPER, Bankruptcy Judge.
This matter came before the Court on the Motion for Summary Judgment of Plaintiff/Debtor Ricky Lee Johnson (“the Debtor”) and the Cross Motion for Summary Judgment of Defendants The Medical Center at Bowling Green, Bowling Green Associated Pathologists, Bowling Green Radiology Associates, Emergency Room Physicians and Urgentcare, Inc. (“the Defendants”). The Court reviewed the submissions of the parties and for the following reasons OVERRULES Plaintiffs Motion for Summary Judgment and SUSTAINS the Defendants’ Motion for Summary Judgment.
FACTS
On April 19, 2000, a default judgment was entered against the Debtor.
On May 8, 2000, a Order of Wage Garnishment was issued against the Debtor’s wages.
On May 14, 2000 through June 18, 2000, $621.61 was garnished from the Debtor’s wages. No wages were garnished from the Debtor’s pay during the 90-day period prior to the Debtor filing his Voluntary Petition in bankruptcy. The wages garnished from the Debtor’s pay were withheld during the 180-day period prior to the bankruptcy filing.
LEGAL ANALYSIS
The Debtor requests the Court to enter summary judgment in his favor pursuant to KRS 378.060 and KRS 378.070 and order that all wages garnished during the 180-days prior to the bankruptcy filing be declared preferential transfers. The Debtor chose not to proceed under 11 U.S.C. § 547(b) since no wages were garnished during the 90-day period prior to the bankruptcy filing.
Kentucky’s law on preferences provides as follows:
Any sale, mortgage or assignment made by a debtor and any judgment suffered by a defendant, or any act or device done or resorted to by a debtor, in contemplation of an insolvency and with the design to prefer one or more creditors *392to the exclusion, in whole or in part, of others, shall operate as an assignment and transfer of all the property of the debtor, and shall inure to the benefit of all his creditors, ... in proportion to the amount of their respective demands including those which are future and contingent. ...
KRS 378.060. Under this statute, the transfer may be set aside as a preference if two conditions are met: (1) the conveyance was made in “contemplation of insolvency” and (2) “with the design to prefer one or more creditors to the exclusion, in whole or in part, of others.” Debtor relies on the Sixth Circuit case, In re Rexplore Drilling, Inc., 971 F.2d 1219 (6th Cir. 1992), contending the case makes it clear that he need not prove intent in order to establish a violation of KRS 378.060.
Kentucky law presumes the elements of the preference statute have been met where it is demonstrated that the debtor made the conveyance or transfer while insolvent. In re Damron Const. Co., Inc., 218 B.R. 371 (Bankr.W.D.Ky.1997), citing Rexplore, 971 F.2d at 1223. If it can be shown that the transfer was made while the debtor was insolvent, Rexplore states that a presumption arises that the transfer was preferential, ie., that (1) it was made in contemplation of insolvency and (2) it was made with the design to prefer one creditor over another. Rexplore, 971 F.2d at 1223. However, this does not end the analysis. Once this presumption arises, the burden then shifts to the defendant to rebut one of these two prongs of the analysis. In re Damron, 218 B.R. at 375; Rexplore, 971 F.2d at 1223.
In this case, there appears to be no dispute that the transfers were made at a time when the Debtor was insolvent. However, the Court finds that the Defendants effectively rebutted the Debtor’s claim that the transfer was made with the design to prefer one creditor over another. In Rexplore, the garnishment resulted from an agreed judgment. Here, the garnishment resulted from a default judgment. Thus, the transfer was not a voluntary one and this is clear evidence that the transfer was not made by the Debtor with the design to prefer one creditor over another. The transfer was involuntary and could not have been made by the Debtor to prefer one creditor over another. For this reason, summary judgment in favor of the Debtor is inappropriate.
Since the Debtor faded to prove that the wages garnished were preferential transfers under the Kentucky statute, Debtor’s claim fails as a matter of law. No funds were garnished during the 90-day period prior to the bankruptcy filing so Debtor has no claim under 11 U.S.C. § 547. Accordingly, summary judgment on Defendants’ behalf is appropriate.
CONCLUSION
For the above reasons the Court finds that Debtor is not entitled to judgment on his claim as a matter of law and Debtor’s Motion for Summary Judgment is OVERRULED. Defendants’ Motion for Summary Judgment is SUSTAINED. An Order incorporating the findings herein and dismissing Debtor’s Complaint accompanies this Memorandum-Opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493254/ | ORDER ON SUPPLEMENTAL MEMORANDUM IN SUPPORT OF PLAINTIFF’S MOTION FOR LEAVE TO FILE FIRST AMENDED COMPLAINT
DONALD E. CALHOUN, Jr., Bankruptcy Judge.
Pursuant to the Order on Motion for Leave to File Amended Complaint entered on September 13, 2001 (“September 13th Order”), Plaintiff filed its Supplemental *453Memorandum In Support of Plaintiffs Motion for Leave to File First Amended Complaint (“Supplemental Memo”). Pursuant to the September 13th Order, Defendant also filed its Response to Supplemental Memo (“Response”).
Jurisdiction
This Court is vested with jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (C), (F) and (0).
Case History
On September 21, 2000, the Committee filed a Complaint to Avoid and Recover Preferential Transfers, naming B & H Worldwide, Inc. a corporate entity of the United Kingdom, as a defendant. The Certificate of Service contained in the Summons filed by the Committee on January 18, 2001, stated that “service of this summons and a copy of the complaint was made 01-18-2001 by: mail service: regular, first class United States mail, postage fully prepaid, addressed to: B & H Worldwide, Inc., 2284-86 NW 82nd Avenue, Miami, Florida 33122.” The Committee served the complaint and summons approximately 119 days after the filing of the complaint.
On February 15, 2001, B & H Worldwide, Inc. filed its Answer. Among other affirmative defenses raised in the answer, B & H Worldwide, Inc. stated that the alleged preferential transfers “were made to and for the benefit of B & H Speedmail Ltd., trading as B & H Worldwide, a United Kingdom Limited Company, and not to or for the benefit of Defendant, B & H Worldwide, Inc., a Delaware Corporation.” Attached to the answer were copies of Southern Air Transport, Inc. checks made payable to B & H Worldwide. The checks were made payable and delivered to B & H Worldwide at a specific address in Mid-dlesex, Great Britain.
On April 18, 2001, this matter came before this Court for a pretrial conference. The issue concerning the affirmative defense raised by B & H Worldwide, Inc. was recognized within the pretrial statements filed and statements by counsel during the pretrial conference. On June 4, 2001, the Committee filed its Motion for Leave to File First Amended Complaint (“Motion”). In the Motion, the Committee asserted that based upon the affirmative defense, it should be allowed to amend the Complaint to ensure that all appropriate parties would be included in the action. It further asserted that the Motion was being made in good faith and not with any purpose to delay the proceedings.
On June 13, 2001, B & H Worldwide, Inc. filed its Memo Contra. In the Memo Contra, B & H Worldwide, Inc. asserted that any proposed addition of a party would be a futile amendment. Under § 546(a) of the Bankruptcy Code, the time to file an action expired two years from the October 1, 1998 entry of the order of relief. B & H Worldwide, Inc. also asserted that the delay involved could not be justified. Southern Air Transport, Inc. made its checks payable to B & H Worldwide and sent them directly to Great Britain. Prior to filing the adversary proceeding, counsel for the Committee sent a demand letter for disgorgement of the alleged preference payment(s). The Committee sent that demand letter to B & H Worldwide in Great Britain. Based upon the foregoing, B & H Worldwide, Inc. asserted that it would be unduly prejudiced if the Committee was allowed to amend its complaint to add parties.
On June 25, 2001, the Committee filed its Reply. In the Reply, the Committee asserted that even if the statute of limitations had passed, the amendment should *454relate back to the date of the original complaint. The Committee asserted that the amended complaint would be filed against affiliated entities of B & H Worldwide, Inc. that share common ownership, officers, and directors. These affiliated entities would know or should know of the adversary proceeding. Therefore, the Committee asserted that allowing it leave to file the amended complaint would be proper.
The Court reviewed these arguments and issued its September 13th Order. In that September 13th Order, the Court stated that it was unable to determine if the Committee’s proposed amended complaint adding additional appropriate party(ies) would satisfy the Notice requirements of Rule 15(c). The Court found that undue delay existed. However, delay in itself was not sufficient to deny Plaintiffs Motion. The Court further found that the Committee had failed to identify the entity(ies) that it would be adding as appropriate party(ies) in the proposed amended complaint. In order to determine if the notice requirements of Rule 15(c)(3) could be met, the Court ordered that the Committee file a supplemental memorandum identifying the appropriate partyfies) to be included.
On September 21, 2001, the Committee filed its Supplemental Memo stating that the amended complaint would include the named defendant along with the following additional defendants: B & H Worldwide (Holdings) Ltd., B & H Worldwide Ltd. pka B & H Speedmail Ltd., and B & H Speedmail Ltd. pka B & H Worldwide Ltd. T/A B & H Worldwide. Within the Supplemental Memo, the Committee argues that the parent corporation, B & H Worldwide, Inc., so controls the activities of its subsidiaries that separateness has ceased and alter ego jurisdiction is asserted. B & H Worldwide, Inc. as a corporation has such control over its subsidiaries that service in Miami, Florida as to B & H Worldwide, Inc. is proper. The Committee further argues that the additional parties to be named to the complaint are subsidiaries that are so interrelated and under common control that they knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been made against them. Due to this close relationship, the Committee argues that service on B & H Worldwide, Inc. in Miami, Florida “had the effect of service on all B & H Parties.” Supplemental Memo at p. 3.
On October 4, 2001, B & H Worldwide, Inc. filed its Response. B & H Worldwide, Inc. argues that the crux of the issue is whether or not the amended complaint sought to be filed would be futile. B & H Worldwide, Inc. takes the position that the added defendants would have available defenses such as statute of limitations and choice of laws rendering the amended complaint futile. The additional parties were not included in the original complaint and did not receive actual or imputed notice of the proceeding pursuant to the requirements of Rule 15(c) of the Federal Rules of Civil Procedure.1 Due to this failure, B & H Worldwide, Inc. argues that the amended complaint adding parties should not be allowed.
Conclusions of Law
Section (c) of Rule 15 of the Federal Rules of Civil Procedure sets the standard for making a determination if a proposed *455amended complaint can relate back. Rule 15(c) states, in relevant part, as follows:
(c) Relation Back of Amendments. An amendment of a pleading relates back to the date of the original pleading when
(1) relation back is permitted by the law that provides the statute of limitations applicable to the action, or
(2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, or
(3) the amendment changes the party or the naming of the party against whom a claim is asserted if the foregoing provision (2) is satisfied and, within the period provided by Rule 4(m) for service of the summons and complaint, the party to be brought in by amendment (A) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (B) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.
As stated in the September 13th Order, the linchpin of this consideration is notice. See, e.g., Schiavone v. Fortune, 477 U.S. 21, 31, 106 S.Ct. 2379, 91 L.Ed.2d 18 (1986). In this case, service of the initial complaint was made by first-class mail upon B & H Worldwide, Inc. in Miami, Florida. The complaint was not delivered until January 24, 2001, more than 120 days after the filing of the complaint. The additional B & H parties sought to be added to the action through the amended complaint did not receive their notice as required within the 120-day time period provided for in Rule 4(m) of the Federal Rules of Civil Procedure. Therefore, this Court finds that undue delay exists and that the requirements of Rule 15(c)(3) of the Federal Rules of Civil Procedure have not been met. Accordingly, it is hereby
ORDERED that the Plaintiffs Motion for Leave to File First Amended Complaint is DENIED.
IT IS SO ORDERED.
. B & H Worldwide, Inc. in support of its Response provided an intercompany mail receipt showing that the initial complaint was received on January 24, 2001. The Committee did not contradict that date as being the date when the initial complaint was delivered. January 24, 2001 is more than 120 days from the filing of the complaint. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493255/ | ORDER
JAMES J. BARTA, Bankruptcy Judge.
This matter concerns the motions of the post-confirmation Debtors to convert to Chapter 7 or Chapter 13, more than nine years after confirmation of a Chapter 11 plan of reorganization.
After a contested confirmation proceeding, the Court confirmed a plan of reorganization that had been proposed by Gan-non Management Company of Missouri and William E. Franke (“Gan-non/Franke”). The plan was confirmed on June 22, 1992 overruling the objections of West Pointe Ltd. Partnership, Northwest Village Limited Partnership, Grandview Hills Limited Partnership, Park Ridge Apartments Limited Partnership and Lamplite Limited Partnership, the pre-confirmation Debtors In Possession, who are the post-confirmation Debtors here. The post-confirmation Debtors’ appeals of the Confirmation Order and other Bankruptcy Court orders have been denied by the United States District Court and the U.S. Eighth Circuit Court of Appeals. Four days after these motions were filed in the Bankruptcy Court, the United States Supreme Court denied the post-confirmation Debtors’ Petition for Writ of Certiorari.
The Gannon/Franke entities and Prairie Properties, LLC (“Prairie”) have argued that under the terms of the confirmed plan, the Effective Date of the plan has occurred. The earlier requests of the *483post-confirmation Debtors for a stay of the Order of Confirmation have been refused at every instance. It appears from the record that a major provision in the confirmed plan requires that the post-confirmation Debtors are to execute a deed in favor of Gannon Partnership 19 L.P. (“G.P.19”) with respect to bare record title to the Apartment Complexes that are the principal assets in these cases. This provision has not been satisfied by the post-confirmation Debtors. The Gan-non/Franke entities have scheduled a hearing on their motion to hold certain parties in contempt for failure to cause the post-confirmation Debtors to make these transfers. But for these transfers, little other activity is required under the confirmed plan.
On October 11, 2001, the post-confirmation Debtors in these separate but jointly administered Chapter 11 cases, filed the “Motion and Notice of Conversion of Case to Chapter 7” (Motion 511 in the lead case No. 90-44326-172). On October 26, 2001, the Gannon/Franke entities filed a memorandum in opposition to conversion to Chapter 7. On October 31, 2001, Prairie filed a separate response, and requested that the motion to convert be denied. On November 7, 2001, the Debtors filed a memorandum in reply to the responses of Gannon/Franke and Prairie; advanced a theory based on similarities with a Chapter 13 case; and concluded by requesting “that the Court grant their Motion for Conversion of their Chapter 11 cases to Chapter 13”.
“Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.” 11 U.S.C. § 706(d); 11 U.S.C. § 1112(f). To be eligible to be a debtor under Chapter 13, a debtor must be an individual with regular income that owes, on the date of the filing of the petition, non-contingent, liquidated, unsecured debts of less than $269,250.00 and non-contingent, liquidated, secured debts of less than $807,750.00. 11 U.S.C. § 109(e). The post-confirmation Debtors here are partnerships, and the secured debt on the date of the fifing of the Chapter 11 petitions was in excess of $60,000,000.00 (the secured debt for any single partnership was greater than $2,000,000.00).
The Debtors have not established their eligibility to proceed as debtors in a Chapter 13 case, and the request to convert to Chapter 13 will be denied.
Although all Parties have argued several questions in their pleadings, the principal issue that is ripe for determination here concerns the post-confirmation Debtors’ requests to convert these cases to Chapter 7 cases after confirmation but pri- or to case closing.
The Bankruptcy Code provides that a debtor may convert a Chapter 11 case to a case under Chapter 7 unless the debtor is not a debtor in possession, or the case was originally commenced as an involuntary case under Chapter 11, or the case was converted to a case under Chapter 11 other than upon the debtor’s request. 11 U.S.C. § 1112(a). Although the language of Section 1112(a) does not specifically state that conversion is authorized “at any time”, neither does it indicate that this permissive conversion to Chapter 7 is limited by circumstances such as whether or not a plan has been confirmed, or whether or not the case has been closed. The Court finds and concludes that recourse to Section 1112(a) is not prohibited by the circumstances in these cases.
In a Chapter 11 case, the term “debtor in possession” means debtor except when a person that has qualified under Section *484322 is serving as trustee in the case. 11 U.S.C. § 1101(1). In these cases, no trustees were appointed under 11 U.S.C. § 1104, and no persons were qualified to serve as pre-confirmation trustees under 11 U.S.C. § 322. The cases were not originally commenced as involuntary cases, and the cases were not converted from cases under another chapter to cases under Chapter 11.
The Court finds and concludes further that, absent language to the contrary that might appear in the terms of a particular confirmed plan or related Confirmation Order, a post-confirmation debtor enjoys the ability under Section 1112(a) of the Bankruptcy Code to convert the Chapter 11 case to a case under Chapter 7 before the case is closed. However, under Section 1112(a), the ability of a post-confirmation debtor to convert to Chapter 7 is not an absolute right, and must be prosecuted by means of a motion on notice to all creditors and parties in interest. See In re T.S.P. Industries, Inc., 120 B.R. 107, 109 (Bankr.N.D.Ill.1990); In re Roy Gooden Plumbing & Sewer Co., Inc., 156 B.R. 635, 637 (Bankr.E.D.Mo.1993); Fed. R. Bankr.P. 1017(f) and 9013; 7 Collier on Bankruptcy, ¶ 1112.02[6], page 1112-13 (15th Ed. Revised). The post-confirmation Debtors’ references to a notice of conversion to Chapter 7 are ineffective here and do not result in the entry of an Order for Relief under Chapter 7.
Neither the pleadings in this matter nor the Court’s own review have identified any terms in the confirmed plan or the related orders of the Court that would prevent these post-confirmation Debtor entities from requesting conversion of the cases to liquidating cases under Chapter 7.
Conversion of a Chapter 11 case to a Chapter 7 case constitutes an order for relief under Chapter 7. Except for certain circumstances that have not been shown to exist here, the date of the order for relief in the converted case does not effect a change in the date of the commencement of the case. 11 U.S.C. § 348(a). Commencement of a case creates an estate. 11 U.S.C. § 541(a). Under the terms of the confirmed plan here, conversion to Chapter 7 would result in the creation of empty estates. Essentially all property of the pre-confirmation Chapter 11 estates is to be transferred under the plan. If other assets were to be identified, the record does not suggest that any meaningful value would be realized from a post-confirmation administration under Chapter 7. See Ross Dworsky v. Canal Street Limited Partnership (In re Canal Street Limited Partnership), 269 B.R. 375 (8th Cir. BAP (Minn.) 2001).
In a Chapter 7 case, the Court is to grant a debtor a discharge unless the debt- or is not an individual. 11 U.S.C. § 727(a)(1). Although a partnership is included in the term “person”, a partnership is not an individual under the Bankruptcy Code. 11 U.S.C. § 101(41). A partnership may not discharge its debts in a liquidation proceeding under Chapter 7. See National Labor Relations Board v. Better Building Supply Corp., 837 F.2d 377, 378 (9th Cir. 1988).
The post-confirmation Debtors here have exhausted their appeals of the Order of Confirmation; they have not argued that they have performed the responsibilities imposed on them by the plan, notwithstanding the binding affect of confirmation; and they are not individuals who may obtain an Order of Discharge of debts under 11 U.S.C. § 727(a)(1).
Therefore, there being no assets to be administered upon in a Chapter 7 case and there being no right to an Order of Discharge under Chapter 7, neither the best interests of creditors, nor the best inter*485ests of the estates would be served by conversion to Chapter 7.
IT IS ORDERED that these matters are concluded; and that the Motion of the post-confirmation Debtors to Convert to Chapter 7 is denied; and that the requests of the post-confirmation Debtors to convert to Chapter 13 is denied; and that all other requests in this matter are denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493256/ | SUPPLEMENTAL ORDER ON PLAINTIFFS MOTION FOR SUMMARY JUDGMENT
C. TIMOTHY CORCORAN, III, Bankruptcy Judge.
This adversary proceeding came on for consideration of the court’s own motion to supplement the order granting plaintiffs motion for summary judgment and granting implementation relief entered on November 26, 2001 (Document No. 18).
At the close of the July 10, 2001, hearing of the plaintiffs motion for summary judgment, the court requested the parties to *786file post-hearing briefs. The parties agreed and the court ordered September 4, 2001, as the date for filing these briefs. The plaintiff timely filed his brief on September 4, 2001 (Document No. 116). The defendants did not timely file a brief. Accordingly, the court considered and determined the motion for summary judgment on the authorities presented to the court and entered an order granting the motion for summary judgment and a judgment on Monday, November 26, 2001 (Document Nos. 18 and 19).
On the previous Friday, the Friday after Thanksgiving, November 23, 2001 — a day in which the court was open but largely unmanned — the defendants filed a brief in opposition to the plaintiffs motion for summary judgment (Document No. 17). That brief was entered on the docket on Monday, November 26, 2001. As a consequence, the court was unaware of the filing of the late filed brief when it entered the order granting the plaintiffs motion for summary judgment.
The court has now had an opportunity to review the defendants’ brief and concludes that nothing in the brief requires the court to reconsider or redetermine any of the conclusions reached in its order granting plaintiffs motion for summary judgment (Document No. 18).
In the brief, the defendants make two arguments in favor of their position. First, they argue that the debtor/defendant’s actions do not fall within the ambit of conduct that requires the imposition of an equitable lien because the Montana state court did not assess punitive damages against the debtor/defendant. (Document No. 17, ¶¶ 5, 6). The defendants contend, therefore, that the plaintiff has failed to establish an “egregious act” within the meaning of Havoco of America, Ltd. v. Hill, 790 So.2d 1018, 1028 (Fla.2001).
In Hill, the court made clear that a fraudulent act is sufficient to impose an equitable lien provided the tracing element is also met. Id. [“When an equitable lien is sought against homestead real property, some fraudulent or otherwise egregious act by the beneficiary of the homestead protection must be proven.”] (Emphasis added). In this case, the court specifically found that the plaintiff had established, pursuant to the doctrine of collateral estoppel, the debtor/defendant’s actual fraud and conversion (Document No. 18, Section II, Page 11). The defendants themselves concede the fraud and conversion in their reply brief (Document No. 17, ¶ 4). Accordingly, this argument is without merit.
Second, the defendants argue that the wife/defendant, Bobbie Thiel, cannot be held liable for the debtor/defendant’s wrongful conduct (Document No. 17, ¶¶ 16-19). They contend that Palm Beach Savings & Loan Association v. Fishbein, 619 So.2d 267, 270 (Fla.1993), is inapplicable. They urge the court to reach a contrary result. The court carefully considered the authorities on this issue and determined that the principles advanced in Fishbein were applicable to this case. Accordingly, this argument is also without merit.
The court regrets that it did not have the defendants’ brief when it decided the issues and entered the November 26 order. Having now had the opportunity to review the brief, however, the court concludes that it is required to take no further action. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493257/ | DECISION RE CLAIMANT’S CURE CLAIM
BURTON PERLMAN, Bankruptcy Judge.
This matter arises in the jointly administered bankruptcy cases of Cincinnati Entertainment Associates, Ltd. (hereafter “CEA”), Cyclones Hockey Club, LP, and CEA Holdings, LLC (hereafter collectively “Debtors”). By order entered April 24, 2001, this court authorized the public auction sale of substantially all of Debtors’ assets. In that order, provision also was made for the assumption and assignment of certain executory contracts or unexpired leases. In connection with such assumption and assignment, the court set a bar date of May 25, 2001 by which cure claims with respect to assumed executory contracts and/or leases were required to be filed. On May 22, 2001, the Hamilton County Board of County Commissioners (hereafter “Claimant”), timely filed a cure claim asserting that it is due the amount of $47,161.00 on account of a pre-petition default in a lease agreement running between itself and Debtors.
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding arising under 28 U.S.C. § 157(b)(2)(A) and (B).
We find the following facts. There are two sports arenas in the City of Cincinnati *855located on the banks of the Ohio River. One is presently known as Cinergy Field and had been used for both the professional football and baseball teams of Cincinnati. The other, now known as Firstar Center, is located to the east of Cinergy Field. Prior to its sale in the present bankruptcy case, it was owned by CEA. The Firstar Center is an enclosed arena, housing a hockey team. Various concert and other special events are also held there. Ciner-gy Field is owned by Hamilton County, and includes extensive parking facilities on several levels. Until recently, Cinergy Field included ,a plaza level which was connected by a walkway directly to Firstar Center, providing access from parking at Cinergy Field to attendees at Firstar Center. The parking in this area of Cinergy Field parking was identified as Lot 6. The parking at Lot 6 was made available to the attendees at Firstar Center pursuant to a certain Lease Agreement. That Lease Agreement was dated January 1,1974, and had been entered into between the City of Cincinnati and the Cincinnati Coliseum Company. In the course of time, the original parties to the Lease Agreement were replaced by Claimant in place of the City of Cincinnati (effective September 26, 1996), and Cincinnati Coliseum Company by CEA, one of the Debtors herein (dated February 10, 1987). The Lease Agreement by its terms related to construction of the new facility, now Firstar Center, and the .making available for that stadium of existing parking facilities at what is now Cinergy Field. The Lease Agreement states that the leased parking facilities “are generally unused at the times” when Firstar Center would be in operation.
Of recent years it has been decided to upgrade the athletic facilities at the river front in Cincinnati. For that purpose, a new football stadium was built on the river front at some distance to the west of Cin-ergy Field. It has also been decided to build a new baseball stadium. This is being built in the space between Cinergy Field and Firstar Center. During the process of construction of the new baseball facility, baseball will continue to be played at Cinergy Field, but it has been necessary to remove a portion of the stands at Ciner-gy Field in order that construction of .the baseball field may proceed. In addition to the demolition of a portion of Cinergy Field stands, that portion of the plaza level surrounding Cinergy Field has, together with the walkway to Firstar Center, been demolished. With this demolition, a significant portion of the parking at Cinergy Field, Lot 6, has disappeared. Prior to that demolition, however, Claimant built a new facility, the East Garage to the east of Firstar Center.
August 1, 2000, is a significant date for present purposes. By that date, construction of the East Garage had been completed and was ready for operation. With the availability of that parking, demolition and clearing of the site between Firstar Center and Cinergy Field commenced, to make way for construction of the new baseball stadium.
Prior to the construction and opening of the East Garage on August 1, 2000, for some years the handling of parking and the proceeds therefrom had occurred in what became a usual manner. This was in conformity with the terms of the Lease Agreement to which reference was made above. The Lease Agreement provided rental terms as follows:
(1) Twenty-five percent (25%) of the first $450,000 Arena Parking receipts during such lease year, plus
(2) Thirty-three and one-third percent (33-1/3%) of Arena Parking receipts during such lease year in excess of $450,000 but not more than $600,000, plus
*856(3) Thirty-seven and one-half percent (37-1/2%) of Arena Parking' receipts during such lease year in excess of $600,000.
The Lease Agreement defines “Arena Parking receipts” as meaning gross receipts derived from charges for Arena Parking, excluding taxes. “Arena Parking” is itself defined at p. 4 of the Lease Agreement, as meaning “the parking of motor vehicles in the stadium Parking Facilities for Arena events.” The county operated the parking facilities through a manager, Central Parking System. After each event at Firstar Center, Central Parking System would remit to CEA the amount due it from parking receipts in the amount prescribed by the Lease Agreement. Because parking for Firstar Center events occurred at a time when the parking facilities at Cinergy Field were “generally unused,” it was a simple matter to calculate the amount due CEA for parking, for all receipts collected at the time of Firstar Center events were subject to distribution in accordance with the Lease Agreement formula. Central Parking would make payment to CEA for its share.
After August 1, 2000, it was not immediately apparent that the East Garage facility would be used by Debtors. The East Garage then not being in existence, of course, was not part of the specified parking facilities at the time the original Lease Agreement was entered into. The Lease Agreement also included a requirement that parking facilities operated by Claimant other than those specified in the Lease Agreement would not be open during events conducted by Debtors. The Lease Agreement had a provision for identifying replacement parking for the parking specified in the Lease Agreement. For its own reasons, Claimant was unwilling to utilize that procedure in connection with the East Garage, and East Garage was not designated as replacement parking in the manner contemplated by the terms of the Lease Agreement. Yet, Debtors felt it desirable to provide for parking in a nearby facility for its season ticket holders, and suite holders. What the parties then did was enter into an oral agreement in August, 2000, pursuant to which season ticket holders and suite holders could park in the East Garage. Moreover, they could use the coupons from their parking passes in Cinergy Field parking for payment in the East Garage. Central Parking System operated East Garage as well as the remaining parking at Cinergy Field. CEA would pay claimant through Central Parking $5.00 per coupon for Cyclones games, and $6.00 per coupon for family shows and concerts. Central Parking would invoice Debtors after an event in accordance with that schedule. CEA paid such invoices until sometime in November, 2000. It did not then pay invoices until after the bankruptcy was filed, March 15, 2001. The amount in controversy here is $45,339.99, the net of $47,161.00, the total of unpaid invoices for the interim period after November, 2000, less a credit of $1,822.00.
Prior to August, 2000, there were approximately 3,600 parking spaces in Ciner-gy Field, including Lot 6. After the demolition began, 2,289 parking spaces were left in Cinergy Field, so that the demolition removed approximately 1,300 spaces from Cinergy Field parking. There are 1,068 parking spaces in East Garage.
The factual background laid out above brings us to the controversy between Claimant and Debtors. What that controversy is must be defined with some care. There is no dispute between the parties that something consensual occurred in August, 2000. The nature of that consensual something is the issue to be determined by the court. Claimant’s position is that that consensual something *857was a modification of the Lease Agreement, while it is the position of Debtors that the consensual something was a separate and independent contract. That issue must be resolved in accordance with the law of contracts.
It is fundamental in the law of contracts that the guiding principle for interpretation in contract law is the ascertainment of the intention of the parties. When the parties agreed to something in August, 2000, was it their intention to modify the Lease Agreement, or was it their intention that they were agreeing on the terms of a new and independent contract? The court has reached the conclusion that the consensual something agreed to by the parties in August, 2000 was a separate and independent contract. The reason that there ivas a consensual agreement in August, 2000, was because the parties would not agree to modify the Lease Agreement. In the face of that uncontroverted fact, there is no room for Claimant’s argument that what happened in August, 2000, was an oral modification of the Lease Agreement.
While Claimant argues for a different outcome on the basis that the consensual something was merely an application of the Lease Agreement, it offers no authority to support its position that, even if this is true, this must lead to a conclusion in its favor. Claimant argues further that Software Clearing House, Inc. v. Intrak, Inc., 66 Ohio App.3d 163, 171, 583 N.E.2d 1056 (1990) compels a conclusion that the consensual something was a modification of the Lease Agreement. While Software Clearing House does recognize that an oral agreement can modify a prior written agreement, see also 17 Am.Jur.2d § 527, that authority cannot apply where the parties do not intend, as is the case here, a modification. Another argument by Claimant is that the manner of dealing with suite, club seat, and season ticket patron parking was unchanged as between Lot 6 and the East Garage, and this supports its position that the August, 2000 agreement was but a modification of the Lease Agreement. But, as is clear from the facts recited above, there was a fundamental change in how such parking was dealt with. Prior to August, 2000, Central Parking remitted to Debtors its share of parking fees collected for Lot 6, determined by the formula in the Lease Agreement. After August, 2000, that procedure was1 changed. First, Central Parking did not remit to Debtors, but instead it billed Debtors for payment. Secondly, the amount charged for such parking in the East Garage was at a different rate than had been charged for parking at Lot 6.
Finally, Claimant argues that because Debtors did not list the oral agreement as an executory contract in their bankruptcy filings, this must mean that they regarded the oral agreement as part of the Lease Agreement. This argument is also without merit, for there is no reason that the oral agreement could not be a separate executory contract which was not scheduled in the bankruptcy.
In the light of the foregoing discussion, the application by Claimants for allowance of a cure claim is denied. The amount sought by Claimant as a cure claim, since it is for an alleged pre-petition debt, would be an unsecured claim.
JUDGMENT ON DECISION BY THE COURT RE CLAIMANT’S CURE CLAIM
The application of Hamilton County Board of County Commissioners for an amount to cure a default in an unexpired lease having come on for consideration before the court, Honorable Burton Perlman, United States Bankruptcy Judge, presiding, and the issues having been duly con*858sidered and a decision having been rendered,
It is Ordered and Adjudged that the application is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493258/ | MEMORANDUM OPINION
BERNARD MARKOVITZ, Bankruptcy Judge.
The chapter 7 trustee has instituted this adversary action seeking to recover from defendant Myers Coach Lines, Inc. the sum of $25,000 which defendant agreed but has refused to pay to purchase debtor’s operating authority for bus service between Pittsburgh and Grove City, Pennsylvania.
Defendant maintains that the agreement, arrived at during the chapter 11 phase of this bankruptcy case, is not enforceable because the chapter 7 trustee neither sought nor obtained the required court approval of the sale.
We will enter a judgment in the amount of $25,000 in favor of the chapter 7 trustee and against defendant for reasons set forth below.
- FACTS -
Debtor Lincoln Coach Lines was a common carrier which provided passenger service to the general public. Among other things, debtor provided scheduled bus service between Pittsburgh and Grove City, Pennsylvania, under operating authority granted by the Pennsylvania Public Utility Commission (“PUC”). From 1984 until August of 2000, debtor was the only common carrier to provide such service between these destinations. The Pennsylvania Department of Transportation (“PENNDOT”) further enhanced the value of the operating authority by providing operating assistance grants to subsidize debtor’s operation of the route.
Debtor filed a voluntary chapter 11 petition on November 29, 1999, and thereafter continued operating its business as a debt- or-in-possession while it attempted to reorganize. Although it clearly had value, its operating authority for the Pittsburgh-to-Grove City route was not listed as an asset on debtor’s bankruptcy schedules.
‘ Debtor came to realize in August of 2000 that it would have to cease operating as of August 20, 2000, because it could not pay the required liability insurance premium that was about to become due.
After coming to this realization but before debtor ceased operating, debtor’s president, Dennis Long, inquired of other common carriers in the area whether they were interested in purchasing debtor’s operating authority for its Pittsburgh-to-Grove City service.
Included among those carriers indicating an interest in this valuable asset was •defendant Meyers Coach Lines, represented by its president, David Myers. Specifically, Myers, for defendant, offered the *64sum of $25,000 to purchase debtor’s operating authority, which offer Long promptly accepted.
Long drafted a letter agreement on August 18, 2000, which provided in pertinent part that “[a]s of August 21, 2000, Myers Coach Lines will purchase the Pittsburgh-to-Grove City Line Run from Lincoln Coach Lines for the sum of $25,000”. Long executed the agreement on August 18, 2000, and faxed it to David Myers, who promptly executed and faxed it back to Long that same afternoon. Neither debt- or nor defendant had consulted with their respective counsel prior to entering into the agreement.
On August 20, 2000, debtor closed its doors for the final time and ceased providing bus service between Pittsburgh and Grove City.
Despite having no authority of its own from the PUC to operate the route, defendant began operating between Pittsburgh and Grove City on the morning of August 21, 2000. Defendant’s apparent authority for so acting must have been based upon the August 18, 2000 letter agreement, as no other basis for its activities has been offered.
After consulting with counsel, who holds himself out as an expert in PUC matters, defendant was advised that the letter agreement dated August 18, 2000, was not enforceable without approval of the bankruptcy court. Defendant instead decided on August 21, 2000, to seek its own operating authority for the above route and to forego the administrative process of having debtor’s operating authority transferred to it. Counsel advised defendant that defendant could obtain emergency operating authority from the PUC within a few days and that the PUC would “look the other way” while defendant operated the bus route in the interim.
On August 25, 2000, defendant’s counsel “walked” the application to and through the PUC requesting emergency authority to operate the route. Its application was granted that same day in an emergency order issued ex parte by the PUC’s board chairman. The entire board of the PUC, without notice or hearing, ratified the emergency order six days later.
On August 28, 2000, eight days after it had ceased operating, debtor filed a motion requesting conversion of its case to a chapter 7 proceeding. Its motion was granted on September 8, 2000. The order appointing the present chapter 7 trustee was dated September 11, 2000. She became aware of her appointment a few days later.
Defendant applied to the PUC on September 11, 2000, for its own pemanent authority to operate the above bus route between Pittsburgh and Grove City. Notice of its application was printed in the September 30, 2000, edition of Pennsylvania Bulletin.
Two days thereafter, on September 13, 2000, defendant submitted an application to PENNDOT for an assistance grant to subsidize its operation of the Pittsburgh-to-Grove City route.
On or about October 6, 2000, the chapter 7 trustee learned from debtor’s president for the first time about the above operating authority and about the agreement of August 18, 2000. As was previously noted, this operating authority was not listed on debtor’s bankruptcy schedules as an estate asset.
PENNDOT notified defendant on October 24, 2000, that its operating assistance grant for the Pittsburgh-to-Grove City route would remain in effect unless and until the bankruptcy court approved a transfer of debtor’s operating authority for the same route to a party other than defendant. Defendant advised neither debt- *65or, the trustee, nor the bankruptcy court of this PENNDOT determination.
Because she was preoccupied after her appointment with sorting through the chaotic state of debtor’s affairs, the chapter 7 trustee did not immediately approach defendant concerning the letter agreement of August 18, 2000. Shortly prior to a sale of debtor’s vehicles during the latter part of October of 2000, the chapter 7 trustee spoke to David Myers and informed him that she wanted to seek court approval of the sale of debtor’s operating authority for the Pittsburgh-to-Grove City route. Myers led the chapter 7 trustee to believe that defendant was still interested in purchasing debtor’s operating authority for the route. He did not disclose that defendant had applied to the PUC for its own operating authority and had applied to PENNDOT for its own operating assistance grant for the route.
Subsequent to this discussion, the chapter 7 trustee attempted, without success, to further discuss with David Myers the sale of debtor’s operating authority to defendant. Her phone calls to him went unanswered.
The PUC initiated a proceeding on November 8, 2000, to revoke debtor’s operating authority for the above route because of debtor’s failure to maintain required liability insurance. Although the complaint was served at debtor’s vacated place of business, the chapter 7 trustee did not receive notice of the proceeding and consequently did not respond thereto.
After her phone calls to David Myers went unanswered, the chapter 7 trustee sent him a letter on November 17, 2000, which in essence requested that defendant cooperate with her in securing bankruptcy court approval of the route transfer. The chapter 7 trustee was “anxious” to begin the process of obtaining court approval of the sale of debtor’s operating authority for the Pittsburgh-to-Grove City route because obtaining it “may take some time”. Myers was asked to contact her to discuss the sale. If no response was forthcoming by November 30, 2000, the chapter 7 trustee stated, she would conclude that defendant would not cooperate and would seek another purchaser.
For obvious reasons, Myers did not immediately respond to the chapter 7 trustee’s letter. Meyers must have realized that the chapter 7 trustee still had time to thwart defendant’s machinations if she learned of them long enough before the PUC approved defendant’s application for its own permanent operating authority.
On November 17, 2000, defendant entered into an agreement with PENNDOT for operating assistance for the Pittsburgh-to-Grove City route. The grant, which amounted to $88,403, covered the period from August 21, 2000, through June 30, 2001.
On November 30, 2000, the PUC approved defendant’s application for permanent authority to operate the Pittsburgh-to-Grove City bus route it had begun operating on August 21, 2000.
Defendant’s counsel, who had deftly steered defendant’s applications for its own permanent operating authority and for an operation assistance grant from PENNDOT through the administrative maze which such applications must traverse, finally responded on November 30, 2000, to the chapter 7 trustee’s letter of November 17, 2000. He informed the chapter 7 trustee that defendant was no longer interested in purchasing debtor’s operating authority for the Pittsburgh-to-Grove City bus route and stated that defendant therefore did not desire to seek bankruptcy court approval for such a sale. His letter gave no indication, however, that defendant had just received its own per*66manent operating authority to operate the route.
In a telephone conversation the next day, counsel to defendant finally informed the chapter 7 trustee that defendant was no longer interested in purchasing debtor’s operating authority because defendant had obtained final PUC approval for its own operating authority. Prior to this conversation the chapter 7 trustee had no knowledge that defendant had applied for its own operating authority.
The PUC issued a final order on December 15, 2000, revoking debtor’s operating authority for the Pittsburgh-to-Grove City bus route. The chapter 7 trustee took no action to have the order reconsidered or rescinded.
The chapter 7 trustee wrote to defendant’s counsel on January 23, 2001, demanding that defendant abide by the agreement of August 18, 2000, and pay debtor the sum of $25,000 for debtor’s operating authority. Defendant did not respond to the chapter 7 trustee’s demand letter and did not pay anything to debtor’s bankruptcy estate in accordance with the letter agreement of August 18, 2000.
The chapter 7 trustee commenced the present adversary action on February 26, 2001, seeking to recover the $25,000 purchase price defendant had agreed in the letter agreement to pay for debtor’s operating authority for the Pittsburgh-to-Grove City route. The funds, if recovered, would be used to pay debtor’s creditors.
The matter was tried on October 18, 2001, at which time both sides were given an opportunity to present evidence on the issues raised in the case.
- DISCUSSION -
The sale contemplated in the agreement of August 18, 2000, was not in the ordinary course of debtor’s business. Debtor was a common carrier in the business of transporting passengers. The sale of its operating authority to another common carrier was not a type of transaction commonly undertaken by companies in the common carrier industry. In re Roth American, 975 F.2d 949, 952-53 (3d Cir.1992).
A bankruptcy trustee’s authority to sell an estate asset outside the ordinary course of the debtor’s business is restricted. Such a sale may take place only after notice and a hearing. 11 U.S.C. § 363(b). The Third Circuit has construed this Bankruptcy Code provision as also requiring bankruptcy court approval. Northview Motors, Inc. v. Chrysler Motors Corp., 186 F.3d 346, 351 (3d Cir.1999). Absent such approval, the transaction is not effective. Calpine Corp. v. O’Brien Environmental Energy, Inc. (In re O’Brien Environmental Energy, Inc.), 181 F.3d 527, 530 (3d Cir.1999).
A hearing concerning the sale of the above operating authority did not take place because the chapter 7 trustee never requested one. As a consequence, court approval for such a transfer was never obtained. Deciding that defendant had taken unfair advantage of her, to the detriment of the estate’s creditors, the chapter 7 trustee brought this adversary action after counsel to defendant informed the chápter 7 trustee that defendant had obtained its own operating authority and therefore no longer was interested in purchasing debtor’s operating authority.
The chapter 7 trustee stated at trial that she sought recovery from defendant under two theories.
She seeks to recover under the principle of quasi-contract on the theory that defendant allegedly was “unjustly enriched” at the expense of the bankruptcy estate when *67defendant acquired a valuable estate asset at no cost to it.
Notwithstanding the absence of a hearing and court approval of the transaction, the chapter 7 trustee also seeks to have the agreement of August 18, 2000, “enforced” on the theory that debtor was ready and willing and, in fact, had performed under the terms of the agreement while defendant refused to do so. She requests a determination that defendant breached the agreement by refusing to perform and seeks to recover the agreed-upon $25,000 purchase price.
The crux of defendant’s position is that it was not obligated to perform because the agreement of August 18, 2000, was not enforceable due to the chapter 7 trustee’s failure to request a hearing and to obtain court approval of the sale. Defendant further denies deceiving the chapter 7 trustee by indicating that it intended to consummate the agreement. Rather than deceiving the chapter 7 trustee, defendant insists that it merely failed to inform the chapter 7 trustee of its efforts to obtain its own operating authority, about which it purportedly had no duty to inform the chapter 7 trustee.
Unjust enrichment is an equitable doctrine. Mitchell v. Moore, 729 A.2d 1200, 1203 (Pa.Super.), appeal denied, 561 Pa. 698, 751 A.2d 192 (2000). Where unjust enrichment is found, the law implies a contract, usually referred to as a quasi-contract or as a contract implied-in-law, which requires defendant to make restitution to plaintiff in quantum meruit. Schenck v. K.E. David, Ltd., 446 Pa.Super. 94, 97, 666 A.2d 327, 328 (1995) appeal denied, 544 Pa. 660, 676 A.2d 1200 (1996).
To prevail on a claim of unjust enrichment, plaintiff must establish that the party against whom recovery is sought either wrongfully secured or passively received a benefit that would be unconscionable for that party to retain. Torchia v. Torchia, 346 Pa.Super. 229, 233, 499 A.2d 581, 582 (1985).
The elements necessary to establish unjust enrichment are: (1) that a benefit was conferred on defendant by plaintiff; (2) that defendant retained such benefit; and (3) that it would be inequitable for defendant to retain the benefit without paying its value. Schenck, 446 Pa.Super. at 97, 666 A.2d at 328. A showing of knowledge or wrongful intent on the part of the party benefitted is not required. The focus is on the resultant unjust enrichment. Torchia, 346 Pa.Super. at 233, 499 A.2d at 581-82. Application of the doctrine requires a fact-intensive inquiry. Id.
The doctrine of unjust enrichment applies here. In fact, this situation exemplifies the significance of the simplistic phrases “Knowledge is Power” and “Timing is Everything”. Had debtor’s president not contacted defendant’s president when he did, defendant would not have had advance knowledge of the cessation of debtor’s operation of the route. Armed with this knowledge and with the realization that the PUC would not, at least for a short while, take action against defendant for operating the route without its own authority to do so, defendant took unfair advantage of debtor and ultimately of debtor’s creditors.
From at least August 21, 2000, when defendant began operating the Pittsburgh-to-Grove City route, until August 25, 2000, when it applied for and obtained on the same day its own emergency operating authority from the PUC, defendant’s operation of the route effectively was based on debtor’s operating authority which it had agreed to purchase from debtor. Unfortu*68nately for debtor and its creditors, defendant refused to pay.
In other words, debtor conferred a benefit upon defendant which defendant gladly retained. (It might be more accurate to say that defendant expropriated debtor’s operating authority and used it for its own benefit.) Defendant’s counsel, who was “well connected” to the PUC’s board of directors, knew that defendant could exploit debtor by relying upon debtor’s operating authority during this time without suffering adverse repercussions from the PUC. Defendant could “freeze out” other carriers who may have had an interest in the route while depriving debtor’s creditors of this valuable asset. It would be inequitable under such circumstances for defendant to reap this benefit without paying what it previously agreed was its value.
The value of this benefit and the amount the chapter 7 trustee reasonably could expect to recover from defendant for this benefit, at first blush, appears nominal. However, defendant and debtor’s president negotiated the value of this timing, this apparent authority, and this special knowledge. In this light we accept their determination that this knowledge, apparent authority, and this timing is worth $25,000.
The matter does not end there. We arrive at the same outcome even if the trustee’s cause of action for unjust enrichment fails for any reason. It is not immediately obvious what theory the chapter 7 trustee has in mind when she asserts that we should “enforce” the agreement of August 18, 2000, and should find that debtor breached the agreement despite the absence of a hearing and court approval thereof. We understand the chapter 7 trustee to assert, perhaps inartfully, that defendant is equitably estopped from asserting that the agreement is not enforceable because of the chapter 7 trustee’s failure to request a hearing and to obtain the required court approval of the transaction. Defendant’s assertion that the agreement is not enforceable, we previously noted, constitutes the linchpin of its defense in this case.
Equitable estoppel, like unjust enrichment, sounds in equity. Zitelli v. Dermatology Education and Research Foundation, 534 Pa. 360, 370, 633 A.2d 134, 139 (1993). It is a principle of “fundamental fairness” whose application depends on the facts peculiar to a case. Homart Development Co. v. Sgrenci, 443 Pa.Super. 538, 554, 662 A.2d 1092, 1100 (1995).
The effect of equitable estoppel has been variously described. Its application makes it possible to enforce a promise implied by words, deeds, or representations which promise induces another to justifiably rely to their injury or detriment. Kreutzer v. Monterey County Herald Co., 560 Pa. 600, 606, 747 A.2d 358, 361 (2000). It also serves to prevent one from assuming a position or asserting a right to another’s disadvantage or prejudice which is at odds with a previously-taken position. Blofsen v. Cutaiar, 460 Pa. 411, 417, 333 A.2d 841, 844 (1975).
Equitable estoppel consists of two essential elements: (1) inducement; and (2) justifiable reliance on that inducement. Novelty Knitting Mills, Inc. v. Siskind, 500 Pa. 432, 436, 457 A.2d 502, 503 (1983). The inducement may arise out of word or deed. The conduct that is induced may occur by commission or by forbearance, provided that a detrimental change in condition results. Id. 500 Pa. at 436, 457 A.2d at 503-04.
The party asserting equitable estoppel has the burden of proving these requirements by clear, precise, and un*69equivocal evidence. Blofsen, 460 Pa. at 417-18, 338 A.2d at 844.
Evidence presented at trial clearly establishes that defendant induced the chapter 7 trustee to believe, until it was too late for the chapter 7 trustee to realistically find another purchaser and obtain court approval of a sale to that other purchaser, that defendant would consummate the agreement of August 18, 2000.
Two or three weeks after the chapter 7 trustee first learned of the agreement between defendant and debtor, David Myers falsely and misleadingly represented to the chapter 7 trustee that defendant still intended to purchase debtor’s operating authority for the Pittsburgh-to-Grove City bus route. Myers undoubtedly realized when he so represented that his representation was false. By that time defendant no longer was interested in purchasing debtor’s operating authority and had no intention of abiding by the agreement of August 18, 2000. Defendant had applied to the PUC more than a month earlier for its own operating authority and was expectantly awaiting approval of its application.
Myers so represented to the chapter 7 trustee for the purpose of inducing the chapter 7 trustee to refrain from finding another purchaser for debtor’s operating authority and then obtaining court approval of a sale to that purchaser before defendant received final approval from the PUC of its own application. He recognized that it most likely would be futile for the chapter 7 trustee to seek another purchaser once defendant had obtained its own authority. No one would then be interested in purchasing debtor’s operating authority.
Defendant wanted to prevent any competition on the Pittsburgh-to-Grove City route once defendant’s own application was approved. The route had but a single operator — i.e., debtor — during the sixteen-year period from 1984 until August of 2000. The lack of a competing operator during this entire period leads us to infer that more than a single operator could not profitably provide service along the route. The fact that PENNDOT provided an operating assistance grant in excess of $88,000 for this route bolsters this conclusion. It also bolsters the conclusion that this route is valuable and that it could have been sold, with the proceeds utilized to pay debtor’s creditors.
This inference also explains why the chapter 7 trustee did not bother to seek another purchaser and obtain court approval of a sale of debtor’s operating authority to that other purchaser after she learned on December 1, 2000, that defendant had obtained its own operating authority. It was a virtual certainty that no other operator would be interested in purchasing debtor’s operating authority once defendant had obtained its own permanent operating authority.
The chapter 7 trustee’s reliance on the above inducement defendant provided was justifiable in light of surrounding circumstances. The existence of debtor’s authority to operate the Pittsburgh-to-Grove City bus route was not even listed as an asset on debtor’s bankruptcy schedules. She was not informed of the agreement between debtor and defendant until October 6, 2000, when debtor’s president first informed her of the agreement. Her attention immediately after her appointment was directed to imposing order on the chaos she inherited when debtor’s case was converted to a chapter 7 proceeding.
Publication of notice in the September 30, 2000, edition of Pennsylvania Bulletin does not undermine the justifiability of the chapter 7 trustee’s reliance upon the above false and misleading representation to her made by David Myers. The chapter 7 trustee had no knowledge of the existence *70of debtor’s own operating authority for the Pittsburgh-to-Grove City bus route when this edition of Pennsylvania Bulletin was published. Moreover, the law firm of which the chapter 7 trustee is a member did not subscribe to Pennsylvania Bulletin. Finally, the law library of the county in which the chapter 7 trustee is located did not subscribe to it.. As a consequence, the chapter 7 trustee had no reason to suspect that defendant was in the process of obtaining its own permanent operating authority and consequently had no intention of performing in accordance with the letter agreement dated August 18, 2000.
It appears that defendant behaved as it did on the advice of its learned counsel, who boasted under oath at trial that he was one of only a half dozen or so attorneys in all of Pennsylvania who practiced regularly before the PUC. In a display of unabashed hubris, counsel stated that he always relished opposing counsel who were not versed in the intricacies of practicing before the PUC because he invariably came out on top.
We also have little doubt that defendant responded as it did to the chapter 7 trustee’s inquiry concerning its continued interest in purchasing debtor’s operating authority because it knew that the chapter 7 trustee was not in a position to recognize that its representation of continued interest was false and misleading.
The chapter 7 trustee’s justifiable reliance upon the above false and deliberately misleading inducement of defendant resulted in detriment to debtor’s bankruptcy estate. As a consequence of her justifiable reliance, the chapter 7 trustee did not pursue other potential buyers for as long as she had no reason to disbelieve defendant’s profession of continued interest in consummating the agreement of August 18, 2000.
We find no fault in the chapter 7 trustee’s failure to pursue other potential buyers and to seek court approval of a sale to them of debtor’s operating authority after she learned that defendant had obtained its own permanent authority to operate along that same route. As we previously indicated, it was a virtual certainty that no more than one operator could profitably provide bus service between Pittsburgh and Grove City. Further pursuit of the matter undoubtedly would have been to no avail. No one would have come forward had the chapter 7 trustee brought a motion to obtain court approval of such a sale. Had she persisted and brought such a motion under these circumstances, we no doubt would have voiced our displeasure with the chapter 7 trustee and would have remonstrated with her.
We conclude in light of the foregoing that defendant also is equitably estopped from asserting in this instance that the agreement of August 18, 2000, is not enforceable in light of the chapter 7 trustee’s failure to seek and obtain court approval thereof. Notwithstanding her undisputed failure to do so, we conclude that defendant breached the agreement when, on the advice of its attorney, it refused to consummate the agreement by purchasing debtor’s operating authority for the sum of $25,000.
The most appropriate measure of damages for defendant’s breach of the agreement is the amount it agreed to pay debtor for debtor’s operating authority — i.e., $25,000. This amount, we believe, represents the market value of the asset when defendant agreed to purchase it. We therefore will enter a judgment in this amount in favor of the chapter 7 trustee and against defendant.
An appropriate order shall issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493260/ | OPINION
RAYMOND T. LYONS, Bankruptcy Judge.
This matter requires the court to determine whether a New Jersey statute which allows for an award of attorney’s fees in a paternity suit may form the basis for an award of counsel fees in a nondischarge-ability action brought under 11 U.S.C. § 523. Because the American Rule in federal litigation prohibits the award of counsel fees except in certain narrow circumstances, the court concludes that the New Jersey statute does not allow the award of counsel fees in a nondischargeability action. The court in its discretion under Fed. R. BankrP. 7054(b) orders the debtor to pay the plaintiffs costs in the adversary proceeding in the amount of $503.26.
This court has jurisdiction under 28 U.S.C. § 1334(b)2, 28 U.S.C. § 157(a) and (b)(1), and the Standing Order of Reference from 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 that can be heard and determined by a bankruptcy judge under 28 U.S.C. § 157(b)(2)(I).
FACTS
The facts of the underlying case are set forth in the October 8, 1997 decision of the Superior Court of New Jersey, Appellate Division (“Appellate Division”). V.M. (“Vincent”) and S.S. (“debtor” or “Sara”) had an intimate relationship but never married. Sara advised Vincent that she was pregnant with his child. On October 15, 1987 Sara, then receiving Aid to Families with Dependent Children, filed a form affidavit with the Ocean County Board of Social Services. In the affidavit Sara declared that she had not had sexual intercourse with any male except Vincent for 45 days before and 45 days after the probable date of conception. An order for paternity and child support was entered against Vincent on or about February 2,1988.
After having paid child support for several years, Vincent filed an action to reopen the issue of filiation. The court ordered a Human Leukocyte Antigen (“HLA”) test which statistically eliminated Vincent as the father of the child. Nevertheless, the Chancery Division ordered that Vincent’s child support obligation continue. He appealed. In an unpublished opinion the Appellate Division ruled that Sara had committed fraud on the court *243when she swore that she had not had sexual intercourse with any male except Vincent for 45 days before and after the probable date of the child’s conception:
We agree that this sworn statement, which is obviously false, is a fraud on the court. Sara could reasonably have been mistaken or in doubt about who her daughter’s father was. But it is not credible that she was unaware of the falsity of her statement that she did not have sexual relations with anyone other than Vincent for forty-five days before and forty-five days after [the child’s] conception.
S.S. v. V.M., No. A-901-96T3, slip op. at 9 (App.Div., October 8, 1997). The Appellate Division vacated the orders for paternity and child support. Pursuant to N.J. Stat. Ann. § 9:17-54 (“The Parentage Act”) and N.J. R. 4:42-9(a)(l), Vincent was awarded counsel fees and costs of $12,759.19 incurred in overturning orders for paternity and child support obtained by fraud.
When Vincent filed an application for wage garnishment to collect his judgment, the debtor filed a petition in bankruptcy under Chapter 7. Vincent filed an adversary complaint to determine that the judgment is nondischargeable under 11 U.S.C. § 523(a)(2), § 523(a)(4), § 523(a)(5) and § 523(a)(6).
During trial, the debtor’s counsel conceded that the determination by the Appellate Division that the debtor had committed fraud on the court binds the bankruptcy court. This court found, consistently with Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), that the Superior Court judgment against the debtor for counsel fees and costs in the amount of $12,759.19 was a debt obtained by fraud and, therefore, nondischargeable under 11 U.S.C. § 523(a)(2)(A).
Plaintiff first requested counsel fees and costs for pursuing the nondischargeability action in the Proposed Findings of Fact and Conclusions of Law filed three days before trial. He did not request them in the adversary complaint. At trial the plaintiff reiterated his request for counsel fees in the nondischargeability action citing In re Scannell, 60 B.R. 562 (Bankr.W.D.Wis.1986). The court allowed the plaintiff to submit a memorandum on the issue and gave the debtor the opportunity to respond. The plaintiff requested counsel fees of $7,258.00 and costs of $503.26 for prosecuting the nondischargeability action. The plaintiff argued that these expenses also constitute a debt that arose from the debtor’s fraud under Cohen v. de la Cruz, 523 U.S. 213, 218 and 222, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), and that In re MacDonald, 69 B.R. 259, 278 (Bankr.D.N.J.1986) authorizes the court to award counsel fees in any action brought to enforce a child support order. The debtor filed a letter of objection based only on her asserted inability to pay.
DISCUSSION
The creditor failed to comply with the procedural requirements of Fed. R. Bankr.P. 7008(b) for applying for counsel fees.
Fed. R. BankrP. 7008(b) compels a party who requests counsel fees in an adversary proceeding to plead the request:
Rule 7008. General Rules of Pleading.
(b) Attorney’s Fees. A request for an award of attorneys’ fees shall be pleaded as a claim in a complaint, cross-claim, third-party complaint, answer, or reply as may be appropriate.
Fed.R.CivP. 9(g), which is incorporated into the bankruptcy rules through Fed. R. *244BaNicrP. 7009, treats attorney’s fees as an item of special damage that must be “specifically stated” when claimed. “Requests for attorney’s fees are items of special damage which must be specifically plead [sic] pursuant to Rule 9(g).” Maidmore Realty Co. v. Maidmore Realty Co., 474 F.2d 840, 843 (3d Cir.1973) (denying counsel fees in a non-bankruptcy foreclosure action); In re DeMaio, 158 B.R. 890, 892 (Bankr.D.Conn.1993) (denying counsel fees to the successful creditor in a nondis-chargeability proceeding); In re Odom, 113 B.R. 623, 625 (Bankr.C.D.Cal.1990) (denying counsel fees to the successful creditor in a nondischargeability proceeding).
The plaintiff failed to ask for counsel fees in the adversary complaint as required by Fed. R. BaNkrP. 7008(b). The plaintiff requested counsel fees for the first time in his Proposed Findings of Fact and Conclusions of Law which he filed three days prior to trial. As the plaintiff has failed to plead his request for attorney’s fees as a claim in his adversary complaint as required by Fed. R. BanicR.P. 7008(b), his application for attorney’s fees is denied. In re Odom, 113 B.R. at 625.
Even if the plaintiff had requested counsel fees properly, the American Rule bars his recovery of counsel fees under the circumstances of this case.
The plaintiff argues that, because the underlying paternity suit is governed by New Jersey law, he may rely upon New Jersey Court Rule N.J. R. 4:42-9(a)(l)3, which sets forth the bases on which the Superior Court may award counsel fees in family actions, and upon N.J. Stat. ANN. 9:17-54, “The Parentage Act,” which allows an award of counsel fees and costs in filiation proceedings:
9:17-54. Costs and fees.
The court may order reasonable fees of counsel, experts and the child’s guardian ad litem, and other costs of the action and pre-trial proceedings, including blood or genetic tests, to be paid by the parties in proportions and at times determined by the court.
N.J. Stat. Ann. § 9:17-54.
The American Rule states that the prevailing party is not entitled to at-*245torne/s fees unless certain limited exceptions apply. Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975), and Fleischmann Distill. Corp. v. Maier Brewing Co., 386 U.S. 714, 717, 87 S.Ct. 1404, 18 L.Ed.2d 475 (1967). The rule is based on the premise that parties should be afforded liberal access to the courts. Conditioning participation on the prospect of losing and paying the entire cost of litigation chills a litigant’s rights. Fleischmann, 386 U.S. at 718, 87 S.Ct. 1404. The American Rule applies to litigation in bankruptcy court. In re Fox, 725 F.2d 661, 662 (11th Cir.1984).4
In Federal court attorney’s fees may be awarded only under one of the following exceptions: (1) a contract provides for payment of attorney’s fees; (2) a statute provides an allowance of attorney’s fees; (3) a recovered fund or property confers a “common benefit,” as in a class action suit; (4) a party willfully disobeys a court order; or (5) a court finds that the losing party has acted “ ‘in bad faith, vexatiously, wantonly or for oppressive reasons.’ ” Cityside Archives, Ltd. v. New York City Health and Hosp. Corp., 37 F.Supp.2d 652, 656-657 (D.N.J.1999), citing Skehan v. Board of Trustees of Bloomsburg State College, 538 F.2d 53, 56 (3d Cir.), cert. denied, 429 U.S. 979, 97 S.Ct. 490, 50 L.Ed.2d 588 (1976) (internal citations omitted). These exceptions have developed in a sequence of United States Supreme Court cases. Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975); Fleischmann Distill. Corp. v. Maier Brewing Co., 386 U.S. 714, 87 S.Ct. 1404, 18 L.Ed.2d 475 (1967) (contract and statutory exceptions); Hall v. Cole, 412 U.S. 1, 93 S.Ct. 1943, 36 L.Ed.2d 702 (1973) (benefit conferred upon a class of litigant); Vaughan v. Atkinson, 369 U.S. 527, 82 S.Ct. 997, 8 L.Ed.2d 88, reh’g denied, 370 U.S. 965, 82 S.Ct. 1578, 8 L.Ed.2d 834 (1962); Chambers v. NASCO, Inc., 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27, reh’g denied, 501 U.S. 1269, 112 S.Ct. 12, 115 L.Ed.2d 1097 (1991) (bad faith). Exceptions (1), (3), (4) and (5) have no application to this case.
When applying the statutory exception (2) to the American Rule, the court examines whether the right that is vindicated in the bankruptcy proceeding arises under state law or under federal law. The court distinguishes carefully between the law that generates the underlying debt and the law that governs the bankruptcy proceeding. Actions in bankruptcy court on debts which arise under a state statute do not automatically support an award of counsel fees in bankruptcy court. In re Fobian, 951 F.2d 1149, 1153 (9th Cir.1991), cert. denied, Western Farm Credit Bank v. Fobian, 505 U.S. 1220, 112 S.Ct. 3031, 120 L.Ed.2d 902, cert. denied, Fobian v. Western Farm Credit Bank, 505 U.S. 1221, 112 S.Ct. 3032, 120 L.Ed.2d 902 (1992).
Determining whether the right vindicated in the bankruptcy proceeding arises under federal law or state law is straightforward. In re Seaway Exp. Corp., 105 B.R. 28, 31-32 (9th Cir. BAP 1989), aff'd, 912 F.2d 1125 (9th Cir.1990). In In re Coast Trading Co., 744 F.2d 686, 693 (9th Cir.1984), a buyer paid for goods with a subsequently dishonored check, then filed for bankruptcy. Although the state statutes governing dishonored checks allowed counsel fees to the prevailing party, the action to declare the buyer’s debt nondis-chargeable under was a pure bankruptcy proceeding controlled by federal law. The *246bankruptcy court therefore denied counsel fees to the seller, who prevailed in the nondischargeability proceeding. In re Coast Trading, 744 F.2d at 693. See also In re Johnson, 756 F.2d 738, 741 (9th Cir.), cert. denied, Johnson v. Righetti, 474 U.S. 828, 106 S.Ct. 88, 88 L.Ed.2d 72 (1985) (debtors not entitled to the attorney’s fees allowed by state statute in a contract action, as the proceeding in bankruptcy court addressed only the stay and was not an action to enforce the contract).
The statutory exception to the American Rule does not apply to allow the Court to invoke the Parentage Age, N.J. Stat. Ann. § 9:17-54, or New Jersey’s Rules of Court to award counsel fees in the creditor’s nondischargeability action.
Under the analysis for the statutory exception to the American Rule, the bankruptcy court cannot award attorney fees based on the Parentage Act. The plaintiffs nondischargeability action was not governed by the Parentage Act and did not address the enforcement or vindication of a right generated by the Parentage Act. The issue before the court in the plaintiffs adversary complaint was the nondischargeability of the debtor’s debt under 11 U.S.C. § 523. Because the right vindicated in bankruptcy court arose as a federal claim under 11 U.S.C. § 523 and not as a state claim under N.J. Stat Ann. § 9:17-54, the statutory exception to the American Rule does not apply to allow the court to invoke the Parentage Act to award the plaintiff counsel fees for the adversary proceeding. For the same reason New Jersey’s Rules of Court cannot serve as a basis for awarding counsel fees.
This result is consistent with In re Barbre, 91 B.R. 846, 848-849 (Bankr.S.D.Ill.1988), where the custodial parent sought nondischargeability of a judgment against the debtor for child support arrears and attorney’s fees awarded in state court. In addition the plaintiff sought attorney’s fees for the nondischargeability action under the state statute that granted fees in paternity proceedings. The bankruptcy court held the entire judgment for child support arrears and state court attorney’s fees nondisehargeable but denied the plaintiffs request for attorney’s fees for the nondischargeability action. In re Barbre, 91 B.R. at 849. The court declared that it had no authority to make an award under the state parentage act, which it considered part of the domestic financial support system to be administered by the state court, and had no other authority to award attorney’s fees in nondischargeability proceedings. In re Barbre, 91 B.R. at 849.
The court in Barbre declined to apply In re Scannell, 60 B.R. 562, 567 (Bankr.W.D.Wis.1986), upon which debtor, Sara, asks this court to rely. The court in Scan-nell, 60 B.R. at 567, without acknowledging the American Rule, awarded a creditor spouse counsel fees for the non-dischargeability action which she prosecuted to protect various support awards from discharge. The court in Scannell appropriated the practice in diversity cases of granting the attorney’s fees allowed under state statute, as the litigant may have been compelled unwillingly to litigate in the federal forum rather than in the state forum and should not be deprived of a state law remedy on that basis. In re Scannell, 60 B.R. at 567. The court in Scannell awarded attorney’s fees in derogation of the American Rule (“Such an award is proper since no federal law or rule purports to affirmatively proscribe the award.” In re Scannell, 60 B.R. at 567.) This court will not apply the result in Scannell. The result in Barbre comports with the American Rule.
*247
Cohen v. de la Cruz, 523 U.S. 213 (1998) is distinguishable and does not allow the court to invoke the Parentage Age, N.J. Stat. Ann. § 9:17-54, to award counsel fees to the plaintiff.
The plaintiff cites In re Cohen, 185 B.R. 180, 189-190 (Bankr.D.N.J.1995); aff'd, 191 B.R. 599 (D.N.J.1996), aff'd 106 F.3d 52 (3d Cir.1997), aff'd, Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) as a basis for awarding him attorney’s fees in the nondischargeability action. The plaintiff interprets the Cohen cases to mean that all damages arising from the debtor’s fraud (including counsel fees in the nondischargeability action) are nondischargeable. For the reasons set forth below, this court distinguishes the Cohen cases and holds that they do not apply to authorize an award of counsel fees in this matter.
The courts in Cohen focused upon the nondischargeability of punitive damages authorized by state statute. The bankruptcy court in In re Cohen, 185 B.R. at 189-190, relied upon the Consumer Fraud Act, N.J. Stat. Ann. § 56:8-19, to award punitive damages, along with attorney’s fees and costs, to the successful tenants in a landlord-tenant dispute. Before the adversary complaint, the tenants’ claim had never been subject to court proceedings, and there had never been an adjudicated award of attorney’s fees. The pivotal issue for the bankruptcy court was whether the punitive damages and attorney’s fees which it was about to award as the first court to hear the case were nondischargeable under 11 U.S.C. § 523(a)(2)(A). Having concluded that the landlord had violated the New Jersey Consumer Fraud Act, the bankruptcy court found that the ten-' ants were entitled to a nondischargeable judgment equal to three times the amount stipulated to the rent leveling board plus reasonable attorney’s fees and costs. Cohen, 185 B.R. at 189-190.
The district court, court of appeals and Supreme Court affirmed the principle that noncompensatory (punitive), statutory damages are nondischargeable under 11 U.S.C. § 523(a)(2). Cohen, 191 B.R. at 609 (D.N.J.); 106 F.3d at 58-59 (3d Cir.); and 523 U.S. at 222, 118 S.Ct. 1212. The Supreme Court also held that 11 U.S.C. § 523(a)(2)(A) “bars the discharge of all liability arising from fraud.” Cohen, 523 U.S. at 222, 118 S.Ct. 1212. None of the courts in Cohen, particularly the Supreme Court, addressed the American Rule or characterized the result as expanding the exceptions to allow counsel fees generally to the prevailing party in a nondischarge-ability action for fraud or on another basis. At most the result is consistent with the statutory exception which states that the bankruptcy court may award counsel fees allowed by state statute when the issue decided in the bankruptcy court vindicates a state law claim. As explained above, in the instant case, the plaintiffs nondis-chargeability action simply vindicated his federal rights under the Bankruptcy Code and was not brought pursuant to a state statute or state law claim.
The plaintiff cites In re MacDonald, 69 B.R. 259, 278 (Bankr.D.N.J.1986), to support her application for attorney’s fees. In MacDonald the bankruptcy court awarded attorney’s fees and costs to the prevailing non-debtor spouse for the expense that she incurred in prosecuting her adversary complaint. The court declared, “It is well settled that legal fees and costs expended by a non-debtor spouse for enforcement of nondischargeable debts are similarly non-dischargeable.” In re MacDonald, 69 B.R. at 278. The court in MacDonald attributed this proposition without explanation to In re Dorman, 3 C.B.C.2d 497 (Bankr.D.N.J.1981), and In re Romeo, 16 *248B.R. 531 (Bankr.D.N.J.1981). Both Dorman, 3 C.B.C.2d at 502, and Romeo, 16 B.R. at 537, simply state that counsel fees awarded in state court to enforce support awards are nondischargeable in bankruptcy. As the statement in MacDonald quoted above does not analyze the American Rule, this court will not rely on that decision as a basis for awarding counsel fees to the plaintiff for prosecuting the nondis-chargeability action.
Costs may be awarded under Fed. R. Bankr.P. 7054(b).
The court in its discretion may award costs in an adversary proceeding.
Rule 7054. Judgments; Costs.
(b) Costs. The court may allow costs to the prevailing party except when a statute of the United States or these rules otherwise provides.
Fed. R. BankrP. 7054(b). Fed.R.Civ.P. 54(d), that makes the award of costs to the prevailing party mandatory in other federal cases, is not incorporated into Fed. R. BankrP. 7054. In re Celotex Corp., 251 B.R. 163, 165 (Bankr.M.D.Fla.2000); In re Investment Bankers, Inc., 135 B.R. 659, 670 (Bankr.D.Colo.1991), aff'd, 161 B.R. 507 (D.Colo.1992), aff'd, 4 F.3d 1556 (10th Cir.1993), cert. denied, Davis, Gillenwater & Lynch v. Turner, 510 U.S. 1114, 114 S.Ct. 1061, 127 L.Ed.2d 381 (1994) (deeming the award of costs discretionary in all instances and essentially compensatory); In re Robertson, 105 B.R. 504, 507 (Bankr.D.Minn.1989) (confirming that Fed. R.CrvP. 54(d) has no application in bankruptcy court).
The Third Circuit has not fully addressed the award of costs under Fed. R. BankrP. 7054(b) in a published opinion. In In re Gioioso, 979 F.2d 956, 963 (3d Cir.1992), the Third Circuit reversed the decision of the bankruptcy court and of the district court, which declined to award costs to a creditor in an adversary proceeding, after the bankruptcy court denied the debtor discharge under 11 U.S.C. § 727(a). Under Fed R. Bankr P. 7054(b) the Third Circuit determined that the bankruptcy court erred in deeming the denial of discharge a “sufficient sanction” against the debtor, in asserting without investigating that the debtor lacked ability to pay, and in deeming inability to pay dispositive. In re Gioioso, 979 F.2d at 963. As bad faith pervaded the debtor’s conduct, the Third Circuit found a sanction mandatory under Fed R. Bankr P. 9011 and an award of costs mandatory under Fed R. Bankr P. 7056(g) (expenses awarded against a party which files false affidavits) and appropriate under Fed. R. Bankr P. 7054(b) (unless fact-finding showed that it would be “futile” to order the debtor to pay). In re Gioioso, 979 F.2d at 960, 961 and 962. As the following footnote indicates, the court in Gioioso did not establish a standard for awarding costs under Fed. R. BankrP. 7054(b) or even commit to a list of factors to be considered:
Although the courts within the Third Circuit have not yet addressed a 7054(b) award of costs in a published opinion, we note that courts elsewhere have denied costs because of a complete absence of bad faith or frivolity ... because of a prevailing party’s unnecessary multiplication of proceedings ... or because the party seeking costs was not technically a “prevailing party,”.... Costs have been taxed in favor of a prevailing party without explanation ... and costs have been taxed in favor a party prevailing on a motion to disqualify an attorney [previously disqualified].
In re Gioioso, 979 F.2d at 963, n. 10 (internal citations omitted). The court in In re Celotex, 251 B.R. 163, 166 (Bankr.M.D.Fla. 2000) observed that the discretionary standard has eluded most courts. Factors *249which the court in Celotex observed in other cases but did not adopt include a comparison of the equities among the parties; a “cost-benefit” analysis of what the litigation accomplished; and the debtor’s ability to pay. In re Celotex, 251 B.R. at 166-167. The court concluded that “the tendency is to authorize costs” in bankruptcy cases and to leave to discussion which costs to authorize. In re Celotex, 251 B.R. at 166; In re D & B Countryside, L.L.C., 217 B.R. 72, 75 (Bankr.E.D.Va.1998) (because the award of costs is discretionary under Fed. R. BanKR.P. 7054(b), after the applicant establishes that a cost is proper under the federal statute, the burden shifts to the opposing party to prove that the cost should not be allowed).
28 U.S.C. § 1920 allows costs for the following expenses:
(1) Fees of the clerk and marshal;
(2) Fees of the court reporter for all or any part of the stenographic transcript necessarily obtained for use in the case;
(3) Fees and disbursements for printing and witnesses;
(4) Fees for exemplification and copies of papers necessarily obtained for use in the case;
(5) Docket fees under section 1923 of this title;
(6) Compensation of court appointed experts, compensation of interpreters, and salaries, fees, expenses, and costs of special interpretation services under section 1828 of this title.
A bill of costs shall be filed in the case, and upon allowance included in the judgment or decree.
28 U.S.C. § 1920.
The statement of services submitted by Vincent’s attorney for the adversary proceeding indicates that she billed $663.50 in costs but requested only $503.26 in reimbursement. Of that $663.50, $150.00 is for the filing fee, an allowable cost under 28 U.S.C. § 1920(1), and $400.74 is for photocopying, an allowable cost under 28 U.S.C. § 1920(3). As the sum of these exceeds the amount sought by Vincent’s attorney, the court finds that the $503.26 requested is an allowable cost.
The financial data show that Sara has the ability to pay these costs. Sara certifies that she earns $23,088.00 annually, and her pay stub indicates the potential to earn overtime. Her husband’s pay stub shows an annual income of $57,804.47 per year, for a gross household income of at least $80,892.47. In the court’s discretion under Fed. R. BankeP. 7054(b) the court orders Sara to pay Vincent $503.26 in costs as the prevailing party in the adversary proceeding.
CONCLUSION
For the reasons set forth above, the court concludes that no exception under the American Rule applies to allow the court to make an award of attorney’s fees to the plaintiff for the expenses that he incurred in successfully prosecuting the nondischargeability action in bankruptcy court. The court awards the plaintiff $503.26 for costs.
. All references to the U.S.C. and NJ. Stat. Ann. are to the West 2001 edition.
. The version of N.J. R. 4:42-9(a)(l) in effect in 1997-1998 when the Appellate Division instructed the Chancery Division to make a determination of counsel fees and costs states:
4:42-9. Counsel fees.
(a) Actions in Which Fee Is Allowable. No fee for legal services shall be allowed in the taxed costs or otherwise, except
(1) In a family action, the court in its discretion may make an allowance both pendente lite and on final determination to be paid by any party to the -action, including if deemed to be just any party successful in the action, on any claim for ... support ... custody, visitation ... and claims relating to family type matters in actions between unmarried persons.
PRESSLER, Current N.J. COURT RULES, (GANN 1998), R. 4:42-9(a)(l). The current rule provides
4:42-9. Counsel fees.
(a) Actions in Which Fee Is Allowable.
No fee for legal services shall be allowed in the taxed costs or otherwise, except
(1) In a family action, a fee allowance both pendente lite and on final determination may be made pursuant to R. 5:3-5(c).
PRESSLER, Current N.J. COURT RULES, (GANN 2001), R. 4:42-9(a)(l). N.J. R. 5:3-5(c) provides:
5:3-5. Attorney Fees and Retainer Agreements in Civil Family Actions; Withdrawal.
(c) Award of Attorney Fees. Subject to the provisions of R. 4:42-9(b), (c), and (d), the court in its discretion may make an allowance ... to ... any party successful in the action, on any claim for ... support .. . custody, parenting time ... and claims relating to family type matters in actions between unmarried persons.
PRESSLER, Current N.J. COURT RULES, (GANN 2001), R. 5:3-5(c).
. 11 U.S.C. § 523(d) allows attorney’s fees to the debtor if the creditor’s application for non-dischargeability under 11 U.S.C. § 523(a)(2) is not "substantially justified.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493261/ | KRESSEL, Bankruptcy Judge.
Burma Jean Martin appeals from two orders of the bankruptcy court1 denying three motions. For reasons discussed in this opinion, we affirm both orders. Background
Martin filed a chapter 7 case in 1995. Since that time, she has been engaged in extensive litigation in numerous forums. The history of that litigation is long and complicated and we will not review it here.2 Her case was closed on October 7, 1999. However, two years later, she filed the three motions which led to these appeals.3
Relief From Settlement
The first two motions filed by Martin are related and together constitute her attempt to avoid a 1996 settlement she signed and the court’s March 13, 1998, order approving that settlement. In One motion, she asks the court “for relief and reconsideration” of its order approving the settlement. In the related motion, she asks for an injunction pending the court’s decision on her first motion.4 Both of these motions were filed on September 24, 2001, and decided by the bankruptcy court in its October 2, 2001, order. Since there is no provision in any rule or statute for “reconsideration” of orders, the bankruptcy court generously and properly, in our view, construed Martin’s motion to be one for relief under Fed. R. Bankr.P. 9024, which incorporates Fed.R.Civ.P. 60. The bankruptcy court analyzed the motion under Rule 60(b)(6), since all other provisions of Rule 60 are either time barred or clearly inapplicable. In its order, the bankruptcy court found that Martin’s motion was untimely, since it was not made within a reasonable time and lacking in merit. We agree.
We see no error in the bankruptcy court’s finding of untimeliness. The settlement which Martin now seeks to attack, was one that she signed in 1996 and was *335approved in 1998. The allegations made in her motion are not new and are simply rehashes of arguments made in other proceedings to a number of different courts.
In addition, most of the allegations, even if true, would not provide grounds for relief from a three year old order. The allegations (and they are merely that) do not demonstrate the “fraud on the court” she relies on. They demonstrate only that Martin regrets agreeing to the settlement and alleges she received bad advice.
After analyzing the factors for the granting of a temporary restraining order, the bankruptcy court also denied Martin’s request for injunctive relief. We agree with the bankruptcy court’s decision to deny that motion. Martin’s motion did not demonstrate any likelihood of prevailing on the merits or address the relative harms to the parties of granting or denying such an injunction. In addition, because of the speed with which the bankruptcy court addressed and decided Martin’s motion, her request for an injunction pending a decision is moot.
Enforcement of Settlement
In her third motion, Martin asks that the bankruptcy court enforce the settlement by ordering Cox and Sanford to deliver title of real property in Dallas to her parents, John Paul Martin and Hazel Victoria Martin. The bankruptcy court denied that motion in its order of October 15, 2001. We note a number of things regarding this motion. First of all, Martin seeks relief in the bankruptcy court on behalf of her parents. We think she lacks standing to do so. In addition, while the bankruptcy court approved the settlement in her pending bankruptcy case, the order that Martin wants enforced is a judgment entered by the United States District Court for the Northern District of Texas which the bankruptcy court lacks jurisdiction to enforce. Lastly, since Martin is requesting an affirmative injunction, her request would properly have been brought by the filing of an adversary proceeding.
We find no error in the bankruptcy’s court order denial of the debtor’s motion to force the conveyance of real property in Dallas, Texas.
CONCLUSION
Since we conclude that Martin’s motions are nothing more than attempts to collaterally attack a long series of final orders entered by a whole series of courts and find no error in either of the bankruptcy court’s orders, we affirm the bankruptcy court’s orders entered October 2, 2001, and October 15, 2001.
. The Honorable Mary Davies Scott, United States Bankruptcy Judge for the Eastern and Western Districts of Arkansas.
. Much of the litigation has been memorialized in published opinions. See, Martin v. Cox (In re Martin), 140 F.3d 806 (8th Cir.1998); Martin v. U.S. Trustee, 2001 WL 1563154 (8th Cir.2001); Martin v. Martin (In re Martin), 141 F.3d 1169, 1998 WL 67740 (8th Cir.1998); Martin v. Sanford (In re Martin), 116 F.3d 480, 1997 WL 334884 (8th Cir.1997); Martin v. Cox (In re Martin), 212 B.R. 316 (8th Cir. BAP 1997); In re Martin, 268 B.R. 168 (Bankr.E.D.Ark.2001); Martin v. Martin, 213 B.R. 575 (E.D.Ark.1997); Martin v. Cox, 213 B.R. 574 (E.D.Ark.1997); Martin v. Cox, 213 B.R. 571 (E.D.Ark.1996); In re Martin, 211 B.R. 23 (Bankr.E.D.Ark.1997); In re Martin, 208 B.R. 463 (Bankr.E.D.Ark.1997); In re Martin, 205 B.R. 145 (Bankr.E.D.Ark.1997); In re Martin, 205 B.R. 143 (Bankr.E.D.Ark.1997); In re Martin, 199 B.R. 175 (Bankr.E.D.Ark.1996); In re Martin, 1997 WL 160435 (Bankr.E.D.Ark.1997); and Sanford v. Martin (In re Martin), 1997 WL 160443 (Bankr.E.D.Ark.1997).
. In order to avoid delaying decision on the debtor’s motion and unnecessarily confusing the procedural posture of these motions even more, the bankruptcy court, in its order of October 2, 2001, reopened the debtor’s case. No one has appealed from that part of the court’s order.
. Injunctive relief is appropriately sought by the filing of a complaint. Fed. R. Bankr.P. 7001(7). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493263/ | Opinion Granting Plaintiff’s Motion for Summary Judgment
STEVEN W. RHODES, Bankruptcy Judge.
Telcom Credit Union filed this adversary proceeding complaint against Sonia Leslie seeking to deny Leslie’s discharge (Count I) or alternatively to determine the dischargeability of her debt (Count II). Telcom previously filed a motion for summary judgment on Count I, which the Court denied. Telcom now seeks summary judgment on Count II. Following a hearing on April 23, 2001, the Court took the matter under advisement. For the reasons stated below, the Court concludes that Telcom is entitled to summary judgment.
I.
On October 6, 1999, following the dismissal of Leslie’s second chapter 13 case, the Court entered an order requiring Leslie to turn over Telcom’s collateral, a 1994 Chevrolet Lumina. Leslie did not comply with the order. Telecom filed a motion to compel return of collateral and, on October 28, 1999, the Court entered another order requiring Leslie to turn over the collateral. Leslie did not comply with that order either. On November 19, 1999, the Court issued an order to show cause why the debtor should not be held in contempt for failure to comply with the order to turn over the collateral. Leslie did not appear at the hearing set for December 9, 1999. On December 16, 1999, the Court issued a warrant for Leslie’s arrest. Telcom finally obtained possession of the vehicle following Leslie’s arrest on February 3, 2000. On April 20, 2000, the Court entered an order for damages in the amount of $7,585.56 for costs, expenses, attorney fees, and depreciation in collateral as a result of Leslie’s failure to comply with the Court’s order of November 19,1999.
On April 21, 2000, Leslie filed for chapter 7 relief. On June 15, 2000, Telcom filed its adversary proceeding complaint against Leslie objecting to the discharge and to determine dischargeability of debt under § 523(a)(6).
*510II.
Telcom contends that Leslie knew that her actions would result in injury to Tel-com. Telcom asserts that Leslie’s failure to comply with the Court’s orders and return the vehicle resulted in excess wear and tear on the vehicle and resulted in Telcom being unable to sell the vehicle for the amount it was worth when the Court initially ordered Leslie to return the vehicle. Telcom asserts that Leslie chose to retain the vehicle and continue to drive it with full knowledge that her actions would result in excess wear and tear and increased mileage on the vehicle. Telecom asserts that Leslie’s actions were also malicious in that she acted in conscious disregard of her obligation to comply with the Court’s orders.
Leslie contends that she did not cause any willful destruction of the car, and had she been allowed to keep the vehicle until it was paid off, Telcom would not have suffered any loss.
III.
Section 523(a)(6) excepts from discharge debts for willful and malicious injury by the debtor. For a debt to be nondischargeable under § 523(a)(6), the plaintiff must prove that the defendant acted “with the actual intent to cause injury.” Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998); Markowitz v. Campbell, 190 F.3d 455, 463 (6th Cir.1999). A willful and malicious injury is one where the debtor “desires to cause consequences of his act, or ... believes that the consequences are substantially certain to result from it.” Markowitz at 464 (citation omitted). See also Kennedy v. Mustaine (In re Kennedy), 249 F.3d 576 (6th Cir.2001); Gonzalez v. Moffitt (In re Moffitt), 252 B.R. 916 (6th Cir. BAP 2000).
Leslie failed to comply with the Court’s orders to turnover the vehicle and continued to use the vehicle because, she contends, she needed it for transportation. Leslie stated at her deposition that she knew that her actions would probably result in the Court holding her in contempt and that she was prepared to accept those consequences. (See Leslie’s November 11, 2000 dep. at 17.) Telcom’s judgment against Leslie is for costs, expenses, attorney fees, and for depreciation to the vehicle as a result of her failure to comply with the order to return the vehicle. Leslie knew that such injuries were substantially certain to occur due to her actions. Accordingly, the Court concludes that Leslie’s actions were willful.
Under § 523(a)(6), a person is deemed to have acted maliciously when that person acts in conscious disregard of his duties or without just cause or excuse. Murray v. Wilcox (In re Wilcox), 229 B.R. 411, 419 (Bankr.N.D.Ohio 1998) Leslie consciously disregarded court orders to return the vehicle with the excuse that she needed the vehicle for transportation. (See Leslie’s dep. at 16.) This does not constitute just cause to ignore a court order. The Court therefore concludes that Leslie acted maliciously.
Accordingly, the Court concludes that Leslie’s debt to Telcom is for a willful and malicious injury and is non-dischargeable under § 523(a)(6). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493264/ | Opinion
STEVEN W. RHODES, Bankruptcy Judge.
The issue before the Court is whether the Court has jurisdiction over the plaintiffs claims against the non-debtor defendants in this adversary proceeding. At the final pre-trial conference, held on March 30, 2001, the parties indicated that the adversary proceeding had been settled as to the debtor, and the complaint was to proceed against the non-debtor defendants only. The Court then decided that the matter would be held in abeyance pending a determination as to the Court’s jurisdiction. The parties were instructed to file briefs on the issue of jurisdiction. Following a hearing on May 7, 2001, the Court took the matter under advisement. The Court now concludes that it does not have jurisdiction.
I.
First Indiana Bank filed this adversary proceeding against the defendants on September 8, 2000. In count I, First Indiana alleges that the debtor induced it to make a loan to the debtor by misrepresenting to First Indiana the value of property the debtor used as security for the loan. First Indiana seeks a determination that the resulting debt is non-dischargeable under § 523(a)(2)(A).
In count II, First Indiana alleges that Mortgage Sources and Michael Cauley acted as the debtor’s agents in obtaining the loan from First Indiana. First Indiana contends that Mortgage Sources and Cau-ley knowingly and fraudulently misrepresented the value of the home to First Indiana in an effort to induce First Indiana to extend the loan to the debtor. Count II alleges that the misrepresentations of Mortgage Sources and Cauley should be imputed to the debtor rendering the debt non-dischargeable under § 523(a)(2)(A).
Count III alleges that the debtor provided First Indiana with a false settlement statement and loan application purportedly prepared at the time the debtor purchased the property used as security for the First Indiana loan. First Indiana contends that it relied on these documents in extending the loan. Count III seeks a determination that the debt is non-dischargeable under § 523(a)(2)(B).
Count IV alleges that Mortgage Sources and Cauley knowingly and fraudulently perpetrated a fraud on First Indiana by submitting a false loan application and settlement statement on behalf of the debtor. First Indiana alleges the debtor is responsible for the actions of his agents. First Indiana therefore seeks a judgment against the debtor, Mortgage Sources and Cauley, jointly and severally, for the full amount of First Indiana’s losses.
*513The parties state that First Indiana and the debtor have entered into a settlement agreement resolving all claims against the debtor. Therefore, only count IV, against Cauley and Mortgage Sources, remains. Although no settlement agreement has been filed, the attorney for First Indiana represented at the hearing that pursuant to the terms of the settlement, the debtor is to pay First Indiana $7,500 and First Indiana is. to dismiss the debtor from the complaint.
II.
First Indiana contends that the Court has jurisdiction over the claims against the non-debtor defendants because the complaint contains substantial allegations of joint conduct between the debtor, Cauley and Mortgage Sources. First Indiana further asserts that the matter is related to the bankruptcy because the outcome of the proceeding will determine First Indiana’s claim against the debtor and determine the extent of the debtor’s liability to Cauley and Mortgage Sources for contribution.
The defendants contend that because the claim against the non-debtor defendants arises under Michigan law and is entirely unrelated to the administration of the bankruptcy case, the Court does not have jurisdiction.
III.
In order for the bankruptcy court to have jurisdiction over a proceeding, it must be at least “related to” a case under title 11. 28 U.S.C. § 157(c)(1). A matter is “related to” a bankruptcy case if “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Sanders Confectionery Products, Inc. v. Heller Financial, Inc., 973 F.2d 474, 482 (6th Cir.1992) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)). The matter does not need to “directly involve the debt- or, as long as it ‘could alter the debtor’s rights [or] liabilities,’ but an ‘extremely tenuous connection’ will not suffice.” Sanders, 973 F.2d at 482 (citing MESC v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1142 (6th Cir.1991)). Moreover, “the mere fact that there may be common issues of fact between a civil proceeding and a controversy involving the bankruptcy estate does not bring the matter within the scope of section [1334(b) ].” Pacor, 743 F.2d at 994. The bankruptcy court’s jurisdiction may extend to suits between non-debtor parties only if the action has “an effect on the bankruptcy estate.” Celotex Corp. v. Edwards, 514 U.S. 300, 115 S.Ct. 1493, 1498 n. 5, 131 L.Ed.2d 403 (1995).
First Indiana relies on Lindsey v. O’Brien, Tanski, Tanzer & Young Health Care Providers of Conn. (In re Dow Coming Corp.), 86 F.3d 482 (6th Cir.1996); Kelley v. Nodine (In re Salem Mortgage Corp.), 783 F.2d 626 (6th Cir.1986); and Haden v. Edwards (In re Edwards), 100 B.R. 973 (Bankr.E.D.Tenn.1989), in support of its contention that the Court has jurisdiction. First Indiana contends that these cases stand for the proposition that “related to” jurisdiction exists when there is joint conduct between the debtor and the non-debtor defendants or when the outcome of the proceeding could conceivably have some effect on the estate being administered in bankruptcy.
However, the test in the Sixth Circuit, as in the majority of other circuits, is whether “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Sanders Confectionery Products, 973 F.2d at 482. To the extent that joint conduct has been found to be a factor, it is because the joint conduct contributed to the proceeding having an effect on the administra*514tion of the bankruptcy estate. See Dow, 86 F.3d at 493-94; Salem, 783 F.2d at 634. Further, although the court in Edwards focused primarily on the joint conduct or intertwined behavior of the debtor and the non-debtor defendant to find that the bankruptcy court had jurisdiction over the non-debtor defendant, it also concluded that an additional basis for determining that the claims against the non-debtor defendant were related to the bankruptcy was the impact a judgment in the plaintiffs favor could have on the bankruptcy estate. Edwards, 100 B.R. at 982. There is no support for the proposition that joint conduct, standing alone, is sufficient to confer jurisdiction.
Further, because this is a no asset case, any claim by First Indiana against the estate or by the non-debtor defendants for contribution would not have any effect on the administration of the bankruptcy estate.
Accordingly, the Court concludes that it does not have jurisdiction over the plaintiffs claims against the non-debtor defendants this adversary proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493265/ | MEMORANDUM OPINION
SUSAN PIERSON SONDERBY, Chief Judge.
This cause comes to be heard on the motion of Liquidating Grantor’s Trust of Proteva, Inc. and Proteva Marketing Group, Inc. for sanctions. For the reasons stated herein, the motion is denied.
FACTS
On January 3, 2001, Liquidating Grant- or’s Trust of Proteva, Inc. (the “Trust”) filed a seven-count complaint (the “Complaint”) against Finova Capital Corporation (“Finova”), William Lynch, Brian Jordan and John Roberts. Lynch, Jordan and Roberts are collectively referred to as the “Guarantors.”
In the Complaint, the Trust seeks, inter alia, to: (i) avoid a security interest (the “Security Interest”) that Finova holds in certain assets of the debtors, Proteva, Inc. and Proteva Marketing Group, Inc. as an alleged preference under 11 U.S.C. § 547; (ii) recover payments made to Finova during the 90-day preference period and payments made to the Guarantors during the one-year insider preference period; and (iii) recover damages from the Guarantors for purportedly breaching their alleged fiduciary duties to the creditors of Finova.
Many of the facts alleged in the Complaint which the Trust relies upon to support its request for relief against Finova and the Guarantors are the same. One of the common dispositive issues concerns whether the attachment of the Security Interest occurred during the preference period. Generally, if a court finds that a security interest attached during the preference period, and provided the other elements of a preference are met and no defense is sustained, the interest can be avoided and payments made during the preference period to the lender can be recovered for the estate.
On February 2, 2001, Finova filed a motion to dismiss the Complaint and/or for entry of summary judgment (the “Finova Dismissal Motion”). On March 1, 2001, the Trust filed its response to the Finova Dismissal Motion.
Further proceedings on the Complaint against Finova and the Finova Dismissal Motion were stayed by virtue of Finova’s filing a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on March 7, 2001 (the “Finova Petition Date”), in the United States Bankruptcy Court for the District of Delaware (the “Finova Chapter 11 Case”).
*571On the Finova Petition Date, the Guarantors filed their motion to dismiss the Complaint and/or for entry of summary judgment (the “Guarantors’ Dismissal Motion”) with this Court. The Trust filed a response on May 18, 2001, and the Guarantors filed a reply on June 26, 2001.
On July 26, 2001, Finova filed a motion seeking an injunction under Sections 362(a) and 105 of the Bankruptcy Code, which if granted, would stay this Court’s ruling on the Guarantors’ Dismissal Motion. The next day, the Guarantors filed their motion to stay proceedings under Section 362(a), Federal Rule of Civil Procedure 19 and “principals of equity and judicial economy” and adopted the arguments in Finova’s stay motion. The stay motions filed by Finova and the Guarantors are collectively referred to as the “Stay Motions.”
In the Stay Motions, Finova and the Guarantors noted that any further proceedings on the Finova Dismissal Motion were stayed by virtue of the filing of the Finova Chapter 11 Case. Finova and the Guarantors argued, however, that the ruling on the Guarantors’ Dismissal Motion should be stayed as well. One reason for the stay request was the risk to Finova of an adverse ruling on the issue of when the Security Interest attached should the Guarantors’ Dismissal Motion go forward. The Guarantors argued that they would be hampered in defending against the Complaint, because much of the evidence relative to the Complaint is purportedly in Finova’s possession and control.
Finova and the Guarantors relied upon a number of opinions in support of their arguments for this Court to impose a stay including, In re Fernstrom Storage and Van Co., 938 F.2d 731 (7th Cir.1991); 555 M Mfg., Inc. v. Calvin Klein, Inc., 13 F.Supp.2d 719 (N.D.Ill.1998); and Klaff v. Wieboldt Stores, Inc., 1988 WL 142163 (N.D.Ill.Dec.23, 1988). None of the cases cited have been reversed and all continue to be good law, although there are factual arguments and other cases upon which a court can rely to decline to impose a stay like the one requested by Finova and the Guarantors. See, argument and cases cited in the Trust’s response to the Stay Motions.
At the initial hearing on the Stay Motions on August 1, 2001 (the “August 1st Hearing”), the parties discussed the fact that a hearing on the confirmation of the plan of reorganization filed in the Finova Chapter 11 Case was set for August 10, 2001. Counsel for Finova suggested that the ruling on the fully-briefed Guarantors’ Dismissal Motion be stayed until the Fino-va Plan was confirmed. He agreed that once the Finova Plan was confirmed, the Stay Motions would be withdrawn as moot. The Court asked the Trust’s counsel if the proposal was acceptable. The Trust declined the offer and requested thirty days to respond to the Stay Motions, fully acknowledging the possibility that the Stay Motions could become moot before the response deadline. The Court entered an order providing that the Trust had until August 31, 2001 to respond to the Stay Motions.
Because it is important to this decision, the colloquy from the August 1st Hearing summarized above by the Court is included below:
THE COURT: Well, you’re just seeking to stay until after the confirmation hearing in the Delaware case which is August 10th; is that correct? Today is the 1st of August.
MR. BACON [Finova’s counsel]: It is correct, your Honor, that we’re only seeking the stay until the bankruptcy is completed up there. Counsel for the Trust seems to know more about that than I do, and that was the time frame *572he mentioned. It’s consistent with what I’ve been told informally. Frankly, your Honor, this thing has been set for another status on September 19th. I would be at this point satisfied with the stay until September 19th because it didn’t seem to me — if you’ll recall when we were here a week ago, I thought the motion was moot when this was set for the 19th. I so indicated, and your counsel, in effect, I thought said, “Well, your Honor, pending the status conference, we’d like you to move forward against the guarantors.” I don’t know whether the court contemplates that or not. If the court did, I would ask the court simply to stay this until the next status and we’d revisit the motion or an adversary proceeding at that time, by which point it should be moot because Finova should be out of bankruptcy.
THE COURT: Can you agree to this without more money being expended? Does it matter if a couple of weeks pass?
MR. KROHN [the Trust’s counsel]: Well, what we would like to do, your Honor, because we’re not sure when the stay is going to actually be lifted in the Finova bankruptcy case — I mean, I think we agree that there is a confirmation hearing that’s scheduled for August 10th. I am not a participant, other than to represent Proteva as a claimant in that case, but I’ve not been closely following what’s going on with respect to the confirmation process.
What we were thinking, and counsel may agree with this, the estate would like 30 days to respond to their motion, which would take us to August 31st. If the confirmation of the Finova bankruptcy plan moots out the motion, then sobeit, and then I think both sides will be satisfied.
MR. BACON: That would be fine with us, your Honor.
MR. KROHN: Your Honor, I just want to confirm something. Counsel said that Finova had no intention of staying the proceedings in this court after the stay has been lifted in Finova’s bankruptcy case because, I mean, that affects how we proceed on these matters; is that correct?
MR. BACON: What I intended to say, your Honor, is this lawyer has no intention of going to the Finova bankruptcy court and trying to stay this court. It would be moot by the time the stay was lifted there anyway. I think I would get thrown out twice-over, so, yes, if I understood the question.
Excerpts of August 1, 2001 hearing, pp. 2-6.
As anticipated, the Finova Plan was confirmed by the Delaware Bankruptcy Court on August 10, 2001. Finova and the Guarantors did not immediately withdraw the Stay Motions. The Trust filed a response to the Stay Motions on August 31, 2001.
At the next scheduled hearing on the Stay Motions on September 19, 2001, Fino-va and the Guarantors withdrew the Stay Motions. Finova and the Guarantors advised the Court that the Stay Motions were moot in light of the confirmation of the Finova Plan and Finova could now fully participate in this adversary proceeding. As a result, the briefing schedule and ruling on the Finova Dismissal Motion could go forward and there was no reason for the Guarantors’ Dismissal Motion to be stayed, as the risk of an adverse ruling was alleviated.
The Trust subsequently filed a motion for sanctions under Section 105 of the Bankruptcy Code against the Guarantors and Finova seeking to recover attorneys’ fees and costs in the amount of $20,572.00, which the Trust expended in responding *573the Stay Motions (the “Sanction Motion”). At the last hearing on the Sanction Motion before the Court on October 31, 2001 (the “October 31st Hearing”), counsel for the Trust advised that “in the spirit of compromise” it would voluntarily reduce its sanction request in an amount equal to all of the fees incurred by the Trust’s law firm’s first-year associate on this matter. Based on the fee entries appended to the Sanction Motion, the amount of the sanction request has been reduced to $5,359.00.
The Trust argues that the Stay Motions were not legitimate requests for relief. Rather, the Trust asserts that the motives for the filing of the Stay Motions were improper and diversionary. According to the Trust, the Stay Motions were filed to multiply the costs of litigation in order to discourage the Trust from aggressively pursing the Complaint. The Trust also maintains that Finova and the Guarantors unreasonably and vexatiously delayed withdrawing the Stay Motions when the Finova Plan was confirmed.
In response, Finova and the Guarantors argue that the Stay Motions were filed for a proper purpose and have a reasonable basis in fact and law. At the October 31st Hearing, Finova and the Guarantors’ counsel explained that the Stay Motions were filed after the Guarantors’ Dismissal Motion was fully briefed when it became apparent that the Finova Plan was not being confirmed as quickly as anticipated. At that time, it “dawned” on Finova’s counsel that the Trust may get a judgment against Guarantors before Finova was able to participate in this adversary proceeding.
DISCUSSION
As stated above, the Trust is requesting that this Court impose sanctions pursuant to Section 105(a) of the Bankruptcy Code. Section 105(a) confers statutory and inherent authority upon the bankruptcy court to impose sanctions. In re Rimsat Ltd., 212 F.3d 1039, 1049 (7th Cir. 2000). “The Supreme Court has cautioned that because of the ‘very potency’ of a court’s inherent power, it should be exercised ‘with restraint and discretion’.” United States v. International Brotherhood of Teamsters, 948 F.2d 1338, 1345 (2nd Cir.1991) quoting Chambers v. NASCO, Inc., 501 U.S. 32, 44, 111 S.Ct. 2123, 2132, 115 L.Ed.2d 27 (1991).
Finova and the Guarantors argue that the Sanction Motion should have been brought under Bankruptcy Rule 9011, the argument being that a party should not be denied the benefit of the “safe-harbor” provision under that rule. Although it is preferable, there does not appear to be a requirement that the Court employ the Bankruptcy Rule 9011 sanction procedures before considering Section 105 sanctions. See Rimsat, 212 F.3d at 1048:
A sanctioning court should ordinarily rely on available authority conferred by statutes and procedural rules, rather than its inherent power, if the available sources of authority would be adequate to serve the court’s purposes. But, this rule does not require the sanction imposed ... to be reversed. To begin with, the bankruptcy court acted pursuant to its statutory authority under 11 U.S.C. § 105(a) as well as its inherent powers ... Moreover, a sanctioning court is not required to apply available statutes and procedural rules in a piecemeal fashion where only a broader source of authority is adequate to justify all the necessary sanctions. The bankruptcy court was justified in resorting to 11 U.S.C. § 105(a) and its inherent powers in order to ensure that all the culpable parties received an appropriate sanction and did not abuse its discretion in *574declining to sanction ... under Bankruptcy Rule 9011 or 7026.
(citations omitted).
Sanctions under Section 105(a) are justified when the “court has clearly found that a litigant ‘intentionally abused the judicial process in an unreasonable and vexatious manner.’ ” In re Collins, 250 B.R. 645, 657 (Bankr.N.D.Ill.2000) citing Rimsat, 212 F.3d at 1047 (emphasis supplied). The party requesting sanctions has the burden of proof. In re McNichols, 258 B.R. 892, 902 (Bankr.N.D.Ill.2001). When the request for sanctions is serious, as it is here, the court must give it serious attention, which necessarily requires specific findings. Szabo Food Service, Inc. v. Canteen Corp., 823 F.2d 1073, 1084 (7th Cir.1987), cert. dismissed Szabo Food Service, Inc. v. Canteen Corp. 485 U.S. 901, 108 S.Ct. 1101, 99 L.Ed.2d 229 (1988). In this regard, the court should consider whether the challenged-actions were without color and taken for improper purposes such as harassment or delay. In re 680 Fifth Ave. Associates, 218 B.R. 305, 324 (Bankr.S.D.N.Y.1998) (citations omitted).
The Trust has not satisfied its burden of proof. First, the Stay Motions had a reasonable basis in fact and law. As stated above, the authority relied upon by Finova and the Guarantors was good law when the Stay Motions were filed. In addition, the facts could support such a request. Granted, there may have been cases standing for the alternative proposition or the facts here may have been distinguishable, but Finova and the Guarantors were certainly within their rights to assert the Stay Motions.
Moreover, the Trust has not brought forth any evidence that would indicate that the actions of Finova, the Guarantors or their respective counsel, rose to the level of unreasonableness and vexatiousness necessary to establish sanctionable behavior. The Court cannot make specific findings of sanctionable conduct on this record. See id. (court denied request for sanctions because movant failed to provide any convincing evidence that the filing of a pleading or conduct of counsel was improper, “either because the claims asserted were without color or because the motives underlying the filing of the complaint and the challenged actions were impure.”) and In re Evanston Beauty Supply, Inc., 1992 WL 111107, at *4 (Bankr.N.D.Ill. May 01, 1992) (court refused to entertain competing sanction requests, where parties failed to introduce evidence to support their allegations).
The explanations offered at the October 31st Hearing by counsel for Finova and the Guarantors concerning the motivations for filing the Stay Motions were not made under an oath. On the other hand, the Trust did not ask that counsel be sworn and submit to cross-examination. Instead, the Trust indicated its consent for the Court to rule on the pleadings.
The Trust places great emphasis on the fact that Finova and the Guarantors waited approximately four months after the filing of the Guarantors’ Dismissal Motion to file the Stay Motions, after the Guarantors’ Dismissal Motion was fully briefed. The delay in filing the Stay Motions is seen by the Trust as evidence of an unreasonable multiplication of proceedings. The Court disagrees. As stated above, the Stay Motions were reasonably grounded in fact and law. Filing the Stay Motions after completion of briefing the Guarantors’ Dismissal Motion did not delay proceedings. To explain, all that remained to be done after the Guarantors’ Dismissal Motion was fully briefed, was for the Court to rule. The stay, if granted, would most likely be of relatively short duration, in place until the Finova Plan was confirmed. After the confirmation of the Finova Plan, *575the stay would have terminated and the Court could rule on the Guarantors’ Dismissal Motion, since it was fully briefed. Moreover, the Court could have denied the Stay Motions, in which case, the Court could consider the Guarantors’ Dismissal Motion without having to wait for completion of briefing.
Finally, the comments made at the August 1st Hearing, cited above, indicate that the Trust’s counsel knew that the Stay Motions would be withdrawn as moot if and when the Finova Plan was confirmed in the near future at that time. Nevertheless, the Trust’s counsel insisted on a response deadline. There is nothing in the record for the Court to find that Finova, the Guarantors and/or their respective counsel knew that the Stay Motions would eventually be withdrawn, but intentionally, vexatiously and unreasonably let the time go by so the Trust would spend more money. Rather, what appears to have happened here is an unfortunate lack of communication. As discussed at the October 31st Hearing, counsel for the Trust was waiting for a telephone call or some communication from Finova and/or the Guarantors that the Finova Plan was confirmed and the Stay Motions were withdrawn. At the same time, Finova and the Guarantors were waiting for an inquiry from the Trust’s counsel as to the status of the Finova Plan confirmation.
Finally, Finova’s counsel has advised that Finova will not seek sanctions against the Trust for bringing the Sanction Motion in order to avoid further litigation. The Court appreciates this sentiment. Fino-va’s counsel did request, however, that the Trust’s counsel be directed to send copies of this Memorandum Opinion and the underlying pleadings to the Trust, in order to ensure that the trustees of the Trust who are charged with reining in litigation costs are aware of what is transpiring. The Court will not enter such an order as the Court is satisfied with the Trust’s counsel’s representation that the Trust is being kept aware of these matters.
For the reasons set forth above, the Court denies the motion of Liquidating Grantor’s Trust of Proteva, Inc. and Pro-teva Marketing Group, Inc. for sanctions. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493266/ | OPINION
LARRY L. LESSEN, Bankruptcy Judge.
These matters were remanded to this Court by the United States District Court for an elaboration of this Court’s rationale in partially denying the Motions for Additional Attorney’s Fees filed by Vicki A. Dempsey and Marcia L. Moellring in the above-captioned eases.
On February 16,1999, Vicki A. Dempsey filed an unverified Motion for Additional Attorney’s Fees in five separate bankruptcy cases, four of which are captioned above.1 In each case, Ms. Dempsey provided the Court with an unverified itemization setting forth her time expended and services rendered, and in each case Ms. Dempsey calculated her fee by multiplying the hours expended by her hourly rate of $110. This Court scheduled a hearing on the Motions for March 31, 1999. Ms. Dempsey did not appear at the hearing; Ms. Moellring did appear. The Court asked Ms. Moellring what, if any, evidence she intended to present in support of the Motions for Additional Attorney’s Fees. Ms. Moellring indicated that she had no evidence to present and that it was her intent to stand on the Motions as filed. The Court then took the matters under advisement.
On May 7, 1999, this Court issued its Orders and Opinions (“Opinions”) in the above-captioned cases allowing Ms. Dempsey’s requests for additional fees up to $1,000 in each of the four cases but denying the motions as to the remainder.2 Ms. Dempsey had sought fees totaling $1,166 in the Epperson case, $1,210 in the Bond case, $1,276 in the Huber case, and $1,309 in the Hatfield case.
On May 14, 1999, Ms. Dempsey filed her notices of appeal, and on December 8, 1999, the United States District Court en*592tered its Order remanding these matters to the Bankruptcy Court for an elaboration and more detailed explanation as to why Ms. Dempsey’s Motions for Additional Attorney’s Fees were partially denied.
In all four cases subject to this appeal and remand, the rationale for denying the motions as to amounts in excess of $1,000 was the same. In its Opinions, this Court, citing well-established authority, held that the burden of proof to show entitlement to the fees requested is on the applicant. See In re Kenneth Leventhal & Co., 19 F.3d 1174, 1177 (7th Cir.1994); In re Price, 143 B.R. 190, 192 (Bankr.N.D.Ill.1992), aff'd 176 B.R. 807, aff'd and remanded 42 F.3d 1068 (7th Cir.1994); In re Stoecker, 114 B.R. 965, 969 (Bankr.N.D.Ill.1990); In re Thorn, 192 B.R. 52, 55 (Bankr.N.D.N.Y.1995).
With respect to the actual time expended in the above-captioned cases, the Court gave Ms. Dempsey the opportunity to present evidence or testimony. She declined to do so. In ruling on the Motions for Additional Fees, the Court did not dissect each time entry on Ms. Dempsey’s itemizations because the Court, again citing accepted precedent, held that reasonable time does not necessarily include all time actually expended. See In re Chas. A. Stevens & Co., 105 B.R. 866, 870-71 (Bankr.N.D.Ill.1989). Rather, the Court, held that Ms. Dempsey had failed to meet her burden of proof that the facts and circumstances of each of the cases justified the amount of time billed.
This Court has found that the amount of time expended by an attorney on a case or a particular task is not always a good indicator of the reasonableness of a fee being sought. For example, most experienced Chapter 13 attorneys are able to avoid having to appear in court multiple times before a Chapter 13 plan is confirmed. Improperly prepared or incomplete schedules, an attorney’s lack of preparation for the meeting of creditors, and an attorney’s failure to understand how Chapter 13s are handled by the Trustee and the Court result in more time being expended on the confirmation process than is reasonable.
In addition, the amount of time an /attorney spends on any type of matter depends to a large extent on that attorney’s ability to delegate duties to members of his or her staff. The use of computers and para-professionals have significantly reduced the amount of attorney time required to complete a Chapter 13 case. Any duty which does not require the knowledge or skill of an attorney should be performed by a non-attorney. It is unreasonable for an attorney to bill his or her time at his or her normal hourly rate for tasks which can and should be performed by a secretary or paralegal. See In re Wildman, 72 B.R. 700, 727 (Bankr.N.D.Ill.1987). As an example, it should not require a significant amount of attorney time to prepare the bankruptcy schedules. The attorney should supervise the preparation, not do the keyboarding. If the attorney does the keyboarding, he or she should not request fees in excess of those which would be charged for the services of a paralegal or secretary. An experienced Chapter 13 attorney with a competent staff needs no more than three or four hours of actual attorney time, in addition to, perhaps, several hours of staff time, to complete a typical Chapter 13 case. Given the allowance of fees of $1,000 in each case, this would result in an effective rate in excess of $200 per hour.
With respect to her hourly rate, the Court did not accept (nor did it expressly reject) Ms. Dempsey’s contention that her hourly rate of $110 was reasonable. Rather, the Court noted that it was aware of *593experienced Chapter 13 bankruptcy attorneys practicing in the Quincy area whose hourly rate is in the $90 to $100 per hour range. More importantly, the Court also noted that Ms. Dempsey, though given the opportunity to do so, had offered no evidence to support her assertion that her hourly rate was reasonable. Again, finding that the burden of proof clearly rests on the applicant, the Court declined to find Ms. Dempsey’s hourly rate to be reasonable.
Beyond the reasonableness of the time expended and the hourly rate, this Court noted that, on December 22, 1998, the United States District Court for the Central District of Illinois adopted a new policy regarding the review level for attorney’s fees in Chapter 13 bankruptcy cases, raising the review level from $800 to $1,000. See In re Kindhart et al., Case Nos. 97-3311, 97-3312, 97-3313 (C.D. Ill. Dec. 22, 1998 Mills, J.). This Court went on to apply the factors set forth in the landmark case of Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974) and to find that the four above-captioned Chapter 13 cases were among the:
more simple and straightforward that the Court and Ms. Dempsey (or Ms. Moellring) have seen. There was nothing difficult or unusual about it. There were no novel or difficult questions raised and the confirmation process was a smooth one. In addition, there has been nothing which has occurred post-confirmation to merit a higher fee. There is no evidence that Ms. Dempsey (or Ms. Moellring) was precluded from other more lucrative employment, nor were there any special time limits imposed by the Debtors or their circumstances. Ms. Dempsey (or Ms. Moellr-ing) are adequately experienced and able to represent the Debtors, and this case is no more undesirable than any other Chapter 13 case. Finally, so far as the Court knows, there was nothing unusual about the nature or length of Ms. Dempsey’s (or Ms. Moellring’s) professional relationship with the Debtor.
Opinions at pp. 6-7.
During the Kindhart proceedings, the United States District Court for the Central District of Illinois adopted a policy regarding the “review level” for attorney’s fees in Chapter 13 bankruptcy cases. It is this Court’s understanding that the implementation of a “review level” means that, in cases which the Bankruptcy Court finds to be typical, uncomplicated Chapter 13 cases with smooth confirmation processes and no novel issues, no difficult questions, and few if any additional complications, the threshold $1,000 fee is and should be deemed presumptively reasonable. Of course, an applicant is always free to seek a fee higher than the “review level”, but that applicant must show specifically how and why a ease merits a fee in excess of the $1,000 threshold. See In re Geraci, 138 F.3d 314, 321 (7th Cir.1998).
One of the purposes of setting the $1,000 threshold for routine Chapter 13 cases was to save the attorney and the Court time when dealing with the large volume of cases which are simple, straightforward, routine, and contain no new issues of law. Under this system, the Court, its staff, the standing Trustee, and the U.S. Trustee are not required to review every petition for fees, but may assume the amounts of fees paid are reasonable and fair. This system also shows appropriate concern for the interests of the unsecured creditors whose interests are affected because attorney fees affect the dividend paid to them in the Chapter 13 plan.
This system is beneficial to the attorney as well. The attorney is not required to file an application to be hired and is not *594required to keep time records. Admittedly, because each set of facts is different, the attorney will make a bit more profit in some cases than in others. In fact, there may be a rare occasion when the attorney is not fairly compensated. However, overall, the fee structure should make the vast majority of cases profitable. On those rare occasions when this is not the case, the attorney is always free to file a motion for additional fees and a complete fee application.
One disadvantage of having a threshold fee is that, as in the cases before the Court, the threshold fee becomes the minimum fee. Chapter 13 debtors are required to devote their income in excess of reasonable monthly expenses to their Chapter 13 plan. Once this amount is determined, it then becomes the fixed monthly payment devoted to funding the Chapter 13 plan. Consequently, the debt- or normally no longer has a financial interest in these funds or in how they are distributed. The trustee’s statutory fee is determined as a percentage of the amount paid into the plan, and that fee is not affected by the attorney’s fee. Accordingly, there is no incentive to the attorney or to the trustee to limit or restrict the attorney’s fee and, as a result, the highest allowable fee is almost always requested. In actuality, it is the unsecured creditors who bear the brunt of this system because it is their dividend which is adversely affected by higher attorney fees. Because the dividend being paid to most unsecured creditors is modest, the system is not set up to encourage unsecured creditors to contest applications for fees. Thus, the only protection afforded to the interests of unsecured creditors must come from the Court.
In the Springfield division of the Central District of Illinois, there were 253 Chapter 13 cases filed in 1999. During the Kind-hart proceedings, the Court heard from five Chapter 13 bankruptcy attorneys who are responsible for 108 of the 253 Chapter 13 cases filed in 1999. These attorneys were clear that they do not have a problem with the fees awarded in this division, nor, apparently, do any of the other 51 attorneys who filed Chapter 13 cases in 1999.
Ms. Dempsey filed 16 Chapter 13 cases in 1999, and she is the only attorney who is constantly concerned that Chapter 13 bankruptcy attorneys are undercompen-sated in this division. This Court has reached the inescapable conclusions that Ms. Dempsey’s difficulty lies with her inefficiency and that her net earnings would increase in Chapter 13 cases if she were able to remedy that problem.
As stated above, to satisfy the burden of proving reasonableness, a fee applicant must establish that the time expended and the hourly rate are reasonable. It is not, in this Court’s estimation, sufficient for an attorney to present the Court with an unverified motion seeking additional fees supported by no evidence or testimony regarding the reasonableness of the time expended or the hourly rate. In the four cases at issue, this Court reached its conclusions regarding the reasonableness of requested fees having the benefit of the complete court record. The Court reviewed the entire case file in each case, presided over each of the hearings, evaluated the value and necessity of Debtors’ counsel’s role at each step, and is very familiar with the amount of time and effort required by competent debtors’ counsel to complete the tasks required by each case. This Court has not and will not ever intentionally deny fees to any professional coming before it for approval of fees when the Court is able to find justification for the request. However, a professional must affirmatively prove his or her entitlement to extraordinary fees in a run-of-the mill *595case; the Court cannot and should not presume entitlement without any evidence of reasonableness.
Thus, this Court’s rulings in the above-captioned cases are based primarily on (i) its understanding of the mandate in Kind-hart and the “review level” for fees in routine Chapter 13 cases, and (ii) the case law which places the burden of proof in these matters squarely upon the applicant. The Court is not attempting to “sidestep” the direction of the District Court on remand. However, the law is clear that the burden of proving that the attorney fee requested by an applicant is reasonable rests on the applicant. In this case, Ms. Dempsey did not appear at the hearing on her Motions for Additional Attorney’s Fees. Instead, she was represented by Ms. Moellring, who presented no evidence.
Ms. Dempsey stated in her brief to the District Court that no transcript of the March 31, 1999, hearing was available. Ms. Dempsey is incorrect. The transcript was obtained by the Court from the official court reporter, and a copy of that transcript is attached to this Opinion. The transcript shows that Ms. Dempsey chose not to appear at the hearing. When the Court inquired as to whether Ms. Dempsey intended to present any evidence in support of her Motions, Ms. Moellring stated that she did not. In fact, Ms. Moellring said that she would rely solely upon the Kindhart decision.
Surely the District Court can appreciate the dilemma presented to the Bankruptcy Court. The applicant submitted an unverified motion for fees, to which a statement of time expended was attached. A hearing was scheduled, and the applicant failed to appear in person. At that point, the Court could not question the applicant about the time expended or about the reasonableness of the services rendered or whether they were necessary and beneficial to the estate. This Court cannot believe that, by failing to appear at a scheduled hearing, the applicant has successfully shifted the burden to the Bankruptcy Court to prove that the requested fees are unreasonable. Yet, based upon comments by her counsel at the hearing, Ms. Dempsey apparently takes the position that the Kindhart decision supports the premise that she should be awarded any fees for which she applies in the future without interference or questioning by the Court as to their reasonableness.
This Court’s reading of the Kindhart cases is quite different. The Court of Appeals remanded the case to the District Court to raise the standard fee allowed in Chapter 13 proceedings in the Central District of Illinois. Upon consultation with the bankruptcy judges, that fee was set by the District Court at $1,000 per case, subject to review every two years.
At this point in the Kindhart proceeding, and for the sake of judicial economy, the Bankruptcy Court recommended to the District Court that Ms. Dempsey’s fee applications be allowed in the amounts requested. By this point in time, there had been one hearing resulting in an opinion, one appeal to the District Court resulting in an opinion, a remand to the Bankruptcy Court resulting in an opinion, an appeal again to the District Court with a resulting opinion, an appeal to the Seventh Circuit with a resulting opinion, and a remand to the District Court, followed by an en banc meeting of the District Court and Bankruptcy Court with an additional opinion. Finally, the case went to the Seventh Circuit for final disposition.
This history of Kindhart and the amount of judicial resources consumed by it was the sole basis for this Court’s recommendation that the fees be allowed in the amounts requested. It was this Court’s hope that the allowance of these *596fees (from funds which would otherwise be payable to the unsecured creditors) would make Ms. Dempsey feel it unnecessary to request additional fees for the appeals. At this point, thankfully, the matter was concluded.
After reviewing all of the orders and opinions in the Kindhart cases, this Court finds no statement approving the reasonableness of Ms. Dempsey’s $110 hourly rate. In fact, to this day Ms. Dempsey has never offered evidence to the Court of what a reasonable hourly rate would be for her services. She has told the Court that she believes she is entitled to this hourly rate and that, on occasion, some judges in other courts have allowed her this rate. She has also stated that other attorneys often receive this hourly fee. However, she has never brought another attorney before the Court to state what a reasonable hourly rate is in the Quincy area or to testify that her specific hourly rate is reasonable. She has certainly never provided testimony from a colleague that her fees in any of the cases before this Court are reasonable based upon the services provided.
In these cases, the Court also notes that Ms. Dempsey has never filed an application to be hired by the estate as required by Section 330 of the Bankruptcy Code. She has only filed a statement of fees required by Bankruptcy Rule 2016. Of more concern, she has never sought authority of the Court to represent the estate post-confirmation. Technically, then, Ms. Dempsey should not be compensated for any services rendered post-confirmation.
In summary, Ms. Dempsey chose not to appear at the March 31, 1999, hearing. Instead, she placed her total reliance for the allowance of her Motions on the Kindhart decision. Under these circumstances, the Court did not have any evidence upon which to justify a deviation from the threshold $1,000 fee. Nothing in any of the cases was atypical; these were all routine Chapter 13 cases. There is nothing in Ms. Dempsey’s itemization to indicate that the cases were unusual or that she did anything extraordinary to benefit the estate.
To this Court, it is clear that the only effect of Kindhart was to establish $1,000 as the threshold fee in Chapter 13 cases in the Central District of Illinois. It certainly does not outline how initial and subsequent fee applications are to be evaluated. Based upon the record and the precedent, the Court has done its best in adjudicating the Motions for Additional Attorney’s Fees in these cases and has followed the letter and spirit of Kindhart. If this Court’s rationale and/or conclusions are in error, perhaps the District Court could provide specific guidelines for evaluating similar fee applications in the future.
. Although the Motion for Additional Attorney's Fees in Case No. 95-72240 was filed by Ms. Dempsey, the fees at issue relate to services rendered by Marcia L. Moellring, a partner of Ms. Dempsey. This Court, like the District Court, will refer to the applicant in all five cases as Ms. Dempsey for ease of refer-
. In the fifth case, Ms. Dempsey's requested fees did not exceed $1,000. Her Motion for Additional Attorney's Fees was allowed, and the Order allowing the Motion was not appealed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493318/ | OPINION AND ORDER ON OBJECTION TO CONFIRMATION
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on an objection to confirmation filed by Deborah A. Wildi. The Court heard the matter on February 12, 2002.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the General Order of Reference entered in this district. This is a core matter which this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(L).
The debtor has proposed a plan which pays $2,000 each month to the trustee for payment in full of all allowed secured and priority unsecured claims and a 5% dividend for unsecured creditors. Deborah Wildi is the wife of the debtor and a party to a contested divorce action. She opposes confirmation of the debtor’s plan on the grounds that the plan is proposed in bad faith and is not feasible.
Mrs. Wildi, despite efforts and a continuance of the hearing date, was unable to obtain an attorney to represent her in this matter. Her objections were dependent on certain factual showings. Although she spoke about many matters, she did not call any witnesses or introduce any exhibits into the record. Her statements, to the extent the Court understood them, alleged both that the debtor had more assets than he disclosed and that he had fewer assets, or at least assets of less value, than was disclosed. She questioned his expenses, but did not call him as a witness about the discrepancies she discussed.
The chapter 13 trustee has recommended confirmation of the debtor’s plan. There has been a relief from stay order entered to permit the divorce action to proceed. Certain determinations by the state court may result in claims Mrs. Wildi *530may assert in this case. At this point, this Court believes all parties may be better served if this chapter 13 plan is confirmed and some stability is provided for the financial obligations between these parties. Therefore, based on a lack of evidence for the factual matters asserted in support of the objection and based on the Court’s review of the proposed plan, the Court OVERRULES Mrs. Wildi’s objection to confirmation. An order confirming the chapter 13 plan will be entered forthwith.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493319/ | OPINION AND ORDER DENYING CROSSMOTIONS FOR SUMMARY JUDGMENT AND SETTING NEW TRIAL DATE
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the crossmotions for summary judgment filed by plaintiff, Sara J. Daneman, the duly appointed chapter 7 trustee for this bank*849ruptcy estate, and defendant Bank One, N.A.
This Court has jurisdiction over this matter pursuant to 18 U.S.C. § 1334 and the General Order of Reference entered in this district. This is a core matter which this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(F).
Rule 56 of the Federal Rules of Civil Procedure is made applicable to this proceeding by Bankruptcy Rule 7056. It permits either a claimant or a defending party to move with or without supporting affidavits for a summary judgment in that party’s favor. The Court shall render summary judgment if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c).
The fact that both parties have filed motions for summary judgment does not change the standards by which courts must evaluate such motions. Taft Broadcasting Co. v. United States, 929 F.2d 240, 248 (6th Cir.1991). Courts are still required to resolve each motion on its own merits drawing all reasonable inferences against the party whose motion is being considered. Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1391 (Fed.Cir.1987). Where genuine issues of material fact remain, summary judgment is not proper for either movant. Id.
The trustee timely commenced this action on October 25, 2000, seeking to avoid and recover the transfer of $10,611.08 to the defendant as a preference. Title 11, United States Code, Section 547(b) provides that the trustee may avoid any transfer of an interest of the debtor in property to or for the benefit of a creditor; made on account of an antecedent debt; made while the debtor was insolvent; made within 90 days of the filing of the debtor’s petition; and which enabled the creditor to receive more than such creditor would have received had the transfer not been made and the creditor received a distribution under chapter 7. If the trustee satisfies each of these elements by a preponderance of the evidence, she would be entitled to recover the $10,611.08 from the defendant under § 550(a) of the Bankruptcy Code.
The only issue the parties dispute is whether the transfer of the $10,611.08 to the defendant was a transfer of an interest of the debtor. Thus, the other elements of the preference statute are deemed satisfied.
With respect to the sole remaining issue, the parties agree that the debtor had an unsecured line of credit with the defendant beginning in July 1995. In April 2000, the debtor was experiencing serious financial problems and asked his son to pay off the balance of this line of credit. After an initial attempt to transfer the funds electronically failed, the debtor’s son issued a check to the defendant in the amount of $10,611.08 to pay off the line of credit.
The trustee characterizes this payment as a loan to the debtor by his son. As such, the debtor would have had an interest in the funds transferred. The defendant argues that under the earmarking doctrine, the funds never belonged to the debtor since the transfer was made directly from the debtor’s son to the defendant. The trustee counters that the earmarking doctrine does not apply under the facts of this case because the debtor, and not his son, chose the creditor to be paid.
The Sixth Circuit has held that when a third party lends money to a debt- or to enable the debtor to satisfy the debt owed to a specific creditor, the proceeds of that loan are not generally the property of the debtor. Mandross v. Peoples Banking Co. (In re Hartley), 825 F.2d 1067, 1070 (6th Cir.1987). In Rabin v. B & M Realty *850Corp. (In re Plechaty), 201 B.R. 486, 491 (Bankr.N.D.Ohio 1996), the bankruptcy court noted, however, that the rule in Hartley applied in general to those cases in which the lender, and not the debtor, selects the creditor to be paid.
It seems to this Court that what was at issue in Hartley and the other earmarking cases is the extent of the debt- or’s control over the money. If the debtor never controlled the money, the money never became part of his assets and, accordingly, there could not have been a diminution of his estate. 825 F.2d at 1070.
Each of the parties has cited to particular excerpts from the depositions on file of the debtor and the debtor’s son to support the proposition that the debtor did, or did not, have dispositive control over the transferred funds. Neither party, however, has convinced this Court of the absence of genuine issues of fact material to this issue. Without live testimony, the Court is simply not in a position to judge the credibility of the witnesses. Furthermore, credibility findings are not appropriate in the context of a motion for summary judgment, but rather must be determined at trial.
Based on the foregoing, the crossmo-tions for summary judgment are DENIED. Trial of this matter, on the sole issue remaining, is hereby rescheduled to January 8, 2002, at 2:30 p.m., in Courtroom C, Fifth Floor, United States Bankruptcy Court, 170 North High Street, Columbus, Ohio 43215.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493320/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW AND ORDER GRANTING AND DENYING SUMMARY ADJUDICATION OF ISSUES AND GRANTING SUMMARY JUDGMENT
THOMAS B. DONOVAN, Bankruptcy Judge.
The cross-motions of defendant Union Bank of California, N.A. (Union Bank), and plaintiff Martin M. Schultz (Schultz) for summary judgment, and, alternatively, for summary adjudication were heard on December 17,1998, and February 11,1999. Sulmeyer Kupetz Baumann & Rothman, by Alan G. Tippie and Donald Rothman, and James A. Frieden appeared for Schultz. Pillsbury Madison & Sutro LLP, by Robert L. Morrison and Leanna B. Einbinder, appeared for Union Bank.
The court read and considered the cross-motions and all papers in support and opposition. At the hearings, the court heard and considered the argument of counsel. The court also heard and considered the argument of counsel at a prior hearing regarding the cross-motions, held on December 9, 1998. The court, being fully informed of the issues presented to it for decision, makes the following findings of material facts without substantial controversy and conclusions of law:
FINDINGS OF MATERIAL FACTS WITHOUT SUBSTANTIAL CONTROVERSY
1. This is a lawsuit about a lawsuit about another lawsuit.
A Brief Outline Of The Background Of This Dispute1
2. The earliest lawsuit, which I will call the Fulton Litigation, began in 1984. The Fulton Litigation developed as follows: Commencing around 1982, Union Bank entered into a series of agreements with Fulton Associates relating to certain promissory notes executed by Fulton Associates, and the bank acquired certain interests in these promissory notes. Commencing about 1984, Fulton Associates filed complaints against Union Bank and other parties relating to the promissory notes described above. Two of these were filed in the Los Angeles Superior Court and were entitled Fulton Associates, et al. v. SMC Real Corp., et al., Los Angeles Superior Court, Nos. C 547248 and C 554554. Around 1987, a cross-complaint was filed naming Union Bank and Schultz as cross-complainants in the action described above. The Fulton Litigation ended in a judgment in favor of Schultz in 1996. That judgment is now final as to all parties except Schultz. Schultz just recently has sought and obtained relief from stay to prosecute his defense of the judgment debtor’s appeal from the Fulton Litigation judgment in Schultz’ favor.
3. The second lawsuit, referred to herein as the State Court Litigation, was *878filed in 1991 by Union Bank against Schultz in the Los Angeles Superior Court, No. BC 042505. Schultz filed a cross-complaint against Union Bank. Trial began in late 1996.
4. Schultz filed his chapter 11 petition pro se on November 14, 1996, and I granted Schultz’ motion for relief from stay shortly after to enable the parties to continue prosecuting the State Court Litigation.
5. In his Interim Statement of Decision, issued on February 18, 1997, after the liability phase of the trial, Judge Peter Smith (a retired superior court judge sitting as a referee), concluded that Union Bank was entitled to no recovery and that Schultz was entitled to prevail on his cross-complaint against Union Bank on Schultz’ claims for rescission, fraud, breach of an implied covenant of good faith and fair dealing, breach of oral and written agreements and cancellation of a $400,000 note secured by a deed of trust on Schultz’ home.
6. Pursuant to a Confidential Settlement Agreement (CSA) between Schultz and Union Bank, dated April 7, 1997 (that I reviewed and approved later that month, after a hearing conducted in camera), the rights and obligations of Schultz and Union Bank in the State Court Litigation were partially settled. The agreement was treated as confidential at the parties’ request because they wanted to prosecute their claims in the State Court Litigation to a Final Judgment after all appeals without alerting the judges involved to the terms of the settlement. The parties agreed in the CSA that the “damages phase” of the State Court Litigation could proceed to a “Final Judgment” after all appeals, pursuant to agreed procedures.
7. In October 1997, Judge Smith in his Final Decision awarded Schultz substantial damages and confirmed Schultz’ right to rescind an Assignment, Indemnity and Security Agreement (AISA) with Union Bank. The AISA apparently was associated with Schultz’ involvement with Fulton Associates.
8. The third lawsuit now before this court was filed by Schultz against Union Bank in 1998, after I approved the CSA, and after Judge Smith’s Final Decision awarding damages and rescission to Schultz, but prior to the Final Judgment in the State Court Litigation. In this third lawsuit, Schultz sought declaratory relief, rescission of the CSA, restitution, compensatory and punitive damages, attorneys’ fees and costs. Union Bank in response did not assert any claims for affirmative relief but asked for an award of attorneys’ fees and costs.
9. Schultz and Union Bank have filed cross-motions for summary judgment and for summary adjudication. Those motions have been exhaustively briefed, documented and argued. I announced oral rulings at hearings on December 17, 1998 and February 11, 1999. These findings and conclusions are intended to document most of those rulings and to modify my ruling as to the “prevailing party” issue. Evidentia-ry rulings that were announced on December 17 are documented in a separate order.
The Origins Of The Confidential Settlement Agreement
10. The precipitating factor in the filing of Schultz’ bankruptcy was the prospective foreclosure on Schultz’ home by First Federal Savings & Loan, the first trust deed holder. Shortly after Schultz’ chapter 11 petition was filed, First Federal moved for relief from stay. At the time, Schultz did not have the funds to bring the first trust deed current. I granted relief from stay to First Federal but allowed Schultz until February 19, 1997 to cure the First Federal arrearages.
11. During the liability phase of the State Court Litigation, Schultz informed *879Judge Smith of his financial predicament in papers opposing a request by Union Bank for a continuance. On February 18, 1997, the day before the scheduled foreclosure sale of Schultz’ home by First Federal, Judge Smith entered his Interim Statement of Decision finding that Union Bank was liable to Schultz for compensatory and punitive damages for fraud, breach of fiduciary duty and breach of contract and that Schultz was entitled to rescind the AISA.
12. Based upon Judge Smith’s Interim Statement of Decision, I granted Schultz additional time to bring the payments on the First Federal trust deed current and thereby save his home from foreclosure. However, I required Schultz to pay all the arrearages to First Federal by May 20, 1997. As of March 5, 1997, the arrearages were $83,077.95.
13. In March 1997, all of Schultz’ funding sources had fallen through and Schultz considered that the only possibility of saving his home rested on the possibility of a settlement with Union Bank.
14. With Schultz facing foreclosure and with Union Bank facing the damages phase of the State Court Litigation and the prospect of being subject to a substantial damage award, the parties began to negotiate a settlement in March 1997.
15. In these settlement discussions, Union Bank was represented by Pillsbury, Madison & Sutro. Schultz was represented by Frieden and Dunne, two sole practitioners.
16. Dunne took the leading role in negotiating the settlement agreement for Schultz. Frieden concentrated on preparing the damages phase of the state court trial. Chiate of the Pillsbury firm and Polkinghorn (assistant general counsel for Union Bank) negotiated for Union Bank. The negotiations were hurried.
17. After preliminary discussions, Chi-ate wrote to Dunne in March of 1997 laying out the terms of a settlement proposal. The letter states, in relevant part that:
Following consummation of the agreement, which will be confidential and not disclosed to the [state] court, the Bank will pay Schultz $3 million. That amount is non-refundable regardless of the outcome of the case.
If Peter Smith (or successor referee or judge) ultimately awards Schultz more that $9 million, including fees, costs interest, and final judgment, and this amount is affirmed on appeal the Bank will pay him an additional $1 million in cash, and provide him an annuity of $300,000 per year, guaranteed for 20 years, the first annual payment to commence one year after the annuity is purchased.
If the final judgment on appeal is less than $9 million, then Schultz will receive from the Bank the difference between the $3 million already paid and the amount of the final judgment.
18. Later the same day Chiate wrote to Dunne confirming additional conversations, including the following:
Whatever the “Tobias” amount is, we have not included or excluded that from negotiations, neither of us have agreed to how it would be included or excluded from this agreement....
19. “Tobias” referred to about $300,000 then held in an escrow account subject to a lien held by Schultz arising from the Fulton Litigation. These funds are discussed below and apparently have been referred to by the parties as the “Tobias II Funds.”
20. The first draft of the settlement agreement was produced on April 3, 1997, by Union Bank’s attorneys from Chiate’s correspondence with Dunne. Dunne and Frieden sent comments, many of which were not adopted by Union Bank’s attorneys but some of which were.
*88021. On April 4, 1997, Goss, a Pillsbury lawyer, wrote to Dunne stating:
We enclose two version[s] of the CONFIDENTIAL SETTLEMENT AGREEMENT (“Agreement”) between Union Bank and Mr. Schultz. The first Agreement is a clean copy which reflects the changes you recently conveyed to Ken Chiate, with some minor additional editorial changes. For ease of reference, the second Agreement is the handwritten “red-lined” version. The underlined portion represents your suggested changes. The bracketed portion represents the editorial changes.
We hope that the Agreement is now acceptable and ready for signature by you and Mr. Schultz. Please return an executed copy of the Agreement by facsimile to me as so[o]n as possible. We would appreciate you sending the original by mail today.
22. On the same day, April 4, 1997, Dunne faxed to Chiate a copy of the agreement. The parties were still tinkering with the agreement and further changes were made, but none of those changes are relevant to the issues in this adversary proceeding.
23. Union Bank meanwhile was attempting to disqualify Judge Smith from further participation in the State Court Litigation. Schultz’ attorney confirmed in a letter dated April 6, 1997 Schultz’ awareness of the bank’s disqualification efforts and the parties’ understanding that even if Union Bank were successful in disqualifying Judge Smith, Schultz would not have to wait to receive the unrestricted use of the initial $3 million payment from Union Bank. Schultz did not ask Union Bank to stop the disqualification process as a condition to the effectiveness and validity of the CSA. Ultimately, Union Bank’s disqualification effort failed.
24. A true and correct copy of the final executed CSA, dated April 7, 1997, is attached as Exhibit 1 to Schultz’ Second Amended Complaint herein.
25. Pursuant to Paragraph 1 of the CSA, Union Bank paid Schultz $3 million shortly after I approved the CSA later in April 1997.
Judge Smith’s Final Decision
26. On September 16, 1997, Judge Smith issued his Statement of Decision (Exhibit 1) which the parties and I refer to as the “Final Decision”. On September 18, 1997, Schultz elected to rescind the AISA. (Exhibit 18) On November 18, 1997, Judgment was entered in the State Court Litigation based upon Judge Smith’s Final Decision. The Judgment voided Union Bank’s $400,000 third trust deed on Schultz’ home, acknowledged Schultz’ rescission of the AISA, and awarded Schultz $1,119,183 in restitutionary damages, $11,960,046 in compensatory damages, and $18,000,000 in punitive damages. (Exhibit 27) Judge Smith’s Final Decision awarded Union Bank as return consideration (i) title to an escrow account in the Tobias II bankruptcy of approximately $300,000.00 [the Tobias II Funds], (ii) the Fulton Associates Judgment in the amount of $998,074 plus any accrued interest and (iii) title to any remaining unpaid notes secured by the Chase property. Union Bank’s motion for a new trial was denied. Attorneys’ fees and costs were awarded to Schultz.
The Appeal And Final Judgement
27. Union Bank appealed the Final Decision. Schultz elected a right accorded to him under the CSA to pursue the appeal with the use of privately employed judges. In the summer of 1998 the parties presented the State Court Litigation appeal to a panel consisting of retired California Supreme Court Chief Justice Malcolm Lucas, retired California Supreme Court Associate Justice Edward Panelli, and retired California Court of Appeal Justice Robert Feinerman. On October 6, 1998, the ap*881pellate panel rendered its decision, which the parties and I refer to as the “Final Judgment” (the language used in the CSA), (a) sustaining the compensatory damage award to Schultz and (b) reversing the $18,000,000 punitive damage award. The Final Judgment said in a concluding footnote that “... this opinion does not address or change any other damage award provided for in the trial court’s judgment.”
Union Bank’s Tender And Schultz’ Rejection
28. Based on the Final Judgment, by letters to Schultz dated October 1 and October 7, 1998, Union Bank claimed that it had complied with all the duties and obligations imposed upon it by the CSA, whether based on the Final Judgment, the State Court Judgment or the CSA. Among other things, Union Bank delivered to Schultz with its letters (a) a cashier’s check for $1,000,000 and (b) a reconveyance of the bank’s deed of trust on Schultz’ home and cancellation of the $400,000 note secured by the bank’s deed of trust. The bank also agreed to pay $3,856,782.96 immediately to an insurance company or other financial institution nominated by Schultz. Union Bank asserted that such sum represented an appropriate premium for the purchase of the annuity called for by the CSA.
29. In response to Union Bank’s letters, Schultz asserted that Union Bank was in material breach of the CSA and that Schultz thereby was discharged from any further obligation to Union Bank under the CSA.
30. The CSA provides that when all applicable appeals are exhausted, the parties will take any and all actions necessary to comply with paragraphs 2(a)-2(c) [of the CSA] (whichever is applicable) and to vacate any outstanding judgment against UNION BANK arising out of the [State Court Litigation] action (Los Angeles Superior Court Case No. 042505).
31. In late 1998, after the Final Judgment was issued, the parties stipulated that the confidentiality provisions of the CSA were no longer necessary, and I rescinded my early 1997 order sealing various pleadings and records herein relating to the CSA.
Some Of The Contractual Terms Disputed In This Adversary Proceeding
32. The term “annuity” as used in the CSA means an annual payment of money and is not reasonably susceptible to the meaning urged by Union Bank: an “annuity contract” that is sold by an insurance company or other annuity provider.
33. The term “provide” as used in the CSA in relation to the Union Bank annuity obligation is not reasonably susceptible to the meaning urged by Union Bank: that Union Bank has the option to substitute in place of its obligation the obligation of an insurance company or any other annuity provider and thereafter that Union Bank’s annuity obligation to Schultz is discharged.
34. The CSA is not reasonably susceptible to the meaning urged by Schultz that subparagraph 2(a) of the CSA was included solely for the benefit of Schultz. Rather, once the Final Decision was rendered in the State Court Litigation between Schultz and Union Bank sustaining an award of compensatory damages of more than $9 million to Schultz, Schultz did not have the contractual right to elect a lump sum payment instead of an annuity. Schultz does not now have the unilateral right to waive subparagraph 2(a) and to elect instead to proceed under subpara-graph 2(b) of the CSA.
35. After some earlier disagreement in this adversary proceeding, Schultz finally conceded that the first annuity payment under the CSA is to be made one year *882after the Final Judgment is entered in the State Court Litigation. Moreover, the evidence confirms that the first annuity payment under the CSA becomes payable one year after a Final Judgment is entered.
One Of The Problems Leading To The Present Dispute
36. At the time of the negotiation of the CSA, in March and April 1997, the AISA between Union Bank and Schultz was in force. Schultz had prayed for the right to rescind the AISA in the State Court Litigation (see Judge Smith’s Finding No. 5), but Schultz had not yet formally elected to rescind the AISA and was pursuing parallel fraud and breach of contract claims against Union Bank. Schultz owned the Fulton Judgment at that point. During 1997 and 1998, Schultz continued to pursue the Fulton Litigation, expending time and incurring substantial attorneys’ fees. Union Bank also asserted its Fulton Litigation/AISA rights against Schultz.
37. During that period, Union Bank initially did not'object to Schultz’ collection or use of what the parties refer to as the “Tobias II Funds,” but when Schultz rescinded the AISA after being allowed to do so in the State Court Litigation, Union Bank asserted the position that pursuant to the Final Judgment it thereby became the owner of the Tobias II Funds.
38. “Tobias II” refers to 9027 Tobias II, Ltd., a California limited partnership, the obligor on a secured note payable to Schultz in the face amount of $99,960 plus interest.
39. “Tobias” refers to a debtor in a 1982 chapter 11 case formally styled In re SMC-9027 Tobias Ltd., Case No. SV82-06963GM which was dismissed in 1994. During the pendency of the 1982 Tobias chapter 11 ease, the bankruptcy court on May 17, 1984 approved the sale of collateral securing a Tobias note and decreeing that the sales proceeds of that collateral, the so-called “Tobias II Funds”, were to be held in trust in a deposit account subject to Schultz’ lien, with the validity of that lien to be determined through the Fulton Litigation.
40. Throughout the Fulton Litigation, R. Wicks Stephens II and his firm of Stephens, Berg & Lasater (Stephens and the firm being referred to collectively hereinafter as “SBL”) were Schultz’ counsel of record.
41. In late 1992 or early 1993, Stephens and Schultz agreed that any Fulton Litigation recovery Schultz became entitled to would be paid to SBL to the extent necessary to pay SBL’s accrued Fulton Litigation fees, costs and expenses incurred on Schultz’ behalf.
42. On March 11, 1996, a Notice of Statement of Decision and Entry of Judgment was filed in the Fulton Litigation. Pursuant to the Statement of Decision (the Fulton Judgment), Schultz was awarded $1.2 million against Tobias and other entities and, among other things, the Tobias note was declared a valid obligation payable to Schultz. Thus, Schultz apparently was awarded the Tobias II Funds.
43. The Fulton Judgment later was supplemented by a minute order, that was entered on May 10, 1996. Pursuant to the minute order, Schultz was awarded attorneys’ fees against Fulton Associates and Tobias, jointly and severally, in the amount of $625,000 and costs of $20,037.57. Although the Fulton Judgment has been appealed, no bond has been posted and no stay has been granted. The appeal was stayed as to Schultz pursuant to the automatic stay resulting from the filing of Schultz’ bankruptcy case. As to all parties other than Schultz, the judgment has been affirmed and the judgment is now final. I signed an order on February 10, 1999 vacating the Schultz bankruptcy stay to enable Schultz to pursue the Fulton Litigation appeal process to its conclusion. *88344. As a result of its pre-bankruptcy work for Schultz in the Fulton Litigation for which it has not been paid, SBL filed a $938,095.37 proof of claim in Schultz’ chapter 11 case. On December 18, 1997, Schultz acknowledged in this court the validity, perfection, first priority and extent of SBL’s attorneys’ lien against the Tobias II Funds and affirmed his allowance of the amount asserted in SBL’s proof of claim.
45. By an order entered on December 29,1997,1 granted relief from stay to SBL to foreclose its interest in Schultz’ interest in the Tobias II Funds. Schultz spent considerable time and effort in December 1997 assisting SBL in its efforts to obtain this order for relief from the stay.
Schultz’ Claims Concerning The Fulton judgment, The Tobias II Funds And De-lag
46. In December 1997, Schultz levied on the Tobias II Funds (coincidentally held in a bank account at Union Bank standing in the name of attorney Robert Bass), pursuant to a writ of execution issued in the Fulton Litigation. Lisa A. Elizondo was Union Bank’s assistant vice president and legal process supervisor responsible for responding to Schultz’ levy.
47. Until March 26, 1998, Elizondo was not aware of the dispute or litigation between Schultz and Union Bank.
48. Elizondo received the levy notice on the Bass account about December 30, 1997. Because the funds were held in a third party’s name, Elizondo informed the sheriff that a 15-day notice to Mr. Bass was required under California law. The sheriff issued a third-party notice on January 15,1998.
49. Elizondo processed the levy routinely and in accordance with Union Bank’s normal procedures. Elizondo responded to the levy on January 12, 1998.
50. Before the 15-day third-party notice period to Bass had elapsed, Fulton Associates filed a motion to quash the writ of execution. Elizondo received Fulton Associate’s motion on or about January 26, 1998 and considered at that time whether the funds should be released or should be held until the motion was ruled upon by the court.
51. On the expiration date for the third-party notice, an entity named 9027 Tobias II Ltd, herein called “Tobias II”, filed a new chapter 11 petition, Case No. LA98-13778AA, automatically staying Schultz’ levy and thereby precluding Union Bank from turninq over the Tobias II Funds.
52. On February 26, 1998, Tobias also filed a motion to reopen its 1982 bankruptcy case.
53. The new Tobias II bankruptcy was dismissed on March 13,1998.
54. On about March 17, 1998, Elizondo received notice of the dismissal of the To-bias II bankruptcy case and Union Bank informed the sheriff that Union Bank needed a third-party demand from the sheriff before it could deliver funds pursuant to the pending levy.
55. The sheriffs office served the third-party demand on March 24, 1998.
56. On March 30, 1998, Elizondo issued instructions to have the funds in the account transferred to Schultz as directed by the levy.
57. On April 1, 1998, Elizondo had Union Bank prepare a cashier’s check for $313,821.36, and caused it to be sent to the sheriff.
58. Schultz’ estate had $1,650,217.70 in cash on hand as of April 2,1998.
59. Schultz also filed pleadings in December 1997 in his bankruptcy case in an apparent effort to assist his secured creditor SBL to obtain relief from the automatic stay so that SBL, as a secured creditor *884claiming a first priority lien on the Tobias II Funds, could exercise its rights against those funds. In those pleadings Schultz conceded “that he does not have any equity in the Tobias Proceeds pursuant to 11 U.S.C. Section 362(d)(2)(A), and that the Tobias Proceeds are not necessary to an effective [Schultz] reorganization pursuant to 11 U.S.C. Section 362(d)(2)(B).”
60. Schultz paid SBL in April 1998 with general funds, not by assigning to SBL the Tobias II Funds levied upon by Schultz. Schultz paid $316,796.36 to SBL in return for a release of SBL’s attorneys’ Men on the Tobias II Funds. The Tobias II Funds levied upon by Schultz were collected by Schultz after Schultz paid SBL.
61. While Schultz blamed his delay in obtaining a writ of execution on lack of funds to employ counsel, Schultz had access to sufficient funds for that purpose as early as September 1997.
62. Though Schultz obtained relief from the stay for SBL, Schultz, not SBL, was the party that levied on and ultimately collected the Tobias II Funds.
63. Any delays encountered by Schultz in collecting the Tobias II Funds were not caused by Union Bank.
64. Under the CSA, Union Bank and Schultz were expressly accorded the “right to complete the [State Court] litigation of the action to a final conclusion.”
65. One of the purposes of the CSA was “to resolve ... the issue of the minimum and maximum amount Schultz can recover in this [State Court] Action.” The parties considered it to be in their best interest and to their mutual advantage to enter into the CSA and “to settle, adjust and compromise all such matters and all such existing or potential disputes, while giving the parties the right to complete the [State Court] litigation of the action to a final conclusion.” The term “Action” in the CSA refers specifically to the State Court Litigation. The term “Action” does not refer to or include in any way the Fulton Litigation.
66. The CSA does not refer to the Fulton Judgment or Tobias II Funds. The CSA alludes to the Fulton Litigation in its opening recitals, apparently solely to put the State Court Litigation in context.
67. After affirming the $11,960,046 compensatory damage award to Schultz and reversing the $18,000,000 punitive damage award, the State Court Litigation Final Judgment expressly states that “this opinion does not address or change any other damage award provided for in the trial court’s judgment.” Thus, the parties’ interests in the Tobias II Funds and the Fulton Judgment were resolved in the Final Judgment.
68. In Mght of the foregoing, and based on a careful reading of the CSA, it would appear that the parties’ rights with respect to the Tobias II Funds, the Fulton Judgment and restitutionary damages in this adversary proceeding are offsetting, notwithstanding the CSA’s limit on Schultz’ maximum recovery. That is, Union Bank would not seem to be entitled to any recovery from Schultz except upon the condition that it makes the restitution to Schultz specified in the State Court Litigation Final Decision, Judgment and Final Judgment, over and above any other consideration called for or limited in the CSA.
69. Union Bank conceded that the issue of the $400,000 note, while not addressed in the CSA, was rendered moot by the Final Judgment which did not disturb that part of the Judgment in the State Court Litigation offsetting the $400,000 note against compensatory damages awarded to Schultz.
70. Union Bank has provided Schultz with a deed of reconveyance that cancels its deed of trust on Schultz’ home and has *885canceled Schultz’ $400,000 note payable to Union Bank.
Any of the above findings that more appropriately should be treated as a conclusion of law is hereby incorporated by reference in the following conclusions.
Based on the foregoing Material Facts Without Substantial Controversy, the court now makes the following conclusions of law:
CONCLUSIONS OF LAW
The Parol Evidence Rule And The CSA
1. The “parol evidence rule” in many of its permutations has been asserted by the parties on these motions. The parol evidence assertions cut both ways as to both parties under California law applicable in this adversary proceeding. The following principles have guided my evaluation of the parol evidence assertions:
a. First, parol evidence is appropriate to explain the surrounding circumstances and prior negotiations leading to the CSA, to explain terms implied by law, and to determine whether the CSA was intended to be an integrated agreement. I conclude that parol evidence is admissible for those purposes and that paragraphs 11 and 15 of the CSA establish that the parties intended an integrated agreement.
b. Second, parol evidence is inadmissible to vary the terms of the integrated agreement. Union Bank’s proffered evidence that the annuity obligation was intended to be satisfied by a contract purchased from an insurance company varies the terms of the CSA. The parties did not reach agreement on that point in the CSA. Thus, the bank’s evidence should be excluded. By the same token, Schultz’ proffered evidence that the payment date on the first annuity installment was the result of “scrivener’s error” varies the terms of the CSA. The parties did not reach agreement on the point asserted by Schultz. Schultz’ evidence should be excluded.
c. Third, evidence of fraud, mistake, lack of consideration or to explain ambiguities in the CSA should not be excluded. I have not excluded such evidence from my evaluation of the record. My findings and conclusions, I believe, reflect a proper consideration of the parties’ proffered evidence on each such issue.
2. The CSA is an integrated, feasible and enforceable contract.
3. Union Bank is obligated to make the annuity payments pursuant to the CSA. If Union Bank should elect to provide those payments through an annuity contract purchased from a third party, Union Bank would remain responsible for the payments to Schultz for the entire term of the annuity. I have considered all the evidence proffered by Union Bank to support an interpretation of the CSA that allows it to purchase an annuity contract from a third party and thereby discharge its annuity obligation to Schultz. Because I find the CSA to be an integrated agreement that is not reasonably susceptible to such an interpretation, the extrinsic evidence introduced by Union Bank is inadmissible pursuant to the parol evidence rule. Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33, 39-40, 69 Cal.Rptr. 561, 442 P.2d 641 (1968); Winet v. Price, 4 Cal.App.4th 1159, 1165, 6 Cal.Rptr.2d 554 (1992).
4. The CSA does not permit Schultz to waive the benefits of the annuity pursuant to CSA subparagraph 2(a) and elect to receive from Union Bank a lump sum payment under CSA subparagraph 2(b). I have considered all the evidence proffered by Schultz to support his contention that the CSA permits him to make such an election. Because I find the CSA to be an integrated agreement that is not *886reasonably susceptible to such an interpretation, the extrinsic evidence introduced by Schultz is inadmissible pursuant to the parol evidence rule. Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33, 39-40, 69 Cal.Rptr. 561, 442 P.2d 641 (1968); Winet v. Price, 4 Cal.App.4th 1159, 1165, 6 Cal.Rpfr.2d 554 (1992).
5. Schultz is not entitled to rescind the CSA. Schultz’ belief that he was entitled to elect the lump sum payment in lieu of the annuity does not constitute a mistake under either Civil Code Section 1577 or 1578 and is therefore not grounds for setting aside the contractual obligations under the CSA. Hedging Concepts, Inc. v. First Alliance Mortgage Co., 41 Cal.App.4th 1410, 1418-21, 49 Cal.Rptr.2d 191 (1996); B.E. Witkin, Summary of California Law, Vol. 1, Contracts §§ 370, 379 (9th ed.1987), and Supplement thereto.
6. The first annuity payment under the CSA is not due or payable until one year after entry of the Final Judgment. The annuity payment commencement date is integral to the CSA. The date set forth in the CSA is not the result of “a scrivener’s error” as asserted by Schultz. Schultz’ proffered evidence to support his assertion of scrivener’s error is inadmissible because such evidence would vary an unambiguous term of the CSA.
Breach Of Contract
7. Although Union Bank described its tender of performance in early October 1998 as “unconditional”, and while the bank’s tender did not fully satisfy the requirements of the CSA, these shortfalls in its performance do not constitute a material breach of the CSA under the circumstances of this adversary proceeding, for the following reasons:
a.First, a breach of the sort asserted by Schultz occurs only if the obligor’s performance is presently due. Here, Union Bank tendered performance on its annuity obligation in October 1998, while the first installment of the annuity was not due or payable under the CSA until one year after the October 1998 entry of the Final Judgment in the State Court Litigation.
b. Under the circumstances of this adversary proceeding initiated by Schultz six months before the Final Judgment was issued, Union Bank’s conduct constituted, at worst, an anticipatory breach. In this case, the alleged anticipatory breach occurred after Schultz sued Union Bank asserting claims based on Schultz’ unilateral interpretation of the CSA. Schultz’ complaint in this adversary proceeding might be said to have provoked Union Bank into resisting by asserting in response its unilateral interpretation of the CSA. Since the time for performance by making the first annuity payment had not arrived when Schultz’ adversary complaint was filed, in effect both sides reasonably anticipated that their conduct and legal positions would be subject to this court’s scrutiny and determination in response to Schultz’ adversary claims. The bank’s participation in Schultz’ adversary proceeding was anything but voluntary. In the end, I determined that Schultz made an invalid claim that the CSA contained a “scrivener’s error” and concluded that the first annuity payment is due and payable one year after entry of the Final Judgment, not in October 1998 as Schultz had originally claimed in this adversary proceeding. Union Bank resisted Schultz’ view on those issues and asserted in response what I determined to be Union Bank’s invalid claim that its CSA obligation was only to provide an annuity contract purchased from an insurance company.
c. Even if Union Bank was entirely at fault on the matter of CSA interpretation or performance (which it clearly was not), excusing Schultz’ performance under the *887CSA would not be an appropriate remedy for the shortcomings in Union Bank’s performance asserted by Schultz. Compensation in damages not only would have provided Schultz with an ample remedy, it would have provided Schultz with essentially (apart from the possibility of recovering Schultz’ attorneys’ fees and costs) all the recovery to which he was entitled under the CSA. Moreover, at best and in any event, the annuity payments would have been available to Schultz only in installments, commensurate with the installments payable under the CSA.
d. Nothing in the record suggests that Union Bank is either unable or unwilling to perform its installment obligation as directed by the CSA or a final order of this court. In fact, the record on this dispute suggests just the opposite — that the bank will perform once the matter is settled by the final decision in this matter.
e. While the parties have fought long and hard over their differences, and while Union Bank was found liable in the Final Judgment in the State Court Litigation for nearly $12 million in damages for fraud and violation of its obligation of good faith and fair dealing toward Mr. Schultz, the discharge and the terms of payment of that damage award have been settled voluntarily by the parties. The record supporting Schultz’ allegations in this adversary proceeding provides no basis for me to conclude that Union Bank’s behavior under the CSA, albeit arms’ length, hard litigation, asking no quarter and giving none, does not conform to the requirements of good faith and fair dealing. The parties to this litigation concerning implementation of the CSA appear to be about equally represented by capable, tough-minded lawyers. Both sides have been tough. Neither seems to have asserted an altogether correct view of its respective CSA rights and obligations.
f.In addition, I conclude that to declare the CSA contract voided by reason of Union Bank’s annuity tender would deprive the bank of a reasonable opportunity to cure any defect in its tender long before the bank’s first payment becomes due under the CSA. I conclude that Schultz has not been discharged from his obligations to perform the executory provisions of the CSA by reason of any breach of the CSA, anticipatory or otherwise, by Union Bank.
Schultz’ Other Claims
8. Schultz’ performance under the CSA is not excused or discharged by California Civil Code Sections 1489 or 1440, or otherwise.
9. Schultz has failed to state or establish an actionable claim for rescission of the CSA.
10. There was a meeting of the minds between the parties regarding monetary compensation to be paid to Schultz and on all other terms specifically dealt with in the CSA.
11. There is no triable issue of fact suggesting that Union Bank drafted the CSA so as to permit it to attempt later to deprive Schultz of the benefits of the CSA.
12. There was no failure of consideration by Union Bank in the execution and/or performance of the CSA.
13. Schultz is not entitled to rescind the CSA pursuant to California Civil Code sections 1689 or 1710.4 on the basis of unilateral mistake, mutual mistake, connivance, fraud in the inducement, rescission based on fraud, failure of consideration, or on any other basis.
14. There is no triable issue of fact suggesting that Union Bank interfered with Schultz’ collection of the Tobias II Funds.
*88815. There is no triable issue of fact suggesting that Union Bank delayed Schultz’ collection of the Tobias II Funds.
16. There is no triable issue of fact suggesting that Union Bank breached the CSA by continuing the State Court Litigation after the CSA was executed.
17. The allegations that Union Bank’s State Court Litigation pre — ■ and post-trial motions breached the CSA do not raise any triable issue of fact. Paragraph 3 of the CSA permitted such motions.
Good Faith
18. Count Two of Schultz’ Second Amended Complaint fails to state a viable claim for tortious breach of the implied covenant of good faith and fair dealing because Schultz has not alleged any “special relationship” with Union Bank in connection with the CSA. Harrell v. 20th Century Ins. Co., 934 F.2d 203, 207 (9th Cir.1991).
19. Schultz has no “special relationship” with Union Bank relating to the CSA. The arms’ length relationship between the parties is clearly established in Paragraph 12 of the CSA.
The Tobias II Funds, The Fulton Judgment And Rescission Of The CSA
20. The Tobias II Funds and Fulton Judgment were not mentioned in the CSA. The CSA is silent with respect to the Tobias II Funds and any right to collect on the Fulton Judgment.
21. Schultz has failed to raise triable issues of fact as to Union Bank’s alleged breach of the CSA based on or related to the Tobias II Funds and the Fulton Judgment.
22. The parties outlined the reasons for the CSA as follows:
WHEREAS, the parties desire to resolve by this Settlement Agreement the issue of the minimum and maximum amount Schultz can recover in this Action, and the Parties consider it to be in their best interests and to them mutual advantage to enter into this Agreement and to settle, adjust and compromise all such matters and all such existing or potential disputes, while giving the Parties the right to complete the litigation of the Action to a final conclusion.
WHEREAS, the purpose of this agreement is to provide Schultz a guaranteed payment and to limit Union Bank’s maximum payment to Schultz, regardless of the ultimate final judgment in the Action.
23.The reference in the CSA to “Action” was intended only as a reference to the State Court Litigation; it was not intended in any way to refer to the Fulton Litigation.
24. As to the Fulton Judgment, the Tobias II Funds and the possibilities of rescission by Schultz, restitutionary damages to Schultz, and return consideration to Union Bank, the CSA is silent. I conclude that there is an ambiguity in the CSA as to the effect of Schultz’ subsequent election to rescind the AISA. The parol evidence properly admissible to explain this ambiguity leads me to the conclusion that there was no meeting of the minds of the parties to the CSA concerning the effect and consequences of either (a) Schultz’ later rescission of the AISA or (b) the State Court Judgment provisions regarding the effect of Schultz’ election to rescind the AISA. The lack of a meeting of the minds of the parties on these subjects, while of considerable consequence to the parties, does not result in a total failure of consideration or the failure of the CSA to achieve status as an enforceable contract or as an integrated agreement. Rather, it leaves open one issue in the State Court Litigation: how to work out the AISA “rescission”, “restitution”, and “return consideration” issues without affecting the CSA “maximum payment to Schultz” *889agreement. I have expressed in these findings and conclusions my views on the subject, but based on the pleadings and the evidence, I do not believe I have the authority properly to impose my views on either party without that party’s voluntary consent. If the parties are not able to work out a resolution of the AISA rescission, Fulton Judgment, Tobias II Funds issues between themselves, the parties will have to return to the State Court to pursue a litigated resolution. Meanwhile, I am required to give full faith and credit to the Final Judgment in the State Court Litigation. 28 U.S.C. § 1738. It clearly seems that the Final Judgment has resolved those issues.
The $400,000 Note And Deed Of Trust
25. The issue of the $400,000 note, while nowhere dealt with in the CSA, is rendered moot by the Final Judgment which did not disturb those parts of the Interim Statement of Decision, Final Decision and Judgment in the State Court Litigation offsetting the $400,000 note against compensatory damages awarded Schultz. Union Bank has delivered to Schultz a deed of reconveyance and has canceled the $400,000 note.
Any of the foregoing conclusions that more appropriately should be treated as a finding of fact hereby is incorporated by reference in the foregoing findings of fact.
Prevailing Party
The issue of which party is the “prevailing party” for purposes of an award of attorneys’ fees, or, indeed, whether either party prevailed, is reserved for later hearing upon further pleadings to be filed.
Conclusion
Based on the court’s rulings set forth above, there is no triable issue of material fact with respect to any cause of action asserted by Schultz.
Schultz’ motion for summary adjudication is granted as to Schultz’ First Cause of Action only; Union Bank is obliged to make, and remains responsible to Schultz for, the annuity payments specified in paragraph 2(a) of the CSA. Schultz’ motion for summary adjudication is denied as to all other issues.
Union Bank’s motion for summary adjudication is denied as to Union Bank’s assertion that it is not obliged to remain responsible for the annuity payments pursuant to the CSA. Union Bank’s motion for summary adjudication is granted as to all other issues raised in Schultz’ First Cause of Action, Second Cause of Action, and Third Cause of Action. Union Bank’s motion for summary judgment is denied.
Schultz’ Second Amended Complaint therefore shall be ordered dismissed with prejudice except as to Union Bank’s obligation to make or remain responsible for the annuity payments pursuant to paragraph 2(a) of the CSA. As to the latter, Schultz shall be granted summary judgment against Union Bank.
. These headings are included simply as a guide and do not constitute part of the following findings and conclusions. They are not intended to be a complete outline of the issues discussed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493321/ | MEMORANDUM OPINION
WILLIAM F. STONE, Jr., Bankruptcy Judge.
The matter before the Court is the Motion by the Debtor to avoid a non-purchase money security interest in certain tangible personal property constituting household goods she granted about 5 months before filing her petition in this case to secure the repayment of a personal loan she obtained from the respondent, Washington Mutual Finance. The specific issue is whether, and if so, to what extent, the specific items of property are exempt as “household furnishings” within the meaning of Va.Code § 34-26, the Virginia “poor debtor’s exemption”. Because no “homestead” exemption in the items was claimed by filing a homestead deed, the items are exempt, if at all, solely pursuant to Va.Code § 34-26.
The items pledged to Washington Mutual are some rings, a movie camera, a pool table, a television, a video recorder (VCR) and a Gateway computer. The creditor has objected to the Motion To Avoid on the grounds that not all of the items are exempt under the Virginia statute and that their total value exceeds the $5,000 limit provided for “household furnishings” in § 34-26(4a) of the statute. A hearing was held before the Court on February 21, 2001 at which both parties appeared by counsel and the Debtor appeared personally and testified.
Although the listing of personal property in question specifically provided for the category of jewelry that it was “(except wedding/engagement rings)”, the Debtor’s testimony at the hearing was that she answered the questions of the lender’s representative, who actually completed the schedule and said nothing about excluding wedding and engagement rings, and that in fact this entry reflected only her wedding and engagement rings. This testimony was not challenged by the creditor and stands uncontradicted. Accordingly, the Court finds that such items are specifically exempt under Va.Code § 34-26(la).
For the other items to qualify as exempt they must constitute “household furnishings” within the meaning of Va.Code § 34-26(4a). The Debtor testified that the pool table was located in the residence which she shared with her husband when she obtained the loan. She also testified that the computer was used by her children for their school activities. Although the Court does not recall any specific testimony about the camera, television and VCR, the Court will find that such items were likewise located in and used in the Debtor’s household as there was no question raised on this point in the pleadings or the hearing concerning such issues.
In attempting to decide correctly what items should properly be characterized as “household furnishings” the Court is instructed by applicable case authority, on the one hand, to construe exemption *86statutes “liberally” in favor of the debtor, but, on the other hand, not “to reduce or enlarge the exemption, or to read into the exemption laws an exception not found there.” In re Hanes, 162 B.R. 733, 737-38 (Bankr.E.D.Va.1994); In re Latham, 182 B.R. 479, 481 (Bankr.W.D.Va.1995). In the latter opinion Chief Judge Krumm of this Court held that the term “household furniture” [furnishings] means “those items of furniture [furnishings] that are typically found in or around the home of debtors and their dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the home itself.” 182 B.R. at 482.
It is the Court’s conclusion, in accord with Judge Bostetter’s holding in In re Hanes, supra, that a television and a VCR, in the current state of the standard of living ordinarily enjoyed by the majority of citizens in the Commonwealth of Virginia, are properly deemed to be items of “household furnishings” within the fair meaning of Va.Code § 34-26(4a) and therefore may rightly claimed as exempt by the Debtor. The Court further concludes that such rationale properly extends in the present state of our technological society to a computer used for household purposes, including the education of the children resident in the household. The Court believes that it would unreasonably expand the meaning of “household furnishings” to include within such term’s ambit a movie or video camera. Accordingly, the Court concludes that such claim of exemption should be denied.
The pool table presents a more difficult question. As counsel for the Debtor points out, a pool table is frequently, although not commonly, found in personal residences and might reasonably be described as one of the furnishings in such residences. In the context of a will a bequest of all of the furnishings of a residence might very appropriately be construed to include a pool table in the residence. Accordingly, give the admonition to construe exemptions liberally in favor of the exemption claimant, a plausible case can be advanced in favor of allowing the claim. Nevertheless, the Court is not persuaded that a pool table should be considered an item of “household furnishings” within the scope of the poor debtor’s exemption. A pool table seems to be of a fundamentally different nature than the descriptive list provided by the General Assembly as to the types of furnishings it had in mind, namely, “beds, dressers, floor coverings, stoves, refrigerators, washing machines, dryers, sewing machines, pots and pans for cooking, plates, and eating utensils”. Va.Code § 34-26(4a) While such list is expressly stated to be nonexclusive, it does seem to indicate rather clearly the type of personal property which the legislature intended to be beyond the power of a debtor to pledge to a non-purchase money lender. Va.Code § 34-28. The Court would describe that intended scope as being personal property commonly found in Virginia households, used to support the everyday life of its members and reasonably necessary for that household to enjoy that basic standard of living which the vast majority of its citizens are privileged to have. That is not to say that it excludes items such as televisions, VCRs and home computers noted above which the members of many households are very satisfied not to have, but simply that such kinds of household goods at this time in our history are commonly found in Virginia households and regularly used in the everyday life of those households. While the Court notes, as pointed out by Judge Bostetter in In re Hanes, supra, that the statute says “all household furnishings” and does not use the qualifier “necessary”, 162 B.R. at 737, it believes that the listing *87of specific kinds of property intended to be included within the exemption and the $5,000 limitation provided for the total of “household furnishings” demonstrate that the legislature intended that its citizens should not be able to render themselves nearly destitute by improvident borrowing, not that they should be able to live in household luxury heedless of their obligations to their creditors. The Court does not believe that it requires affirmative evidence before it to state that the ordinary citizen would perceive a pool table in a private residence to be indicative of status, luxury and privilege, not something commonly enjoyed by Virginia’s residents. Finally, the Court believes that it is reasonable to observe that one who was looking to purchase a used pool table would likely look in the classified advertising of his newspaper under the section for sporting goods rather than under furniture or household goods. While some might characterize this observation as rather dubious rationale to support a conclusion as to the proper meaning of a statute, the Court does believe that the common understanding of a term is helpful in deciding what the General Assembly intended by the use of the rather generic term of “household furnishings”, especially when the list of illustrative items provided in the statute fails to include any reference whatsoever to any sporting or purely recreational property. For the reasons noted the Court will deny the exemption claim as to the pool table.
The Debtor testified that her estranged husband is in possession of and has an ownership interest or claim upon the property she pledged to Washington Mutual. That issue is not before the Court and this ruling is only applicable to whatever the Debtor’s interest may be in such property. In view of the Court’s conclusions as to those items of the pledged property which are exempt and those which are not, there is no need under the facts of this particular case to take up the value of such property. The Clerk shall send copies of this Memorandum Opinion as directed in a separate order being entered contemporaneously herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493322/ | ORDER GRANTING JUDGMENT FOR THE DEFENDANTS
RONALD G. PEARSON, Bankruptcy Judge.
On June 19, 2001, a trial was held on the Complaint of Universal Bank, N.A. objecting to the discharge of the debt owed by Sharon Lynn Howard and Ashley Lewis Howard pursuant to 11 U.S.C. § 523(a)(2)(A). For the reasons that follow, the Court finds in favor of the Defendants.
I. FACTS
Ashley Lewis Howard worked as a draftsman until he was laid off on March 3, 2000. Sharon Howard has worked at odd jobs over the past several years, but due to medical problems has chosen to stay home to care for the couple’s three children. A few days before Mr. Howard lost his job, Debtors had purchased a second home in Scott Depot, West Virginia. Debtors intended to move into the second home and lease their former home to pay the mortgages.
In May of 2000, Debtors received a solicitation for a credit card with a pre-approved credit limit of $5000.00 from the Plaintiff, Universal Card, N.A. (“Universal”). To take advantage of the lower rate of 2.9% on balance transfers, Debtors applied for and were issued the credit card. Debtors subsequently transferred $3,060 outstanding on one of their other credit cards to the Universal account. Additionally, during the period of May 26, 2000 to June 21, 2000, Debtors made 29 purchases totaling $1,804.76 and one cash advance in the amount of $93.00. Universal does not contend that these purchases were for luxury items, and Ms. Howard testified that a majority of the purchases were for groceries and miscellaneous items like soap and toilet tissue.1 The Debtors continued to make purchases until they reached their credit limit of $5,000. No payments were made on the account.
Even though Mr. Howard was unemployed at the time the Debtors received the solicitation from Universal, Debtors indicated on the credit application that Mr. Howard had annual income of approximately $30,000.00. Based on Mr. Howard’s work history, Debtors anticipated that Mr. Howard would be employed within a matter of weeks. As a draftsman, Mr. Howard would work on a temporary or contractual basis. Mr. Howard testified, that “quite often as a contractor, a company will let me go to bring somebody in that has a different type of understanding of the structure. Maybe I will be replaced by an architect..It would generally take Mr. Howard, at the most, about two weeks to get another job. According to Mr. Howard, throughout the 12 calendar quarters of the years 1997, 1998 and 1999, *116he had gainful full-time employment as a draftsman.
The Debtors also testified that at the time they received the solicitation and while they were making purchases on the Universal account in May of 2000 that they had hoped to sell their stock to help pay the bills while Mr. Howard was unemployed. The Debtors had invested $5,000 for the purchase of stock in February 2000. At one point in May, Mr. Howard testified, at the time they were making purchases on the Universal Credit Card, the stock was valued at 10,000. The February 28 to March 31, 2000 statement from Salomon Smith Barney provided that the value of the stock had a value of 4,162.90. However, by June 30, a statement from Salomon Smith Barney indicated that the value of the stock had diminished to 1,162.90. By the end of 2001, the stock had nearly no value.
Though Mr. Howard was drawing $1000.00 per month in unemployment benefits, which was approximately half his pri- or take home pay, Debtors were unable to make their minimum monthly debt payments. After contacting a credit counseling service, which declined to provide assistance due to the mortgages involved, Debtors consulted a lawyer in August of 2000. On September 1, 2000, Debtors filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Universal filed this adversary proceeding on November 24, 2000.
II. DISCUSSION
Universal Bank alleges that the debt owed to it is nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), 523(a)(2)(B). Under subsection (A), a debtor may not discharge debts for money obtained by “false pretenses, false representations, 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).
To prevail under section 523(a)(2)(A), a creditor must prove the following traditional fraud elements by a preponderance of the evidence:
1. Debtor made a representation to the creditor.
2. That the Debtor knew the representation was false at the time it was made
3. That the Debtor made the representation with the intention and purpose of deceiving the creditor.
4. That the Creditor justifiably relied on the representation.
5. That Creditor sustained a loss or damage as result of the representation.
Hechts v. Valdes (In re Valdes), 188 B.R. 533 (Bankr.D.Md.1995); In re Eashai, 167 B.R. 181 (9th Cir. BAP 1994).
There are three theories that courts generally follow when applying section 523 to credit card transactions. See First Card Services, Inc. v. Kitzmiller, 206 B.R. 424 (Bankr.N.D.W.V.1997) (citing Chase Manhattan Bank, N.A. v. Ford (In re Ford), 186 B.R. 312 (Bankr.N.D.Ga.1995)). The first is the “implied representation” theory, where a cardholder impliedly represents upon using the credit card that there is both an ability and intent to repay. Id. at 426. Representation by implication is required because at the time of the transaction, there is usually no personal contact between the cardholder and credit card company. Id. The ability-implying prong of the doctrine essentially provides that with each use of the card the cardholder guarantees his ability to pay that debt. In re Ford, 186 B.R. 312, 317 (Bankr.N.D.Ga.1995). Therefore, “the doctrine suggests that a breach of that *117duty ... will present sufficient grounds for denying a debtor his discharge.” Id. The theory provides no room for any hope on the part of a debtor that his financial situation will improve and that he may at a later date have the ability to repay.
The second theory, referred to as the “assumption of the risk” theory, holds that the cardholder, by just using the credit card, does not make any representations to the issuer. Kitzmiller, 206 B.R. at 424. Under this theory, the charges are dis-chargeable unless made after the card is revoked. Id. The issuer, therefore assumes the risk that the cardholder will incur more debts than it is possible to repay. When this theory is applied, all pre-revocation charges are discharged regardless of the debtor’s intent. A creditor is thus left with little or no recourse even when fraud is apparent. Valdes, 188 B.R. at 586-587.
The third theory, “totality of the circumstances,” also requires a fictitious implication of intent not to repay. However, unlike the implied representation theory, in which debts are nondisehargeable if the debtor is aware of its inability to pay when debt is incurred, the totality of the circumstances theory requires the creditor prove actual fraud through a pattern of “facts and circumstances ... [that] present a deceptive pattern.” Kitzmiller, 206 B.R. at 424. Though, totality of the circumstances does not include the ability of the debtor to pay at the time charges were made, the Court may consider the debtor’s own concept of his ability to pay only “to the extent that such lack of ability could lead the Court to infer that the Debtors did not intend to repay the debt because it would be financially impossible.” Id at 427. This Court adopts the totality of the circumstances theory. As the Court in Kitzmiller found, the “totality of the circumstances” represents a balance of general principles of historical fraud with modern credit card charges.2
Under the totality of the circumstances test, the following factors should be considered when attempting to discern if the debtor did not intend to repay.
1. The length of time between the charges made and the filing of the bankruptcy.
2. Whether or not an attorney had been consulted before the charges were made.
3. The number of charges made.
4. The amount of the charges.
5. The debtor’s concept of his ability to repay.
6. Whether the charges were above the credit limit.
7. Whether multiple charges were made on the same day.
8. Whether the debtor was employed.
9. Debtor’s prospects for employment.
10. The financial sophistication of the debtor.
11. Whether there was a sudden change in the debtor’s buying habits.
*11812. Whether the purchases were made for necessities or luxury goods.
Kitzmiller, 206 B.R. at 427.
The facts in this case support a finding that Debtors intended to repay the debt and did not intend to deceive Universal. Though the charges on the Universal card were made within three months from the date the Debtors filed bankruptcy, the Debtors did not consult a lawyer until August of 2000, after they contacted a credit counseling service. Further, even after consulting a lawyer, Ms. Howard had to be persuaded not to reaffirm some of the unsecured debts. Though 29 purchases were made on the card, a majority of the purchases were small in size and apparently for necessities.
In addition, though the Debtors were unemployed at the time they were incurring debt on the Universal card, the Debtors expected that Mr. Howard would return to work soon. It would generally take Mr. Howard, at the most, two weeks to find employment after leaving a job. Mr. Howard testified, and there was no evidence offered to the contrary, that throughout the twelve calendar quarters of the years 1997, 1998 and 1999 Mr. Howard had gainful full time employment. It is obvious to the Court that the Debtors expected the trend of minimal time between jobs to continue.3
The Debtors in this case suffered a series of financial set-backs which is so commonly the reason that debtors seek bankruptcy relief. Ms. Howard testified that prior to March of 2000 she had never been late on any payments to any creditors. The record further indicates that the Debtors even attempted to save money and invest for their future. Debtors were relying on their investment in stock, which at one point had a value in excess of $10,000, as insurance for hard times. Unfortunately, the Debtor’s investment lost nearly all of its value within the same time that Mr. Howard was unable to find a new draftsman position. The Debtor’s had also bought a second home just days prior to Mr. Howard losing his job. It was this string of events that led to the Debtors bankruptcy.
The Court finds that the Debtors were merely taking advantage of the credit offered to them by Universal to try to weather their financial difficulties while Mr. Howard was between jobs. Universal has failed to prove that it was anything other than the intent of the Debtors to repay their debt to Universal. Because there was no misrepresentation of an intent to repay, this Court need not reach the other elements necessary to prove an action under 11 U.S.C. § 528(a)(2)(A). It is accordingly,
ORDERED that the debt owed to Universal Bank is DISCHARGED.
. The credit card statements from Universal indicate that a majority of the transactions were with gasoline vendors and grocery stores.
. In addition to the policy concerns of adopting the implied representation theory, the Court finds that such theory does not comport with the plain language of §§ 523(a)(2)(A) and (B). Any representation as to the ability to repay is a statement respecting the debtor’s "financial condition” and is not actionable under § 523(a)(2)(A). See Kitzmiller 206 B.R. at 426 (citing Chemical Bank v. Sigrist, 163 B.R. 940 (Bankr.W.D.N.Y.1994)). A false statement respecting a debtor's financial condition must be in writing and any nondis-chargeability action based on that statement must be brought pursuant to § 523(a)(2)(B).
. Though Universal argued on numerous occasions that Debtors also misstated Mr. Howard’s income on the credit card application, as discussed in note 2 above, the misstatement can not serve as a basis for nondis-chargeability under section 523(a)(2)(A). Regardless, the Court finds that the Debtors anticipated that Mr. Howard would find employment soon after the application was submitted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493324/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court are the following, to-wit:
1. Motion for partial summary judgment filed by the plaintiff, Grand Oaks, Inc., (Grand Oaks).
2. Motion for partial summary judgment filed by Cumberland Management Group, Inc., a Mississippi corporation (CMG).
3. Motion to strike affidavit and deposition testimony, pursuant to Rule 32, Federal Rules of Civil Procedure, filed by Mardyth Pollard (Mrs. Pollard).
Appropriate responses were filed to each of the aforesaid pleadings, and the court, having heard and considered same, hereby finds as follows, to-wit:
I.
The court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This adversary is predominantly a core proceeding as defined in 28 U.S.C. § 157(b)(2)(A), (B), (C), (H), and (0).
II.
Grand Oaks has sought partial summary judgment on the following claims, to-wit:
*1291. Reformation of the deed and contract conveying the golf course parking lot to CMG pursuant to a unilateral mistake theory (Count VI of the Third Amended Complaint).
2. Reformation of the deeds, conveying the five (5) acre parcel to William R. Pollard and wife, Mardyth Pollard (Pollards), and area 3B to CMG, pursuant to a mutual mistake theory (Count VI of the Third Amended Complaint.)
3. Creation of easements by implication across the five (5) acre parcel, as well as, area 3B (Count V of the Third Amended Complaint).
As noted above, CMG filed a response to the Grand Oaks motion for partial summary judgment, and, thereafter, filed its own motion for summary judgment as to the following claims:
1. The mistake theories (Count VI of the Third Amended Complaint).
2. The remedies of reformation or rescission.
3. The fraud claims insofar as they relate to promises of future performance (Count II of the Third Amended Complaint).
4. The breach of contract claims which pertain to the transfer of real property not supported by any written document, promises which allegedly lack consideration or are affected by a “judicial admission,” and contracts which are unenforceable under the doctrine of accord and satisfaction (Count III of the Third Amended Complaint).
5. The remedy of specific performance.
6. The easement claims (Count V of the Third Amended Complaint).
7. The judicial foreclosure claim (Count X of the Third Amended Complaint).
CMG also seeks summary judgment on its own breach of contract counter-claims.
Mrs. Pollard has filed a motion to strike the deposition and affidavit testimony relied upon by Grand Oaks in its motion for partial summary judgment pursuant to Rule 32, Federal Rules of Civil Procedure. Mrs. Pollard contends that this testimony cannot be used against her since she was not a party to this cause of action when the testimony was obtained.
III.
Summary judgment is properly granted when pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Bankruptcy Rule 7056; Uniform Local Bankruptcy Rule 18. The court must examine each issue in a light most favorable to the nonmoving party. Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Phillips v. OKC Corp., 812 F.2d 265 (5th Cir.1987); Putman v. Insurance Co. of North America, 673 F.Supp. 171 (N.D.Miss.1987). The moving party must demonstrate to the court the basis on which it believes that summary judgment is justified. The non-moving party must then show that a genuine issue of material fact arises as to that issue. Celotex Corporation v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Leonard v. Dixie Well Service & Supply, Inc., 828 F.2d 291 (5th Cir.1987), Putman v. Insurance Co. of North America, 673 F.Supp. 171 (N.D.Miss.1987). An issue is genuine if “there is sufficient evidence favoring the nonmoving party for a fact finder to find for that party.” Phillips, 812 F.2d at 273. A fact is material if it would “affect the outcome of the lawsuit *130under the governing substantive law.” Phillips, 812 F.2d at 272.
IV.
Both of the motions for summary-judgment are premised on essentially the same legal concepts even though they seek diametrically opposite results. These concepts, set forth below, encompass the specific theories and claims for relief noted in paragraph II hereinabove, to-wit:
1. Mutual mistake.
2. Unilateral mistake coupled with
fraud or inequitable conduct.
3. Scrivener’s error.
4. Ratification.
5. Explanations for the acts of ratification.
The court has seen probative factual evidence that Grand Oaks could perhaps establish a prima facie case based on the theory of mutual mistake, as well as, the theory of unilateral mistake. At this point, no evidence has been developed to establish the scrivener’s error theory. However, there is a possibility that this could occur depending on the testimony that might be elicited from attorney Carolyn Kessinger, who prepared the pertinent documents.
The court would hasten to mention that it has also seen probative evidence indicating that the factual underpinnings of the mutual mistake theory and the unilateral mistake theory have been ratified by Grand Oaks.
Finally, there is also evidence reflecting that Grand Oaks can provide a reasonable explanation for the acts that might otherwise be considered as ratification.
As such, there are three tiers to these scenarios of recovery, all of which are fraught with genuine, material factual disputes. Consequently, with the exception of the issue to be addressed subsequently, both motions for summary judgment must be overruled. In doing so, this court notes that it has the discretion to deny motions for summary judgment and allow parties to proceed to trial so that the record might be more fully developed for the trier of fact. Kunin v. Feofanov, 69 F.3d 59, 61 (5th Cir.1995); Black v. J.I. Case Co., 22 F.3d 568, 572 (5th Cir.1994); Veillon v. Exploration Servs., Inc., 876 F.2d 1197, 1200 (5th Cir.1989).
V.
The one issue that can be resolved through summary judgment is the efficacy of the deed of trust which was executed by CMG in favor of Grand Oaks which encumbers CMG’s real property. The designated trustee in the deed of trust, Carolyn C. Kessinger, also acknowledged the deed of trust.
In Metropolitan National Bank v. United States, 901 F.2d 1297 (5th Cir. 1990), the court stated as follows:
Under Mississippi law neither a grantee designated by a deed of trust, nor the trustee designated to act for the grantee, can properly acknowledge a deed of trust.
Metropolitan National Bank, 901 F.2d at 1302.
The court further stated:
Because the acknowledgment was void, the deed of trust was not eligible for recordation and, even though the deed was recorded, it nevertheless did not impart constructive notice to creditors under Miss.Code Ann. § 89-3-1. See also Holden v. Brimage, 72 Miss, at 229-30, 18 So. at 383; Wasson v. Connor, 54 Miss. 351, 352-53 (1877) (where grantee acknowledged grantor’s signature, “[t]he deed never having been legally acknowledged, [it] was, of course, *131improperly recorded, and it afforded notice to nobody”).
In Mills v. Damson Oil Corp., this court stated that “[i]t is well settled in Mississippi that constructive notice is not imparted to bona fide purchasers by recording a defectively acknowledged deed.” 686 F.2d 1096, 1103-04 (citing Ligon v. Barton, 88 Miss. 135, 40 So. 555 (1906); Elmslie v. Thurman, 87 Miss. 537, 40 So. 67 (1906); Smith v. McIntosh, 176 Miss. 725, 170 So. 303 (1936)).
Id.
CMG, as the Chapter 11 debtor-in-possession with the powers of a trustee, conveyed by 11 U.S.C. § 1107(a), contends that it can avoid the deed of trust in favor of Grand Oaks pursuant to 11 U.S.C. § 544(a)(3) 1, which provides as follows:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists [and has perfected such transfer],
CMG asserts that the aforementioned section grants to it the hypothetical “avoiding powers” of a bona fide purchaser of real property with a perfected instrument of transfer as of the date of the filing of the bankruptcy petition. As such, CMG contends that it can avoid the lien of the subject deed of trust even though it was the party executing the instrument in favor of Grand Oaks.
Grand Oaks cites the case of Pyne v. Hartman Paving, Inc. (In re Hartman Paving), 745 F.2d 307 (4th Cir.1984), for the proposition that, since CMG was the grantor in the deed of trust, it cannot utilize § 544(a)(3) to avoid the resulting Hen. Succinctly stated, Grand Oaks argues that even though the deed of trust is void under state law and should not have been recorded, it is still a vaHd instrument between CMG and Grand Oaks. Grand Oaks also contends that CMG had actual notice of the content and effect of the deed of trust, and, therefore, is unable to avail itself of the avoidance power granted to a Chapter 11 debtor-in-possession.
This court is not persuaded by the reasoning set forth in the Hartman Paving opinion. The statutory language of § 544(a) conveys to a trustee and to a debtor-in-possession the power to avoid any transfer of property of the debtor, such as the deed of trust in question, without regard to any knowledge of the trustee or of any creditor. The avoidance of the Hen of the deed of trust is not for the exclusive benefit of CMG, but rather is for the benefit of CMG’s bankruptcy estate. Without doubt, if this were a Chapter 7 bankruptcy case, the Chapter 7 trustee could clearly utilize § 544(a)(3) to set aside the Grand Oaks deed of trust with the underlying purpose of distributing the value of the unencumbered property to the creditors of the estate in keeping with the priorities set forth in the Bankruptcy Code.
*132Every court that has considered the Hartman Paving decision has found it to be wrongly decided and has refused to follow its reasoning. See, e.g., In re Sandy Ridge Oil Co., Inc., 807 F.2d 1332, 1335-36 (7th Cir.1986); In re Iowa-Missouri Realty Co., Inc., 86 B.R. 617, 619, 621 (Bankr.W.D.Mo.1988); In re Boardwalk Development Co., Inc., 72 B.R. 152, 155 (Bankr.E.D.N.C.1987); In re M.S.C., Inc., 54 B.R. 650, 653-54 (Bankr.D.S.C.1985); and In re Matos, 50 B.R. 742, 744 (N.D.Ala.1985). To the contrary, these courts adopted the dissent in Hartman Paving.
For other cases reaching this identical result, see, In re Greenbelt Coop., Inc., 124 B.R. 465 (Bankr.D.Md.1991) (debtor’s actual knowledge not imputed to debtor as debtor in possession for § 544 purposes; question is whether avoidance would benefit remaining creditors); In re Mid-America Petroleum, Inc., 83 B.R. 937, 943 (Bankr.N.D.Tex.1988) (“Actual notice of the claim by the debtor prior to becoming the debtor in possession is irrelevant.”) (emphasis added); In re Sandy Ridge Oil Co., Inc., 807 F.2d 1332, 1335 (7th Cir.1986); In re Iowa-Missouri Realty Co., Inc., 86 B.R. 617 (Bankr.W.D.Mo.1988); In re Matos, 50 B.R. 742 (N.D.Ala.1985) (“[D]ebtors in possession do not, if at all, avoid [a] mortgage as a debtor; but avoid it, if at all, only in their role as trustee for all claimants against the debtor.”); In re Georgia Granite Co., Inc., 86 B.R. 733, 738 (Bankr.N.D.Ga.1988); In re Wiggs, 87 B.R. 57, 58 (Bankr.S.D.Ill.1988); In re International Gold Bullion Exchange, Inc., 53 B.R. 660, 665 (Bankr.S.D.Fla.1985); In re Great Plains Western Ranch Co., Inc., 38 B.R. 899, 905 (Bankr.C.D.Cal.1984); In re Frazier, 16 B.R. 674, 678 (Bankr.M.D.Tenn.1981); see also Double J Cattle Co. v. Geis, 203 B.R. 484, 487 (Bankr.D.Wyo.1995) (Chapter 12 debtor can use § 544 to avoid unperfected lien on cattle despite actual knowledge of lien).
As a result of the foregoing analysis, this court concludes that the deed of trust executed in favor of Grand Oaks may be avoided by CMG pursuant § 544(a)(3). CMG’s motion for partial summary judgment as to this issue is well taken and will be sustained by a separate order.
The court would remind the parties, however, of the effect of § 349(b)(1)(B) of the Bankruptcy Code, which provides as follows:
(b) Unless the court, for cause, orders otherwise, a dismissal of a case other than under § 742 of this title—
(1) reinstates—
(B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or preserved under section 510(c)(2), 522(i)(2,) or 551 of this title;
In other words, if this bankruptcy case is dismissed without being brought to a conclusion as contemplated by the Bankruptcy Code, this avoidance action will be unraveled. The reinstating effect of this section is yet another reason supporting the rationale underpinning those decisions which have criticized the Hartman Paving majority opinion.
VI.
Because of the results reached herein-above, the court is of the opinion that the motion to strike filed by Mrs. Pollard is now moot. Accordingly, it will be dismissed by the aforementioned separate order.
. Unless specifically noted otherwise, all statutory code sections that follow should be considered as Title 11, U.S. Code. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493325/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court is a complaint filed by the plaintiff, Linda K. Walker, wherein she seeks a determination of the dischargeability of certain obligations owed to her by the debtor, Douglas Howard Walker, pursuant to a divorce proceeding in the Chancery Court of De-Soto County, Mississippi. After a presentation of evidence by both parties, the court ruled on the dischargeability of certain obligations imposed upon the debtor, but withheld ruling on the exact amount of one-half of the medical expenses not covered by insurance for the parties’ minor children that would be non-dischargeable, as well as, the issue of the dischargeability of the plaintiffs attorney’s fees as set forth in the judgment of divorce; the court requested and has now reviewed copies of the medical bills relating to the minor children, as well as, an itemization of the fees and expenses from the plaintiffs attorney in the divorce proceeding; and, therefore, the court hereby finds as follows, to-wit:
I.
The court has jurisdiction of the subject matter of and the parties to this adversary proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(I).
II.
A trial in open court was held in this adversary proceeding on November 15, *1342000. Based on a review of the evidence, including the judgment of divorce entered in the Chancery Court of DeSoto County, Mississippi, the court found the following items to be non-dischargeable in this bankruptcy case:
(1) Child support payments.
(2) One-half of the college expenses incurred by the two daughters born to the marriage of the parties.
(3) Lump sum alimony in the form of monthly mortgage payments due on the parties’ marital residence.
(4) One-half of the medical expenses incurred by the minor children and not covered by insurance.
The chancery court’s award of one-half of the value of stock sold by the debtor prior to the parties’ separation, in the amount of $650.00, was found by the court to be a dischargeable debt because it was not in the nature of alimony or support as contemplated by § 523(a)(5) 1, and was not excepted from discharge by § 523(a)(15).
As noted above, the court held that the chancery court’s award of one-half of all medical expenses not covered by insurance for the parties’ minor children was in the nature of support or alimony and non-dischargeable pursuant to § 523(a)(5). However, the court reserved ruling on the amount of this award pending a review of the pertinent bills. The plaintiffs attorney submitted bills totaling $448.20 for medical services and $240.63 for prescriptions. The court finds that these expenses relate solely to the couple’s minor children, Pamela and Karen. No objection has been filed by the debtor or the debtor’s attorney to these bills. Accordingly, the court finds that the sum of $344.45, representing one-half of the $688.83 total, is non-dischargea-ble at this time.
III.
The plaintiff asserted that the attorney’s fees and costs incurred by her in the divorce action, which were awarded to her in the judgment of divorce, should be a non-dischargeable debt. The court withheld ruling on this issue and requested that an itemization of the fees and expenses be submitted by the plaintiffs attorney.
Within the Fifth Circuit, an attorney’s fee award granted in a divorce judgment may be non-dischargeable in a subsequent bankruptcy case if the attorney’s fees form part of an overall economic arrangement to provide the non-debtor spouse with needed support. In Joseph v. O’Toole (In re Joseph), 16 F.3d 86 (5th Cir.1994), Attorney J. Huey O’Toole represented Jean Joseph in a divorce proceeding filed in Harris County, Texas, against her husband, Dr. Philmore J. Joseph. O’Toole expended significant time and effort in obtaining a temporary support award and, ultimately, a divorce, decree. Following an appeal by Dr. Joseph, the divorce decree was reversed and remanded. At a subsequent hearing, the court granted a divorce with terms very similar to the decree which had been appealed. However, because the second divorce decree did not address the issue of O’Toole’s fees, the court rendered a separate judgment against Dr. Joseph for O’Toole’s fees. Dr. Joseph filed a voluntary Chapter 7 petition for bankruptcy. O’Toole filed a complaint seeking to have his judgment for attorney’s fees declared non-dischargeable. The bankruptcy court held that the attorney’s fee judgment formed a part of the overall support award granted to Mrs. Jo*135seph and, therefore, determined that the fee award was non-disehargeable. The district court affirmed. On appeal to the Fifth Circuit, Dr. Joseph argued that only those attorney’s fees directly attributable to an award of support should be non-dischargeable. The Fifth Circuit disagreed and held as follows:
An attorney’s fee award granted pursuant to a divorce decree does not elude discharge because it tangentially relates to an award of support and maintenance; rather, the attorney’s fee award is deemed non-dischargeable if the award itself reflects a balancing of the party’s financial needs.
Id. at 88.
The court went on to suggest that the factors, which should be examined in balancing the party’s financial needs, include the disparity in the earning power of the parties and the probable future need for support. In applying these factors to Dr. Joseph’s obligation to pay the attorney’s fees incurred by his former spouse, the court found that the award of attorney’s fees was in the nature of alimony, maintenance and support and was, therefore, non-dischargeable.
This court reviewed closely the judgment of divorce entered by the DeSoto County Chancery Court to determine if the award of attorney’s fees to the plaintiff reflected a balancing of the party’s financial needs. Paragraph 13 of the judgment of divorce was informative:
13. In accordance with the factors set forth in Martin v. Martin, the court determines that the wife is entitled to an award of reasonable legal fees. Counsel for wife will be granted leave to reopen for the purpose of submitting an itemization of the legal fees incurred. A specific award shall be made at that time. All costs are assessed to the husband.
Although no citation was given for Martin v. Martin, this court found a published Mississippi Supreme Court opinion bearing the same name dated August 8, 1990. In Martin v. Martin, 566 So.2d 704 (Miss.1990), the court found that the determination of attorney’s fees to be awarded in a divorce case is a matter entrusted to the sound discretion of the chancellor. In the opinion, the Supreme Court addressed the chancellor’s failure to award attorney’s fees to Nancy B. Martin in her divorce proceeding against her former husband. The court noted that the chancellor had found that both parties were equally vested with property, as well as, that the respective incomes of both parties and the ability to earn income were practically the same. The court then held that if a party is financially able to pay his or her attorney, an award of attorney’s fees is not appropriate. Martin v. Martin, 566 So.2d 704, 707 (Miss.1990). Accordingly, the assignment of error regarding the failure of the chancellor to award attorney’s fees was rejected by the Mississippi Supreme Court.
Returning to the language contained in the judgment of divorce rendered by the DeSoto County Chancery Court, this court observes that the chancellor specifically found that the plaintiff herein was entitled to an award of reasonable legal fees in accordance with the factors set forth in Martin v. Martin. Awarding attorney’s fees against the debtor after citing Martin v. Martin indicates that the chancellor believed that the plaintiff was financially unable to pay her attorney. This in turn indicates that the chancellor conducted a balancing of the parties’ respective financial needs in making the award. Accordingly, this court finds that the award of attorney’s fees in the sum of $8,500.00, plus costs in the sum of $122.00, are in the nature of support as contemplated by *136§ 523(a)(5). Therefore, the total of $8,622.00, is non-dischargeable in this bankruptcy case.
An order will be entered accordingly.
. All subsequent statutory citations are to the United States Bankruptcy Code unless otherwise indicated. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493327/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court is a motion for rehef from automatic stay filed by Gibson Construction, Inc., (“Gibson”); response thereto having been filed by James Michael MitcheU and Elizabeth H. Mitchell (“debtors”) and by the Chapter 7 trustee (“trustee”); as well as, a motion to avoid judicial hen filed by the debtors with a response by Gibson; the parties having agreed to submit their respective motions to the court based on an agreed stipulation of facts and memorandum briefs; and the court, having received and reviewed same, finds as follows, to-wit:
I.
The court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334 and 28 *144U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(B), (F), and (G).
II.
The parties stipulated to the following pertinent facts:
1. The debtors, James Michael Mitchell, who is one and the same person as Mike Mitchell, and Elizabeth H. Mitchell, who is one and the same person as Elizabeth Hardin Mitchell, are husband and wife, and are joint owners of a parcel of land in Calhoun County, Mississippi, more particularly described as being in the NE 1/4 of the NE 1/4 of Section 28, Twp. 14 South, Range 1 East. Said parcel of land contains forty (40) acres, more of less, and is the homestead of the debtors.
That homestead was established on said property on or about February 12,1996, as shown by Homestead Application made Exhibit “A” hereto 1. The Calhoun County Tax Assessor’s Office has said property, together with improvements thereon, valued at $106,090.00, as shown by Exhibit “A.”
2. The creditor, Gibson Construction, Inc., furnished the labor to construct a home on the debtor’s property as described in the preceding paragraph, from October 5, 1994, until January 20, 1995, for and on behalf of debtors.
3. The creditor, Gibson Construction, Inc., having not received payment for its labor performed to construct the debtors’ home, filed an affidavit and notice of labor lien with the Chancery Clerk of Calhoun County, Mississippi, at 11:00 a.m. January 25, 1995. Said notice of labor lien was filed by said clerk in Construction Lien Book No. A1 at page 19 of the records in her office, as shown by copy of said affidavit and notice of lien made Exhibit “A” to creditor’s motion.
4. Creditor, Gibson Construction, Inc., filed its complaint against the debtors, Mike Mitchell and Elizabeth Mitchell, in Cause No. C95-070 of the Circuit Court of Calhoun County, Mississippi, for the labor performed by employees of the creditor, Gibson Construction, Inc., in the construction of said home for debtors, in the amount of $31,908.00, together with prejudgment interest and attorney fees. Said complaint was filed on April 17, 1995, and is made Exhibit “B” to the creditor’s motion.
5. Creditor Gibson Construction, Inc., obtained a judgment against the debtors on its complaint for the labor performed in the construction of said home, in the above styled and numbered cause, dated June 12, 2000, effective as of May 5, 2000, in the total amount of $48,804.00, together with all costs accruing therein, and legal interest at the rate of 8% per annum, from and after the date of said judgment. The $48,804.00 included the $31,908.00 for labor in the construction of said home, as well as, pre-judgment interest and attorney fees. A copy of said judgment is made Exhibit “D” to creditor’s motion.
6. The only other lien or mortgage on debtors’ homestead property is a First Deed of Trust to Bancorp South Bank in the approximate amount of $14,000.00.
Having reviewed the court file, including the pleadings contained therein, the court makes the following findings:
1. The debtors filed their joint Chapter 7 petition on August 8, 2000.
*1452. The judgment obtained by Gibson against the debtors in the Circuit Court of Calhoun County, Mississippi, was entered of record by Deborah Dunn, Circuit Clerk of Calhoun County, Mississippi, on June 14, 2000.
3. The entry of the Gibson judgment against the debtors occurred within 90 days of the filing of the bankruptcy case.
4. In their schedules, the debtors have asserted a homestead exemption as to the forty acre parcel of property described hereinabove.
5. As set forth in his response to Gibson’s motion, the Chapter 7 trustee does not object to the automatic stay being lifted so long as recovery by Gibson is limited to execution on the debtor’s homestead property. The trustee asserts that the Gibson judgment is a voidable preference and objects to any attempt by Gibson to assert its lien against any other nonexempt property of the estate.
III.
As set forth in the stipulated facts, Gibson obtained a judgment against the debtors for labor incurred in constructing the debtors’ home. After obtaining the judgment, Gibson proceeding to an execution sale of the debtors’ home and one acre appurtenance. This sale was stayed by the filing of the bankruptcy case on August 8, 2000. Gibson promptly filed a motion for relief from the automatic stay requesting that it be allowed to proceed with the execution sale of the debtors’ homestead property. Citing Miss.Code Ann. § 85-3-47, Gibson asserts that homestead property is not exempt from an execution sale if the underlying debt is for labor or materials furnished in construction of improvements on the homestead property.
The debtors initially filed a motion to avoid the judicial lien of Gibson pursuant to § 522(f)(1), which allows debtors to avoid such a lien to the extent that it impairs an exemption to which the debtors would be otherwise entitled2. The debtors argue that Miss.Code Ann. § 85-3-47 applies only when the debt being executed upon is evidenced by a judgment. In their brief, the debtors assert that the judgment obtained by Gibson is a voidable preference because it was obtained within 90 days preceding the bankruptcy filing. As such, the debtors contend that the judgment may be set aside thus preventing Gibson’s utilization of Miss.Code Ann. § 85-3-47.
IV.
Before examining § 522(f)(1) and Miss. Code Ann. § 85-3417, the court must first determine the nature of the lien held by Gibson in this case. As set forth in the stipulated facts, Gibson furnished labor in the construction of the debtors’ home. Miss.Code Ann. § 85-7-131 indicates that a lien on a house is automatically created to secure any debt for labor or materials provided in the construction of the dwelling. This lien is enforceable against certain third parties without notice from the time of the commencement of a suit to enforce the lien or the filing of the contract or notice thereof in the office of the appropriate chancery clerk. For reference purposes, the pertinent portions of § 85-7-131 are set forth as follows:
§ 85-7-131. Property subject to lien; effect as to purchasers, etc., without notice.
Every house, building ... or structure of any kind ... erected, construct*146ed, altered or repaired ... shall be liable for the debt contracted and owing, for labor done or materials furnished ... and debt for such services or construction shall be a lien thereon. The ... laborers, and materialmen and/or contractors who rendered services and constructed the improvements shall have a hen therefor-If such house, build-
ing, structure, or fixture be in a city, town or village, the hen shah extend to and cover the entire lot of land on which it stands and the entire curtilage thereto belonging; or, if not in a city, town or village, the hen shall extend to and cover one (1) acre of land on which the same may stand, if there be so much, to be selected by the holder of the hen.... Such hen shah take effect as to purchasers or encumbrancers for valuable consideration without notice thereof, only from the time of commencing suit to enforce the hen, or from the time of filing the contract under which the hen arose, or notice thereof, in the office of the clerk of the chancery court ...
Miss.Code Ann. § 85-7-133 sets forth what is required in order to “perfect” the construction hen created by § 85-7-131. For reference purposes, § 85-7-133 is set forth as follows:
§ 85-7-133. Chancery clerk to keep record of construction hens.
Each of the several chancery clerks of this state shall provide in his office, as a part of the land records of his county, a record entitled “Notice of Construction, Liens” wherein notices under Section 85-7-131 shall be filed and recorded, and such hens, as provided hereunder, shall not take effect unless and until some notation thereof shah be filed and recorded in said record showing a description of the property involved, the name of the lienor or henors, the date of filing, if and where suit is filed, and if and where contract is filed or recorded.
The mechanism for enforcing a construction hen under Mississippi law is provided by Miss.Code Ann § 85-7-141, which provides, in pertinent part, as follows:
§ 85-7-141. Commencement of suit to enforce hen.
Any person entitled to and desiring to have the benefit of such hen shah commence his suit in the circuit court of the county in which the property or some part thereof is situated ... within twelve months next after the time when the money due and claimed by the suit became due and payable, and not after, and the suit shall be commenced by petition, describing with reasonable certainty the property upon which the hen is averred to exist, and setting out the nature of the contract and indebtedness, and the amount thereof ... such suits shah be docketed and conducted as other suits in said court, and may be tried at the first term.
Miss.Code Ann. § 85-7-153 provides that after a judgment is obtained on the suit to enforce the hen, a special writ of execution shall issue allowing the sale of the subject property as fohows:
§ 85-7-153. Execution.
When the judgment shah be against the house, budding, structure, or fixture and land, or against the same without the land ... a special writ of execution shah issue, to make the amount recovered by sale of the property, which shall be described therein ...
Once the special writ of execution has been issued, Miss.Code Ann. § 85-7-155 authorizes the sale of the subject property to satisfy the debt as follows:
§ 85-7-155. Sale of house, budding, etc., with or without land; procedure; purchasers estate and land.
*147If such special writ of execution be for the sale of a house, building, structure, or fixture and the land, or for the sale of the same without the land, the officer shall levy on, advertise, sale, and convey the same as in other cases of land levied on for debt; ...
The above referenced Mississippi statutes indicate that obtaining redress for the non-payment of labor or materials furnished in the construction of a dwelling is a multi-step process. The hen is automatically created when labor or materials are furnished. (§ 85-7-131) This hen may be perfected as to third parties by filing a notice in the office of the chancery clerk of the county in which the dwelling is located. (§ 85-7-133) The hen is then enforced by filing a complaint in the circuit court of the county in which the dwelling is located. (§ 85-7-141) Once a judgment is obtained, a special writ of execution is issued. The special writ of execution ahows the dwelling to be sold to satisfy the hen. (§ 85-7-155) Significantly, the judgment, resulting from the suit required by § 85-7-141, is only one step in the process to enforce the hen which was created by § 85-7-131.
V.
The debtors are seeking to utilize § 522(f)(1) of the Bankruptcy Code to avoid Gibson’s hen on their homestead property. Section 522(f)(1) provides, in part, as follows, to-wit:
Notwithstanding any waiver of exemptions ... the debtor may avoid the fixing of a hen on an interest of the debtor in property to the extent that such hen impairs an exemption to which the debt- or would have been entitled under section (b) of this section, if such hen is— (A) a judicial hen ...
11 U.S.C. § 522(f)(1)(A).
The debtors contend that Gibson is attempting to enforce a judicial hen against their homestead property, and that § 522(f)(1) is therefore triggered to allow the debtors to avoid the hen. Gibson counters with the argument that § 522(f)(1) does not apply in this instance because the hen in question is a statutory hen rather than a judicial hen. Fortunately, these terms are defined in the Bankruptcy Code as follows:
“judicial hen” means hen obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding; “statutory hen” means hen arising solely by force of a statute on specified circumstances or conditions, or hen of distress for rent, whether or not statutory, but does not include a security interest or judicial hen, whether or not such interest or hen is provided by or is dependent on a statute and whether or not such interest of hen is made fully effective by statute;
11 U.S.C. § 101(36), (53).
Based on the analysis of the Mississippi statutes apphcable to the creation, perfection, and enforcement of a construction hen, set forth in paragraph IV, the court concludes that the hen in this proceeding is a statutory hen which may not be avoided by the debtors pursuant to § 522(f)(1). The United States Bankruptcy Court for the Southern District of Mississippi has reached a similar conclusion. See, In re Wiltcher, 204 B.R. 488, 490 (Bankr.N.D.Miss.1996) (The hen, arising under Miss.Code Ann. § 85-7-131, is a statutory hen even though a judgment was obtained for hen enforcement purposes.)
Accordingly, the debtor’s motion to avoid Gibson’s judicial hen is not well taken and will be denied.
VI.
In its motion to terminate the automatic stay, Gibson cites Miss.Code Ann. § 85-3-*14847, which provides that property is not exempt from the collection of a debt arising from labor or materials furnished to the property. Gibson argues that because it holds a lien which is enforceable against property, unprotected by the debtor’s homestead exemption, sufficient cause exists to terminate the automatic stay.
In an attempt to circumvent the provisions of Miss.Code Ann. § 85-3-47, the debtors raised, as an alternative defense, that Gibson’s judgment is a voidable preference under the Bankruptcy Code since it was enrolled within 90 days of the filing of the bankruptcy case. The debtors contend that once Gibson’s judgment is set aside, § 85-3-47 will no longer apply, and the debtors may effectively assert their homestead exemption against Gibson’s statutory lien claim. The debtors’ argument requires a close examination of the pertinent portions of Miss.Code Ann. § 85-3-47, which reveals that the section forbids claiming an exemption in property not only against a “judgment” for labor performed, but also for “any labor done thereon, or materials furnished therefor.” Dividing § 85-3-47 into its component parts explains the statute’s effect:
[N]or shall any property be exempt [1] from sale for non-payment of taxes or assessments, or [2] from any labor done thereon, or [3] materials furnished therefor, or [4] when the judgment is for labor performed or upon a forfeited recognizance or bail bond.
Although “parts 1 and 4” refer to “sale” and “judgment” respectively, “parts 2 and 3” contain no such conditions. The statute provides that property is not exempt “from any labor done thereon, or materials furnished therefor,” regardless of whether the debt has been reduced to a judgment or has been enforced through an execution sale.
VII.
Addressing the debtors’ assertion that Gibson’s judgment is a voidable preference, the court has before it only the debtors’ brief submitted in support of the motion to avoid Gibson’s judicial lien. A preference cause of action, asserting § 547(b) of the Bankruptcy Code, requires the filing of a complaint and a trial. The court at this time makes no findings or conclusions concerning such a cause of action. However, the debtors should be mindful of § 547(b)(5), the element of the preference test that requires a preference defendant to receive more, as a result of the alleged preferential transfer, than the defendant would receive in a hypothetical Chapter 7 bankruptcy distribution. Gibson already had a statutory hen which was enforceable against the debtor’s property. The circuit court suit and the resulting judgment were procedural or ministerial “hoops” that were necessarily followed to enforce the lien, much like a pre-petition foreclosure of a deed of trust which is generally not a voidable preference. Even, assuming arguendo, that the judgment could be set aside, the statutory lien would survive and the process of enforcement could begin anew.
VIII
Since Gibson holds an unavoidable claim against the debtors for constructing their residence, and because Miss.Code Ann. § 85-3-47 dictates that the debtors may not claim an exemption in their homestead property against such a claim, the court finds that sufficient cause exists to lift the automatic stay in this Chapter 7 case.
Based on the foregoing analysis, the court finds that the automatic stay should be lifted for the limited purpose of allowing Gibson to proceed with enforcement of its statutory construction lien and result*149ing judgment against the debtors’ house and one acre appurtenance.
A separate order will be entered accordingly.
. The court reviewed Exhibit "A" in the course of its deliberations, but has not attached a copy to this opinion.
. Unless otherwise indicated, all subsequent statutory citations are to the United States Bankruptcy Code. Mississippi Code sections will be noted as Miss.Code Ann. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493329/ | OPINION AND ORDER SUSTAINING PLAINTIFF’S COMPLAINT TO AVOID MECHANIC’S LIEN AND RECONSIDERING DISALLOWANCE OF DEFENDANT’S CLAIM
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the plaintiffs complaint to avoid the defendant’s mechanic’s hen on the following grounds:
1. The defendant performed no work on the plaintiffs home in the fah of 1998 and was fully paid for ah work he performed prior to that time;
2. The defendant failed to serve his affidavit of mechanic’s hen upon the plaintiff within thirty (30) days as required by Ohio Revised Code § 1311.07;
3. The defendant failed to file his affidavit of mechanic’s hen within sixty (60) days of the last work he performed on the plaintiffs home; and
4. The mechanic’s hen is defective because it does not contain the first date the defendant performed work on the plaintiffs home.
The defendant denied that his mechanic’s hen was invalid, and the matter was tried to the Court on November 5, 2001.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the General Order of Reference entered in this district. This is a core matter which *204this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(B) and (K).
The only witnesses testifying at trial were the defendant and one of his employees. In addition, Exhibits A through E were admitted without objection. The plaintiff previously had identified himself as a witness and indicated he would testify regarding the work performed or not performed on his residence, the qualify of such work, and the payments he made. The plaintiff, however, did not appear at the trial, and no reason was given for his absence.
Based on the evidence presented, the Court finds that the defendant performed work on the plaintiffs home in October 1998 for which he was not paid. The Court further finds that the value of the material and labor expended for this work was not less than $4,800. The evidence also established that the defendant filed his mechanic’s lien within sixty (60) days of the date he last performed work on the plaintiffs home and that he served a copy of the affidavit of mechanic’s lien on the plaintiff within the required thirty-day period.
The mechanic’s lien affidavit on its face, however, fails to include the first date the plaintiff performed work or furnished materials. Ohio Revised Code § 1811.06(A) specifically requires that this information be included in the affidavit. Each of the requirements set forth in this provision is mandatory and the failure to comply with any of them precludes the attachment of a mechanic’s lien. See In re King, 37 B.R. 69 (Bankr.S.D.Ohio 1984). Therefore, the Court concludes that the defendant’s purported mechanic’s lien on the plaintiffs real property is invalid. Accordingly, the Court will enter a separate judgment entry declaring the defendant’s mechanic’s lien to be null and void.
The Court further determines, however, that the evidence presented at trial constitutes cause for reconsidering the order disallowing the defendant’s claim entered on March 26, 2001. See 11 U.S.C. § 502(j). Based on the evidence, the equities of this case clearly favor allowance of the defendant’s claim as a general unsecured claim. Therefore, the Court ORDERS that the defendant’s claim for $4,800 be allowed and paid the same dividend as other unsecured claims through the plaintiffs chapter 18 plan.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493332/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the Chapter 7 Trustee’s Objection to Exemption Claimed in Real Estate. The Debtors filed a Response to the Objection, and the Court heard the matter on February 5, 2002. The issue presented is whether Eileen Cunningham’s ownership interest in that portion of residential property in which she does not reside can be claimed as exempt. The Court took the matter under advisement and directed the parties to file briefs. For the reasons stated in In re Brizida, 276 B.R. 316 (Bankr.D.Mass.2002), as well as for the additional reason set forth below, the Court shall enter an order overruling the Trustee’s Objection.
II. FACTS
The Debtors filed a voluntary Chapter 7 petition on May 2, 2002. They are married and living separately. Ms. Cunningham resides at 9 Blackwell Street, Dorchester, Massachusetts, whereas Mr. Cunningham resides in Whitman, Massachusetts. On Schedule A-Real Property, the Debtors listed a 33 1/3% ownership interest in the real property located at 9 Blackwell Street (the “property”) with a current market value of $200,000. According to the Debtors’ Schedules, the property is unencumbered by mortgages or statutory liens. On Schedule C, the Debtors claimed an exemption under Mass. Gen. Laws Ch. 188, § 1 (West 2001) to the extent of $300,000 with respect to the property.
In his Objection, the Trustee alleged that Eileen Cunningham is the owner of a 2/3 interest in the property, which is a three-family home. The Debtor occupies the second floor; the Debtor’s sisters live on the first floor and in apartment on the third floor. According to the Trustee,
The Debtor inherited a 1/2 interest in the Property from her aunt, Rosalyn M. Flaherty ... who died June 22, 1987. *315Pursuant to a codicil to Ms. Flaherty’s Last Will and Testament, dated March 8, 1984, the Debtor inherited 1/2 of the Property as a joint tenant with her mother Joan F. O’Brien....
The Will and Codicil were approved by the Probate Court on September 22, 1987....
On June 1, 1988, Joan O’Brien transferred her interest in the Property to the Debtor and the Debtor’s two sisters as joint tenants....
Trustee’s Objection at ¶¶ 5, 6, and 7. In her response, the Debtor admitted that she is the owner of a 2/3 interest, although in her Memorandum she indicated that she is the owner of a 1/3 interest in the property. For purposes of this decision, this inconsistency is not material.
III. ANALYSIS
The Court adopts and incorporates by reference it decision in In re Brizida, 276 B.R. 316 (Bankr.D.Mass.2002). The instant case, however, is distinguishable from Brizida in two ways. In Brizida, the Debtors owned their three-family home and rented two floors, whereas in the instant case, the Debtor owns a 2/3 interest in the house, and she did not disclose receipt of any rent from her sisters.
In Thurston v. Maddocks, 88 Mass. 427, 1863 WL 3435 (1863), the court indicated that the homestead statute in effect at the time did not create a right of homestead in “only a partial ownership and possession in common with others.” 88 Mass. 427, 1863 WL 3435 at *3. The court stated the following:
The words of the statute create a right of homestead “in the farm or lot of land and buddings thereon owned or rightly possessed by him as a residence.” It requires a very liberal interpretation to extend this to land and buddings of which one has only a partial ownership and possession in common with others. If the legislature had intended to include ownership or possession in common, they would have been likely to make provision as to how many tenants in common may have homesteads in the same lot or building; to regulate the relations existing between such tenants while the estate was undivided; and to mention the effects of partition. It is manifest that partition might greatly increase or diminish the value of a homestead estate, or destroy it altogether in some cases. As the right under an existing statute is not created by operation of law, but must either be set forth in the deed of conveyance, or created after-wards by a declaration in writing, signed, sealed, acknowledged and recorded, there will probably be no serious inconvenience arising from a more restricted interpretation, which shall require the person who is about to create a right of homestead to sever his interest from that of co-tenants. If inconveniences shall arise, they may be remedied by legislation which shall meet all the exigencies of such cases. The best interpretation which the court are able to give to the statute is, to limit it to cases of sole ownership or possession.
Id. (emphasis supplied).
Although the homestead statute in effect in 1863 did not permit tenants in common to exempt a homestead in property, legislation has remedied that restriction. The present statute specifically provides that “[f]or purposes of this chapter, an owner of a home shall include a sole owner, joint tenant, tenant by the entirety or tenant in common; provided, that only one owner may acquire an estate of homestead in any such home for the benefit of his family; and provided further, that an estate of *316homestead may be acquired on only one principal residence for the benefit of a family.” Mass. Gen. Laws Ch. 188, § 1.
In Ladd v. Swanson, 24 Mass.App.Ct. 644, 511 N.E.2d 1112 (1987), the court determined that tenants in common had an absolute right to partition even though one of the tenants had filed a declaration of homestead. The court reasoned as follows:
We think that, on the basis of the traditional purpose of an estate of homestead and the express language of c. 188, § 1, the defendant cannot rely upon the declaration of homestead to defeat or frustrate the right of her tenants in common to partition the tenancy. An estate of homestead “is a provision by the humanity of the law for a residence for the owner and his family,” Bates v. Bates, 97 Mass. 392, 395 (1867), free from attachment or levy on execution by creditors up to the amount allowed by law. See Silloway v. Brown, 94 Mass. 30, 12 Allen 30, 32 (1866). Other jurisdictions passing on the issue have concluded that a tenant in common can assert a claim of homestead against creditors but not against cotenants. See, e.g., Best v. Williams, 260 Ark. 30, 537 S.W.2d 793 (1976); Tullis v. Tullis, 342 So.2d 88 (Fla.App.1977); Gottsch v. Ireland, 358 P.2d 1097 (Okl.1961). See also Ill.Rev. Stat. c. 110, par. 12-901 (1985), which provides that the Illinois Homestead Act “is not applicable between joint tenants or tenants in common but it is applicable as to any creditors of such persons.” As noted in Ball v. Ball, 27 Ill.App.3d 678, 680, 326 N.E.2d 782 (1975), construing identical language in an earlier statute, if a claim of homestead could be asserted against a cotenant, then the homestead estate would be increased “to an exclusive right of possession to the entire premises as long as assent to sale was withheld.”
As an alternative claim, the defendant asserts that, if the plaintiffs are allowed to partition the tenancy, then G.L. c. 188, § 7, requires that her estate of homestead must be set aside and preserved. There is no merit to this contention, as it would effectively nullify what we have held are the rights of tenants in common. See Atlantic Sav. Bank v. Metropolitan Bank & Trust Co., 9 Mass.App.Ct. 286, 400 N.E.2d 1290 (1980), construing the purpose and intent of that provision. See also Ball v. Ball, supra.
24 Mass.App.Ct. at 646-47, 511 N.E.2d at 1113-1114 (emphasis supplied). Although expressed as dicta in Ladd, the Court concludes that if Massachusetts courts were to determine the issue of whether a joint tenant or co-tenant could claim a homestead in a multi-family dwelling, the courts would rule in favor of debtors claiming the exemption. Accordingly, in view of the express terms of Ch. 188, § 1 and the decision in Ladd, the Court finds that Ms. Cunningham is entitled to claim a homestead exemption in the entire premises.
IV. CONCLUSION
In view of the foregoing, the Court shall enter an order overruling the Trustee’s Objection. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493333/ | MEMORANDUM OPINION
McKELVIE, District Judge.
This is a breach of contract case brought as an adversary proceeding within the Stone & Webster, Inc. et al. bankruptcy case. Plaintiff The Shaw Group, Inc. is a Louisiana corporation engaged in the business of providing professional engineering, construction, and consultation services. Defendant Taiwan Power Company (“TPC”) is a corporation of the Republic of China, Taiwan. TPC is an agency and/or instrumentality of the Republic of China, as all of its shares are held on behalf of the Ministry of Economic Affairs of the Republic of China.1
On February 7, 2001, Shaw filed its complaint and commenced this adversary proceeding against TPC. Shaw alleges that TPC breached a July 7, 2000 Memorandum of Understanding among Stone & Webster Engineering Corporation (“SWEC”), Stone & Webster International Corporation (“SWIC”), Shaw, and TPC, by failing to pay Shaw on certain overdue accounts receivable and retainage. The rights to those payments were purchased by Shaw pursuant to a July 14, 2000 Asset Purchase Agreement by and among Stone & Webster, Inc., certain Stone & Webster subsidiaries, and Shaw. Shaw also seeks a declaratory judgment that, due to TPC’s breach, Shaw has no further contractual obligations to TPC.
On May 1, 2001, TPC filed a motion to dismiss Shaw’s complaint, arguing (i) that it is immune from suit in the United States under the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. § 1602 et seq.; (ii) that Shaw lacks standing to bring its claims; (iii) that this court, in its capacity as the bankruptcy court presiding over the Stone & Webster et al. bankruptcy proceedings, is without jurisdiction to hear Shaw’s claims against it; and (iv) that the doctrine of forum non conveniens requires that Shaw bring its suit in the civil courts of the Republic of China. This is the court’s decision on TPC’s motion.
I. FACTUAL BACKGROUND
The following facts are drawn from the factual allegations in Shaw’s complaint. For purposes of this motion to dismiss, these allegations are accepted as true.
On December 3, 1997, SWIC and TPC entered into a Contract for Consultation Service for Design and Construction of the Lungmen Nuclear Power Project (“the TPC Contract”), located in Taiwan. Under the terms of the TPC Contract, SWIC agreed to provide engineering and project management services for the construction of the Lungmen power plant in consideration of the payment by TPC of approximately $72 million.
On June 2, 2000 (the “Petition Date”), SWIC and several of its affiliates (collectively, “the Debtors”), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. At that time, the Debtors announced that they would seek to sell substantially all of their assets. Ultimately, an auction for the Debtors’ assets was held in Wilmington, Delaware on July 6-7, 2000. At the begin*363ning of the auction, it was uncertain whether the TPC Contract would be included among those assets to be transferred to the successful bidder, or whether it would be among the “rejected” contracts and, therefore, not included among the assets sold. As the bidding continued, however, Shaw decided to accept the TPC Contract as an assetdiability to be purchased, and removed that contract from the rejected contracts list. On the morning of July 7, at the conclusion of the auction, Shaw was declared the successful bidder for substantially all of the assets of SWEC, including the TPC Contract.
Thereafter, SWIC, SWEC, TPC, and Shaw entered into a Memorandum of Understanding relating to the TPC Contract (the “MOU”). Under the terms of the MOU, the Debtors would file a motion for leave to reject the TPC Contract. The MOU recognized, however, that “TPC will incur significant damages as a result of the rejection of the TPC Contract.” Thus, in order to avoid those damages, and to allow for the unimpeded continuation of the Lungmen Nuclear Power Project, TPC and Shaw agreed to enter into a Replacement Contract, under which Shaw would complete the balance of the engineering services for the Lungmen Project.
According to the MOU, as a prerequisite to entering the Replacement Contract, Shaw was required to “[take] charge of the key SWIC employees working on the Lungmen Nuclear Power Project and all related know-how and intellectual property.” It was further required that “the Debtors agree to continue working on the Lungmen Nuclear Project pending approval of the Motion” and that “upon approval of the Motion, each of the Debtors, TPC, and the Replacement Contractor [Shaw/ Stone & Webster Asia, Inc.] agree to use [their] best efforts to cooperate fully with each other in order to effectuate a seamless transition” of the project from SWIC to Shaw. TPC, for its part, warranted in the MOU that it had paid SWIC for the services rendered since the Petition Date and further agreed “to reimburse SWIC (or [Shaw]) for all reasonable costs and expenses incurred by SWIC (or [Shaw]) in” effecting the transition contemplated in the MOU.
On or about July 14, 2000, the Debtors and Shaw entered into an Asset Purchase Agreement (“the Shaw Agreement”), under which Shaw purchased, among other assets of the Debtors, “all Accounts Receivable,” excluding Completed or Rejected Contracts. Shaw submits that the TPC Contract with SWIC was not among the Completed Contracts or Rejected Contracts, as defined in the Shaw Agreement, but was among the contracts purchased therein. “Accounts Receivable” was defined in the Shaw Agreement as “all accounts receivable of any Seller, of whatever kind or nature, including all current or deferred rights of payment for projects completed or commenced or services rendered on or prior to the Closing Date, whether or not such projects have been billed by Sellers as of the Closing Date.”
On July 13, 2000, this court entered the Sale Order, which approved the Shaw Agreement and all of its terms and conditions. Paragraph 36 of the July 13 Sale Order authorized the Debtors’ execution of the MOU and deemed the TPC Contract rejected pursuant to § 365 of the Bankruptcy Code. Thereafter, on September 18, 2000, TPC and Stone & Webster Asia, Inc. (“SWAP’), executed the Contract for Continuation of Consultation Service for Design and Construction of the Lungmen Nuclear Power Project Phase II, the “Replacement Contract” called for by the MOU.
As of the Petition Date, the Debtors had completed approximately 50 percent of the work required under the TPC Contract. *364Following the Petition Date, and up the execution of the Replacement Contract on September 18, 2000, the services required under the TPC Contract continued to be performed and TPC was invoiced for that work. TPC has paid all but six of the invoices. These six invoices (Nos. 58, 59, 61, 68, 64, and 65), totaling U.S. $1,845,878.65 plus N.T.2 $12,619,512.00, were submitted to TPC pursuant to the TPC Contract and the MOU between June 27 and September 5, 2000 for work performed in furtherance of the Lungmen project as contemplated under, the MOU.
TPC has refused to honor these invoices or Shaw’s rights in those accounts receivable formerly held by the Debtors. Additionally, Shaw asserts that amounts believed to be U.S. $1,503,087 plus N.T. $25,872,196 in retainage previously withheld and therefore owing under the TPC Contract have also not been paid.
II. DISCUSSION
In its Motion to Dismiss, TPC raises four independent grounds that it believes warrant the dismissal of Shaw’s adversary complaint. Based on the court’s review of the parties’ briefs, the court concludes that, should it find that it has subject matter jurisdiction over this case under the Foreign Sovereign Immunities Act of 1976 (“the FSIA”), the court would not dismiss Shaw’s complaint based on the latter three grounds. The court turns its attention, therefore, to the threshold question of whether TPC is immune to suit under the FSIA.
A. Is TPC Immune to This Suit Under the FSIA?
TPC contends that it is immune to this suit under the FSIA, 28 U.S.C. § 1602 et seq. The FSIA “establishes a comprehensive framework for determining whether a court in this country, state or federal, may exercise jurisdiction over a foreign state” or instrumentality.3 Republic of Argentina v. Weltover, Inc. et al., 504 U.S. 607, 610, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992). Under the FSIA, “a foreign state shall be immune from the jurisdiction of the courts of the United States” unless one of several statutory exceptions applies. See 28 U.S.C. § 1604 (foreign sovereigns are presumptively immune from civil actions in the United States).
Courts must apply the FSIA “in every action against a foreign sovereign, since subject matter jurisdiction in any such action depends on the existence of one of the specified exceptions to foreign sovereign immunity.” Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 493, 103 S.Ct. 1962, 76 L.Ed.2d 81 (1983). Accordingly, a court must presume that under the FSIA, actions taken by foreign states or their instrumentalities, such as TPC, are sovereign acts that are protected from the exercise of the court’s jurisdiction, unless one of the exceptions to the FSIA applies. See Crist v. Republic of Turkey, 995 F.Supp. 5, 8 (D.D.C.1998).
To overcome the presumption of immunity, Shaw must prove that the conduct that forms the basis of its complaint falls within one of the statutorily defined exceptions. Weltover, 504 U.S. at 610-11, 112 S.Ct. 2160; Federal Ins. Co. v. Richard I. Rubin & Co., 12 F.3d 1270, 1285 (3d Cir.1993). Shaw argues that TPC is subject to jurisdiction under the FSIA’s “com*365mercial activity” exception, see 28 U.S.C. § 1605(a)(2). Generally speaking, the commercial activity exception of the FSIA “withdraws immunity in cases involving essentially private commercial activities of foreign sovereigns that have an impact on the United States.” Commercial Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 241 (2d Cir.1994). The portion of the statute setting forth this exception provides that:
A foreign state shall not be immune from the jurisdiction of the courts of the United States in any case ... in which the action is based upon
[i] a commercial activity carried on in the United States by a foreign state; or
[ii] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or
[iii] upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that causes a direct effect in the United States.
28 U.S.C. § 1605(a)(2).
The parties do not dispute that the acts upon which this suit are “based” are TPC’s alleged failures to make required payments under the TPC Contract. Although TPC concedes that this alleged activity is correctly characterized as “commercial” under the FSIA, see 28 U.S.C. § 1603(d) (defining “commercial activity” as “either a regular course of commercial conduct or a particular commercial transaction or act”), it nonetheless asserts that this court may not exercise jurisdiction over it, because there is an insufficient nexus between the alleged commercial acts and the United States. TPC argues that because the disputed invoices were not payable in the United States,4 the failure to pay those invoices cannot fall under the exceptions in clauses (i) or (ii) of § 1605(a)(2) for “a commercial activity carried on in the United States” or “an act performed in the United States.” Therefore, the only potentially applicable commercial activity exception remaining is the “direct effect in the United States” exception found in clause (iii).
TPC claims that this third and final clause of the “commercial activities” exception also does not apply, because TPC’s alleged acts have no “direct effect” in the United States, within the meaning of 28 U.S.C. § 1605(a)(2)5. In support of its position, TPC relies on cases such as Adler v. Federal Republic of Nigeria, 107 F.3d 720, 726 (9th Cir.1997), and United World Trade, Inc. v. Mangyshlakneft Oil Prod. Ass’n, 33 F.3d 1232, 1239 (10th Cir.1994), for the proposition that mere financial loss to an American corporation is not sufficient to constitute a “direct effect” in the United States where the contract — specifically the defendant’s payment thereunder — is to be performed outside of the United States. Cf. Weltover, 504 U.S. at 619, 112 S.Ct. 2160 (finding direct effect in the United States for breach of contract *366case where “New York was the place of performance for Argentina’s ultimate contractual obligations”); see also Antares Aircraft, L.P. v. Federal Republic of Nigeria, 999 F.2d 33, 35 (2d Cir.1993) (stating that financial loss to United States corporation alone is insufficient to demonstrate “direct effect in the United States”); General Elec. Capital Corp. v. Grossman, 991 F.2d 1376, 1385 (8th Cir.1993) (“in order for a ‘financial loss to be “direct,” the corporate entity must itself be placed in financial peril as an immediate consequence of the defendant’s unlawful activity.’ ”) (quoting citation omitted); Zedan v. Kingdom of Saudi Arabia, 849 F.2d 1511, 1515 n. 2 (D.C.Cir.1988) (“the terms of ... a contract would, at the very least, have to specify a particular location in the United States, even perhaps the particular bank through which payment was to be made, before the breach could be said to cause ... direct ... effect in the United States”).
Thus, TPC reasons that the acts that this suit is “based upon” do not have a direct effect in the United States because Stone & Webster’s performance under the TPC Contract and the MOU and Shaw’s performance under the MOU and the Replacement Contract were all due in Taiwan and the place of performance designated for TPC’s payment of the disputed invoices was in Taiwan. Shaw, in response, argues that because the MOU was made and negotiated in the United States and because portions of the MOU were performed in the United States, TPC’s breach of the MOU does have a direct effect in the United States.
Based on the parties’ positions, the only provision of the “commercial activities” exception that the court must consider is the third clause of § 1605(a)(2), “the direct effect in the United States” provision. “[A]n effect is direct if it follows as an immediate consequence of the defendant’s activity.” Weltover, 504 U.S. at 618, 112 S.Ct. 2160 (rejecting requirement that effect be both “substantial” and “foreseeable” in order to be direct). It has been stated that in construing the terms “direct effect in the United States, courts should be ... mindful of Congress’s concern of providing access to the courts to those aggrieved by the commercial acts of a foreign sovereign.... No rigid parsing of § 1605(a)(2) should lose sight of that purpose.” Tifa Ltd. v. Republic of Ghana, 692 F.Supp. 393, 403 (D.N.J.1988) (citing Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300, 317 (2d Cir.1981)); but see United World Trade, 33 F.3d at 1238 n. 4 (stating that Congress also intended to safeguard against our courts becoming “small international courts of claims” and “protected against this danger ‘by enacting substantive provisions requiring some form of substantial contact with the United States.’ ”).
Despite the above quoted language, which suggests that courts should and may construe the “direct effect” provision liberally, the court is unaware of any case in which mere financial loss to a United States corporation arising from the breach of a contract under which both payments and services were to take place outside of the United States, was found to be sufficient to confer jurisdiction under clause (iii) of § 1605(a)(2). In Texas Trading, the Second Circuit concluded that the “direct effect” test was satisfied, because the American corporation suffered financial loss and the foreign corporation defendant was to present documents and collect money in United States. Similarly, in concluding that the “commercial activities” exception was met in Weltover, 504 U.S. at 619, 112 S.Ct. 2160, the Supreme Court noted that the defendant’s obligations that were at issue in the case had a “direct effect” *367because the parties had “designated their accounts in New York as the place of payment [making] New York ... the place of performance for Argentina’s ultimate contractual obligations.” See also, e.g., United World Trade, 33 F.3d at 1237 (noting that defendant was immune from suit in United States because, unlike Weltover, no part of defendant’s performance under the contract was to take place in the United States).
In Shaw’s answering brief, it argues that TPC’s breach of the MOU caused a direct effect in the United States because (i) TPC participated in the underlying bankruptcy proceedings to safeguard its interests and negotiated and executed the MOU in Delaware6 for the purpose of effecting a “seamless transition” from SWIG to Shaw; and (ii) under the TPC Contract, Shaw performed certain inspection, design, and engineering services (for which TPC was billed) in Boston, Massachusetts before delivering the work to Taiwan for approval. The relevant inquiry under the FSIA, however, is not whether TPC had contacts with the United States; it is whether the commercial acts that the suit is based upon had a direct effect in the United States. See Federal Ins. Co., 12 F.3d at 1290. As Shaw’s suit is based upon TPC’s alleged failure to pay certain invoices that were both issued and payable abroad for work on a project in Taiwan, the fact that the contract at issue was negotiated, executed, or that Shaw did some of its work in the United States does not demonstrate that TPC’s failure to pay under the contract caused a direct effect in the United States.
The cases that Shaw cites to establish that the contacts in this case are sufficient to establish that the commercial activities exception applies are distinguishable. More importantly, it should be noted, their rationale is not inconsistent with the cases cited by TPC in support of dismissal. In Wasserstein Perella Emerging Markers Fin., L.P. v. Formosa, 2000 WL 573231, *10 (S.D.N.Y. May 11, 2000), the court found that the defendant foreign sovereign was subject to jurisdiction under the commercial activities exception. There, however, the defendant had agreed to close and repay a loan in New York, and pursuant to the loan, “transferable securities in the form of promissory notes would have been offered for sale in the United States.” Therefore, the court concluded that its alleged breach caused a direct effect in the United States. In Honduras Aircraft Registry, Ltd. v. Honduras, 129 F.3d 543, 545-46, 549 (11th Cir.1997), the suit was based upon the breach of a contract to develop and maintain offices and a computer database in Florida. No such connection is present in the case at bar. The TPC Contract and MOU contemplated that both parties’ performance — the project work and the payment for that work— take place in Taiwan. Moreover, the express purpose of the MOU was to act as a bridge between two separate contracts (the TPC Contract and the Replacement Contract), and thereby avoid the interruption of work on the Lungmen project. Both of the contracts relating to the Lung-men project are subject to Republic of China law on their face. All of this suggests that the proper forum for Shaw’s suit is in the Republic of China.
In light of the above finding, the court need not reach TPC’s remaining bases for dismissal.
*368III. CONCLUSION
Because TPC is a “foreign state,” within the meaning of the FSIA, jurisdiction over it can only be proper if Shaw demonstrates that a statutory exception to the FSIA applies. Although Shaw contends that the “commercial activities” exception applies, for the reasons stated above, the court disagrees. Should Shaw seeks to pursue its claims against TPC, it must pursue them in courts of the Republic of China.
Although the court is sympathetic to Shaw’s claims, based on the foregoing jurisdictional analysis under the FSIA, which the court is required to conduct as a threshold matter, the court is compelled to dismiss the case.
. The facts that support TPC’s status as an agency or instrumentality of the Republic of China are set forth in TPC’s declaration in support of its motion to dismiss. For a foreign corporate entity to qualify as an "agency or instrumentality” of a foreign state, "the majority of [its] shares or ownership interest [must be] owned by a foreign state or political subdivision thereof_”28 U.S.C. § 1603(b). Shaw does not dispute that TPC is an agency or instrumentality of the Republic of China.
. ''N.T.” denominates Taiwan Dollars.
. The FSIA definition of “foreign state” includes any entity that is an “agency or instrumentality of a foreign state.” See 28 U.S.C. § 1603(a), (b). Shaw concedes for purposes of this motion that TPC qualifies as a "foreign state” under the FSIA.
. The disputed invoices state that they are payable, via electronic transfer, to Stone & Webster’s accounts at the Farmers Bank of China, His Chih Branch, and to the Standard Chartered Bank, Taipei Branch. According to a letter from S. Chow of Stone & Webster to TPC, the payment of all outstanding invoices — including the all of the disputed invoices — to bank accounts in Taiwan was effective as of May 4, 2000. The TPC Contract governing the retention payment does not designate a place of performance.
. TPC does not dispute that the first two requirements of clause (iii) are satisfied: (i) Shaw’s suit is based on TPC's alleged acts outside the United States, or (ii) that those acts are “in connection” with a commercial activity of a foreign states outside this country.
. TPC opposes Shaw’s characterization of where the agreement was negotiated and executed, but for purposes of this motion the court will assume it was negotiated and executed in the United States. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493334/ | OPINION
THOMAS M. TWARDOWSKI, Bankruptcy Judge.
Before the court is Debtor/Plaintiffs (“Plaintiff’) complaint seeking declaratory relief to reduce his federal tax liability for the 1995 calendar year and his objection to the proof of claim filed by the Internal Revenue Service (“Defendant”) in the main bankruptcy case. This court heard both matters on a consolidated record.1 We now enter judgment in favor of Defendant on the complaint and we overrule Plaintiffs objection to Defendant’s proof of claim finding that Plaintiff in fact has a federal income tax deficiency for the 1995 tax year in the amount of $24,079.00, that Defendant is entitled to impose both a failure to file penalty against Plaintiff under 26 U.S.C. § 6651(a)(1) in the amount of $1,204.00 and an accuracy related penalty under 26 U.S.C. § 6662(a) in the amount of $4,816.00 and that Defendant is entitled to interest through April 20, 1998 in the amount of $5,878.00. Our findings of fact and conclusions of law follow.
FINDINGS OF FACT
1. Plaintiff owned and operated the Custom Lawn & Tree Service (“Custom Lawn”) in Fogelsville, PA during the 1995 tax year.
2. Plaintiffs income tax return for the 1995 tax year was due on extension by October 15,1996. See Defendant’s Exhibit A.
3. Plaintiff filed his 1995 United States individual income tax return (Form 1040) on November 4, 1996 reporting gross receipts (income) of $158,762.00 and expenses in the amount of $137,770.00. See Defendant’s Exhibit A.
k. Plaintiff utilized the standard deduction rather than itemize his personal expenses on his 1995 income tax return. See Defendant’s Exhibit A, Form 1040, fine 34.
5. Defendant conducted an examination of Plaintiff in 1998 and determined that Plaintiff had income of $208,061.00 in the 1995 tax year which is $49,299.00 more than he reported on his 1995 federal income tax return. This excess income consisted of $14,399.00 in excess checking account deposits and cash used to purchase $23,400.00 in gambling chips from the Claridge Casino Hotel (“Claridge”) on June 17, 1995 and $11,500.00 in gambling chips from the Trump Taj Mahal Casino Resort (“Taj Mahal”) on June 22, 1995.2 *391These purchases are reflected on Currency Transaction Reports (“CTR”) which the Claridge and the Taj Mahal filed with Defendant. See Defendant’s Exhibits B, E; Notes of Testimony, November 15, 2000 trial (“N.T.”) at 51-52, 55-57, 94.
6. Defendant also determined that Plaintiffs expenses for the 1995 tax year totaled $113,769.00 which is $24,001.00 less than Plaintiff reported on his 1995 federal income tax return. N.T. at 52-53.
7. As a result of these discrepancies, Defendant determined that Plaintiff had underpaid his 1995 federal income tax in the amount of $24,079.00. See Defendant’s Exhibit B.
8. On August 11, 1998, Defendant sent Plaintiff a notice of deficiency which notified Plaintiff of Defendant’s intent to assess a tax deficiency of $24,079.00 for the 1995 tax year, a failure to file penalty under 26 U.S.C. § 6651(a)(1) in the amount of $1024.00 due to the fact that Plaintiff filed his 1995 income tax return late, an accuracy related penalty under 26 U.S.C. § 6662(a) of $4,816.00 for Plaintiffs underpayment of taxes for the 1995 tax year and interest to April 20, 1998 in the amount of $5,878.00. See Defendant’s Exhibit B.
9. Thereafter, Plaintiff filed a petition in the United States Tax Court challenging the proposed assessment. However, the Tax Court litigation was stayed by Plaintiffs filing of this chapter 13 bankruptcy petition on September 8,1999.
10. Plaintiff and his wife, Anabela Berar-di, testified that they went to Atlantic City on Father’s Day weekend in June of 1995 with $500.00 and left early the next morning with enough money for tolls and a meal at McDonalds. N.T. at 44, 45.
11. Plaintiff admits and we find as a fact that Plaintiff purchased over $30,000.00 worth of gambling chips from casinos on the days in question. N.T. at 44.
12. Plaintiff testified that “the money that was used to purchase those chips were derived from a conglomeration of markers drawn, and winnings earned, whereas all of the chips were converted into cash and then the cash ... again bought more gaming chips.” N.T. at 44-45.
13. Plaintiff testified that he had a maximum line of credit of $3,000.00 with each of the three casinos he visited on Father’s Day in June of 1995. N.T. at 13.
1J. At the height of his winnings, which was somewhere between 6:00 p.m. and 7:00 p.m. on the first day of his visit over Father’s Day weekend in June of 1995, Plaintiff had $19,000.00 in cash and had generated in excess of $30,000.00 to $40,000.00 in gambling action or winnings during the day. N.T. at 16, 20.
15. Plaintiff testified that he never cashed out $10,000.00 or more at any cashier window. N.T. at 17.
16. Alan Mackie, an employee of Defendant who has some expertise in casino records and the procedures used at casinos, testified that based upon the statements Defendant received from the casinos, it appears that Plaintiff presented $23,400.00 in cash to the Claridge on June 17. 1995 to purchase gaming chips and $11,500.00 in cash to the Taj Mahal on June 22, 1995 to purchase gaming chips. While Plaintiff testified that he cashed in chips to obtain the money to purchase the gaming chips, no records were received from the casinos to support this testimony. N.T. at 94-95.
*39217. Monika Drury, a tax auditor employed by Defendant, testified that during her audit of Plaintiffs 1995 income tax return she reviewed all of the documentation Plaintiff provided to her and gave Plaintiff credit for all of the business expenses which were documented. N.T. at 61-63. Specifically, Plaintiff claimed a $14,664.00 depreciation deduction on his 1995 federal income tax return for his vehicles and mowers used in connection with his Custom Lawn business as well as a $20,992.00 deduction from gross receipts as “cost of goods” and both of these deductions were allowed in full by Defendant. Defendant disallowed $24,001.00 of business expenses claimed by Plaintiff on his 1995 federal income tax return because these expenses were not documented.
CONCLUSIONS OF LAW.
1. Section 6201 of the Internal Revenue Code authorizes the Secretary of the Treasury or his designee to assess all taxes including interest and additions to tax imposed by the Internal Revenue Code. 26 U.S.C. § 6201.
2. A presumption exists in favor of Defendant that the notice of tax deficiency is correct, and therefore, the burden of producing evidence to rebut the presumption is on Plaintiff. As stated by the Third Circuit, “the burden of proving that an assessment is arbitrary and excessive rests on the taxpayer; if the taxpayer cannot prove that the assessment was arbitrary, [he] retains the burden of overcoming the presumption in favor of the government that the assessment was not erroneous.” Resyn Corp. v. United States, 851 F.2d 660, 662-63 (3rd Cir.1988); see also Foster v. Commissioner of Internal Revenue, 391 F.2d 727, 735 (4th Cir.1968); United States v. Baskin & Sears, P.C., 207 B.R. 84, 86-8 (E.D.Pa.1997); Abel v. United States (In re Abel), 200 B.R. 816, 819-21 (E.D.Pa. 1996).
3. Section 61(a)(1) of the Internal Revenue Code provides that gross income includes “all income from whatever source derived.” 26 U.S.C. § 61(a)(1).
L Once it is shown that unreported receipts or deposits have the appearance of income, the taxpayer has the burden of convincing the court that the receipts or deposits came from a nontaxable source. Ruark v. Commissioner of Internal Revenue, 449 F.2d 311, 312 (9th Cir.1971).
5. A “court is not bound to accept testimony at face value even when it is uncontroverted if it is improbable, unreasonable or questionable.” Ruark, 449 F.2d at 312 (quoting Factor v. Commissioner of Internal Revenue, 281 F.2d 100, 111 (9th Cir.1960)), cert. denied, 364 U.S. 933, 81 S.Ct. 380, 5 L.Ed.2d 365 (1961).
6. For the reasons that follow, we conclude that Plaintiff failed to meet his burden of overcoming the presumption that he had unreported income in the 1995 tax year in the amount of $49,299.00.
(A). Plaintiff provided no evidence or testimony to refute Defendant’s determination that he had $14,399.00 in excess deposits to his checking account in the 1995 tax year which deposits were not reported as income.3 Therefore, this determination must stand.
(B). Plaintiff provided no evidence or testimony to refute Defendant’s determination that he had unreported income of $11,500.00 in the 1995 tax year which he *393used to purchase gambling chips at the Taj Mahal on June 22, 1995. Therefore, Defendant’s determination that Plaintiff had unreported income in the amount of $11,500.00 in the 1995 tax year must stand.
(C). Plaintiff admitted that he made a cash purchase of $23,400.00 of gambling chips at the Claridge on June 17,1995. As required by law, Claridge filed with Defendant a CTR reporting that Plaintiff paid $28,400.00 in cash to buy gambling chips on June 17, 1995. Casinos are legally required to file a CTR “of each transaction in currency, involving either cash in or cash out, of more than $10,000.00.” 31 C.F.R. § 103.22(b)(2). Multiple transactions totaling more than $10,000.00 during any gaming day are treated as a single transaction. 31 C.F.R. § 103.22(c). “Cash in” transactions include purchases of chips, payments on any form of credit, including markers and counter checks and bets of currency. 31 C.F.R. § 103.22(b)(2)(i)(A), (D), (E). “Cash out transactions include redemption of chips, advances on any form of credit, including markers, and payment on bets”. 31 C.F.R. § 103(b)(2)(ii)(A), (D), (E). Plaintiff failed to introduce evidence to support his claim that the $23,400.00 used to purchase the gambling chips were derived from casino loans. Therefore, Plaintiff failed to meet his burden of overcoming the presumption that Defendant’s determination that he had unreported income of $23,400.00 in the 1995 tax year which he used to purchase gambling chips at the Claridge on June 17, 1995 was correct and this determination must stand.
7. Gambling wins constitute gross income which must be reported. Garner v. United States, 501 F.2d 228, 232 (9th Cir.1972), aff'd., 424 U.S. 648, 96 S.Ct. 1178, 47 L.Ed.2d 370 (1976). A taxpayer is permitted to take a deduction for his gambling losses up to the amount of his winnings. 26 U.S.C. § 165(d); Garner, 501 F.2d at 232; Norgaard v. Commissioner of Internal Revenue, 939 F.2d 874, 878 (9th Cir.1991)(losses from wagering deductible “to the extent of the gains from such transactions”). However, “a gambler whose losses offset his winnings must nevertheless report all winnings as gross income and losses as deductions.” Garner, 501 F.2d at 232. In addition, gambling losses must be taken as itemized deductions under section 63(d) of the Internal Revenue Code, 26 U.S.C. § 63(d). Hochman v. Commissioner of Internal Revenue, T.C.M. (P-H)1986-24 (U.S. Tax Ct.1986).
8. In the case before us, Plaintiff did not file a Schedule A itemizing his gambling losses as deductions, but instead took the standard deduction on his Form 1040. Moreover, the evidence Plaintiff submitted on his gambling losses was incomplete and inconclusive. Accordingly, Plaintiff may not deduct his gambling losses from his winnings for the 1995 tax year.
9. The taxpayer has both the burden of showing that he is entitled to a particular deduction and the duty to maintain records sufficient to establish the amount of the deduction. 26 C.F.R. § 1.6001-1. See also Norgaard, 939 F.2d at 877.
10. Plaintiffs bald assertion that his Schedule C attached to his Form 1040 reflected money he spent on his business is insufficient to meet his burden of showing entitlement to a particular deduction.
11. Plaintiff claimed a $14,664.00 depreciation deduction on his 1995 federal income tax return for his vehicles and mowers used in connection with his Custom Lawn business as well as a $20,992.00 deduction from gross receipts as “cost of goods” and both of these deductions were allowed in full by Defendant, as were other properly documented deductions, because *394they were properly documented. Defendant properly disallowed $24,001.00 of business expenses claimed by Plaintiff on his 1995 federal income tax return because these expenses were not documented.
12. Penalties and additions to tax are presumed correct. Pahl v. Commissioner of Internal Revenue, 150 F.3d 1124, 1181 (9th Cir.1998).
IS. The failure to file penalty under 26 U.S.C. § 6651(a)(1) applies when an income tax return is not filed within the prescribed time and imposes a 5% addition to tax if the failure to file is not for more than one month. Plaintiffs federal income tax return was filed on November 4, 1996, which was twenty days after Plaintiffs extended deadline to file, October 15, 1996, expired. Therefore, the failure to file penalty imposed in this case in the amount of $1,204.00 is correct and must stand.
Ik- The accuracy related penalty under 26 U.S.C. § 6662(a) applies when it has been determined that the underpayment of tax is attributable to negligence or disregard of rules or regulations, when there has been a substantial understatement of income tax or when there has been any substantial valuation misstatement and imposes a 20% addition to the amount of the tax underpayment. The accuracy related penalty imposed by Defendant in this case in the amount of $4,816.00 is correct and must stand since the underpayment of tax is attributable to Plaintiffs negligence or disregard of rules or regulations.
15. If any amount of tax imposed by the Internal Revenue Code is not paid when it is due, 26 U.S.C. § 6601 requires that interest on the unpaid tax bill must be paid at a rate established by 26 U.S.C. § 6621.
16. As Plaintiff failed to pay his federal income tax obligation for the 1995 tax year when it was due, Defendant’s determination that. Plaintiff owes interest in the amount of $5,878.00 through April 20,1998 is correct and must stand.
An appropriate Order follows.
ORDER
AND NOW, this 22nd day of February, 2002, upon consideration of the foregoing Findings of Fact and Conclusions of Law, it is ORDERED that: (1) JUDGMENT ON THE COMPLAINT IS ENTERED IN FAVOR OF DEFENDANT and it is determined that: (a) Plaintiff has a federal income tax deficiency for the 1995 tax year in the amount of $24,079.00; and (b) Defendant is entitled to impose both a failure to file penalty against Plaintiff under 26 U.S.C. § 6651(a)(1) in the amount of $1,204.00 and an accuracy related penalty under 26 U.S.C. § 6662(a) in the amount of $4,816.00; and (c) Defendant is entitled to interest through April 20, 1998 in the amount of $5,878.00; and (2) Plaintiffs objection to the proof of claim filed by Defendant is OVERRULED and Defendant’s proof of claim is ALLOWED AS FILED.
. Although we declined to formally consolidate the within adversary matter and contested matter, we directed the parties to submit evidence at one hearing/trial for purposes of judicial economy.
. Defendant did not include the $12,000.00 of verified gambling debt that Plaintiff paid to various casinos in the 1995 tax year as unreported income. N.T. at 57-58.
. Plaintiff maintains that this sum represents loans he received from various casinos. However, Plaintiff failed to introduce any evidence to support this assertion and therefore. we find that Plaintiff failed to overcome the presumption that he had $14,399.00 in unreported income in the 1995 tax year and this determination must stand. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493335/ | ORDER SUSTAINING OBJECTION TO EXEMPTION ELECTION
GEORGE R. HODGES, Chief Judge.
This matter was heard before the undersigned, United States Bankruptcy Judge, upon the objection to the debtor’s exemption election filed by the United States Bankruptcy Administrator. For the reasons stated herein, the Bankruptcy Administrator’s objection is sustained.
Factual Background
1. On November 1, 2001 the debtor filed a voluntary chapter 11 proceeding. The debtor .filed a Schedule C — Property Claimed as Exempt with his petition. The original exemption election exempted funds in a checking account in the amount of $5,945.98 pursuant to N.C. Gen. Stat. § 1-362. The debtor also exempted a money market account in the amount of $1,427.01 pursuant to N.C. Gen. Stat. § lC-1601(a)(9). The debtor used the exemption provided by N.C. Gen. Stat. § lC-1601(a)(2) to exempt eleven turkeys valued at $100 and $3,500 of his interest in a purchase money note and deed of trust.
2. On February 26, 2002, the Bankruptcy Administrator filed an Objection to Exemption Election on December 26, 2001. Specifically, the Bankruptcy Administrator objected to the debtor’s claim of exemption under N.C. Gen Stat. § 1-362 of the $5,945.98 in his checking account, arguing that the debtor had not had any earnings in the sixty days prior to filing from his personal services, and that the debtor did not • have a family supported wholly or *422partly by his labor. In addition, the Bankruptcy Administrator objected to the debt- or’s claim of exemption under N.C. Gen. Stat. § lC-1601(a)(9) of the $1,427.01 in a money market account, arguing that the account was not an individual retirement account or part of a retirement plan.
3. On January 11, 2002, the debtor amended his exemption election. The debt- or no longer claimed an exemption in the turkeys or his interest in a purchase money note and deed of trust. The debtor changed his exemption of the $1,427.01 in his money market account such that he now claimed this account exempt under N.C. Gen. Stat. § 1-362. Out of the $5,945.98 contained in the debtor’s checking account, he claimed $3,500 as exempt pursuant to N.C. Gen. Stat. § 1C-1601(a)(2).
4. The Court heard the Bankruptcy Administrator’s objection on February 21, 2002. The Bankruptcy Administrator maintained her objection to the debtor’s claim of exemption under N.C. Gen. Stat. § 1-362 arguing that the debtor was not entitled to this exemption as he was a single person without dependents and did not qualify as a “family” as required by the language of N.C. GeN. Stat. § 1-362. The Bankruptcy Administrator withdrew her objection to the remaining exemptions as set forth in the amended exemption election.
Discussion
5. The issued raised by the Bankruptcy Administrator is whether an unmarried debtor without dependents qualifies as a “family” and is entitled to claim the exemption allowed under N.C. Gen. Stat. § 1-362. The statute provides an exemption for the debtor’s earnings for his personal services within the previous sixty days so long as those wages are necessary for the support of a family. For purposes of the exemption, the North Carolina courts understand the word “family” to imply that the debtor has other dependents who rely on the debtor for support. See Elmwood v. Elmwood, 295 N.C. 168, 244 S.E.2d 668 (1978).
6. In Elmwood, the court quoted Goodwin v. Claytor, 137 N.C. 224, 49 S.E. 173 (1904), for the general rule that exemptions should be liberally construed so as to “embrace all persons coming fairly within their scope.” 295 N.C. at 185, 244 S.E.2d at 678. The retirement pay of the debtor in Elmwood, a divorced man, had been garnished for alimony and child support arrearages. Id. at 178, 244 S.E.2d at 674. The debtor claimed that his retirement pay for the previous 60-day period was exempt pursuant to § 1-362 because this money was necessary for the support of his second family. Id. at 177, 244 S.E.2d at 674. The court concluded that the debt- or was entitled to the exemption but noted the following reservation:
It would seem reasonable to suppose that what the Legislature of 1870-71 had in mind in enacting this exemption was to protect the wage-earner’s family from want as against the claims, however just, of his other creditors and that it was not contemplated that the needs of a wage-earner’s second family should be supplied at the expense of the legitimate claims of his first family.
Id. at 185, 244 S.E.2d at 678 (emphasis added). It is evident from the language used by the court that it interpreted the word “family” to imply the debtor plus the debtor’s dependents.
7. Opinions from the Court of Appeals indicate a similar understanding. In Harris v. Hinson, 87 N.CApp. 148, 360 S.E.2d 118 (1987), the court quoted a New York decision as follows, “[t]he intent of the legislature is plain. A debtor’s duty to his family is recognized so far that, if he has a family wholly or partly supported by his *423labor, he may, if necessary always have 60 days’ back earnings exempt....” Harris, 87 N.C.App. at 151, 360 S.E.2d at 120 (quoting In re Trustees of Board of Publication and Sabbath School Work, 22 Misc. 645, 50 N.Y.S. 171, 173 (1898) (emphasis added)). Because North Carolina Statutes regarding execution proceedings were modeled after similar laws in New York, that state’s interpretation of the exemption is particularly pertinent. Id.
8. Another Court of Appeals case that addressed the § 1-362 exemption was Jacobi-Lewis Co. Inc. v. Charco Enterprises, Inc., 121 N.C.App. 500, 466 S.E.2d 338 (1996). In a dissenting opinion, Judge Lewis quoted a Wisconsin opinion stating that the purpose of the exemption is “to provide the debtor and his family with the means of obtaining a livelihood and preventing them from becoming a charge upon the public.” 121 N.C.App. at 502, 466 S.E.2d at 339 (quoting North Side Bank v. Gentile, 129 Wis.2d 208, 385 N.W.2d 133, 139 (1986) (emphasis added)). Judge Lewis dissented from the court’s ruling that a debtor’s income from lease payments could be exempted on the theory that the § 1-362 exemption only applies to wages for personal services and salaries. Id. But it appears that the term “family” as Judge Lewis understands it-implies that the debtor supports other dependents.
9. Finally, North Carolina debtors generally have a great deal of flexibility in claiming and maintaining their exemptions. Household Finance Corp. v. Ellis, 107 N.C.App. 262, 266, 419 S.E.2d 592, 595 (1992). However, debtors must demonstrate-not just allege-that their earnings are actually necessary for the support of their families in order to claim a § 1-362 exemption. Sturgill v. Sturgill, 49 N.C.App. 580, 586 272 S.E.2d 423, 428 (1980). Failure to do so may result in the denial of the exemption. Id.
10. Taken together, case law references to the § 1-362 exemption imply that North Carolina courts would not grant the exemption to a single debtor who has no dependents. That interpretation also comports with the plain meaning of the statute. Absent a State Court decision on this specific issue, it is reasonable to deny a § 1-362 exemption to a debtor who cannot show responsibility for the support of other dependents.
11. Subsequent to the motion, hearing, and ruling on the Bankruptcy Administrator’s objection to exemption, the debtor raised by correspondence some additional authority. The court has reviewed this authority and finds it either unpersuasive or not on point. The court does specifically note, however, that this Order is without prejudice to any valid claim of exemption that the debtor may have pursuant to any provision other than N.C. Gen. Stat. § 1-362.
Conclusion
For the above stated reasons, the court concludes that the debtor should not be permitted to claim an exemption pursuant to N.C. Gen. Stat. § 1-362.
It is, therefore, ORDERED that the Bankruptcy Administrator’s objection is therefore SUSTAINED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493337/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court are the following:
1. Motion to dismiss filed by the Chapter 12 trustee asserting that the debtor, MeSwine Creek Farms, Inc., is not eligible for Chapter 12 relief pursuant to 11 U.S.C. § 101(18) and (19).
2. Motion to dismiss for failure to qualify as a Chapter 12 debtor filed by the United States of America— Farm Service Agency (FSA).
3. Objection to the confirmation of the debtor’s Chapter 12 plan filed by FSA.
4. Motion, filed by FSA, to declare that the automatic stay is not in effect or, alternatively, to lift the automatic stay and abandon real property and farm equipment.
Responses to each of the aforesaid pleadings were filed by the debtor; and the court, having heard and considered same, hereby finds as follows, to-wit:
I.
The court has jurisdiction of the parties to and the subject matter of these proceedings pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. These are core proceedings as defined in 28 U.S.C. § 157(b)(2)(A), (B), (G), (L), and (0).
II.
MOTIONS TO DISMISS
The Chapter 12 trustee and FSA have premised their motions to dismiss on the argument that the debtor is ineligible for Chapter 12 bankruptcy relief pursuant to the definitions set forth in 11 U.S.C. § 101(18)(B) and (19), which read as follows:
(18) “family farmer” means—
(B) corporation or partnership in which more than 50 percent of the outstanding stock or equity is held by one family, or by one family and then relatives of the members of such family, and such family or such relatives conduct the farming operation, and
(i) more than 80 percent of the value of its assets consists of assets related to the farming operation;
(ii) its aggregate debts do not exceed $1,500,000 and not less than 80 percent of its aggregate noncontingent, liquidated debts (excluding a debt for one dwelling which is owned by such corporation or partnership and which a shareholder or partner maintains as a principal residence, unless such debt *463arises out of a farming operation), on the date the case is filed, arise out of the farming operation owned or operated by such corporation or such partnership; and
(iii) if such corporation issues stock, such stock is not publicly traded;
(19) “family farmer with regular annual income” means family farmer whose annual income is sufficiently stable and regular to engage such family farmer to make payments under a plan under chapter 12 of this title.
Cloy M. Case (Case), the president and sole stockholder of the debtor, originally incurred several debts with FSA beginning as early as April 18, 1979, with the execution of a promissory note in the sum of $165,000.00, bearing interest at the rate 8 1/2% per annum. This was followed by the execution of a second promissory note on April 3, 1981, in the principal sum of $37,760.00, bearing interest at the rate of 5% per annum. The evidence indicates these notes were collateralized by real property and farm equipment, the hens of which were perfected by appropriately recorded deeds of trust and financing, statements. One or both of these notes were renewed on several occasions, the last instrument being dated April 11, 1985. As of November 1, 1999, the total debt owed to FSA had risen to the sum of $661,190.26. The respective promissory notes, their principal amounts, annual rates of interest, and due dates of their final installments are set forth as follows:
Date of Instrument Principal Amount Annual Rate of Interest Due Date of Final Installment
4/18/79 $165,000.00 8.50% 4/18/2004
4/3/81 37,760.00 5.00% 4/3/2000
4/20/82 8,000.00 14.25% 4/20/83
5/4/83 53,700.00 10.25% 5/4/84
3/5/84 67,500.00 7.25% 3/5/85
5/2/84 12,030.00 7.25% 5/2/85
4/11/85 85,670.00 7.25% 4/11/86
The deeds of trust encumber 412.2 acres of real property, formerly owned by Case, which FSA previously valued at $354,500.00. The debts were also secured by certain items of farm equipment, valued by FSA in the sum of $3,450.00.
Because of a moratorium, prohibiting foreclosures by FSA and its predecessor in interest, Farmers Home Administration, as well as, because of an intervening individual bankruptcy petition filed by Case and his wife, Linda Joyce Case, No. 89-12398, FSA has made little effort to enforce its security interests over the past several years.
As alleged in FSA’s pleadings, Case applied to FSA for permission to sell the subject real property in July, 1998. The application was conditionally approved subject to the buyer paying the fair market value of the property in the sum of $354,500.00, plus $94,894.00, representing the value of gravel and timber allegedly sold by Case without FSA’s permission. This condition could not be met so the application was denied on July 24, 1998.
In July, 1999, FSA gave notice to Case of its intent to foreclose its deeds of trust. Case then incorporated the debtor, McSwine Creek Farms, Inc., and trans*464ferred title to the real property to the corporation on August 20, 1999, by an Assumption Quitclaim Deed. The consideration for this transfer was the assumption by the corporation of all debts owed to FSA to the extent of the fair market value of the real property.
Case indicated that he transferred his cattle, certain farm equipment, and an eighteen-wheeler dump truck with trailer to the debtor in exchange for the execution of a promissory note in the principal sum of $20,000.00.
Shortly after its incorporation, the debt- or filed a corporate Chapter 12 bankruptcy petition on October 7, 1999. The debtor filed a plan of reorganization proposing to pay FSA as follows:
Class 111(a) — $165,000.00 shall be paid in 40 equal amortized installments at the rate of 8.5% per annum, which shall begin on February 15, 2001, with a like amount due on the same day of each succeeding year with the final payment being due on February 15, 2040.
Class 111(b) — $35,000.00 shall be paid in a single balloon payment to come due in 10 years plus interest accrued at the rate of 5% per annum. The proceeds of any timber sales by the debtor prior to the maturity of this claim shall be applied to the balance of principal and interest. (In another section of the plan, this number is expressed as $37,760.00.)
The aforesaid amounts to be paid to FSA are based on the promissory note dated April 18, 1979, in the principal sum of $165,000.00, and the promissory note dated April 3, 1981, in the principal sum of $37,760.00. The total of these two notes roughly coincides with the value placed on the real property by the debtor in the sum of $200,000.00. Although it is not clear, depending on whether the debtor proposes to pay FSA $35,000.00 or $37,760.00, the slight overage could be attributable to a value assigned by the debtor to the farm equipment which is subject to FSA’s lien.
The debtor indicates that it proposes to fund its plan of reorganization as follows:
1. CRP (Conservation Reserve Program) Payment — $7,961.00 per year. (The parties concur that this payment will last only through 2007.)
2. Crop program payments — The debt- or projects that it will receive approximately $2,000.00 per year from the United States Department of Agriculture. FSA notes that these payments will last only through 2002, and that they will- decline annually from the present date until that time.
3. Cattle operation — The debtor anticipates that it will earn approximately $2,000.00 to $3,000.00 per year from the sale of cattle.
4. House rent — The debtor will receive an estimated $700.00 per month or $8,400.00 per year from Case, individually, as rent for the residential dwelling that he occupies on the subject real property.
5. Timber proceeds — The aforesaid plan payments will be augmented by the proceeds from the sale of timber which is currently growing on the real property. The projected amounts to be realized from the timber sales were not calculated, but the hardwood timber was expected to be harvested in five years and the pine timber in ten years.
While the Chapter 12 trustee’s motion to dismiss is fairly generic, FSA’s motion focuses more closely on the requirement that “not less than 80% of its (the debtor’s) aggregate non-contingent liquidated debts .... arise out of the farming operation owned or operated by such corporation .... ” FSA also asserts that the debtor *465has not filed its bankruptcy case in good faith.
Although Case has been involved with FSA for over twenty years, he has not been engaged in actual fanning activities for the past several years. As such, he would not qualify individually as a “family farmer” because 50% or more of his income in calendar year 1998 was not generated from farming activities. This requirement, however, does not apply to a corporation. See, In re Cross Timbers Ranch, Inc., 151 B.R. 923 (Bankr.W.D.Mo.1993). Case obviously recognized this disparity between a corporate and an individual Chapter 12 debtor, insofar as eligibility was concerned, and thus elected to incorporate before filing bankruptcy. This is not inherently wrong. In the absence of further substantiating evidence, this court cannot presumptively conclude that the actions of Case were in bad faith. See, In re Turner, 87 B.R. 514 (Bankr.S.D.Ohio 1988) and In re KZK Livestock, Inc., 147 B.R. 452 (Bankr.C.D.Ill.1992). Since the debtor herein has timely filed schedules and a proposed Chapter 12 plan of reorganization, this court also finds that the factual circumstances in In re S Farms One, Inc., 73 B.R. 103 (Bankr.D.Colo.1987), relied upon by FSA, are distinguishable.
The most significant question is 80% of the aggregate non-contingent, liquidated debt owed by McSwine Creek Farms, Inc., arises out of the farming operation owned or operated by the debtor corporation. Clearly, if the corporate debtor could assume the indebtedness owed to FSA, this requirement would be met. The $20,000.00 debt owed by the debtor to Case, generated through the purchase of his cattle, farm equipment, and dump truck, is meaningless. The true test is whether the debt owed to FSA is legitimately owed by McSwine Creek Farms, Inc.
Paragraph No. 12 of the FSA deeds of trust provides as follows:
(12) Neither the property or any portion thereof or interest therein shall be leased, assigned, sold, transferred, or encumbered, voluntarily or otherwise, without the written consent of the Government. ...
Conditions such as this are authorized pursuant to regulations codified at 7 CFR 1943.12(b)(4)(iii), 1943.12(b)(10), and 1965.27.
Case obviously knew that FSA’s consent was required since he made application to FSA for permission to sell his property earlier. The court must, therefore, conclude that this “restriction on transfer” is fatal to the effort of the corporate debtor to include the debt owed to FSA in its Chapter 12 bankruptcy. The court is aware of no authority that would permit the debtor to circumvent the clear and unambiguous provisions set forth in the deeds of trust. Consequently, the debt to FSA is not owed by the corporate debtor. Likewise, the underlying collateral, securing the debt to FSA, can not be includible in this bankruptcy estate.
III.
OBJECTION TO CONFIRMATION FILED BY FSA
For the reasons set forth immediately hereinabove, the court has determined that the debt is not owed to FSA by McSwine Creek Farms, Inc., and the property securing the debt should not be considered a part of this bankruptcy estate. As such, even without further discussion, the objection to confirmation is well taken. However, the court is compelled to comment on the following issues which also are pertinent to the debtor’s proposed plan of reorganization, to-wit:
*4661. Both the debtor and FSA offered appraisal testimony concerning the subject real property by individuals who were appropriately qualified as expert witnesses. The debtor’s appraiser, Brewer Appraisal Service, indicated that the property had a value of $200,000.00, representing approximately $485.00 per acre for the 412.2 acre tract. FSA’s appraiser, Thomas A. Ken-nard and Associates, valued the same property at $895,424.00, at a rate of $960.00 per acre. In their market data approaches to valuation, both appraisers utilized comparable sales adjusted to account for differences, either better or worse, in the subject real property. The sizeable disparity in the appraisals can be attributed primarily to the value assigned by the FSA appraiser to timber that might be merchantable at some future date. This added value was not included by the debtor’s appraiser who looked only to comparable sales, some of which also had growing timber.
Although the court is of the opinion that the methodology utilized by FSA’s appraiser resulted in a somewhat artificially high evaluation, the debtor’s appraiser did not take into account that the value of the property could perhaps be enhanced independently because of the merchantable timber. It would appear that the debtor’s participation in the CRP pine forestation program could have a positive influence on the land value as compared to purely un-managed timber growth. On the other hand, the court is cognizant of the fact that there is no absolute certainty that timber growing now will be harvested at some indefinite future date for a significant value. Obviously, there are many unfortunate things that can happen to standing timber over the next five to ten years. Regardless, the court is of the opinion that a mid-range value for this property, in the vicinity of $280,000.00, would be appropriate. Based on calculations provided by Sidney Owen, Jr., an FSA loan specialist, the amortization of this amount would require an annual payment of at least $24,000.00, payable over 40 years at 8 1/2% per annum. The debtor’s income projections, after being adjusted for the ultimate termination of the CRP payment, as well as, the termination and reduction of the crop program payments, would not service this debt over the foreseeable future.
2. There is no showing in the debtor’s plan, that is discernable to the court, of any repayment proposal for the farm equipment which is subject to the FSA hen, nor is there any showing that the $20,000.00 debt, owed to Case, can be serviced.
For these additional reasons, the court concludes that the debtor’s plan of reorganization is not feasible, and the objection to confirmation, filed by FSA, shall be sustained.
IV.
MOTION TO DECLARE THE AUTOMATIC STAY NOT TO BE IN EFFECT, OR, ALTERNATIVELY, TO LIFT THE AUTOMATIC STAY AND ABANDON THE REAL PROPERTY AND FARM EQUIPMENT
In the bankruptcy case of Case and his wife, Linda Joyce Case, mentioned herein-above, an order lifting the automatic stay and abandoning the property collateralized to FSA was entered on February 2, 1990. Ostensibly, because of the moratorium, no action was taken by FSA until it submitted its notice of intent to foreclose in July, 1999. Because the court has already concluded that the real property could not be transferred from Case to the corporate debtor, it is not property of this bankruptcy estate. Consequently, the automatic *467stay must be lifted and the property abandoned as it was once done in 1990.
Short of an agreement being negotiated between Case, the debtor, and FSA, the court has no discretion to mandate that FSA accept the debtor as the owner of the subject real property. This would contravene the express provisions of the FSA deeds of trust, as well as, the aforementioned sections of the Code of Federal Regulations.
An order will be entered consistent with this opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493339/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court are the following:
1. Motion for summary judgment filed by the defendant, David W. Ellington, referred to in this opinion as “debtor.”
2. A motion to strike, or, in the alternative, a response to the motion for summary judgment filed by the plaintiff, Wade, Inc., referred to in this opinion as “Wade.”
3. Rejoinder to the motion to strike, etc., filed by the debtor.
The court, having considered the aforesaid pleadings and the memoranda of law submitted by the parties, hereby finds as follows, to-wit:
*472I.
The court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(I).
II.
STATEMENT OF FACTS
The debtor purchased three items of farm equipment from Wade pursuant to the following contracts:
1. 4-row cotton picker, contract # 492422917-01, executed on February 7,1995.
2. 5-row cotton picker, contract #492422914-02, executed on April 19,1996.
3. 8-row cultivator, contract #492422917, executed on June 27, 1996.
The three contracts were assigned to John Deere Company, the financial division of Deere & Company, referred to in this opinion as “Deere Credit.” Pursuant to the terms of a John Deere Agricultural Dealer Finance Agreement, the assignment of the three contracts was with full recourse against Wade. When the debtor defaulted in the payment of his contractual obligations, the contracts were reassigned by Deere Credit to Wade on April 6, 1999.
Prior to the reassignment to Wade, an employee of Deere Credit, Larry Long, contacted the debtor to discuss the payment of delinquencies that had arisen under the contracts. In an effort to avoid the immediate repossession of the equipment, the debtor, on October 2,1998, delivered two postdated checks to Long. According to Wade’s responses to requests for admissions, the checks were made payable to Deere Credit and were dated respectively, October 15, 1998, and October 20, 1998. According to Long’s deposition testimony, the debtor represented that he would honor the checks through proceeds that he anticipated realizing from future crop sales. The checks were not honored. The debtor, however, retained possession of the equipment and used the two cotton pickers in harvesting his 1998 crop. The items of equipment were thereafter returned to Wade in early December, 1998.
Shortly after the debtor filed a voluntary Chapter 7 bankruptcy petition, Wade filed its complaint, pursuant to 11 U.S.C. § 523(a)(2), asserting that the debt, which had then been reassigned to Wade, should be excepted from discharge. Wade contends that it has sustained damages, totaling approximately $35,000.00, resulting from the depreciation to the two cotton pickers which were used by the debtor between October 2, 1998, and early December, 1998. No damages are claimed because of the retention of the cultivator which was not utilized during the harvest. Wade alleges that the damages were principally caused by the debtor’s misrepresentations that he would honor the two postdated checks in consideration for the continued retention of the equipment.
In his motion for summary judgment, the debtor makes the following arguments:
1. That he made no representations which could legally be considered as fraudulent, including the delivery of the two postdated checks which were subsequently not honored, because the representations were promissory in nature and were based on events to be performed in the future.
2. That any representations that he made were to Larry Long, an employee of Deere Credit, and not to the plaintiff, Wade. As such, the debtor contends that his representations are not “imputable” as if they were made directly to Wade, nor could Wade have relied to its detriment on the representations.
*473The court will address each of these issues hereinbelow.
III.
SUMMARY JUDGMENT STANDARDS
Summary judgment is properly granted when pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Bankruptcy Rule 7056; Uniform Local Bankruptcy Rule 18. The court must examine each issue in a light most favorable to the nonmoving party. Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Phillips v. OKC Corp., 812 F.2d 265 (5th Cir.1987); Putman v. Insurance Co. of North America, 673 F.Supp. 171 (N.D.Miss.1987). The moving party must demonstrate to the court the basis on which it believes that summary judgment is justified. The non-moving party must then show that a genuine issue of material fact arises as to that issue. Celotex Corporation v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Leonard v. Dixie Well Service & Supply, Inc., 828 F.2d 291 (5th Cir.1987), Putman v. Insurance Co. of North America, 673 F.Supp. 171 (N.D.Miss.1987). An issue is genuine if “there is sufficient evidence favoring the nonmoving party for a fact finder to find for that party.” Phillips, 812 F.2d at 273. A fact is material if it would “affect the outcome of the lawsuit under the governing substantive law.” Phillips, 812 F.2d at 272.
IV.
DISCUSSION
ISSUE NO. 1
In order to establish that the obligation, owed by the debtor, should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(2), Wade must prove the following elements:
1. The debtor made a representation.
2. The representation was false.
3. The representation was made with the intention of deceiving Wade.
4. Wade justifiably relied on the representation.
5. Wade sustained damages as a result of the representation.
In this proceeding, the debtor delivered two postdated checks to the representative of Deere Credit, indicating that he would timely honor these checks from funds to be generated from the sale of his crop. In consideration of these representations, the debtor was permitted to retain possession of the three items of farm equipment purchased from Wade, two of which were utilized thereafter in the harvest.
The debtor contends that any representations that he made were not fraudulent, in a legal context, because they were promissory in nature, i.e., they were promises predicated on future performance. The debtor’s position is generally correct. However, there is an exception to the general rule if the debtor’s promises were made with a present undisclosed intent not to perform in the future. This exception must be proved by Wade.
The debtor argues that the debt owed to Wade, which resulted from the three promissory notes mentioned herein-above, could not have been predicated on any fraudulent representations that he might have made. While the three promissory notes are clearly the genesis of the debt owed to Wade, the complaint seeks recovery for the depreciation to the two *474cotton pickers, i.e., the damage to the collateral which secured the debt. This depreciation, though tangentially related to the promissory notes, arose because of the debtor’s continued use of the equipment. This was precipitated by Deere Credit’s forbearance from immediately repossessing the equipment in consideration of the delivery of the two postdated checks. In the absence of being shown any pertinent authority from the Fifth Circuit Court of Appeals, this court is not convinced, as a matter of law, that damages resulting from forbearance cannot trigger a non-dis-chargeable debt, particularly when the forbearance was allegedly induced by fraudulent misrepresentations. Without question, Wade must prove each of the aforementioned five elements necessary to constitute fraud, and, in this case, the additional requirement that the debtor had the present undisclosed intent not to perform in the future when the representations were made. This will not be a simple task.
As to this issue, because material factual issues remain in dispute, the debtor’s motion for summary judgment is not well taken.
ISSUE NO. 2
The debtor has asserted that since his representations, which include the delivery of the two postdated checks, were made to an employee of Deere Credit, that the representations cannot be imputed to him insofar as Wade is concerned. In essence, the debtor contends that Wade has no cause of action against him because he made no representations to Wade.
This court is of the opinion that the case relied upon by the debtor, Cook v. Children’s Medical Group, P.A., 756 So.2d 734 (Miss.1999), is factually distinguishable. In Cook, the defendant medical practitioners failed to disclose to the parents of a child, in whose name the cause of action had been brought, the catastrophic effects caused to the child by a pertussis vaccination. In a concurring opinion, Justice Smith opined that the fraudulent representations made to the parents were not imputable to the medical practitioners insofar as a fraud cause of action on behalf of the child was concerned. No representations, fraudulent or otherwise, had been made to the child.
In the matter before this court, the debtor incurred three obligations with Wade which were assigned with recourse to Deere Credit. Clearly, the representations made by the debtor were not made directly to Wade, but to Larry Long, the representative of Deere Credit. When the debtor defaulted on the obligations, because of the recourse nature of the transactions, all rights and remedies held by Deere Credit were reassigned to Wade. Consequently, in the opinion of the court, the representations made to Long by the debtor should be considered as if they were made directly to Wade. The parties in this proceeding are postured by contract rights, unlike the Cook case. There, the misrepresentations were made to the parents of a child, and the concurring opinion simply pointed out that that did not create a separate and distinct tort cause of action for fraud in favor of the child. Here, the contractual interplay mandates a completely different result. See, Hartford Casualty Insurance Company v. Fields (Matter of Fields), 926 F.2d 501 (5th Cir.1991).
Therefore, as to this issue, the court concludes that the debtor’s motion for summary judgment is not well taken as a matter of law.
An order will be entered consistent with this opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493340/ | ORDER
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court are the following:
*4761. Master file:
a. Motion to avoid judicial lien filed by the debtor, Annie L. Robinson (referred to hereinafter as “Robinson”); a response having been filed by judgment creditor, Wilson Nichols (referred to hereinafter as “Nichols”).
b. An objection, filed by Robinson, to a proof of claim filed by Nichols.
c. A motion, filed by Robinson, to modify her Chapter 13 plan after confirmation; a response having been filed by Nichols.
2. Adversary Proceeding:
A complaint, filed by Nichols, against Robinson to determine the secured status of his judgment claim.
And the court, having considered same, hereby finds, orders, and adjudicates as follows, to-wit:
I.
The court has jurisdiction of the parties to and the subject matter of the aforementioned proceedings pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. These matters are core proceedings as defined in 28 U.S.C. § 157(b)(2)(A), (B), (K), and (0).
II.
The following factual events are pertinent to the above listed proceedings:
1. On or about November 25, 1997, the debtor, Robinson, was given a check in the sum of $5,000.00 by Nichols to be used as a down payment on a mobile home to be acquired from Oakwood Mobile Homes, Inc., which was located in Alcorn County, Mississippi. Robinson altered this check, raising the amount to $8,330.00, and had the mobile home titled in her name rather than in Nichols’ name. Robinson, who had previously been living with Nichols, had the mobile home moved to De-Soto County, Mississippi, where she now resides. According to the exhibits which were appended to the pleadings, Robinson apparently does not own the real property upon which the mobile home is located.
2. On November 28, 1998, Nichols initiated a lawsuit against Robinson in the Chancery Court of Marshall County, Mississippi. This lawsuit was transferred to the Chancery Court of Alcorn County, Mississippi, the aforementioned domicile of Oak-wood Mobile Homes, Inc., which was named as a co-defendant along with Oakwood Acceptance Corporation.
3. On February 17, 1999, Robinson filed a Chapter 13 bankruptcy petition with this court. In her schedules, she failed to list Nichols as a creditor and also failed to disclose the existence of the pending chancery court litigation.
4. On April 14, 1999, Robinson’s Chapter 13 plan was confirmed, but it also failed to include any mention or treatment of the contingent claim obviously existing in Nichols’ favor.
5. On April 11, 2000, a consent judgment was entered in the Chancery Court of Alcorn County, Cause No. 99-0257(02), wherein Nichols was awarded judgment against Robinson in the sum of $8,330.00, together with interest accrued, or yet to accrue, at the rate of 8% per annum. The other defendants, Oakwood Mobile Homes, Inc., and Oakwood Acceptance Corporation, were dismissed from the cause of action.
6. On May 2, 2000, Robinson filed a motion to add Nichols as an additional creditor in her bankruptcy case. When no objections were filed *477to this motion, Nichols was added as a creditor pursuant to an order entered on May 2, 2000. Robinson had previously indicated in her confirmed plan that she would pay a 100% distribution to unsecured creditors. As such, the Chapter 13 trustee filed a motion to allow Nichols’ supplemental claim in the amount of $8,330.00 to be paid in full. Thereafter, Robinson filed the above listed motion to avoid Nichols’ judicial lien, the objection to Nichols’ proof of claim, and a second motion to modify her Chapter 13 plan after confirmation. Nichols submitted timely responses and also filed the above listed adversary proceeding.
III.
As can be seen from the above factual litany, although Nichols’ cause of action against Robinson clearly arose before the filing of this bankruptcy case, it did not ripen into a liquidated judgment until well over a year after the filing. Indeed, the judgment was entered, with the consent of Robinson, almost a year after her Chapter 13 plan was confirmed. Robinson obviously knew that Nichols’ litigation was pending, as well as, that he had a contingent claim months before she filed her bankruptcy petition. For reasons unknown to the court, Robinson elected not to disclose the claim nor deal with the claim in her Chapter 13 plan. Nichols was added as a creditor only after the judgment was entered and enrolled. There are four factors, none of which standing alone is dispositive, which must be considered:
1. Nichols’ claim against Robinson arose as a result of her fraudulent misconduct.
2. Robinson failed to disclose anything about this claim during the administration of her bankruptcy case until after Nichols’ judgment was entered.
3. Robinson consented to the entry of the judgment at a time when her • bankruptcy case was still pending and her Chapter 13 plan of reorganization was still active.
4. Robinson initially consented to pay a 100% distribution to her unsecured creditors until Nichols’ claim was added. Now, not only does she object to the consent judgment, she seeks to avoid Nichols’ judgment lien to the extent that it impairs her exemptions, and she seeks to modify the distribution to unsecured creditors from 100% to 2%.
In the opinion of the court, Robinson has displayed a total lack of candor and good faith in dealing with this court in the administration of her bankruptcy case. As such, Nichols’'judgment claim, which arose from Robinson’s pre-petition conduct, but did not ripen into a non-contingent, liquidated claim until after the confirmation of Robinson’s Chapter 13 plan, should not be administered or discharged in this bankruptcy case. It shall survive this bankruptcy case the same as if it had arisen post-confirmation. If Robinson takes exception with this conclusion, the court will then have no choice but to dismiss this bankruptcy case as having been filed and administered in bad faith.
The court would hasten to point out as a caveat to Nichols that the automatic stay remains enforceable as to property that is still considered property of this bankruptcy estate. In a Chapter 13 context, this specifically includes the salary of the debtor which is being earned post-petition to fund the Chapter 13 plan. See, 11 U.S.C. § 1306(a)(2). From a review of the schedules filed by Robinson, there appears to be no non-exempt, unencumbered assets to which Nichols’ judgment could *478attach. As such, in keeping with the provisions of 11 U.S.C. § 506(a), the judgment claim is an unsecured claim until Robinson’s salary is freed from the protection of the automatic stay. This will occur when her presently confirmed Chapter 13 plan is completed.
In summary, the court concludes that the above listed proceedings should be decided as follows:
1. Robinson’s motion to avoid Nichols’ judicial lien is hereby overruled.
2. Robinson’s objection to the proof of claim filed by Nichols is hereby overruled. In keeping with the aforementioned discussion, Nichols’ judgment claim shall survive the administration of this bankruptcy case unimpaired, consistent with state law. It shall not be affected by Robinson’s bankruptcy discharge. While the judgment claim appears to be unsecured at this time, it may be enforced against Robinson’s earnings or assets acquired post-petition when her current Chapter 13 plan is completed and the automatic stay is fully lifted as to property of the bankruptcy estate.
3. Robinson’s motion to modify her Chapter 13 plan after confirmation is hereby overruled. Her confirmed plan which proposes to pay unsecured creditors 100% shall remain in effect. In the absence of an agreement between the parties, Nichols’ claim shall not be treated through this plan.
4. The adversary complaint filed by Nichols is rendered moot by virtue of the above decisions, and it is hereby dismissed. As noted above, Nichols’ judgment claim shall survive this bankruptcy case unimpaired and shall be enforceable in keeping with state law immediately upon the completion of Robinson’s currently confirmed Chapter 13 plan. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493343/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court is a motion for partial summary judgment filed by the defendants, BDO Seidman, BDO Seidman, LLP, Jerome Walsh, Walsh Communications, Inc., Ronald G. Ashby, James B. Cross, Eileen M. McGinley, Leland E. Graul, Jack A. Weisbaum, and Scott M. Univer, (referred to collectively herein as BDO); response thereto having been filed by the plaintiff, River Oaks Furniture, Inc., (referred to herein as River *503Oaks); and the court, having heard and considered same, hereby finds as follows, to-wit:
I.
The court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1384 and 28 U.S.C. § 157. Although the issue, which is the subject of the motion for partial summary judgment, would be categorized primarily as a non-core proceeding, the parties have agreed that this court may enter final orders in this adversary proceeding as contemplated by 28 U.S.C. § 157(c)(2).
II.
In essence, the motion for partial summary judgment filed by BDO seeks the dismissal of Count I of the Third Amended Complaint through which River Oaks seeks damages against BDO for professional malpractice, negligence, and breach of contract allegedly incurred in connection with the installation and implementation of the SYMIX computer system. The basis for the motion is two fold, to-wit:
1. River Oaks represented in the course of a Rule 30(b)(6) [Federal Rules of Civil Procedure] deposition, as well as, in arguments before the court that evidence of River Oaks’ damages related to the installation and implementation of the SYMIX system would be presented through expert testimony.
2. All expert reports and expert depositions have now been received and taken in this proceeding, and there is no expert testimony quantifying any damages suffered by River Oaks concerning the computer system.
River Oaks has conceded that none of its expert witnesses quantified damages insofar as the SYMIX system is concerned. However, in its response to the motion for partial summary judgment, River Oaks takes the following position:
1. If successful on the SYMIX claim, River Oaks contends that it is entitled to the value of the lost use of the SYMIX system which can be calculated as interest on the funds invested by River Oaks into the sys-, tem prior to its conversion.
2. The damages to River Oaks, which would be attributable to the SYMIX claim, do not require expert testimony for support. Rather, these damages can be simply calculated by applying the legal rate of interest at 8% per annum to the funds that River Oaks had invested in the system as of June 30, 1995, for a period of 19 months, until February, 1997. (In its memorandum brief, River Oaks asserts that the funds that it had invested through June 30, 1995, totaled $2,483,435.83. Applying the 8% per annum rate of interest to that amount for the 19 month period that River Oaks was without the fully operational SYMIX system, translates into damages for the loss of use in the sum of $314,568.54.)
3. Alternatively, River Oaks contends that the court should bifurcate the trial of this proceeding and conduct a separate hearing subsequently as to the SYMIX claim if such a subsequent trial would be deemed necessary.
III.
As factual background, the court would point out that BDO contractually agreed with River Oaks to assist in defining an implementation process that would insure a timely and effective installation of the SYMIX system. In addition, it agreed to assist in managing the overall activity related to the installation and implementa*504tion of the system while providing specific technical assistance in selected areas. The date first set for the conversion of the River Oaks existing system to the SYMIX system was December 31, 1994, but this was pushed back to July, 1995. The first attempt at conversion at that time was unsuccessful. The conversion was not fully completed until February, 1997, nineteen months later.
The SYMIX computer system is comprised of numerous modules. These modules are designed to perform specific functions within the system, for example, credit and accounts receivable; scheduling — master, cut and daily; inventory control; shipping; purchasing and accounts payable; sales and marketing; accounting, etc. Some of the modules were fully operational on the date of the initial “go five” effort while others came “on line” intermittently during the 19 month period of time from July, 1995, until February, 1997. For a discussion of the modules, their effective dates of becoming operational, as well as, their anticipated efficiency, see the interoffice memorandum prepared by River Oaks employee, Jim Jackson, to River Oaks Chief Financial Officer, Johnny Walker, dated December 30, 1996. (Exhibit No. 1201 to the testimony of Jim Jackson.)
In its complaint, River Oaks claimed that the conversion to SYMIX had a significant negative impact on its business and operations. River Oaks alleged that production ground to a halt, that it had to reenter orders in its existing “Sofa” computer system resulting in misplaced and incorrect orders, as well as, the inability to track orders through the system and respond to customer inquiries. River Oaks contended that it lost control of fabric procurement which resulted in substantial over purchases. However, the River Oaks’ witnesses have been unable to identify any particular order which was not filled nor any specific customer that was lost as a result of the conversion.
In summary, River Oaks has not been able to quantify with any meaningful precision the lost profits or extra costs that it suffered. Because of these developments, River Oaks now takes the position that it was denied the use of a fully “integrated” system, which it was contractually promised, for a period of 19 months. It seeks compensation for the loss of the use of the “integrated” system through the interest calculation as discussed hereinabove.
IV.
In its motion for partial summary judgment, BDO reminded the court of the following:
1. Although River Oaks designated Johnny Walker as a Rule 30(b)(6) witness to speak on Area of Inquiry Number 61 (all damages suffered from any count of the complaint), Walker was instructed not to answer questions related to the estimation of damages at the deposition. Counsel for River Oaks advised BDO that all testimony related to damages would be furnished through expert witnesses. (Parenthetically, the court would note that this comports with the provisions of the Revised Order entered by this court in deciding a motion for Rule 37 sanctions filed by BDO. The court commented, “[T]his order shall specifically not be considered as applicable to the amount of damages allegedly suffered by River Oaks, the testimony relative to which was requested in area of inquiry number 61. The court reserves the right to address this concern at the conclusion of the expert phase of discovery which will be completed subsequently.” See *505Revised Order entered February 24, 2000.)
2. At a December 8, 1999, hearing, counsel for River Oaks indicated that its expert witness, Gary French, was preparing a damage report which would include damages related to the computer engagement.
3. Following the preparation and submission of his expert witness report, French was deposed by BDO and indicated that he had made no damage analysis or computation regarding the SYMIX claim.
4. At a conference held between the parties and the court on November 17, 2000, counsel for River Oaks acknowledged that no damages had been calculated by any expert concerning the SYMIX claim.
V.
When initially reviewing the response filed by River Oaks to the motion for partial summary judgment, the court was somewhat uncertain as to how River Oaks had derived its SYMIX investment figure of $2,483,435.83. Following a more thorough analysis, the court sees that River Oaks calculated only the costs incurred before June 30, 1995, a date prior to the “go live” effort. (See page 8, River Oaks’ response brief.) Counsel for BDO commented on this factor in its rebuttal memorandum as follows:
“... In the instant case, had River Oaks revealed interest on lost use damages as its theory of damages or even a theory of damage, defendants would have conducted discovery (both factual and expert depositions and document requests) on a number of issues including subjecting each River Oaks employee to examination regarding his capitalized time,1 determining the costs and details of the amounts River Oaks paid to vendors, and quantifying the benefits of the modules as implemented. As it is, defendants have nothing but the contentions and argument of counsel regarding the damage computation....”
BDO rebuttal memorandum at page 3 with the accompanying footnote.
The pertinent comment by BDO is that “River Oaks has no testimony regarding capitalization of costs for the period of time (1993 — mid 1995) upon which it cur*506rently seeks to compute damages.” It can be discerned from the testimony of Jim Jackson, the Rule 30(b)(6) witness designated to address the capitalization of costs beginning in the fall of 1995, that River Oaks incurred expenses and invested employee time in the SYMIX project after the “go live” effort. Johnny Walker, the Rule 30(b)(6) witness designated to discuss the period prior to the fall of 1995, provided no relevant costs capitalization testimony. (See footnote No. 1.)
River Oaks indicated, however, that it developed its investment figure through Richard Gill, one of BDO’s auditors, who testified that he audited the costs as set out on Exhibit No. 1392, subjected those costs to detail test work, and concluded that the costs were substantiated. The court has examined the computer costs accumulation for the month ending June, 1995, and sees that the figure extrapolated by River Oaks appears on that document. The court now understands how and where River Oaks derived the investment figure to which it would apply its interest rate assessment. This, however, does not conclusively establish that this is the legally correct starting point to begin the calculation, particularly if Gill was not furnished accurate information. Additionally, BDO was somewhat “lulled” into conducting no discovery relative to this capitalized costs number because the calculation of damages resulting from this theory of recovery was to come from the expert witness. Clearly, no discovery was derived from Walker’s Rule 30(b)(6) deposition.
VI.
As noted above, the SYMIX system is comprised of numerous modules. The undisputed testimony is that some of the modules were operating effectively on the date of the initial conversion, while others became operational at intermittent times during the pertinent 19 month period that River Oaks contends that it sustained loss of use damages. While River Oaks did not have a fully “integrated” computer system in place, it was certainly receiving benefits from those modules that had been placed in operation and were continuing to be placed in operation as work progressed. It is legally impermissible to permit River Oaks to claim interest on its investment, as of June 30, 1995, for the full 19 month period, since it was receiving quantifiable benefits from components of the system during this same period of time. In the opinion of the court, damages must be calculated on the value of the particular modules that were not operational for the period of time that they were not “on line.” The first step would be to calculate the value of the specific module to the system as a whole, and then determine the precise amount of time that that module was not operational during the 19 month period. The computation of these numbers would then have to be applied ratably to River Oaks’ capitalized investment in the computer system, based on legitimate verifiable costs. If this analysis were undertaken, the resulting number would obviously be less than the total damages claimed by River Oaks in the sum of $314,568.54. The calculation of these numbers, particularly the benefit of a specific module to the entire system, would, in the opinion of the court, necessitate specialized or expert testimony. Computing damages in this context is certainly beyond the discretion of this court as the finder of fact.
VII.
River Oaks did not disclose to BDO that it was going to claim interest as the exclusive measure of damages for the loss of use of the SYMIX system until November 17, 2000. By that time, all of the parties had become aware that the expert *507witness, who was slated originally to provide this testimony, had not quantified damages related to the SYMIX claim. Considering the methodology that must be utilized to calculate the interest damages, as discussed hereinabove, the court is of the opinion that it is now too late to posture this theory. Even more significantly, considering the Rule 30(b)(6) witnesses’ testimony as to this particular area of inquiry, coupled with the fact that no expert testimony has been developed, it is impossible for River Oaks to present testimony that could substantiate this essential element of proof. Consequently, in the absence of quantifiable damages, the court must conclude that the motion for partial summary judgment filed by BDO as to the SYMIX claim must be sustained.
An order will be entered consistent with this opinion.
. In the brief amount of discovery which has been conducted on this issue, it has already been determined that River Oaks did not truthfully represent to BDO as its auditor the amount of time expended by some of its employees on the computer project. For example, although 100 percent of Jim Jackson’s time was capitalized on the computer project from the time he became River Oaks’ project manager, he testified that he was called away from the project for weeks at a time to conduct inventory and to prepare forecasts for BNY. (See Jackson 30(b)(6) deposition at 55-57, 130-31.) In any event, this Court’s Revised Order regarding Rule 37 sanctions "conclusively bound” River Oaks to the testimony of Johnny Walker and Jim Jackson regarding areas of inquiry 44 and 45 (capitalization of the costs of the computer system, including personnel time and River Oaks’ method of computing the amount of time its personnel expended on the computer project.) (Revised Order entered 2/24/00 at 9-10.) Jim Jackson was designated only to testify concerning the time frame when he became River Oaks’ project manager (fall 1995 to present), and testified only with respect to that period. (Jackson 30(b)(6) at 127, 136.) Johnny Walker had no knowledge regarding the capitalization methodology; he "didn’t get down to that level of detail.” (Walker 30(b)(6) deposition at 119-20.) Accordingly, River Oaks has no testimony regarding capitalization of costs for the period of time (1993-mid 1995) upon which it currently seeks to compute damages. Defendants respectfully request the Court to bind River Oaks to the testimony outlined in the Revised Order, and preclude introduction of testimony from other sources. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493345/ | MEMORANDUM ON TRUSTEE’S OBJECTION TO CLAIMS OF EXEMPTION
RICHARD STAIR, Jr., Bankruptcy Judge.
Maurice K. Guinn, the Chapter 7 Trustee (Trustee), filed an Objection to Claims of Exemption on April 11, 2001. Subsequently, an Objection to Amended Claims of Exemption (collectively, the “Objection”) was filed by the Trustee on May 17, 2001. A Pretrial Order dated June 13, 2001, fixes the issues to be resolved by the court as follows:
(1) Is the debtor’s interest in a Fidelity Investments[ ] Roth IRA exempt pursuant to TenmCode Ann. § 26-2-105?
*583(2) May the debtor exempt the $500.00 in her checking account and a Scanoe valued at $100.00 pursuant to Tenn.Code Ann. § 26-2-102?
(3) May the debtor exempt the $500.00 in her checking [account] and a Scanoe valued at $100.00 pursuant to Tenn.Code Ann. § 26-2-103?
By agreement of the parties, all issues will be resolved upon written Stipulations filed on June 14, 2001, and upon briefs.
This is a core proceeding. 28 U.S.C.A. § 157(b)(2)(B) (West 1993).
I
The Debtor filed her Chapter 7 Petition on February 1, 2001. Among the claimed exemptions in Schedule C were $500.00 in the Debtor’s checking account and a “Sea-noe” valued at $100.00. Both exemptions were claimed under Tenn. Code Ann. § 26-2-102 (2000), which defines the terms “earnings,” “disposable earnings,” and “garnishment” but does not create an exemption. The Trustee therefore is correct in his objection that § 26-2-102 is not a valid source of exemption.
The Debtor does not contest the Trustee’s Objection on these points and explains that § 26-2-102 was incorrectly referenced due to a problem with her counsel’s computer program caused by the recent renumbering of the Tennessee exemption statutes. The proper source of exemption for the checking account funds is Tenn. Code Ann. § 26-2-103, which allows for exemption of up to $4,000.00 in personal property, “including money and funds on deposit with a bank or other financial institution.” Tenn. Code Ann. § 26-2-103 (2000).1
However, through the exclusion of other property, the Debtor has already exhausted her $4,000.00 exemption under § 26-2-103. The Debtor proposes to make room for the checking account funds by removing a gift trust, valued at $1,194.00, from her § 26-2-103 exemptions. The Debtor contends that the trust is not property of the estate and should not have been included in her scheduled exemptions. The gift trust issue is not before the court.
Additionally, by affidavit dated June 27, 2001, appended to Trial Brief of Renee Vandeberg filed June 28, 2001, the Debtor states that the “Scanoe” belongs to her ex-husband and was inadvertently included in her scheduled assets. The Debtor further contends that because the “Scanoe” is not property of the estate, the issue of its exemption is moot. The property of the estate issue is not before the court.
Because the Debtor has not further amended her exemptions to remove the gift trust to allow her to exempt the $500.00 cash and because she has not withdrawn her claim of exemption in the “Sca-noe,” the Trustee’s Objection to the Debt- or’s claimed exemptions in these assets will be sustained. The court will, however, allow the Debtor a period of ten days to amend her Schedule C as to these assets should she desire to do so.
II
The remainder, and primary focus, of the Trustee’s Objection is the Debtor’s claimed exemption of $128,850.00 in retirement account funds under Tenn. Code Ann. § 26-2-105(b) which, on the date of the Debtor’s filing, provided:
*584Except [for domestic relations provisions not relevant to this case], any funds or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement plan which is qualified under §§ 401(a), 403(a), 403(b), and 408 of the Internal Revenue Code of 1986, as amended, are exempt from any and all claims of creditors of the participant or beneficiary, except the state of Tennessee. All records of the debtor concerning such plan and of the plan concerning the debtor’s participation in the plan, or interest in the plan, are exempt from the subpoena process.
TenN. Code ANN. § 26-2-105(b) (2000).2 Specifically, the Trustee objects to the exemption of $41,908.12 held by the Debtor in a Roth IRA account.
Roth IRAs were created by the Taxpayer Relief Act of 1997 and codified at 26 U.S.C.A. § 408A (West Supp.2001). Similar to a traditional individual retirement account, the Roth IRA has been described as follows:
The 1997 Act created a new IRA vehicle named for the Senator who introduced it. The Roth IRA differs from the traditional IRA in that contributions made to it are nondeductible. However, income generated in the Roth IRA will build up tax-free similar to the traditional IRA, but unlike the traditional IRA, distributions from the Roth IRA are tax-exempt.
The main difference between the two IRAs is the timing of the tax benefit to the individual. With a traditional IRA, the taxpayer receives the benefit upfront with a tax deduction for the contribution, accumulates income tax-free, and pays taxes on the distributions when taken at retirement. In contrast, with the Roth IRA, the taxpayer does not receive a tax deduction when the contribution is made, but still accumulates tax-free income, and does not pay taxes when distributions are taken.
Jolie Howard, The Roth IRA: A Viable Savings Vehicle for Americans?, 35 Hous. L. Rev. 1269,1279-83 (1998).
The Internal Revenue Code provides that a Roth IRA created under § 408A shall be treated in most respects “in the same manner as an individual retirement plan” created under § 408. 26 U.S.C.A. § 408A(a). However, despite the similarities between the two IRAs, § 408A is a statute separate from, rather than a subsection of, § 408.
Enacted prior to the creation of the Roth IRA, Tenn. Code Ann. § 26-2-105(b) provides an exemption for traditional § 408 IRAs but was not amended to exempt Roth IRAs until May 22, 2001, nearly four months after the Debtor’s bankruptcy filing. See 2001 Tenn. Pub. Acts 260. Because exemptions are set on the date of the commencement of the bankruptcy case, the Trustee contends that the Debt- or’s exclusion of her Roth IRA under § 26-2-105(b) is invalid. See In re Miller, 246 B.R. 564, 566 (Bankr.E.D.Tenn.2000) (“Bankruptcy exemptions are ‘fixed on the date of filing’ and ‘only ... the law and facts as they exist[ed] on the date of filing the petition’ are to be considered.”) (quoting Armstrong v. Peterson (In re Peterson), 897 F.2d 935, 937 (8th Cir.1990)).
*585Conversely, the Debtor argues that the reach of § 26-2-105(b) should extend to Roth IRAs. She first points out that the stated purpose of the recent T.C.A. amendment — “to clarify the exemption of Roth IRA funds from execution, attachment, or garnishment” — suggests that such accounts have always been exempt under § 26-2-105(b). See 2001 Tenn. Pub. Acts 260 (emphasis added). The Debtor also looks to a Tennessee Attorney General opinion which, more than two years before this bankruptcy, opined that Roth IRAs are exempt under Tennessee law because “they are essentially qualified plans under Internal Revenue Code § 408.” Tenn. Att’y Gen. Op. 98-184, at *1086-88 (Sept. 9, 1998) (“[I]n light of the applicable legislative history, it appears that the purpose and intent of Tenn. Code Ann. § 26-2-104 [now § 26-2-105] is best accomplished by including Roth IRAs within its scope.”). The Debtor urges the conclusion that Roth IRAs are sufficiently related to § 408 to enjoy the same protection under Tennessee law. See id. at *1087 (Section 408A incorporates § 408 by reference.).
When construing a Tennessee statute, the court must adhere to the rules of construction employed by the courts of Tennessee. See In re Martin, 102 B.R. 639, 645 (Bankr.E.D.Tenn.1989). The Tennessee Supreme Court recently commented:
This Court’s role in statutory interpretation is to ascertain and to effectuate the legislature’s intent. Generally, legislative intent shall be derived from the plain and ordinary meaning of the statutory language when a statute’s language is unambiguous. If a statute’s language is expressed in a manner devoid of ambiguity, courts are not at liberty to depart from the statute’s words.
Freeman v. Marco Transp. Co., 27 S.W.3d 909, 911 (Tenn.2000) (citations omitted). Therefore, unless an ambiguity is present in § 26-2-105(b), the court cannot consider the legislature’s intention regarding the exemption of Roth IRAs.
Each party in the present case tenders an entirely reasonable interpretation of the statutory text. Under Tennessee law, where the parties legitimately have differing interpretations of the same statutory language, an ambiguity exists. See Owens v. State, 908 S.W.2d 923, 926 (Tenn.1995); Consumer Advocate Div. v. Tennessee Regulatory Auth., No. M1999-01699COA-R12-CV, 2000 WL 1514324, at *3 (Tenn.Ct.App. Oct. 12, 2000). Accordingly, the legislative history of § 26-2-105(b), along with the overall statutory scheme, may be considered in resolving this issue. See id.
The court has previously recognized that in Tennessee:
The primary rule of statutory construction, more important and compelling than all others, is that the law be rendered intelligible and absurdities avoided. The ordinary meaning of the words used may be restricted or enlarged to avoid absurdity and effectuate the legislative intent.
Martin, 102 B.R. at 645 (quoting Roberts v. Cahill Forge & Foundry Co., 181 Tenn. 688, 184 S.W.2d 29, 31 (1944)); accord State v. Leech, 588 S.W.2d 534, 540 (Tenn.1979) (Statutes must be construed with “the saving grace of common sense.”). Further, the court “must consider not merely the words or phrases used, but also the background, purpose and general circumstances under which they were used.” First Nat'l Bank of Memphis v. McCanless, 186 Tenn. 1, 207 S.W.2d 1007, 1009 (1948). “[A] construction should be avoided which would operate to impair, frus*586trate or defeat the object of the statute.” Id. at 1010.
The Tennessee Attorney General identified two primary goals in the legislative history of § 26-2-105. First, the legislature intended to protect private retirement plans in order to “benefit and encourage people who are saving money for their retirement.” Tenn. Att’y Gen. Op. 98-184, at *1087. Additionally, the legislature intended for this protection to extend to those private plans protected by federal law. See id.
The court concludes that Roth IRAs were not expressly included in the language of § 26-2-105 merely because they had not yet been created at the time of the enactment of the state statute. See id. at 1087. The structure and purpose of traditional and Roth IRAs are analogous and it is inconceivable that the Tennessee legislature would consciously chose to protect one and not the other. The recent amendment “clarifying” the exemption of Roth IRAs only serves to bolster this conclusion.3
The court has given thoughtful consideration to the Trustee’s view that § 26-2-105 should be construed strictly according to its express terms, but despite the Trustee’s well-presented position the statute’s ambiguity must be resolved in a manner consistent with legislative policy and intent. See Burns v. Duncan, 28 Tenn.App. 374, 133 S.W.2d 1000, 1007 (1939). The court must presume that the legislature did not intend an absurdity. See Kite v. Kite, 22 S.W.3d 803, 805 (Tenn.1997).
For the above reasons, the court concludes that the Debtor’s exemption under Tenn. Code Ann. § 26-2-105(b) is appropriate and the Trustee’s Objection will be overruled. An appropriate order will be entered.
ORDER
For the reasons stated in the Memorandum on Trustee’s Objection to Claims of Exemption filed this date, the court directs the following:
1. The Debtor’s claim in her Amendment to Schedule C filed April 17, 2001, to an exemption of $500.00 in her checking account under “TCA § 26-2-102” is DISALLOWED. The Objection to Amended Claims of Exemption filed by the Chapter 7 Trustee, Maurice K. Guinn, on May 17, 2001, is, as to this exemption, SUSTAINED.
2. The Debtor’s claim in her Amendment to Schedule C filed April 17, 2001, to an exemption of her “Scanoe” under “TCA § 26-2-102” is DISALLOWED. The Objection to Amended Claims of Exemption filed by the Chapter 7 Trustee, Maurice K. Guinn, on May 17, 2001, is, as to this exemption, SUSTAINED.
3. The Debtor’s claim in her Amendment to Schedule C filed April 17, 2001, to an exemption in $128,850.00 in her retirement account under “TCA § 26-2-105” is ALLOWED and the Objection to Amended Claims of Exemption filed by the Chapter 7 Trustee Maurice K. Guinn, on May 17, 2001, is, as to this exemption, OVERRULED.
*5874. The Debtor may, within ten (10) days, further amend Schedule C to her Voluntary Petition to accommodate the court’s ruling on the $500.00 in her checking account and the “Scanoe.”
SO ORDERED.
. This statute was renumbered from § 26-2-102 to § 26-2-103 in the year 2000. See Tenn. Code Ann. § 26-2-102 (Compiler’s Notes). The Debtor states that her counsel’s computer program was not updated to reflect this change until after the relevant filings in this case.
. The court has previously observed that the Internal Revenue Code sections referenced in this statute are incorrectly joined in the conjunctive rather than the disjunctive. A literal reading would render the statute a nullity by allowing an exemption only in the unlikely, if not impossible, instance that a retirement plan satisfied all four IRC provisions. See, e.g., In re Martin, 102 B.R. 639, 640 n. 2, 645 (Bankr.E.D.Tenn.1989).
. The court acknowledges that the Tennessee legislature was aware of Roth IRAs prior to the Debtor’s bankruptcy filing and seemingly could have amended § 26-2-105 sooner than it did. See Tenn. Code Ann. § 67-2-104(s) (1998 & Supp.2000) (amended in 1998 to address Roth IRAs). However, legislative inaction "is a poor beacon to follow in discerning the proper statutory route.” Zuber v. Allen, 396 U.S. 168, 90 S.Ct. 314, 323, 24 L.Ed.2d 345 (1969). It is "at best treacherous” to construe a statute through legislative silence or delay. Girouard v. United States, 328 U.S. 61, 66 S.Ct. 826, 830, 90 L.Ed. 1084 (1946). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493346/ | ORDER APPROVING CONTRACT TERMINATION AGREEMENT WITH UNITED STEEL WORKERS OF AMERICA (AFL-CIO-CLC)
R. THOMAS STINNETT, Bankruptcy Judge.
The above-captioned debtors have filed a motion pursuant to § 1113 of the Bankruptcy Code for approval of a Contract Termination Agreement (as defined below) by and between North American Royalties, Inc. (“NAR”), and the United Steelworkers of America (AFL-CIO-CLC) (the “Union”) related to NAR’s Chattanooga Plants (as defined in the Motion).
Based upon the Motion, any objections and replies of record, the argument of counsel, and the court’s Memorandum Opinion entered this date, the court finds that:
A. This is a core proceeding under 28 U.S.C. § 157(b);
B. In connection with the relief sought in the Motion and in accordance with § 1113 of the Bankruptcy Code, NAR and the Union have negotiated in good faith and have reached an agreement with respect to the terms and conditions of a termination agreement (the “Contract Termination Agreement”) relative to NAR’s Chattanooga Plants. A copy of the Contract Termination Agreement is attached to the Motion as Exhibit A.
C. Good cause exists for NAR to enter into the Contract Termination Agreement to resolve any and all disputes with the Union with respect to the collective bargaining agreement (the “CBA” as defined in the Motion).
D. Due notice of the Contract Termination Agreement has been given in accordance with the Bankruptcy Code and Rules, and no further notice need be given with respect to approval of the Contract Termination Agreement.
Accordingly, it is hereby
ORDERED that the Contract Termination Agreement is approved, pursuant to 11 U.S.C. § 1113 and other relevant provisions of the Bankruptcy Code;
*596It is FURTHER ORDERED that the court retains jurisdiction to resolve all disputes related to the CBA and the Contract Termination Agreement; and
It is FURTHER ORDERED that this order is immediately effective and is not stayed by Rule 6004(g) of the Federal Rules of Bankruptcy Procedure. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493347/ | DECISION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
The instant cause is brought before this Court upon the Trustee’s objection to the Amended Proof of Claim submitted by the GRC Group (hereinafter referred to as “GRC”). The specific basis for the Trustee’s objection is the assertion by GRC that it is a secured creditor with respect to certain insurance renewal commission which were included within the scope of the Debtor’s bankruptcy estate. On this matter, the Parties, through numerous supporting legal memoranda, raised three issues for this Court to resolve: (1) Did GRC obtain an enforceable lien in the Debtor’s insurance renewal commissions by filing, prepetition, a complaint for a creditor’s bill pursuant to O.R.C. § 2833.01; (2) if GRC does have a valid lien against the Debtor’s insurance renewal commission, does the Consumer Protection Act (15 U.S.C. § 1601 et seq.) apply so as to limit GRC’s ability to recover against this asset; and (3) finally, if a valid lien exists, is the Trustee entitled to fees and expenses totaling Eleven Thousand Four Hundred Eighteen and 75/100 ($11,418.75) dollars under 11 U.S.C. § 506(c). The facts and circumstances which give rise to these issues are briefly as follows:
In late 1995, the GRC Group obtained a judgment against the Debtor in the amount of Five Hundred Twenty-three Thousand Three Hundred Twelve dollars ($523,312.00). Shortly thereafter, in an attempt to satisfy this judgment, GRC caused to be issued a writ of execution against the Debtor’s property. The property received therefrom, however, was insufficient to satisfy GRC’s judgment. As a result, GRC also filed a complaint for a creditor’s bill pursuant to O.R.C. § 2333.01, in which it sought to attach those insurance renewal commissions due to the Debtor from Northwestern Mutual Life Insurance Company. In this complaint, GRC stated, inter alia, that:
The plaintiffs have issued a[sie] execution against the defendant Stephen H. Wiener but that the execution has not provided sufficient assets with which to satisfy plaintiffs judgment.
The Debtor, however, in his Answer to GRC’s complaint, specifically denied this averment; this matter was then stayed by the Debtor’s intervening bankruptcy which was filed on September 15,1997.
After the commencement of the Debtor’s bankruptcy case, the Trustee issued a notice to all creditors to file a proof of claim. *812In accordance therewith, GRC, on May 26, 1998, submitted a timely proof of claim as an unsecured creditor in the amount of Five Hundred Twenty-three Thousand Three Hundred Twelve dollars ($523,312.00). Sometime following this event, the Trustee, after investigating the financial affairs of the Debtor, determined that the only possible asset available for recovery was the interest the Debtor maintained in the insurance renewal commission due from Northwestern Mutual Life Insurance Company; to recover this asset the Trustee brought an adversary proceeding against Northwestern Mutual Life Insurance Company (Case No. 00-3026). The Trustee then, in considering the contingent nature of insurance renewal commissions, determined the present value of this asset to be Twenty-five Thousand dollars ($25,000.00), and thereafter filed a Notice of Intent to Sell this asset Free and Clear of Liens. GRC, however, filed an Objection thereto, asserting that the renewal commission were worth considerably more — specifically, between One Hundred Thousand dollars ($100,000.00) and One Hundred Fifty Thousand dollars ($150,-000.00).
On March 1, 2001, the Court held a hearing on GRC’s Objection to the Trustee’s intent to sell the Debtor’s insurance renewal commission. After hearing the Parties’ arguments, the Court permitted GRC to amend its proof of claim so as to assert a security interest in the Debtor’s renewal commissions.1 On April 11, 2001, GRC filed its amended proof of claim— against which the Trustee objects — asserting that it was a fully secured creditor with respect to the Twenty-five Thousand dollar ($25,000.00) value attached to the Debtor’s renewal commissions.
LEGAL DISCUSSION
Determinations as to the validity, extent, or priority of liens in a bankruptcy case are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(E). Thus, this case is a core proceeding.
The central issues raised by the Trustee’s objection to the GRC’s amended proof of claim is whether GRC obtained an enforceable lien in the Debtor’s insurance renewal commissions by bringing, prior to the filing of the Debtor’s bankruptcy petition, a complaint for a creditor’s bill under O.R.C. § 2333.01. As property rights, including the existence of liens, are generally determined by reference to applicable state law, this Court will look to the law of Ohio in addressing this issue. Butner v. United States, 440 U.S. 48, 55-57, 99 S.Ct. 914, 918-19, 59 L.Ed.2d 136 (1979) (existence of security interest resolved by reference to state law).
Under Ohio law, a Creditor’s Bill is a device which permits a judgment-creditor to reach a debtor’s equitable assets which, for reasons of uncertainties respecting title or valuation, cannot be effectively subjected under the ordinary legal process of execution by way of judgment liens, attachment or garnishment. Hoover v. Professional & Executive Mtg. Corp., 21 Ohio App.3d 223, 225, 486 N.E.2d 1285, 1287 (1985). For purposes of Ohio law, a creditor’s bill is statutorily provided for in O.R.C. § 2333.01 which states that:
*813When a judgment debtor does not have sufficient personal or real property subject to levy on execution to satisfy the judgment, any equitable interest which he has in real estate as mortgagor, mortgagee, or otherwise, or any interest he has in a banking, turnpike, bridge, or other joint-stock company, or in a money contract, claim, or chose in action, due or to become due to him, or in a judgment or order, or money, goods, or effects which he has in the possession of any person or body politic or corporate, shall be subject to the payment of the judgment by action.
It is well-established that a suit brought under this section creates a lien, for the benefit of the judgment-creditor, on all of the debtor’s equitable assets. Federal Deposit Insurance Corp. v. Willoughby, 19 Ohio App.3d 51, 55, 482 N.E.2d 1267, 1272 (1984).
The Trustee, although not controverting this rule, argues that GRC did not obtain a lien on the Debtor’s equitable assets — i.e., the Debtor’s insurance renewal commissions — because of a procedural defect with GRC’s complaint on the creditor’s bill. Specifically, the Trustee stated to the Court:
The filing of a creditor’s bill actions pursuant to RC 2333.01 secures a plaintiffs lien on the defendant’s assets that are the subject of the action, as long as the plaintiff establishes the prerequisite that the defendant does not possess real or personal property that is subject to levy on execution sufficient to satisfy the judgment. GRC Group did not establish this prerequisite prior to the bankruptcy filing. Because the Debtor denied the averments of GRC Group’s complaint, the burden of proof was then placed on GRG [sic] Group to show that the Debt- or did not possess real or personal property upon which they could levy to satisfy its judgment.
(Trustee’s Response dated March 21, 2001, to GRC’s Objection to Trustee’s Notice of Intent to Sell Free and Clear of Liens, at pgs. 2-3). Thus, given this statement as it applies to the particular facts of this case, the position of the Trustee can be restated as this: When a creditor’s bill is at issue, a fatal defect will exist with any lien which arises therefrom when that creditor, after being confronted with a debtor’s denial, is prevented from establishing that the debt- or lacked sufficient assets to execute against. In support of this position, the Trustee cited to the holdings of two Ohio cases. First, in Gaib v. Gaib it was held that:
By fifing the creditor’s bills, plaintiff secured a lien on the assets of defendant which he attached assuming that plaintiff can satisfy the requirement of R.C. 2333.01 that defendant did not have sufficient real or personal property subject to levy on execution to satisfy the judgment.
14 Ohio App.3d 97, 99, 470 N.E.2d 189, 191 (1983) (internal citations omitted). Second, the Trustee in support of his position cited to Graybar Elec. Co. v. Keller Elec. Co., where it was stated:
In a complaint for a creditor’s bill, the complainant must aver generally that the judgment debtor does not have sufficient personal or real property subject to levy on execution to satisfy the judgment. When the judgment debtor, in its answer, denies the complainant’s averment, the plaintiff must offer evidence that the judgment debtor lacks sufficient property on which to levy execution.
113 Ohio App.3d 172, 175, 680 N.E.2d 687, 689 (1996) (internal citations omitted).
A close review of the above language, however, shows that it does not stand for the proposition espoused by the *814Trustee.2 This is because while the above language clearly shows that a plaintiff who brings a complaint for a creditor’s bill must, upon the debtor’s denial, establish the averments contained in his complaint, nowhere in the above language is it stated that a lien is only created at the time the averments of the creditor’s complaint are established. In other words, nothing in the above language indicates that as a condition precedent to obtaining a lien, a judgment creditor must offer evidence of a judgment debtor’s lack of sufficient property on which to levy. In fact, just the opposite is true as Ohio law has repeatedly held that when a complaint for creditor’s bill is brought a lien is automatically created, at the very latest, when service of the complaint is perfected. Willoughby, 19 Ohio App.3d at 55, 482 N.E.2d 1267; Catawba West, Inc. v. Domo, 75 Ohio App.3d 80, 87, 598 N.E.2d 883, 887 (1991); Huston Assoc. v. VWV, Inc., Lake App. No. 92-L-050, unreported, 1992 WL 387351 (Dec. 18, 1992); Rushworth v. Rosie, No. 98-G-2186, unreported, 1999 WL 1073793 (Oct. 22, 1999).
Notwithstanding, it is abundantly clear from the holdings of Gaib v. Gaib and Graybar Elec. Co. v. Keller Elec. Co., that if a judgment creditor, upon the debt- or’s denial, does not sustain his burden of proof (i.e., that the debtor has insufficient property on which to levy), any lien against which the judgment creditor had formerly maintained against the debtor’s property will be lost. In this case, however, considering that the Debtor’s intervening bankruptcy stayed GRC’s complaint for a creditors bill, no such determination was made. Furthermore, given the reality that the Debtor admitted, through his bankruptcy petition, that he was insolvent, it is highly unlikely that the Debtor could successfully controvert GRC’s averment that he lacked sufficient assets upon which to execute. Accordingly, based upon these considerations, it is the decision of this Court that GRC maintains, to the extent provided for by Ohio law, a valid lien against the Debtor’s insurance renewal commissions. The Court thus now turns to address the next issue raised by the Parties which concerns what, if any, impact the Consumer Protection Act has on GRC’s ability to recover against its security interest in the Debtor’s insurance renewal commissions.
The Consumer Protection Act was created, in part, to prevent certain predatory practices by creditors. In re Lawrence, 205 B.R. 115, 117 (Bankr.E.D.Tenn.1997). As a part of this stated purposes, the Consumer Protection Act places limitations on the amount of an employees wages that may be subject to a garnishment action; this amount, as set forth in 15 U.S.C. § 1673(a), is the lesser of (1) twenty-five (25) percent of a debtor’s weekly disposable earnings, or (2) the amount by which the debtor’s disposable earnings exceed thirty (30) times the federal minimum hourly wage. Disposable earnings are defined as “that part of the earnings of any individual remaining after the deduction from those earnings of any amounts required by law to be withheld.” 15 U.S.C. § 1672(b).
In Kokoszka v. Belford, 417 U.S. 642, 651, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974), the Supreme Court of the United States was presented with a case involving the *815interplay between bankruptcy law and the limitations on garnishment contained in the Consumer Protection Act. The specific issue the Supreme Court was asked to address in Kokoszka v. Belford was this: Does the Consumer Protection Act’s limitation on the garnishment of earnings apply in bankruptcy so as to exempt 75% of a debtor’s tax refund from the jurisdiction of the bankruptcy trustee. In addressing this issue, the Court, after thoroughly examining the legislative history of the statute, found that once a debtor enters bankruptcy, the protections afforded to the debtor by the Consumer Protection Act were no longer applicable; specifically, the Court stated:
An examination of the legislative history of the Consumer Protection Act makes it clear that, while it was enacted against the background of the Bankruptcy Act, it was not intended to alter the clear purpose of the latter Act to assemble, once a bankruptcy petition is filed, all of the debtor’s assets for the benefit of his creditors. Indeed, Congress’ concern was not the administration of a bankrupt’s estate but the prevention of bankruptcy in the first place by eliminating an essential element in the predatory extension of credit resulting in a disruption of employment, production, as well as consumption and a consequent increase in personal bankruptcies.
In short, the Consumer Credit Protection Act sought to prevent consumers from entering bankruptcy in the first place. However, if, despite its protection, bankruptcy did occur, the debtor’s protection and remedy remained under the Bankruptcy Act.
417 U.S. at 650-51, 94 S.Ct. at 2436. The Court then went on to state:
There is every indication that Congress, in an effort to avoid the necessity of bankruptcy, sought to regulate garnishment in its usual sense as a levy on periodic payments of compensation needed to support the wage earner and his family on a week-to-week, month-to-month basis. There is no indication, however, that Congress intended drastically to alter the delicate balance of a debtor’s protections and obligations during the bankruptcy procedure.
Id. at 651, 94 S.Ct. 2431. Accordingly, based upon this analysis, the Supreme Court held that the Consumer Protection Act did not restrict the right of a bankruptcy trustee to treat an income tax refund as nonexempt property of the bankruptcy estate. Id. at 652, 94 S.Ct. 2431.
The legal issue presented in this case, of course, differs somewhat from that presented in Kokoszka v. Belford in that the roles of the Parties are reversed; that is, in the instant case it is the Trustee, and not the Debtor, who seeks the protection afforded by the Consumer Protection Act. However, as set forth in Kokoszka, the Consumer Protection Act was designed to protect consumers/debtors and not creditors. Long Island Trust Co. v. United States Postal Service, 647 F.2d 336, 339 (2nd Cir.1981). By analogy then, the Consumer Protection Act should not apply to a bankruptcy trustee because they, in their capacity as a representative of a debtor’s bankruptcy estate, work on behalf of unsecured creditors. In re Harp, 166 B.R. 740, 746 (Bankr.N.D.Ala.1993). Therefore, in this case simply because it is the Trustee, and not Debtor, who seeks to invoke the protections afforded by the Consumer Protection Act, the Court can see no reason, on this basis alone, to deviate from the rule, established by the Supreme Court in Kokoszka, that the limitations on garnishment contained in the Consumer Protection Act are not applicable in a bankruptcy proceeding.
*816In addition, the Court notes that when insurance renewal commissions are at issue, an additional concern is raised. In particular, insurance renewal commissions, which are paid to an insurance agent when an insured renews his or her policy, do not necessarily require the rendering of any future services. See Yoppolo v. Golde (In re Golde), 253 B.R. 843 (Bankr.N.D.Ohio 2000) (discussing in detail insurance renewal commissions). The Consumer Protection Act, however, only applies to “earnings” which, although “earnings” may according to its statutory definition include commissions,3 has been held to only apply to compensation received for personal services, notwithstanding any label given to the contrary. BancOhio Nat'l Bank v. Box, 63 Ohio App.3d 704, 707, 580 N.E.2d 23, 24 (1989); Gerry Elson Agency, Inc. v. Muck, 509 S.W.2d 750, 753 (Mo.Ct.App.1974). Accordingly, for this reason, and based upon the Supreme Court’s holding in Kokoszka v. Belford, this Court will not afford the Trustee the protections provided for by the Consumer Protection Act.
The last issue the Court needs to address is whether the Trustee is entitled to compensation under 11 U.S.C. § 506(c) which constitutes an important exception to the general rule that secured claims are superior to administrative claims. This section provides that:
The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim.
Pursuant to this statutory language, three requirements are necessary for a bankruptcy trustee to recover the cost and expenses in preserving collateral subject to a valid security interest: (1) the expenditure was necessary; (2) the amounts expended were reasonable; and (3) the creditor benefited from the expenses. Matter of P.C., Ltd., 929 F.2d 203, 205 (5th Cir.1991). The burden of demonstrating the existence of these elements is on the party seeking recovery. Id.
In this case, the Court after reviewing all of the evidence presented finds that the Trustee has sustained his burden with respect to the above elements. In this regard, the Court makes a few observations. First, in considering both the many procedural hurdles and legal issues encountered in the Trustee’s attempt to recover the Debtor’s insurance renewal commissions, the Trustee’s fees and expenses of Eleven Thousand Four Hundred Eighteen and 75/100 dollars ($11,418.75) are reasonable. Second, when considering the fact that GRC did. not immediately assert its status as a secured party — i.e., by filing a proof of claim as a secured creditor or by bringing a motion for relief from stay — the Court is of the view that the Trustee’s actions, in addition to being necessary to preserve an estate asset, directly benefitted GRC. Finally, and along this same line, the Court observes that if GRC felt that the Debtor’s insurance renewal commissions were worth considerably more than the Twenty-five Thousand dollar ($25,000.00) figure put forth by the Trustee, it could have purchased the Trustee’s interest therein.
Thus to summarize, GRC, for purposes of bankruptcy law, will be treated as a secured creditor with respect to the Debt- or’s insurance renewal commissions. The Trustee, however, will be entitled to recov*817er his fees and expenses in preserving GRC’s collateral pursuant to 11 U.S.C. § 506(c). 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 Objection of the Trustee, John J. Hunter, to GRC Group’s Amended Proof of Claim, be, and is hereby, OVERRULED.
It is FURTHER ORDERED that pursuant to 11 U.S.C. § 506(c), the Trustee, John J. Hunter, be, and is hereby, entitled to Eleven Thousand Four Hundred Eighteen and 75/100 dollars ($11,418.75) in fees and expenses.
. In addition, the Court, given GRC’s insistence that the renewal commission were worth considerably more than Twenty-five Thousand dollars ($25,000.00), found that GRC should be given the opportunity to submit to the Trustee a bid on the renewal commissions so as to permit GRC to recover the purported additional value in this asset. GRC, however, apparently after reconsidering its position, declined to bid on this asset within the time frame allowed by the Court.
. A side note for the record. In this case, the creditor's bill filed by GRC averred that its execution against the Debtor yielded insufficient assets to satisfy its judgment. Thus, it is clear that GRC’s complaint for a creditor’s bill properly averred, as is required in an action brought under O.R.C. § 2333.01, that the Debtor did not have sufficient personal or real property to satisfy its judgment.
. Under 15 U.S.C. § 1672(a), "the term 'earnings’ means compensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus, or otherwise, and includes periodic payments pursuant to a pension or retirement program.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493348/ | DECISION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
On the basis of fraud and misrepresentation, the Plaintiff seeks to have an obligation owed to it by the Debtors held nondischargeable. The statutory authority upon which the Plaintiff relies to have the Defendant’s obligation held nondis-chargeable is § 523(a)(2) which generally provides that a discharge is not available for any debt to the extent that the debt was obtained by a false pretense, a false representation or actual fraud. The events which gave rise to the obligation underlying the Plaintiffs complaint were explained to the Court as follows:
The Defendant was the beneficiary of certain welfare benefits from the Plaintiff. With respect to these benefits, however, the Defendant failed to disclose, when there was a duty to do so, certain information. In specific terms, the Defendant, while her husband, Michael Dodd, was receiving workers’ compensation benefits, denied the receipt of such compensation. In addition, the Defendant did not disclose certain changes in Michael Dodd’s income. As a result of these transgressions, the Defendant, after pleading guilty to a charge of grand theft, was sentenced to one year in prison (suspended) and ordered to pay Eighteen Thousand Eighty-four and 59/100 dollars ($18,084.59) in restitution. (Plaintiffs Pre-Trial Memoranda at pg. 2).
On September 9, 1999, the Defendant and her husband, Michael Dodd, filed a voluntary petition in this Court for relief under Chapter 7 of the United States Bankruptcy Code. Thereafter, the Plaintiff timely commenced the instant adversary proceeding praying that the Eighteen Thousand Eighty-four and 59/100 dollars ($18,084.59) that the Defendant was ordered to pay as restitution be determined to be a nondischargeable debt pursuant to 11 U.S.C. § 523(a)(2). On the Plaintiffs compliance with the requirements of this section, the Court originally scheduled a Trial on the matter. However, prior to *819the time of the Trial, the Parties, by and through their legal counsel, requested that the matter be submitted to the Court by Stipulations with accompanying arguments in support. After granting this request, the Parties submitted to the Court a document entitled “Stipulation of all Facts and Respective Parties’ Positions Based on Said Facts.” The stipulated facts contained therein provided that:
On December 16, 1992, the Debtor, Michael Dodd, suffered a work-related injury while at work.
The Debtor Michael Dodd received medical treatment for said injury at Toledo Hospital and from Dr. Lawrence Spetka, and other treating individuals/entities (primary care providers) totaling $10,858.94.
The Toledo Hospital records, beginning with Michael Dodd’s emergency room visit on December 17, 1992, confirmed that the injury was work-related and that the payor would be Ohio Bureau of Workers’ Compensation.
The Debtor, Michael Dodd, submitted an application for payment of compensation and medical benefits to the Ohio Bureau of Workers’ compensation regarding said injury.
Michael Dodd’s claim was subsequently allowed for L4-5 disc herniation with L5 — radiculopathy and a claim number was assigned thereto.
The primary care providers only submitted billings to the Plaintiff, the Fulton County Department of Human Services, who paid the providers $10,358.94.
The Ohio Bureau of Workers’ Compensation Act provides that all treatment of allowed industrial injuries is to be paid-in-full by the Bureau of Workers’ Compensation.
Neither the Toledo Hospital nor the other medical providers who treated Michael Dodd ever billed the Ohio Bureau of Workers’ Compensation.
The Ohio Administrative Code provides that all bills for treatment of allowed industrial injuries must be submitted either within two (2) years of the date of service or within six (6) months from the date of mailing of a Final Order allowing the claim, or be forever barred (O.A.C. 4121-3-23).
Under O.A.C. § 4123-3-23, payment of bills can be made retroactively, but only if they have been timely submitted. Pursuant to rules/regulations of the Bureau of Workers’ Compensation, only the primary care providers can submit billing(s) to Workers’ Compensation for payment; the individual receiving the “treatment” (in this case Michael Dodd) can not.
With respect to the foregoing facts, the Parties agreed that, on the basis of the exception to discharge contained in § 523(a)(2), the sum of Seven Thousand Seven Hundred Twenty-five and 65/100 dollars ($7,725.65) should be excepted from discharge. The Defendant, however, argues that the Ten Thousand Three Hundred Fifty-eight and 94/100 dollars ($10,-358.94) paid by the Plaintiff to the medical care providers of Michael Dodd should be found to be dischargeable on the basis that if the Ohio Bureau of Workers’ Compensation had been properly billed, they, instead of the Plaintiff, would have paid these costs. With respect to this position, however, the Defendant cites neither to any statutory authority nor to any supporting case law. Instead, the Defendant’s position is based entirely in equity; in particular, the Defendant stated to the Court:
Michael Dodd should not have to bear the responsibility/liability for “paying” the $10,358.94 when such would have been paid-in-full if the Plaintiff had properly either not paid the primary *820care provider(s), or after having paid them, followed-up to assure that the primary care provider(s) submitted billing(s) to the Bureau of Workers’ Compensation and assigned to the Plaintiff their right to receive payment (a subro-gation theory).
(Parties’ Stipulation of All Facts and Respective Parties’ Positions Based on Said Facts at pg. 5-6).
LEGAL ANALYSIS
Proceedings brought to determine the dischargeability of a particular debt are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(I). Thus, this case is a core proceeding.
The Defendant in this case, although acknowledging that a portion of her debt to the Plaintiff is nondischargeable, seeks to discharge that portion of the debt which she feels was unfairly allocated against her. With respect to the Defendant’s request, the Court initially observes that nowhere in the Bankruptcy Code is it provided that a debtor is entitled to receive a partial discharge of his or her debt. Nevertheless, many bankruptcy courts, including this Court, have found that debtors, under certain limited circumstances, may be partial discharge of a particular debt. See Tennessee Student Assistance Corp. v. Hornsby (In re Hornsby), 144 F.3d 433 (6th Cir.1998) (permitting partial discharge of a student loan debt); Graves v. Myrvang (In re Myrvang), 232 F.3d 1116 (9th Cir.2000) (bankruptcy court has power to order partial discharge of separate debts arising from terms of a divorce decree). The statutory authority for this action is found in § 105(a) of the Bankruptcy Code.
Section 105(a) of the Bankruptcy Code confers upon the bankruptcy courts the equitable power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions” of the Code. This statutory authority, as the Supreme Court of the United States has pointed out, is in line with “the traditional understanding that bankruptcy courts,- as courts of equity, have broad authority to modify creditor-debtor relationships.” United States v. Energy Resources Co., Inc., 495 U.S. 545, 549, 110 S.Ct. 2139, 2142, 109 L.Ed.2d 580 (1990). Bankruptcy courts have used this power in a multitude of different situations. In particular, and although the Court could not find an actual instance where § 105(a) has been applied to partially discharge a debt based on fraud under § 523(a)(2), § 105(a) has been applied, with great regularity, to partially discharge both student loan debts and marital obligations. See, e.g., In re Hornsby and In re Myrvang, supra. This power to partially discharge debts, however, is circumscribed in a very important respect: a bankruptcy court is not to apply its equitable powers unless the party to be benefitted has acted in a manner which is entirely consistent with basic principles of equity jurisprudence.1 In re Gilmore, 198 B.R. 686, 690 (Bankr.E.D.Tex.1996); Robbins v. U.S. Dep’t of Educ. (In re Robbins), 265 B.R. 763, 765-66 (Bankr.N.D.Ohio 2001).
*821In considering this tenet as it applies to the particular facts of this case, the Court initially observes that there is no reason to doubt the Defendant’s supposition that if Michael Dodd’s medical care providers had properly billed the Ohio Bureau of Workers’ Compensation, the Plaintiff, having had no cause to pay Michael Dodd’s medical bills, would not have had a claim against the Defendant for such expenses. In addition, from the facts presented by the Parties, it appears as if Michael Dodd took all reasonable steps to insure that the Ohio Bureau of Workers’ Compensation was properly billed for his medical expenses. Nevertheless, such considerations, standing alone, merely evidence that the Defendant may have a cause of action against Michael Dodd’s medical care providers as they, and not the Plaintiff, were responsible for failing to bill the Ohio Bureau of Workers’ Compensation. In this regard, the Court notes that equity does not condone the shifting of blame to another innocent party. See, e.g., Whirlpool Corp. v. Morse, 222 F.Supp. 645, 657 (D.Minn.1968) (it is a premise of equity that fault should not be shifted where there is no good reason to do so); City of Huntington Beach v. City of Westminster, 57 Cal.App.4th 220, 222, 66 Cal.Rptr.2d 826, 826 (1997) (“[t]here is no equitable basis for a total shifting of a loss from one fault-free party to another.”).
The Defendant, however, seeks to ascribe liability to the Plaintiff by arguing that the Plaintiff, after it paid Michael Dodd’s primary care providers, was under a duty to conduct a follow-up investigation to ensure that the medical care providers of the Defendant properly billed the Ohio Bureau of Workers’ Compensation. However, after considering this assertion, the Court finds that even if this assertion were true — and there is nothing in the record which would indicate that the Plaintiff was under either a legal or contractual duty to conduct a follow-up investigation — the Defendant is not deserving of any equitable relief. The following explains why:
A basic tenet of equity jurisprudence is that the party seeking equitable relief must come to the court with “clean hands.” The essence of this doctrine is that no person can obtain affirmative relief in equity with respect to a transaction in which he or she has been guilty of inequitable conduct; as was more fully explained by the Supreme Court of the United States in Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co.:
[H]e who comes into equity must come with clean hands. This maxim is far more than a mere banality. It is a self-imposed ordinance that closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief, however improper may have been the behavior of the defendant. That doctrine is rooted in the historical concept of court of equity as a vehicle for affirmatively enforcing the requirements of conscience and good faith. This presupposes a refusal on its part to be the abettor of iniquity. Thus while equity does not demand that its suitors shall have led blameless fives, as to other matters, it does require that they shall have acted fairly and without fraud or deceit as to the controversy in issue.
This maxim necessarily gives wide range to the equity court’s use of discretion in refusing to aid the unclean litigant. It is not bound by formula or restrained by any limitation that tends to trammel the free and just exercise of discretion. Accordingly one’s misconduct need not necessarily have been of such a nature as to be punishable as a crime or as to justify legal proceedings of any character. Any willful act concerning the cause of action *822which rightfully can be said to transgress equitable standards of conduct is sufficient cause for the invocation of the maxim by the chancellor.
324 U.S. 806, 814-15, 65 S.Ct. 993, 997-98, 89 L.Ed. 1381 (1945).
In this case, no actual dispute exists that the Defendant committed acts of iraud against the Plaintiff. Furthermore, a strong inference exists — and one in which the Defendant has not attempted to refute — that the loss the Plaintiff incurred in paying Michael Dodd’s medical bills is directly related to the prior transgressions committed by the Defendant; that is, no liability for Michael Dodd’s medical expenses would have been incurred “but for” the fact that the Defendant was, in the first instance, dishonest with the Plaintiff. As a result, the Defendant, in asking forgiveness for Michael Dodd’s medical bills, is essentially saying this to the Court: I admit defrauding the Plaintiff, however, because I didn’t intend to defraud the Plaintiff as much as I actually did, I shouldn’t be held liable for the excess. Such a position, however, is completely diametric to any notion that the Defendant dealt fairly in her relationship with the Plaintiff. Consequently, the Court will not consider invoking its equitable powers as the Defendant, under any conceivable interpretation, has not come to this Court with “clean hands.”
Thus, to summarize, it is the position of this Court that the wrongful acts committed by the Defendant lead directly to the Defendant’s obligation to pay for Michael Dodd’s medical bills. As a result therefrom, the Court cannot find that the circumstances of this case call for this Court invoking its equitable powers under § 105(a) so as to partially discharge the Defendant of her obligation to the Plaintiff. Therefore, the Defendant’s entire obligation to the Plaintiff will be found to be a nondischargeable debt. In reaching this conclusion, 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 obligation of the Defendant, Juanita Dodd, to the Plaintiff, the Fulton County Dept, of Human Services, be, and is hereby, determined to be a NONDISCHARGEABLE DEBT.
. It should also be noted that a bankruptcy court's power under § 105(a) is also limited to those actions which are consistent with both the language and the goals of the Bankruptcy Code. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 969, 99 L.Ed.2d 169 (1988) (a bankruptcy court’s equitable powers must be practiced within the confínes of the Bankruptcy Code); Murgillo v. California State Bd. of Equalization (In re Murgillo), 176 B.R. 524, 531 (9th Cir. BAP 1995) (a court may exercise its equitable power only to fulfill some specific Code provision, and not to achieve a result not contemplated by the Code). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493350/ | RULING ON CHAPTER 7 TRUSTEE’S FEE APPLICATION
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
ISSUE
The question in this matter is the entitlement of a Chapter 7 Trustee to reasonable compensation from the debtor’s property when the debtor’s Chapter 7 case was reconverted to one under Chapter 11 and then dismissed, without any distribution to creditors during the Chapter 7 case. Although the debtor does not object to the requested compensation, the United States Trustee for Region 2 and Assistant United States Trustee for the District of Connecticut (together, “the U.S. Trustee”) oppose the fee application.
*2II.
BACKGROUND
Main Realty & Management, LLC (“the debtor”) filed a petition under Chapter 11 on December 8, 2000, listing as its only significant asset an office building located at 121-131 Main Street, New Britain, Connecticut (“the property”). The U.S. Trustee, on June 20, 2001, filed a motion to convert the debtor’s Chapter 11 case to one under Chapter 7, or, alternatively, to require the debtor to take certain actions by stipulated dates, intended to lead to a hearing on plan confirmation (“the U.S. Trustee’s motion”). When, after several continuances, the U.S. Trustee’s motion, on August 23, 2001, came on for hearing, the debtor’s attorney, James F. Ripper, Esq. (“Ripper”)1 failed to appear. The court, consequently, ordered the debtor’s case converted to one under Chapter 7 and requested the U.S. Trustee to appoint a trustee. The U.S. Trustee appointed Anthony S. Novak, Esq. (“Novak”) from the panel of private trustees as interim case trustee.
Three weeks later, on September 13, 2001, the debtor filed a motion to vacate the order of conversion and to permit the debtor’s estate to remain in Chapter 11. The debtor alleged that Ripper’s failure to attend the August 23, 2001 hearing was due to Ripper’s belief that the debtor had filed all delinquent reports and the U.S. Trustee was going to withdraw the conversion motion. The court, after a duly-noticed hearing held on October 11, 2001, vacated the conversion order, with the U.S. Trustee’s consent. Novak, by a pleading dated October 10, 2001, had filed a “limited objection” to the debtor’s motion to vacate, contending that any order of reconversion should provide that Novak’s services and expenses during the Chapter 7 case “in excess of $1,500” be paid. (No-vak Obj. at 2).
The debtor thereafter submitted a disclosure statement and a plan of reorganization. But, on January 24, 2002, the debtor filed a motion for dismissal of its Chapter 11 case, asserting that it was in the best interest of creditors and the debt- or. Novak then submitted the instant application for Chapter 7 administrative trustee fees and expenses, duly itemizing expenditures of time amounting to $4,932.50 and costs of $35.46. The application, in paragraph nine, stated: “Upon consultation with Debtor’s counsel, the Trustee has agreed to a payment of $1,300 for his fees and expenses incurred in this case.” Novak further asserted that the itemized services rendered were “associated with the pursuit of assets on behalf of creditors in this case.” (Novak App. ¶ 11).
On April 2, 2002, the U.S. Trustee filed a brief in opposition to Novak’s application, noting that under a “literal application” of Bankruptcy Code § 326(a), Novak is not entitled to compensation and that Novak did not perform “substantial services on the estate’s behalf to warrant equitable compensation based on quantum meruit.” (U.S. Trustee Br. at 3).
The court, on April 4, 2002, held a hearing on the debtor’s motion to dismiss its case and on Novak’s fee application. There being no objection from the appearing parties, the court entered an order dismissing the debtor’s Chapter 11 case. Novak testified concerning the extent of his services as Chapter 7 trustee. They included reviewing land records, visiting the property, conferring with secured parties concerning the perfection and status of the security documents and contacting re*3altors to determine the market value of the property. He also had collected rents totaling $2,539.74, out of which he still retains $1,300 pending the court’s ruling on his application.
III.
DISCUSSION
A.
There are a number of reported opinions from district and bankruptcy courts generally dealing with the issue raised in this proceeding. They are divided in their holdings.
Bankruptcy Code § 330(a),2 inter alia, authorizes the court to award to a trustee, subject to § 326, “reasonable compensation.” Section 326(a)3 limits a Chapter 7 trustee’s compensation to certain percentages of monies distributed to creditors, “excluding the debtor.... ” Some courts rely upon the plain meaning rule to hold that since the Bankruptcy Code contains no provision for compensating Chapter 7 trustees when no monies are disbursed to creditors,4 the court lacks discretion to make an award. In a situation comparable to the present case, where the debtor’s Chapter 7 case was converted to one under Chapter 11 and, then, voluntarily dismissed, a district court upheld the bankruptcy court’s denial of fees to a Chapter 7 trustee, holding: “The plain language of section 326(a) indicates that only money the trustee distributes can be included in calculating the compensation base.” In re Celano, No. CIV.A.01-1310, 2001 WL 1586778, at *3 (E.D.La. Dec.7, 2001). The court further concluded that if unfairness to a diligent trustee might result, “the problem needs to be remedied by Congress, rather than this Court.” Id; see also In re Murphy, 272 B.R. 483, 485 (Bankr.D.Colo.2002) (“Notwithstanding what might otherwise qualify as ‘reasonable compensation’ for a trustee under section 330(a), Chapter 7 trustee’s fees are limited by the plain language of section 326(a) to a percentage of moneys Chapter 7 trustees disburse, even in cases that convert to Chapter 13.”); In re Fischer, 210 B.R. 467, 469 (Bankr.D.Minn.1997) (denying the Chapter 7 trustee’s request for compensation after case was converted to Chapter 13, stating that “[o]ne of the risks that trustees take is that even if there are nonexempt assets in the case, that the debtor will convert the case to chapter 13 or obtain dismissal of the case short of final administration.”); In re *4Woodworth, 70 B.R. 361, 363 (Bankr.N.D.N.Y.1987) (denying Chapter 7 trustee compensation when case was converted to Chapter 13 even though trustee had discovered valuable asset). Cf. In re England, 153 F.3d 232, 235 (5th Cir.1998) (concluding that calculation of Chapter 7 trustee’s maximum compensation cannot include unliquidated property transferred to unsecured creditors, and stating that “[t]he plain language of § 326(a) indicates that the statute caps a trustee’s compensation based upon only the moneys disbursed, without allowance for the property disbursed.”).
Other courts, and they are presently in the majority, conclude that a literal application of § 326(a) may result in harshness, and where a Chapter 7 trustee has, for example, discovered assets before the conversion or voluntary dismissal of the debtor’s case occurred, an award of compensation on a quantum meruit basis is justified. See In re Rodriguez, 240 B.R. 912, 914 (Bankr.D.Colo.1999) (awarding compensation on quantum meruit principle where before the debtor converted case to Chapter 13 the Chapter 7 trustee had investigated debtor’s failure to keep financial records, and filed an adversary proceeding to deny debtor’s discharge); In re Moore, 235 B.R. 414, 417 (Bankr.W.D.Ky.1999) (granting the Chapter 7 trustee compensation on quantum meruit basis when case converted to Chapter 13 after trustee had performed substantial services resulting in discovery of assets); In re Colburn, 231 B.R. 778, 785 (Bankr.D.Or.1999) (granting Chapter 7 trustee compensation for transforming a “no asset” Chapter 7 case to one that would have paid 100% to creditors where Chapter 7 case converted to Chapter 13); In re Washington, 232 B.R. 814, 818 (Bankr.S.D.Fla.1999) (granting Chapter 7 trustee compensation on quantum meruit basis for services in discovering debtor’s undisclosed assets before case converted from Chapter 7 to Chapter 13); In re Berry, 166 B.R. 932, 935 (Bankr.D.Or.1994) (same); see also In re Pancoastal, Inc., 104 B.R. 656, 659 (Bankr.D.Del.1989); In re Roberts, 80 B.R. 565, 568 (Bankr.N.D.Ga.1987); In re Stabler, 75 B.R. 135, 136-37 (Bankr.M.D.Fla.1987); In re Parameswaran, 64 B.R. 341, 344 (Bankr.S.D.N.Y.1986); In re Pray, 37 B.R. 27, 30-31 (Bankr.M.D.Fla.1983).
B.
The U.S. Trustee does not ask the court for a ruling in this proceeding that no fee can ever be paid to a Chapter 7 trustee when the trustee did not disburse monies to creditors. Rather, the U.S. Trustee contends that quantum meruit compensation does not lie where nothing substantial was accomplished by the trustee. They note that within three weeks after his appointment, Novak was alerted to the fact that “his role might be terminated before fully administering the case.” (U.S. Trustee Br. at 3.) No creditors’ meeting pursuant to Bankruptcy Code § 341 was ever held. They further assert that Novak neither discovered assets nor commenced avoidance actions, and that most of Novak’s time involved investigating whether there might be equity in the property for unsecured creditors. Cf. In re Fischer, 210 B.R. at 469 (“Being a chapter 7 trustee is a difficult and risky business. While the trustee is entitled to a statutory part of the filing fee, currently $60.00, that amount rarely compensates the trustee for the time spent on the case. Trustees can only hope that by achieving certain efficiencies by way of volume and by making a substantial fee in an occasional case, that the work of a trustee will be profitable.”).
IV.
Status of U.S. Trustee
28 U.S.C. § 586(a)(3) provides:
*5Each United States trustee ... shall ... whenever the United States trustee considers it to be appropriate—
(A)(i) review[], in accordance with procedural guidelines adopted by the Executive Office of the United States Trust-ee5 (which guidelines shall be applied uniformly by the United States trustee, except when circumstances warrant different treatment), applications filed for compensation and reimbursement under section 330 of title 11; and
(ii) fíle[ ] with the court comments with respect to such application and, if the United States Trustee considers it appropriate, object[ ] to such application.
“[T]he United States trustee is a proper party to intervene and be heard at any hearing to consider fees. Moreover, because of the oversight responsibilities, the United States trustee is in the best position to advise the court on the contribution of the various parties and to support or object to premium requests on applications based on a party’s ‘substantial contribution.’ ” 1 Lawrence P. King, Collier on Bankruptcy, ¶ 6.20[1][a] (15th ed. rev.2001).
V.
CONCLUSION
This matter is a close call. Both Novak, as a long time member of the panel of private trustees, and the Assistant United States Trustee and her counsel are well known to this court as conscientious, capable and credible professionals. The court, on several occasions in the past, has approved quantum meruit compensation in dismissed Chapter 7 cases to Chapter 7 trustees (in relatively minor amounts) when there was no objection by the U.S. Trustee or any other party. After giving due consideration to the arguments of both parties, the court concludes that Novak’s services do not rise to the level of actual value or potential benefit to the debtor or its creditors sufficient to warrant quantum meruit compensation. Cf. Black’s Law Dictionary 1255 (7th ed.1999) (defining ‘quantum meruit ’ as, inter alia, “a claim or right of action for the reasonable value of services rendered”); Morgan Buildings & Spas, Inc. v. Dean’s Stoves & Spas, Inc., 58 Conn.App. 560, 563, 753 A.2d 957 (2000) (“A plaintiff seeking damages under ... quantum meruit must establish that the defendant received a benefit .... ”); cf. also H.R.Rep. No. 95-595, at 108 (1977), U.S.Code Cong. & Admin.News 1978, 5963, 6069 (discussing the effects of the then proposed changes in fee structure for liquidation cases, and stating that “(trustees will be required to recover assets for the benefit of creditors before they may be paid”).
The application for Chapter 7 trustee fees is denied. It is
SO ORDERED.
. The docket sheet for this case does not indicate the debtor ever sought to receive court approval for Ripper to serve as attorney for the debtor-in-possession.
. Section 330 provides in relevant part:
(a)(1) After notice to the parties in interest and the United States trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee, an examiner, a professional person employed under section 327 or 1103—
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney and by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
. Section 326 provides in relevant part:
(a) In a case under chapter 7 or 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee’s services, payable after the trustee renders such services, not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000 upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.
.Pursuant to Bankruptcy Code § 330(b), all trustees in Chapter 7 cases presently receive a $60 fee out of the filing fee paid by the debtor.
. An examination of these guidelines reveals nothing relevant to the issue before the court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493352/ | ORDER STRIKING ADVERSARY COMPLAINT FROM THE RECORD AS VIOLATION OF COURT ORDER; DETERMINING THAT CLAIMS WITHIN COMPLAINT ARE SUBJECT TO DISMISSAL ON GROUNDS OF JUDICIAL ESTOP-PEL; AND DENYING ‘DEBTOR/APPELLANT’S MOTION TO STRIKE THE UNITED STATES OBJECTIONS TO THE DISCHARGE OF CERTAIN ALLEGED INCOME TAX DEBTS”
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
This matter comes before the Court on Motion to Dismiss And, in the Alternative, Motion to Strike brought by the United States and “Debtor/Appellant’s Motion to Strike the United States Objections to the Discharge of Certain Alleged Income Tax Debts and Memorandum of Law in Sup*137port Thereof’ brought by Debtor. For the reasons stated herein, this Court strikes Debtor’s adversary complaint from the record. This Court also denies Debtor/Appellant’s Motion to Strike the United States Objections to the Discharge of Certain Alleged Income Tax Debts as explained below.
On or about December 5, 2000, Walter J. Lawrence (hereinafter “Lawrence”) petitioned this Court for an order allowing him to file for bankruptcy under Chapter 7 of the Bankruptcy Code (11 U.S.C.).
Lawrence has been enjoined by the Seventh Circuit from—
filing any petition for bankruptcy, or any civil action arising out of bankruptcy petitions that have already been filed, or any appeal to this court arising from such actions, -without first obtaining leave of the appropriate court. In seeking leave of the court, Mr. Lawrence must certify that the claims he wishes to present have not been raised and disposed of on the merits in any federal court and that the claims are not frivolous. Failure to certify the claims or a false certification may result in Mr. Lawrence being found in contempt of court.
Lawrence v. United States, 4 F.3d 996, 1993 WL 360952 (7th Cir.1993). The Seventh Circuit ordered this extraordinary measure “to protect the judicial system’s limited resources and insure that they are being used efficiently.” Id.
The United States objected to the petition alleging that Lawrence had not met his burden of showing (1) that his reason for filing would not be frivolous, (2) that he did not seek to relitigate claims previously determined in a federal court, and (3) that his request was made in good faith.
On January 17, 2001, after a hearing on the petition, this Court granted Lawrence permission to file for bankruptcy under Chapter 7 of the Bankruptcy Code. The United States withdrew its opposition to Lawrence’s petition based upon the his testimony, under oath at that hearing, that he was not seeking to discharge or challenge his federal income tax liabilities or affect the federal tax liens in this bankruptcy case.
At the hearing, the Lawrence was placed under oath. Lawrence stated unequivocally, “I don’t intend to try to discharge any of the taxes. I’m not even going to try.” Transcript of Hearing, pp. 9, 11. 20-5; 10, 11. 1-2. See also, Transcript of Hearing, pp. 10-18, 24-27. He further stated: “The IRS is not being prejudiced, Your Honor, because they are receiving 100 percent of my pension plan, and they will continue to do so.” Transcript of Hearing, p. 9.
Throughout the hearing, Lawrence repeatedly asserted that he sought to litigate no issues with respect to the tax claims against him. The following dialogue from the hearing makes clear that Lawrence represented to this Court that he did not seek to discharge or in any way affect his federal tax liabilities by filing a petition in bankruptcy.
Q: [Yjou do not intend to challenge any aspect of whether a lien may or may not attach to property?
A.[Lawrence]: No. It’s — I can’t, without being in contempt of court, and I am not going to do that.
Q: But you may attempt to exempt a portion of your pension?
A. [Lawrence]: I need to definitely — if I am going to drive a vehicle and pay certain expenses and pay insurance on that, I need to.
Q: And by exempt do you mean — •
*138A. [Lawrence]: I don’t even know if I can exempt it or not. I don’t know. Under 62-2316 USC, I don’t think I can.
Q: So you-—
A. [Lawrence]: I am going to ask the Court if I can.
Q.: And you do not challenge, intend to challenge the federal tax liens; is that your testimony?
A.[Lawrence]: I can’t.
Q.: You do not intend to challenge the amount of any tax liability?
A. [Lawrence]: No.
Q.: You do not intend to attempt to discharge your Federal income taxes?
A. [Lawrence]: That is correct.
Q.: No Federal income taxes at all will be discharged in this proceeding?
A. [Lawrence]: That is correct....
Transcript of Hearing, pp. 24-25.
Lawrence also stated that with respect to his tax liabilities: “I am not going to try to litigate any interest, penalty, or principal amount.” Transcript of Hearing, p. 13, 11. 14-15. Lawrence did state at the hearing that he would seek to exempt certain property from the bankruptcy estate. He may have believed that such exemption might protect a portion of his pension plan' from collection by the IRS.
This Court at the hearing inquired as to whether Lawrence’s intended actions in this bankruptcy case complied with the requirements set forth by the Seventh Circuit for permitting him to file for bankruptcy. In particular, this Court wanted to ascertain whether Lawrence intended to raise claims that were frivolous or had been determined previously in a court of law. Transcript of Hearing, pp. 35-36. In reliance upon Lawrence’s assurances given at the hearing, this Court granted Lawrence’s petition.
Following the hearing, Lawrence filed a “no asset” petition in bankruptcy under Chapter 7 of the Bankruptcy Code. He received a discharge in bankruptcy on April 30, 2001.
On or about March 30, 2001, Lawrence filed a motion seeking to avoid a judicial lien for taxes owed to the United States styled, “Debtor’s Motion to Avoid Judicial Lien Coupled with Motion for Entry of Order on Debtor’s Claimed Exemptions.” Lawrence sought (1) an order from this Court “allowing” the debtor’s claimed exemptions and (2) an order from this Court that the federal tax liens upon the Lawrence’s property and rights to property are avoided. The United States opposed Lawrence’s motion to the extent that it sought to avoid the federal tax liens of the United States. After a hearing on the issue, this Court denied the motion on the grounds that the hen of the United States was not a judicial lien.
Lawrence subsequently moved for reconsideration arguing that the federal tax liens against his property are invalid-statutory liens that he sought to “quash.” In his motion for reconsideration, Lawrence raised frivolous tax protest arguments including the assertion that wages are not taxable income. These frivolous arguments were not new to Lawrence. He had raised them at other times before other courts and has been sanctioned for doing so. See, e.g., Lawrence v. United States, 229 F.3d 1152, 2000 WL 1182452 (6th Cir.2000); Lawrence v. United States, 4 F.3d 996, 1993 WL 360952 (7th Cir.1993).
This Court denied the motion for reconsideration, held that the Motion was merit-less, and found that the matters raised in the motion rendered false Lawrence’s certification through his sworn testimony given before the Court on January 17, 2001. For these reasons, the Court prohibited Lawrence from “filing any further pro*139ceeding with this court seeking to challenge in any way the tax claims of the United States or the enforceability of any liens arising therefrom” and determined that any such pleadings would be “stricken by the court sua sponte upon receipt.” Order Denying Debtor’s Motion for Reconsideration Coupled with Motion to Quash Statutory Lien, dated July 2, 2001.
Lawrence has now filed an adversary complaint entitled “Plaintiff/Debtor’s Complaint to Determine the Validity, Priority, Or Extent of a Lien With Demand for Jury Trial.” In his complaint, Lawrence alleges that the federal tax liens upon his property and rights to property are invalid.1 Lawrence’s approach is to challenge the validity of the tax assessments which give rise to the federal tax liens under 26 U.S.C. § 6321. Lawrence’s adversary complaint was brought in direct contradiction of this Court’s Order Denying Debtor’s Motion for Reconsideration Coupled with Motion to Quash Statutory Lien of July 2, 2001.
This Court has also determined that the claims within the adversary complaint are subject to dismissal on the grounds of judicial estoppel and that, had this Court not determined to strike Lawrence’s pleading, it would have dismissed the claims for that reason.
“The doctrine of judicial estoppel is an equitable principle which generally operates to preclude a party from asserting a position in a legal proceeding inconsistent with a position taken by that party in the same or prior litigation.” USLIFE Corp. v. U.S. Life Ins., 560 F.Supp. 1302 (N.D.Tex.1983). Judicial estoppel serves to prevent abuse of the judicial process by litigants. New Hampshire v. Maine, 532 U.S. 742, 121 S.Ct. 1808, 1814, 149 L.Ed.2d 968 (2001); Sear-Land Service, Inc. v. Sellan, 64 F.Supp.2d 1255 (S.D.Fla.1999); In re Woolley’s Parkway Center, Inc., 147 B.R. 996 (Bankr.M.D.Fla.1992). “The doctrine is designed to prevent parties from making a mockery of justice by inconsistent pleadings.” United Kingdom v. United States, 238 F.3d 1312, 1324 (11th Cir.2001); Taylor v. Food World, Inc., 133 F.3d 1419, 1422 (11th Cir.1998); McKinnon v. Blue Cross and Blue Shield of Alabama, 935 F.2d 1187, 1192 (11th Cir.1991).
Where a party has taken a position under oath in one judicial proceeding, he is estopped to make a contrary assertion in a later proceeding. This rule, known as judicial estoppel, is founded on the same ethical precept as estoppel in pais: a party who has induced someone else to act in a particular manner should not be permitted later to cause loss to the person he has misled by adopting an inconsistent position. Judicial estoppel, like all estoppel, is equitable in nature, and is designed to protect those who are misled by a change in position.
Colonial Refrigerated Transportation, Inc. v. Mitchell, 403 F.2d 541, 550 (5th Cir.1968); United Kingdom, 238 F.3d at 1324 (“Judicial estoppel is applied to the calculated assertion of divergent sworn positions. The doctrine is designed to prevent parties from making a mockery of justice by inconsistent pleadings”).
*140There are no “inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel.” New Hampshire, 121 S.Ct. at 1815. However, the Supreme Court has recognized that courts typically consider the following: whether the position is “clearly inconsistent” with the party’s prior position; whether a court was convinced to accept the previous position such as to lead to “the perception that either the first or the second court was misled”; and whether the change in the position would be unfair to the opposing party. New Hampshire, 121 S.Ct. at 1815. See also Miller v. Willett, 154 B.R. 987, 990 (Bankr.N.D.Fla.1993).
In this case, Lawrence’s current position is clearly contrary to his statements under oath at the January 17, 2001, hearing. Lawrence represented to this Court that he would not challenge his federal tax liabilities or the validity of his federal tax liens, and that he would not seek to relitigate matters or raise frivolous arguments. Yet, through his current adversary Complaint, Lawrence seeks to do these things.
This Court accepted Lawrence’s representations and based its ruling, which permitted Lawrence to file his Chapter 7 bankruptcy petition, upon them. This Court was concerned at the time that it made its decision that Lawrence would not use the judicial system as a tool to hamper legitimate collection of federal tax liabilities. Lawrence’s representations that he would not seek to challenge the validity of his federal tax liabilities or federal tax liens made this Court’s decision simple. If Lawrence were not seeking to challenge these matters, he then would not be in a position to raise the frivolous tax protest arguments for which he had been previously sanctioned. Nor would he be in a position to abuse the protections of the Bankruptcy Code (11 U.S.C.), in an effort to hamper legitimate federal law enforcement, in this case, assessment and collection of federal income tax liabilities.
To allow Lawrence to continue challenging his federal tax liens and federal tax liabilities after he has promised not to do so is unfair to both this Court and to the United States. Had Lawrence given honest answers at the hearing on January 17, 2001, regarding his intention to challenge his federal tax liens and federal tax liabilities by raising arguments previously made and rejected in other courts and arguments without legal merit or factual foundation, Lawrence likely would not have been permitted to file his petition for bankruptcy. Certainly, the United States would have had further information on which to challenge Lawrence’s petition. This Court would have made further inquiry as well prior to granting Lawrence permission to file a petition in bankruptcy.
“[Wjhere a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.” New Hampshire, 121 S.Ct. at 1813. The application of judicial estoppel is appropriate here, where Lawrence’s representations at the hearing resulted in this Court permitting the Lawrence to file bankruptcy in the Northern District of Florida on the expectation that Lawrence would not make frivolous claims, seek to relitigate previously determined matters, or challenge his federal income tax liabilities or federal tax liens. This Court will not allow Lawrence to make a mockery of the judicial system or to waste valuable judicial time and resources which could be otherwise devoted to resolving *141disputes between honest debtors and creditors.
In addition, Lawrence has filed “Debt- or/Appellant’s Motion to Strike the United States Objections to the Discharge of Certain Alleged Income Tax Debts and Memorandum of Law in Support Thereof.” Given this Court’s striking of the adversary complaint, this Motion is moot. Lawrence’s Motion is also without merit.
Accordingly, it is
HEREBY ORDERED, ADJUDGED, and DECREED that “Plaintiff/Debtor’s Complaint to Determine the Validity, Priority, Or Extent of a Lien With Demand for Jury Trial” is stricken from the record; and it is
FURTHER ORDERED, ADJUDGED, and DECREED that the Motion to Strike the United States Objections to Discharge of Certain Alleged Income Tax Debts is DENIED.
Order Denying Debtor/Plaintiff’s Motion to Avoid Statutory Lien
THIS CASE is before the Court on plaintiff/debtor Walter J. Lawrence’s motion to avoid the statutory income tax lien of the United States of America. See Docket Entry # 10. The instant adversary proceeding was dismissed following the November 14th 2001 hearing on the defendant’s motion to strike the plain-tiffrdebtor’s pleadings and to dismiss the case.
Judicial estoppel requires denial of the instant motion. The injunction contained in Lawrence v. United States (Matter of Lawrence), 4 F.3d 996, 1993 WL 360952 (7th Cir.1993) prohibits the Mr. Lawrence from using this proceeding as a forum to challenge previously adjudicated tax matters. Mr. Lawrence was permitted to file the underlying Chapter 7 ease in this Court based on his sworn testimony that he would obey that injunction, and would not use the instant Chapter 7 case as a platform for litigation concerning his income taxes. The instant motion directly contravenes that testimony, violates the injunction from the Seventh Circuit Court of Appeals, and violates this Court’s Order binding Mr. Lawrence to the terms and conditions set forth in the injunction. Finally, the instant motion is moot following the dismissal of the adversary proceeding and the underlying administrative case.
Therefore, it is ORDERED AND ADJUDGED that the plaintiff/debtor’s motion to avoid statutory lien is DENIED.
. Within his adversary complaint, Lawrence apparently seeks the discharge of sanctions imposed upon him by the Sixth Circuit for raising frivolous tax protest arguments. It is this Court’s opinion that this Court's July 2, 2001, order applies equally to these sanctions and that Lawrence may not seek their dis-chargeability in this bankruptcy. Certainly, as this Court has stricken the adversary complaint from the record for the reasons discussed in the text of the opinion, the issue is no longer before the Court. In any event, the sanctions would be non-dischargeable pursuant to 11 U.S.C: § 523(a)(7). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493353/ | REVISED MEMORANDUM OPINION
JAMES D. WALKER, Jr., Bankruptcy Judge.
This matter comes before the Court on separate Motions for Summary Judgment filed by each of the defendants, Case Credit Corporation (“Case Credit”) and Falcon Power, Inc. (“Falcon Power”). Plaintiff, Baldwin Rental Centers, Inc. (“Debtor”) filed an adversary proceeding captioned “Objection to Claim of Case Credit Corporation and Complaint for Damages Against Case Credit Corporation and Falcon Power.” In this adversary, Debtor objects to the amended proof of claim filed by Case Credit Corporation in the pending chapter 11 case. The complaint seeks recovery of damages for breach of an oral contract against Case Credit and Falcon Power in an amount exceeding $3,000,000.00. The complaint also asserts a claim and seeks recovery against Case Credit pursuant to O.C.G.A. § 51-1-8 for breach of a private duty. The Court held a hearing to consider the motions for summary judgment on March 28, 2000. This is a core matter within the meaning of 28 U.S.C. § 157(b)(2). After careful consideration of the pleadings, evidence, and applicable authorities, the Court hereby enters the following findings of fact and conclusions of law in compliance with Federal Rule of Bankruptcy Procedure 7052. The Court will consolidate the motions for summary judgment in this memorandum opinion.1
Findings of Fact
For purposes of the objection to claim and the motions for summary judgment, the following facts are treated as not being *154in dispute. Debtor, Baldwin Rental Centers, Inc., filed a petition under chapter 11 of the Bankruptcy Code on August 20, 1997. Debtor is in the short-term equipment rental business and rents equipment to building contractors and home owners. Mr. Jerry Baldwin (“Mr. Baldwin”), Debt- or’s president, started the business by opening one store in Waycross, Georgia, in 1989 as a sole proprietorship. The business was incorporated in 1994 and, by that time, had expanded its operation to include several stores in South Georgia. In approximately 1994, Debtor developed a business relationship with the Case Company store in Jacksonville, Florida, from which Debtor would purchase Case equipment for its rental business. Typically, Case Credit Corporation would finance these transactions. In November 1994, Falcon Power, a company headquartered in Phoenix, Arizona, bought out the Case Company store in Jacksonville. Thereafter, Falcon Power became a dealer for Case Corporation and sold or leased Case equipment. After the acquisition, many of the former Case employees remained as Falcon Power employees. Debtor continued to do business with Falcon Power and Case Credit. Prior to 1995, a typical transaction among Debtor, Falcon Power, and Case Credit would involve Debtor purchasing a piece of Case equipment through the Falcon Power store with financing by Case Credit. Case Credit retained the right to approve or disapprove of the financing on a transaction by transaction basis.
Sometime in March 1995, Debtor, through Mr. Baldwin, had a meeting with Mr. Lou Fiala, the sales representative for Falcon Power, and Mr. Duane Murph, the Jacksonville store manager for Falcon Power.2 At this meeting, the parties discussed several matters which included the sale or lease of equipment to Debtor, having Falcon Power sales representatives refer short-term (daily or weekly) rentals to Debtor and Debtor’s sales representatives refer long-term (more than 3 months) rentals or purchases to Falcon Power, having Falcon Power set up a parts department for Case equipment in some of Debt- or’s stores on a consignment basis, having Falcon Power provide training to Debtor employees on Case equipment for maintenance purposes, and transporting equipment throughout South Georgia with an 18-wheel tractor-trailer. There are no notes or any form of written documentation evidencing the discussions of this meeting.
After this meeting, beginning on March 31, 1995, Debtor entered into a series of lease agreements with Falcon Power for the acquisition of various types of Case equipment. Debtor entered into twenty-three lease agreements between March 31, 1995 and October 31, 1996. The majority of these leases, seventeen of the twenty-three, were entered between March 31 and July 20, 1995. Each of Debtor’s proposed lease applications and agreements was prepared by a Falcon Power representative and submitted directly to Case Credit, typically by an electronic transmission. Case Credit would either approve or disapprove of the lease application on a transaction by transaction basis. If the transaction was approved, a Falcon Power representative would prepare and complete the appropriate paperwork for Debt- or to execute. If Case Credit disapproved the transaction, then the proposed lease agreement would be terminated. Each lease agreement was signed by Mr. Baldwin on behalf of the Debtor. Each lease agreement contains the following language: “In this Lease, T, ‘my’, ‘me’ and ‘Customer’ means the lessee; ‘you’, ‘your’ *155or ‘Dealer’ means the lessor.” Baldwin Rental Center is listed as the Customer (lessee) and Falcon Power is listed as the Dealer (lessor). In addition, each lease agreement entered into by Debtor contains a clause referred to as “Totality of Agreement” which states the following:
This Agreement contains the entire agreement between you and me unless a change is agreed to in writing by you and me and accepted by any party to whom you assign this Agreement.
The terms of each lease provide that it was to be immediately assigned to Case Credit. The twenty-three lease agreements constitute the only written evidence of transactions among Debtor, Falcon Power, and Case Credit.
As a result of Debtor entering into the series of lease agreements for various types of Case equipment, Debtor was greatly increasing the size of its inventory. The equipment Debtor was leasing included, but was not limited to, backhoes, wheel loaders, crawler dozers, and skid steerers. Some of this equipment was new to Debt- or’s inventory. Some of this equipment was similar to other types of equipment made by other manufacturers that Debtor had in its inventory prior to March 1995. Debtor was becoming one of the largest customers for the Falcon Power store in Jacksonville, Florida. At the same time, Debtor was incurring a substantial liability with Case Credit. At some point during their relationship, Case Credit established a credit limit for Debtor in the amount of $1.5 million. On more than one occasion, Debtor reached this credit limit and would have to “pay down” the credit limit prior to acquiring more equipment.
In addition to acquiring the equipment in March 1995, Debtor purchased a 18-wheel tractor trailer. This vehicle was to be used to transport equipment throughout South Georgia. Debtor opened new stores in Albany and Valdosta, Georgia, sometime after March 1995. These stores increased Debtor’s store number to seven throughout South Georgia. In four of Debtor’s stores, Falcon Power set up a department for Debtor to carry and sell Case parts. The parts department was set up on a consignment basis whereby a Falcon Power representative would stock the parts in the store and maintain the inventory on a monthly basis. After each inventory was taken, Falcon Power would bill Debtor for the amount of parts that had been removed from the inventory. Falcon maintained the parts department and inventory for approximately six months. Debtor also received four signs to place in its store windows to show the general public that it was selling parts for Case equipment.
While the record is not clear as to specific dates, there is evidence in the form of deposition testimony that Debtor had other meetings and discussions with representatives of Falcon Power after March 1995. However, there was no representative from Case Credit at any of the meetings between Debtor and Falcon Power that occurred prior to August, 1995. On or about August 15, 1995, Mr. Baldwin had a meeting with several representatives from Falcon Power and Case Credit in Valdosta in which matters were discussed including Debtor’s equipment needs and plans for future expansion. This was the first meeting Debtor had with representatives from Case Credit. There are no written notes or documentation evidencing the discussions of this meeting or the events that took place at this meeting.
By mid-1996 and into 1997, it became apparent to Debtor that the equipment on Debtor’s yard was not being rented sufficiently to meet its financial obligations under the lease agreements "with Case Credit. Debtor had reached its credit limit *156with Case Credit. Debtor attempted to meet with representatives from Case Credit to refinance the lease agreements or get assistance in changing the mix of its Case equipment inventory. This was not successful. Debtor subsequently filed for protection under chapter 11 of the Bankruptcy Code on August 20, 1997. In Debt- or’s bankruptcy schedules, Debtor does not list an interest in a partnership or joint venture with Falcon Power or Case Credit. In addition, Debtor’s schedules do not list any executory contracts or agreements with Falcon Power or Case Credit. Debt- or’s Schedule B lists a potential law suit against Case Corporation for an unknown amount. Case Credit filed claim number 62 in Debtor’s chapter 11 case which was amended to $58,759.13 secured, $363,459.45 unsecured, and $119,108.43 administrative priority. Falcon Power filed an unsecured claim, designated as number 57, in Debtor’s chapter 11 case in the amount of $28,140.33.
Conclusions of Law
I. Debtor’s Objection to Claim of Case Credit
The Court will first consider Debtor’s objection to the claim of Case Credit. Case Credit Corporation filed claim number 62 on January 12, 1998. In response to this Court’s Memorandum Opinion and Order dated December 1,1998, Case Credit amended their claim to $58,759.13 secured, $363,459.45 unsecured, and $119,180.43 administrative priority. Debt- or asserts the following objections to the claim. First, Debtor alleges that the liquidated damage clause found in each of the lease agreements entered into between Debtor and Case Credit are not reasonable and are punitive in nature and should be disregarded. Second, Debtor objects to the mathematical calculations of Case Credit in formulating its claim. Third, Debtor alleges that Case Credit failed to mitigate its damages by selling the equipment for less than its fair market value and failing to sell it in a commercially reasonable manner. Debtor seeks a reduction in the amount of the amended claim filed by Case Credit, or in the alternative, Debtor seeks to have the claim disallowed for breach of an oral contract.
The Court will address each of these objections in turn. First, in its Memorandum Opinion and Order dated December 1, 1998, this Court addressed the reasonableness of the liquidated damages clause found in each of the lease agreements entered into between Debtor and Case Credit. Although Debtor filed a notice of appeal of that Order, Debtor withdrew the notice. Accordingly, this Court’s Order of December 1,1998, stands as the law of the case and this portion of Debtor’s objection is hereby overruled. Second, at the hearing on March 28, 2000, the parties notified the Court that Case Credit further amended its proof of claim which resolved Debt- or’s objection to the mathematical calculations. Finally, if Debtor has evidence to present to the Court regarding its objection to the commercial reasonableness of the sale of the collateral, then the Court will schedule a hearing to consider that issue. Debtor’s counsel shall notify the Court and request a hearing in writing within 15 days from the date of this Order. Otherwise, if Debtor’s objection to the Case Credit claim has been resolved, then the Court directs Debtor to withdraw that portion of its Objection and Complaint.
II. Debtor’s Complaint for Damages Against Case Credit and Falcon Power
The issue presented to the Court is whether the parties entered into a binding oral contract whereby Debtor can recover damages from Falcon Power or Case Credit for the breach of such oral contract. Debtor alleges that the parties en*157tered into an oral contract as a result of the meeting in March 1995, subsequent meetings, and the parties’ conduct. Debt- or asserts that this contract provided that Debtor would join forces with Falcon Power and Case Credit in that Debtor would become the exclusive short-term rental house for Case equipment in South Georgia. Case Credit and Falcon Power respond by asserting that there was no binding contract entered into among the parties. In the alternative, Defendants argue that if the Court finds that a contract was entered into among the parties, then they assert numerous defenses to the complaint for breach of contract.
Summary judgment is appropriate when there is no dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Combs v. King, 764 F.2d 818, 827 (11th Cir.1985). The party seeking summary judgment may do so by showing that an essential element of the non-movant’s case is lacking. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). “[A] party seeking summary judgment 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 material fact.” Id. (quoting Fed.R.Civ.P. 56(c)). Once the moving party has properly supported its motion with such evidence, the party opposing the motion “ ‘may not rest upon the mere allegations or denials of his pleading, but ... must set forth specific facts showing that there is a genuine issue for trial.’ ” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (quoting First Nat’l Bank of Arizona v. Cities Service Co., 391 U.S. 253, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968) and Fed.R.Civ.P. 56(e)). If there is a genuine issue of fact in dispute, summary judgment must be denied. Warrior Tombigbee Transp. Co., Inc. v. M/V Nan Fung, 695 F.2d 1294, 1296-97 (11th Cir.1983). A fact is material if it may affect the outcome of the case under the governing substantive law. Anderson, 477 at 248, 106 S.Ct. 2505. A genuine issue for trial exists when “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id. The Court finds that, after reviewing all facts and reasonable inferences in favor of the Debtor as the non-moving party, summary judgment is appropriate on the ground that the merits of the case fail to establish the creation of an oral contract under Georgia law.
Debtor makes a number of allegations in support of its position that the parties entered into an oral contract, that the defendants breached the terms of that contract, and that Debtor is entitled to recover a substantial sum of money for the alleged breach. Because of the complexity of this matter, the following outline of Debtor’s allegations will be beneficial to lay the foundation of Debtor’s cause of action. Debtor alleges that Mr. Fiala and Mr. Murph approached Debtor at the March 1995 meeting with an offer to enter into a business relationship that Debtor describes as a “joint undertaking” or a “tri-partite business relationship” among Debtor, Falcon Power, and Case Credit. Debtor asserts that this agreement changed their prior business relationship from buyer/seller to some type of partnership whereby Debtor would become the exclusive rental house, parts provider, and warranty work provider for Falcon Power and Case Credit in South Georgia. Debtor asserts that the concept behind this agreement was for Debtor to provide short-term rentals of Case equipment to customers *158with the hope that customers would eventually enter into a longer term lease or purchase the equipment from Falcon Power with financing by Case Credit. Thus, Debtor claims that the agreement would benefit all the parties because Falcon Power and Case Credit focused on a long-term lease or purchase and Debtor could enhance its business by providing customers with a short-term trial run of a piece of Case equipment. In addition, Debtor’s stores would be a more convenient place for Case customers in South Georgia to obtain equipment, parts, or warranty work since the nearest Falcon Power store was located in Jacksonville, Florida.
As part of the “joint undertaking” agreement, Debtor asserts that it was required to do the following: 1) carry a full line of Case equipment, 2) open new stores in Valdosta and Albany, 3) purchase an 18-wheel tractor-trailer to transport equipment around South Georgia, 4) allow four of its stores to carry parts for Case equipment, and 5) have its mechanics trained by Falcon Power to do warranty work in South Georgia on Case equipment. Debt- or asserts that Falcon Power’s part of this agreement was to: 1) have Falcon Power sales representatives in the South Georgia territory provide support and referrals to guarantee that Debtor would have customers for the short-term rental of Case equipment to enable Debtor to maintain its financial obligations to Case Credit, 2) provide Debtor with Case equipment, 3) set up a parts department in four of Debtor’s stores on a consignment basis whereby Falcon Power employees would maintain the inventory and accounting records, 4) provide Debtor with signs for the four stores so customers would know that Case parts were available in the store, 5) provide the training for Debtor employees to do warranty work on Case equipment, and 6) provide business for Debtor to haul Case equipment in South Georgia using the 18-wheel tractor trader.
Although there were not any Case Credit representatives at the March 1995 meeting, Debtor asserts that Case Credit was a party to this agreement because Debtor understood that Case Credit would provide unlimited financing for Debtor to acquire the equipment. Debtor later learned that the funding was not unlimited because Case Credit set a credit limit of $1.5 million for Debtor. Debtor asserts that Mr. Fíala and Mr. Murph acted with the apparent authority and consent to bind Case Credit to the terms of this agreement because they were former employees of Case Corporation.
Debtor asserts that it accepted the terms of the agreement and began performing its obligations under the oral contract by doing several things. Debtor entered into the large number of lease agreements with Falcon Power and Case Credit starting March 31, 1995. The acquisition of this equipment significantly increased Debtor’s inventory compared to the size of Debtor’s inventory prior to March 1995. Debtor asserts that the volume and type of equipment it received evidences the agreement. In addition, Debtor asserts that the fact it obtained such a high credit limit from Case Credit evidences their participation in the “joint undertaking” in that Debtor became more than just a customer to Falcon Power and Case Credit. Debtor had business cards printed up so that Falcon Power sales representatives could distribute them while making sales calls. Debtor alleges that there was an agreement whereby Falcon Power sales representatives would receive a commission for referrals of customers to Debtor. Debtor also purchased an 18-wheel tractor-trailer to haul equipment throughout South Georgia. Debtor opened up new stores in Albany and Val-*159dosta. Debtor received four signs from Falcon Power to place in its stores to advertise that Debtor was carrying Case equipment parts.
Debtor alleges that Falcon Power and Case breached the terms of the oral agreement because they were involved in its creation and, therefore, had an obligation to see that the terms were fulfilled. Specifically, as to Falcon Power, Debtor alleges that it: 1) failed to provide the field support and generate short-term rentals of the equipment to keep up with the volume of equipment leases being made by Debt- or, 2) failed to utilize the tractor-trailer purchased by Debtor to haul equipment, and 3) failed to train Debtor’s mechanics to perform warranty work on Case equipment. Debtor alleges that it was led to believe that its expense of purchasing or leasing the equipment through Case Credit would be adequately covered by the referrals from Falcon Power representatives. As to Case Credit, Debtor alleges that it breached the agreement because it was a part of the original undertaking, and when the deal fell through, it was part of the violation. In addition, Debtor alleges that Case Credit breached the agreement by not assisting in refinancing the leases or rebalancing the inventory.
In this case, the Court must separate enforceable from unenforceable promises to determine if a valid oral contract existed between the parties. The Restatement Second of Contracts defines a contract as follows: “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” Restatement (Second) of Contracts § 1 (1979). “A contract had been defined as a promise enforceable at law directly or indirectly. It imports a legally enforceable obligation directly assumed by or imposed on the contractor, to do something.” In re Packer Ave. Assoc., 1 B.R. 286, 289 (Bankr.E.D.Pa.1979) (citing Corbin on Contracts § 3 (1961)). Georgia law defines a contract in general as “an agreement between two or more parties for the doing or not doing of some specified thing.” O.C.G.A. § 13-1-1 (2000). In general, the three basic requirements for the formation of a contract are offer, acceptance, and consideration. If these elements are lacking, then an enforceable contract does not exist. Georgia law provides, “[t]o constitute a valid contract, there must be parties able to contract, a consideration moving to the contract, the assent of the parties to the terms of the contract, and a subject matter upon which the contact can operate.” O.C.G.A. § 13-3-1.
Debtor acknowledges that there are no written documents, memoranda, or notes evidencing the alleged agreement. Therefore, the Court will consider the enforceability of an alleged oral contract. Oral contracts may be enforceable under Georgia law which provides, “[p]arol contracts shall include only contracts in words as remembered by witnesses.” O.C.G.A. § 13-6-1. The Court will look to the words and conduct of the parties to determine the terms of an oral agreement. In the case of Super Valu Stores, Inc. v. First Nat’l Bank of Columbus, the District Court for the Middle District of Georgia stated,
For oral contracts to be enforceable under Georgia law it must be shown that there was a meeting of the minds of the contracting parties [and] mutuality as to every essential element of the oral agreement. It must be shown “with reasonable certainty as to what the parties were obligating themselves to do to effect what they envisioned ... ”, and “in order for the contract to be valid the agreement must ordinarily be expressed plainly and explicitly enough to show *160what the parties agreed upon. A contract cannot be enforced in any form of action if its terms are incomplete ... incomprehensible.... ” vague, indefinite or uncertain.
Super Valu Stores, Inc. v. First Nat’l Bank of Columbus, 463 F.Supp. 1183, 1193 (M.D.Ga.1979) (citing Bagwell-Hughes, Inc. v. McConnell, 224 Ga. 659, 661, 164 S.E.2d 229, 231 (1968) and Gragg v. Hall, 164 Ga. 628, 139 S.E. 339 (1927)).
In this case, the Court finds that the defendants are entitled to summary judgment because the evidence is not sufficient to present a triable issue as to the existence of an oral contract. The facts supporting Debtor’s allegations are not persuasive and fail to support its complaint against Falcon Power and Case Credit. Georgia law is clear in that there must be a meeting of the minds of the contracting parties and mutuality as to every essential element of an oral contract. Id. In addressing the rules of construction of a contract, the Supreme Court of Georgia stated, “[tjhere must be a mutual consent of the parties thereto, and they must assent to the same thing, in the same sense.... Both parties must assent to the same thing, in order to make a binding contract between them.” Robinson v. Weller, 81 Ga. 704, 8 S.E. 447, 449 (1888). The evidence presented fails to show a meeting of the minds or mutual assent among Debtor, Falcon Power, and Case Credit. The Court cannot find that the parties came to a meeting of the minds in March 1995 for several reasons. First, only two of the parties, Debtor and Falcon Power, were present at the March 1995 meeting. Debtor’s first contact with a representative from Case Credit occurred at the meeting in August 1995. Second, the Court finds that the evidence fails to show that either Mr. Fiala, the Falcon Power sales representative, or Mr. Murph, the Falcon Power store manager, had the authority to bind either Falcon Power or Case Credit to the alleged contract. Mr. Fiala and Mr. Murph were in the business of selling or leasing equipment to Debtor. The deposition testimony of Mr. Murph shows that individual store managers had limited authority to bind Falcon Power to commitments. (Murph Dep. at 15, 19). The evidence reflects that these gentlemen, while making a sales call on Debtor, had some discussions with Debtor about expanding business in South Georgia. The Court finds that these discussions did not create a binding oral contract in that the essential elements for the creation of a contract are lacking. Before an alleged contract can be binding, the offer must be accepted “unequivocally, unconditionally, and without variance of any sort.” Robinson, 81 Ga. at 707, 8 S.E. at 449; see also Arnett v. Tuller, 134 Ga. 609, 68 S.E. 330 (1910); Phinizy v. Bush, 129 Ga. 479, 59 S.E. 259 (1907); Larned v. Wentworth, 114 Ga. 208, 39 S.E. 855 (1901). In this case, the Court finds there was no meeting of the minds or mutual assent by the parties to any terms which would create an enforceable contract under Georgia law.
As to Case Credit, the Court finds that Mr. Fiala and Mr. Murph did not have the authority to bind Case Credit to the alleged three-party agreement. Debt- or argues that because they were originally employees of the Case Corporation store in Jacksonville, Florida, and remained with Falcon Power after the buyout, Mr. Fiala and Mr. Murph somehow remained agents of Case Credit and continued to represent Case Credit, and thus had the authority to bind Case Credit to this agreement. Debtor makes an assumption that such authority exists based on their conduct and course of dealing but Debtor fails to provide any evidence that Case Credit authorized the Falcon employ*161ees to act on their behalf. “[W]here the only evidence that a person is an agent of another party is the mere assumption that such agency existed, or an inference drawn from the actions of that person that he was an agent of another party, such evidence has no probative value and is insufficient to authorize a finding that such an agency exists.” Shivers v. Sexton, 164 Ga.App. 490, 491, 296 S.E.2d 749 (1982). Mr. Murph testified in his deposition that he did not have any authority to enter into contracts or to act on behalf of Case Credit. (Murph Dep. at 27). The Court does not find Debtor’s argument persuasive, and finds that Mr. Fíala and Mr. Murph did not have the authority to bind Case Credit to the terms of the alleged agreement.
The evidence reveals that there was no representative from Case Credit at the meeting in March 1995 and that Debtor never contacted Case Credit to confirm them participation in any joint undertaking. The evidence also shows that Debtor first met with Case Credit representatives in August 1995, which was after Debtor entered into a substantial number of lease agreements with Case Credit. Debtor argues that the purpose of this meeting was to review their commitment and confirm the agreement so that the parties could understand their roles in the joint undertaking. Debtor testified that he made a presentation at the meeting which addressed several matters, including how the program worked financially, the future needs and next generation of equipment, and commission rates for Falcon Power representatives who refer customers to Debtor. (Baldwin Dep. at 89-90). The Court cannot find that the participation of Case Credit and Falcon Power representatives at this meeting evidences their consent to the alleged agreement, or created an enforceable contract with Debtor. The meeting occurred at a time when Debtor had already entered into a large number of lease agreements with Falcon Power and Case Credit, thereby becoming a large customer of both companies. The representatives at the meeting did not have the authority to bind Case Credit or Falcon Power to the complex type of agreement which Debtor alleges. Mr. Baldwin testified that he was aware that the Case Credit representatives at that meeting did not have the authority to approve the program outlined at the meeting. (Baldwin Dep. at 92-94).
Debtor argues that Case Credit was a party to this agreement because it was the financing arm of the deal and was to provide Debtor unlimited financing to acquire the equipment. The Court finds Debtor’s understanding that Case Credit would provide unlimited financing for the business relationship unreasonable. The evidence reflects that Debtor assumed that Case Credit was aware of the agreement. Debtor never contacted anyone at Case Credit to confirm their participation in the alleged agreement. (Baldwin Dep. at 81, 83). The record reflects, and Debtor acknowledges, that at some point during their relationship Case Credit established a credit limit for Debtor in the amount of $1.5 million. (Baldwin Dep. at 111).
Next, Debtor argues that Case Credit participated in this joint undertaking because the extension of a $1.5 million credit limit to Debtor, which was a relatively small business, was substantial and that Debtor was not required to submit financial statements to support such a high credit limit. The Court does not find Debtor’s argument persuasive. The evidence shows that Case Credit was approving or disapproving each lease proposal submitted by Debtor through Falcon Power on a transaction by transaction basis. The decision to extend or not to extend credit was a business decision to be made *162by Case Credit and did not rise to the level of conduct that would evidence their assent to the creation of the alleged oral agreement with Debtor and Falcon Power.
The Court finds that Debtor’s assertion that the Falcon Power sales representatives were to support Debtor by making referrals to generate short-term rentals for Debtor which would cover Debtor’s costs of acquiring the Case equipment is not convincing evidence of any joint venture. The evidence reflects that there were a total of five short-term rental transactions that Debtor made which were attributed to the efforts of Falcon Power representatives from March 1995 through June 1997. The evidence shows that there was only one commission check in the amount of $586.90 paid by Debtor to Mr. Fila, the Falcon Power sales representative, for such referrals. (Baldwin Dep.Ex. B-4). The evidence reflects that there was never any system or method set up for the parties to track referrals or commissions. (Parrish Dep. at 75). The fact that Debtor had business cards printed up for Falcon Employees to distribute to customers whom they referred to Debtor fails to evidence an agreement. There was never any requirement for Falcon Power sales representatives to provide a designated number of referrals to Debtor. The Court is not persuaded that Debtor, in acquiring such a large amount of Case equipment, would rely on Falcon Power sales representatives to guarantee short-term lease rentals to cover its financial liability to Case Credit. Debtor’s reliance on Falcon Power employees to guarantee short-term lease rentals is unreasonable. The most that a Falcon Power sales representative could do for Debtor would be to refer customers to Debtor’s business, not guarantee that the customer would rent from Debtor.
Debtor asserts that it was required to carry a full line of Case equipment to fulfill its obligation under the alleged agreement, and that the Falcon Power representatives decided which equipment Debtor was to lease and receive to make up Debtor’s inventory. Essentially, Debtor is stating that it relinquished its decision making and control over its inventory of Case equipment to Falcon Power sales representatives. The Court believes that Debtor would not surrender such control of its business decisions to employees of another corporation. Debtor made its own business decisions for several years prior to developing a relationship with Falcon Power and Case Credit. In addition, the Court does not find Debtor’s argument persuasive because Debtor was the only one signing the lease agreements and liable under the terms of the lease agreement. Each lease agreement entered into by Debtor lists Falcon Power as the “Dealer” and Debtor as the “Customer.” If Debtor did not need a particular piece of equipment, then Debtor could have refused to enter into the lease agreement. Debtor also argues that sometimes the equipment would arrive prior to the lease being signed, which evidences the fact that Debtor did not have control over the equipment being ordered and delivered. This argument does not persuade the Court because Debtor had the option of not signing a lease agreement and returning the equipment to Falcon Power.
Debtor asserts that the fact that Falcon Power set up a parts department for Case parts to be sold in four of Debtor’s stores evidences their agreement. The Court is not persuaded that the establishment of a parts department in four of Debtor’s stores rises to the level of creating a binding contract between Debtor and Falcon Power. The evidence reveals that the parts department was set up on a consignment basis whereby Falcon Power’s parts *163representative would stock the parts, maintain the inventory, and all of the records. Debtor would be billed for the parts that had been removed from the inventory. While the dates were not clear from the record, the parts departments and inventory lasted for approximately six months. Mr. Murph testified that the purpose of having the parts stocked in Debtor’s stores was to have them available for Debtor to perform maintenance on its Case equipment inventory. (Murph Dep. at 86). There was nothing in writing as to the parts agreement between Debtor and Falcon Power, and there are too many issues that were not addressed by the parties to show that there was a meeting of the minds to create an enforceable agreement. There is no evidence that Debtor discussed or received permission from Case Credit to carry a Case parts inventory. There was no agreement as to the type of parts that were to be stocked. There was no agreement as to the projected volume of sales for the parts. The Court finds that the establishment of a consignment parts department by Falcon Power in Debtor’s stores does not impute liability to Falcon Power or Case Credit for loses suffered by Debtor.
At some point after March 1995, Debtor received several signs for four of their store windows stating, “Case Parts Sold Here.” Debtor argues that the signs were purchased by Falcon Power on Debtor’s behalf. There is no evidence that Case Corporation approved obtaining signs for Debtor’s stores. The evidence that Falcon Power obtained the signs for Debtor’s stores is consistent with the establishment of the consignment parts department in the stores. All of the parts were handled by Falcon Power employees. For the reasons outlined above regarding the parts department, the Court is not persuaded by Debtor’s argument that a binding contract was created among the parties.
The Court cannot construe Debtor’s allegation that Falcon Power would train Debtor’s employees to do warranty work on Case equipment as evidence of the alleged agreement that Debtor would become the exclusive warranty repair provider in South Georgia because the training never occurred. Once again, there are too many issues which remain unanswered to reflect a meeting of the minds and mutual assent to an agreement. There was no date set to train the employees or time line within which the mechanics were to be trained. There was no agreement as to the extent or type of training which Debt- or’s employees would receive.
Debtor acknowledges that there are no written instruments, other than the individual lease agreements, evidencing this “joint undertaking” or “tri-partite agreement.” There are no written documents, instruments, or memoranda. Indeed, the individual lease agreements constitute the only written documentation or evidence of a relationship among the parties. Although there was deposition testimony that a former Falcon Power employee saw a memo regarding the approval by Falcon Power’s management as to the short-term rental referrals to Debtor and receiving commissions, which was on Falcon Power stationery and disbursed, the memorandum itself was not produced and would be the highest and best evidence to support this allegation. (Thompson Dep. at 62).
The allegations set forth in the case at bar are similar to the case of Soar v. NFL Players’ Assn., 550 F.2d 1287 (1st Cir.1977), wherein the United States Court of Appeals for the First Circuit considered the enforceability of an alleged oral contract. “It is fundamental that for a contract to be enforceable it must be of sufficient explicitness so that a court can perceive what are the respective obli*164gations of the parties ... [W]e are convinced that the district court properly-found that the alleged oral contract was too indefinite to be enforced even if it fulfilled the other conditions of a valid contract....” Id. at 1289-90 (citations omitted). The Soar court found that the purported oral contract left too many unanswered questions:
It is clear that any agreement which leaves unanswered such critical questions cannot by any reasonable stretch of the imagination be said to represent a real meeting of the minds. While an enforceable contract might be found in some circumstances if one or more such questions were left unanswered, ... the accumulation in the instant case of so many unanswered questions is convincing evidence that there never was a consensus ad idem between the parties.
Id. at 1290. This case presents similar problems in that the evidence shows that numerous essential terms of the contract previously outlined by the Court were simply not addressed by the parties, therefore defeating the creation of a binding contract.
The Court finds that this alleged three-party agreement cannot be construed as an enforceable contract because the terms of the contract are simply not clear and explicit.
A court cannot enforce a contract unless it can determine what it is. It is not enough that the parties think that they have made a contract; they must have expressed their intentions in a manner that is capable of understanding. It is not even though that they have actually agreed, if their expressions, when interpreted in the light of accompanying factors and circumstances, are not such that the court can determine what the terms of that agreement are. Vagueness of expression, indefiniteness and uncertainty as to any of the essential terms of an agreement, have often been held to prevent the creation of an enforceable contract.
Abrams v. Illinois College of Podiatric Medicine, 77 Ill.App.3d 471, 476, 32 Ill.Dec. 680, 395 N.E.2d 1061, 1065 (1979) (citing 1 Corbin on Contracts § 95, at 394 (1963) and 1 Williston on Contracts § 37 (3d ed.1957)). In this case, the terms of the alleged agreement are too vague to create an enforceable contract. Although Debtor makes a number of allegations in support of its position on the creation of a binding contract, there are simply too many questions left unanswered as to the terms of the contract. In order for the Court to find a binding contract, the Court would have to create many of the essential terms in order to fashion a remedy. Debt- or acknowledges that there were no specifics set forth regarding the agreement, rather it was a general understanding between the parties. (Baldwin Dep. at 303-06). There was no time frame set for the agreement. There were no firm numbers set regarding the terms of the agreement. There was no designated dollar volume on the rental referrals to be made by Falcon representative. There were no sales projections on the parts inventory. There was no set date regarding the training of Debtor’s employees. There was no set amount or volume of warranty work or service work that would be performed by Debtor. There was no agreement regarding the sharing and burden of profits and losses. In this case, the Court declines to shift the burden of Debtor’s financial losses to Case Credit and Falcon Power in the absence of an enforceable contract among the parties.
Summary judgment is appropriate in this case because the Court finds that there was not an enforceable contract created among the parties. Accordingly, the *165Court will enter an order granting the motions for summary judgment in favor of Case Credit and Falcon Power. Debtor’s complaint for damages against Case Credit for breach of a private duty pursuant to O.C.G.A. § 51-1-8 will be dismissed.
In the pleadings, both Defendants raise a number of defenses to Debtor’s complaint including the Statute of Frauds, es-toppel, and merger. The Court would expect such defenses to be raised in light of the facts of this case. However, because the Court finds that there was no binding contract entered into among the parties, the Court declines to address these defenses.
. This revised memorandum opinion replaces the Court’s previous opinion of July 17, 2000, for the purpose of correcting minor clerical errors. The order entered on July 17, 2000, is not revised, and continues in full force and effect as entered.
. Mr. Fiala is now deceased. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493354/ | ORDER SUSTAINING OBJECTION TO CONFIRMATION
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on the Objection of Countrywide Home Loans, Inc. (“Countrywide”), to confirmation of the Debtor’s Chapter 13 Plan which provides inter alia that:
The Bankruptcy Court shall retain exclusive jurisdiction over the assessment and or entitlement of any mortgagee to attorney’s fees, costs or other expenses resulting from breach of the mortgage covenant. Any mortgagee requesting reimbursement for post petition attorney’s fees, costs, expenses or any other related charges shall file an application for approval with the Bankruptcy Court regarding any request for post petition compensation and or reimbursement of post petition expenses.
Chapter 13 Plan, Docket No. 5, at 1, ¶ 1. At the confirmation hearing, when Debt- or’s counsel acknowledged that this language could require the Bankruptcy Court to monitor legal fees for years after the case was completed, he orally modified the provision to apply to legal fees and costs incurred during or related to the Chapter 13 bankruptcy proceeding.
Notwithstanding this concession, Countrywide presses its objection, arguing that the disputed provision extends well *167beyond attorney’s fees and would arguably apply to late fees, property inspection fees, appraisal fees, taxes, and insurance charges. Countrywide cites Telfair v. First Union Mortgage Corp., 216 F.3d 1333 (11th Cir.2000), cert denied, 531 U.S. 1073, 121 S.Ct. 765, 148 L.Ed.2d 666 (2001), for the proposition that fees and expenses are governed by the note and mortgage and should not be subject to post-confirmation review by the bankruptcy court. Countrywide also argues that the proposed post-confirmation court intervention is unconstitutional, as it would modify contractual relationships between parties, and would also impair the ability of creditors to collect fees and expenses.
The Debtor contends that without the requested protection, creditors will be allowed to, and they would in fact, exercise unfettered discretion in charging fees and expenses in Chapter 13 cases, and that abuse by the credit industry in charging excessive fees in Chapter 13 cases in this District is rampant. When asked if evidence would be produced to support that allegation, the Debtor declined, stating that the issue before the Court was a legal one only, citing In re Tate, 253 B.R. 653 (Bankr.W.D.N.C.2000). Tate held that creditors seeking fees for preparing and filing proofs of claim must comply with Fed. R. Bankr.P.2016 by filing a fee application. I fail to see where Tate addresses how or why the provisions of Section 506(b) should apply, post-confirmation, in this scenario. That Section states:
To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.
11 U.S.C. § 506(b).
The Supreme Court has stated that Section 506(b) “applies only from the date of filing through the confirmation date.” Rake v. Wade, 508 U.S. 464, 468, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993); see also Telfair, 216 F.3d at 1338-39, which explained that the purpose of § 506(b) is to allow oversecured creditors to include post-petition interest and reasonable fees and costs as part of their secured claims to be paid through the Chapter 13 plan. Id. at 1339. Here, the proffered language would extend or expand Section 506 to control post-confirmation secured creditors’ fees and expenses. If such issues do arise, they are not part of Countrywide’s pre-confirmation secured claim and they will exist separate from the plan, and apart from this bankruptcy case. I agree with the Telfair holding that the terms of the note and mortgage, freely agreed to by the Debtor and Countrywide, are not subject to modification, and that in the absence of proof on the issue, there is no presumption that without Court supervision there are or will be abuses by secured lenders. Id.
For these reasons, Countrywide’s Objection is sustained, and the language proffered by the Debtor is not approved and shall not be part of the Debtor’s confirmed Chapter 13 plan. There are a number of pending Chapter 13 cases where the Debt- or’s attorney has included similar language in the plan. In those cases, orders consistent with this one shall enter within thirty days.
Enter judgment consistent with this order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493355/ | MEMORANDUM DECISION AND ORDER
MELANIE L. CYGANOWSKI, Bankruptcy Judge.
(Re: Motion for Final Allowance of Compensation and Reimbursement of Expenses for Flower, Medalie & Markowitz, Esqs.)
Before the Court is a Motion for Final Allowance of Compensation and Reimbursement of Expenses for Flower, Meda-lie & Markowitz, Esqs. (“FM & M”) fik/a Flower & Medalie, Esqs., as Chapter 11 Counsel for the Debtor, to be payable solely by the Debtor and not from the *169bankrupt estate (the “Motion”). In the Motion, FM & M seeks a determination that $120,095.001 in legal fees and expense reimbursements associated with representing the above-captioned Debtor while he was a debtor under Chapter 11 were not discharged when the Debtor’s case was converted to Chapter 7 and a Chapter 7 discharge was entered. For the reasons stated below, the Motion is denied.
FACTUAL BACKGROUND
On October 23, 1992, John Fickling (the “Debtor”) filed a voluntary petition under Chapter 11 of the Bankruptcy Code. By Order, dated January 28, 1993, the Debtor was authorized to employ FM & M as his counsel in the Chapter 11 case. FM & M served as Debtor’s counsel until March 18, 1997 when the Court authorized FM & M’s withdrawal as counsel of record.2 The Debtor’s case was converted to Chapter 7 on November 13, 1996. On April 14, 1997, an Order of Discharge was entered and the Debtor was released from all dis-chargeable debts.
On March 21, 2001, FM & M filed the Motion seeking authorization to collect $120,0953 in legal fees and expense reimbursements associated with its representation of the Debtor in Chapter 11 directly from the Debtor as a non-dischargeable debt. The Debtor objects to the Motion and argues that while a post Chapter 11-filing, pre Chapter 7-conversion administrative expense claim is entitled to priority in the Chapter 7 case, it is nevertheless discharged by a Chapter 7 discharge order. (See Debtor’s Objection, dated April 17, 2001, ¶ 9).
DISCUSSION
An Order of discharge in a Chapter 7 case discharges a debtor from “all debts that arose before the date of the order for relief under [Chapter 7].” 11 U.S.C. § 727(b). When a case is converted from Chapter 11 to Chapter 7, the date of the order for relief is deemed-to be the date of the conversion to Chapter 7 for purposes of determining the reach of the Section 727(b) discharge. 11 U.S.C. § 348(b). Therefore, any debts incurred by a debtor prior to conversion to Chapter 7 are included within the Order of Discharge issued in the Chapter 7 case.4 This conclusion is further supported by the legislative history of Section 727(b), which provides that “if a case is converted from chapter 11 or chapter 13 to a case under chapter 7, all debts prior to the time of conversion are discharged.... The logical result ... is to equate the result that obtains whether the case is converted from another chapter to chapter 7, or whether the other chapter proceeding is dismissed and a new case is commenced by filing a petition under chap*170ter 7.” 124 Cong. Rec. H11098 (daily ed. Sept. 28, 1978) (statement of Rep. Edwards), reprinted in Appendix D Collier on Bankruptcy, App. Pt. 4(f)(i), at App. Pt. 4-2452.
FM & M argues that Section 348(d) dictates a contrary result. That section provides that “[a] claim against the estate or the debtor that arises after the order for relief but before conversion in a case that is converted under section 1112 ... of this title, other than a claim specified in section 503(b) of this title, shall be treated for all purposes as if such claim had arisen immediately before the date of the filing of the petition.” 11 U.S.C. § 348(d). FM & M argues that because its Chapter 11 counsel fees are a “claim specified in section 503(b),” they are not deemed to arise before the date of the filing of the petition and therefore are not discharged.
The Court believes that the decisions of In re Toms, 229 B.R. 646 (Bankr.E.D.Pa.1999), and In re Ramaker, 117 B.R. 959 (Bankr.N.D.Iowa 1990), are di rectly on point and that the reasoning set forth therein should be incorporated here. In those cases, the courts determined that Section 348(d) deals with the treatment and priority of claims in the Chapter 7 distribution scheme and that this provision was not intended to “eliminate from the effect of the discharge those claims arising after the filing of the chapter 11 case but before its conversion to chapter 7.” 117 B.R. at 962, 229 B.R. at 654. Rather, the Ramaker and Toms courts held that Section 348(d) permits Chapter 11 administrative expenses to retain priority status in the converted-Chapter 7 case (ie., they are paid after Chapter 7 administrative expenses and ahead of unsecured creditors) but nonetheless are discharged to the extent there are insufficient estate assets to satisfy them.
As the Ramaker court further explained,
Read in conjunction with § 348(a) and (b), [Section 727(b) ] provides that unless a debt is excepted from discharge under § 523, a discharge under § 727(a) discharges the. debtor from all debts “that arose before the date of the order for relief under this chapter.” That phrase is given meaning by 11 U.S.C. § 348(b) which states in pertinent part that in § 727(b), “‘[t]he order for relief under this chapter’ in a chapter to which a case has been converted under § ... 1112 ... of this title means the conversion of such case to such chapter.” Thus, § 727(b) specifically discharges the debtor from all debts arising before the date of conversion. The only exceptions are those provided under 11 U.S.C. § 523.
117 B.R. at 963.5 As in Ramaker, FM & M does not argue that there are any grounds under § 523 for denying the Debtor a discharge of his administrative claim arising during his Chapter 11 case.
CONCLUSION
For all of the foregoing reasons, the Motion is denied. The Court holds that, to the extent that estate assets are insufficient to satisfy them, FM & M’s Chapter 11 counsel fees were discharged by the Order of Discharge, dated April 14, 1997, that issued after the case was converted to Chapter 7. Chapter 11 counsel fees will, however, be given priority as a Chapter 11 administrative expense, as re-*171quested, payable from the estate in accordance with Section 726.
Although not raised by the parties, it appears to the Court that a portion of the fees that are the subject of this Motion did not arise during the Chapter 11 case, and thus are not subject to the foregoing analysis. That is, FM & M’s fees from November 13, 1996 through March 18, 1997 were incurred in the Chapter 7 case, and not while the Debtor was proceeding in Chapter 11. Nothing in this Decision and Order is intended to deal with the fees incurred by FM & M in the Chapter 7 period; if appropriate, FM & M may make an application for reimbursement of fees and expenses as Chapter 7 Debtor’s,counsel under Sections 330(a) and 503(b)(2).
So Ordered.
ORDER MODIFYING MEMORANDUM DECISION AND ORDER, DATED APRIL 30, 2002
WHEREAS the Court having issued a Memorandum Decision and Order, dated April 30, 2002, denying the Motion for Final Allowance of Compensation and Reimbursement of Expenses for Flower, Me-dalie & Markowitz, Esqs. as Chapter 11 Counsel for the Debtor to be payable solely by the Debtor and not from the bankrupt estate; and
WHEREAS the Court having received correspondence from Jeffrey Herzberg, Esq., dated May 1, 2002, advising that “Flower, Medalie & Markowitz, Esqs. will not waive any part of its Court order and granted allowed Chapter 11 administrative expense claim in the sum of $120,095”; and
WHEREAS, based on such correspondence, it appears to the Court that clarification of its April 30, 2002 Decision is warranted as it was not the Court’s intention to allow or disallow Flower, Medalie’s fees prior to a final hearing in the Chapter 7 case; it is hereby
ORDERED that the third sentence of the first paragraph on page 5 of the April 30, 2002 Order is hereby modified so that it shall read: “Chapter 11 counsel fees will, however, be given priority as a Chapter 11 administrative expense payable from the estate in accordance with Section 726. The allowance or disallowance of such fees shall be considered at the time of the final hearing in the Chapter 7 case.”
. FM & M’s original Motion sought $152,200 in fees, reduced by a $38,000 retainer, and $6,844.16 in expense reimbursements, for a total of $121,044.16. In response to the Comments of the United States Trustee Regarding Application for Interim Compensation, dated April 18, 2001, FM & M voluntarily reduced its request for fees by $855 and its request for expenses, by $94.16. (See FM & M Reply to Debtor's Objection, dated April 23, 2001). This brings the total amount of fees and expenses to $120,095.
. Although FM & M does not make the distinction, because of the intervening conversion to Chapter 7, FM & M only represented the Debtor as a Chapter 11 Debtor from January 28, 1993 until November 12, 1996. From November 13, 1996 (the date of conversion of the case from Chapter 11 to Chapter 7) through March 18, 1997, FM & M served as the Debtor’s Chapter 7 counsel.
. See footnote 1, above.
. Except for debts that are nondischargeable under Section 523, Section 727(b) makes no distinction between the nature of the debt incurred.
. See also In re Toms, 229 B.R. at 653 ("Thus, when a bankruptcy case is converted to chapter 7 from chapters 11, 12 or 13, section 727(b) renders dischargeable all debts which arose before the date of conversion, unless those debts are made non-dischargeable by section 523(a)”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493358/ | 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 all of the proceeds that they received under a certain policy of insurance: to wit, Twenty-one Thousand One Hundred Seventy-three dollars ($21,-173.00) in prepetition proceeds the Debtors received from Aetna U.S. Healthcare as reimbursement for claims and losses incurred by the Debtor, Linda Feasel. The statutory grounds upon which the Debtors rely for their claim of an exemption in the insurance proceeds are O.R.C. §§ 2329.66(a)(6)(e) and 3923.19.
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, the Parties filed legal briefs with the Court in support of their respective positions. In addition, the Parties have, in accordance with this Court’s order dated August 8, 2000, filed with the Court a stipulated set of facts. The facts, *336as delineated by the Parties, are in relevant part as follows:
This proceeding was commenced on August 25, 1999 by a voluntary petition for relief under Chapter 7. Thereafter, the Trustee was appointed as Trustee and remains Trustee as of the date of this stipulation.
Prior to the commencement of this proceeding, the debtor Linda Feasel was diagnosed with cancer. Her medical treatment for the cancer commenced on May 18, 1999. Subsequent to the meeting of creditors and shortly before discharge, the debtor, Linda Feasel received checks from Aetna U.S. Healthcare in the following amounts for the treatment indicated:
$ 5,841.11 Services provided at Medical College of Ohio 5/18-5/21,1999
$14,107.79 Services provided at Medical College of Ohio 8/3 — 8/7,1999
$ 1,224.64 Services provided 8/3/99 — Dr. Gerken $ 4,827.32 Services provided 10/1/99 — Surgicare
None of the funds involved in this proceeding were received prepetition.
The Funds paid were made in four increments as set forth above.
The total cost of Linda Feasel’s medical bills for treatment is at this time unknown.
The portion of the funds attributable to prepetition treatment is $21,173.44 and the sum of $4,827.32 for postpetition treatment.
The" debtor, Linda Feasel received all the funds, none of the funds were paid to the debtor, Harold Feasel.
The debtor, Linda Feasel was disabled from May through October, 1999.
The treatment to the debtor, Linda Feasel was covered under two health insurance policies. One was through employment and the other was through privately paid for supplemental insurance.
The medical claims were paid by the insurance policy through employment, except for certain deductibles or if the claim was not a covered charge. ,In the event that a claim was not paid for these reasons, the unpaid portion was then paid for by the supplemental insurance. In addition, the supplemental insurance then paid the balance to the debtor Linda Feasel.
On March 19, 2000, the debtor Linda Feasel died. At the time of her death, Linda Feasel only had $4,014.00 of the funds on hand having expended the balance of the funds for the purchase of a 2000 Chevrolet Astro Van. These assets were received by the debtor, Harold Feasel from the Estate of Linda Feasel, as the surviving spouse of the debtor, Linda Feasel.
LEGAL ANALYSIS
In the instant case, the Court is called upon to determine the permissibility of the Debtors’ claim of an exemption in certain insurance proceeds paid on account of pre-petition medical services rendered to the Debtor, Linda Feasel. Specifically, the Debtors seek to exempt Twenty-one Thousand One Hundred Seventy-three and 44/100 dollars ($21,173.44) in proceeds received from Aetna U.S. Healthcare. In this respect, it appears to the Court, from the above set of stipulated facts, that the prepetition medical services provided to the Debtor, Linda Feasel, have been paid in full, and thus the funds the Debtors seek to exempt are, in essence, excess insurance proceeds. In support of their claim of exemption, the Debtors, as previously stated, cite to O.R.C. §§ 2323.66(A)(6)(e) and 3923.16 which provide that:
2329.66 PROPERTY THAT PERSON DOMICILED IN THIS STATE MAY HOLD EXEMPT
(A) Every person who is domiciled in this state may hold property exempt *337from execution, garnishment, attachment, or sale to satisfy a judgment or order, as follows:
(6)(e) The person’s interest in the portion of benefits under policies of sickness and accident insurance and in lump-sum payments for dismemberment and other losses insured under those policies, as exempted by section 3923.19 of the Revised Code
3923.19 BENEFITS EXEMPT FROM LEGAL PROCESS; EXCEPTION
The portion of any benefits under all policies of sickness and accident insurance as does not exceed six hundred dollars for each month during any period of disability covered by the policies, is not liable to attachment or other process, or to be taken, appropriated, or applied by any legal or equitable process or by operation of law, either before or after payment of the benefits, to pay any liabilities of the person insured under any such policy. This exemption does not apply if an action is brought to recover for necessaries contracted for during the period of disability, and if the complaint contains a statement to that effect.
When a policy provides for a lump sum payment because of a dismemberment or other loss insured, the payment is exempt from execution by the insured’s creditors.
With respect to the Debtors’ claim of an exemption under these two statutory sections, the Bankruptcy Rules provide that the Trustee, as the party objecting to the Debtors’ claim of an exemption, bears the burden of proving that the exemption is not properly claimed. Fed.R.BanKR.P. 4003(c).1 In accordance therewith, the Trustee, in his Memorandum in Support, argues as follows:
Under the provisions of R.C. 3923.19, the exemption statute, Linda Feasel would be entitled to $600.00 for each month during any disability covered by the policies. The two periods of disability under the Aetna policy for which this exemption could be claimed are the two visits which Linda Feasel spent in Medical College Hospital. Thus, she may be entitled to a $1,200.00 exemption. However, this theory should not stand because the record reflects that during the period of this proceeding Linda Feasel was still receiving medical/healthcare benefits from both Aetna and the private insurance company; as a result [sic] may very well receive additional lump sum payments in the near future.
Thus, with regards to the above statement, the Trustee’s objection to the Debtors’ claim of exemption is essentially composed of two separate components: First, the Trustee asserts that the Debtors have not complied with the requirements of the above statutory sections, and thus are totally precluded from claiming an exemption in the insurance proceeds that they received from Aetna U.S. Healthcare. Second, and in the alternative, the Trustee asserts that if the Debtors are entitled to claim an exemption in the insurance proceeds, the amount of the Debtors’ exemption should be limited to the Six Hundred Dollar ($600.00) per month cap provided for in the first paragraph of O.R.C. 3923.19; which according to the Trustee means that the Debtor, Linda Feasel, having just two periods of disability, is only entitled to claim an exemption of One *338Thousand Two Hundred dollars ($1,200.00) in the insurance proceeds received from Aetna U.S. Healthcare.
After considering the Trustee’s first point of contention — regarding the Debtors’ complete lack of a valid claim of an exemption in the insurance proceeds received from Aetna U.S. Healthcare — the Court finds the Trustee’s argument to be without merit. This reason for this is that the Court can see no reason why the possible receipt of future payments, whether by installment or by a lump-sum payment, should affect the Debtors’ entitlement to claim an exemption in the proceeds already received. Simply stated, the Court can see no reason why a debtor’s claim of exemption must be fully liquidated and then paid in order to be exemptible under O.R.C. .§§ 2329.66(A)(6)(e) and 3923.19. Moreover, such a position, besides being in accord with established practices, is in conformance with the basic maxim of Ohio exemption law which provides that exemptions are to be liberally construed so as to maximize their availability to debtors. In re Brown, 133 B.R. 860, 861 (Bankr.N.D.Ohio 1991); In re Cope, 80 B.R. 426, 427 (Bankr.N.D.Ohio 1987).
As stated above, the Trustee has also asserted that even if the Debtors are entitled to claim an exemption under O.R.C. § 3923.19, the Debtors’ exemption should be limited to the Six Hundred dollar ($600.00) per month cap provided for in the first paragraph of the statute. The Debtors, however, argue that such a cap is inapplicable because the second paragraph of O.R.C. § 3923.19, which does not provide for a dollar limitation upon a debtor’s claim of exemption, is applicable under the particular facts of this case. In this regard, the Debtors, in their brief to the Court, state that in accordance with the language contained in the second paragraph of O.R.C. § 3923.19, the funds paid to them constituted a “lump sum payment because of a[n] ... other loss insured[.]”
The Court, however, while not actually disagreeing with the Debtors that those assets which are encompassed within the scope of the second paragraph of O.R.C. § 3923.16 are fully exemptible, must disagree with the Debtors’ categorization of the insurance proceeds actually received by the Debtor, Linda Feasel. Specifically, the Court cannot find that the insurance proceeds received by the Debtor, Linda Feasel, fall within the meaning of a “lump-sum payment” as provided for in O.R.C. § 3923.16. In coming to this conclusion, the Court first observes that it could not find any language in the Debtor’s insurance policy which called for a lump-sum payment. Moreover, the Debtors have clearly stipulated that they received four incremental payments from their insurance company, and thus the insurance proceeds actually received by the Debtor, Linda Feasel, cannot by their very nature be considered a lump-sum payment as that term is used in O.R.C. § 3923.19. See BlacK’s Law Dictionary 949 (6th ed.1990) (defining a lump-sum payment as “a single payment in contrast to installments”). Accordingly, the Debtors’ entitlement to claim an exemption in the insurance proceeds will be limited to the Six Hundred dollar ($600.00) per month cap provided for in O.R.C. § 3923.19. However, in this regard, the Court, in contrast to the Trustee’s argument, finds that as the Debtor, Linda Feasel, was disabled for six (6) months (i.e., May through October of 1999) the Debtors shall be entitled to a Three Thousand Six Hundred dollar ($3,600.00) exemption in the insurance proceeds received from Aetna U.S. Healthcare.
One final note before concluding. The Parties, in their briefs to the Court, have raised an issue concerning whether, or not the last installment the Debtors received *339of Four Thousand Eight Hundred Twenty-seven and 32/100 dollars ($4,827.32) is property of the estate. In this regard, however, the Parties have stipulated that such funds, in addition to being paid post-petition, were disbursed as the result of medical services rendered to Linda Feasel postpetition. Thus, given this stipulation, the Court cannot find that the Debtor, Linda Feasel, had a cognizable interest, either legal or equitable, in these funds upon the commencement of the Debtors’ bankruptcy case. Accordingly, no interest in these funds would have passed to the Trustee in accordance with 11 U.S.C. § 541(a).
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 Debtors shall be entitled to claim a Three Thousand Six Hundred dollar ($3,600.00) exemption in the insurance proceeds received from Aet-na U.S. Healthcare.
It is FURTHER ORDERED that the Debtors turnover to the Trustee the nonexempt portion of the moneys received from Aetna U.S. Healthcare.
. Bankruptcy Rule 4003(c), which is entitled "Burden of proof” provides that, “[i]n any hearing under this rule, the objecting party has the burden of proving that the exemptions are not properly claimed. After hearing on notice, the court shall determine the issues presented by the objections.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493360/ | ORDER GRANTING MOTION OF ABRAM & TRACY, INC FOR PARTIAL SUMMARY JUDGMENT
CHARLES M. CALDWELL, Bankruptcy Judge.
A Motion for Partial Summary Judgment and Memoranda in Opposition are before the Court. Abram & Tracy, Inc. (“Debtor”) seeks this relief. The Debtor is opposed by the State of Ohio Department of Taxation (“State”) and the Internal Revenue Service (“IRS”). The dispute is based upon a confirmed plan that provides a release for the principal of the Debtor. *371According to the State and the IRS the release exceeds the jurisdiction of this Court. They point to section 524(e) of the United States Bankruptcy Code (“Code”). That section provides that the, “... discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” They also argue that the Debtor has improperly modified its confirmed plan. On the other hand, the Debt- or asserts there is no statutory prohibition against third-party releases. In addition, the Debtor protests that the State and the IRS failed to object to the confirmation of the plan or appeal its confirmation, and are barred from challenging any of the provisions of the confirmed plan. The Court has concluded that the Debtor’s Motion should be granted. A brief history of this case will illustrate the bases for the decision.
The Debtor had been engaged in the heating and plumbing construction business since 1969. Because of an inability to collect on receivables between 1989 and 1992, it did not make tax withholding payments. All business operations ceased in 1995. Subsequently, the Debtor’s sole function was the leasing of its real property on Sullivant Avenue (“Property”). Tax collection efforts prompted the instant chapter 11 filing, commenced on March 28, 1997. The Debtor scheduled secured indebtedness to the IRS and the State in the respective amounts of $150,000.00 and $31,000.00 for withholding taxes. The scheduled security was the Property that the Debtor listed as having a value of $319,000.00. The Debtor listed Keybank has holding a first mortgage in the amount of $93,000.00. After the complete satisfaction of obligations to the IRS, the State, and to Keybank, it would appear from the Schedules that there would be approximately $45,000.00 to satisfy unsecured obligations. At least on the date of filing, it appeared that the Debtor could satisfy all creditors’ claims from the Property and even retain a modest surplus. On April 23, 1997, the IRS filed a Proof of Claim for $159,424.42, and on July 22,1997, the State filed a Proof of Claim for $67,284.46.
On July 28, 1997, the Debtor filed an Amended Liquidating Plan of Reorganization and a Disclosure Statement. The Debtor premised the funding for the Amended Liquidating Plan on the sale of the Property, pursuant to an executed listing agreement at the price of $349,000.00. The Debtor proposed to pay the allowed secured claim of the State in full. As for the IRS, the Debtor scheduled its claim as disputed; however, the Debtor proposed to pay any amount that was found payable, in full. The Amended Liquidating Plan specifically provided as follows:
The rights afforded under the Plan and the treatment of Claims and Interests under the Plan are in consideration of complete satisfaction of all Claims and termination of all Interests, including any interest accrued on Claims from the Petition Date.
As of the Confirmation Date, except as provided in the Plan, all entities shall be precluded from asserting against the Debtor, its officer, shareholder or their respective properties of the Debtor (sic), any other or further Claims, debts, rights, causes of action or liabilities based upon any acts, omission, transaction or other activity of any nature that occur prior to the Confirmation Date.
The Court set an October 7, 1997, hearing to approve the Amended Disclosure Statement and confirm the Amended Liquidating Plan. The objection deadline was September 26, 1997. A review of the record shows that only two objections were filed with the Court — one by Keybank and one by the State. Keybank objected to *372the lack of a date certain for the lifting of the automatic stay in the event the Debtor was unable to sell the Property. Keybank also objected that there was no provision for interim payments. The State objected that the Debtor had not revealed enough information regarding the treatment of its claim.
After the confirmation hearing, the Court entered two agreed orders — one for Keybank and one for the U.S. Trustee. In the Keybank Agreed Order entered on October 31, 1997, the parties stipulated that to allow the Debtor to complete the sale, the stay would remain in effect until November 1, 1999. There was also a provision for interim payments. In the U.S. Trustee’s Agreed Order entered October 31, 1997, the parties stipulated to the continued post-confirmation payment of quarterly fees. Neither the State nor the IRS obtained an agreed entry to preserve their interests.
On February 2, 1998, the Court entered an Order Confirming Debtor’s Chapter 11 Plan that specifically referenced the two Agreed Orders detailed above. To consummate the confirmed Amended Liquidating Plan, the Debtor filed an Application to Appoint a Realtor to market the Property on May 18, 1998, and an order was entered on June 8, 1998. After a long series of status reports and status hearings, a prospective purchaser was finally found, as contemplated by the confirmed Amended Liquidating Plan. On February 4, 2000, a Motion of Debtor for Order Authorizing the Sale of Real Estate Free and Clear of Liens was filed. The Debtor proposed to sell the Property for $240,000.00 in cash, a price much lower than the listing price and the scheduled value. In its Motion, however, the Debtor revealed that in April 1999, fire damaged one building. It was detailed that the Debtor received $36,000.00 in insurance, and $30,000.00 was paid to Keybank. The balance was held in escrow with the city of Columbus to cover fire excavation costs. After the payment of various closing costs, the Debtor proposed to pay Keybank in full. The Debtor also proposed to pay the State $44,000.00 and the IRS $60,000.00 in full satisfaction of their claims.
On February 23, 2000, an Objection to Motion to Sale Free and Clear of Liens was filed by the State. In this Objection, the State sought payment in full of secured lien interests. On March 14, 2000, the IRS also filed an Objection. The IRS asserted that the proposal was insufficient to satisfy its liens. Further, the IRS argued that the proposed payment was an improper modification of the plan, and that the Debtor was improperly seeking a discharge of the officer’s liability. An Amended Agreed Order Authorizing Debt- or to Conduct Sale of Real Estate Free and Clear of Liens was entered on June 22, 2000. In relevant part, the Order provided the Debtor was authorized to complete the sale, and disburse closing costs, real estate taxes, the court-appointed realtor’s commission, and payment in full to Keybank. Ml lien interests of the IRS and the State were to attach to the net proceeds. The Debtor was required to file within five days an adversary proceeding to determine the extent and validity of the liens of the IRS and the State. The Debt- or filed the instant adversary proceeding on June 23, 2000. Unfortunately, this sale never closed because the prospective purchaser failed to obtain financing.
On November 13, 2000, the Court entered an Order to Show Cause for Conversion or Dismissal based upon the inability of the Debtor to complete the sale. A hearing was set for February 5, 2001, at 10:00 a.m. Subsequently, on January 2, 2001, the Debtor filed, pursuant to the confirmed Amended Liquidating Plan, a *373second Motion to Sell Real Property Free and Clear of Liens, this time by public auction. The Debtor proposed payment in full to Keybank, but listed the claims of the State and the IRS as disputed. All liens were to attach to the proceeds.
The auction was conducted on January 22, 2001, and the property sold for $160,000.00. On January 25, 2001, the Debtor filed a Motion for Authority to Complete the Sale Free and Clear of Liens. The Debtor proposed payment in full to Keybank, and the payment of real estate taxes and the auctioneer’s fee. Liens were to attach to the proceeds to be held in escrow pending a conclusion of the instant adversary proceeding. After a lengthy series of difficulties in closing this sale, on June 18, 2001, a final Order authorizing the completion of the sale was entered. The Debtor realized $65,248.37 in net proceeds.
In addressing the issues raised by the parties, stepping back is helpful to review what happened in this five-year-old chapter 11 proceeding. First, the Debtor proposed and had confirmed a plan that called for the liquidation of its real property. Like any other sale of real property in bankruptcy, a listing price is set, the debt- or retains a broker, and they market the property. Inherent in this exercise is the risk that the property may sit on the market for a substantial period. Its condition may deteriorate by unforeseen events such as fire. At the end of the process, the property may sell for an amount lower than the listing price or even the scheduled value. Known variables affect the establishment of a listing price, such as recent comparable sales and location, but it is not an exact science. There is never a guarantee that property will sell for the listing price. The fact that in the instant case the property sold for much less than the listing price and the scheduled value is nothing more than a measure of reality. We cannot now characterize it as an impermissible modification of the original plan. To be fair to the State and the IRS, it does not appear that anyone fully appreciated or anticipated that the sale proceeds would not be sufficient to pay all claims.
The second reality of this case is that the State and the IRS did not challenge the release provision during the confirmation process. This fact is at the heart of the Debtor’s assertion that the State and the IRS are precluded from objecting now. The State and the IRS seek to overcome this obstacle by arguing that this Court was without jurisdiction to grant a third-party release under section 524(e) of the Code. Since this is a matter of jurisdiction, they argue it can be raised anytime. Recently, the Sixth Circuit Court of Appeals has ruled that bankruptcy courts have the jurisdiction to enjoin creditor action against third parties, over creditor opposition. In re Dow Corning Corp., 280 F.3d 648, 656-658 (6th Cir.2002). It is important to note that in Dow Coming, unlike the instant case, however, the creditors objected to the plan. The Sixth Circuit Court of Appeals has held that the confirmation of a chapter 11 plan has the effect of a judgment. On this basis the principle of res judicata precludes the further litigation of any issues that parties raised or could have raised during the confirmation process. In re Chattanooga Wholesale Antiques, Inc., 930 F.2d 458, 463-464 (6th Cir.1991); In re Sanders Confectionery Products, Inc., 973 F.2d 474, 480-485 (6th Cir.1992), cert. denied 506 U.S. 1079, 113 S.Ct. 1046, 122 L.Ed.2d 355 (1993), reh. denied 507 U.S. 1002, 113 S.Ct. 1628, 123 L.Ed.2d 186 (1993).
The third reality of this case is that the Debtor has disbursed funds to Key-bank. As a result, the plan has been substantially consummated. This fact pre-*374eludes any modification of the terms of the confirmed Amended Liquidating Plan by the Debtor, the IRS or the State. In re Burnsbrooke Apartments of Athens, Ltd., 151 B.R. 455, 456-458 (Bankr.S.D.Ohio 1992). At this point, all this Court can do is ensure that all parties follow the provisions of the Code and the confirmed Amended Liquidating Plan. In re Pioneer Inv. Servs. Co., 141 B.R. 635, 641-642 (Bankr.E.D.Tenn.1992).
The Court concludes that there is no jurisdictional bar to the granting of third-party releases, and because the Amended Liquidating Plan was confirmed without opposition from the State and the IRS, they cannot object now. This Order, however, should not be viewed as a criticism of the State and the IRS. Their actions are understandable given the potential at the outset of this case that the Debtor could pay all claims. Hindsight is always perfect. The difficulty is that at this point there is simply no relief this Court can fashion. As noted by one commentator, “The heart of the reorganization process is found in § 1141 of the Code, which prescribes the effect of the confirmation of the plan of reorganization. The essential effect of § 1141 is to dissolve the pre-confir-mation relationships of the parties and replace them with the relationships specified in the plan of reorganization.” Ralph E. Avery, Chapter 11 Bankruptcy and Principles of Res Judicata, 102 Com.L.J. 257, 290 (1997).
Accordingly, the Motion for Partial Summary Judgment is GRANTED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493361/ | ORDER DENYING DEBTOR’S MOTION TO CONVERT TO CHAPTER 13
AUDREY EVANS, Bankruptcy Judge.
Debtor’s Motion to Convert this case from Chapter 7 to Chapter 13 is before the Court. A hearing was held March 7, 2002. Laura Grimes, Esq. appeared for the debt- or who did not appear personally. Raymond Harrill, Esq. appeared for Bennie Beard. The Trustee, M. Randy Rice, was also present. The Court took the matter under advisement.
This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), and the Court has jurisdiction to enter a final judgment in this case. The following constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
The issue before the Court is whether a debtor has an absolute right to convert to Chapter 13 under 11 U.S.C. § 706(a) regardless of the circumstances or the debt- or’s bad faith in seeking the conversion. The Court holds that § 706(a) does not afford debtors an absolute right to convert to Chapter 13, and in this case, the Debt- or’s bad faith, abuse of process, and inabili*400ty to fund a Chapter 13 plan preclude the Debtor from converting his Chapter 7 case to Chapter 13.
FACTS
The Court’s decision is based, in part, on the Debtor’s behavior since the date of his filing bankruptcy. Those actions were expressly included in the Court’s record by the admittance of the Court’s docket in both the Debtor’s case-in-chief and the adversary proceeding with no objection, and the parties’ stipulation to the facts contained in all documents previously filed with the Court with the exception of any allegations by creditor Bennie Beard (“Beard”) not specifically admitted by Debtor. The Court also takes judicial notice of its files, dockets and prior proceedings with respect to the Debtor’s case-in-chief and the adversary proceeding. See Fed.R.Evid. 201; In re Johnson, 210 B.R. 134 (Bankr.W.D.Tenn.1997); Matter of Alofs Manufacturing Co., 209 B.R. 83 (Bankr.W.D.Mich.1997). A review of Debtor’s behavior in these matters follows.
The Chapter 7 Bankruptcy Case
The Debtor, James A. Ponzini, filed for relief under Chapter 7 of the Bankruptcy Code on November 14, 2000. M. Randy Rice was appointed trustee of the Debtor’s bankruptcy estate (the “Trustee”). On Schedule I of Debtor’s voluntary petition, he lists $1,500.00 of regular income from his business and a total of $1,154.00 in expenses associated with the operation of his business. On Schedule J to his petition, he lists a total of $1,995.00 of current monthly expenses which includes the business expenses of $1,154.00. Based on the schedules, Debtor’s monthly expenses exceed his monthly income by $495.00. The Debtor’s Statement of Financial Affairs indicated he had gross income of $30,000 in the year 1998, $30,000 in the year 1999 and $10,000 gross income from the beginning of 2000 through the date of his bankruptcy filing. Debtor has not amended his plan to alter these amounts, and has not presented any evidence to the Court to show that Debtor’s income or expenses have changed since he filed his petition.
On August 16, 2001, the Trustee moved to compel Debtor to turnover funds in the amount of $6,569.13 (the “Motion to Compel Turnover”). At the March 7, 2002 hearing on Debtor’s Motion to Convert to Chapter 13, the Trustee testified that the funds he sought to recover were certain funds in the Debtor’s Individual Retirement Account (“IRA”) that constituted non-exempt assets the Debtor had failed to turn over to the estate. Specifically, the Debtor listed the value of his IRA on his amended bankruptcy petition as $10,000.00 with $7,715.00 listed as exempt property. In his Motion to Compel Turnover, Trustee stated that after reviewing the Debtor’s records, he determined that the IRA was actually worth $14,284.13. The Trustee testified that he made demand for payment on both the Debtor and the IRA’s custodian, A.G. Edwards, and moved for a Rule 2004 examination in an attempt to obtain more information on the A.G. Edwards IRA, including monthly statements. The Trustee testified that he learned from A.G. Edwards that the IRA had substantially declined from the time he started trying to get information on the IRA and the date of the 2004 exam. The Trustee testified that he could not get the nonexempt IRA assets turned over to the estate and never received the information and documentation he requested, although the Debtor never told him he was having trouble obtaining the information. The Trustee testified that his relationship with the Debtor was one of “non-cooperation.” The Trustee also testified that during the Debtor’s 2004 examination, he urged the Debtor to attend court proceedings.
*401The Debtor did not file a response to the Trustee’s Motion to Compel Turnover. A hearing on the matter was scheduled for September 11, 2001 and continued to September 25, 2001. At the September 25, 2001 hearing, the Debtor failed to appear but R. Patt Pine, Esq. of the Dickerson Law Firm appeared and informed the Court that the firm had withdrawn from representing the Debtor in the adversary proceeding but failed to withdraw in the case-in-chief. Pine stated that the firm had no contact with the Debtor who was “uncooperative.” To ensure the Debtor had notice of the law firm’s anticipated withdrawal, the Court continued the hearing until October 11, 2001, and specifically ordered the Debtor to personally appear.
The Debtor did not appear in person on October 11, 2001, and the Court set a hearing for November 15, 2001 to consider and act upon the Trustee’s Motion to Compel Turnover and Beard’s complaint in the adversary proceeding (which is discussed later in this opinion). Again, the Court ordered the Debtor to appear in person. On October 15, 2001, the Court entered an order granting termination of the Dickerson Law Firm’s representation. On November 15, 2001, the Debtor appeared without counsel and the Court continued the matter until December 4, 2001 to allow Debtor the opportunity to hire counsel. At the December 4, 2001 status hearing, Michael Knollmeyer, Esq. of Knollmeyer Law Office, P.A. appeared on behalf of Debtor and stated that the Debtor would most likely file a motion to convert in the near future. The Court then scheduled another status hearing for ■ January 10, 2002.
The Debtor moved to convert his bankruptcy case from Chapter 7 to Chapter 13 on December 14, 2001. The Trustee withdrew the Motion to Compel Turnover at the January 10, 2002 hearing due to the Debtor’s motion to convert. At the January 10 hearing, Debtor’s attorney was instructed to serve a Notice and Opportunity to Object to the other parties in connection with the Debtor’s Motion to Convert to Chapter 13. A final status hearing was held on January 29, 2002. Beard filed his objection to Debtor’s motion to convert on January 30, 2002, and the Court scheduled a hearing on the matter for March 7, 2002. At the March 7, 2002 hearing, at which the Debtor failed to appear, Laura Grimes, Esq. made an oral motion on behalf of Knollmeyer Law Office, P.A. to withdraw from Debtor’s representation because she had not heard from Debtor since the firm had been retained, and because the firm would be seeking collection remedies against Debtor due to an insufficient retainer.
The Adversary Proceeding
Beard filed an adversary proceeding against Debtor on April 19, 2001, seeking an exception to Debtor’s discharge for Beard’s claim and objecting to the Debt- or’s discharge. Beard’s claim against Debtor is based on a default judgment entered against Debtor in favor of Beard in Pulaski County Circuit Court on June 28, 1999. Beard’s lawsuit against Debtor arose out of a former business relationship between the two (the exact nature of which is disputed) and an agreement between the Debtor and Beard under which Debtor admittedly owes an unpaid balance. In connection with the lawsuit, a Notice of Deposition Upon Oral Examination was served upon the Debtor on November 6, 2000, and the Debtor was notified to appear for deposition on November 14, 2000. The day of the scheduled deposition, Debt- or filed for relief under Chapter 7 of the Bankruptcy Code, and did not appear for the deposition.
Beard continued to try to ascertain the Debtor’s financial position by conducting *402two 2004 examinations, one on February 1, 2001 and one on April 5, 2001. In the course of these examinations, Debtor failed to produce certain bank statements and tax returns. Debtor asserted in his answer to Beard’s complaint that he could not locate some of these records. A portion of the transcript from the April 5, 2001 examination was submitted into evidence with no objection at the March 7, 2002 hearing. The transcript reveals that Debtor failed to produce previously requested bank records that he had agreed to produce.
Debtor filed an answer to Beard’s complaint on July 11, 2001, approximately 20 days after it was due. The Court subsequently entered a preliminary pretrial order requiring the parties to file and serve Pretrial Statements by August 3, 2001. Beard filed a pretrial statement on August 2, 2001. Debtor obtained an extension until September 7, 2001 to file a Pretrial Statement. In the meantime, his attorney, Michael E. Crawley, Esq. of the Dickerson Law Firm, moved to withdraw as attorney of record and the Court granted his motion. Debtor did not file a Pretrial Statement, and on September 21, 2001, a status hearing was scheduled for October 11, 2001 to coincide with the hearing on the Trustee’s Motion to Compel Turnover. From that point on, status hearings on the adversary proceeding were combined with the hearings in the case-in-chief and continued as previously described in this opinion. At the December 4, 2001 status hearing, the Court extended the deadline for Debtor’s Pretrial Statement in the adversary proceeding until December 20, 2001. Debtor’s counsel, Michael Knollmeyer, informed the Court that Debtor intended to convert his case to Chapter 13, and requested the Court to clarify that Debtor did not have to file a Pretrial Statement if he converted to Chapter 13. The Court did so. Again, a final status hearing was held January 29, 2002, and the Court held that the adversary proceeding would remain pending until a decision was made on the Debtor’s Motion to Convert to Chapter 13.
DISCUSSION
Debtor’s counsel asserts that he has an absolute right to convert to Chapter 13 under § 706(a), and that even if such right were not absolute, there is insufficient evidence to support a finding of bad faith on his part in filing the motion to convert to Chapter 13. Debtor’s counsel also contends that debtor has met the requirements for filing under Chapter 13 as specified by 11 U.S.C. § 109(e).
Beard argues that § 706(a) does not grant a debtor an absolute right to convert, and that Debtor should not be allowed to convert due to his bad faith and abuse of the bankruptcy process as evidenced by his failure to appear at Court when ordered to and his lack of cooperation with the Trustee, his own attorneys and Beard. Beard further argues that Debtor’s motion to convert should be denied because he cannot fund a chapter 13 plan in any case.
Does § 706(a) Provide a Debtor with an Absolute Right to Convert?
Pursuant to § 706(a), a debtor may convert a chapter 7 bankruptcy case to a chapter 11, 12 or 13 bankruptcy case “at any time” provided the debtor has not previously converted the case. 11 U.S.C. § 706(a) provides:
(a) The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1307, or 1208 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.
*403The courts are divided on the issue of whether § 706(a) grants the debtor an absolute right to convert from chapter 7 to another chapter provided the debtor is eligible to file under that chapter.1 The Eighth Circuit has acknowledged the split in authority but has not ruled on the issue. In re Little, 253 B.R. 427, 429 (8th Cir. BAP 2000) (dismissing appeal as moot). This district is also divided on the issue of whether a debtor’s right to convert is absolute under § 706(a). See Martin v. Cox, 213 B.R. 571 (E.D.Ark.1996) (District Court affirmed Bankruptcy Court’s denial of motion to convert where debtor’s bad faith and legal manipulations constituted “extreme circumstances”); In re Widdicombe, 269 B.R. 803, 807 (Bankr.W.D.Ark.2001) (debtor has absolute right to convert regardless of circumstances); In re Johnson, 262 B.R. 75 (Bankr.E.D.Ark.2001) (extreme circumstances warranted denial of debtor’s motion to convert).
Courts finding that a debtor has a one time absolute right to convert under § 706(a) hold that the plain language of the statute and its legislative history require that result. See In re Widdicombe, 269 B.R. 803, 807 (Bankr.W.D.Ark.2001); In re Porras, 188 B.R. 375, 377 (Bankr.W.D.Tex.1995).2 Other courts (a majority according to at least one court3) hold that the plain language of § 706(a) does not provide a debtor with an absolute right to convert a chapter 7 case despite § 706(a)’s use of the phrase “at any time” and the legislative history’s use of the term “absolute.” See In re Young, 269 B.R. 816 (Bankr.W.D.Mo.2001); In re Krishnaya, 263 B.R. 63 (Bankr.S.D.N.Y.2001); In re Marcakis, 254 B.R. 77 (Bankr.E.D.N.Y.2000); In re Starkey, 179 B.R. 687 (Bankr.N.D.Okla.1995). These courts and others also hold that the court has an inherit equitable power and duty to avoid an abuse of process where a debtor seeks to convert from chapter 7 in extreme circumstances amounting to bad faith. See Martin v. Cox, 213 B.R. at 573; Young, 269 B.R. at 824; Krishnaya, 263 at 69; In re Spencer, 137 B.R. 506, 512 (Bankr.N.D.Okla.1992)4. Having reviewed both *404lines of cases and their reasoning, this Court concludes that a debtor has no absolute right to convert under § 706(a) for the reasons explained in this opinion.
It is well settled that the plain meaning of a statute should be conclusive, provided it does not result in an interpretation clearly not intended by the statute’s drafters. See Widdicombe, 269 B.R. at 807 (citing Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)). The plain meaning of § 706(a) does not provide debtors with an absolute right to convert a chapter 7 case to a case under chapters 11, 12 or 13. Section 706(a) does not contain the word “absolute” or any other word or phrase indicating that the right to convert is unequivocal. The courts finding that § 706(a) does provide an absolute right to convert have relied on the phrase “at any time” in § 706(a); however, it is more logical to interpret this phrase as referring to the debtor’s right to convert at any point in the bankruptcy case’s proceedings rather than granting the debtor a one-time absolute right to convert. “The words ‘at any time’ quite obviously mean that the debtor may seek a conversion at any time in the life of the case. However, ‘at any time’ is not the same as and does not mean ‘regardless of circumstances.’ ” Young, 269 B.R. at 822 (quoting Starkey, 179 B.R. at 692).
Moreover, and most importantly, § 706(a) states that the court “may” convert a case at any time. The statute’s use of the verb “may” rather than “shall” supports the view that the right granted by § 706(a) is presumptive rather than absolute. See Marcakis, 254 B.R. at 82 (“The very first words of section 706(a) — ‘The debtor may convert a case ... ’ — is in the nature of the permissive.”). In Marcakis, the Bankruptcy Court compared the permissive language of § 706(a) to the mandatory language of 11 U.S.C. § 1307(b) which provides that the court shall dismiss a case under Chapter 13 upon request of the debtor at any time provided the case has not previously been converted. Id. The Marcakis court concluded that, “[S]imply put, ‘shall’ means ‘must,’ something mandatory, and ‘may’ connotes the permissive, the possible; and when turning to section 706, ..., subsections (b) and (c) of section 706 speak of what a court ‘may’ do concerning conversion.” Id. See also In re Hauswirth, 242 B.R. 95, 96 n. 2 (Bankr.N.D.Ga.1999) (“Congress demonstrated its ability to accord debtors a virtually absolute right in § 1307(b),.... The difference in the language in [§ 706(a) and § 1307(b)] supports a conclusion that they should be interpreted differently.”).
The idea that the right granted by § 706(a) is absolute appears to be rooted in the statute’s legislative history which provides:
Subsection (a) of this section gives the debtor one absolute right of conversion of a liquidation case to a reorganization or individual repayment plan case. If the case has already once been converted from chapter 11 or 13 to chapter 7, then the debtor does not have that right. The policy of the provision is that the debtor should always be given the opportunity to repay his debts.
H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 380 (1977), reprinted in, 1978 U.S.C.C.A.N. 5787, 5963, 6336; S.Rep. No. 95-989, 95th Cong., 2d Sess. 94 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5880. Notwithstanding the legislative history’s description of the conversion right as “absolute,” the Court is obliged to apply the statute, not its legislative history. The Bankruptcy Court for the Northern District of Oklahoma has described the proper role of legislative history in statutory interpretation as follows:
*405There has been much ado about when or if legislative history should be considered as an aid to interpretation of a statute. But this Court is not aware of any rule that legislative history, when considered, must be taken literally. At best, legislative history is a clue to the meaning of a statute; it is not the only clue, or even the single most important clue; and its summary, nontechnical character must always be kept in mind.
Starkey, 179 B.R. at 692. Furthermore, the legislative history of § 706(a) also states that “The policy of the provision is that the debtor should always be given the opportunity to repay his debts.... ” S.Rep. No. 95-989, p. 94, U.S.Code Cong. & Admin.News 1978, p. 5880. The right to convert set forth in § 706(a) should be applied so that this policy is furthered rather than frustrated. See Spencer, 137 B.R. at 511-512. “Where conversion to Ch. 13 amounts to an attempt to escape debts rather than to repay them, the reason for the rule ceases — and there the rule ceases also.” Id.
Finally, under the bankruptcy rules, the court has a role in determining whether conversion is appropriate. Federal Rule of Bankruptcy Procedure 1017(f)(2) requires that a conversion of a bankruptcy case under § 706(a) be made on motion filed and served as required by Rule 9013. Rule 2002(a)(4) requires that all interested parties be given 20 days’ written notice of the hearing on conversion of a Chapter 7 case to any other chapter. Several courts have pointed out that the rules’ requirements regarding motion, notice and a hearing indicate the § 706(a) right to convert is not absolute. “If the right to convert were absolute, there would be no need to file a motion, notify creditors, and have a hearing; those procedures would be useless and meaningless.” Young, 269 B.R. at 822 (citing Krishnaya, 263 B.R. at 65). See also Marcakis, 254 B.R. at 82. Courts have routinely held that debtors must follow these procedures to implement a conversion and that a conversion is not effective upon notice as it is in a conversion of a case from chapter 12 or 13 to chapter 7.5 See In re Dipalma, 94 B.R. 546, 549 (Bankr.N.D.Ill.1988) (“Taken together [Rules 1017(f)(2), 9013 and 2002(a)(4)] make it clear that the mere filing of a notice of conversion is insufficient to effect a conversion and that an order is necessary; otherwise, the provisions for the filing of a motion and for notice and a hearing would be meaningless.”).6
Clearly, the plain language of § 706(a), especially when read in context with other sections of the Bankruptcy Code and Rules, does not grant a debtor an absolute right to convert a chapter 7 case. Rather, a debtor’s right to convert is presumptive and should be granted if the court finds it is appropriate under the Bankruptcy Code.
Whether a motion to convert a chapter 7 case is appropriate depends on the circumstances of the case. See Young, 269 B.R. at 824 (citing In re Pakuris, 262 B.R. 330 (Bankr.E.D.Pa.2001) and In re Tardiff, 145 B.R. 357 (Bankr.D.Me.1992)). The Court can and should rely on its equitable powers to avoid abuse of process, and where extreme circumstances amounting to an abuse of process are present, conversion should be denied. See Martin v. Cox, *406213 B.R. 571; Young, 269 B.R. at 828; Krishnaya, 263 B.R. 63; Johnson, 262 B.R. 75; Sully, 223 B.R. 582; Starkey, 179 B.R. 687; Spencer, 137 B.R. 506. Nevertheless, “[t]he Court’s power to deny conversion in any case should be exercised sparingly.” See Young, 269 B.R. at 828-829.
Some courts have held that denial of a § 706(a) motion to convert is also warranted where the conversion will serve no purpose or is otherwise not feasible and subject to reconversion under § 1307 or § 1112(b). See In re Lilley, 29 B.R. 442, 443 (1st Cir. BAP 1983) (“Bankruptcy Appellate Panel upheld bankruptcy court’s denial of debtors’ motion to convert because debtors’ had insufficient income to fund Chapter 13 plan.”); Martin v. Cox, 213 B.R. 571 (noting that debtor’s ability to convert would have been conditioned on meeting all the eligibility requirements for filing a Chapter 13 case, including the requirement of good faith for confirmation of a plan); In re Safley, 132 B.R. 397, 399-400 (Bankr.E.D.Ark.1991) (denying conversion as “meaningless” due to previous discharge of debtor’s debts).7
Having concluded that a debtor does not have an absolute right to convert a chapter 7 case under § 706(a), and that extreme circumstances evidencing a debtor’s bad faith and abuse of the bankruptcy process, as well as futility in converting to Chapter 13, warrant denial of a debtor’s motion to convert under § 706(a), the Court must determine the propriety of the Debtor’s motion to convert in this Case.
Should Debtor Be Allowed to Convert in this Case?
In this case, Debtor has abused the bankruptcy process throughout the administration of his case-in-chief under Chapter 7 and by moving to convert his case to Chapter 13. Debtor attempts to hold his creditors at bay simply by filing bankruptcy and doing nothing; specifically, Debtor has ignored court orders to appear in person, failed to file required pleadings, and refused to cooperate with the Chapter 7 Trustee and other parties.
Debtor chose to file a Chapter 7 case the same day as a scheduled deposition in connection with the state court default judgment entered in favor of Beard. By requesting relief under Chapter 7, it was Debtor’s responsibility to then cooperate with the Trustee and the Court in the administration of his case. However, when hearings on both Beard’s complaint in the adversary proceeding and the Trustee’s Motion To Compel Turnover became inevitable after months of delay due solely to Debtor, Debtor sought to convert his case to Chapter 13 where he might retain his IRA and discharge Beard’s debt without making any substantial payments.
It is clear from Debtor’s schedules that he has no disposable income with which to fund a Chapter 13 plan. His monthly expenses exceed his monthly income by $495.00, and Debtor has failed to provide the Court with any evidence of any change in his income or expenses that would allow him to propose a Chapter 13 plan in good faith. The facts in this case illustrate that Debtor did not move to convert so that he might pay off his creditors, but rather, to stall any collection efforts by his creditors or the Chapter 7 Trustee.
CONCLUSION
The Court finds that Debtor is not entitled to convert to Chapter 13 under *407§ 706(a). Debtor’s Motion to Convert to Chapter 13 is hereby DENIED.
IT IS SO ORDERED.
. The debtor's right to convert under § 706(a) is limited by § 706(d) which provides that "[n]otwithstanding any other provisions of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.” In the case of a conversion to a chapter 13 case, a debtor must meet the basic requirements of "who may be a debtor” under § 109(e) which generally allows individuals (and their spouses) with regular income to file under chapter 13 if their noncontingent, liquidated, unsecured and noncontingent, liquidated, secured debts do not exceed certain amounts.
. See also Street v. Lawson (In re Street), 55 B.R. 763, 765 (9th Cir. BAP 1985); In re Mosby, 244 B.R. 79, 83-84 (Bankr.E.D.Va.2000); In re Verdi, 241 B.R. 851, 854-55 (Bankr.E.D.Pa.1999); Nelson v. Easley (In re Easley), 72 B.R. 948, 952 (Bankr.M.D.Tenn.1987); In re Kleber, 81 B.R. 726, 727 (Bankr.N.D.Ga.1987); In re Caldwell, 67 B.R. 296, 300-01 (Bankr.E.D.Tenn.1986); In re Jennings, 31 B.R. 378, 381 (Bankr.S.D.Ohio 1983.).
. See In re Young, 269 B.R. 816, 824 (Bankr.W.D.Mo.2001). Although cases holding that a debtor has an absolute right to convert have frequently been described as the majority view (e.g., see Bruce H. White, "Is a Debtor’s Right to Convert Under § 706(a) Really Absolute?,” 17 Am. Bankr.Inst. J. 28, 29 (Feb. 1998)), this Court’s review of recent rulings on this issue reveal a larger number of courts adopting what was previously referred to as the minority view (i.e., the view that a debtor does not have an absolute right to convert under § 706(a)), such that it is no longer clear which is the majority or minority view.
. See also In re Pakuris, 262 B.R. 330 (Bankr.E.D.Pa.2001); In re Dews, 243 B.R. 337 (Bankr.S.D.Ohio 1999); and Kuntz v. Shambam (In re Kuntz), 233 B.R. 580 (1st Cir. BAP 1999); and In re Jeffrey, 176 B.R. 4 (Bankr.D.Mass.1994).
. Rule 1017(a)(3) provides that a Chapter 12 or Chapter 13 case "shall be converted without court order when the debtor files a notice of conversion under §§ 1208(a) or 1307(a).”
. See also Calder v. Job, (In re Calder), 973 F.2d 862, 867 (10th Cir.1992); Young, 269 B.R. at 822-823; Krishnaya, 263 B.R. at 65; Starkey, 179 B.R. at 698; Spencer, 137 B.R. at 511.
. Courts adhering to the view that debtors have an absolute right to convert provide that the available remedy in such a case is to allow an opportunity for reconversion under § 1307 or § 1112(b). See In re Finney, 992 F.2d 43, 45-46 (4th Cir.1993). However, this approach has been criticized as “futile and wasted.” See Enterprise Nat'l Bank of Sarasota v. Wallace (In re Wallace), 191 B.R. 925, 927 (Bankr.M.D.Fla.1995). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493366/ | MEMORANDUM OPINION
JAMES D. WALKER, Jr., Bankruptcy Judge.
This matter comes before the Court on Defendant Dodd’s Builder’s Supply, Inc.’s Motion to Open Default pursuant to Rule 55(c) of the Federal Rules of Civil Procedure. Fed.R.Civ.P. 55(c). The Court held a hearing on July 13, 2001. After considering the pleadings, evidence and applicable authorities, the Court enters the following findings of fact and conclusions of law in compliance with Federal Rule of Bankruptcy Procedure 7052.
*823
Findings of Fact
On March 2, 2001, Debtor filed a complaint with this Court alleging, among other things, that Dodd’s Builder’s Supply, Inc. (“Defendant DBS”) violated the automatic stay and the discharge injunction order issued by this Court on July 17, 2000, by attempting to collect a debt discharged by that order. Debtor states in his complaint that, along with his brother Ted Lamar Jones, he operated a home construction business. Debtor also states that as part of that business, they had a revolving account with Defendant DBS for supplies. At the end of 1999, Debtor and his brother owed approximately $8,000 to Defendant DBS, which they were unable to pay. Thereafter, Debtor’s brother, Ted Lamar Jones, filed for bankruptcy on December 30, 1999, and Debtor filed for bankruptcy on April 3, 2000. Seeing that it was unable to collect its debt from Debt- or or his brother, Defendant DBS filed materialman’s liens for the amount it was owed against J. Dale Mann, a homeowner whose home was built by Debtor and his brother with supplies purchased from Defendant DBS, and against another owner. Debtor alleges in his complaint that these hens are invalid under Ga.Code Ann. § 44-14-361 et seq.
Subsequently, Debtor’s debts were discharged on July 17, 2000, and Ted Lamar Jones’s debts were discharged on December 8, 2000. Debtor alleges in his complaint that despite filing for bankruptcy and receiving a discharge of his debts, Defendant DBS swore out a warrant against him with the Monroe County Sheriffs Office stating Debtor had engaged in a scheme to defraud it in violation of Ga. Code Ann. § 16-8-15. Thereafter, Debtor filed a complaint against Defendant DBS with this Court claiming Defendant DBS violated the automatic stay and the discharge injunction order. Debtor’s brother, Ted Lamar Jones, filed a similar complaint.
Defendant DBS appeared pro se before this Court at an expedited hearing held on March 12, 2001, concerning Debtor’s complaint and the complaint filed by his brother. While the matter in dispute at the hearing did not directly affect Defendant DBS, Defendant DBS did appear. Thereafter, Defendant DBS wrote a letter to Debtor on April 25, 2001, in an effort to resolve the matter. However, Defendant DBS did not obtain legal counsel and failed to respond to the complaint filed by Debt- or against it. Accordingly, a default was entered on May 7, 2001. Subsequently, Defendant DBS acquired legal counsel and filed this motion to open default on June 7, 2001.
Conclusions of Law
Rule 55(c) of the Federal Rules of Civil Procedure provides “For good cause shown the court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b).” Fed.R.Civ.P. 55(c). Because no judgement by default was entered in this case, it is the good cause standard that the Court must look to in determining whether to set aside the default.
This Court has previously noted that there are four factors which should be considered in assessing good cause. While other factors may also be considered, these four factors are: “(1) the promptness of the defaulting party’s action to vacate the default, (2) the plausibility of the defaulting party’s excuse for the default, (3) the merit of any defense the defaulting party might wish to present in response to the underlying action, and (4) any prejudice the party not in default might suffer if the default is opened.” Am. Express Travel Related Serv. v. Jawish (In re Jawish), 260 B.R. 564, 567 (Bankr.M.D.Ga.2000). In looking at these factors, a court should *824be mindful of the general policy favoring decisions based on the merits. Id.
The first factor to be considered is how promptly the defaulting party acted in attempting to vacate the default. As Defendant DBS correctly notes, Rogers v. Allied Media, Inc. found that the filing of a motion to open a default one month after the entry of default was not per se unreasonable. Rogers v. Allied Media, Inc. (In re Rogers), 160 B.R. 249, 252 (Bankr.N.D.Ga.1993). In this case, a default was entered on May 7, 2001. Defendant DBS filed its motion to open the default on June 7, 2001. Having determined that Defendant DBS filed its motion one month after the default was entered, this Court finds that Defendant DBS was sufficiently prompt in its action to vacate the default. However, this period of one month should not be construed as a safe harbor for promptly filed motions for relief from default. In fact, but for the unliquidated damages aspect of this case, a judgment would have been entered within days of the entry of default, thereby creating a radically different and more strenuous standard for relief.
The second factor that a court should consider in opening a default is whether the defaulting party’s excuse for the default is plausible. This involves an examination of the defaulting party’s culpability. Jawish, 260 B.R. at 568. Here, Defendant DBS states that it did not respond to Debtor’s complaint because it misunderstood the requirement that it respond in writing. Defendant DBS had not retained legal counsel. Defendant DBS also states that it attempted to resolve the matter by writing a letter to Debtor counsel explaining that it had no actions pending against Debtor and that the liens it had filed were settled. Defendant DBS went on to state in its letter that it should be removed from Debtor’s action with the Court. Having written this letter, Defendant DBS thought the matter was resolved.
This Court has previously stated in relation to this case that the lack of legal assistance which creates misunderstandings as to legal requirements cannot be viewed by the Court as a plausible excuse for failing to respond to Debtor’s complaint. Jones v. Mann (In re Jones), 277 B.R. 812 (Bankr.M.D.Ga.2001) (order denying J. Dale Mann’s motion to open default). Accordingly, Defendant DBS’s excuse is, at best, marginally plausible. On the other, Defendant DBS has not exhibited the level of culpability comparable to J. Dale Mann, a defendant in this case who filed an unsuccessful motion to open default. This Court has never advised Defendant DBS to obtain legal counsel, as the Court did with J. Dale Mann. Therefore, Defendant DBS did not ignore any warnings by this Court. In addition, Defendant DBS exerted greater effort than Mr. Mann in responding to Debtor’s complaint by writing directly to Debtor’s counsel. Accordingly, this matter is distinguishable from J. Dale Mann’s motion to open default in this case. So while Defendant DBS’s excuse is marginally plausible, this factor will not weigh as heavily in the Court’s analysis as it did in the Court’s analysis of Mr. Mann’s similar motion, because Defendant DBS has not exhibited the same level of culpability.
The third factor to consider in whether to open a default is whether the defaulting party has a potentially meritorious defense to the underlying action. Debtor’s complaint states that Defendant DBS violated the automatic stay and the discharge injunction order issued in the case by attempting to collect a debt that had been discharged. Debtor alleges that Defendant DBS attempted to collect its debt by filing invalid materialman’s liens, and by swearing out a warrant alleging Debtor *825committed fraud against it. Debtor states that the materialman’s liens were not valid because under Ga.Code Ann. § 44-14-361 et seq., a lien against a homeowner who receives the benefit of materials must be filed within ninety days. Debtor argues that Defendant DBS, having a revolving account with Debtor and his brother, applied the funds it received in such a way as to enable the debts to fall within the ninety day deadline, without regard to whether the supplies purchased were actually used on the individual’s homes who had liens filed against them within the ninety days. Debtor further argues that the debts owed to Defendant DBS were not for supplies used on the buildings owned by the individuals who had liens filed against them, so the liens are not valid.
Defendant DBS responds by stating that the liens were valid and that it has not filed any criminal action or civil action against Debtor, so it has not violated the automatic stay or the discharge injunction order by attempting to collect a debt. Defendant DBS alleges that the criminal proceedings were initiated by the District Attorney. As to the liens, Defendant DBS notes that it does not offer revolving accounts to customers. Instead, Defendant DBS maintains a 30 day account for customers, which must be paid in full each month. In addition, Defendant DBS states that it did not selectively apply payments made by Debtor. When it received payments from Debtor without instructions as to how to apply the payments, it followed “generally accepted accounting principles” and applied the payments to the oldest outstanding accounts. Furthermore, Defendant DBS cites Georgia case law that notes that a materialman is not required to show that the materials he is owed money for were actually used on the house of the homeowner who has had a lien filed against him. Maloy v. Planter’s Warehouse & Lumber Co., Inc., 142 Ga.App. 69, 234 S.E.2d 807, 809 (1977). Accordingly, Defendant DBS appears to have a potentially meritorious defense to Debt- or’s allegations.
As to the fourth factor, prejudice to the debtor, the opening of any default causes delay and therefore is somewhat prejudicial to a debtor. Jawish, 260 B.R. at 568. However, this prejudice must be balanced against the policy favoring resolving disputes on the merits. Id. Here, because Defendant DBS has asserted a defense with potential merit and the prejudice to Debtor appears to be minimal, the balance weighs in favor of opening the default.
Taking all of these factors into consideration, the Court finds that there is good cause to open the default. Defendant DBS was sufficiently prompt in its actions to vacate the default. The excuse offered by Defendant DBS for its default does not evince a high level of culpability, and Defendant DBS’s defense to the underlying action appears to have merit. Furthermore, the Court is mindful of the general policy favoring decisions based on the merits. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493367/ | MEMORANDUM OPINION
JAMES D. WALKER, Jr., Bankruptcy Judge.
This matter comes before the Court on Complaint to Avoid Preferential Transfer of a Security Interest, Complaint for Turnover, and Complaint for Damages filed by the Chapter 7 Trustee, David E. Mullís (“Trustee”) against USA Restaurant Equipment Company, Steve Kalkavouras, and Patricia Kalkavouras (“Defendants”). This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(F). The Court held a trial on Trustee’s Complaint on June 19, 2001. After considering the pleadings, the evidence, and the applicable authorities, the Court enters the following findings of fact and conclusions of law in compliance with Federal Rule of Bankruptcy Procedure 7052.
Findings of Fact
On March 7, 1997, Brian Harsh (“Debt- or”) entered into an agreement with Defendants under which he purchased restaurant equipment for $32,188.10 in ‘'which Defendants retained a security interest. Debtor began making monthly payments for the equipment but later experienced financial difficulty and filed for bankruptcy on June 12, 2000.
*835Pursuant to Federal Rule of Bankruptcy Procedure 2002, notice of the bankruptcy was sent to Debtor’s creditors, including Defendants, informing them of the meeting of creditors on July 12, 2000. On June 23, 2000, Trustee sent a letter to Defendants requesting documents relating to the purchase, loan, security interest, corresponding collateral, and evidence of perfection of the security interest for the purpose of determining whether the bankruptcy estate would claim an interest in the equipment. Defendants failed to respond to Trustee’s request and did not appear at the meeting of creditors. Instead, on July 12, 2000-the date of the creditors’ meeting-Defendants repossessed the equipment. Defendants insist they received neither notice of the bankruptcy nor Trustee’s June 23 letter prior to the repossession.
On July 17, 2000, Trustee sent another letter to Defendants, which Defendants admit having received, informing Defendants that the repossession violated the automatic stay. Trustee explained that removal of the equipment was unlawful and improper because Defendants had failed to provide proof that their security interest was perfected and because Trustee had not abandoned the equipment, thereby making it property of the estate. In the letter, Trustee demanded that Defendants turn over the equipment and informed them that the equipment must be maintained in compliance with local and state regulations. In addition, Trustee requested that Defendants contact him immediately with any documents that establish a perfected security interest.
Defendant Steve Kalkavouras responded to Trustee’s letter by informing a member of Trustee’s staff that he would throw the equipment away before he would turn it over. Defendants did not seek legal counsel.
Trustee filed a complaint on January 18, 2001, which Defendants did not answer. Trustee filed a Request to Enter Default on April 11, 2001. Pursuant to Federal Rule of Bankruptcy Procedure 7055, the Clerk of Court entered default on April 12, 2001. The only issue remaining for trial was what relief the Court should award Trustee as a result of Defendants’ actions. Out of an abundance of caution and in the interest of fairness, the Court permitted Defendants to fully participate in the pretrial conferences and the trial.
A pretrial conference was held on March 19, 2001, at which Defendants appeared pro se and requested that the default be opened. At that conference, the Court ordered Defendants to disclose the location of the equipment so that Trustee could inspect it. When Defendants refused, the Court explained that they were contravening a direct order of the Court. Defendants claimed they understood; however, they still refused to disclose the location of the equipment to the Court. Defendants’ disrespect for the Court’s order negated the good cause required for opening the default. Furthermore, Defendants presented no defense on the merits. Accordingly, the Court denied the request to open the default and advised Defendants to obtain legal counsel.
The case was first set for trial on May 22, 2001. The Court allowed Defendants to participate in the trial, and they again appeared pro se. At that time, Defendants informed the Court that they were unable to obtain legal counsel but that they would make the equipment available for inspection. The Court continued the trial until June 19, 2001, so Trustee could inspect the equipment. The Court expected Defendants to cooperate with Trustee and help to mitigate the harm caused by their misconduct.
*836All the equipment except a bread mixer was in operating condition on the date Defendants repossessed it. However, upon inspection, Trustee found that the equipment had so deteriorated since the repossession, that it no longer complied with local and state health regulations and, therefore, had no fair market value. As to the bread mixer, Defendants testified that they discarded it because its motor was burned out when they repossessed the mixer.
At the time the equipment was purchased in March 1997, it had a fair market value of $27,210.00. Trustee relied on IRS rules to determine the value of the depreciated equipment. Pursuant to Revenue Procedure 87-56, 1987-2 C.B. 674, 1987 WL 350424, the equipment has a class life of 18 years and a general depreciation life of 10 years. Having been in use for 3 years and 3 months and having been repossessed 2 months thereafter, the equipment had a depreciation life of approximately 6 years and 6 months remaining at the time of repossession. Based on these figures, Trustee argued that the bread mixer had a fair market value of $6,175.00 on the date of repossession and that the remaining equipment had a fair market value of $11,511.50 on the date of repossession. At the time of trial, the equipment was worthless.
Trustee has expended 24.30 hours in pursuing this case. Calculated at an hourly rate of $125.00, Trustee stated that the total cost of attorney fees was $3,037.50. Trustee further showed that the total amount of expenses incurred by him as attorney was $250.16.
Conclusions of Law
Once a court has entered default and denied a request to open the default, the only remaining issue for the court to decide is the remedy to award the prevailing party. However, in this case, because Defendants appeared pro se and did not have a full appreciation for the legal process or the consequences of not complying with that process, the Court permitted Defendants to present their defenses to Trustee’s complaint at trial. Therefore, the Court will briefly address the potential merit of those defenses before turning to the issue of remedies.
Defendants claim that they owned the equipment and had a right to repossess it under a writ of possession obtained in state court. However, this defense does not take into account the automatic stay.
A bankruptcy filing creates an estate comprised of certain types of property interests, including all the debtor’s legal and equitable interests in property as of the commencement of the case. 11 U.S.C. § 541(a) (West 1994). Any interest of Debtor in the equipment at the time of filing became property of the bankruptcy estate. He had entered into an Agreement to Purchase the equipment, he took possession of the equipment, and he made payments on the equipment. Therefore, he had an interest in the equipment that became property of the bankruptcy estate.1
*837In addition, when a party files for bankruptcy, the filing operates to stay any act by any entity to obtain possession of or exercise control over property of the estate. 11 U.S.C. § 362(a) (West 1994). Therefore, Defendants’ actions in repossessing the equipment 30 days after Debt- or filed for bankruptcy and continuing to hold such equipment violated the automatic stay. Defendants stated at trial, however, that they did not know Debtor filed for bankruptcy. They claimed they did not receive notice of the bankruptcy filing or Trustee’s letter to them dated June 23, 2000, regarding the bankruptcy. While the Court finds such evidence relevant to the issue of what remedies to allow for the violation of the automatic stay, the Court does not find the evidence relevant to the issue of whether Defendants did, in fact, violate the automatic stay. Any actions taken in violation of the stay whether knowingly or unknowingly are considered void and without effect. In re Albany Partners, Ltd,., 749 F.2d 670 (11th Cir.1984); In re Brown, 210 B.R, 878 (Bankr.S.D.Ga.1997). Therefore, Defendants’ knowledge is only pertinent as to remedies the Court should consider for the violations.
Having addressed Defendants’ defenses to the substance of Trustee’s complaint, the Court will now consider which remedies are appropriate in this case. As of July 17, 2000, the daté they received Trustee’s second letter, Defendants had knowledge of Debtor’s bankruptcy filing and of the unlawful nature of their actions. Thereafter, Defendants continued to exercise control of the equipment and refused all of Trustee’s requests for information and for turnover of the equipment. Such behavior constitutes a knowing and willful violation of the automatic stay. As a result of Defendants’ willful violation, Trustee is entitled to recover damages, costs, and attorney fees associated with the violation. 11 U.S.C. § 362(h) (West 1994).2
Because the equipment was found to be of no value at the time Trustee and Debtor inspected it, the actual damages caused by Defendants’ violation of the stay is the amount Trustee would have realized from a sale of the equipment. The Court considers Revenue Procedure 87-56, 1987-2 C.B. 674, 1987 WL 350424 as guidance in assessing the value of the equipment, but it will not accept a mechanical determination of the liquidation value. The Court must make an independent determination of the amount Trustee would have received if Defendant had complied with the automatic stay. The amount is certain to be less than the IRS depreciated value based on the purchase price.
*838While the Court would have preferred to have expert appraisal evidence as to the amount the estate would have realized from a liquidation of the equipment, such evidence is admittedly difficult to obtain and present. The difficulty was compounded by the belligerent refusal of Defendants to cooperate with Trustee’s efforts. On the other hand, the Court must not adopt a punitive valuation in response to Defendants’ misconduct. The remedy for the misconduct lies in the punitive damages and not in the actual damages.
Using the selling price as a guide, and taking the IRS depreciation calculations into account together with the Court’s common sense and experience, the Court finds that the actual liquidation value of the equipment was $6,500.00 excluding the value of the bread mixer. As for the bread mixer, Defendants apparently discarded it because it was inoperable at the time of repossession. While the Court would prefer Trustee to make that determination, the Court has no cause to question Defendants’ conclusion. Furthermore, because Defendants were not aware of the automatic stay at the time they discarded the bread mixer, that action should not result in either actual or punitive damages. Therefore, the Court finds that Defendants caused actual damages of $6,500.00. Because Trustee determined that the equipment is worthless, Defendants shall be permitted to retain and dispose of the equipment and to realize whatever, if any, value it may hold.
Next, the Court considers whether costs and attorney fees should be awarded. Trustee expended a significant expense in attorney fees in pursuing this case that he would not have expended if Defendants had simply responded to Trustee’s request for documentation and request to inspect the equipment. Defendants’ lack of response is due to their ignorance of bankruptcy law. However, this Court cannot excuse their continued ignorance after they were informed of their violations and advised to seek legal counsel. Trustee stated that the attorney fees were $3,037.50 and the expenses were $250.16. Accordingly, the Court finds that Defendants must pay $3,037.50 in attorney fees and $250.16 in expenses.
Under Section 362(h) of the Bankruptcy Code, the Court may also award punitive damages when the circumstances are appropriate. 11 U.S.C. § 362(h) (West 1994). The Court has gone to great lengths to understand Defendants’ perspective in this case. The Court is aware that Defendants are not natural citizens of this country and that they distrust governmental authority, which may be the cause of some of their difficulties in this case. Defendant Steve Kalkavouras made belligerent and defiant references to government oppression in his homeland. If Defendant’s account is to be believed, he and his family have suffered cruelty, injustice, and oppression at the hands of persons associated with that government. The Court’s instinct for honesty and candor points to the possibility that Defendant’s rantings were calculated to evoke sympathy. Nevertheless, they will be accepted as proof of a state of mind that diminishes, to some extent, Defendants’ responsibility for their misconduct. However, while state of mind may mitigate responsibility, it does not eliminate responsibility. The Court is persuaded that Defendants were aware of the law but preferred to remain ignorant of its requirements. Consequently, the circumstances are appropriate for punitive damages.
While taking Defendant’s state of mind into account in determining the amount of punitive damages, the Court must also take into account the financial circumstances of Defendants. Unfortu*839nately, Defendants did not provide the Court with any information in this regard. The testimony indicates that Defendants run a small business engaged in selling new and used commercial equipment. While Defendants’ business apparently is viable, it does not appear from the testimony to be a substantial business. The award of actual damages and attorney fees in this case seems likely to impose a substantial financial hardship on Defendant. On the other hand, punitive damages in some amount are mandated by the misconduct of Defendants.
Moreover, the state-of-mind mitigation specified above does not in any way excuse Defendants’ violation of the order issued by this Court on March 19, 2001. The Court verbally ordered Defendants to disclose the location of the restaurant equipment. Defendants adamantly and belligerently stated that they would refuse to comply with that order. They did in fact refuse to comply with that order until May 22, 2001, the first date set for the trial of the case.
Although Defendants eventually complied with the order, the Court cannot ignore the disregard that Defendants exhibited toward the law and this Court during the March 19, 2001 proceeding and by refusing to comply with an order of the Court, issued in open court and verbally directed to Defendants. Taking all these factors into account, the Court imposes punitive damages in the amount of $3,000.00.
An order in accordance with this opinion will be entered on this date.
ORDER
In accordance with the memorandum opinion entered on this date, it is hereby
ORDERED that Defendants pay actual damages in the amount of $6,500.00 plus post judgment interest of 12% per annum, costs and attorney fees in the amount of $3,287.66, and contempt sanctions in the amount of $3,000.00.
. At trial, Defendants labored under the misguided assumption that because Debtor did not pay for the equipment in full under the terms of the agreement, they owned the equipment and could do with it whatever they wished, including repossessing it. While the Court understands that someone without any knowledge of secured transactions might believe that, it is not the law. When a creditor enters into a signed agreement to sell identified commercial equipment, the creditor delivers the equipment to the debtor, the debtor agrees to pay the creditor in monthly installments, and the creditor reserves the right to repossess the equipment if the debtor does not comply with the terms of the agreement, *837then the agreement creates a purchase money security interest ("PMSI”). U.C.C. § 9-203(1) (1977). However, for the agreement to be binding against third parties, the creditor must perfect the PMSI. Because Defendants allowed Debtor to take possession of the equipment, under Article 9 of the Uniform Commercial Code (codified at title 11, article 9 of the Official Code of Georgia Annotated), the only way for Defendants to perfect their interest was to file a financing statement with the clerk of superior court of any county in Georgia. U.C.C. §§ 9-302(1); 9-401. Defendants did not do this. Upon Debtor’s filing bankruptcy, Trustee gained the rights of a hypothetical lien creditor, which takes priority over an unperfected PMSI. 11 U.S.C. § 544(a) (West 1993); U.C.C. § 9-301(l)(b). Therefore, when Debtor filed for bankruptcy, Trustee’s interest in the equipment took priority over Defendants’ interest.
. Section 362(h) provides "An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorney’s fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(h) (West 1994). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493369/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court are the following pleadings:
*103(1) Complaint filed by the plaintiff, Arthur Carpenter, against the defendant, First State Bank, seeking to hold the bank in contempt, etc.
(2) Complaint filed by the plaintiff against the defendant seeking to enjoin an execution sale of a parcel of property owned by the plaintiff.
(3) Motion filed by the plaintiff seeking to avoid the judicial lien in favor of the defendant to the extent that it impairs the plaintiffs homestead exemption.
Appropriate responses were filed by the defendant; and the court, having heard and considered same, hereby finds as follows, to-wit:
I.
The court has jurisdiction of the subject matter of and the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(A), (B), and (O).
II.
In the pre-trial order, the parties stipulated to the following facts:
(1)The debtor, Arthur Carpenter, borrowed $2,966.58 from First State Bank on December 28, 1984. Carpenter made interest payments, and the note was renewed with the last renewal being on December 22, 1988. On December 28, 1989, the note was charged off by First State Bank. In mid-1993, a complaint was filed in the Circuit Court of Marshall County, Mississippi, to collect this unpaid debt. The debtor did not respond. A default judgment was taken on September 28, 1993, and entered by the court on October 13, 1993, in the amount of $4,904.23, plus interest and attorney’s fees totaling $6,596.02.
(2) During the early 1990’s, Arthur Carpenter was married to Shirley A. Carpenter, and they operated a service station on a 7.8 acre tract of land on U.S. Hwy. 72 north of Ashland, Mississippi. They also owned Lot 15 of the Dogwood Hills Subdivision which was their residence. In 1992, the Mississippi Transportation Commission purchased a portion of the commercial property from the Carpenters during the U.S. Hwy. 72 expansion leaving them with approximately 2.5 acres.
(3) On February 13, 1996, a writ of execution was issued by the Circuit Court Clerk of Marshall County, Mississippi, directing the Sheriff of Benton County, Mississippi, to levy execution on the 2.5 acre tract. A notice of execution sale was published in the Southern Advocate which set the execution sale for March 22, 1996, within legal hours.
(4) On March 15, 1996, Arthur Carpenter filed a Chapter 7 petition with the United States Bankruptcy Court for the Northern District of Mississippi. Notices were issued by the court on March 25, 1996.
(5) The Sheriff of Benton County, Mississippi, conducted the execution sale as scheduled on March 22, 1996. A Sheriffs deed was issued to Spark’s Farms, Inc., for $8,550.00.
(6) On July 2, 1996, the debtor received a discharge, and on July 10, 1996, the case was closed.
(7) On April 9, 1997, the debtor moved to reopen the case to litigate alleged automatic stay violations. The case was reopened on June 27, 1997. Each side was given 30 days to file pleadings relating to automatic stay violations, etc.
(8) On August 11, 1997, Bill Kemp on behalf of First State Bank filed an amended motion to ratify the execution sale. A default judgment was entered and later set *104aside. The debtor filed an answer and counter-complaint and the matter was heard on July 28, 1999. The court denied the amended motion to ratify the execution sale and ordered First State Bank to secure the reconveyance of the 2.5 acre tract to the debtor. This order closed adversary proceeding number 97-1167.
(9) On August 2, 1999, First State Bank sought relief from the automatic stay to proceed with a new execution sale. The court granted this motion.
(10) On March 23, 2000, the debtor filed a complaint for contempt of court, for reinstatement of mortgage and deed of trust, and to set aside foreclosure, all in adversary proceeding number 00-1077. This adversary proceeding also named Sparks Farms, Inc., as a defendant. The answer of First State Bank was filed by Bill Schneller on April 19, 2000. On July 18, 2000, the debtor voluntarily dismissed Sparks Farms, Inc., from the case following receipt of a quitclaim deed wherein Sparks Farms, Inc., reconveyed the 2.5 acres to the debtor.
(11) First State Bank scheduled another execution sale for January 3, 2002. The debtor filed for and obtained a temporary restraining order to stop the sale pending resolution of the complaint. The debtor was also given permission to amend the complaint to request lien avoidance. The debtor posted a $1,000.00 bond, and the matter was set for trial.
III.
Other Factual Events
(1) On March 15, 1996, the plaintiff, Arthur Carpenter (Carpenter), filed his voluntary bankruptcy case.
(2) Although not listed on his bankruptcy schedules at the time of the aforementioned filing, Carpenter owned with his then wife, Shirley A. Carpenter, a parcel of property identified as Lot 15, Dogwood Hills Subdivision, which contained 8.9 acres. Carpenter also owned exclusively a 2.54 acre parcel of property which is the subject matter of this litigation. This latter parcel had previously been used for commercial purposes as a service station before being partially condemned by the Mississippi Transportation Commission. According to the testimony of Darrell Morrison, the Benton County Tax Assessor/Collector, the 2.54 acre parcel could not have been claimed as exempt homestead for tax purposes since it was not jointly owned by Carpenter and his spouse.
(3) On March 22, 1996, pursuant to a judgment held by First State Bank, the 2.54 acre parcel of property was sold at an execution sale to Sparks Farms, Inc. This sale was subsequently set aside by this court since it occurred after the automatic stay had been activated following Carpenter’s bankruptcy filing. The order memorializing this decision was entered on July 28,1999.
(4) On April 1, 1996, Carpenter’s attorney, Clencie Cotton, filed the bankruptcy schedules which indicated that Carpenter owned a 7.9 acre parcel of unimproved property. The schedules did not disclose the ownership of Lot 15, Dogwood Hills Subdivision, and were not amended to reflect this ownership until February 3,1999. The 7.9 acre unimproved parcel was claimed as exempt homestead. However, no property owned by Carpenter at that time contained this amount of acreage. In his testimony, Cotton indicated that he intended this homestead claim to encompass the 2.54 acre parcel, but the description that he utilized in the schedules created a significant ambiguity.
Cotton testified that he claimed this parcel as exempt homestead because he was *105of the opinion that Carpenter was going to deed his interest in Lot 15, Dogwood Hills Subdivision, to Shirley A. Carpenter in the divorce proceeding. Cotton undertook this strategy despite the fact that the property was unimproved and had never been occupied for residential purposes.
(5) On July 2, 1996, Carpenter received his discharge in bankruptcy, and on July 10, 1996, the bankruptcy case was closed.
(6) On October 30, 1996, as a part of the settlement of the divorce proceeding and contrary to Cotton’s expectations, Carpenter received a deed from Shirley A. Carpenter to Lot 15, Dogwood Hills Subdivision. Carpenter then subsequently deeded this property to his current wife, Lucy Emory Carpenter.
(7) On June 27, 1997, Carpenter’s bankruptcy case was reopened pursuant to a motion filed on April 9, 1997. Carpenter and First State Bank were given 30 days to file any appropriate pleadings.
(8) On August 11, 1997, First State Bank filed a motion to ratify the previous execution sale conducted on March 22, 1996. The court declined to do so, and directed First State Bank to have the property reconveyed to Carpenter. Because of the intervening illness and ultimate death of the attorney representing First State Bank, this decision was not effectively rendered until July 28, 1999, and an order was entered on that date.
(9) On August 2,1999, First State Bank filed a motion seeking relief from the automatic stay as to the 2.54 acre parcel. An order was entered sustaining this motion on March 17, 2000.
(10) On March 23, 2000, Carpenter filed a complaint to hold First State Bank in contempt for allegedly violating the automatic stay, to reinstate the mortgage and deed of trust, and to set aside the foreclosure. The court notes that this complaint contained at least two misnomers. First State Bank did not hold a mortgage or deed of trust, and no foreclosure had occurred.
(11) On July 18, 2000, Sparks Farms, Inc., finally reconveyed the 2.54 acre parcel of property to Carpenter by a quitclaim deed following the payment of a negotiated amount of compensation by First State Bank. This conveyance was obtained in order to comply with the court’s order entered almost one year earlier on July 28, 1999.
(12) In December, 2001, Carpenter and his current wife, Lucy Emory Carpenter, exchanged deeds conveying title to both the 2.54 acre parcel and Lot 15, Dogwood Hills Subdivision, to themselves as joint tenants.
(13) Carpenter did not attempt to avoid the judgment lien of First State Bank to the extent that it impaired his alleged homestead exemption until December, 2001.
(14) Because the automatic stay had been previously lifted, First State Bank scheduled a second execution sale for January 3, 2002. Carpenter sought and obtained a temporary restraining order prohibiting the sale on that date.
IV.
Uses of the Respective Properties
Lot 15, Dogwood Hills Subdivision— This property contains 8.9 acres and is the site of Carpenter’s residence, a mobile home. It was owned by Carpenter and Shirley A. Carpenter until October 30, 1996, when it was deeded exclusively to Carpenter. He subsequently deeded this property to his current wife, Lucy Emory Carpenter. Thereafter, Lucy Emory Carpenter deeded a one-half interest to Carpenter in December, 2001. Carpenter tes*106tified that he keeps a few cows on this property, as well as, some junked cars which are utilized for the sale of parts. This property has been claimed as exempt homestead for tax purposes for several years.
2.54 Acre Parcel — This parcel, which was formerly the site of a service station, is presently unimproved and is located one to one and one-half miles from Lot 15, Dogwood Hills Subdivision. Carpenter testified that his son utilizes this property to sell, store, and repair used cars, as well as, to sell car parts. Carpenter indicated that he utilizes this property for similar purposes. While this parcel is relatively small, Carpenter indicated that he has kept “a cow or two” on the property. Pri- or to 1992, this property contained approximately four acres until a portion was condemned by the Mississippi Transportation Commission for highway right of way purposes. This property was owned exclusively by Carpenter until December, 2001, when he conveyed a one-half interest to his current wife, Lucy Emory Carpenter. This property has never been claimed as exempt homestead for tax purposes.
V.
Following the trial of this matter, in a bench opinion, the court dismissed the allegations of contempt against First State Bank. The said bench opinion is incorporated herein by reference. Thereafter, the primary question that remained unresolved was whether Carpenter could claim the non-contiguous 2.54 acre parcel as a part of his exempt homestead. The resolution of this question wül likewise determine whether Carpenter can avoid the judicial lien of First State Bank to the extent that it impairs his homestead exemption.
VI.
In Shows v. Watkins, 485 So.2d 288 (Miss.1986), the Mississippi Supreme Court commented on whether non-contiguous parcels can be claimed as homestead, to-wit:
Very little Mississippi case law was found defining exactly how homestead is determined. One case did, however, hold that when determining whether a non-contiguous tract should be allowed as homestead, “the controlling factor is whether or not the property is being devoted to homestead purposes and uses consistent with the purpose and use to which his home tract is devoted.” Horton v. Horton, 210 Miss. 116, 48 So.2d 850, 855 (1950). It can be gleaned from the holding in Horton that an important factor in determining homestead is the purpose and the use the property is put to.
Id. at p. 291.
In In re Cobbins, 234 B.R. 882 (Bankr.S.D.Miss.1999), aff'd 227 F.3d 302 (5th Cir.2000), the following comments authored by Judge Edward Ellington are noteworthy, to-wit:
There is case law to the effect that the homestead statute must be liberally construed in the exemptionist’s favor. See, e.g., Levis-Zukoski Mercantile Co. v. McIntyre, 93 Miss. 806, 47 So. 435 (1908) (“The homestead right being a favored one in law, whenever there is serious doubt as to whether the property is or is not a homestead, the doubt should be resolved in favor of the exemptionist, sustaining, instead of defeating, the estate, which is created by sound public policy.”); Dogan v. Cooley, 184 Miss. 106, 185 So. 783, 790 (1939) (“The exemption laws of the state have been liberally construed.. .to guard the family from the pitiless consequences of imprudence and the harsh lashing of adversity”) Daily v. Gulfport, 212 Miss. 361, 54 So.2d 485 (1951) (“statutes *107granting homestead exemption are entitled to be liberally construed”); Biggs v. Roberts, 237 Miss. 406, 115 So.2d 151 (1959) (“exemption laws are construed liberally in favor of the owner of the property exempted”); Matter of Williamson, 844 F.2d 1166, 1169 (5th Cir.1988) (“In construing the homestead statute, the Mississippi Supreme Court has established a rule of construction that requires resolution of doubt or ambiguity in the exemptionist’s favor [because] [t]he concern of the homestead exemption provision is to protect the entire family from the misfortunes or imprudence of its primary breadwinner, referred to in the statutory language as householder.”).
Id. at p. 304.
As Mississippi courts recognize, the “controlling factor” in determining the homestead character of any given parcel is “whether or not the property is devoted to homestead purposes...”
Id. at p. 305.
While this court recognizes that a homestead exemption claim is to be liberally construed in favor of the exemptionist, the court must be guided by the use of the pr5perty as the “controlling factor,” which is also a recognized principal of Mississippi law.
In the proceeding currently before the court, the following factors are significant, to-wit:
(1)At the time of the filing of Carpenter’s bankruptcy case, he was residing with his then wife, Shirley A. Carpenter, in a mobile home located on Lot 15, Dogwood Hills Subdivision. This property was owned jointly by both of them and was claimed as exempt homestead for ad valorem tax purposes. The 2.54 acre parcel, which had formerly been utilized for commercial purposes as a service station, was unimproved and owned exclusively by Carpenter. It was not claimed as exempt homestead until after December, 2001, following the exchange of deeds between Carpenter and his current wife, Lucy Emory Carpenter.
(2) The testimony indicated that the primary use of the 2.54 acre parcel is for the storage, repair, and sale of automobile parts by Carpenter’s son. There was no testimony that Carpenter’s son uses Lot 15, Dogwood Hills Subdivision, for this same purpose. Carpenter indicated that he utilizes both parcels of property for similar purposes, but to a much lessor extent. He also testified that he kept a small number of cattle on each tract, but the extent of this usage was, at best, vague. Regardless, from the overall flavor of the testimony, it appears to the court that the primary use of the 2.54 acre parcel is by Carpenter’s son.
(3) Carpenter testified that he intended to claim the property on which his mobile home was situated as his homestead. He subsequently added that he also wanted to include the former service station property within his exemption.
(4) The Benton County Tax Assessor/Collector, Darrell Morrison, testified that Carpenter could not claim the 2.54 acre parcel as exempt homestead for tax purposes at the time that this bankruptcy case was filed because it was not owned in the same legal capacity as Lot 15, Dogwood Hills Subdivision, which was claimed as exempt. While being able to claim a parcel of property as exempt for tax purposes is not the overriding test to determine whether a property can be claimed as homestead, it certainly evidences an in*108tent by the property owner that the property is not considered as homestead.
(5) The history of the use of the 2.54 ácre parcel indicates that this property has and is still being utilized primarily for commercial purposes. This is not consistent with the use of Lot 15, Dogwood Hills Subdivision, which is primarily being utilized as the Carpenters’ residence.
(6) The operative time to determine whether a property is exempt for purposes of bankruptcy is as of the date of the bankruptcy filing. While exemption claims may be modified throughout the administration of the bankruptcy ease, the character and use of the property should not be changed to tactically create an exemption where one would not have existed at the time of the filing of the petition.
For the reasons cited hereinabove, the court is of the opinion that the 2.54 acre parcel was not exemptible as homestead at the time that Carpenter filed his bankruptcy petition, nor can it be claimed as homestead now. For these reasons, the court is of the opinion that Carpenter’s motion to avoid the judicial lien of First State Bank to the extent that it impairs his homestead exemption is not well taken as to the 2.54 acre parcel.
The temporary restraining order shall be dissolved to permit First State Bank to complete its execution sale. Thereafter, the court will determine the disposition of any excess proceeds realized from the sale, as well as, the disposition of the bond posted by Carpenter.
An order will be entered consistent with this opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493372/ | DECISION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
The cause comes before the Court after a Trial on two separate complaints: the Complaint of OCWEN Federal Bank, FSB, et al.; and the Complaint of Magdalene Woods, et al. Both these Complaints seek to have a debt held nondischargeable on the basis that the Debtor allegedly misrepresented her interest in certain real property. In this regard, the specific dispute at issue in both of the Complaints involves the identity of a party named “Louise Jones” who was the grantee of a deed of transfer executed in 1992. As resolution of this matter involved common questions of fact, the Court consolidated, for purposes of the Trial, the herein stated adversary proceedings pursuant to Bankruptcy Rule 7042.
In this case, two individuals claim to be the “Louise Jones” who received title to property located at 3325 Parkwood Avenue in Toledo, Ohio: (1) the Debtor, Louise Jones, who later used her purported title to the property to secure a mortgage now held by the Plaintiff, OCWEN Federal Bank, FSB; and (2) an individual named Virginia Louise Brown, who claims to have gone by the name of Louise Jones for a period of time, and who eventually transferred title to the Parkwood property, by way of a quit-claim deed, to the Plaintiffs, LaToya Brown and Magdalene Woods. As it pertains to the issue of who is the actual “Louise Jones” who received title to the Parkwood property, the Parties submitted to the Court the following stipulations:
On November 20, 1992, a person by the name of Louise Shipman transferred, by way of a general warranty deed, property located at 3325 Parkwood Avenue, Toledo Ohio. The named grantee of this transfer was stated as “LOUISE *138JONES, a single woman.” Contemporaneous with this transfer, three related documents were also executed: a mortgage in favor of Louise Shipman; a Real Property Conveyance Fee Statement of Value and Receipt; and a Cognovit Note in favor of Louise Shipman. All three of these documents bear a signature stated as “Louise Jones.”
On April 23, 1998, Virginia Louise Brown, signing as “Louise Jones,” purported to transfer the Parkwood Avenue property, by way of a quit-claim deed, from “Louise Jones” to Latoya Brown and Magdalene Woods. Although recorded the same day, this deed was executed and acknowledged without “LOUISE JONES, single” contained in the acknowledgment. Later, on August 17, 1999, this deed was re-recorded with the language “LOUISE JONES, Single” added to the acknowledgment.
On May 27, 1998, the Debtor executed, on the Parkwood property, an Open-End Mortgage in the amount of $31,500.00 in favor of Residential Money Centers, Inc.; this mortgage was then recorded on June 9, 1998. On June 15, 1998, the Debtor’s mortgage was assigned to the Plaintiff, OCWEN Federal Bank who thereafter duly recorded the assignment.
In addition to the above stipulations, the Parties do not controvert the following facts:
On February 5, 2001, the Debtor filed a petition in this Court for relief under Chapter 7 of the United States Bankruptcy Code.
At the time the transfer of property at issue in this case took place, the Debtor was the sister-in-law of both Virginia Louise Brown and Magdalene Woods. The Debtor never lived at the Parkwood property, nor did the Debtor charge anyone rent for living in the property.
In addition, the Debtor never made any improvements to the Parkwood property, nor did the Debtor make any payments in connection with the property— e.g., the Debtor did not pay any insurance, taxes, or utilities at the property. In 1992, when the Parkwood property was sold, the Debtor did not make any form of a down payment on the property-
Magdalene Woods has lived at the Park-wood property with her husband, Willy Woods, since 1993. At the time the Parkwood property was sold to “Louise Jones,” Magdalene Woods and her husband were having difficulties with the IRS.
In 1992, the Parkwood property was in not in a habitable condition. Virginia Louise Brown thereafter made improvements to the property so that her sister Magdalene Woods could move in.
Louise Shipman, the grantor of the Parkwood property in 1992, is now deceased.
As it pertains to the 1992 transfer of the Parkwood property, the Debtor and Virginia Brown have presented a very divergent account of events. According to the Debtor, she was asked to travel from Michigan by Virginia Brown and Magdalene Woods for the purpose of attending the closing and becoming the grantee of the Parkwood property. In this regard, the Debtor contends that she, along with Virginia Brown and Magdalene Woods, were in attendance at the closing. The reason given by the Debtor for this arrangement was that both Virginia Brown and Magdalene Woods were having financial difficulties, thus necessitating that she hold title to the property. In particular, the Debtor testified to Magdalene Wood’s difficulties with the IRS, and to the fact that Virginia Louise Brown was concerned that if she owned real property, the SSI she *139received for her son would be put in jeopardy.
When questioned about the specific events surrounding the closing of the Parkwood property, it became apparent that the Debtor’s account of events was not entirely clear. The Debtor, however, remained adamant that she attended the 1992 closing and that the signatures contained on the various closing documents were hers. In support of this position, the testimony of a handwriting expert was elicited who testified that those documents executed contemporaneously with the transfer of the Parkwood property do, in fact, contain the signature of the Debtor, Louise Jones, and not Virginia Louise Brown. When questioned about her ownership interest in the Parkwood property, the Debtor explained that, although she knew that she was holding the property for the benefit of Virginia Brown and Magdalene Woods, she still thought that she had the authority to place a mortgage on the property.
By comparison, Virginia Brown gave an entirely different account of events concerning the 1992 closing on the Parkwood property. In particular, Virginia Brown claims that she was the sole grantee of the Parkwood property. In this regard, Virginia Brown claims that (1) only she, and not the Debtor, was present at the closing of the Parkwood property, and (2) that her signature is contained on those documents executed at the closing of the Parkwood property. In support of this position, Virginia Brown testified that, with respect to those transactions surrounding the Park-wood property, she utilized the name “Louise Jones” because at that time she was dating a man with the last name of Jones. Although this fact was not necessarily controverted, it was shown to the Court that Virginia Brown never used the name “Louise Jones” in any other transactions — e.g., on a driver’s license, with tax forms, or with a bank account.
DISCUSSION
It is a well-established principle under Ohio law that when an interest in property is transferred by way of a deed, the deed shall operate, so far as is allowed by law, according to the intention of the parties. Ohio Jur.3d., Deeds § 88. As a result, when two or more persons claim to be the named grantee in a deed, only the intended grantee is entitled to take an interest in the property conveyed in the deed. Thomas v. Columbus, 39 Ohio App.3d 53, 56, 528 N.E.2d 1274, 1277 (1987). Furthermore, it is axiomatic that a person can only transfer an interest in property if they have an interest greater than or equal to the interest to be transferred. Therefore, in accordance with these principles, resolution as to the identity of the true “Louise Brown” has these two overall implications in this matter: First, if the Debtor was the actual “Louise Jones” who received title to the Parkwood property in 1992, then OCWEN Bank would hold a valid mortgage against the property which, in turn, would moot both Complaints to determine dischargeability as no misrepresentations would have been made by the Debtor. Conversely, if Virginia Brown is the true “Louise Jones” who received title to the Parkwood property in 1992, then LaToya Brown and Magdalene Woods, as the recipients of a quit-claim deed from Virginia Brown, would be the actual owners of the property. Furthermore, their ownership interest in the property would exist free from any claim of OCWEN Bank, as the Debtor would have had no interest in the property in which to' convey to OCWEN Bank.
In this case, it is apparent that if the Debtor actually attended the 1992 closing of the Parkwood Property then she must *140have been the intended beneficiary of the Parkwood property. Simply put, there would have been no other reason- for the Debtor to have attended the 1992 closing other than to receive title to the property as she alleges. Both Virginia Brown and Magdalene Woods, however, strongly contest the Debtor’s assertion that she was present at the closing. In support of their respective positions, the Debtor, Virginia Brown and Magdalene Woods all testified very adamantly to their particular account of events. The Court, however, after observing the demeanor of these witnesses, and in considering the self-serving nature of their statements, cannot accord much weight to their testimony. Unfortunately, no other person with first-hand knowledge of the 1992 closing was able to testify in this matter. As a result, this Court is left with entirely secondary evidence to make a determination as to whether the Debtor was, in fact, present at the 1992 closing of the Parkwood property.
Of all the secondary evidence presented in this case, the most relevant concerns the expert testimony pertaining to the Debt- or’s handwriting. In this regard, this evidence clearly establishes that the Debtor signed the three documents related to the 1992 closing of the Parkwood property. Of course, such evidence does not unequivocally demonstrate that the Debtor was present at 1992 closing as it is possible that the Debtor could have signed these documents sometime after the closing. Nevertheless, it is very difficult for this Court to conceive of any reason (and none was offered) as to why the Debtor would sign closing documents such as a Mortgage to the Parkwood property, a Property Conveyance Statement and a Cognovit Note without being both present at the closing and also under the belief that she was the intended grantee of the Parkwood property. Further lending support to this position is this simple fact: the Court, after putting the question before the Parties, was offered no viable explanation as to how the Debtor, if she was not actually present at the 1992 closing, came to have knowledge that a person who goes by her name, Louise Jones, held title to the Park-wood property. In sum, it seems a very far stretch that the Debtor, on just the outside chance that Virginia Brown took title to the Parkwood property in the name of “Louise Jones,” would decide to obtain a mortgage of over Thirty Thousand dollars ($30,000.00) against the Parkwood property-
To counter these points, Virginia Brown has asserted that she went by the name of “Louise Jones” because at the time the transactions in question took place, she was dating a man with the last name of Jones. The Court, however, simply cannot give any credence to this assertion. This is because, while there is no dispute that Virginia Brown, whose middle name is Louise, dated a man with the last name of Jones, Virginia Brown was not able to produce any evidence that she ever went by the name of “Louise Jones” with respect to any transactions not involving the Parkwood property. Simply put, one would expect that a person who undertakes to use a different name, would thereafter use that new name in more than just an isolated transaction.
Accordingly, for the above stated reasons, the Court is persuaded that the Debtor, and not Virginia Brown, is the actual “Louise Jones” who received title to the Parkwood property in 1992. As such, the Debtor’s act of granting a mortgage interest in the Parkwood property to OCWEN Bank did not constitute an act of misrepresentation as is alleged in both of the Complaints to determine dischargeability brought against the Debtor. Notwithstanding, it does seem quite incongruous that the Debtor was able to receive over *141Thirty Thousand dollars ($30,000.00) from the Parkwood property without having contributed in any way to the property. However, as the Debtor was the intended transferee of the Parkwood property, both Virginia Brown and Magdalene Woods took their chances by allowing the Debtor to take to title to the Parkwood property. In this regard, considering the financial difficulties that were facing both Virginia Brown and Magdalene Woods, the facts of this case represent a classic “strawman” scenario whereby a third-party purchases property for another in order to conceal the true identity of the real purchaser.
In summary, the Court holds that the Debtor was the actual “Louise Jones” who, in 1992, received title to the property located at 3325 Parkwood Avenue. Therefore, as the true owner of the property, the Debtor was legally entitled to grant a mortgage interest on the property. As a consequence, neither the Plaintiff, OCWEN Federal Bank, FSB, nor the Plaintiffs, Virginia Brown and Magdalene Woods, have a claim for misrepresentation against the Debtor. 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 Complaint to Determine Dischargeability brought by the Plaintiffs, OCWEN Federal Bank, FSB, and National Land Title Insurance Company, be, and is hereby, DISMISSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493373/ | DECISION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
The cause comes before the Court after a Trial on two separate complaints: the Complaint of OCWEN Federal Bank, FSB, et al.; and the Complaint of Magdalene Woods, et al. Both these Complaints seek to have a debt held nondischargeable on the basis that the Debtor allegedly misrepresented her interest in certain real property. In this regard, the specific dispute at issue in both of the Complaints involves the identity of a party named “Louise Jones” who was the grantee of a deed of transfer executed in 1992. As resolution of this matter involved common questions of fact, the Court consolidated, for purposes of the Trial, the herein stated adversary proceedings pursuant to Bankruptcy Rule 7042.
In this case, two individuals claim to be the “Louise Jones” who received title to property located at 3325 Parkwood Avenue in Toledo, Ohio: (1) the Debtor, Louise Jones, who later used her purported title to the property to secure a mortgage now held by the Plaintiff, OCWEN Federal Bank, FSB; and (2) an individual named Virginia Louise Brown, who claims to have gone by the name of Louise Jones for a period of time, and who eventually transferred title to the Parkwood property, by way of a quit-claim deed, to the Plaintiffs, LaToya Brown and Magdalene Woods. As it pertains to the issue of who is the actual “Louise Jones” who received title to the Parkwood property, the Parties submitted to the Court the following stipulations:
On November 20, 1992, a person by the name of Louise Shipman transferred, by way of a general warranty deed, property located at 3325 Parkwood Avenue, Toledo Ohio. The named grantee of this transfer was stated as “LOUISE JONES, a single woman.” Contemporaneous with this transfer, three related documents were also executed: a mortgage in favor of Louise Shipman; a Real Property Conveyance Fee Statement of Value and Receipt; and a Cognovit Note in favor of Louise Shipman. All three of these documents bear a signature stated as “Louise Jones.”
On April 23, 1998, Virginia Louise Brown, signing as “Louise Jones,” purported to transfer the Parkwood Avenue property, by way of a quit-claim deed, from “Louise Jones” to Latoya Brown and Magdalene Woods. Although recorded the same day, this deed was executed and acknowledged without “LOUISE JONES, single” contained in the acknowledgment. Later, on August 17, 1999, this deed was re-recorded with the language “LOUISE JONES, Single” added to the acknowledgment.
On May 27, 1998, the Debtor executed, on the Parkwood property, an Open-*143End Mortgage in the amount of $81,500.00 in favor of Residential Money Centers, Inc.; this mortgage was then recorded on June 9, 1998. On June 15, 1998, the Debtor’s mortgage was assigned to the Plaintiff, OCWEN Federal Bank who thereafter duly recorded the assignment.
In addition to the above stipulations, the Parties do not controvert the following facts:
On February 5, 2001, the Debtor filed a petition in this Court for relief under Chapter 7 of the United States Bankruptcy Code.
At the time the transfer of property at issue in this case took place, the Debtor was the sister-in-law of both Virginia Louise Brown and Magdalene Woods.
The Debtor never lived at the Parkwood property, nor did the Debtor charge anyone rent for living in the property. In addition, the Debtor never made any improvements to the Parkwood property, nor did the Debtor make any payments in connection with the property— e.g., the Debtor did not pay any insurance, taxes, or utilities at the property.
In 1992, when the Parkwood property was sold, the Debtor did not make any form of a down payment on the property.
Magdalene Woods has lived at the Park-wood property with her husband, Willy Woods, since 1993. At the time the Parkwood property was sold to “Louise Jones,” Magdalene Woods and her husband were having difficulties with the IRS.
In 1992, the Parkwood property was in not in a habitable condition. Virginia Louise Brown thereafter made improvements to the property so that her sister Magdalene Woods could move in.
Louise Shipman, the grantor of the Parkwood property in 1992, is now deceased.
As it pertains to the 1992 transfer of the Parkwood property, the Debtor and Virginia Brown have presented a very divergent account of events. According to the Debtor, she was asked to travel from Michigan by Virginia Brown and Magdalene Woods for the purpose of attending the closing and becoming the grantee of the Parkwood property. In this regard, the Debtor contends that she, along with Virginia Brown and Magdalene Woods, were in attendance at the closing. The reason given by the Debtor for this arrangement was that both Virginia Brown and Magdalene Woods were having financial difficulties, thus necessitating that she hold title to the property. In particular, the Debtor testified to Magdalene Wood’s difficulties with the IRS, and to the fact that Virginia Louise Brown was concerned that if she owned real property, the SSI she received for her son would be put in jeopardy.
When questioned about the specific events surrounding the closing of the Parkwood property, it became apparent that the Debtor’s account of events was not entirely clear. The Debtor, however, remained adamant that she attended the 1992 closing and that the signatures contained on the various closing documents were hers. In support of this position, the testimony of a handwriting expert was elicited who testified that those documents executed contemporaneously with the transfer of the Parkwood property do, in fact, contain the signature of the Debtor, Louise Jones, and not Virginia Louise Brown. When questioned about her ownership interest in the Parkwood property, the Debtor explained that, although she knew that she was holding the property for the benefit of Virginia Brown and Mag*144dalene Woods, she still thought that she had the authority to place a mortgage on the property.
By comparison, Virginia Brown gave an entirely different account of events concerning the 1992 closing on the Parkwood property. In particular, Virginia Brown claims that she was the sole grantee of the Parkwood property. In this regard, Virginia Brown claims that (1) only she, and not the Debtor, was present at the closing of the Parkwood property, and (2) that her signature is contained on those documents executed at the closing of the Parkwood property. In support of this position, Virginia Brown testified that, with respect to those transactions surrounding the Park-wood property, she utilized the name “Louise Jones” because at that time she was dating a man with the last name of Jones. Although this fact was not necessarily controverted, it was shown to the Court that Virginia Brown never used the name “Louise Jones” in any other transactions — e.g., on a driver’s license, with tax forms, or with a bank account.
DISCUSSION
It is a well-established principle under Ohio law that when an interest in property is transferred by way of a deed, the deed shall operate, so far as is allowed by law, according to the intention of the parties. Ohio Jur.3d., Deeds § 83. As a result, when two or more persons claim to be the named grantee in a deed, only the intended grantee is entitled to take an interest in the property conveyed in the deed. Thomas v. Columbus, 39 Ohio App.3d 53, 56, 528 N.E.2d 1274, 1277 (1987). Furthermore, it is axiomatic that a person can only transfer an interest in property if they have an interest greater than or equal to the interest to be transferred. Therefore, in accordance with these principles, resolution as to the identity of the true “Louise Brown” has these two overall implications in this matter: First, if the Debtor was the actual “Louise Jones” who received title to the Parkwood property in 1992, then OCWEN Bank would hold a valid mortgage against the property which, in turn, would moot both Complaints to determine dischargeability as no misrepresentations would have been made by the Debtor. Conversely, if Virginia Brown is the true “Louise Jones” who received title to the Parkwood property in 1992, then LaToya Brown and Magdalene Woods, as the recipients of a quit-claim deed from Virginia Brown, would be the actual owners of the property. Furthermore, their ownership interest in the property would exist free from any claim of OCWEN Bank, as the Debtor would have had no interest in the property in which to convey to OCWEN Bank.
In this case, it is apparent that if the Debtor actually attended the 1992 closing of the Parkwood Property then she must have been the intended beneficiary of the Parkwood property. Simply put, there would have been no other reason for the Debtor to have attended the 1992 closing other than to receive title to the property as she alleges. Both Virginia Brown and Magdalene Woods, however, strongly contest the Debtor’s assertion that she was present at the closing. In support of their respective positions, the Debtor, Virginia Brown and Magdalene Woods all testified very adamantly to their particular account of events. The Court, however, after observing the demeanor of these witnesses, and in considering the self-serving nature of their statements, cannot accord much weight to their testimony. Unfortunately, no other person with first-hand knowledge of the 1992 closing was able to testify in this matter. As a result, this Court is left with entirely secondary evidence to make a determination as to whether the Debtor *145was, in fact, present at the 1992 closing of the Parkwood property.
Of all the secondary evidence presented in this case, the most relevant concerns the expert testimony pertaining to the Debt- or’s handwriting. In this regard, this evidence clearly establishes that the Debtor signed the three documents related to the 1992 closing of the Parkwood property. Of course, such evidence does not unequivocally ' demonstrate that the Debtor was present at 1992 closing as it is possible that the Debtor could have signed these documents sometime after the closing. Nevertheless, it is very difficult for this Court to conceive of any reason (and none was offered) as to why the Debtor would sign closing documents such as a Mortgage to the Parkwood property, a Property Conveyance Statement and a Cognovit Note without being both present at the closing and also under the belief that she was the intended grantee of the Parkwood property. Further lending support to this position is this simple fact: the Court, after putting the question before the Parties, was offered no viable explanation as to how the Debtor, if she was not actually present at the 1992 closing, came to have knowledge that a person who goes by her name, Louise Jones, held title to the Park-wood property. In sum, it seems a very far stretch that the Debtor, on just the outside chance that Virginia Brown took title to the Parkwood property in the name of “Louise Jones,” would decide to obtain a mortgage of over Thirty Thousand dollars ($30,000.00) against the Parkwood property-
To counter these points, Virginia Brown has asserted that she went by the name of “Louise Jones” because at the time the transactions in question took place, she was dating a man with the last name of Jones. The Court, however, simply cannot give any credence to this assertion. This is because, while there is no dispute that Virginia Brown, whose middle name is Louise, dated a man with the last name of Jones, Virginia Brown was not able to produce any evidence that she ever went by the name of “Louise Jones” with respect to any transactions not involving the Parkwood property. Simply put, one would expect that a person who undertakes to use a different name, would thereafter use that new name in more than just an isolated transaction.
Accordingly, for the above stated reasons, the Court is persuaded that the Debtor, and not Virginia Brown, is the actual “Louise Jones” who received title to the Parkwood property in 1992. As such, the Debtor’s act of granting a mortgage interest in the Parkwood property to OCWEN Bank did not constitute an act of misrepresentation as is alleged in both of the Complaints to determine dischargeability brought against the Debtor. Notwithstanding, it does seem quite incongruous that the Debtor was able to receive over Thirty Thousand dollars ($30,000.00) from the Parkwood property without having contributed in any way to the property. However, as the Debtor was the intended transferee of the Parkwood property, both Virginia Brown and Magdalene Woods took their chances by allowing the Debtor to take to title to the Parkwood property. In this regard, considering the financial difficulties that were facing both Virginia Brown and Magdalene Woods, the facts of this case represent a classic “strawman” scenario whereby a third-party purchases property for another in order to conceal the true identity of the real purchaser.
In summary, the Court holds that the Debtor was the actual “Louise Jones” who, in 1992, received title to the property located at 3325 Parkwood Avenue. Therefore, as the true owner of the property, the Debtor was legally entitled to grant a *146mortgage interest on the property. As a consequence, neither the Plaintiff, OCWEN Federal Bank, FSB, nor the Plaintiffs, Virginia Brown and Magdalene Woods, have a claim for misrepresentation against the Debtor. 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 Complaint to Determine Dischargeability brought by the Plaintiffs, Magdalene Woods, Virginia Louise Brown and Latoya Brown, be, and is hereby, DISMISSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493375/ | MEMORANDUM OPINION
ROBERT F. HERSHNER, Jr., Chief Judge.
Martha Josephine Rucker, Movant, filed on December 29, 2000, a Motion for Sanctions Pursuant to 11 U.S.C. § 105(a). Conseco Finance Servicing Corp. fka Green Tree Financial Servicing Corporation, Thomas S. Kenney, and Kenney and Solomon, P.C.,1 filed a response on January 17, 2001. The Court will refer to Conseco Finance as “Respondent.” A hearing was held on July 11, 2001. The Court, having considered the evidence presented and the arguments of counsel, now publishes this memorandum opinion.
Movant purchased a mobile home in December of 1996. Respondent financed the purchase and perfected its security interest in Movant’s mobile home.2 Movant was to make monthly payments of $267.72. The term of the loan was thirty years. Movant was required to maintain insurance on her mobile home.
Movant had financial problems and filed a petition under Chapter 13 of the Bankruptcy Code on June 22, 1999. The Court entered an order on January 11, 2000, confirming Movant’s Chapter 13 plan. The confirmed Chapter 13 plan provides that Movant would act as her own disbursing agent on her obligation to Respondent.
Movant failed to make her payments to Respondent. Respondent filed on October 29, 1999, a motion for relief from the automatic stay. Movant and Respondent reached an agreement and submitted a consent order, which the Court entered on February 16, 2000. The consent order was prepared by Respondent’s counsel.
The consent order provided, in part, as follows:
IT APPEARING that CONSECO filed a Motion for Relief from Stay alleging that the debtor failed to insure the home; and
IT APPEARING that the debtor has provided proof of insurance; however, an earned insurance premium is owed by the debtor to CONSECO in the amount of $128.70; and
IT APPEARING that the parties have agreed that CONSECO should be allowed to amend its prepetition arrear-age claim by increasing said claim $128.70 and that said amended prepetition arrearage claim shall be paid in full by the Chapter 13 Trustee; and
IT APPEARING that the parties further agree the debtor shall resume regular monthly payments on December 20, *2641999 and each month thereafter until the contract is paid in full.
SO ORDERED, this 16 day of Feb., 2000.
Movant again failed to make her payments to Respondent. Respondent filed another motion for relief on April 26, 2000. Movant and Respondent reached an agreement and submitted another consent order, which the Court entered on August 11, 2000. The consent order was prepared by Respondent’s counsel.
The consent order provided, in part, as follows:
IT APPEARING that CONSECO has filed a Motion to Modify Automatic Stay alleging that the post-petition payments on the Mobile Home Retail Installment Contract are in arrears; and
IT APPEARING that the parties have agreed that as of the date of this hearing, the Debtor has brought her post-petition principal and interest payments current; and
IT APPEARING that the parties have agreed that the Debtor shall resume making regular contract payments on July 20, 2000 and each subsequent payment thereafter pursuant to the Mobile Home Retail Installment Contract and this Consent Order; and
IT APPEARING that the parties have agreed that the Debtor shall provide CONSECO with proof of current insurance on the subject mobile home on or before July 14, 2000; ...
The consent order contained a six-month strict compliance provision. This provision provided that, should Movant fail to cure, within fifteen days, a default under the consent order, Respondent could file a default motion supported by an affidavit setting forth the default. Respondent then would be entitled to relief from the automatic stay without further notice to Mov-ant and without a hearing.
Respondent sent a letter dated September 27, 2000, advising Movant that she was in default for failing to make her payment for September of 2000 in the amount of $424.32.3 The letter stated that Respondent would submit a request that the Court lift the automatic stay supported by an affidavit unless Movant cured the default within fifteen days.
Respondent sent Movant’s counsel a letter dated October 6, 2000, explaining why Respondent contended that it was owed $424.32. The letter provided, in part:
Pursuant to your request, the following is a breakdown of the arrearage pursuant to the Notice of Default dated September 27, 2000:
Payment due date Amount Due Amount Paid by Debtor Amount Outstanding
8/20/99 $310.62 $267.62 $ 43.00
9/20/99 $310.62 $267.82 $ 42.80
10/20/99 $310.62 $267.72 $ 42.90
12/20/99 $267.72 $138.70 $129.02
2/20/00 $310.62 $267.72 $ 42.90
3/20/00 $310.62 $267.72 $ 42.90
4/20/00 $310.62 $267.72 $ 42.90
5/20/00 $310.62 $272.72 $ 37.90
$424.32
Movant made her “regular” September 2000 payment of $267.724 within the fifteen-day grace period. Movant did not pay the arrearage claimed by Respondent. Respondent filed on October 30, 2000, a Default Motion supported by an affidavit and a proposed order lifting the automatic stay. The affidavit was made by Roberta Hansen, Respondent’s bankruptcy supervisor. Ms. Hansen, in her affidavit, states, in part:
*2655.
A consent order was entered setting forth a payment plan for the Debtor to cure the post-petition arrearage and resume monthly payments to CONSECO. The Consent Order was signed by all parties and was entered by the Court on August 11, 2000. A copy of the Consent Order is attached hereto as Exhibit “C”.
6.
On September 27, 2000, counsel for CONSECO sent to the Debtor and to the Debtor’s attorney, pursuant to the ■Consent Order, a Notice of Default and Right to Cure. A copy of the Notice of Default is attached hereto as Exhibit “D” and incorporated herein by reference. The Notice advised the Debtor that she had fifteen (15) days to cure the arrearage of $424.32.
7.
Since the posting of the Notice of Default, the Debtor has paid $267.72. The Debtor remains in default in the amount of $156.60.
Movant’s counsel sent a letter to the Court, which was received on October 30, 2000. The Court treated the letter as a response to Respondent’s Default Motion.
A hearing on Respondent’s Default Motion was held on January 9, 2001. Respondent contended that Movant was in default because Movant had failed to include four months of insurance premiums when Mov-ant made her September 2000 payment. Respondent’s witness testified that Movant had failed to pay the insurance premiums of $42.90 for February, March, April, and May of 2000. Respondent argued that Movant was in default under the consent order because Movant had not paid these insurance premiums.
The Court, after hearing evidence on January 9, 2001, held that the consent order entered on August 11, 2000, had resolved the dispute between Movant and Respondent and that the consent order was silent regarding the insurance premiums for February, March, April, and May of 2000. The Court held that Respondent’s affidavit was not sufficient to show a default and that Movant was not in default under the consent order.
The Court entered an order on January 12, 2001, denying Respondent’s Default Motion. That order is now final and binding.
The Court held a hearing on Movant’s motion for sanctions on July 11, 2001. Respondent argued that it believed that the consent order entered on August 11, 2000, allowed it to collect the insurance premiums. Respondent argued that its affidavit alleging a default by Movant was not false. Respondent argued that it attempted to resolve the default issue. The Court notes, however, that Respondent’s offer to resolve the default required Movant to pay the disputed insurance premiums through her Chapter 13 plan.
Movant testified that she was required to be in court several times as a result of Respondent’s Default Motion. Movant testified that she felt bad, but didn’t lose any sleep over this matter. Movant testified that the stress she suffered was worth $2,000. Movant testified that she has made all payments to Respondent.5
Movant contends that Respondent knowingly filed a false affidavit in support of the Default Motion. Movant brings her action for sanctions under section 105(a) of the Bankruptcy Code6 and Federal Rules of *266Civil Procedure 9011.7
The Court notes that Movant’s motion for sanctions was filed premature under Rule 9011(c)(1)(A).8 Collier on Bankruptcy states:
¶ 9011.06. Initiation of Sanctions.
[1]-Motion by Party.
[b]-“Safe Harbor” Prerequisite to Filing Motion.
The “safe harbor” provision contained in Rule 9011(c)(1)(A), granting a time period between the time of service and the time for filing, is designed to allow for the cprrection of the alleged violation. Accordingly, a motion for sanctions under Rule 9011 may not be “filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected, except that this limitation shall not apply if the conduct alleged is the filing of a petition in violation of subdivision (b).” ...
This “safe-harbor” provision is a mandatory procedural prerequisite. Sanctions imposed without compliance are subject to reversal. The fact that a court has granted leave to move for sanctions may not be used to circumvent the “safe harbor” prerequisite.
10 Collier on Bankruptcy ¶ 9011.06[l][b] (15th ed. rev.2001). See 1 Moore’s Manual: Federal Practice and Procedure § 9.22[3] (2001).
The record shows that Movant’s counsel served the motion for sanctions on December 28, 2000. Movant’s counsel filed the motion for sanctions with the Court on December 29, 2000. Thus, Movant’s motion for sanctions did not comply with the “safe harbor” provision of Rule 9011(c)(1)(A) and sanctions may not be awarded under Rule 9011.
Movant also seeks an award of sanctions under section 105(a) of the Bankruptcy Code,9 which provides as follows:
§ 105. Power of court
(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
11 U.S.C.A. § 105(a) (West 1993).
In Norwest Bank Minnesota, N.A. v. Lindsey (In re Lindsey),10 this Court stated:
Section 105 grants the Court statutory contempt powers to award monetary damages and other relief as “necessary and appropriate” to carry out the provisions of the Bankruptcy Code. Hardy v. United States (In re Hardy), 97 F.3d 1384, 1389-90 (11th Cir.1996). “[T]he plain meaning of § 105(a) encompasses any type of order, whether injunctive, compensative or punitive, as long as it is ‘necessary or appropriate to carry out the provisions of the Bankruptcy Code.” *267Jove Engineering, Inc. v. Internal Revenue Service, 92 F.3d 1539, 1554 (11th Cir.1996) (emphasis original).
In In re Volpert, 110 F.3d 494 (7th 1997), the Seventh Circuit Court of Appeals stated:
[U]nder 11 U.S.C. § 105(a), bankruptcy courts may punish an attorney who unreasonably and vexatiously multiplies the proceedings before them. See Caldwell v. Unified Capital Corp. (In re Rainbow Magazine), 77 F.3d 278, 283-84 (9th Cir.1996); In re Courtesy Inns, 40 F.3d 1084, 1089 (10th Cir.1994) .... The ability to prevent the type of behavior exhibited in this case is necessary if the bankruptcy courts are to carry out efficiently and effectively the duties assigned to them by Congress.
110 F.3d at 500.
“ ‘Vexatious’ means ‘without reasonable or probable cause or excuse.’ ” United States v. Gilbert, 198 F.3d 1293, 1298 (11th Cir.1999).
The Court also may sanction certain conduct through its inherent contempt powers, which arise independent of any statute or rule. Jove, 92 F.3d at 1553. The inherent powers of a court can be invoked even if procedural rules exist which sanction the same conduct. Chambers v. NASCO, Inc., 501 U.S. 32, 49, 111 S.Ct. 2123, 2135, 115 L.Ed.2d 27 (1991). The court has the inherent power to assess attorney’s fees against a party or counsel that has acted in bad faith, vexatiously, wantonly, or for oppressive reasons. Chambers, 501 U.S. at 45-46, 111 S.Ct. at 2133; Glatter v. Mroz (In re Mroz), 65 F.3d 1567, 1574-76 (11th Cir.1996).
“[The Court’s] contempt powers [under § 105(a) ] inherently include the ability to sanction a party.” Bessette v. Avco Financial Services, Inc., 230 F.3d 439, 445 (1st Cir.2000), cert. denied, 532 U.S. 1048, 121 S.Ct. 2016, 149 L.Ed.2d 1018 (2001).
Respondent contends that its affidavit was not false because Movant failed to pay the insurance premiums for February, March, April, and May of 2000. Respondent, in its letter brief,11 states, in part:
As is set forth in our response, sanctions are not warranted in this case because the filing of the Affidavit does not violate the Federal Rule of Bankruptcy Procedure 9011(b). The Affidavit was not presented for any improper purpose. The Affidavit was not filed to harass or to cause unnecessary delay or needless increase in the cost of litigation. The Affidavit was filed because there had been a default under the terms and obligations set forth in the Mobile Home Retail Installment Contract in that monthly insurance payments remained unpaid. As the record reflects, insurance was an issue when the subject Consent Order was agreed to inasmuch as the Consent Order provides that the debtor was to provide Conseco with proof of current insurance on the subject mobile home on or before July 14, 2000. Furthermore, the debtor testified at the hearing that she did not provide this proof of insurance until after the July 11, hearing. Clearly, insurance was an issue. It is often the case that insurance premiums paid by the creditor cannot be reimbursed after the debtor provides proof of independent insurance, for a variety of reasons. For instance there may be a gap in coverage. As the Court is aware, in this case the premiums could not be reimbursed due to the debt- or’s delay in providing Conseco with the written notice of cancellation they re*268quire. Therefore, the Consent Order was drafted to recite that the debtor had brought her post petition principal and interest payments current, that the debtor shall provide Conseco with proof of her insurance on the subject mobile home on or before July 14, 2000 and to provide that the strict compliance mechanism of the Consent Order could be triggered if the debtor defaulted under any terms or obligations set forth in the Consent Order or the Mobile Home Retail Installment [Contract]. It was believed that this would be sufficient as the Contract requires the Debtor to maintain insurance or pay for insurance which the Creditor has to buy.
The Court disagreed that this language was sufficient to allow Conseco to take an Order Lifting Stay pursuant to an Affidavit of Default for the default. The Court’s ruling in denying the Affidavit of Default makes it clear to the respondents in this Motion for Sanctions that the Court would prefer that the Consent Order be more explicit with regard to the expectation as to repayment of the unreimbursable insurance premiums. Certainly, the Court’s denial of the movant’s Affidavit of Default in this matter will cause the respondents in this Motion for Sanctions to be more clear on this issue in Consent Orders drafted which address this issue in the future. However, the respondents to the Motion for Sanctions believe that it was not unreasonable for them to believe that they had sufficiently drafted the Consent Order to allow them to address unreimbursed insurance premiums through the strict compliance provision.
(Emphasis omitted).
The Court is not persuaded that it was reasonable for Respondent to rely on the consent order entered on August 11, 2000, to collect the insurance premiums. The consent order was silent regarding the insurance premiums. The consent order was prepared by Respondent’s counsel.
The Court notes that Respondent’s counsel had prepared a prior consent order, which was entered on February 16, 2000, which specifically addressed unpaid insurance premiums. It is clear that Respondent’s counsel knew how to prepare a consent order which dealt with insurance premiums. The Court can only conclude that the consent order entered on August 11, 2000, resolved all of the issues presented by Respondent’s motion for relief. The Court is persuaded that Respondent, through its Default Motion and supporting affidavit, attempted to collect insurance premiums contrary to the provisions of the consent order.
The Court is persuaded that Respondent’s filing of the Default Motion had no reasonable basis and should not be excused. The Court is persuaded that Respondent should be sanctioned for filing the Default Motion and supporting affidavit.
The Court notes that Movant was required to be in court several times as a result of Respondent’s Default Motion. Movant has suffered stress because of Respondent’s Default Motion.
The Court is persuaded Respondent should be sanctioned $514.80, which is three times the amount of the default asserted by Respondent.12
The Court directs Movant’s attorney to file a verified statement of his attorney time within twenty days of this decision. *269The Court will then make an appropriate award of attorney’s fees.
An order in accordance with this memorandum opinion will be entered this date.
. Thomas S. Kenney is counsel for Conseco Finance Servicing Corporation. Mr. Kenney is a partner in the law firm of Kenney and Solomon, P.C.
. Respondent was known as Green Tree Financial Corporation when it financed the purchase of Movant’s mobile home.
. Movant's monthly payments are due on the twentieth of each month.
. This amount represents the monthly principal and interest on Movant's mobile home obligation.
. Some of Movant’s payments were made in the 15-day grace period.
. 11 U.S.C.A. § 105(a) (West 1993).
. Fed. R. Bankr.P. 9011.
. Fed. R. Bankr.P. 9011(c)(1)(A).
. 11 U.S.C.A. § 105(a) (West 1993).
. Ch. 13 Case No. 98-54195 (Bankr.M.D.Ga. Sept. 14, 2000).
. Respondent's letter brief was filed with the Court on July 23, 2001.
. Respondent contended that Movant had failed to pay insurance premiums of $42.90 for February, March, April, and May of 2000. Those premiums totaled $171.60 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493376/ | DECISION DENYING AND DISMISSING COMPLAINT
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on the Plaintiffs Complaint to determine that her debt in the amount of $4,100 is nondischargeable, under 11 U.S.C. § 523(a)(10). After a non-eviden-tiary (at the election of the parties) hearing, the matter was submitted on briefs. For the reasons discussed below, the Complaint is DENIED and DISMISSED.
BACKGROUND
The facts giving rise to this lawsuit stem from the Debtor’s first Chapter 7 bankruptcy filing in October 1994. That was a garden variety no asset case wherein the Debtor, a realtor and contractor, received a discharge and saw his case closed on January 5,1996.
On January 14, 2000, the Debtor moved to reopen the bankruptcy case to add certain creditors not scheduled in the 1994 filing. The motion to reopen was granted, and the Debtor moved to amend the sched*301ule of creditors holding unsecured claims, seeking inter alia to include Sharon Osenkowski as a creditor. Osenkowski objected, arguing that the Debtor’s strategy was intentional, and done in bad faith. Osenkowski’s claim was based on poor workmanship by the Debtor in constructing her home, and while unaware of the bankruptcy filing, had sued the Debtor in December 1994, in state court. She incurred significant legal fees pursuing her state court claim, due to the Debtor’s belated disclosure of his bankruptcy filing. After a hearing on the Debtor’s motion to amend schedules, the motion was granted but conditioned on the Debtor paying the fees and expenses incurred by Osenkowski in the state court litigation. The Debtor declined to pay any fees, and appealed the conditional order to the First Circuit BAP, which affirmed my order in Moretti v. Bergeron (In re Moretti), 260 B.R. 602 (1st Cir. BAP 2001). On March 26, 2001, Jamie Moretti filed a second Chapter 7 case, listing Osenkowski as an unsecured creditor.1 On June 22, 2001, Osenkowski timely filed a complaint to determine the dis-chargeability of her debt, citing Section 523(a)(10) as the sole statutory basis.
Osenkowski argues that the order denying the Debtor’s Motion to Amend2 in the prior Chapter 7 case is res judicata as to the dischargeability of her claim in the instant case. The Debtor argues that the motion to add Osenkowski as a creditor in the prior proceeding has no bearing on the dischargeability of her debt, because the issue of dischargeability was never litigated, and that therefore, res judicata is not applicable.
DISCUSSION
Section 523(a)(10) states a discharge will not discharge an individual debtor from a debt:
that was or could have been listed or scheduled by the debtor in a prior case concerning the debtor under this title or under the Bankruptcy Act in which the debtor waived discharge, or was denied a discharge under section 727(a)(2), (3), (4), (5), (6), or (7) of this title, or under section 14c(l), (2), (3), (4), (6), or (7) of such Act.
11 U.S.C. § 523(a)(10). Osenkowski’s only argument under this section is that the denial of the motion seeking to include her as a creditor in the prior proceeding is res judicata of the dischargeability of her claim in this proceeding. That position is untenable, because the dischargeability of Osenkowski’s debt was not determined in Moretti’s prior bankruptcy, nor was it ever adjudicated in any other court.3 Therefore, the principles of res judicata are inapplicable. See Blasbalg v. Tarro (In re Hyperion Enters., Inc.), 149 B.R. 281, 282 (Bankr.D.R.I.1993).
Osenkowski does not argue that the Debtor formally waved his discharge under Section 727(a)(10), or that he was denied a discharge in the prior bankruptcy— either of which would be necessary to bring this matter within the purview of Section 523(a)(10). Rather, it appears that Osenkowski is still laboring under the same misconception that she exhibited be*302fore the BAP, i.e., that discharge is somehow related to the amendment of schedules. The BAP made clear in its decision that one has nothing to do with the other, stating:
The Debtor neither filed a complaint for a determination of dischargeability in the bankruptcy court nor sought leave of that court to file such a complaint; and the bankruptcy judge made no ruling on the dischargeability of the debts at issue, under 528(a)(3) or any other basis. Moreover, as the Debtor himself correctly points out, the late scheduling of these debts, if permitted, would have no effect on their dischargeability.
Therefore, if the late scheduling of this debt were to send a message to state courts and the creditor herself that the debt is within the scope of the discharge, it would do so as a result of a misunderstanding of the law: the erroneous belief that the late listing of a debt brings it within the scope of the discharge. Unfortunately, many debtors, creditors, and even attorneys do so misunderstand the law..perhaps because the law (on the dischargeability of unlisted debts) is somewhat counterin-tuitive, this general misunderstanding of the law seems well entrenched.
Moretti, 260 B.R. at 609, 612 (footnotes omitted).
Because Osenkowski has not met her burden of establishing that the debt in question is nondischargeable under Section 528(a)(10), or that res judicata applies to this matter, her Complaint is DENIED and DISMISSED.
Enter judgment consistent with this Decision.
. Because the Debtor's prior Chapter 7 cases was hied more than six years prior to the instant Chapter 7 petition, Section 727(a)(8) is not implicated and the Debtor is entitled to another discharge in this proceeding.
. Although the motion to amend was labeled “granted”, the Debtor never fulfilled the condition of paying Osenkowski’s legal fees, so the relief sought by the Debtor was, for practical purposes, denied.
.I listened to the recorded arguments at the hearing on the motion to add creditors in the prior bankruptcy, and neither Osenkowski nor the Debtor sought a determination of the dischargeability of this debt. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493377/ | AMENDED OPINION REGARDING DISMISSAL OF INVOLUNTARY PETITION WITH PREJUDICE TO REFILING1
JAMES D. GREGG, Chief Judge.
On May 21, 2002, Philip L. Hammond, “Hammond,” filed what purports to be an involuntary petition under chapter 7 of the Bankruptcy Code. 11 U.S.C. § 303. The filing of an involuntary petition commences a bankruptcy case. 11 U.S.C. § 303(b).
The court has jurisdiction over this case. 28 U.S.C. § 1334. Determining whether an order for relief should be granted in an involuntary case is a core proceeding. 28 U.S.C. § 157(b)(2)(A); see also 11 U.S.C. § 303(h) (which mandates that the court shall determine whether to enter an order for relief or to dismiss an involuntary case).
Hammond’s involuntary petition was filed against alleged debtor Donald Davis, who is an assistant United States Attorney *430for the Western District of Michigan. Also included in the caption, presumably as a joint alleged debtor, is Honorable Robert Hohnes Bell, Chief Judge, United States District Court for the Western District of Michigan.2
The papers filed by Hammond to commence this case are largely incomprehensible. When the papers were filed, no filing fee was paid. After filing of Hammond’s papers, a deputy bankruptcy court clerk brought the papers to the undersigned judge who has been assigned as the presiding judge in this case.
After a careful review of Hammond’s papers, and consideration of other admissible evidence that is capable of judicial notice, the court has determined that it is appropriate, in the interest of justice, to render this opinion and enter an order on its own initiative.
A bankruptcy court may take judicial notice of adjudicative facts. Fed. R. Evid. 201. Judicial notice may be taken by a court “whether requested or not.” Fed. R. Evid. 201(c). Such notice may be taken “at any stage of the proceeding.” Fed. R. Evid. 201(f).
A bankruptcy judge may take judicial notice of the records on file before the court. Matter of Holly’s, Inc., 172 B.R. 545, 553 n. 5 (Bankr.W.D.Mich.1994). See also NCNB Texas National Bank v. Johnson, 11 F.3d 1260 (5th Cir.1994); Matter of Woodmar Realty Co., 294 F.2d 785 (7th Cir.1961); Matter of Colorado Corp., 531 F.2d 463 (10th Cir.1976).
In each judicial district, bankruptcy judges constitute “a unit of the district court to be known as the bankruptcy court for that district.” 28 U.S.C. § 151. Therefore, in appropriate circumstances, a bankruptcy judge may take judicial notice of the district court’s files. St. Louis Baptist Temple, Inc. v. Federal Deposit Ins. Corp., 605 F.2d 1169, 1172 (10th Cir.1979) (“it has been held that federal courts, in appropriate circumstances, may take notice of proceedings in other courts, both within and without the federal judicial system, if those proceedings have a direct relation to matters at issue”); In re Wright, 187 B.R. 826, 829 (Bankr.D.Conn.1995) (the bankruptcy court made an independent review and took judicial notice of the contents of the action in the district court’s file); In re Walters, 176 B.R. 835, 856 n. 12 (Bankr.N.D.Ind.1994) (the bankruptcy court took judicial notice of a file from the district court because the bankruptcy court is a unit of the district court).
This court takes judicial notice of a case file maintained by the United States District Court for the Western District of Michigan, i.e., United States v. Anderson, et al., Case No. 1:01 CR 00175, the “Anderson” case, which was filed on July 26, 2001. In Anderson, a criminal case, there are fifteen co-defendants. Hammond is one of those defendants. The presiding judge is Honorable Robert Holmes Bell, Chief Judge of the United States District Court for the Western District of Michigan, “Judge Bell.” The attorney for the plaintiff United States is Donald A. Davis, Esq., from the United States Attorney’s Office for the Western District of Michigan, “Prosecutor Davis.”
As disclosed by the Anderson district court case file, on July 26, 2001, Hammond was indicted on a number of counts, including conspiracy to defraud the United *431States, creating fictitious obligations intending to defraud, and the making of false statements under the penalty of perjury. (U.S.D.C. Docket 1.) On September 20, 2001, a jury trial was scheduled regarding a number of the co-defendants, including Hammond. (U.S.D.C. Docket 176.) After a continuance was granted by the district court on October 17, 2001 (U.S.D.C. Docket 193), and after a final Pretrial Conference was held on November 19, 2001, a jury trial took place before Judge Bell. That trial lasted eleven days during the period from November 26 to December 12, 2001. Per the Minutes in the district court’s docket, the jury rendered its verdict on December 12, 2001.
Hammond was convicted of engaging in a number of illegal activities, including conspiring to defraud the United States and creating fictitious obligations with the intent to defraud. (U.S.D.C. Docket Minutes between docket entries 263 and 264.) Hammond was scheduled to be sentenced on May 21, 2002 at 1:00 p.m. (U.S.D.C. Docket 286.)
Less than three hours before Hammond’s sentencing hearing, on May 21, 2002, at 10:46 a.m., the bankruptcy court received Hammond’s involuntary petition against Prosecutor Davis and Judge Bell.
The procedural defects of the involuntary petition are numerous. By way of illustration, the information required about the alleged debtors is lacking, the nature of Hammond’s alleged claim is not disclosed, and the amount of Hammond’s alleged claim is unstated. This material information is required pursuant to Official Bankruptcy Form 5, Involuntary Petition.
Hammond did not pay the requisite filing fee. Fed. R. Bankr. Pro. 1006. This failure, standing alone, constitutes sufficient cause for dismissal. 11 U.S.C. § 707(a)(2).
The nearly incomprehensible documents attached to Hammond’s involuntary petition, and the gibberish in Hammond’s “Complaint” within the involuntary petition, conclusively demonstrate that he has two major goals: (1) to get out of jail and (2) to harass Prosecutor Davis and Judge Bell. To seek to achieve these goals, Hammond is abusing the bankruptcy system.
A petitioning creditor must be the “holder of a claim” against the alleged debtor to be eligible file an involuntary petition against the alleged debtor. 11 U.S.C. § 303(b). “Claim” is defined in the Bankruptcy Code. 11 U.S.C. § 101(5). There is absolutely nothing in Hammond’s papers which even remotely suggests that he holds any “claim” against Prosecutor Davis or Judge Bell. Therefore, Hammond is not eligible to file an involuntary petition against either Prosecutor Davis or Judge Bell in this case.
The Sixth Circuit Court of Appeals has held it is permissible to dismiss a chapter 7 case for bad faith filing. In re Zick, 931 F.2d 1124 (6th Cir.1991) (debtor was in bad faith; under facts of the case, an evidentiary hearing was not required); cf. In re Trident Assocs. Ltd. Partnership, 52 F.3d 127 (6th Cir.1995) (chapter 11 case dismissed for lack of good faith; “good faith is an amorphous notion, largely defined by factual inquiry”). Although the Sixth Circuit has not addressed the issue, a number of other circuit courts have upheld chapter 13 cases being dismissed because of bad faith filings. In re Lilley, 91 F.3d 491 (3d Cir.1996); In re Eisen, 14 F.3d 469 (9th Cir.1994); In re Gier, 986 F.2d 1326 (10th Cir.1993); Matter of Love, 957 F.2d 1350 (7th Cir.1992) (all upholding dismissals for bad faith filings); cf. In re Molitor, 76 F.3d 218 (8th Cir.1996) (upholding conversion of case from chapter 13 *432to chapter 7 as a result of a bad faith filing).
No reported decisions have been found when a bankruptcy court has sua sponte dismissed an involuntary petition for a bad faith filing. However, under extraordinary circumstances, such as exist in the present case, such an action is proper. First, 11 U.S.C. § 303(i) permits an award of punitive damages when an involuntary petition is filed in bad faith. Therefore, the Bankruptcy Code expressly contemplates that a bad faith involuntary filing may take place. Second, there is no principled reason to distinguish bad faith filings in involuntary cases from bad faith filings in voluntary cases, whether filed under chapter 7, 11 or 13. Third, this judge believes the bankruptcy court has a duty to dismiss abusive or manipulative cases and it is proper for the court to act, when extreme circumstances exist, on its own initiative. To delay or do nothing would permit a bad faith filer, in this instance a convicted criminal who wants to harass government officials, to drag inculpable individuals, such as the alleged debtors in this case, through illegal mud. See 11 U.S.C. § 105(a) (a bankruptcy court may issue sua sponte orders to prevent an abuse of process).
This involuntary petition is nothing more than a convicted criminal’s fantasy and should be addressed swiftly. Fed. R. BaNKR. PRO. 1001 (the Bankruptcy Rules “shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding”). Filing an abusive involuntary petition is not some type of Monopoly game whereby Hammond may attempt to win some sort of “get out of jail free” card.
In chapter 13 cases, an extremely large number of decisions have held that dismissal is warranted when the case is abusively filed. See cases cited in Norton Bankruptcy Law & Practice 2d § 125:5 n. 68 (in a number of these reported decisions, the court dismissed the case with a 180 day bar to refile or dismissed the case “with prejudice,” meaning the case could not be refiled). Also, in egregious instances, sua sponte dismissal is warranted. Id. at n. 40.
The court determines the proper disposition of this involuntary bankruptcy petition is to dismiss the case with prejudice. Further, it strongly appears that Hammond may have committed a bankruptcy crime. See 18 U.S.C. § 152(2), (3) and perhaps (4). This judge is obligated to report the possibility of Hammond’s bankruptcy crimes to the United States Attorney. 18 U.S.C. § 3057. Therefore, a copy of this opinion, a copy of the dismissal order, and a copy of the involuntary petition (with attachments) shall be transmitted to the United States Attorney for the Western District of Michigan in lieu of a formal report.
An order shall be entered accordingly.
. The only changes in this amended opinion are the correction of typographical errors in the original opinion. This was done because the undersigned judge has decided to submit the opinion for publication.
. In addition to the other procedural deficiencies, some of which are addressed below, the court notes that it is improper to file an involuntary petition against joint alleged debtors. See e.g. In re Benny, 842 F.2d 1147 (9th Cir.1988) (the Bankruptcy Code does not contemplate the filing of a joint involuntary petition). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493378/ | MEMORANDUM OPINION ON DEBTORS’ OBJECTION TO THE PROOF OF CLAIM FILED BY THE INTERNAL REVENUE SERVICE
JAMES S. STARZYNSKI, Bankruptcy Judge.
This matter is before the Court on cross-motions for summary judgment filed by the Debtors, through their attorney Modrall, Sperling, Roehl, Harris & Sisk, P.A. (Katharine Cook Fishman) and by the Internal Revenue Service, through its attorney Andrew L. Sobotka. This is a core proceeding. 28 U.S.C. § 157(b)(2)(B). The parties submitted stipulated facts and exhibits. (Docket # 34).
FACTS
On December 12, 1992 a jury awarded Debtor Valencia $304,167 in compensatory damages and $1,000,000 in punitive damages. (Fact 8). The District Judge ordered the payment of pre-judgment interest on the compensatory damages awarded against defendant Parker & Parsley Petroleum Company, Inc. at the rate of six percent from March 12, 1991 through December 21, 1992 and against defendant Evergreen Resources, Inc. at the rate of six percent from June 27, 1991. (Fact 9). Debtor’s share of the pre-judgment interest was $31,693.52. Defendants appealed and the judgment was upheld. (Facts 12, 13). The parties then settled.
Exhibit G is the Settlement Agreement and Release executed by Plaintiffs (Debtor Valencia and David Cupps and Jeffrey Hinger), Defendants and the Defendants’ Insurers. The parties stipulate that this Settlement was effective on September 13, *5291995, the date of the last signature. (Fact 22) Recital A provides the caption of the lawsuit being settled. Recital B provides, in part:
The settlement amount stated herein is payable without costs or interest and is being tendered to foreclose the potential for any further litigation arising from or related to the Complaint and/or the Occurrence (defined below).
Recital D states:
All sums set forth herein are in settlement of the Complaint, which alleged, inter alia, damages which arise out of personal injuries or sickness arising from the Occurrence.
In consideration of the release, the Insurers paid $10,075,000 in cash (¶ 2A) and agreed to make periodic payments to Cupps, Hinger, and two attorneys (¶ 2B). Debtor would be paid in full with cash and would not receive periodic payments. Paragraph 2C provides:
To the best knowledge of the Parties, the Periodic Payments specified in this agreement constitute damages on account of physical injury or sickness within the meaning of Internal Revenue Code Section 104(a)(2) 1.
The parties stipulate that the total amount received by the Plaintiffs from the Defendants pursuant to the settlement was $17,355,000. (Fact 17). Had a mandate been entered on the amount originally awarded, the plaintiffs would have been entitled to $17,989,180 in damages, costs, and interest. (Fact 18).
The Statute
Internal Revenue Code § 104(a), in 1988, read as follows:
(a) In general. — Except in the ease of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include—
(2) the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness.
In 1989, § 104(a) was amended, adding, among other things, the following:
Paragraph (2) shall not apply to any punitive damages in connection with a case not involving physical injury or physical sickness.
DEBTOR’S ARGUMENT
In their motion for summary judgment, Debtors argue that 1) the express allocation contained in the 1995 settlement agreement must be respected because there is an express allocation in the agreement, which was negotiated by parties with adversarial interests at arms length and in good faith, and because the intent of the insurer was to have all damages paid qualify as section 104(a)(2) damages in order to make a qualified assignment of their liabilities pursuant to Section 130 of the IRC; and 2) the proceeds are excludable from income pursuant to section 104(a)(2) because the underlying cause of action was based on tort and the damages were re*530ceived on account of physical injuries; the 1989 amendment to section 104 makes it clear that the proceeds are excludable; and substantial legal authority existed in 1995 to exclude the proceeds.
IRS ARGUMENTS
IRS disputes Debtors’ arguments. First, IRS claims that the 1995 Settlement Agreement makes no allocation of the lump sum that was paid to Debtor; therefore, it argues, the allocation made by the jury must control. Second, IRS claims that punitive damages and interest are taxable; courts have rejected arguments to the contrary because punitive damages are not received “on account of personal injury” as required by the statute, but are awarded to punish and deter defendant’s conduct.
Punitive Damages
Under New Mexico law, punitive damages are awarded to punish a wrongdoer and to serve as a deterrent. Walta v. Gallegos Law Firm, P.C., 2002-NMCA-015, 131 N.M. 544, 40 P.3d 449, 461 (2001) cert. denied No. 27,281, 131 N.M. 619, 41 P.3d 345 (2002); Madrid v. Marquez, 131 N.M. 132, 33 P.3d 683, 685 (Ct.App.2001). Punitive damages do not measure a loss suffered by the plaintiff. Madrid, 131 N.M. at 134, 33 P.3d at 685. See also Gonzales v. Sansoy, 103 N.M. 127, 129, 703 P.2d 904, 906 (Ct.App.1984) (Punitive damages may not be assessed to compensate for a loss by plaintiff.)
Supreme Court Cases
In United States v. Burke, 504 U.S. 229, 237, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992), the Supreme Court ruled that to come within the § 104(a)(2) income exclusion, a plaintiff must show that his or her claim is a tort-like personal injury. Because the Court found that Title VII, the statute at issue (dealing with back pay awards arising from unlawful discrimination based on sex), did not redress tort-like personal injuries, id. at 241, 112 S.Ct. 1867, it did not need to, nor did it, address the question of whether the damages in that case were “on account of’ personal injuries. In the case before this Court there is no question that Debtor suffered a tort-like personal injury; the issue is whether the punitive damages (if any) fit within the exception as well.
Commissioner v. Schleier, 515 U.S. 323, 336-37, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995), decided June 14, 1995, expanded on Burke, ruling:
In sum, the plain language of § 104(a)(2), the text of the applicable regulation, and our decision in Burke establish two independent requirements that a taxpayer must meet before a recovery may be excluded under § 104(a)(2). First, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is “based upon tort or tort type rights”; and second, the taxpayer must show that the damages were received “on account of personal injuries or sickness.”
The Schleier Court adopts a stringent “sufficient causation” test2 that demands a *531“more direct nexus between the personal injury and the damage award.” Debra Cohen-Whelan, From Injury to Income: The Taxation of Punitive Damages “On Account Of’ United States v. Schleier, 71 Notre Dame L.Rev. 913, 915-16 (1996).
The United States Supreme Court also addressed § 104 in O’Gilvie v. United States, 519 U.S. 79, 117 S.Ct. 452, 136 L.Ed.2d 454 (1996). Petitioners had received punitive damages and the Court of Appeals for the Tenth Circuit ruled that they were not excluded from income as “damages ... on account of personal injury or sickness.” Id. at 82, 117 S.Ct. 452. The Supreme Court agreed with the government’s interpretation of § 104, ie., that punitive damages were not received “on account of’ personal injuries, but were awarded “on account of’ the defendant’s reprehensible conduct and the jury’s need to punish and deter it. Id. at 83-84, 117 S.Ct. 452. The Court cited its earlier opinion in Commissioner v. Schleier, 515 U.S. 323, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995) which held that income is excludable “not simply because the taxpayer received a tort settlement, but rather because each element ... satisfies the requirement ... that the damages were received ‘on account of personal injuries or sickness.’ ” O’Gilvie, 519 U.S. at 84, 117 S.Ct. 452 (citing Schleier, 515 U.S. at 330, 115 S.Ct. 2159). The O’Gilvie petitioners also argued that the 1989 amendment demonstrated an intent by Congress to remove punitive damages in nonphysical injury cases from the exception of § 104 (i.e., petitioners argued that the amendment taxes punitive damages only in cases of nonphysical injury.) They argued that the amendment would not have been necessary unless punitive damages were already excluded from income. Id., at 89, 117 S.Ct. 452. The Supreme Court disagreed, finding that 1) the law was uncertain in 1989 when the amendment was enacted, 2) by passing the amendment Congress only made clear that in cases of nonphysical injury punitive damages were not excluded from income (ie., Congress did nothing with respect to cases involving physical injury), and 3) Congress simply left the law where it found it in respect to cases of physical injuries. Id. at 89-90, 117 S.Ct. 452.
Discussion
1. Allocation of damages
The Court finds that the Settlement Agreement does not allocate Debtors’ award. Exhibit G Recital D states that “All sums set forth herein are in settlement of the Complaint, which alleged, inter alia, damages which arise out of personal injuries or sickness arising from the Occurrence.” It does not say the settlement is only of the personal injury jury award. In fact, the jury awarded Debtor $304,167 in compensatory damages and $1,000,000 in punitive damages. Stipulated Fact 8. Under the settlement agreement in 1995 Debtor received $1,870,311.58. Stipulated fact 19. It is not credible that the defendants would settle a compensatory damage award for six times the amount awarded by a jury. The Court finds that the settlement was of both the compensatory and punitive damages awarded by the jury.
IRS allocated the settlement among compensatory damages, punitive damages, and interest. Stipulated Fact 29 and Ex-*532Mbits J and L. The IRS also allowed as a deduction a pro-rated amount of legal fees, costs, and gross receipts taxes. An allocation of a settlement based upon a jury verdict is proper. Robinson v. Commissioner of Internal Revenue, 70 F.3d 34, 38 (5th Cir.1995). See also Rozpad v. Commissioner of Internal Revenue, 154 F.3d 1, 4-5 (1st Cir.1998).
2. Exclusion of the award
Under Schleier Debtors cannot exclude punitive damages under section 104(a)(2) because under New Mexico law they are not “on account of’ personal injuries or sickness. Under New Mexico law punitive damages are on account of the defendant’s behavior.
The 1989 amendment does not support Debtors’ argument that pumtive damages are taxable only in nonphysical injury cases. See discussion above of O’Gilvie.
Debtor’s final argument is that the law as it existed in September, 1995 allowed exclusion of the punitive damages. The Court disagrees. Schleier was decided on June 14, 1995. Circuit cases finding punitive damages taxable at the time included Reese v. United States, 24 F.3d 228 (Fed.Cir.1994); Commissioner of Internal Revenue v. Miller, 914 F.2d 586 (4th Cir.1990); Wesson v. United States, 48 F.3d 894 (5th Cir. March 30, 1995); Estate of Moore v. Commissioner of Internal Revenue, 53 F.3d 712 (5th Cir. June 2, 1995); and Hawkins v. United States, 30 F.3d 1077 (9th Cir.1994). The only circuit case to exempt pumtive damages was Horton v. Commissioner of Internal Revenue, 33 F.3d 625 (6th Cir.1994). And, Horton was arguably not good law after the decision in Schleier3. See Bagley v. Commissioner of Internal Revenue, 105 T.C. 396, 417-18, 1995 WL 730447 (1995) aff'd. 121 F.3d 393 (8th Cir.1997) (Concluding that Schleier effectively overruled Horton.) Therefore, contrary to Debtor’s argument, the Court finds that the law was predominantly against the Debtor’s position in September, 1995.
Conclusion
The Court finds that Debtor’s Motion for Summary Judgment should be denied, and the IRS’s Motion for Summary Judgment should be granted. The IRS’s determination of Debtor’s tax liability should be upheld.
. Debtor argues that the defendants and/or their insurance companies drafted the settlement, and this provision demonstrates their intent that the entire settlement be construed as personal injuries. Debtor also points out that it would be to the defendants' and insurance companies’ tax benefit to have the entire amount considered personal injuries. For that reason, the Court places little weight on this self-serving provision; one would expect the settlement to be drafted this way by the insurer. In any event, the deferred payment provisions do not pertain to the Debtor.
. "But for causation classifies the damages received as being on account of personal injury when the injury is a prerequisite for the receipt of punitive damages. Thus, but for the personal injury, the plaintiff would not have received the punitive damages award. But for causation provides for the most tenuous connection between the injury and the award. Sufficient causation requires that the plaintiff show that the personal injury award was the sufficient cause of the punitive damage award. Sufficient causation is established when the plaintiff’s proof of a compensable injury also supports the damage award.” Cohen-Whelan, 71 Notre Dame L.Rev. 915 n. 13 (citing Commissioner v. Miller, 914 F.2d 586, 589 (4th Cir.1990)). Cf. O’Gilvie v. United States, 519 U.S. at 82, 117 S.Ct. 452, rejecting the petitioners "but for” interpretation of the statute:
*531"On one linguistic interpretation of those words, that of petitioners, they require no more than a 'but-for' connection between 'any' damages and a lawsuit for personal injuries. They would thereby bring virtually all personal injury lawsuit damages within the scope of the provision, since: 'but for the personal injury, there would be no lawsuit, and but for lawsuit, there would be no damages.' ”
. Horton is based on a reading of Burke that the Court should focus on the nature of the claim underlying the damage award, and that this focus is “the beginning and end of the inquiry.” Horton, 33 F.3d at 630-31. The Schleier Court ruled "We did not hold that the inquiry into ‘tort or tort type rights' constituted the beginning and end of the analysis.” 515 U.S. at 336, 115 S.Ct. 2159. The Burke inquiry was a "necessary condition” for excludability, but "not a sufficient condition.” Id. A Court would still need to determine if the amounts were received "on account of personal injuries or sickness.” Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493379/ | *568
ORDER DENYING DEFENDANT’S MOTION TO ALTER OR AMEND
(Doc. No. 15)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THIS CAUSE came on for hearing to consider Defendant’s Motion to Alter or Amend, filed by Robert J. Bean (Debtor) on December 17, 2001. The Motion to Alter or Amend is addressed to this Court’s Findings of Fact, Conclusions of Law, and Memorandum Opinion entered on December 10, 2001, in which this Court determined that the Debtor is liable for conversion, thus, its obligation to the plaintiff, Germain, Inc. d/b/a Lincoln Mercury of Naples and Germain Motor Company, Inc. (Germain), shall be excepted from the overall protection of bankruptcy discharge. In addition, this Court held that the Debt- or’s debt comes within the exception of discharge under 11 U.S.C. § 523(a)(4), embezzlement and excepted under 11 U.S.C. § 523(a)(6), the portion of the debt concerning the unaccountable proceeds of the vehicles sold by the Debtor, separate from the worthless check claim. Counsel for the Debtor urges that this record does not warrant the conclusion that the Debtor, individually, received any benefit from the sale of the automobiles.
This contention is without merit. It is self evident that a corporation is a legal entity and can only act through natural persons who are in charge of its affairs, which are usually the president of a corporation. While it is true that the officers and directors of a corporation are not liable for the debts of the corporation unless they guarantee the same, they cannot use the corporate shield to hide behind and escape immunity from tortious conduct facially conducted by the corporation but also obviously by the individual who is responsible for the actions, which is the basis of the charge under consideration.
This record leaves no doubt that the Debtor was the sole stockholder and officer in charge of the affairs of Paradise Motors, Inc. during the relevant time. This record more than justifies the drawing of the inference that he was responsible for converting the funds obtained from selling the vehicles of Germain. There is authority to support the proposition that indirect benefit to the director for tortious conduct in which the debtor participated was sufficient to prevent the debtor from receiving benefits that the Bankruptcy Code affords to honest persons. In re Arm, 87 F.3d 1046 (9th Cir.1996). It is well established that the courts will not permit a tortfeasor debtor to hoist the Bankruptcy Code for protection of the full consequences of its tortious conduct. In re Bilzerian, 100 F.3d 886 (11th Cir.1996).
Based on the foregoing, this Court is satisfied that the Motion to Alter or Amend is not well taken because the conclusions and findings as set forth in the Order were not an egregious misapplication of applicable law.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Defendant’s Motion to Alter or Amend be, and the same is hereby, denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493381/ | ORDER GRANTING IN PART AND DENYING MOTION TO DISMISS
(Doc. No. 27)
ALEXANDER L. PASKAY, Bankruptcy Judge.
The matter under consideration in this yet to be confirmed Chapter 11 case is a Motion to Dismiss filed together by the State of Florida, Department of Transportation (DOT) and Thomas F. Barry, Jr., Secretary of the State of Florida, Department of Transportation (DOT Secretary) in Adversary Proceeding No. 01-479. This Adversary Proceeding was initiated by Mid-Continent Electric, Inc. (Debtor) against the DOT and DOT Secretary by the filing of an Amended Complaint, which sets forth three claims in three separate counts.
The claim in Count I is entitled “Enjoin Violations of the Automatic Stay.” In Paragraph 5, the Debtor asserts that it intends to institute an action against the DOT to recover final payment under its contract with the DOT, bearing contract no. 19713 (the Project). In Paragraph 6, the Debtor contends that “Said property is in the possession of the Defendant.” (Sic). In Paragraph 7, the Debtor contends that: “This action threatened by FDOT is in contravention of and in violation of the provisions of 11 U.S.C. § 362.” (Sic). In Paragraph 8, the Debtor contends that: “Further, the actions of the FDOT violate the provisions of 11 U.S.C. § 108(a)(2).” (Sic). In addition to the injunctive relief sought, the Debtor also stated that it intends to pursue an action against DOT for an equitable contract adjustment. In the Wherefore Clause, the Debtor seeks an injunction forbidding the DOT, its agents, servants and employees, “from violating Federal Bankruptcy law and by continuing to ignore an act in contravention of the provisions of 11 U.S.C. §§ 362 and 108(a)(2).”
The claim in Count II is entitled “Enjoin Violations of Federal Bankruptcy Law,” and basically states the same allegations as in Count I, but in this Count the relief sought is against the DOT Secretary, his *603agents, servants and employees. The Debtor seeks an injunction preventing them “from violating Federal Bankruptcy law by continuing to ignore and act in contravention of the provisions of 11 U.S.C. §§ 362 and 108(a)(2).”
The claim in Count III is entitled “Declaratory Judgment,” and names the DOT Secretary as defendant. In this Count, the Debtor seeks declaratory judgment pursuant to 28 U.S.C. § 2201 and 28 U.S.C. § 2202. The gravamen of the relief sought is an adjudication by this Court that the State’s Statute of Limitations on the claim of the Debtor against the DOT did not run on November 7, 2000 since the Debtor filed its Petition for Relief on August 17, 2000, and the applicable Statute of Limitation was extended by virtue of 11 U.S.C. § 108(a)(2). In the Wherefore Clause, the Debtor demands a judgment against the DOT Secretary claiming that the applicable Statute of Limitations was tolled by the Petition for Relief filed by the Debtor by virtue of 11 U.S.C. § 108, and the position of the DOT Secretary as conducted through his agents and employees is in violation of federal law. (Sic).
The immediate matter under consideration is a Motion to Dismiss the Amended Complaint, filed by both the DOT and the DOT Secretary. The DOT contends that this Court lacks jurisdiction over the sovereign State of Florida and that the Amended Complaint fails to state a cause of action against the DOT. In addition, both Defendants request that this Court abstain from hearing the Amended Complaint on the basis of judicial economy. In the alternative, they seek a stay pending the outcome of a decision by the U.S. Supreme Court, currently pending before that Court in the case of Raygor v. Regents of the University of Minnesota, cert. accepted, 532 U.S. 1065, 121 S.Ct. 2214, 150 L.Ed.2d 208 (2001). This decision was subsequently decided by the Supreme Court on February 27, 2002. See Raygor, 534 U.S. 533, 122 S.Ct. 999, 152 L.Ed.2d 27 (2002).
The Debtor does not seek, in this Adversary Proceeding, any monetary relief against the State of Florida, the DOT Secretary, or the DOT. Instead, the Debtor seeks an injunction against both the DOT and the DOT Secretary from effectuating a permanent forfeiture, i.e., a non-payment of the balance claimed to be due as the final payment with respect to the Project. The Debtor also seeks declaratory relief that the Statute of Limitations imposed by Florida Statutes § 337.19 was tolled pursuant to 11 U.S.C. § 108(a)(2).
In response, the DOT Secretary and DOT argue that this Court lacks jurisdiction over the State of Florida on duel grounds: (1) the Eleventh Amendment and (2) sovereign immunity theories, as espoused by the Supreme Court in Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996) and its progeny, Kimel v. Florida Bd. of Regents, 528 U.S. 62, 120 S.Ct. 631, 145 L.Ed.2d 522 (2000); Alden v. Maine, 527 U.S. 706, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999). And, the DOT and DOT Secretary argue that the Amended Complaint fails to state a cause of action.
This Court, having considered argument of counsel and the extensive legal memo-randa in support and in opposition of the Motion to Dismiss by both Defendants, now finds and concludes as follows:
Considering the Motion under consideration as it relates to the claims of the Debtor in Counts I and II, this Court is satisfied that these claims, as pled, do not state a claim for which relief can be granted. First, it is unclear from the pleading which of the subclauses of 11 U.S.C. § 362 the DOT was supposed to have violated or *604threatened to violate the automatic stay. Apparently, the Debtor intends to sue the DOT to recover the final contract balance it claims it is entitled to under certain contract it had with the DOT, and it is apprehensive that the DOT will raise the defense that the claim is time barred. The perceived apprehension is far short to an allegation of immediate and irreparable harm which is an essential element for a viable claim for injunctive relief pursuant to Federal Rule of Civil Procedure 65(b), as adopted by Federal Rule of Bankruptcy Procedure 7065(b) interpreting the Rule. See In re Duplitronics, Inc., 183 B.R. 1010 (Bankr.N.D.Ill.1995)(factors to consider in determining whether to issue a temporary restraining order include (i) some likelihood of prevailing on the merits; (ii) inadequate remedy at law and irreparable harm if order not granted; (iii) balance of harms between movant and nonmoving party if relief is granted or denied; and (iv) potential harm to public interest). See also Erickson v. Trinity Theatre, Inc., 13 F.3d 1061, 1067 (7th Cir.1994); Abbott Laboratories v. Mead Johnson & Co., 971 F.2d 6, 11-12 (7th Cir.1992). It is difficult to comprehend how one can violate 11 U.S.C. § 108(a)(2). This Section of the Code does not prohibit anything. It merely provides for the extension of the applicable statute of limitation under non-bankruptcy law when the statute of limitation has yet to expire at the time the bankruptcy case has commenced.
Concerning the claim set forth in Count II of the Amended Complaint entitled “Enjoin Violation of Federal Bankruptcy Law” (sic), the allegations in this Count are the same as those discussed above, but the relief is sought against the DOT Secretary. Thus, for the reasons discussed above, with respect to the defects of the claim asserted in connection with Count I, the same are equally applicable to the claim in this Count. In sum, this Court is satisfied that the Motion to Dismiss these two counts (Counts I and II) should be granted, albeit not for the grounds urged by the Defendants but for the Debtor’s failure to state a claim for which relief could be granted.
Ordinarily, in light of the foregoing, it would be unnecessary to discuss the availability vel non of the defense of sovereign immunity asserted by both Defendants. However, in light of the fact that the dismissal of these counts is without prejudice, and the Debtor may re-plead a viable claim in Counts I and II, for this reason, this Court is satisfied that it is appropriate to consider the viability of the defense of sovereign immunity based on Seminole Tribe and the Eleventh Amendment.
Since the Supreme Court’s decision in Seminole Tribe, supra, States have argued that the federal bankruptcy courts have no jurisdiction over States and state claims. With varying degrees of success, States have raised sovereign immunity defenses to the jurisdiction of the bankruptcy courts determinations of dischargeability of claims of the States; recovery of improper transfers to a state, injunctive relief orders restoring a debtor’s state rights; and claimed violations by the sovereign of the automatic stay, primarily by the IRS.
In Seminole Tribe, the Supreme Court, in dictum, stated that “Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction.” 517 U.S. at 72, 116 S.Ct. 1114. Many courts have used this sentence to imply that no Article I power can override sovereign immunity. After Seminole Tribe, the Supreme Court continued to restate that Congress cannot abrogate state sovereignty based on the specific Article I powers invoked in those cases. In re Hood, 262 B.R. 412, 426 (6th Cir. BAP 2001) citing *605Board of Trustees of the Univ. of Ala. v. Garrett, 531 U.S. 356, 121 S.Ct. 955, 148 L.Ed.2d 866 (2001); Kimel v. Florida Bd. of Regents, supra; Alden v. Maine, supra; Florida Prepaid Postsecondary Educ. Exp. Bd. v. College Sav. Bank (II), 527 U.S. 627, 119 S.Ct. 2199, 144 L.Ed.2d 575 (1999)(parenthetical indications omitted). However, the majority opinion twice acknowledged that States enjoy immunity except where there is a “surrender of this immunity in the plan of the convention.” Seminole Tribe, 517 U.S. at 68 & n. 13, 116 S.Ct. 1114. Again, in Alden, the Supreme Court recognized that state sovereign immunity is not available to States “where there has been ‘a surrender of this immunity in the plan of the convention.’ ” 527 U.S. at 716, 119 S.Ct. 2240 (quoting The Federalist, No. 81).
States also rely upon the Eleventh Amendment as authority for the sovereign immunity defense. The Eleventh Amendment provides that “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 was patterned after Justice Iredell’s dissent in Chisholm v. Georgia, 2 U.S. 419, 2 Dall. 419, 1 L.Ed. 440 (1793), after the Supreme Court held that the Constitution permitted a citizen of one state to sue another state in federal court. As articulated by the Supreme Court, the Eleventh Amendment does not confer state sovereign immunity, but merely restored it to the extent retained by the States under the original Constitution. Alden, 527 U.S. at 727, 119 S.Ct. 2240 (“The Court has been consistent in interpreting the adoption of the Eleventh Amendment as conclusive evidence ... that the view expressed by ... Justice Iredell in his dissenting opinion in Chisholm reflect[s] the original understanding of the Constitution.”). The Eleventh Amendment does provide limitations upon the courts. See In re NVR, LP, 189 F.3d 442 (4th Cir.1999)(holding that the Eleventh Amendment does bar any proceeding aimed at an affirmative recovery of funds from a state).
This Court is satisfied that the defense of sovereign immunity is not available to either the DOT or DOT Secretary or the Eleventh Amendment protection for the following reasons. First, the claims asserted by the Debtor against the Defendants are not a suit to collect money from the State nor does it involve state law, which requires the construction of this Court of state law. It is clear that what the relief really sought by the Debtor is nothing more and nothing less than a declaration of this Court that 11 U.S.C. § 108(a)(2) did extend the applicable statute of limitations period as set forth in Florida Statutes § 337.19.
Even assuming without conceding that a suit filed in this Court by the Debt- or indirectly implicates a State’s sovereign immunity, the underlying transaction is based on an express contract the Debtor had with the DOT. It is well established that the defense of sovereign immunity does not protect a state agency from an action arising out of a breach of an express or implied covenant or condition of an express written contract entered into with statutory authority. Champagne-Webber, Inc. v. City of Ft. Lauderdale, 519 So.2d 696 (Fla. 4th DCA 1988). See also Pan-Am Tobacco Corp. v. Department of Corrections, 471 So.2d 4 (Fla.1984)(Department of Corrections could not invoke its sovereign immunity as a bar to an action on breach of contract defense).
This leaves for consideration the Motion to Dismiss as it relates to the claim set forth in Count III of the Amended *606Complaint. In this Count, the Debtor seeks declaratory relief in order to obtain a determination by this Court that 11 U.S.C. § 108(a)(2) did toll the running of the statute of limitations when the Debtor filed its Petition for Relief under Chapter 11, thus the defense of the statute would not bar any suit yet to be filed by the Debtor to collect the final balance allegedly due on its contract with the DOT.
What is involved here is a suit to obtain a determination by this Court of the extent and the scope of 11 U.S.C. § 108(a)(2), a specific provision of the Bankruptcy Code. There are sufficient allegations in this Count to establish that there is a case or controversy which involves the interpretation of federal law, a matter which is clearly within the competence and jurisdiction of this Court. The resolution of this issue is obviously an integral part of a contract dispute with an agency of the State of Florida and its Secretary. It would be clearly inappropriate to have this issue be resolved in a non-bankruptcy forum. This Court is satisfied that, in this narrow context, the defense of sovereign immunity is insufficient to warrant the dismissal of the claim in Count III.
One last comment, both Defendants also seek, in the alternative, an abstention by this Court of the claims set forth in the three counts of the Amended Complaint. The Motion does not spell out the basis for this relief. However, it is evident that neither 28 U.S.C. § 1334(c)(1) nor (c)(2) are applicable simply because the Adversary Proceeding pending before this Court is not a civil proceeding based on state law, but based on 11 U.S.C. § 108(a)(2) (emphasis added). Concerning the contention that it is appropriate to abstain for the sake of judicial economy, this Court is equally satisfied that there is no basis which would warrant an abstention.
Finally, the Defendants request a stay of this case pending the resolution of Raygor. In Raygor, the U.S. Supreme Court affirmed the Minnesota State Supreme Court’s decision that held unconstitutional 28 U.S.C. § 1367(d), which tolls the limitations period for supplemental claims while they are pending in federal court and thirty days after they are dismissed, when applied to claims against nonconsenting state defendants. Raygor is distinguishable from the instant case inasmuch as 28 U.S.C. § 1367 is the federal supplemental jurisdiction statute, which allows state law claims to be heard in federal court as supplemental claims. Section 108 of the Code is afforded to debtors who file Petitions for Relief under Chapter 7, 13, or 11. It does not toll the limitations period for supplemental claims, federal or otherwise, while they are pending in federal court, it tolls the limitations period for all causes of actions not yet filed. Moreover, as this Court has determined that the DOT and DOT Secretary cannot use the defense of sovereign immunity as to Count III, Raygor is nondispositive to the case at hand.
Based on the foregoing, it is
ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss be, and the same is hereby, granted as to Counts I and II of the Amended Complaint without prejudice and all claims asserted against the DOT are dismissed. It is further
ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss or abstain the claim in Count III be, and the same is hereby, denied. The DOT Secretary shall file an answer to Count III of the Amended Complaint within 20 days from the date of the entry of this Order. It is further
ORDERED, ADJUDGED AND DECREED that if an answer is filed, the *607matter shall be scheduled forthwith for a pre-trial conference. It is further
ORDERED, ADJUDGED AND DECREED that in the event the DOT Secretary fails to file an answer to the claim set forth in Count III of the Amended Complaint within the time fixed by this Court, the Debtor may proceed to seek the entry of default and a judgment by default against the DOT Secretary. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493382/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Bankruptcy Judge.
The matter under consideration in this yet-to-be confirmed Chapter 11 case is an eight count Complaint filed by Mid-Continent Electric, Inc. (Debtor) who named Fifth Third Bank of Florida (Bank) and James E. Kingsbury (Kingsbury) as defendants. Although, as noted, there are eight counts in this Complaint, the immediate matter under consideration is limited to the claim in Count I, which is a claim by the Debtor that the pledge by the Debtor of its assets to secure the indebtedness of Douglas McIntyre (McIntyre) was fraudulent, thus avoidable, pursuant to 11 U.S.C. § 544(b) and Fla. Stat. § 726.106(1).
The claims in Count III, IV, VII, and VIII are asserted against Kingsbury; however, by compromise, the claims *608against Kingsbury have been settled. Accordingly, by stipulation of the parties, the present matter is limited to consider the fraudulent claims of the Debtor against the Bank and specifically, whether or not as a result of the pledge of all of the assets of the Debtor to secure a loan of its principal, McIntyre, and not the debt of the Debtor, in a leverage buy-out (LBO), rendered the Debtor insolvent.
In Count II, the Debtor seeks the identical relief under a different theory, that is based on Fla. Stat. § 726.105, and seeks a termination of its guaranty of the note and a declaration that the security interest claimed by the Bank is invalid and unenforceable.
In Count Y, the relief sought is a subordination of the Bank’s claim pursuant to Section 510(c) of the Code. And, in Count VII of its Complaint, the Debtor seeks valuation of collateral securing the claims of the Bank in the event it is found to be valid and enforceable for the purpose of determining the nature and the allowable secured claim of the Bank.
It was agreed by the parties that the claims relating to subordination of the Bank’s claim shall be deferred pending the resolution of the fraudulent transfer claims asserted by the Debtor. Thus, this Court will consider only whether or not the transfer involved was fraudulent pursuant to Fla. Stat. § 726.106(a) and pursuant to Section 544(b) of the Code.
The facts as relevant to the narrow issue controlling this controversy which is whether or not the Debtor became insolvent as a result of the transfer under consideration are as follows.
At the time relevant, the Debtor was and still is engaged in the business of an outdoor electrical contractor, installing traffic signals and highway lighting for governmental entities and private customers. Prior to 1985, Kingsbury was the 100 percent stockholder and the principal of the Debtor. In 1985, the Debtor employed McIntyre as an estimator for the business. On or about June 21, 1991, McIntyre and Kingsbury entered into an agreement entitled “Agreement Mid-Continent Electric, Inc.” (Agreement) (Def.’s Ex. 1H). Pursuant to the terms of the Agreement, Kings-bury agreed to have the Debtor issue to McIntyre one share of its stock and agreed to have the Debtor issue one additional share for the ten years thereafter. In total, McIntyre would own 11 shares of the Debtor and Kingsbury would own 10 shares of the Debtor. At that time, McIntyre would be the majority shareholder of the Debtor. However, instead of the ten years time frame as set forth in the Agreement, the process was accelerated and by 1993, McIntyre became a 50 percent stockholder of the Debtor, each owning 10 shares each of the Debtor’s stock.
Kingsbury, because of his poor health and his involvement with another business, indicated that he wanted to sell his interest in the Debtor to McIntyre. In 1995 and 1996, Kingsbury’s health deteriorated and it was evident that he would not be able to carry on his responsibilities with the Debtor. Initially, Kingsbury asked for $2 million for his 50 percent interest in the Debtor. McIntyre attempted to obtain financing and approached Northern Trust Bank and asked how much money he could borrow to consummate this transaction. Northern Trust Bank indicated that the maximum amount would be $800,000. Kingsbury declined to accept $800,000 for his interest and indicated that he would not take anything less than the initial offer of $2 million.
At that time, the Debtor banked with the Bank. McIntyre approached the Bank and inquired about financing his planned purchase of the stock from Kingsbury. *609The Bank indicated that it was willing to loan $1.6 million but Kingsbury declined this offer again, indicating that he must have the full $2 million. Ultimately, the parties agreed that, in addition to the loan from the Bank of $1.6 million, Kingsbury would take back a note representing a separate obligation for $400,000, to make up the difference.
It is without dispute that McIntyre could not have purchased the stock from Kingsbury with his own funds or with his own assets. It is equally clear that he had no resources whatsoever to repay the $2 million obligation personally, and this debt could only be serviced with the revenues generated by the Debtor. The obligation owed to the Bank represented by the note required monthly payments of $20,000. In addition, the Kingsbury note required monthly payments of $4,644.34, or a total of approximately $25,000 a month in servicing the debt as a result of the LBO.
The closing took place on June 25, 1998, for the purchase by McIntyre of Kings-bury’s 50 percent interest in the Debtor for a total of $2 million. This transaction was funded by a promissory note (Note) payable to the Bank by McIntyre and his wife Karen McIntyre in the amount of $1.6 million and a security agreement (Security Agreement) executed by the Debtor (Def.’s Ex. IB & 1C). The loan was guaranteed by the Debtor as a result of the Debtor pledging all of its tangible and intangible assets as collateral for this obligation. The proceeds of the loan, in the amount of $1.6 million, were paid to Kingsbury as part of the purchase price.
In addition, McIntyre executed and delivered to Kingsbury a promissory note (Kingsbury Note) in the amount of $400,000 (Def.’s Ex. ID), representing the balance of the purchase price of the stock. This obligation was secured by specific personal property owned by the Debtor, but junior and inferior to the security interest granted by the Debtor to the Bank on the identical collateral. This was documented by the execution of a security agreement, executed by the Debtor and McIntyre in favor of Kingsbury (Def.’s Ex. ID). As part of the transaction, Kings-bury entered into a Non-Competition Agreement and Consultation Agreement (Def.’s Ex. II & 1J). Pursuant to these Agreements, Kingsbury agreed not to compete with the Debtor, and further agreed to permit the Debtor to use his primary qualifier license as an electrical contractor for a three-year period of time.
On August 17, 2000, the Debtor filed its Petition for Relief under Chapter 11 in this Court. The Complaint against the Bank and Kingsbury was filed on May 14, 2001. In due course, both Defendants were served and filed their Answers, which basically consisted of some general admissions and some denials. Both the Debtor and the Bank have stipulated that all operating elements for fraudulent transfer claim under Section 726.106(1) of the Florida Statutes are without dispute and were established with the exception of whether or not, as a result of the pledging of all of the assets of the Debtor to secure the debt of McIntyre in order to enable him to purchase the stock interest of Kingsbury, it rendered the Debtor insolvent.
There is no contention and apparently there is no evidence that the Debtor was unable to pay its debts as they became due prior to this transaction and possibly immediately thereafter. It is also without dispute that the Debtor was not insolvent prior to this transaction. It is apparent from the foregoing that the issue of the resulting insolvency from this transaction described above is the crux of this controversy.
Since the burden is on the Debtor, it is clear that if the evidence presented is in *610equilibrium, that is equally supports the claim of the resulting insolvency and the claim of the opposite, the Debtor has failed to carry the burden with the requisite degree of proof, and its claim must fail.
The following documents admitted into evidence that are relevant to the issue under consideration are as follows. First, there is an audited Financial Statement (Def.’s Ex IF), purporting to reflect the financial conditions of the Debtor as of April 30, 1998, submitted on August 1998, about two months after the closing of the LBO. This audit was prepared by James M. Gualario (Gualario), a Certified Public Accountant.
Second, there is a Preliminary Draft of an Audit Report of the Debtor for the fiscal year ending April 30, 1999, prepared by Nathan A. Phillips. (Phillips), a Certified Public Accountant of the accounting firm of Wentzel, Berry, Wentzel & Phillips, P.A. (Joint Ex. 2). According to Phillips, due to the internal control structure and the Debtor’s operation, the reportable conditions, under the standards established by American Institute of Certified Public Accountants, contained significant deficiencies, and therefore, due to his inability to verify several items, notably, the status of the accounts receivable, he disclaimed the authenticity of the data included in the report. Phillips was unwilling to certify the report as an audited Financial Statement.
Third, is another unaudited Financial Statement prepared by Joel S. Miller (Miller), CPA of the accounting firm of Miller & Westerfer, P.A. (Pl.’s Ex. 1). This report is also based on the internal records of the Debtor. The final “Audited Financial Statement” of the Debtor submitted into evidence is a report prepared by L. Gail Markham, CPA (Markham) (Def.’s Ex. 1).
According to the Audited Financial Statement prepared by Gualario, the financial condition of the Debtor as of April 30, 1998, indicates that the total assets of the Debtor was $4,161,961, and liabilities $2,817,761, or stockholder’s net equity of $1,344,200. The record is unrebutted that this audited financial statement was seriously deficient in many respects. There is a total lack of evidence of any pre-audit and post-audit analytical procedures conducted, as required by SAS # 56. There is no evidence that the appropriate audit programs were used to conduct and oversee the audit process. Moreover, there is no evidence from the statement indicating that procedures were performed to evaluate the organization’s ability to continue as a going concern. There is no evidence that the auditing firm complied with SAS # 55, which requires the auditing firm to obtain an understanding of the organization’s internal control structure. The record reflects that there was insufficient field work performed. There was no evidence to establish that the auditing firm complied with SAS # 82, which requires an auditing firm to assess potential fraud factors.
Although there were confirmation letters sent and received regarding the accounts receivable of the Debtor, there was no evidence that the information was agreed to with respect to the accounts receivable aging amounts. And, most importantly, the auditing costs and estimated earnings in excess of billings, which is absolutely essential in construction accounting, was lacking. For the reasons stated, this Court is satisfied that the audited financial statement prepared by Gua-lario is totally unreliable and therefore, this Court will not consider any of the data contained in the first audited financial statement.
*611The same statements are also applicable, but for different reasons to the draft audited financial statement (Joint Ex. 2) prepared by the audit firm of Wentzel, Berry, Wentzel & Phillips, P.A. The auditing firm expressly disclaimed any ability to express any opinion because the scope of their work was not sufficient to enable the firm to express any opinion on the financial statements concerning the Debtor’s condition as of April 30, 1999. Thus, the battle of experts is between the testimony and report of Miller, the witness for the Debt- or and Markham, the expert presented by the Bank.
The report prepared by Miller was prepared from the in-house records of the Debtor. Miller prepared an internal balance sheet reflecting the Debtor’s condition as of June 30, 1998 or five days after the LBO, which according to Miller reflects total assets of $5,032,421 versus total liabilities of $5,428,241, or a negative stockholder’s equity of $395,820 (PL’s Ex. 1-1).
Miller made a number of adjustments to the balance sheet. He wrote off the accounts receivable as bad debts instead of adjusting for an allowance for the balance as doubtful accounts. He created a write-off of approximately $192,000. It might appear that that was a double write-off, an initial bad debt write-off of $191,991 and the doubtful account write-of of $72,250. However, it is equally possible that the last amount is in addition to the original write-off, and therefore, the total bad debt write-off of $192,000 was the correct number. Moreover, Miller testified that the initial $119,901 was a write-off of past accounts receivable and the $72,250 was an allowance for existing accounts receivable that would not be collected. Miller also adjusted the cost and estimated earnings, which was in excess of the billings by $102,000. His further adjustments involved liabilities for billings in excess of costs and estimated earnings by $596,212. He also included expense of income taxes as a liability in the amount of $119,810. Miller included of course, in the liability column of the debt created by the LBO, the sum of $2,000,000 (representing the $1.6 million loan from the Bank and the $400,000 loan from Kingsbury).
It should be noted at the outset that according to the testimony of Markham, the report prepared by Miller was unreliable and should not be accepted since the record reveals that the Debtor withheld billings in order to avoid paying taxes by the end of the fiscal year. As a result, there were accumulated and excessive billings after the end of the fiscal year and at the beginning of the new fiscal year. While the excessive billing might have represented a false picture of the income at any given time, it has not great significance for the total picture of insolvency.
It is clear that the report of Miller also leaves something to be desired, as it is not a certified audit report and was prepared from in-house records of the Debtor, the same records, at least in part that might have been used by Phillips, who was unable to warrant the correctness of the data and disclaimed the validity of his report, which was ultimately not issued. Be as it may however, as it will appear, it is the best available audit in this record and more reliable than the report prepared by Markham for the following reasons.
According to Markham, the Debtor was solvent and had a net equity of $901,392. She also indicates that the Debtor received a reasonable equivalent value for pledging all of the company’s assets to the Bank. First, Markham allocated $1.5 million to the value of the Non-Compete and Consultation Agreements, which were signed by Kingsbury, who was the seller of the stock. This record is devoid of any evidence to indicate any rational basis to quantify any *612value for these Agreements, and as a matter of fact, there is nothing in this record to indicate that Kingsbury ever gave any consultation to run the business after the LBO. Markham’s valuation of the assets was based on book value rather than fair market value. Accordingly to her testimony, book value equals fair market value, which of course disregards depreciation. Moreover, as a general proposition, book values seldom equals fair market values. For instance, there was actually an appraisal available of the assets of the Debt- or (Joint Ex. 5 and 7), but she completely ignored this appraisal, and to the contrary relied on the book value of the assets involved. She made no adjustment whatsoever to the book values. And, she did not make any adjustment to the financial statement of June 30, 1998, when she recognized a $1,900,000 profit, but did not recognize the tax liability attached to making that profit. Most telling, her explanation for failing to make adjustments was that she decided not to make any adjustments because there were too many errors in the financial statements as a result of the poor quality of the records. Therefore, she expressed the view that it was better to leave everything alone without the adjustments, which would be more credible than adjusting some accounts and not others. For example, the potential tax liability appeared to be $379,654, which she did not recognize as a liability.
Markham recognized in her report as an asset the pre-paid income tax of $120,000. This pre-paid income tax was related to the taxes due in the prior tax year, i.e., the one ending April 30, 1998 and notwithstanding, she kept it as an asset as to her report reflecting the Debtor’s condition as of June 30, 1998. Markham made no adjustment whatsoever for work-in-progress, indicating a profit of over a million, because she had no adequate records to make the adjustment.
A great deal of time was spent on the alleged income position of the Debtor even though it is clear that the income during any given period has no relevance to the balance sheet test and only indirectly has any bearing on the values of the accounts receivable as an asset. It is especially true in a construction business, and it is apparently common in this practice, to bill out an invoice to the owner for work yet to be performed and not really earned. This, of course, distorts the picture because the expenses that must be incurred to perform that segment of the work are not reflected on the income statement and might indirectly impact the viability of the account and the value of the receivable involved.
It appears that she, just like Gualario, whom she criticized, failed to make any analysis of the accounts receivable and she also criticized Miller’s construction analysis, but she prepared none herself. She ignored the potential liability of the Debt- or’s workmen’s compensation claim of over $100,000 and said that she was not aware of such claim. She did not audit any of the receivables and accepted on face value, 100% of the face value of all accounts receivables, whether or not they were actually collectable or not.
In sum, based on this highly unsatisfactory record, and considering all of the data available for this Court to determine, this Court is satisfied with the requisite degree of proof, that the Debtor became insolvent to the extent of $395,820 as a result of the LBO.
In Count I, the Debtor requested the following relief: (1) a finding that the Debtor’s pledge of its assets as collateral pursuant to the Security Agreement and guaranty to the Bank were fraudulent transfers pursuant to Fla. Stat. § 726.106(1); (2) that the Debtor may avoid said transfers pursuant to 11 U.S.C. § 544(b); (3) that the guaranty be termi*613nated; (4) that the Bank’s security interest in the Debtor’s collateral be declared invalid; and (5) that a money judgment equal to all sums paid under the Note be entered in favor of the Debtor and against the Bank.
In light of the foregoing, this Court finds that as a result of pledging of all of the assets of the Debtor to secure the debt of its principal, McIntyre, in the LBO, the Debtor was rendered insolvent.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Security Agreement executed by the Debtor pledging the assets of the Debtor as collateral to the loan of McIntyre to the Bank be, and the same is hereby, deemed invalid and unenforceable pursuant to 11 U.S.C. § 544(b) and Fla. Stat. § 726.106. It is further
ORDERED, ADJUDGED AND DECREED that the Guaranty executed by the Debtor be, and the same shall hereby, continue to be valid and enforceable. It is further
ORDERED, ADJUDGED AND DECREED that a pre-trial conference shall be held on May 23, 2002, beginning at 3:00 pm. at the United States Bankruptcy Courthouse, Fort Myers, Federal Building and Federal Courthouse, Room 4-117, Courtroom D, 2110 First Street, Fort Myers, Florida, to consider the issue of whether or not the Debtor is entitled to a money judgment in favor of the Debtor and against the Bank in the amount equal to the payments made to the Bank as a result of the LBO. It is further
ORDERED, ADJUDGED AND DECREED that 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/8493383/ | ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Bankruptcy Judge.
On October 21, 1998, Scott Wetzel Services, Inc. (Debtor) filed its Petition for Relief under Chapter 11 of the Bankruptcy Code. Its attempt to reorganize came to an abrupt halt on December 28, 1998 when the Chapter 11 case was converted to a Chapter 7 liquidation case. In due course, Larry S. Hyman was appointed and placed in charge of the administration of the Chapter 7 estate of the Debtor as trustee (Trustee).
The present matter before this Court is Adversary Proceeding No. 00-616, commenced by the Trustee who filed a Complaint consisting of four counts. The claim in Count I is based on the allegation by the Trustee that within the 90 days preceding of the commencement of the Chapter 11 case, on September 23, 1998, the Debtor, while insolvent, transferred the sum of $525,000 to Legion Insurance Company (Legion Insurance) on account of an antecedent debt it owed to Legion Insurance. It is further contended by the Trustee that as a result of the transfer, Legion Insurance, if permitted to retain the funds, would recover more on its claim that the other unsecured creditors will receive in this Chapter 7 liquidation case. According to the Trustee, the transfer was a preferential transfer voidable by the Trustee pursuant to 11 U.S.C. § 547(b)(4)(A).
The claim in Count II of the Complaint is also an alleged voidable preference based on Section 547(b)(4)(B) of the Code. In support of the claim in Count II, the Trustee alleges that at the time relevant, Legion Insurance was an “insider” of the Debtor, thus transfers outside of the 90 days and during the 1 year preceding the commencement of the case are also recoverable as preferential transfers.
In Count III of the Complaint, the Trustee seeks to avoid and recover actual fraudulent transfers pursuant to Section 548(a)(1)(A) of the Code. The Trustee seeks to recover all transfers, including the $525,000 transfer and the six transfers that totaled an aggregate amount of $4,225,000, during the relevant time.
In Count IV of the Complaint, the Trustee seeks to avoid and recover constructive fraudulent transfers pursuant to Section 548(a)(1)(B) of the Code. The Trustee seeks to recover all transfers, including the $525,000 transfer and the six transfers that totaled an aggregate amount of $4,225,000, during the relevant time.
The immediate matter under consideration are two Motions for Summary Judgment, one filed by the Trustee and the other by Legion Insurance. The Trustee’s Motion for Summary Judgment is directed to Count I of the Complaint only, whereas Legion Insurance’s Motion for Summary Judgment is directed to all Counts of the Complaint. This opinion only deals with the viability vel non of the claim of Count I. It is the contention of both parties that there are no genuine issues of material facts and each is entitled to a judgment in their respective favor as a matter of law.
The facts relevant to the claim set forth in Count I, as appear from the record, are indeed without substantial dispute and can be summarized as follows. At the time relevant, the Debtor had been engaged in the business of administering claims on behalf of several insurance com*615panies, including Legion Insurance. Legion Insurance is in the business of providing workmen’s compensation insurance, among other types of insurance. Legion Insurance entered into several contracts with the Debtor under which the Debtor was to serve as a third party administrator of claims filed by the insureds of Legion Insurance. A contract entered into on November 13, 1991, among the Debtor, Legion Insurance, and Visiting Nurse’s Association of Texas, Inc. is typical and similar to other agreements between the Debtor and Legion Insurance. Although it is claimed that there were instances were some entities’ clients of the Debtor were self-insured and not insured by Legion Insurance, there is nothing in the record to establish in fact that this assumption is correct. Be as it may, it appears that in states where the entity elected to be self-insured, the entity was required to procure back-up insurance to assure that all proper workmen’s compensation claims were paid and Legion Insurance may have been involved in such instances.
The duties of the Debtor under a typical contract is set forth in detail in Section 111(3.1). Without setting forth the specifics, it shall suffice to state that it was the Debtor’s obligation to deal with all claims made by the insureds of Legion Insurance; to maintain the records of all claims made by the insureds; to determine the proper benefits to be paid; to make timely payments of the benefits due to an insured; and to assist counsel in instances were the claims were disputed.
The duties of Legion Insurance is set forth in Section V(5.1) of the contract. It was the sole responsibility of Legion Insurance to provide all funds to the Debtor for the payment of the claims and the allocated loss expenses. Legion Insurance agreed to maintain a claim fund account for the purpose of making payments to the Debtor for claims and expenses incurred on behalf of Legion Insurance. Under Section VII(7.1), the Debtor had the authority and control in all matters pertaining to the handling of claims under the agreement except of the aggregate expenditures in excess of $10,000,000.
In order to implement the program, Legion Insurance maintained bank accounts in Milwaukee, Wisconsin (Milwaukee Accounts) and deposited the funds which were necessary to pay the claims made by Legion Insurance’s insured and the expenses. The fees of the Debtor were paid by the insureds. It is without dispute that the only entity who had authorization to make withdraws and/or transfers was the Debtor.
Under their arrangement, the Debtor established and maintained the “Scott Wetzel Services, Inc., ITF Legion Insurance Master Account” (account no. 1408822418) at Bank of America, formerly Barnett Bank (Bank of America), which was also referred to by the parties as an “escrow account” (Legion Master Account). The Legion Master Account was used to deposit all funds received from the Milwaukee Accounts. Then, the Debtor would transfer the funds to individual trust accounts opened and maintained by the Debtor for each insured of Legion Insurance serviced by the Debtor. The Debtor opened and maintained approximately 80 separate trust accounts, also referred to as zero accounts (Zero Accounts). The Zero Accounts were cleared every day when the particular claim was paid.
Under their arrangement as described by a typical contract, the Debtor had the right to debit weekly, through the automated clearinghouse (ACH), funds which was basically a wire transfer from the Milwaukee Accounts to the Legion Master Account set up by the Debtor. The Le*616gion Master Account was solely controlled by the Debtor and all authorized signatories were the employees of the Debtor. Legion Insurance was not designated as a signatory. The claims of the insureds of Legion Insurance were paid by cheek drawn on the Zero Accounts from monies transferred from the Legion Master Account in the amount necessary to pay the claim. The transfer of the funds from Milwaukee was determined by the history of the payment of the claims of the insured.
In early February 1998, Legion Insurance informed the Debtor that the ACH withdrawals on the Milwaukee Accounts were in excess of the claims paid by the Debtor. In essence, there was an overage of monies from the Milwaukee Accounts to the Legion Master Account. Legion Insurance and the Debtor agreed that the Debtor would maintain a lower escrow balance and pay back the overage to Legion Insurance. On February 3, 1998, the Debtor transferred $3,904,913.37 from the Legion Master Account to Legion Insurance. And, on February 24, 1998, the Debtor transferred an additional $1,104,622 from the Legion Master Account to Legion Insurance. It is without dispute that these amounts reduced the “obligation” due to Legion Insurance as a result of the overage. The Debtor and Legion Insurance continued to do business after February 1998.
By September of 1998, it was apparent that the Debtor was in financial trouble as the Legion Master Account was constantly overdrawn. It is without dispute that by September 8, 1998, the Master Account was in a serious overdrawn position, indicating an overdraft of $802,084.33. This was due to the fact that Bank of America honored checks drawn by the Debtor on the Legion Master Account when there were not sufficient funds in the account to cover the checks drawn and there were several claims which had to be paid to the insureds by the Debtor on behalf of Legion Insurance. Because of the status of the Legion Master Account, Legion Insurance cancelled the Debtor’s authority to obtain any more funds through ACH from the Milwaukee Accounts.
Because there were unsatisfied outstanding claims that had to be satisfied by the Debtor, it is without dispute that on September 24, 1998, the Debtor withdrew from its operating account the sum of $525,000 and deposited the same in the Legion Master Account. The funds transferred were originally funds of the Debtor maintained with Smith-Barney brokerage house. With these funds, the Debtor paid the claims of the insureds of Legion Insurance including National Hospice (NHOIA), Media Services, Belmont Constructor, Herman Hospital, Patterson Smith Hospitality, and other insureds totaling in excess of the $525,000 deposited by the Debtor in the Legion Master Account. See Affidavit of Lillian Conrad, and Exhibits A, B, C, D, E, F & G. Surprisingly, however, Bank of America credited the Legion Master Account to the then outstanding overdraft balance on September 10, 1998, of $802,084.33 thereby reducing the overdraft balance to $277,084.33. Basically these are the relevant undisputed facts based on which both parties contend that they are entitled to a judgment on Count I as a matter of law.
It is the contention of the Trustee that the transfer of $525,000 were funds of the Debtor used to pay claims pursuant to the agreement on behalf of Legion Insurance to whom the Debtor was indebted in the amount of $6,023,926, according to the proof of claim filed by Legion Insurance on April 22, 1999. According to the Trustee, at the time the Debtor deposited the $525,000 into the Legion Master Account: *617(1) the Debtor was insolvent; (2) it was a payment on account of an antecedent debt inasmuch as the Debtor was indebted to Legion Insurance; (3) it is not in serious dispute that if Legion Insurance is permitted to retain the benefits of the payment made by the Debtor on behalf of Legion Insurance, Legion Insurance’s liability to the insureds would have been reduced by $525,000; and (4) the payment was made within the 90 days preceding the filing of the Debtor’s bankruptcy case. Thus, it is the Trustee’s contention that the payment can be recovered as a voidable preference pursuant to Section 547(b)(4)(A) of the Code.
Based on the same facts, Legion Insurance contends that the transferred funds by the Debtor of $525,000 to the Legion Master Account was a payment to Bank of America in order to reduce the overdraft caused by the Debtor which was the debt owed by the Debtor to Bank of America, and was not a payment made on behalf of Legion Insurance. Thus, if anybody received a voidable preference, it was Bank of America and not Legion Insurance. In support of this proposition, Legion Insurance points out that Florida Statutes § 674.104(l)(e) provides that the holder of an account, if the account is overdrawn, is indebted to the bank. However, Section 674.104(l)(e) is the section that defines “customer” as “a person having an account with a bank or for whom a bank has agreed to collect items, including a bank that maintains an account at another bank.”
The common feature of both of the conflicting contentions of the Trustee and Legion Insurance are that the controlling facts are without dispute. It must be pointed out at the outset that in an action to recover preferential transfer pursuant to Section 547(b)(4)(A), the burden of proof is on the Trustee, who must establish by the preponderance of the evidence that he is entitled to a judgment as a matter of law. Applying this standard, it is evident that if the evidence is in equilibrium that is, equally supports the position of the plaintiff and the defendant, the plaintiff has failed to establish with the requisite degree of proof, thus the plaintiff is not entitled to the relief sought.
In the present instance, there is evidence that the $525,000 transferred by the Debtor from its operating account of its own funds to the Legion Master Account was used to pay claims of Legion Insurance’s insured, thus the payment was for the benefit of Legion Insurance. As noted earlier, in September of 1998 when Legion Insurance froze the Milwaukee Accounts, there were outstanding claims of insureds by Legion Insurance that Legion Insurance had the contractual obligation to pay. It is without dispute that the Debtor in fact paid these claims and thus relieved Legion Insurance of the liability of those claims. While it is true that this transaction does not fit into the orthodox view of a garden variety voidable preference, in that the transfer of funds by the Debtor was not to Legion Insurance directly, whom the Debtor was indebted, but to Legion Insurance’s insureds, which certainly conferred a quantifiable benefit to Legion Insurance, it nevertheless satisfies a liability which was not the Debtor’s liability but that of Legion Insurance.
The attachments to Legion Insurance’s proof' of claim indicate that Legion Insurance derived the amount owed from the Debtor to Legion Insurance by calculating the amounts “wrongfully” transferred out of the Legion Master Account totaling $11,738,614.10 less amounts transferred to or for the benefit of Legion Insurance, including the $525,000 payment in dispute, leaving a total of $7,328,614.10 owed to Legion Insurance. It is evidence from the *618foregoing that Legion Insurance conceded that the payments to its insureds in the amount of $525,000 conferred a quantifiable benefit to Legion Insurance. There is no dispute that the $525,000 was made to pay claims to the insureds of Legion Insurance.
The documents attached to the Affidavit of Ms. Conrad, indicate that more than $525,000 worth of claims were satisfied to insureds of Legion Insurance following the transfer of the $525,000 into the Legion Master Account from the Debtor.
The Affidavits filed by Legion Insurance do not directly dispute Ms. Conrad’s Affidavit. On the contrary, all Affidavits recite the relationship between the Debtor and Legion Insurance, indicate that Legion Insurance was not the customer of Bank of America and merely state that the Legion Master Account was in an overdrawn state. See Affidavit of Gregg C. Frederick, Senior Vice-President, Contract Compliance of Legion Insurance, paragraph 6: Legion Insurance did not have signatory authority with respect to Trust Account ... Debtor had control and dominion over Trust Account. And paragraph 7: Legion Insurance was npt a customer of the bank.
The Affidavit of Stanley A. Murphy, Director in the Financial & Claims Division of Peterson Consulting’s Tampa office, is the closest affidavit to directly contravene the Affidavit of Ms. Conrad. Mr. Murphy is a Certified Public Accountant who was hired by Legion Insurance. In paragraph 8 of his Affidavit he states “the 525 transfer was never transferred to an external Legion account, only transferred from one SWS account to another.” And in paragraph 11 he states:
Based on my analysis, in my opinion ...
G. The September 24, 1998 fund transfer by SWS to the Legion Master Account in the amount of $525,000 was not an avoidable, preferential transfer as the funds were under the control of SWS at all times in both the operating and Legion Master Account, and were never transferred externally to Legion...
I. Maintaining negative bank balances was a common business practice of SWS.
It is evident that the statements in the Affidavit of Mr. Murphy are not fact statements based on personal knowledge but are legal conclusions, which as a matter of course, this Court should disregard and cannot consider. This Court rejects the argument advanced by Legion Insurance that the Legion Master Account was “just another” account of the Debtor. The Legion Master Account was specifically opened “in trust for” Legion Insurance and it is without dispute that the Debtor had a separate operating account.
With respect to the elements necessary to satisfy under 11 U.S.C. § 547, the parties agreed that the only issue was regarding the satisfaction of 11 U.S.C. § 547(b)(1) “to or for the benefit of a creditor,” and all other elements had been satisfied by the Trustee. This Court is satisfied that the evidence supports the Trustee’s contention that the $525,000 was transferred from the Debtor to or for the benefit of Legion Insurance. Therefore, the Trustee has met its burden on summary judgment and that the transfer of $525,000 is voidable as a preferential transfer pursuant to 11 U.S.C. § 547(b)(4)(A).
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Trustee’s Motion for Partial Summary Judgment be, and the same is hereby, granted. A separate partial final judgment shall be entered in favor of the Trustee and against Legion *619Insurance consistent with this Order. It is further
ORDERED, ADJUDGED AND DECREED that the Defendant’s Legion Insurance Company’s Motion for Summary Judgment be, and the same is hereby, denied as to Count I only. It is further
ORDERED, ADJUDGED AND DECREED that a separate Partial Final Judgment shall be entered in accordance to this opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493385/ | MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS MOTION FOR SUMMARY JUDGMENT AND GRANTING TRUSTEE’S CROSS-MOTION FOR SUMMARY JUDGMENT ON ISSUE OF TRANSFER DATE
PAUL G. HYMAN, Jr., Bankruptcy Judge.
THIS MATTER came before the Court on November 30, 2001 upon Mark T. *637Pulte’s (the “Defendant”) Motion for Summary Judgment against Deborah Menotte (the “Trustee”). On January 9, 2002, the Trustee filed a Response in Opposition to Defendant’s Motion for Summary Judgment (the “Response”) and a Cross-Motion for Summary Judgment on Limited Issue of Transfer Date (the “Cross-Motion”). On January 28, 2002, the Defendant filed a Reply to Plaintiffs Response to Motion for Summary Judgment and Plaintiffs Motion for Summary Judgment on Issue of Transfer Date and Incorporated Memorandum of Law (the “Reply”). On February 8, 2002, the Trustee filed a Reply to Defendant’s Response to Plaintiffs Cross-Motion for Summary Judgment on Limited Issue of Transfer Date (the “Trustee’s Reply Brief’). On February 15, 2002 the Trustee and Defendant filed a Joint Stipulation of Undisputed Facts (the “Stipulation of Facts”). Having carefully reviewed the Motion for Summary Judgment, the Response and Cross-Motion, the Reply, the Trustee’s Reply Brief, and the Stipulation of Facts, the Court hereby enters the following findings of fact and conclusions of law.
FINDINGS OF FACT
In February of 1998, Douglass Flynn Martin (the “Debtor”) entered into a Contract whereby the Debtor was to sell the parcel of real property located at 1780 S. Ocean Boulevard, Manalapan, Florida (the “Manalapan Property”) for $4.4 million to Benjamin Kennedy. On March 20, 1998, Benjamin Kennedy assigned the Contract to the Defendant herein. Subsequently, the Debtor announced his intent not to close on the Contract.
On May 28, 1998, the Defendant brought an action for specific performance against the Debtor by filing a Complaint for Specific Performance in the Fifteenth Judicial Circuit in and for Palm Beach County, Florida (the “State Court Action”). The State Court Action sought to compel the Debtor to convey the Manalapan Property to the Defendant pursuant to the express terms of the Contract. In the State Court Action, the Debtor alleged inter alia that the property was sold for less than fair market value.
Ultimately, the Defendant prevailed in the State Court Action. Without making an express finding as to the Debtor’s assertion that the property was sold for less than its fair market value, the State Court entered an Order Granting Summary Judgment in favor of the Defendant. On October 14, 1999, a Final Judgment of Specific Performance was entered by the State Court. The Final Judgment was recorded in the Public Records of Palm Beach County on October 27, 1999. The Debtor appealed the State Court’s ruling, however, the ruling was affirmed on July 21, 2000 by Florida’s Fourth District Court of Appeal. The District Court of Appeal issued a mandate that the Debtor convey the Manalapan Property to the Defendant in accordance with the Final Judgment.
On August 10, 2000, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On September 8, 2000, the Defendant was granted relief from the automatic stay to enforce his judgment. On October 20, 2000, the Honorable Stephen A. Rapp, Circuit Court Judge of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida executed the Warranty Deed on behalf of the Debtor. The Warranty Deed was recorded on October 20, 2000, in the Public Records of Palm Beach County, Florida.
On June 13, 2001, this case was converted from one under Chapter 11 to one under Chapter 7. Deborah C. Menotte (the “Trustee”) became the duly appointed Chapter 7 Trustee of the Debtor’s bankruptcy estate. On October 3, 2001, the *638Trustee filed the Complaint for Avoidance and Recovery of Fraudulent Transfer and for Related Relief (the “Complaint”), instituting the instant Adversary Proceeding. In the Complaint, the Trustee asserts that the transfer of the Manalapan Property to the Defendant constitutes a fraudulent transfer pursuant to 11 U.S.C. § 548(a)(1)(B) and Florida Statutes § 726.105(l)(b) and § 726.106(1). Accordingly, the Trustee seeks to avoid such transfer through the trustee’s avoidance powers established under 11 U.S.C. § 544(b). The fourth count of the Complaint asserts that the Defendant “received and retained the Manalapan Property while the Debtor received less than reasonably equivalent value in return.” As such, the Trustee seeks damages against the Defendant under a theory of unjust enrichment.
The Defendant’s Motion for Summary Judgment seeks a determination that the transfer of the Manalapan Property was not a fraudulent transfer under any of the theories espoused by the Trustee. The Defendant argues that in the State Court Action the Debtor raised as a defense the assertion that he received less than fair market value for the Manalapan Property. As such, the Defendant argues that the Final Judgment of Specific Performance collaterally estops the Trustee from relit-igating the issue of whether the Debtor received a reasonably equivalent value in exchange for the Manalapan Property.
The Defendant argues further that the transfer of the Manalapan Property occurred on May 29, 1998, the date the Defendant filed his Notice of Lis Pendens, rather than October 27, 1999, the date the Defendant recorded the Final Judgment of Specific Performance. Accordingly, the Defendant argues that the transfer took place outside the one year look back provision of 11 U.S.C. § 548(a)(1)(B).
Finally, the Defendant asserts that the Trustee’s claim of unjust enrichment is without merit. The Defendant claims that unjust enrichment is an equitable remedy, appropriate only when one is without a suitable legal remedy. Here, however, the Defendant argues that the Trustee has legal remedies available, namely the remedies available under the Contract as well as the statutory remedies she has already asserted.
In the Response, the Trustee argues that genuine issues of material fact remain in dispute, and therefore summary judgment is inappropriate. Specifically, the Trustee argues that a dispute exists as to whether the Debtor received reasonably equivalent value in exchange for the Mana-lapan Property. Furthermore, the Trast-ee argues that a dispute of fact exists as to whether the Debtor was insolvent on the date of the transfer, or whether the Debt- or became insolvent as a result of the transfer.
The Trustee asserts that she is not barred from arguing that the Debtor received less than the reasonably equivalent value for the Manalapan Property; this issue was neither necessary nor appropriate to the state court’s judgment against the Debtor.
Finally, the Trustee argues that she may recover on a claim of unjust enrichment as the Debtor clearly conferred a benefit upon the Defendant, and that it would be inequitable for the Defendant to retain such benefit without paying the value thereof to the Trustee. The Trustee asserts that neither the Trustee nor the Debtor’s bankruptcy estate were parties to the Contract, and therefore neither are bound by the terms of such Contract.
In the Trustee’s Cross-Motion for Summary Judgment on Limited Issue of Transfer Date, the Trustee argues that *639under Florida law the transfer of the Man-alapan Property took place upon recordation of the Final Judgment for Specific Performance rather than the date the Defendant filed the Notice of Lis Pendens; a fortiori, the Trustee asserts that the transfer occurred on October 27, 1999, within one year of the Petition Date. In his Reply, the Defendant argues that if the Court were to accept the Trustee’s logic, the Notice of Lis Pendens would be stripped of its value. The Trustee counters the Defendant’s argument by asserting in the Trustee’s Reply Brief that the Notice of Lis Pendens filed by the Defendant is inoperative, as the Notice was filed on May 29, 1998 and such notices are only effective for one year from the time of its recording. Accordingly, the Trustee argues that the Notice of Lis Pendens was not perfected as of the Petition Date.
CONCLUSIONS OF LAW
The Court has jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. §§ 1334(b), 157(b)(1), and 157(b)(2)(H). This is a core proceeding in accordance with 28 U.S.C. § 157(b)(2)(H).
Federal Rule of Civil Procedure 56(c), made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056(c), provides that “[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Rice v. Branigar Org., Inc., 922 F.2d 788, 790 (11th Cir.1991); Buzzi v. Gomez, 62 F.Supp.2d 1344, 1349 (S.D.Fla.1999). Rule 56 is based upon the principle that if the court is made aware of the absence of genuine issues of material fact, the court should, upon motion, promptly adjudicate the legal questions which remain and terminate the case, thus avoiding the delay and expense associated with a trial. See United States v. Feinstein, 717 F.Supp. 1552 (S.D.Fla.1989). In considering a motion for summary judgment, “the court’s responsibility is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party.” 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) (citing Anderson, 477 U.S. at 248, 106 S.Ct. 2505). “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 (citing Fed R. Civ. P. 1). “Summary judgment is appropriate when, after drawing all reasonable inference in favor of the party against whom summary judgment is sought, no reasonable trier of fact could find in favor of the non-moving party.” Salkin v. Slobodinsky (In re Saber), 233 B.R. 547, 551 (Bankr.S.D.Fla.1999)(citing Murray v. Nat’l Broad. Co., 844 F.2d 988, 992 (2d Cir.1988)).
The legal standard governing the entry of summary judgment has been articulated by the United States Supreme Court in Celotex and Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In Celotex and Anderson, the Supreme Court focused on the question of what constitutes a genuine issue of material fact within the meaning *640of Rule 56. In Celotex, the Court held that the moving party may satisfy the burden imposed by Rule 56 in two ways: the moving party may submit affidavit evidence that negates an essential element of the non-moving party’s claim and/or the moving party may demonstrate that the non-moving party’s evidence is insufficient to establish an essential element of the non-moving party’s claim. See Celotex, 477 U.S. at 328, 106 S.Ct. 2548.
In Anderson, the Court stated that the standard for summary judgment mirrors the standard for a directed verdict under Federal Rule of Civil Procedure 50(a), which provides that the trial judge must direct a verdict if there can be but one reasonable conclusion as to the verdict. See Anderson, 477 U.S. at 250, 106 S.Ct. 2505. The Court explained that the inquiry under summary judgment and directed verdict are the same: “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Id. at 251-52, 106 S.Ct. 2505.
In order to defeat a motion for summary judgment under this standard, the non-moving party must do more than simply show that there is some doubt as to the facts of the case. See id. at 252, 106 S.Ct. 2505. Rule 56 must be construed not only with regard to the party moving for summary judgment but also with regard to the non-moving party and that party’s duty to demonstrate that the movant’s claims have no factual basis. See id. “The mere existence of a scintilla of evidence in support of the [non-moving party’s] position will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party].” Id. Thus, the non-moving party must establish the existence of a genuine issue of material fact and may not rest upon its pleadings or mere assertions of disputed fact to prevent a court’s entry of summary judgment. See First Nat. Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968); Resolution Trust Corp. v. Clark, 741 F.Supp. 896, 897-98 (S.D.Fla.1990); Pierre v. Welfare (In re Pierre), 198 B.R. 389, 391-92 (Bankr.S.D.Fla.1996).
I. As a Matter of Law, the Transfer of the Manalapan Property Took Place on October 27, 1999 — The Date the Final Judgment of Specific Performance was Recorded.
In Count I of the Trustee’s Complaint, the Trustee seeks to avoid the transfer of the Manalapan Property asserting that such transfer is a fraudulent transfer pursuant to 11 U.S.C. § 548(a)(1)(B). Specifically, section 548(a)(1) provides in pertinent part that:
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...
11 U.S.C. § 548(a)(1) (emphasis added).
The Defendant argues that “as a matter of law, the transfer occurred on May 28, 1998, the date Pulte filed his lis pendens in the public records of Palm Beach County, Florida.” The Debtor filed his petition for relief under Chapter 11 of the Bankruptcy Code on August 10, 2000. As such, it is the Defendant’s position that the Manalapan Property was transferred more than one year before the Petition Date, and therefore the Trustee’s claim under § 548 is not viable. The Defendant’s argument is legally incorrect.
Florida Statutes § 48.23 governs notices of lis pendens. The term “lis pendens” literally implies a pending suit, it is *641defined as the jurisdiction, power, or control which courts acquire over property involved in a pending suit. See DePass v. Chitty, 90 Fla. 77, 105 So. 148 (1925). A notice of lis pendens or actual notice filed on the public records, protects both the lis pendens proponent and third parties. The notice protects the lis pendens proponent’s interest both from extinguishment and from any impairment from intervening liens. See Medical Facilities Dev. Inc. v. Little Arch Creek Props. Inc., 675 So.2d 915, 917 (Fla.1996). The notice also protects future purchasers or encumbrancers of the property by informing them that there is a current suit involving the property’s title. Id.
The duration of a notice of lis pendens is determined by Florida Statutes § 48.23(2) which provides:
No notice of lis pendens is effectual for any purpose beyond 1 year from the commencement of the action unless the relief sought is disclosed by the initial pleading to be founded on a duly recorded instrument or on a lien claimed under part I of chapter 713 against the property involved, except when the court extends the time on reasonable notice and for good cause. The court may impose such terms for the extension of time as justice requires.
Fla. Stat. § 48.23(2) (1994) (emphasis added).
In the instant case, the Defendant does not assert that the Notice of Lis Pendens was ever extended by a court of competent jurisdiction. Applying Florida Statutes § 48.23(2) the natural expiration of the Notice of Lis Pendens would have occurred on May 29, 1999. Therefore, as of May 29, 1999, the Notice of Lis Pendens was no longer perfected as to prevent a bona fide purchaser from acquiring an interest in the Manalapan Property superior to that of the Debtor.
As the Trustee has noted, what did ultimately become of record evidencing the Defendant’s interest in the Manalapan Property was the Final Judgment of Specific Performance, which was not recorded until October 27, 1999. Rule 1.570 of the Florida Rules of Civil Procedure provides that:
If the judgment is for a conveyance, transfer, release, or acquittance of real or personal property, the judgment shall have the effect of a duly executed conveyance, transfer, release, or acquittance that is recorded in the county where the judgment is recorded. A judgment under this subdivision shall be effective notwithstanding any disability of a party.
Fla. R. Civ. P. 1.570(d) (1999). In effect, this rule mandates that a judgment for specific performance is considered duly executed when said judgment is recorded. Kendall Grove Joint Venture v. Martinez-Esteve, 59 B.R. 407, 409 (S.D.Fla.1986). Accordingly, the Court finds that the Man-alapan Property was transferred from the Debtor and to the Defendant on October 27, 1999, the date the Final Judgment was recorded.
II. The Trustee May Use Her § 544(b) Avoidance Powers to Recover a Fraudulent Transfer Made by the Debtor.
The Defendant argues that the Trustee is prohibited from using her § 544(b) “strong-arm” powers to set aside a conveyance made pursuant to a prepetition state court specific performance judgment. The Defendant relies upon In re Kendall Grove Joint Venture, 50 B.R. 64 (Bankr.S.D.Fla.1985), aff'd, 59 B.R. 407 (S.D.Fla.1986) in support of his argument.
In Kendall Grove, a buyer-real estate developer obtained a state court judgment *642for specific performance of his contract for the sale of real property. The decree for specific performance was entered on August 17, 1984, and recorded in the public records on August 22, 1984.
On September 18, 1984, an involuntary petition for bankruptcy was filed against the debtor. Shortly thereafter, the debtor sought to avoid the transfer under 11 U.S.C. § 544. Kendall Grove, 50 B.R. at 65. The crux of the debtor’s argument in favor of avoidance was that the contract was executory under § 365(a) of the Bankruptcy Code, and therefore could be avoided by the debtor-in-possession. Relying on Rule 1.570 of the Florida Rules of Civil Procedure, the court found that the specific performance decree entered against the debtor was considered duly executed when the judgment was recorded. Therefore, the court found that the contract was not executory, and therefore not subject to avoidance under § 544. Id. at 66.
In the present case, the Debtor’s reliance on Kendall Grove is misplaced. The Trustee herein never alleged that the Contract between the Debtor and the Defendant was executory. Rather, the Trustee is seeking to use her § 544(b) avoidance powers to remedy an alleged fraudulent conveyance. It is hornbook law that a trustee in bankruptcy has both a right and duty to use her avoidance powers in such fashion.
[t]he procedure for challenging a transfer that was made or the incurrence of an obligation that is purportedly fraudulent, under either section 548 of the Code, or under applicable state law pursuant to the strong arm powers of section 544, is the commencement of an adversary proceeding within the bankruptcy case.
5 Collier on Bankruptcy ¶ 548.06[1], at 548-52.7 (Lawrence P. King ed., 15th ed.1979); see also 6 Collier on Bankruptcy ¶ 704.03, at 704-8 (Lawrence P. King ed., 15th ed.1979)(stating that trustees are “representatives of the estate, charged with doing whatever is necessary to advance its interests. Rights of action arising upon the contracts or property of the debtor, not yet resolved into suit, pass to the trustee, and should be asserted in the proper tribunal....”) Accordingly, the Court finds that the Trustee is not barred from using her § 544(b) avoidance powers to set aside an alleged fraudulent transfer made by the Debtor to the Defendant.
III. A Material Dispute of Fact Exists as to Whether the Debtor Received a Reasonably Equivalent Value in Exchange for the Manalapan Property.
The crux of the Defendant’s argument in favor of Summary Judgment is that the issue of whether the Debtor received a reasonably equivalent value in exchange for the Manalapan Property was litigated previously, in the Defendant’s favor, during the State Court Action. Therefore, the Defendant argues that the doctrine of collateral estoppel bars the Trustee from relitigating this issue.
Closely related to the doctrine of res judicata is the doctrine of collateral estoppel, or issue preclusion. Under this doctrine, where the subsequent litigation arises from a different cause of action than the prior litigation, relitigation of those issues common to both the prior and subsequent actions that were either expressly or by necessary implication adjudicated in the prior action are barred. Christo v. Padgett, 223 F.3d 1324, 1338 n. 46 (11th Cir.2000); Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II, Ltd.), 898 F.2d 1544, 1549 n. 3 (11th Cir.1990); Cope v. Bank Am. Hous. Serv., Inc., 2000 WL 1639590, at *4 (M.D.Ala.2000).
*643Relitigation of an issue is barred under the doctrine of collateral estoppel where the following four elements are present:
(1) The issue at stake is identical to the one involved in the prior proceeding;
(2) The issue was actually litigated in the prior proceeding;
(3) The determination of the issue in the prior litigation must have been a critical and necessary part of the judgment in the first action; and
(4) The party against whom collateral estoppel is asserted must have had a full and fair opportunity to litigate the issue in the prior proceeding.
Christo, 223 F.3d at 1339; Cope, 2000 WL 1639590, at *8. In the present case, the Defendant has failed to establish the second element of collateral estoppel; the Defendant has failed to show that reasonably equivalent value was actually litigated in the State Court Action.
In his Motion for Summary Judgment, the Defendant asserts that during the State Court Action the Debtor raised as his eighth affirmative defense that the Contract should be set aside because “[a]t the time of the delivery of the [buyer’s] offer ... the Defendants knew or should have known that the contract was insubstantial in that the value of the property being offered to purchase by the alleged buyer ‘Kennedy’ was undervalued.” Accordingly, the Defendant argues that “[t]he issue of value of the property was raised and adjudicated in the Florida court.”
“The first rule for identifying the issues to be precluded is that if there is no showing as to the issues that were actually decided, there is no issue preclusion. The burden is on the party asserting preclusion to show actual decision of the specific issues involved.” 18 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 4420 (2002). Although the Defendant makes the assertion that the value of the property was actually litigated in the State Court Action, the Defendant fails to point to any specific findings of fact made by the state court judge. The Final Judgment of Specific Performance makes no reference to whether a reasonably equivalent value was received in exchange for the Manalapan Property. The fact that the issue of the value of the Manalapan Property was raised as a defense by the Debtor is simply not dispositive that this issue was actually and fully litigated in the state court proceeding. “There is simply no evidence in the state court pleadings that the court made any such decision” as claimed in the argument for preclusion. There was no adjudication “expressly nor by necessary implication.” In re Troy Dodson Contr. Co., 993 F.2d 1211, 1214 (5th Cir.1993). Accordingly, this Court finds that the Trustee is not precluded from exploring whether the Debtor received a reasonably equivalent value in exchange for the Manalapan Property.
In his pleadings, the Defendant sets forth various calculations to establish that he paid the Debtor a reasonably equivalent value for the Manalapan Property. Likewise, in the Trustee’s pleadings, the Trustee provides a number of theories which conclude that the Defendant did not pay a reasonable equivalent value. The Court finds that whether the Defendant paid a reasonably equivalent • value in exchange for the Manalapan Property presents a genuine dispute of material fact. Therefore, summary judgment is inappropriate; a trial will be necessary to resolve this issue.
IV. A Material Disputes of Fact Exists as to Whether the Debtor was Solvent as of the Transfer Date.
Similarly, there appears to be a genuine dispute of material fact as to the *644Debtor’s insolvency as of the Transfer Date. In Counts II and III of the Complaint, the Trustee asserts that the Debtor either was insolvent at the time of the transfer of the Manalapan Property, or became insolvent as a result of the transfer.
In his Motion, the Defendant makes the argument that the Debtor “had the ability to pay his debts as they came due,” and that the “Trustee will not be able to establish ‘balance sheet’ insolvency” as required under Florida Statutes § 726.106(1). As argued swpra, in regards to the value exchanged for the Manalapan Property, the Defendant presents several theories to establish the Debtor’s solvency at the time of the transfer. The Defendant relies upon several loan applications to prove that the Debtor was solvent as of the Transfer Date.
Likewise, in response, the Trustee provides a counter-argument, establishing that the Debtor was not solvent as of the transfer date. Not only does the Trustee claim that the loan applications relied on by the Defendant are “wholly, completely and totally inaccurate,” the Trustee relies upon several other documents to prove that the Debtor was insolvent at the time of transfer. Clearly, a dispute of fact exists as to the Debtor’s insolvency as of the Transfer Date. Here too, this issue must be resolved at trial.
V. The Trustee Cannot Proceed Under the Equitable Doctrine of Unjust Enrichment.
Finally, the Defendant argues that the Trustee is not entitled to assert a claim for unjust enrichment as set forth in Count IV of the Complaint. The Defendant asserts that “a claim for unjust enrichment cannot stand where an express contract exists.” Since the Manalapan Property was sold pursuant to an express contract, the Defendant argues that the Trustee is precluded as a matter of law from pursuing this claim. Furthermore, the Defendant claims that unjust enrichment is not available where a legal remedy exists.
A claim for unjust enrichment is an equitable claim, based on a legal fiction created by courts to imply a “contract” as a matter of law. Although the parties may have never by word or deed indicated in any way that there was any agreement between them, the law will, in essence, “create” an agreement in situations where it is deemed unjust for one party to have received a benefit without having to pay compensation for it. It derives, not from a “real” contract but a “quasi-contract.”
Tooltrend, Inc. v. CMT Utensili, SRL, 198 F.3d 802, 805 (11th Cir.1999). In order to maintain a claim for unjust enrichment the Trustee must show that: (1) a benefit was conferred upon the Defendant by the Debtor, (2) appreciation by the Defendant of such benefit, and (3) acceptance and retention of such benefit by the Defendant under such circumstances that it would be inequitable for him to retain it without paying the value thereof. Id.; Nautica Int'l, Inc. v. Intermarine USA, L.P., 5 F.Supp 2d 1333, 1341 (S.D.Fla.1998). “The theory of unjust enrichment is equitable in nature and is, therefore, not available where there is an adequate legal remedy.” Nautica, 5 F.Supp 2d at 1342.
In the present case, the Trustee has set forth in several counts fraudulent transfer claims under both federal and state law. Reviewing these statutory claims in the light most favorable to the non-moving party, as required when analyzing a motion for summary judgment, it appears that these claims, if successful, would provide the Trustee with an adequate legal remedy. Moreover, upon re*645viewing the Complaint, the trustee fails to allege that its statutory remedies are inadequate. See id. Accordingly, the Court finds that the Trustee cannot proceed under the equitable doctrine of unjust enrichment; summary judgment shall be granted in favor of the Defendant as to Count IV of the Trustee’s Complaint.
ORDER
In accordance with the foregoing analysis and being otherwise fully advised in the premises, the Court hereby ORDERS AND ADJUDGES as follows:
1. Summary Judgment is entered in favor of the Trustee and against the Defendant in regards to the Transfer Date. The Transfer Date was October 27, 1999, the date the Final Judgment of Specific Performance was recorded.
2. As to Counts I through III of the Trustee’s Complaint, the Defendant’s Motion for Summary Judgment is DENIED.
3. As to Count IV of the Trustee’s Complaint, the Defendant’s Motion for Summary Judgment is GRANTED.
4. Pursuant to Federal Rule of Bankruptcy Procedure 9021, a separate Final Judgment incorporating these findings of fact and conclusions of law will be entered contemporaneously herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493386/ | ORDER
JAMES G. MIXON, Bankruptcy Judge.
The issue in this case is whether John M. Zenone (“Debtor”) may amend his exemptions to include an IRA account not previously scheduled as exempt.
On September 10, 1999, the Debtor filed a voluntary petition for relief under the provisions of chapter 13 of the United States Bankruptcy Code. On December 27, 1999, the Debtor’s former wife, Sherri Atha Burks (“Burks”), filed a motion to dismiss the case, which motion was heard by the Court on January 21, 2001. As a result of the hearing, an order was entered granting the motion to dismiss upon the condition that the Debtor be allowed to convert to chapter 7 within 20 days. On February 10, 2000, the case was converted to chapter 7 on motion of the Debtor, and James F. Dowden, Esq., was appointed Trustee.
The original Schedule I listed the Debt- or’s income at $3,200.00 per month from “Medlife.” Filed in connection with the chapter 13 petition, the Debtor’s original Schedule B, personal property, identified as an asset “Pension (IRA/401k) $17,000.00.” (Schedule B, original petition, September 10, 1999.) Among the exemptions claimed were $2575.00 in value in a 1997 Land Rover Discovery automobile and a Metlife policy valued at $35,000.00. (February 7, 2002 Hr’g, Burks. Ex. 1, Schedule C, original petition.) The pension identified on Schedule B was not claimed as exempt. The Debtor amended Schedule B on September 29, 1999, describing the pension as “pension (IRA/ 401k). Former spouse to receive $17k (approx. $34,000.00 total).” (April 5, 2002 Hr’g, Burks Ex. 8, Amended Schedule B.)
On June 19, 2000, the Trustee filed a motion to sell free and clear of hens a 1971 Volkswagen and a 1997 Land Rover. On July 21, 2000, an order was entered granting the Trustee’s motion.
On March 14, 2001, the Trustee filed a report of sale reflecting that the Trustee received a total of $14,000.00 net to the estate from the sale of the 1971 Volkswagen and 1997 Land Rover. On Septem*794ber 5, 2001, the Debtor received his discharge. On November 28, 2001, the Trustee filed his final report, and the Debtor and Burks filed objections to the report. The Debtor objected on the grounds that he had claimed an exemption in the Land Rover and the proceeds of an ERISA-qualified plan1 and that the Trustee’s final account did not propose to distribute the exempt property to the Debtor.
The Trustee’s final report reflects that he received the following proceeds from liquidation of assets:
1. 1971 Volkswagen $ 2,000.00
2. 1997 Land Rover $12,000.00
3. Income Tax Refund $ 3,771.05
4. Fidelity Investments $18,454.94
On January 29, 2002, the Debtor filed an amended Schedule C claim of exemption claiming $8,174.00 exempt out of the $18,454.94 received from Fidelity Investments and described on the Amended Schedule C as an IRA/401(k) fund. On February 7, 2002, the Debtor filed a second Amended Schedule C claim of exemption claiming the entire sum of $18,454.94 exempt pursuant to 11 U.S.C. § 522(d)(10).
The Trustee and Burks filed objections to the Debtor’s two amended claims of exemption. A hearing was held on February 7, 2002, on the Debtor’s and Burks’ objections to the Trustee’s final accounting, and on April 5, 2002, a hearing was held on the objections to the Debtor’s amended claims of exemption. At the conclusion of the hearings, the matters were taken under advisement.
The proceedings before the Court are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(A) (1994), and the Court has jurisdiction to enter a final judgment in this case.
DISCUSSION
The material facts in this case are not in dispute. The Debtor’s original schedules identified as an asset a pension characterized as an “IRA/401k” with a value of $17,000.00 as of the petition date of September 10, 1999. This asset was not originally claimed as exempt. The Debtor’s amended Schedule B filed September 29, 1999, continued to describe the asset as an IRA/401(k) pension fund.
From information supplied by Burks, the Trustee later determined from the records of Fidelity Investment that as of January 22, 1999, the Debtor had two accounts, a general investment mutual fund valued at $14,602.10 and a mutual fund IRA valued at $16,880.68, for a total of $31,482.78.
The schedules valued the asset at $17,000.00. The Debtor acknowledged that after he amended schedules on September 29, 1999, he spent the difference between $31,482.78 and the $18,454.94 the Trustee obtained in September 2000. (Tr. at 44, April 5, 2002 Hr’g.) The Debtor testified that this was necessary because he had no income during this time.
The Debtor argues that Federal Rule of Bankruptcy Procedure 1009 permits an amendment to the schedule of exemptions at any time before the case is closed.2 The Debtor also contends that the funds at issue are not property of the estate pursuant to section 541(c)(2) of the Bankruptcy Code and section 16-66-220(a)(l) of Ar*795kansas Code Annotated.3 The Trastee and Burks argue that the Debtor should not be permitted to claim an exemption in the IRA because the Debtor is guilty of misconduct in connection with the case. They also state that the Debtor should not be allowed an exemption in the proceeds of the Land Rover on the basis of laches, waiver and estoppel. Burks further contends that the Debtor should not be allowed to claim an exemption in a $35,000.00 Metlife disability policy because the insurance company denied the Debt- or’s claim.
Many Courts have concluded that if the debtor has acted in bad faith in connection with the case or if prejudice to the creditors would result, the debtor’s request to amend the claim of exemptions should be denied. In re Sumerell, 194 B.R. 818, 832 (Bankr.E.D.Tenn.1996)(citing In re Yonikus, 996 F.2d 866 (7th Cir.1993); Stinson v. Williamson (In re Williamson), 804 F.2d 1355 (5th Cir.1986); Lucius v. McLemore, 741 F.2d 125, 127 (6th Cir.1984); Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir.1982); Magallanes v. Williams (In re Magallanes), 96 B.R. 253 (9th Cir. BAP 1988); Ward v. Turner, 176 B.R. 424 (E.D.La.1994); appeal dismissed, 66 F.3d 322 (5th Cir.1995); In re St. Angelo, 189 B.R. 24 (Bankr.D.R.I.1995); In re Fournier, 169 B.R. 282 (Bankr.D.Conn.1994)). Accord, Mertz v. Rott, 955 F.2d 596, 598 (8th Cir.1992) (holding nondisclosure of tax refund warranted denial of discharge even if refund would have been exempt).
Here, the Debtor, without Court authority or legal right, transferred post-petition more than $13,000.00 from the Fidelity account without asserting a claim of exemption. Now the Debtor seeks to amend his claim of exemption to exempt the balance of the funds in the Fidelity account. His conduct rises to the level of bad faith and could be grounds to revoke his discharge pursuant to 11 U.S.C. § 727(d)(2)(1994).
Furthermore, allowing an amendment to exemptions would be prejudicial to the creditors and Trustee who are now without a remedy to object to the Debtor’s claim of exemption, pursuant to 11 U.S.C. § 522(c)(10).4 In re Yonikus, 996 F.2d 866, 872 (7th Cir.1993)(stating that an amendment to a bankruptcy petition may be denied upon a showing of bad faith or prejudice to creditors) (citing In re Doan, 672 F.2d at 833).
Therefore, the objections to the Debtor’s amended claims of exemptions are sustained, and the Debtor’s amendments will not be permitted. Burks’ objection to the claim of exemption in proceeds from a Metlife insurance policy is moot because the Debtor’s claim to the funds was denied, and there are no proceeds to exempt. The objections to the Trustee’s final account are sustained by agreement. The Trustee will amend his final account to permit the Debtor’s original claim of exemption in $2575.00 of the proceeds of the sale of the Land Rover automobile.
IT IS SO ORDERED.
. According to the Court's file, the Debtor had not yet filed his amended claim of exemption claiming these proceeds when he objected to the final report.
. See Federal Rule of Bankruptcy Procedure 1009(a): “General Right to amend. A voluntary petition ... [or] ... schedule ... may be amended by the debtor as a matter of course at any time before the case is closed.”
. The Court cannot resolve the issue of whether the funds are excluded from property of the estate because the record is devoid of evidence demonstrating that the funds are subject to restrictions on transfer by Ark.Code Ann. § 16 — 66 — 220(a)(1) or other nonbank-ruptcy law.
. For example, the Trustee and creditors could argue that had the Debtor not spent funds from his investment account, those funds would have been sufficient for his support and that an exemption in the remaining funds was not reasonably necessary for the support of the Debtor and his dependents. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493387/ | MEMORANDUM OPINION
MARK W. VAUGHN, Chief Judge.
The Court has before it Deutsche Financial Services’ (“Deutsche’s”) Motion for an Order pursuant to 11 U.S.C. § 365 to Compel Lease Payments (the “Motion”) from Metrobility Optical Systems, Inc. (the “Debtor”).1 Based upon the record before the Court and for the reasons set out below, the Court denies the Motion.
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.). *36This is a core proceeding in accordance with 28 U.S.C. § 157(b).
Facts
The Debtor filed for bankruptcy protection under Chapter 11 on September 10, 2001 (the “Filing Date”). The Debtor and Deutsche are parties to a Master Lease Agreement, No. 40015226, dated August 17, 2000, and Schedule No. 01 thereto (collectively, the “Agreement”) for the lease of IFS ERP and Oracle Software (the “Software”). Prior to the Filing Date, the Debtor made monthly payments of $13,062.65 under the Agreement. The Debtor made one post-petition payment of $13,062.65 to Deutsche on October 23, 2001, which the Debtor requests be returned.
DISCUSSION
The issue before the Court is the nature of the Agreement between the parties. Deutsche argues that the Agreement is a true lease to which the requirements of N.H. RSA § 382-A:2A-103(l)(g) are not applicable and that obligates the Debtor to make ongoing payments according to the terms of the Agreement pursuant to § 365. The Debtor responds that the Agreement created a security interest in the Software under N.H. RSA §§ 382-A:2A-103(l)(j) and 382-A:l-201(37). Further, the Debtor argues that Deutsche’s security interest is subject to deficiencies causing it to be unperfected and subject to avoidance. As noted above, the Debtor also requests the return of a post-petition payment of $13,062.65.
N.H. RSA § 382-A:2A-103(l)(j) defines a lease as “a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease.” N.H. RSA § 382-A:2A-103(l)(j). N.H. RSA § 382-A:1-201(37) defines a security interest as “an interest in personal property or fixtures which secures payment or performance of an obligation.” Id. § 382-A:1-201(37). 'Whether a transaction creates a lease or security interest is determined by the facts of each case.” Id. The statute further provides that “a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee” and either
(a) the original term of the lease is equal to or greater than the remaining economic life of the goods;
(b) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
(c) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or
(d) the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.
Id. § 382-A:1-201(37)(a)-(d).
The Agreement between the parties in the present case created a security interest, not a lease, as it meets the requirements set forth in N.H. RSA § 382-A:1-201(37). The consideration under the Agreement for the possession and use of the Software is for the term of the Agreement, and the Debtor cannot terminate the Agreement. See N.H. RSA § 382-A:1-201(37). Additionally, the Agreement satisfies the fourth disjunctive requirement of RSA § 382-A:1-201(37) because the Debt- or has an option to purchase the software for the nominal additional consideration of one dollar upon satisfaction of the Agree*37ment’s terms. See id. Accordingly, pursuant to N.H. RSA § 382-A:1-201(37), the Agreement created a security interest. See id.; see also North American Rental v. First Southern Leasing, Ltd. (In re North American Rental), 54 B.R. 574, 575-77 (Bankr.D.N.H.1985) (determining that “leases” in question were not intended as security because effective purchase option payment amounts were substantial and other indicia did not justify finding that contracts were intended as security interests).
Further, the Court notes that the Agreement in question also possesses other indicia of a security interest. First, Deutsche reserved the right to accelerate all future payments under the lease in the event of Debtor’s default. See In re North American Rental, 54 B.R. at 577. Second, Deutsche is not a “true lessor” of the type of goods which is the subject of the Agreement, but is a financier. Id.
Although the Debtor requests that the Court decide whether Deutsche’s security interest is perfected, the Court declines to do so at this time.2 However, since the Agreement between the parties created a security interest, Deutsche is not entitled to post-petition payments from the Debtor under § 365. Thus, Deutsche shall return the post-petition payment of $13,062.65 made by the Debtor on October 23, 2001.
Conclusion
The Court, denies Deutsche’s motion to compel lease payments because the Agreement between the parties is a financing lease that creates a security interest in the Software under N.H. RSA §§ 382-A:2A-103(1)(j) and 382-A:1-201(37). Further, the Court declines to rule upon the status of Deutsche’s security interest and instead restores the post-petition status quo between the parties with respect to the Agreement. Accordingly, Deutsche shall return the post-petition payment of $13,062.65 to the Debtor. 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.
. Unless otherwise noted, all section references hereinafter are to Title 11 of the United States Code.
. Pursuant to Fed.R.Bankr.P. 7001, a challenge to the validity of a security interest must be brought as an adversary proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493388/ | MEMORANDUM OPINION
THOMAS M. BRAHNEY, III, Chief Judge.
This matter came before the Court on the Objection to Claim, Complaint and Request for Issuance of Writ of Sequestration and Attachment filed by the Chapter 7 Trustee, David Adler. Many of the issues of the Complaint have been addressed in previously entered Orders and Judgments of this Court resolving various Motions filed. A trial was held on the remaining issues at which time the Court heard the statements of counsel, the testimony of witnesses and received documentary evidence. Upon consideration of the statements made, the evidence presented, the memoranda filed, the record in the case and the applicable law, the Court enters the following Memorandum Opinion.1
The Objection and Complaint herein was filed by the Trustee seeking two items of relief. First, the Trustee objected to the claim filed by the Internal Revenue Service (“IRS”) against the bankruptcy estate, or rather, objected to its payment by the estate. Second, the Trustee sought to have a 50% interest in two promissory notes, the “Dorvin Notes”, turned over to the estate because it has always been estate property or because a purported transfer by Debtor Albert Huddleston, was a simulation under state law. In a prior Opinion and Judgment, entered on June 6, 2001, the Court allowed the IRS Amended Proof of Claim against the estate, but deferred ruling on the amount of that claim, further finding that the individual Defendants herein, the “Huddleston Children” were not liable for the IRS claim. The Opinion also found that there were questions of fact as to the turnover allegations and deferred those issues to the recent trial on the merits. Here, the Court rules on those two deferred matters.
With regard to the amount of the IRS claim, the evidence offered at trial consisted of the testimony of Brenda Esser, an IRS Revenue Officer, and the Certificate of Assessments and Payments regarding the estate tax return filed by Albert Hud-dleston (“Debtor”), as administrator for his first wife, Madeline Huddleston. The facts relating to the estate tax claim, along with the fiduciary fraud liability imposed against the Debtor, were discussed in some detail in this Court’s prior Opinion and will not be recounted here. It will suffice to state that the original estate tax deficiency was in the amount of $345,147.00 and the fraud penalty was in the amount of $172,573.00. The Debtor and the Huddleston Children are jointly and severally liable under the Internal Revenue Code for both the original tax liability and the fraud penalty, the Debtor as a fiduciary and the Children as transferees.
However, as Esser testified to at the trial, the tax and fraud penalty were abated by seizures from and payments by the Huddleston Children. As is apparently its legal prerogative, the IRS chose to settle the Childrens’ transferee liabilities after collecting what it considered were the maximum amounts that could be collected at the time. Notably, however, the is no evidence of a settlement with the youngest child, Alicia, although there has apparently *190been a Stipulated Judgment entered into with her. Consequently, the IRS is left with the option of collecting the balance from the Debtor and, accordingly, this bankruptcy estate.- This course of action is what the Court questioned in its previous Opinion, in view of the fact that further collection from most of the Children is time-barred under the Internal Revenue Code. However, after considering the testimony of Esser, and finding no contrary evidence, the Court must conclude that the IRS acted within the bounds of its discretion, though perhaps not as the Court would have preferred, in its collection efforts. Thus, the Court must find that, as presented in the exhibit offered at trial, the IRS holds an allowed claim against the estate in the amounts of $801,656.98 (priority), $116,774.05 (general unsecured) and $31,371.54 (administrative).
The majority of the testimony at trial dealt with the Trustee’s turnover claim. This claim relates to the Dorvin Notes, which are two promissory notes executed on March 15, 1979 by Dorvin Developments, Inc. and Edwin C. Dorvin (collectively, “Dorvin”) in favor of the Debtor during his marriage to the late Madeline Huddleston. The first note was in the original principal sum of $58,000.00 and the second note was in the principal sum of $296,000.00. These notes were a part of the community of acquets and gains of the Debtor and Madeline Huddleston. Until Madeline Huddleston’s death on January 17, 1981, the notes were payable through a collecting agent, Bank of New Orleans, which received all proceeds and paid them one-half to the Debtor and one-half to Madeline Huddleston.
After Madeline Huddleston’s death, the Debtor opened her succession and was named administrator of her estate. On July 2, 1981 and July 15, 1981, the Debtor wrote Dorvin to change the collecting agent to Continental Titles, Inc. (“CTI”), a Defendant in this action and a company owned at least 50% by the Debtor. Thereafter, CTI received the note proceeds and deposited them into an account at First National Bank of Jefferson (“Whitney Account”).2 No other funds of CTI were deposited into this account because CTI maintained a separate account at Merchants Bank & Trust for its other receipts.
On or about May 13, 1987, the Debtor allegedly endorsed the back of the two Dorvin Notes “Pay to the order of Continental Titles”. However, there is no credible evidence that there was any consideration given by CTI for the alleged transfer, although the Debtor maintains that the notes were a capital contribution to CTI. The books and records of CTI did not reflect such a contribution and, indeed, in a 1990 deposition given by the Debtor in an adversary proceeding brought by the Huddleston Children, the Debtor state that he did not know what consideration was given for the endorsement of the notes. Moreover, there is also no evidence that the Debtor ever relinquished possession of the notes. On January 29, 1988, Albert and Helene Hud-dleston (“Debtors”) filed a Joint Petition for Relief under Chapter 11 of the Bankruptcy Code.
Most of the evidence at trial concerning the financial records of CTI and the Debtors came from Wayne Bienvenu, an examiner who prepared a Court-ordered report dated January 4, 1990 concerning the operations and finances of the Debtors and their related businesses, and from his report itself. CTI’s balance sheets for the fiscal years ending May 31, 1987, May 31, 1988 and May 31, 1989 do not reflect the Dorvin Notes as assets, nor do they reflect *191any interest income paid on the notes as income to the company. Rather, all payments received on the notes were applied on the CTI books to reduce the Debtor’s outstanding shareholder loans to CTI. Bienvenu testified that the CTI cash receipts and disbursements records reveal that approximately $37,000.00 was deposited into and disbursed from the Whitney Account for the fiscal year June 1, 1988 through May 31, 1989. The primary source for these funds was the note payments. As in previous years, the payments were credited against the Debtor’s shareholder loans.
While the disbursements from the Whitney Account were charged to the Debtor’s shareholder loan account on CTI’s books, in fact the disbursements were made for the benefit of the Debtor or Ms family or for the Debtors’ residence on Chateau Magdelaine. The trial testimony of both of the Debtors supports this fact. Significantly, there is no evidence that any of the proceeds from the notes went to satisfy a single corporate obligation of CTI. In fact, the Articles of Incorporation for CTI do not authorize the company to acquire or hold for investment any securities, negotiable notes or mortgage notes. It could, however, act as an escrow agent to receive and disburse monies.
On April 10, 1990, the Debtors’ case was converted to a Chapter 7 case. Prior to the conversion, the Huddleston Children instituted an adversary proceeding, referred to above, against the Debtors seeking turnover of certain property from the estate of Madeline Huddleston that they claimed belonged one-half to them. Pursuant to the Judgment entered by this Court in connection with that proceeding, the Court recognized that the Children were one-half owners of the Dorvin Notes. The Court made no finding regarding the ownership of the other one-half interest. During the pendency of the adversary proceeding, the law firm of Stone, Pigman, Walther, Whittmann & Hutchinson, L.L.P. (“Stone, Pigman”), began collecting all payments on the Dorvin Notes. Stone, Pigman has continued to collect all payments since that time, with the one-half not belonging to the Children being held in escrow.
In his deposition given in the Children’s adversary proceeding, the Debtor testified that, beginning in July of 1981, he utilized CTI as a collecting agent for the Dorvin Notes and that he used the funds deposited in the Whitney Account for the benefit of the Huddleston Children or jointly-owned property. Also in the deposition, he stated that CTI had acquired “ownership” of the notes in May of 1987, but that he continued to place the funds in the Whitney Account and use them for the same purposes as previously done. As Bienvenu’s report indicates, the Debtor was, up to that time, declaring the income interest from the Dorvin Notes on his personal income tax returns.
The evidence regarding the Debtor’s previous transactions relating to his assets is illuminating. In 1979, he incorporated Continental Builders Supply, Inc. (“CBS”) and, though he was the true owner, the stock was issued in the name of Michael Coons. Coons endorsed the stock of CBS back to the Debtor, but CBS’ books do not reflect this. In Ms 1990 deposition, the Debtor states that this was done because it was better for dealmg with vendors if someone other than he was the record owner of the company. In 1980, when his first wife was apparently planning divorce, the Debtor transferred the stock in CTI and other of his companies so that he would not be the record owner of the companies for purposes of any divorce proceedings. No consideration was given for any of these transfers. As aforementioned, when the Debtor was the *192administrator for the estate of Madeline Huddleston, none of her interest in these companies was listed on the either the succession papers filed in state court or on the federal estate tax return.
Bienvenu’s report outlines numerous questionable transfers and transactions undertaken by the Debtor pre-petition and post-petition that illustrate the Debtor’s propensity for moving his assets around for his own purposes. For example, the report notes that certain real property was purportedly transferred in August of 1987 from Urban Redevelopments, Inc. (“Urban”), another of the Debtor’s companies, to CTI for allegedly fair consideration. However, the report also notes that a counter-letter by CTI indicates that no funds changed hands in the transactions and that CTI has no interest in the properties. The accounting records of Urban still reflected ownership of the properties. Finally, this Court is fully aware, from the prior adversary proceeding, of the Debt- or’s attempts to hide the assets his Children inherited from their mother and continue to use them for his purposes.
CTI introduced certain evidence at trial that attempts to prove that the transfer to CTI was genuine and indeed was recognized as such by the former Trustee, Claude Smith, and the current Trustee. It is true that, after the conversion of the Debtors’ case, Smith was a director, officer and shareholder of CTI. However, the CTI Corporate Resolution executed on August 31, 1993, and signed by Smith, only recognizes that the Debtor “notified” Dorvin on May 31, 1987 that CTI was the owner of the Dorvin Notes and that the Debtor had the authority to transfer his one-half interest in the notes. It does not, nor could it, conclusively state that the transfer was validly done. Indeed, at paragraph 5, the transfer is referred to as “purported”. The Resolution actually serves to renounce CTI’s claim to The Huddleston Children’s one-half interest in the notes and authorize Stone, Pigman to release the proceeds it has received and will receive to the Children.
Also, it is a fact Bienvenu acknowledged in his testimony at trial and in his report that he understood from the Debtor that it was his position that the transfer of the notes was a capital contribution to CTI. However, Bienvenu also noted in his report that, as of May 31, 1987, the Working Trial Balance of CTI did not reflect this capital contribution and that Huddleston subsequently directed his bookkeeper to review the records and that it was the bookkeeper’s recommendation to adjust the books to reflect the capital contribution. Finally, CTI offers the evidence that the Debtors’ schedules indicate that the Dorvin Notes were owned by CTI and that the Trustee report forms for 1999 and 2000 do not include the notes as an estate asset.
The Trustee seeks turnover of the Dor-vin Notes and their proceeds under two theories. First, he contends that the notes never were anything other than property of Albert Huddleston and, thus, upon filing, property of the estate. Therefore, he merely seeks turnover of estate property from its custodian under 11 U.S.C. §§ 542 and 543. Alternatively, he seeks a declaration of the Court that the purported transfer of The notes in 1987 by the Debt- or was a simulation under Louisiana state law and, thus, invalid. Because the Court finds that the transfer was a simulation, the issue of whether, under bankruptcy law, the Complaint herein is a turnover action or an avoidance action, as CTI maintains, with its attendant potential statute of limitations problems, need not be addressed.
Pursuant to La.C.C.art.2025, “[a] contract is a simulation when, by mutual *193agreement, it does not express the true intent of the parties.” A simulated sale occurs when the parties do not have the good faith intent to transfer ownership. Wilson v. Progressive State Bank & Trust Company, 446 So.2d 867 (La.App. 2nd Cir. 1984). Such a sale is a sham and, as a result, an absolute nullity. Id. Whether a transaction is a simulation is to be decided upon the facts and circumstances of each case. Milano v. Milano, 243 So.2d 876 (La.App. 1st Cir.1971). However, when the property allegedly sold remains in the possession of The seller, there is a presumption of a simulation. La.C.C.art. 2480. An action to annul a simulated sale is not preseriptable. Manion v. Pollingue, 524 So.2d 25 (La.App. 3rd Cir.1988); Safford v. Ellish, 276 So.2d 884 (La.App. 1st Cir.1973).
The facts in this case clearly indicate that the purported transfer by the Debtor of the Dorvin Notes to CTI was a simulation. While some writings, including the endorsement of the notes, may seem to support the intent to make the transfer, the other credible evidence belies this stated intent. Until, at the earliest the second half of 1989, the books and records of CTI do not reflect any consideration given for the transfer, do not reflect the notes as an asset of CTI and do not reflect interest income to CTI from the notes. Indeed, the corporate articles of CTI do not authorize it to acquire or hold notes for investment. The proceeds of the notes were deposited into an account from which the expenses of the Debtors and the Huddleston Children were paid, as the note proceeds had been used before the alleged transfer. No other funds paid to CTI were ever deposited into this account, nor were any expenses of CTI ever paid from the account. Payments received on the notes were applied on CTI’s books to reduce the Debtor’s shareholder loans. The interest income from the notes was being declared by the Debtor on his income. tax returns, at least until the time of Bienvenu’s report. Perhaps most importantly, there is no evidence that the Debt- or ever relinquished possession of the Dor-vin Notes.
Also telling of the true intent of the Debtor regarding the “transfer” of the Dorvin Notes is the Debtor’s own history, recited above, of manipulating so-called transfers to conceal and disguise his ownership of property from creditors and other third parties. Not only does this history establish a pattern of such actions, but it throws considerable doubt upon the credibility of the testimony of the Debtor regarding his intent in connection with the Dorvin Notes. The Debtor’s intent is whatever the exigencies of the circumstances warrant, or what is sometimes referred to as “selective intent”. Moreover, his deposition testimony outlined above is not supportive of his position with regard to the notes, perhaps because it was given at a time when it better served his purposes to take a different position regarding his many questionable transactions. Nonetheless, his highly suspect testimony does little to bolster the argument of CTI that it owns the notes when opposed by credible evidence to the contrary.
The Court does not find the Debt- or’s testimony regarding his intent credible. Nor does the Court find much support for the validity of the transfer in the other evidence offered by CTI. The fact that former Trustee Smith supposedly recognized the transfer is of no moment since it was after the fact and cannot change the legal nature of the transaction and also Smith was not authorized by the Court to make such a recognition. That the Debtors’ bankruptcy schedules list the Dorvin Notes as assets of CTI is also far from conclusive, nor are the Trustee report *194forms. In fact, there is nothing offered by CTI into evidence that sufficiently counters the great weight of evidence that points to the conclusion that the transfer of the Dorvin Notes by the Debtor in May of 1987 was a simulation and a sham and, thus, a nullity. Regarding the assertion of CTI that the Trustee’s claims should be barred by the doctrine of laches because there is prejudice to CTI in the time period that has passed since the transfer, the Court finds no evidence of such prejudice and, therefore, will not apply laches.
In conclusion, the Court finds, first, that the claim of the IRS will be allowed in the following amounts: $801,656.98 — priority; $116,774.05 — general unsecured; and $31,-371.54 — administrative. The Court does not find, however, as the Trustee suggests, that the estate still holds claims of indemnity and contribution against the Huddle-ston Children for the tax liability. Those claims, including one against Alicia, have prescribed, as the Court found in the previous Opinion entered in this ease. Second, the Court finds that it is proper to annul the May 1987 transfer of the Dorvin Notes to CTI as a simulation and declares that the undivided one-half interest in the notes that is not owned by the Huddleston Children is property of the Debtors’ bankruptcy estate. An appropriate Judgment will be entered.
JUDGMENT
For the reasons assigned in the foregoing Memorandum Opinion entered herein by the Court this date,
IT IS ORDERED, ADJUDGED AND DECREED that, on the Complaint filed by the Trustee, David Adler, judgment be, and it is hereby, ENTERED IN FAVOR OF THE TRUSTEE. The May 13, 1987 transfer by Debtor, Albert Huddleston, of two promissory notes, executed on March 15, 1979 in favor of the Debtor by Dorvin Developments, Inc. and Edwin Dorvin (“Dorvin Notes”), to Defendant, Continental Titles, Inc. (“CTI”), is hereby DECLARED TO BE A SIMULATION AND A NULLITY.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the estate of the Debtors be, and it is hereby, DECLARED THE OWNER OF THE UNDIVIDED ONE-HALF INTEREST IN THE DORVIN NOTES NOT OWNED BY THE HUDDLESTON CHILDREN. Such property, and the proceeds therefrom since the filing of the Debtors’ bankruptcy, is ordered to be TURNED OVER TO THE TRUSTEE by CTI, the Debtors and Stone, Pigman, Walther, Whittmann and Hutchinson, L.L.P., or any other person or entity with possession or custody of the property, within two weeks of the date of entry of this Judgment.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the Objection to Claim filed by the Trustee be, and it is hereby, OVERRULED. The Amended Proof of Claim filed by the Internal Revenue Service (“IRS”) will be ALLOWED IN THE FOLLOWING AMOUNTS: $801,656.98 IN PRIORITY CLAIM; $116,774.05 IN GENERAL UNSECURED CLAIM; AND $31,371.54 IN ADMINISTRATIVE CLAIM.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that Defendants Meghan Huddleston Delgiorno, Lindsay Huddleston Kersker, Kevin Doyle Huddleston and Alicia St. John Huddleston, HAVE NO LIABILITY FOR THE AMENDED IRS CLAIM UNDER INDEMNITY OR CONTRIBUTION.
. This Memorandum Opinion constitutes the Court's Findings of Fact and Conclusions of Law in accordance with Bankruptcy Rule 7052.
. First National Bank of Jefferson was subsequently purchased by Whitney National Bank. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493389/ | OPINION
BROWN, Bankruptcy Judge.
Option One Mortgage Corporation (“Option One”) appeals the order of the bankruptcy court granting a default judgment to Daniel J. Schoenlein (“Appellee”), the non-debtor spouse of the Debtor. The Panel has determined that oral argument would not significantly aid the decisional process. Fed. R. Bankr.P. 8012. Option One contends that the bankruptcy court abused its discretion in granting a default judgment in favor of the Appellee and, although no motion to set aside the default appears in the record, that the bankruptcy court should have set aside the default. In addition, Option One claims that service of the complaint was improper and therefore violated due process.
Based upon the information presented in the briefs and appendices, the Panel holds that the bankruptcy court incorrectly concluded that service of process upon Option One was proper. Moreover, we conclude that the core jurisdiction of the bankruptcy court was never determined, placing into question its authority to enter a default judgment. Finally, we conclude that the court abused its discretion in entering a default judgment under the circumstances of this case. Accordingly, we VACATE the bankruptcy court’s order granting the Appellee’s motion for a default judgment and REMAND the proceeding.
I. ISSUES ON APPEAL
The issues on appeal are whether the bankruptcy court abused its discretion in granting a default judgment and whether the bankruptcy court properly concluded that service of process was proper pursuant to Federal Rule of Bankruptcy Procedure 7004. Although not raised by the parties, the Panel sua sponte also questions whether the bankruptcy court had core jurisdiction over these parties and this proceeding. BN1 Telecomm., Inc. v. Lomaz (In re BN1 Telecomm., Inc.), 246 B.R. 845, 848 (6th Cir. BAP 2000) (absent consent, if the proceeding is not core, the bankruptcy court is deprived “of subject matter jurisdiction to enter a final order of default”).
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. A final order of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). An order granting a motion for a default judgment is a final order. See, e.g., MacPherson v. Johnson (In re MacPherson), 254 B.R. 302, 303 (1st Cir. BAP 2000) (default judgment is a final order); see also, Bare*214ly v. Powell (In re Baskett), 219 B.R. 754, 757 (6th Cir. BAP 1998) (denying a motion to set aside a default judgment is a final order).
Appellate review of the granting of default judgments and the refusal to set aside such judgments is under the abuse of discretion standard. In re Baskett, 219 B.R. at 757. Our review of the bankruptcy court’s jurisdiction, a question of law, is a de novo review.
III. FACTS
The Appellee, who was not a debtor in the bankruptcy case, filed a complaint in his wife’s bankruptcy case on July 16, 2001, challenging several creditors’ claims against him, including the validity or extent of a mortgage interest claimed by Option One. This appeal concerns only the dispute between the Appellee and Option One. On July 20, 2001, the complaint was mailed by the Appellee by regular, first class mail to Option One in California, to the attention of the Legal Department, in care of John Stocker. John Stocker is a contract employee of Option One and had previously communicated with the Appel-lee regarding the mortgage. Due to what appears to have been a miscommunication between John Stocker and Deborah Jame-son, the Assistant Vice President and counsel for Option One, Option One did not file a timely answer to the complaint, nor did it file a request for an extension of time to answer or otherwise respond to the complaint. Option One had turned the claim against it over to its title insurer, and Ms. Jameson expected that insurer to defend the adversary proceeding.
On August 24, 2001, the plaintiff filed for a default judgment. For some unknown reason, the motion recited that Option One had “an extension to answer the complaint for 30 days from August 16, 2001.” Option One’s answer to the original complaint and a motion to file its answer instanter was filed on September 24, 2001, which was approximately one week after the extension mentioned in the motion for default.
A default had not been entered by the clerk. The bankruptcy court held a hearing on January 14, 2002 and concluded that Option One’s failure to file an answer in a timely manner was more than a mere mistake and amounted to negligence. The court held that this negligence was exacerbated when Option One allowed thirty days to pass after the motion for default was filed before it filed any response, but the court did not comment upon the answer being filed within one week of the extension mentioned by the plaintiff in his motion for default judgment. Therefore, the bankruptcy court granted the default judgment, holding that Option One was not entitled to protection or relief from its own negligence.
IV. DISCUSSION
This case comes to the Bankruptcy Appellate Panel in an unusual posture. Typically upon entry of a default judgment, appeals follow the trial court’s refusal to set aside the default judgment. See Federal Rule of Bankruptcy Procedure 7055, incorporating Federal Rule of Civil Procedure 55(c), which provides for setting aside such a judgment under Rule 60(b) standards. A prior Panel has explained those standards and the application of excusable neglect under Rule 60(b), In re Baskett, 219 B.R. 754, and it is unnecessary for us to restate that opinion. Although the parties here mix together in their arguments the concepts of abuse in entering a default judgment and refusing to set it aside, it was no doubt clear to Option One from the bankruptcy judge’s oral ruling that a motion to set aside the default judgment would have been futile. The judgment was entered by the bankruptcy judge after *215a hearing on the motion for default judgment, and that judgment is a final order for appeal purposes. The trial court’s action in entering a default judgment is a discretionary one, as indicated by the “may” language of Rule 55(b). See also, Ahern & MacLean, Bankruptcy Procedure Manual, § 7055.02 (2002 ed.).
Although no motion to set aside the default judgment is before the Panel, because of the record, including the trial court’s oral ruling, we are able to evaluate whether a default judgment should have been entered, and we fail to see its justification. The trial courts are guided in this circuit by clear authority that “ ‘[tjrials on the merits are favored in federal courts and a ‘glaring abuse’ of discretion is not required for reversal of a court’s refusal to relieve a party of the harsh sanction of default.’ ” In re Baskett, 219 B.R. at 757 (quoting INVST Fin. Group, Inc. v. Chew-Nuclear Sys., Inc., 815 F.2d 391, 397-98 (6th Cir.1987), cert. denied, 484 U.S. 927, 108 S.Ct. 291, 98 L.Ed.2d 251 (1987)); see also, Shepard Claims Serv., Inc. v. William Darrah & Assocs., 796 F.2d 190, 193 (6th Cir.1986) (“When the grant of a default judgment precludes consideration of the merits of a case, ‘even a slight abuse [of discretion] may justify reversal.’ ”) (citation omitted). Although much of the authority in this circuit is in the context of refusal to set aside a default judgment, the preference for trials on the merits versus default is equally applicable to the trial court’s entry of a default judgment without sufficient cause.
The bankruptcy court was justifiably concerned about why Option One had not answered the complaint, but in its concern that court failed to mention that Option One had filed its answer almost four months before the final hearing on the default motion. Moreover, the court’s oral ruling did not comment upon the facts that the plaintiffs default motion purported to give Option One an additional 30 day extension from August 16 to answer and that the answer was filed within one week of that extension. While only the bankruptcy court could have granted an extension of time to answer, the fact that the plaintiffs motion purported to give Option One such an extension bears on the overall question of whether the plaintiff was prejudiced by this slight delay in answering. In the context of the facts before us, the granting of the default judgment appears to be an overly harsh sanction, one granted solely upon a finding that Option One had been negligent in failing to timely answer. In the context of Rule 55(c), the Sixth Circuit has said that mere negligence is never enough to justify refusal to set aside a default. Shepard Claims Serv., Inc., 796 F.2d at 194 (the defaulting party’s failure must be willful, a higher standard than “careless and inexcusable”). The bankruptcy court’s finding was limited to negligence, an insufficient standard to justify default.
Although upon remand Option One’s answer may moot its current argument about insufficiency of service, in the context of whether the bankruptcy court was correct in entering a default we conclude that the bankruptcy court was incorrect in its determination that Option One had been properly served with the complaint and summons. Service of process in bankruptcy court is governed by Federal Rule of Bankruptcy Procedure 7004, which states in relevant part:
(b) Service by First Class Mail. Except as provided in subdivision (h), in addition to the methods of service authorized by Rule 4(e)-(j) F.R. Civ. P., service may be made within the United States by first class mail postage prepaid as follows:
*216(3) Upon a domestic or foreign corporation or upon a partnership or other unincorporated association, by mailing a copy of the summons and complaint to the attention of an officer, a managing or general agent, or to any other agent authorized by appointment or by law to receive service of process and, if the agent is one authorized by statute to receive service and the statute so requires, by also mailing a copy to the defendant.
Fed. R. Bankr.P. 7004.
Federal Rule of Civil Procedure 4(h) governs service upon corporations and associations and states in relevant part:
(h) Service Upon Corporations and Associations. Unless otherwise provided by federal law, service upon a domestic or foreign corporation or upon a partnership or other unincorporated association that is subject to suit under a common name, and from which a waiver of service has not been obtained and filed, shall be effected:
(1) in a judicial district of the United States in the manner prescribed for individuals by subdivision (e)(1), or by delivering a copy of the summons and of the complaint to an officer, a managing or general agent, or to any other agent authorized by appointment or by law to receive service of process and, if the agent is one authorized by statute to receive service and the statute so requires, by also mailing a copy to the defendant....
Fed.R.CivJP. 4(h).
John Stocker, the party to whose attention the copy of the complaint and summons was addressed, is not an employee of Option One. He is also not an officer, managing or general agent, nor is he authorized to receive service of process on behalf of Option One. John Stocker is an independent contractor of Option One. Therefore, it is clear that there was no proper service of process pursuant to either Federal Rule of Bankruptcy Procedure 7004 or Federal Rule of Civil Procedure 4(h).
Federal Rule of Civil Procedure 4(e)(1) permits service of process “pursuant to the law of the state in which the district court is located, or in which service is effected, for the service of a summons upon the defendant in an action brought in the courts of general jurisdiction of the State.” Fed.R.Civ.P. 4(e)(1). Therefore, we examine Ohio law, because this is the location of the district court, if not also the state in which the service was effected.1
Ohio Rule of Civil Procedure 4.2(F) governs service of process upon corporations and states that service shall be made as follows:
(F) Upon a corporation either domestic or foreign: by serving the agent authorized by appointment or by law to receive service of process; or by serving the corporation by certified or express mail at any of its usual places of business; or by serving an officer or a managing or general agent of the corporation.
Ohio Rev.Code Ann. § 4.2(F)(West 2002) (emphasis added).
Although Ohio law has a somewhat more lenient approach to effecting service upon a corporation, the Appellee has still failed to effect proper service pursuant to the state statute. As the above language indi*217cates, service on a corporation in Ohio is proper by serving the corporation at its usual place of business via certified or express mail. The mail does not have to be specifically addressed to any officer or agent of the corporation. Samson Sales, Inc. v. Honeywell, Inc., 66 Ohio St.2d 290, 421 N.E.2d 522 (1981). However, the certificate of service attached to the original complaint shows that the Appellee served Option One via regular, first class, United States mail-not by certified or express mail as required by the Ohio statute. Therefore, there was no proper service of process made upon Option One pursuant to Ohio law.
It may be that the bankruptcy court was evaluating service under an “apparent authority” analysis, without expressing it in those terms, but the parties did not address the service issue to us in those terms. There is authority in this circuit to argue an apparent authority of Mr. Stocker in this case, Ford Motor Credit Co. v. Weaver, 680 F.2d 451 (6th Cir.1982), but it is unnecessary for the Panel to examine that aspect since the parties did not address it and since we otherwise find the default judgment inappropriate.
An additional reason, if not principal one, for our vacating the default judgment is our concern about the jurisdictional posture of this proceeding. The complaint was filed against several defendants by a plaintiff who was not the debt- or in bankruptcy, seeking remedies that are not exclusively bankruptcy remedies. The complaint’s jurisdictional paragraph 1 merely says the court has jurisdiction under 18 [presumably intended to be 28] U.S.C. §§ 157 and 1334, thus failing to comply with Bankruptcy Rule 7008(a)’s requirement that the complaint “contain a statement that the proceeding is core or non-core.... ” We understand that bankruptcy courts are often deprived of an effective opportunity to determine whether a proceeding is core when the parties do not address that issue. The bankruptcy judge, nevertheless, has an independent obligation to determine if a proceeding is core. 28 U.S.C. § 157(c)(1). This obligation is highlighted in proceedings involving default scenarios.
Another Panel addressed such a scenario in In re BN1 Telecomm., Inc., 246 B.R. 845, concluding that the bankruptcy court’s failure to analyze whether the proceeding was core placed into question whether that court had appropriate jurisdiction over the proceeding to enter a final judgment of default. We need not re-examine that issue here; rather, it is enough to say that the nature of this proceeding, brought by a non-debtor plaintiff against non-debtor defendants and concerning non-bankruptcy issues, is sufficient to place into question whether the proceeding is core. Thus, that question alone reinforces our conclusion that the bankruptcy court abused its discretion, if it did not exceed its jurisdiction, in entering the default judgment. If a final conclusion were that the court lacked subject matter jurisdiction, absent consent, to enter the default judgment, the judgment would be void. See Antoine v. Atlas Turner, Inc., 66 F.3d 105, 108 (6th Cir.1995).
Finally, we note that the judgment may be deficient, if not void, due to the nature of the remedies sought in the complaint. The complaint seeks alternative remedies against Option One, either a determination that Option One’s mortgage lien is invalid or that it is limited to the one-half interest owned by the plaintiffs spouse, who is the Debtor in bankruptcy. The default judgment merely says that judgment is entered “in favor of the Plaintiff, Daniel J. Sehoen-lein, and against the Defendant, Option One Mortgage Company.” We do not know what the judgment means. Which alternative remedy does it grant? How would it be enforceable if it were valid? *218Since it is obvious that the real defending party is Option One’s title insurer, we wonder what effect the judgment would have upon that insurer’s liability. Such questions, in themselves, point to the ineffectiveness of the judgment.
We make no determination about the underlying merits of this proceeding, but do observe that Option One expresses a meritorious defense, one deserving of a judicial determination rather than a default for slight delay in answering the complaint.
Therefore, we VACATE the order granting a default judgment and REMAND this proceeding to the bankruptcy court to make a determination on whether this proceeding is core and, if not, whether the parties consent to the entry of a final judgment by the bankruptcy court. That decision will determine whether or how the bankruptcy court will consider the merits.
. Because our conclusions are otherwise that the default judgment must be vacated, we will not pursue examination of the law of California, where service was arguably effected. Under that state’s Code of Civil Procedure, service may be obtained upon authorized officers and agents of corporations by first class or air mail. Cal. Civ. P. §§ 415.39, 416.10 (West 2002). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493391/ | MEMORANDUM OPINION
JAMES D. WALKER, Jr., Bankruptcy Judge.
This matter comes before the Court on Defendant Dodd’s Builder’s Supply, Inc.’s Motion to Open Default pursuant to Rule 55(c) of the Federal Rules of Civil Procedure. Fed.R.Civ.P. 55(c). The Court held a hearing on July 13, 2001. After considering the pleadings, evidence and applicable authorities, the Court enters the following findings of fact and conclusions of law in compliance with Federal Rule of Bankruptcy Procedure 7052.
Findings of Fact
On March 1, 2001, Debtor filed a complaint with this Court alleging, among oth-. er things, that Dodd’s Builder’s Supply, Inc. (“Defendant DBS”) violated the automatic stay and the discharge injunction order issued by this Court on December 8, *3792000, by attempting to collect a debt discharged by that order. Debtor states in his complaint that, along with his brother David Eugene Jones, he operated a home construction business. Debtor also states that as part of that business, they had a revolving account with Defendant DBS for supplies. At the end of 1999, Debtor and his brother owed approximately $8,000 to Defendant DBS, which they were unable to pay. Thereafter, Debtor filed for bankruptcy on December 30,1999, and Debtor’s brother, David Eugene Jones, filed for bankruptcy on April 3, 2000. The debt owed to Defendant DBS was listed in Debtor’s bankruptcy schedules. Seeing that it was unable to collect its debt from Debtor or his brother, Defendant DBS filed materialman’s liens for the amount it was owed against J. Dale Mann, a homeowner whose home was built by Debtor and his brother with supplies purchased from Defendant DBS, and against another owner. Debtor alleges in his complaint that these liens are invalid under Ga.Code Ann. § 44-14-361 et seq.
Subsequently, Debtor’s debts, including the debt owed to Defendant DBS, were discharged on December 8, 2000, and David Eugene Jones’s debts were discharged on July 17, 2000. Debtor alleges in his complaint that despite filing for bankruptcy and receiving a discharge of his debts, Defendant DBS swore out a warrant against him with the Monroe County Sheriffs Office stating Debtor had engaged in a scheme to defraud it in violation of Ga.Code Ann. § 16-8-15. Thereafter, Debtor filed a complaint against Defendant DBS with this Court claiming Defendant DBS violated the automatic stay and the discharge injunction order. Debtor’s brother, David Eugene' Jones, filed a similar complaint.
Defendant DBS appeared pro se before this Court at an expedited hearing held on March 12, 2001, concerning Debtor’s complaint and the complaint filed by his brother. While the matter in dispute at the hearing did not directly affect Defendant DBS, Defendant DBS did appear. Thereafter, Defendant DBS wrote a letter to Debtor on April 25, 2001, in an effort to resolve the matter. However, Defendant DBS did not obtain legal counsel and failed to respond to the complaint filed by Debt- or against it. Accordingly, a default was entered on May 7, 2001. Subsequently, Defendant DBS acquired legal counsel and filed this motion to open default on June 7, 2001.
Conclusions of Lavi
Rule 55(c) of the Federal Rules of Civil Procedure provides “For good cause shown the court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b).” Fed.R.Civ.P. 55(c). Because no judgement by default was entered in this case, it is the good cause standard that the Court must look to in determining whether to set aside the default.
This Court has previously noted that there are four factors which should be considered in assessing good cause. While other factors may also be considered, these four factors are: “(1) the promptness of the defaulting party’s action to vacate the default, (2) the plausibility of the defaulting party’s excuse for the default, (3) the merit of any defense the defaulting party might wish to present ip response to the underlying action, and (4) any prejudice the party not in default might suffer if the default is opened.” Am. Express Travel Related Serv. v. Jawish (In re Jawish), 260 B.R. 564, 567 (Bankr.M.D.Ga.2000). In looking at these factors, a court should be mindful of the general policy favoring decisions based on the merits. Id.
*380The first factor to be considered is how promptly the defaulting party acted in attempting to vacate the default. As Defendant DBS correctly notes, Rogers v. Allied Media, Inc. found that the filing of a motion to open a default one month after the entry of default was not per se unreasonable. Rogers v. Allied Media, Inc. (In re Rogers), 160 B.R. 249, 252 (Bankr. N.D.Ga.1993). In this case, a default was entered on May 7, 2001. Defendant DBS filed its motion to open the default on June 7, 2001. Having determined that Defendant DBS filed its motion one month after the default was entered, this Court finds that Defendant DBS was sufficiently prompt in its action to vacate the default. However, this period of one month should not be construed as a safe harbor for promptly filed motions for relief from default. In fact, but for the unliquidated damages aspect of this case, a judgment would have been entered within days of the entry of default, thereby creating a radically different and more strenuous standard for relief.
The second factor that a court should consider in opening a default is whether the defaulting party’s excuse for the default is plausible. This involves an examination of the defaulting party’s culpability. Jawish, 260 B.R. at 568. Here, Defendant DBS states that it did not respond to Debtor’s complaint because it misunderstood the requirement that it respond in writing. Defendant DBS had not retained legal counsel. Defendant DBS also states that it attempted to resolve the matter by writing a letter to Debtor’s counsel explaining that it had no actions pending against Debtor and that the liens it had filed were settled. Defendant DBS went on to state in its letter that it should be removed from Debtor’s action with the Court. Having written this letter, Defendant DBS thought the matter was resolved.
This Court has previously stated in relation to this case that the lack of legal assistance which creates misunderstandings as to legal requirements cannot be viewed by the Court as a plausible excuse for failing to respond to Debtor’s complaint. Jones v. Mann (In re Jones), Ch. 7 Case No. 99-55074, Adv. No. 01-5024 (Bankr.M D. Ga. July 16, 2001) (order denying J. Dale Mann’s motion to open default). Accordingly, Defendant DBS’s excuse is, at best, marginally plausible. On the other hand, Defendant DBS has not exhibited the level of culpability comparable to J. Dale Mann, a defendant in this case who filed an unsuccessful motion to open default. This Court has never advised Defendant DBS to obtain legal counsel, as the Court did with J. Dale Mann. Therefore, Defendant DBS did not ignore any warnings by this Court. In addition, Defendant DBS exerted greater effort than Mr. Mann in responding to Debtor’s complaint by writing directly to Debtor’s counsel. Accordingly, this matter is distinguishable from J. Dale Mann’s motion to open default in this case. So while Defendant DBS’s excuse is marginally plausible, this factor will not weigh as heavily in the Court’s analysis as it did in the Court’s analysis of Mr. Mann’s similar motion, because Defendant DBS has not exhibited the same level of culpability.
The third factor to consider in whether to open a default is whether the defaulting party has a potentially meritorious defense to the underlying action. Debtor’s complaint states that Defendant DBS violated the automatic stay and the discharge injunction order issued in the case by attempting to collect a debt that had been discharged. Debtor alleges that Defendant DBS attempted to collect its debt by filing invalid materialman’s liens, and by *381swearing out a warrant alleging Debtor committed fraud against it. Debtor states that the materialman’s liens were not valid because under Ga.Code Ann. § 44-14-361 et seq., a lien against a homeowner who receives the benefit of materials must be filed within ninety days. Debtor argues that Defendant DBS, having a revolving account with Debtor and his brother, applied the funds it received in such a way as to enable the debts to fall within the ninety day deadline, without regard to whether the supplies purchased were actually used on the individual’s homes who had liens filed against them within the ninety days. Debtor farther argues that the debts owed to Defendant DBS were not for supplies used on the buildings owned by the individuals who had liens filed against them, so the liens are not valid.
Defendant DBS responds by stating that the liens were valid and that it has not filed any criminal action or civil action against Debtor, so it has not violated the automatic stay or the discharge injunction order by attempting to collect a debt. Defendant DBS alleges that the criminal proceedings were initiated by the District Attorneys. As to the liens, Defendant DBS notes that it does not offer revolving accounts to customers. Instead, Defendant DBS maintains a 30 day account for customers, which must be paid in full each month. In addition, Defendant DBS states that it did not selectively apply payments made by Debtor. When it received payments from Debtor without instructions as to how to apply the payments, it followed “generally accepted accounting principles” and applied the payments to the oldest outstanding accounts. Furthermore, Defendant DBS cites Georgia case law that notes that a materialman is not required to show that the materials he is owed money for were actually used on the house of the homeowner who has had a lien filed against him. Maloy v. Planter’s Warehouse & Lumber Co., Inc., 142 Ga. App. 69, 234 S.E.2d 807, 809 (1977). Accordingly, Defendant DBS appears to have a potentially meritorious defense to Debt- or’s allegations.
As to the fourth factor, prejudice to the debtor, the opening of any default causes delay and therefore is somewhat prejudicial to a debtor. Jawish, 260 B.R. at 568. However, this prejudice must be balanced against the policy favoring resolving disputes on the merits. Id. Here, because Defendant DBS has asserted a defense with potential merit and the prejudice to Debtor appears to be minimal, the balance weighs in favor of opening the default.
Taking all of these factors into consideration, the Court finds that there is good cause to open the default. Defendant DBS was sufficiently prompt in its actions to vacate the default. The excuse offered by Defendant DBS for its default does not evince a high level of culpability, and Defendant DBS’s defense to the underlying action appears to have merit. Furthermore, the Court is mindful of the general policy favoring decisions based on the merits. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493393/ | MEMORANDUM OPINION
PATRICIA M. BROWN, Bankruptcy Judge.
This matter came before the court on the Objection of the Portland Teacher’s Credit Union (hereinafter “PTCU”) to confirmation of the debtors’ proposed Chapter 13 plan. A hearing on this matter was held on February 7, 2002. The debtors were represented by Jason Wilson-Aguilar. PTCU was represented by Peter McCord. Thereafter, I took these matters under advisement.
I have reviewed my notes, the exhibits, and the pleadings and other submissions in the file. I also have read applicable legal authorities, both as cited to me and as located through my own research. I have considered carefully the oral testimony and arguments presented and have read counsel’s submissions in detail. The following findings of fact and legal conclusions constitute the court’s findings under Federal Rule of Civil Procedure 52(a), applicable in this proceeding under Federal Rule of Bankruptcy Procedure 9014.
FACTS
The facts are not in dispute. On or about February 9, 1996 the debtors borrowed $17,129 from PTCU under a line of credit agreement. This debt was secured by a Deed of Trust dated February 9, 1996, recorded February 12, 1996, as Document No. 96011889 in the official records of Washington County, Oregon, in which the Debtors were the Grantors and PTCU was the Beneficiary. (“February Trust Deed”.) The February Trust Deed eneum- ' bered the Debtors’ residential real property located at 13403 SW Clearview Way, Tigard, Oregon 97223.
On or about November 21, 1996 the debtors borrowed an additional $25,000 from PTCU under a home equity loan agreement. This debt was secured by a second Deed of Trust dated November 21, 1996, recorded November 26,1996, as Document No. 96105499 in the official records of Washington County, Oregon (“the November Trust Deed”). The November Trust Deed also encumbered the Clear-view Way property.
Both the February Trust Deed and the November Trust Deed contained language providing that upon default PTCU could:
*855“... exercise any one or more of the following rights and remedies, in addition to any other rights or remedies provided by law:
(a) With respect to all or any part of the Real Property, the Trustee shall have the right to foreclose by notice and sale and [PTCU] shall have the right to foreclose by judicial foreclosure, in either case in accordance with and to the full extent provided by applicable law.” Trust Deeds, ¶ 14.1
Additionally, the Trust Deeds contained a provision regarding election of remedies as follows:
“... Election by [PTCU] to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or take action to perform an obligation of Grantor under this Deed of Trust after failure of Grantor to perform shall not affect [PTCU]’s right to take actions on the indebtedness and exercise its remedies under this Deed of Trust.” Trust Deeds, ¶ 4.4
The debtors subsequently defaulted on their obligations to PTCU under the line of credit and home equity loan agreements. PTCU then filed a suit against the debtors in Washington County Circuit Court seeking a judgment in the amount due on the notes secured by the deeds of trust. On July 21, 2000 the Washington County Circuit Court entered judgment against the debtors and in favor of PTCU in the amount of $43,700.02 plus costs and attorney fees in the amount of $4,966.00 (“PTCU Judgment”). The PTCU Judgment constituted a lien on all of the debtors’ real property located in Washington County. In addition, on July 25, 2000, PTCU recorded a Lien Record Abstract in Clackamas County where the PTCU Judgment became a lien on all of the Debtors’ real property located in that county. The Debtors made some payments toward the judgment held by PTCU but did not wholly satisfy it.
On June 28, 2001, the Debtors filed their Chapter 13 bankruptcy petition. Their schedules indicate that they own two pieces of real property, their residence located on Clearview Way which they valued at $360,000, and a rental property located at 19230 Bryant Rd., Lake Oswego Oregon which they valued at $218,440.
The Clearview Way property is encumbered by a first mortgage or trust deed lien in favor of Washington Mutual in the amount of $279,000 and a Washington County real property tax lien in the amount of $3,808.18. In addition, the schedules indicate it is encumbered by the judgment liens held by PTCU and a judgment lien in favor of Wells Fargo. The schedules further indicate that the residential property is encumbered by a deed of trust in favor of PTCU but that it is “disputed” and that it is “Debtor’s portion (sic) is Trust Deed merged into judgment.”
The Bryant Rd. property is encumbered by a first mortgage or trust deed hen in favor of Mainlander Service Corp in the amount of $206,250 and a Clackamas County real property tax lien in the amount of $2,569,18. In addition, the schedules reflect it is encumbered by the PTCU judgment hen as well as a judgment hen in favor of Wells Fargo Bank.
The Debtors’ original Chapter 13 plan is dated July 19, 2001. Both PTCU and Wells Fargo were hsted in paragraph 2(b). However, the plan states that there was no equity in the properties to which either PTCU’s or Wells Fargo’s judgment hens could attach and that, as a consequence, their claims would be treated as wholly unsecured. The plan further provided that “Upon entry of discharge the judgment hens of Wells Fargo and PTCU shall be deemed extinguished and satisfied.” *856The plan further provided that Wells Fargo’s and PTCU’s judgment liens against the debtors’ residential property would be avoided under § 522(f)(1)(A).
PTCU objected to confirmation of the debtor’s proposed plan. It argued that in addition to the judgment lien recognized by the debtors, it was also a secured creditor by virtue of the two deeds of trust it held against the Clearview Way property. In addition it argued that its rights were not subject to modification because its claim was secured only by the debtors’ principal residence. Finally, it argued that its trust deed secured claim was superior to any homestead exemption claimed by the debtors and therefore could not be avoided under § 522.
The Debtors filed their first amended Chapter 13 plan dated October 17, 2001, on October 18, 2001. This plan increased the total amount of payments that the debtors were to make over the life of the plan. However, it did not change the manner in which PTCU’s claim was treated. Creditor First Select was substituted for Wells Fargo Bank as a judgment lien creditor. On October 24, 2001, PTCU filed an objection to the amended plan in which it incorporated its objections to the original plan.
DISCUSSION
The debtors dispute PTCU’s characterization of its security interests. The Debtors contend that by suing on the notes secured by the deeds of trust, PTCU waived its rights under the deeds of trust and therefore has no security for its claim except its judicial liens. In support of this contention the debtors cite O.R.S. 86.735(4) and In re Morrison, Case No. 300-31640-tmbl3 (Bankr.D.Or.2000).
O.R.S. 86.735(4) states that:
“The trustee may foreclose a trust deed by advertisement and sale in the manner provided in ORS 86.740 to 86.755 if: ...
(4) No action has been instituted to recover the debt or any part of it then remaining secured by the trust deed, or, if such action has been instituted, the action has been dismissed.... ”
In Morrison, this court held that a creditor had elected its remedies by suing on a promissory note underlying its deed of trust and thus lost its deed of trust hen. I based this decision on the fact that the loan documents entered into by the parties in Morrison prohibited the creditor from pursuing more than one remedy for the debtor’s breach. However, I also noted that ORS 86.735(4) “suggests that once the whole note has been sued upon, no further action can be brought.”
PTCU argues that Morrison is distinguishable on its face because the deed of trust in that case prohibited the creditor from pursuing more than one of the remedies provided for in the deed of trust whereas the trust deeds at issue in this case permits it to “exercise any one or more ” of the remedies provided for in the trust deeds (emphasis added). Further, while it concedes that it is prohibited by ORS 86.735(4) from foreclosing its trust deeds by advertisement and sale, it contends that it is entitled to treat the trust deeds as mortgages and seek judicial foreclosure under ORS 88.010 et. seq.
ORS 86.715 states:
“A trust deed is deemed to be a mortgage on real property and is subject to all laws relating to mortgages on real property except to the extent that such laws are inconsistent with the provisions of ORS 86.705 to 86.795, in which event the provisions of ORS 86.705 to 86.795 shall control.”
ORS 88.010 provides that a mortgage shall be foreclosed by suit subject, however, to ORS 88.040 which provides:
*857“During the pendency of an action for the recovery of a debt secured by any lien mentioned in ORS 88.010, a suit cannot be maintained for foreclosure of the lien, nor thereafter, unless judgment is given in such action that the plaintiff recover the debt or some part thereof, and an execution thereon against the property of the debtor is returned unsatisfied in whole or in part.”
PTCU contends that the language of ORS 88.040 clearly recognizes that a creditor has the right to bring an action on the note underlying a trust deed, execute on that judgment, and, if it is unable to satisfy the judgment by execution, still foreclose on its collateral.
The Debtors argue that PTCU’s reliance on ORS 86.715 is misplaced. They note that ORS 86.715 provides that a trust deed shall be subject to mortgage law “except to the extent that such laws are inconsistent with the provisions of ORS 86.705 to 86.795” Here they argue, allowing PTCU to proceed with judicial foreclosure of the trust deeds under mortgage law would be inconsistent with the provisions of ORS 86.770(2)(b) and is, therefore, not permitted by ORS 86.715.
ORS 86.770(2) provides:
“... no other or further action shall be brought, nor judgment entered for any deficiency, against the grantor, or the grantor’s successor in interest, if any, on the note, bond, or other obligation secured by the trust deed or against any other person obligated on such note, bond or other obligation after a sale is made:
(a) By a trustee under ORS 86.705 to 86.795; or
(b) Under a judicial foreclosure of a residential trust deed.”
PTCU agrees with the debtor’s contention that the trust deeds at issue are residential trust deeds and that it could not judicially foreclose those trust deeds and then obtain a deficiency judgment on them. It argues, however, that under ORS 86.770(2)(b) the bar prohibiting a creditor from obtaining a deficiency judgment does not become operative until after a foreclosure sale. Here, it argues, since no foreclosure sale has occurred, the provisions of ORS 86.770(2) do not come into play. Consequently, it contends, it may maintain judicial foreclosures of its trust deeds without violating the provision of that statute.
The statutes cited by the parties clearly state that a creditor who forecloses a residential deed of trust, either by advertisement and sale or through judicial foreclosure, may not thereafter obtain a deficiency judgment against the obligor on the underlying obligation. However, none of these statutes directly address the issue of whether a creditor who holds a note secured by a residential deed of trust may sue on the note and then foreclose on its deed of trust. I must, therefore, look to case law for the answer to that question.
Under Oregon law, a holder of a security interest in real property, whether a mortgage or a deed of trust, may judicially foreclose on its collateral and, thereafter, sue on the note to collect any deficiency owing unless the security agreement is a purchase money mortgage or a residential deed of trust. In such cases the creditor is prohibited from seeking a deficiency from the grantor by statute. ORS 86.770(2) (Residential Trust Deed) and 88.070 (Purchase Money Mortgage).
No statute specifically prohibits a creditor from avoiding the restriction' on suing to collect deficiencies for purchase money mortgages and residential deeds of trust by first suing on the notes, executing on that judgment and thereafter foreclos*858ing its security interest. However, Oregon case law has consistently held that “If the purchase money mortgagee elects to foreclose the mortgage, he is barred from bringing an action on the mortgage debt, or he may obtain a judgment on the mortgage debt, in which case he loses his mortgage hen.” Banteir v. Harrison, 259 Or. 182, 485 P.2d 1073, 1075 (1971). See also, Ward v. Beem Corporation, 249 Or. 204, 209, 437 P.2d 483 (1968) (“... purchase money mortgagee has an election to either foreclose his mortgage, in which case he is barred from bringing an action on the mortgage debt, or to obtain a judgment on the mortgage debt, in which case he loses his mortgage lien.”) Beckhuson v. Frank, 97 Or.App. 347, 351, 775 P.2d 923 (1989) (“a trust deed beneficiary may elect to sue on the note and thereby waive his priority and security, or he may foreclose on the security and waive his right to collect a deficiency.”)
In Knight v. Boese, (In re Knight), Adversary Case No. 91-6190-R (Bankr.D.Or.1992), Judge Radcliffe noted that the doctrine of election of remedies, whereby a creditor who elects to sue on a note loses his mortgage or trust deed lien, was developed by the Supreme Court of Oregon “as a necessary corollary to the anti-deficiency statutes [such as ORS 86.770(2).]” He notes that under this doctrine:
“a purchase money mortgagee or trust deed beneficiary has an election upon default. It may either elect to (1) foreclose upon the property encumbered by its mortgage or trust deed in the manner provided by law, or in the alternative, it may (2) bring an action at law against the parties personally liable for the debt secured by the mortgage or trust deed. Once a remedy has been elected, the creditor is barred from pursuing the other remedy.”
He goes on to note:
“One obvious reason for the development of [the doctrine of election of remedies] lies in the rationale that the mortgagee or trust deed beneficiary should be prevented from doing indirectly what the anti-deficiency statutes prohibit, directly. In other words, if the statutes prohibit the obtaining of a deficiency after foreclosure, a creditor should not be able to obtain a judgment, execute thereon and then collect the deficiency, if any, by way of foreclosure. This would permit a creditor to obtain a deficiency judgment so long as the creditor elected to sue the parties personally liable on its debt first and to execute upon any judgment obtained prior to attempting foreclosure on the property subject to a purchase money mortgage or trust deed.”
I agree with Judge Radcliffe’s well reasoned opinion in Knight and find that, under the doctrine of election of remedies, a creditor who elects to sue on a note secured by a residential deed of trust and obtains judgment on that suit thereby waives its trust deed lien. Accordingly, I find that PTCU does not hold enforceable trust deeds against the Debtor’s Crestview Way property. Rather it has judgment liens which fall in priority after the Debtors’ homestead exemption of $33,000 pursuant to ORS 23.240. The question then becomes whether PTCU’s judgment lien can be stripped away pursuant to 11 U.S.C. § 522(f)(1)(A).
PTCU argues that the provisions of 11 U.S.C. § 1322(b)(2) prohibit the Debtors from modifying its rights as its only security is the Debtors’ “principal residence.” Obviously, this is innacurate as PTCU has a judgment lien on both the residence in Washington County and the rental proper-. ty in Clackamas County. 11 U.S.C. § 1322(b)(2) is not applicable. Further, § 1322(b)(2) only prohibits a debtor from *859modifying the rights of holders of secured claims if those claims are secured by a “security interest” in the debtor’s principal residence. The term security interest is defined by the Bankruptcy Code as a “lien created by agreement.” 11 U.S.C. § 101(51). A judicial lien is not created by agreement. Thus, § 1322(b)(2) would be inapplicable even if PTCU’s judgment lien attached only to the debtor’s principal residence.
No evidence was presented as to the value of the real property. Therefore, I will use the figures contained in the Debtors’ schedules:
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No evidence was presented as to the amount of First Select’s judgment lien nor its priority with respect to PTCU’s judgment lien. It appears there is at least $8,549.70 of equity to which one or both of these judgments would attach. However, I have insufficient information to make a determination with respect to the priority or amount of the judgment liens. Therefore, I will deny confirmation and allow the Debtors 28 days to file an amended plan. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493395/ | OPINION
1
KEVIN J. CAREY, Bankruptcy Judge.
An involuntary chapter 7 bankruptcy petition was filed against C.F. Foods, L.P. (the “Debtor” or “CF Foods”) on May 6, 1999. An order for relief was entered on July 1, 1999 and the chapter 7 trustee was appointed on July 15,1999.
*105On June 15, 2000, the trustee filed a complaint against Campus Crusade for Christ, Inc. (“Campus Crusade”),2 alleging that twenty-four payments, totaling $72,200.00, that were made by the Debtor to Campus Crusade between December 1995 and January 1999 should be avoided as fraudulent transfers pursuant to Bankruptcy Code §§ 544(b) and 548 (11 U.S.C. § 544(b) and § 548) and the Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa. C.S.A. § 5101 et seq (“PUFTA”).3 On August 10, 2000, Campus Crusade filed an answer to the complaint. A trial was held on April 26, 2001 and, thereafter, the parties filed post-trial memoranda of law. Upon further order of this court, the parties also filed Proposed Findings of Fact and Conclusions of Law.
The trustee argues that the payments made by the Debtor to Campus Crusade were made with the actual intent to hinder, delay and defraud creditors because, as admitted by the Debtor’s general partner, David P. Burry, virtually all of the Debtor’s business operations were nothing more than a Ponzi scheme.4 Therefore, the trustee argues that the transfers are avoidable under § 5104(a)(1) of PUFTA and § 548(a)(1)(A) of the Bankruptcy Code, due to the Debtor’s actual intent to defraud creditors. In the alternative, the trustee also argues that the transfers are avoidable under theories of constructive fraud, as set forth in § 5104(a)(2) of PUF-TA and § 548(a)(1)(B) of the Bankruptcy Code, because (i) Campus Crusade did not give the Debtor reasonably equivalent value in return for the transfers; and (ii) the Debtor was engaged in a business for which the remaining assets of the Debtor were unreasonably small in relation to the business or the Debtor intended to incur debts beyond the Debtor’s ability to pay as they became due. Campus Crusade did not present any evidence at trial, but argues that the trustee’s evidence was not sufficient to prove either (i) actual intent to *106defraud creditors, by failing to establish the existence of any of the “badges of fraud” as set forth in § 5104(b), or (ii) constructive intent to defraud creditors by failing to analyze adequately the partners’ nonpartnership assets in determining whether the Debtor was insolvent.
For the reasons set forth below, the relief requested by the trustee will be granted.
FACTS5
On January 1,1994, David Burry formed a limited partnership in Chadds Ford, Pennsylvania known as “C.F. Foods, L.P.” CF 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.
Burry was a general partner who managed and operated CF Foods. Edward Stillman was an alleged limited partner and investor in CF Foods. Burry solicited investors in CF Foods by promising them that his expertise in the wholesale candy distribution business resulted in high profits for CF Foods and, as a result, CF Foods could provide returns of 18-30% to investors. The returns paid to CF Foods’ early investors were paid for with the proceeds derived from investments made by later investors. Over time, the seemingly impressive returns paid by CF Foods to its investors gained the attention of the friends and family of both Burry and Edward Stillman, and interest in investing in the enterprise grew. Burry eventually attracted over $25 million in investments in CF Foods.
Burry represented to investors, his business partner, financial institutions, and his accountant that he was very successful at purchasing very large quantities of candy from wholesalers and manufacturers at “close-out” prices and then re-selling these large quantities in the marketplace for a significant mark-up. CF Foods purportedly conducted two types of sales transactions. The portion of the business dubbed by Burry as “Sales One” was completely fictitious and fraudulent in nature. Burry was solely responsible for managing Sales One and no one at CF Foods other than Burry had any personal involvement in this aspect of the business. Sales One ostensibly 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.
The other portion of the business, known as “Sales Two,” was the “legitimate” aspect of CF Foods with real employees, real inventory, and real sales deliveries. In 1998, Sales Two reflected actual sales totaling less than $5 million, out of total reported sales of more than $140 million. The exact amount of “Sales Two” transactions is difficult to pinpoint because Burry included some fraudulent “Sales One” transactions in those reported as “Sales Two” transactions and CF Foods’ internal accounting records are otherwise unreliable, given Burry’s widespread forgeries and falsification of records.
Using the invoices, shipping documents, and related business records acquired from the small amount of real candy business conducted by CF Foods, Burry systematically created phony “business records” by “whiting out” old information, *107typing in new information, and then photocopying the forged record so that it would be indistinguishable from a copy of an authentic business record reflecting a real transaction. Burry then logged hundreds of fictitious transactions into the computerized general ledger system for CF Foods, which generated impressive — but false-— balance sheets, income statements, and accounts receivable listings, among others.
Burry took these financial statements to a certified public accountant, who then prepared a review of the financial information provided to him by Burry. The accountant was never asked by Burry to conduct an audit of CF Foods, and the reports he prepared were merely summaries of the false financial information provided by Burry.
As a result of the false information provided by Burry to his accountant, the following total sales figures were reported 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
By David Burry’s own admission, approximately 97% of these sales never actually occurred.
Beginning in January 1999, in an effort to meet the increasing financial strains imposed on CF Foods as a result of demands for repayment of capital by investors in CF Foods, Burry engaged in a massive check kiting scheme, involving hundreds of checks totaling more than $70 million that were written on 20 different bank accounts controlled by Burry at First Union National Bank, PNC Bank, Commerce Bank, Fleet Bank and Bank of America. Burry’s check kiting activities eventually resulted in total losses of approximately $2.5 million to three of the financial institutions.
Between April 7 and 9, 1999, PNC Bank notified CF Foods that its operating account was overdrawn by approximately $1 million. As a result of the overdraft problems, on Saturday, April 10, 1999, Burry admitted to Edward Stillman that the “Sales One” portion of the CF Foods operation had been a “sham” and that no such sales ever occurred. Burry told Stillman that he had cut and pasted receipts to deceive other individuals and banks, and stated that he went to work early in the morning and stayed late into the night putting together fake business records. Burry also admitted to Stillman that he had intercepted audit confirmation requests sent out by CF Foods’ auditors by contacting various businesses and telling them that the confirmation requests had been sent out by mistake and should be returned to Burry, who then falsely confirmed the receivables balances.
Burry also made similar admissions to other persons. On April 10, 1999, Burry told Paul Weis, who had worked as the controller for CF Foods, that “Sales One was nothing more than a Ponzi scheme” and that “I got good with white out and doctoring bank and other records.” On April 10, 1999, Burry told his brother-in-law that he had been living a “lie” for a long time and had “embezzled” money from CF Foods, family members, friends, banks, church members and others. On April 20, 1999, Burry also gave a full confession admitting his responsibility for the entire CF Foods Ponzi scheme in a meeting with the U.S. Attorney’s Office and the FBI.
During the period of the December 28, 1995 through January 19, 1999, CF Foods *108made the following payments to Campus Crusade (the “Transfers”):
Date Amount
12/28/95 $ 1,000.00
4/2/96 $ 500.00
7/24/96 $ 500.00
9/11/96 $ 500.00
10/7/96 $ 1,000.00
12/4/96 $ 1,700.00
2/12/97 $ 1,500.00
3/17/97 $ 1,500.00
4/28/97 $ 1,500.00
4/28/97 $ 500.00
7/14/97 $ 1,500.00
7/14/97 $ 500.00
10/3/97 $ 2,000.00
10/8/97 $ 18,000.00
1/20/98 $ 500.00
1/20/98 $ 1,500.00
4/13/98 $ 500.00
4/13/98 $ 1,500.00
4/27/98 $ 1,500.00
7/20/98 $ 3,500.00
7/21/98 $ 10,000.00
8/12/98 $ 12,000.00
10/19/98 $ 4,500.00
1/19/99 $ 4,500.00
Total 72,200.00
In response to the trustee’s Request for Admissions, Campus Crusade admitted that it received the foregoing payments and that each payment constituted “..a transfer of property of the Debtor, to or for the benefit of [Campus Crusade].”6 In response to the trustee’s interrogatories, Campus Crusade stated that it “... does not believe that the donations(s) [i.e., the Transfers] resulted from the delivery of goods, services or loans of money or other reasonably equivalent value delivered by the Defendant to the Debtor.”7
At trial, the trustee also presented testimony of his certified public accountant, Daniel J. Coffey, who testified about his review and analysis of the exhibits introduced at trial, the Debtor’s books and records, other documents regarding the Debt- or’s finances obtained from third party sources, such as banks or pension plans, and information from Burry’s criminal trial.8 Based upon his review and analysis, the accountant offered expert opinions (i) regarding the insolvency of the Debtor, which included a review of Burry’s finances,9 (ii) that, at the time the Debtor was making transfers to Campus Crusade, the Debtor was engaged in a business with an unreasonably small amount of capital,10 and (iii) that the Debtor intended to incur debt beyond its ability to pay such debt as it matured.11
DISCUSSION
A. The Transfers to Campus Crusade were made by the Debtor with actual intent to hinder, delay or defraud creditors and are avoidable under both § 5104(a)(1) of PUFTA and § 548(a)(1)(A) of the Bankruptcy Code.
The trustee argues that the Transfers were made by the Debtor with an actual intent to hinder, delay or defraud its creditors and, therefore, are avoidable under both § 5104(a)(1) of PUFTA and § 548(a)(1)(A) of the Bankruptcy Code.12 *109Campus Crusade argues that the trustee did not present sufficient evidence to establish the existence of any of the factors set forth in § 5104(b), often referred to as the “badges of fraud.” The plain language of § 5104(b) clearly provides that other factors, beyond those listed, can be considered in determining whether a transfer was made with actual intent to defraud.13 Therefore, even in the absence of any of the enumerated badges, a court can find actual fraud.
The parties do not dispute that the trustee, as plaintiff, has the burden of proving the Debtor’s actual intent to defraud creditors.14 Burry, the Debtor’s *110general partner, admitted that the vast majority of the Debtor’s operations were nothing more than a Ponzi scheme. (Exhibit T-l).15 Numerous courts have decided that a debtor’s actual intent to hinder, delay or defraud creditors may be inferred from the Debtor’s active participation in a Ponzi scheme. Cohen, 199 B.R. at 717; Jobin v. Ripley (In re M & L Business Machine Co., Inc.), 198 B.R. 800, 806-07 (D.Colo.1996); Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 860-61 (D.Utah 1987); Floyd v. Dunson (In re Ramirez Rodriguez), 209 B.R. 424, 433 (Bankr.S.D.Tex.1997); Emerson v. Maples (In re Mark Benskin & Co.), 161 B.R. 644, 649 (Bankr.W.D.Tenn.1993); Taubman, 160 B.R. at 983.16 As explained by the court in Independent Clearing House,
One can infer an intent to defraud future undertakers [investors] from the mere fact that a debtor was running a Ponzi scheme. Indeed, no other reasonable inference is possible. A Ponzi scheme cannot work forever. The investor pool is a limited resource and will eventually ran dry. The perpetrator must know that the scheme will eventually collapse as a result of the inability to attract new investors. The perpetrator nevertheless makes payments to present investors, which, by definition, are meant to attract new investors. He must know all along, from the very nature of his activities, that investors at the end of the line will lose their money. Knowledge to a substantial certainty constitutes intent in the eyes of the law, cf. Restatement (Second) of Torts § 8A (1963 & 1964), and a debtor’s knowledge that future investors will not be paid is sufficient to establish his actual intent to defraud them. Cf. Coleman Am. Moving Servs., Inc. v. First Nat’l Bank & Trust Co. (In re American Properties, Inc.), 14 B.R. 637, 643 (Bankr.D .Kan. 1981)(intentionally carrying out a transaction with full knowledge that its effect will be detrimental to *111creditors is sufficient for actual intent to hinder, delay or defraud within the meaning of § 548(a)(1)).
Independent Clearing House, 77 B.R. at 860. Further, a guilty plea or criminal conviction of the perpetrator of the Ponzi scheme provides evidence of actual fraudulent intent. Ramirez Rodriguez, 209 B.R. at 433; Benskin & Co., 161 B.R. at 649.
The Transfers at issue were charitable contributions.17 Although Campus Crusade was not an investor in the Ponzi scheme, neither § 5104(a)(1) nor § 548(a)(1)(A) requires that the transfers be made to defraud the transferee, but only that they are made with actual intent to hinder, delay or defraud any creditor of the debtor (12 Pa.C.S.A. § 5104(a)(1)) or any entity to which the debtor was or became indebted (11 U.S.C. § 548(a)(1)(A)). See In re Blatstein, 192 F.3d 88, 97-98 (3d Cir.1999). Cf. Independent Clearing House, 77 B.R. at 860 (“To be fraudulent under section 548(a)(1) a transfer need not be made with the intent to hinder, delay or defraud the transferee. The trustee need only show that the transfers were made with the intent to hinder, delay or defraud ‘any entity to which the debtor was or became [indebted], on or after the date that such transfer occurred.’ 11 U.S.C. § 548(a)(1) (emphasis added).”)
It is also reasonable, and, in this case, appropriate, to infer that, except for transfers to a person who took in good faith and for a reasonably equivalent value, as described in § 5108(a) of PUFTA or in § 548(c) of the Bankruptcy Code, all other transfers made by the debtor during an on-going Ponzi scheme are part of the overall fraud. The “good faith” exceptions found in § 5108(a) of PUFTA and § 548(c) of the Bankruptcy Code are not applicable to the Transfers at issue here, because, in its answer to the trustee’s interrogatories, Campus Crusade admitted that the Transfers were not in return for “the delivery of goods, services or loans of money or other reasonably equivalent value delivered by [Campus Crusade] to the Debtor.”18 In perpetrating the Ponzi scheme, Burry had to know that the monies from investors would eventually run out and that the payments to charities would contribute to the eventual collapse of the stratagem. Knowledge that future investors will not be paid is sufficient to establish actual intent to defraud them. Independent Clearing House, 77 B.R. at 860.19
The trustee’s expert also opined that the Debtor’s payments of $1.7 million to charities during the four years prior to the bankruptcy filing, including the transfers to Campus Crusade, were made as part of the fraudulent scheme to impress investors that the Debtor was a profitable and charitable enterprise.20 Based upon all of the facts and circumstances, this inference can be drawn even absent an expert’s conclusion about this part of the scheme.
Based upon the foregoing, I conclude that the Transfers to Campus Crusade *112were made by the Debtor with actual intent to defraud creditors.
Pursuant to 12 Pa.C.S.A. § 5109, the cause of action with respect to a fraudulent transfer under § 5104(a)(1) must be brought “within four years after the transfer was made ... or, if later, within one year after the transfer ... was or could reasonably have been discovered by the claimant.” 12 Pa.C.S.A. § 5109(1). Bankruptcy Code § 108(a) extends the applicable nonbankruptcy law period for commencing an action to the later of (i) the end of such period; or (ii) two years after the order for relief.21 The order for relief in this case was entered on July 1, 1999 and the trustee commenced this adversary proceeding on June 15, 2000, which is within the two-year extension of PUFTA § 5109(1), effected by Bankruptcy Code § 108(a). Because each of the Transfers to Campus Crusade described in the trustee’s complaint were made within four years of the order for relief, all of the Transfers are avoidable pursuant to 11 U.S.C. § 544(b) and 12 Pa.C.S.A. §§ 5104(a)(1), 5107(a), and 5109 (as extended by 11 U.S.C. § 108(a)). Additionally, the Transfers made within one year before the date of the filing of the Debtor’s petition are also avoidable pursuant to 11 U.S.C. § 548(a)(1)(A).
B. The Transfers to Campus Crusade were made by the Debtor without receiving reasonably equivalent value in exchange for the transfers and the Debtor (i) was engaged in a business for which the remaining assets of the debtor were unreasonably small in relation to its business; and (ii) intended to incur, or believed or reasonably should have believed that it would incur, debts beyond its ability to pay as they became due.
The trustee also argues that the Transfers to Campus Crusade are avoidable under the constructive fraud theories set forth in § 5104(a)(2) of PUFTA and § 548(a)(1)(B) of the Bankruptcy Code.22 To weigh adequately the parties’ argu-*113mente concerning § 5104(a)(2) of PUFTA, I must first decide their respective burdens of proof.23 In so doing, I have considered and compared the rule followed in interpreting the constructive fraud provisions of the now-repealed UFCA, the legislative history of PUFTA, as well as the intervening enactment of Bankruptcy Code § 548.
When considering cases under the UFCA, both state and federal courts held that the burden of proof “shifts” in matters alleging constructive fraud, so that after the creditor challenging the transfer shows that the grantor was in debt at the time of the conveyance, “the burden shifts to the grantees to establish by clear and convincing evidence, either that the grantor was then solvent and not rendered insolvent by the conveyance, or that he received fair consideration for the conveyance.” Elliott v. Kiesewetter, 98 F.3d 47 (3d Cir.1996) citing Coscia v. Hendrie, 427 Pa.Super. 585, 629 A.2d 1024, 1026 (1993).
In 1993, Pennsylvania enacted PUFTA to replace the UFCA.24 PUFTA itself is silent on the issue of burdens of proof for constructive fraud and there is no decisional law in this Circuit or in Pennsylvania resolving the question authoritatively.25 However, the legislative history, particularly the Committee Comments to the statute, is helpful.26 Comment (6) to § 5102 of *114PUFTA provides guidance regarding the burdens of proof under PUFTA, specifically with respect to constructive fraud matters, as follows:
Neither this chapter nor these comments comprehensively address such ev-identiary and procedural matters as the standard of proof required to establish particular facts, allocation of the burden of proof and burden of persuasion, and the circumstances in which such burdens may shift. Certain specific points are addressed. See, e.g., subsection (b), Comment (5) to 12 Pa.C.S. § 5104 infra, and Comments (1) and (6) to 12 Pa.C.S. § 5108 infra. Except for points specifically addressed, these matters are left to the courts to determine, giving appropriate consideration to, among other things, the policy of construing uniform laws to make uniform the laws of those states that have enacted similar uniform laws (as set forth in 1 Pa.C.S. § 1927 and in the transitional provisions of the act enacting this chapter), the possible desirability of conformity with similar provisions of the Bankruptcy Code and, to the extent not inconsistent with this chapter, prior Pennsylvania case law. However, certain cases applying prior Pennsylvania law have stated in effect (if rephrased in the terms used in this chapter) that if a creditor establishes that the transferor was in debt at the time of a transfer, the burden shifts to the parties seeking to uphold the transfer to establish that the transfer- or received reasonably equivalent value or met the financial conditions required by 12 Pa.C.S. §§ 5104(a)(2) and 5105. Stinner v. Stinner, 800 Pa.Super. 351, 446 A.2d 651 (1982); In re Glenn, 108 B.R. 70 (Bankr.W.D.Pa.1989). That principle is an archaism and has not been consistently followed (compare, e.g., In re Joshua Slocum, Ltd., 103 B.R. 610 (Bankr.E.D.Pa.1989), aff'd. mem., 121 B.R. 442 (E.D.Pa.1989)), and in any event should not be followed in applying this chapter.
12 Pa.C.S.A. § 5102, Committee Comment — 1993, No. 6 (1999)(emphasis added). Comment (8) to § 5102 of PUFTA notes the Comment (6) is a nonuniform addition.
The foregoing comments clearly reflect that the drafters of PUFTA considered the parties’ burdens of proof and chose not to adopt the prior Pennsylvania law regarding burden shifting for cases alleging constructive fraud. When the drafters wanted to create specific presumptions or defenses that would shift the burden of proof from the creditor challenging the transfer, those presumptions and defenses were clearly and specifically defined. See, e.g., 12 Pa.C.S .A. § 5102(b)(Presumption of insolvency); 12 Pa.C.S.A. § 5102, Committee Comment — 1993, No. 2 (1999)(“The presumption [of insolvency] is established in recognition of the difficulties typically imposed on a creditor in proving insolvency in the bankruptcy sense ... ”); 12 Pa. C.S.A. § 5104, Committee Comment— 1993, No. 5 (1999)(“Proof of the existence of any one or more of the factors enumerated in subsection (b) [of § 5104] may be relevant evidence as to the debtor’s actual intent but does not create a presumption that the debtor has made a fraudulent transfer.”); 12 Pa.C.S.A. § 5108, Committee Comment — 1993, No. 1 (1999)(“The person who invokes [the good faith defense to a case alleging actual intent to defraud creditors] ... carries the burden of establishing good faith and the reasonable *115equivalence of the consideration exchanged”).
Furthermore, the drafters of the Uniform Fraudulent Transfer Act looked to the federal Bankruptcy Code for guidance. See Michael L. Cook and Richard E. Mendales, The Uniform Fraudulent Transfer Act: An Introductory Critique, 62 Am.Bankr.L.J. 87, 87 (1988). Logically, it follows that the drafters of PUFTA expected § 5104(a)(2) of PUFTA and § 548(a)(1)(B) of the Bankruptcy Code to be construed and interpreted in a uniform manner.27 The Third Circuit Court of Appeals has held consistently that the plaintiff must prove each of the elements of a constructive fraud claim brought under Bankruptcy Code § 548. Mellon Bank, N.A. v. The Official Comm. of Unsecured Creditors of R.M.L., Inc. (In re R.M.L., Inc.), 92 F.3d 139, 144 (3d Cir.l996)(citing BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 1760, 128 L.Ed.2d 556 (1994)); Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 648 (3d Cir.1991) cert. denied 503 U.S. 937, 112 S.Ct. 1476, 117 L.Ed.2d 620 (1992). Bankruptcy courts in other jurisdictions have held likewise. Cuthill v. Greenmark, LLC (In re World Vision Entertainment, Inc.), 275 B.R. 641, 655-57 (Bankr.M.D.Fla. 2002); Baumgart v. Bedlyn, Inc. (In re Empire Interiors, Inc.), 248 B.R. 305, 307 (Bankr.N.D.Ohio 2000); Breeden v. L.I.Bridge Fund, LLC (In re Bennett Funding Group, Inc.), 232 B.R. 565, 570 (Bankr.N.D.N.Y.1999). These bankruptcy courts also specify that the appropriate standard of proof in constructive fraud cases is the preponderance of the evidence standard. World Vision, 275 B.R. at 655; Empire Interiors, 248 B.R. at 307; Bennett Funding Group, 232 B.R. at 570.
For all of the foregoing reasons, I conclude that, except when the statute expressly provides otherwise, there is no shifting burden of proof in a constructive fraud proceeding brought under § 5104(a)(2) or § 510528 of PUFTA and, therefore, the plaintiff carries the burden of proof on all elements by a preponderance of the evidence standard.
Campus Crusade admitted that it did not provide the Debtor with “reasonably equivalent value” in exchange for the Transfers.29 Therefore, the trustee is left with the burden of proving that, at the time the Transfers were made, the Debtor either (i) was engaged in a business for which its remaining assets were unreasonably small in relation to the business; or (ii) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debt- or’s ability to pay as they became due. 12 Pa.C.S.A. § 5104(a)(2)© and (ii).30 (See *116also 11 U.S.C. § 548(a)(1)(B)(ii)(II) and (III)). The Committee Comments to PUFTA § 5104 state:
In general, the tests of paragraphs (a)(2)(i) and (a)(2)(ii) should be viewed as addressing slightly different aspects of the same fundamental inquiry: whether the debtor is and, on a continuing basis will be able to pay its debts as they become due. By definition, a debtor which reasonably should be able to pay its debts as they become due on a continuing basis should be deemed to have adequate assets in relation to its business or transaction, sufficient to satisfy the test of paragraph (a)(2)(i), and such debtor also should be deemed to satisfy the “reasonably should have believed” test of paragraph (a)(2)(ii).
12 Pa.C.S.A. § 5104, Committee Comment — 1993, No. 4 (1999). Although there are not many cases interpreting the phrase “unreasonably small assets,” other courts have turned to cases which review the similar Bankruptcy Code provision § 548(a)(2)(B)(ii) for guidance on this issue. Salisbury v. Texas Commerce Bank-Houston, N.A. (In re WCC Holding Corp.), 171 B.R. 972, 985 (Bankr.N.D.Tex.1994); Taubman, 160 B.R. at 988. Both the WCC and Taubman courts determined that the “unreasonably small assets” (or the “unreasonably small capital”) test requires an analysis of the debtor’s ability to generate sufficient cash flow from operations and the sale of assets to pay its debts and remain financially stable. Id.
Burry has admitted that virtually all of the Debtor’s business was a Ponzi scheme. As such, the Debtor’s ability to generate cash flow to pay its “debts” came only from the continuation of the fraudulent scheme — and the operation could never be “financially stable,” since its collapse was inevitable.
The test described in both PUFTA § 5104(a)(2)(ii) and Bankruptcy Code § 548(a)(l)(B)(ii)(III) is more easily met. Burry’s operation of the Debtor’s Ponzi scheme shows his subjective intent to incur debts beyond the Debtor’s ability to pay as they became due. See Taubman, 160 B.R. *117at 987 (requiring a determination of the debtor’s subjective intent under a § 548(a)(1)(B)(ii)(III) analysis). As discussed in the preceding section about “actual intent,” as Burry doled out charitable contributions or took in new investors, he must have realized that the Ponzi scheme would eventually fail, so that, ultimately, many debts could not and would not be paid.
Accordingly, I conclude that the Transfers are avoidable under the trustee’s constructive fraud theories, pursuant to 11 U.S.C. § 544(b) and 12 Pa.C.S.A. § 5104(a)(2), § 5107(a) and § 5109 (as extended by 11 U.S.C. § 108(a)). Furthermore, the Transfers made within one year before the date of the filing of the Debtor’s petition also are avoidable pursuant to 11 U.S.C. § 548(a)(1)(B). An appropriate order will be entered.
ORDER
AND NOW, this 3rd day of July, 2002, for the reasons set forth in the accompanying Opinion, it is hereby ORDERED, ADJUDGED AND DECREED that:
1. The Transfers in the total amount of $72,200.00 from the Debtor to defendant Campus Crusade for Christ, Inc. are avoidable fraudulent transfers under 11 U.S.C. § 544(b) and 12 Pa.C.S.A. § 5104(a)(1) and (2), § 5107(a) and § 5109 and are recoverable by the trustee pursuant to 11 U.S.C. § 550;1 and
2. Judgment is entered in favor of the trustee and against Campus Crusade for Christ, Inc. in the amount of $72,200.00;
3. Campus Crusade for Christ, Inc. shall remit to the trustee the sum of $72,200.00 pursuant to 11 U.S.C. § 550(a) within ten (10) days of the date of this order;
4. Any claims which Campus Crusade for Christ, Inc. may hold against the Debtor shall be disallowed until such sum of $72,200.00 is paid in accordance with 11 U.S.C. § 502(d);
5. The failure by Campus Crusade for Christ, Inc. to comply with the terms of this order will result in the imposition of statutory rate of interest as set forth in 28 U.S.C. § 1961. Computation of such interest shall commence as of the date of this Order.
. This Opinion constitutes the findings of fact and conclusions of law required by Fed. R. Bankr.P. 7052. This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, § 157(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(1) and (b)(2)(H) and (O).
. The original complaint also listed Paul Jany as a defendant, but by order dated April 2, 2001, Paul Jany was removed as a defendant from this adversary proceeding.
. The trustee's complaint refers specifically to Bankruptcy Code § 548 only in the paragraph alleging proper jurisdiction, but also avers that the "transfers are voidable pursuant to the Uniform Fraudulent Conveyance Act of Pennsylvania [now repealed] as incorporated pursuant toll U.S.C. § 544(b) of the United States Bankruptcy Code.” Complaint, ¶ 16. However, the evidence offered by the trustee at trial (as well as his arguments in the post-trial memorandum of law and Proposed Findings of Fact and Conclusions of Law), indicate that the trustee asserts that the transfers complained of are avoidable under both Bankruptcy Code § 548 and PUFTA, which is applicable to this proceeding pursuant to Bankruptcy Code § 544(b). Campus Crusades’ argument at trial (as well as in its post-trial memorandum of law and Proposed Findings of Fact and Conclusions of Law), likewise indicates that Campus Crusade consented to trial of these issues under Bankruptcy Code § 548 and PUFTA. See Fed.R.Bankr.P. 7015(b), making applicable Fed.R.Civ.P. 15(b). ("When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings.”)
.Exhibit T-l, introduced into evidence without objection at the April 26, 2001 trial, is a certified copy of the "Government’s Guilty Plea Memorandum,” filed in the criminal case before the District Court for the Eastern District of Pennsylvania captioned "United States of America v. David P. Burry, Criminal No. 99-956” (the "Guilty Plea Memorandum”). The Guilty Plea Memorandum details the fraudulent activities of the Debtor’s general partner, David P. Burry ("Burry”), including the fact that ”[t]he returns paid to CF Foods' early investors were paid for with the proceeds derived from investments made by later investors” (p. 7) and Burry’s admission that he was operating a Ponzi scheme (p. 17). See n. 15, infra, for a description of a “Ponzi scheme.”
. The facts set forth herein are undisputed and taken largely from the Guilty Plea Memorandum. See n. 4, supra.
. Exhibit T-14, ¶ 2(a)-(w). Although If 2 of T-14 does not include any reference to the payment made on September 11, 1996, at trial, Campus Crusade stipulated that it had received all of the checks attached to the complaint, including check no. 8936 dated September 11, 1996 in the amount of $500.00.
. Exhibit T-15, ¶ 2(d).
. See Tr. at p. 7-12.
. See Tr. atp. 12-17.
. See Tr. at p. 20-21.
. See Tr. at p. 21.
. See n. 3, infra. Section 5104(a)(1) of PUF-TA and § 548(a)(1)(A) of the Bankruptcy Code contain nearly identical language, but one important distinction is that § 548(a)(1) limits *109the trustee’s reach to transfers made within one year prior to the bankruptcy filing. PUF-TA has a four-year "reach-back” period. 12 Pa.C.S.A. § 5109(1).
. Section 5104 of PUFTA, 12 Pa.C.S.A. § 5104(a)(1) and (b), provide:
§ 5104. Transfers fraudulent as to present and future creditors.
(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 actual intent to hinder, delay or defraud any creditor of the debtor;
(b) Certain factors. — In determining actual intent under subsection (a)(1), consideration may be given, among other factors, to whether:
(2) the transfer or the obligation was to an insider;
(3) the debtor retained possession or control of the property transferred after the transfer;
(4) the transfer or obligation was disclosed or concealed;
(5) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(6) the transfer was of substantially all the debtor's assets;
(7) the debtor absconded;
(8) the debtor removed or concealed assets;
(9) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(10) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(11) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(12) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
. Earlier cases have held that the trustee must prove actual intent to defraud creditors by clear and convincing evidence. Matter of Foxcroft Square Co., 184 B.R. 671, 674 (E.D.Pa.1995); In re Taubman, 160 B.R. 964, 984 (Bankr.S.D.Ohio 1993). The foregoing cases, however, analyze the burden of proof standard under each state’s enacted version of the Uniform Fraudulent Conveyance Act. Pennsylvania repealed the Pennsylvania Uniform Fraudulent Conveyance Act (the "UFCA”) by P.L. 479, No. 70, § 1 (Dec. 3, 1993), and replaced it with PUFTA. In Plot-kin v. Pomona Valley Imports, Inc. (In re Cohen), 199 B.R. 709 (9th Cir. BAP 1996), the Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals decided that determining whether transfers were made with actual intent to hinder, delay or defraud creditors utilized the same inquiry under either 11 U.S.C. § 548(a)(1) or the Uniform Fraudulent Transfer Act, but did not specify which standard applied. Cohen, 199 B.R. at 716. Generally, courts do not agree which standard applies to “actual intent” actions under § 548(a)(1)(A). Compare Provident Life and Accident Ins. Co. v. General Syndicators of America (In re Laramie Assoc., Ltd), 1997 WL 587288, at *6 (E.D.Pa.l997)(clear and convincing evidence standard) with Thompson v. Jonovich (In re Food & Fibre Protection, Ltd.), 168 B.R. 408, 418 (Bankr.D.Ariz.1994)(pre-ponderance of the evidence standard). See also Development Specialists, Inc. v. Hamilton Bank, N.A. (In re Model Imperial, Inc.), 250 B.R. 776, 790-91 (Bankr.S.D.Fla.2000) (noting disagreement regarding which standard applies in Florida courts, but deciding that, *110under the Supreme Court’s decision in Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), a preponderance of the evidence standard applies to fraudulent conveyance actions). Because the trustee has met the more strict "clear and convincing evidence” standard in the matter now before me, I need not, and therefore do not, decide whether the standard for proving actual fraud under either PUFTA or Bankruptcy Code § 548(a)(1)(A) is the "clear and convincing test” or the "preponderance of the evidence” test.
. A "Ponzi scheme” has been described as follows:
In general, a ponzi scheme is a fraudulent investment arrangement in which returns to investors are not obtained from any underlying business venture but are taken from monies received from new investors. Typically, investors are promised high rates of return and initial investors obtain a greater amount of money from the ponzi scheme than those who join the ponzi scheme later. As a result of the absence of sufficient, or any, assets able to generate funds necessary to pay the promised returns, the success of such a scheme guarantees its demise because the operator must attract more and more funds, which thereby creates a greater need for funds to pay previous investors, all of which ultimately causes the scheme to collapse.
Taubman, 160 B.R. at 978 (citations omitted).
. Although most of these cases conclude that participation in a Ponzi scheme provides proof of a debtor’s actual intent to defraud creditors under 11 U.S.C. § 548(a)(1)(A), a number of courts have also held that this analysis was equally applicable to proving actual fraudulent intent under the corresponding state fraudulent transfer act (Cohen, 199 B.R. at 716-17) or state fraudulent conveyance act, notwithstanding a higher burden of proof (i.e., the clear and convincing evidence standard). Independent Clearing House, 77 B.R. at 866; Taubman, 160 B.R. at 984.
. However, the Transfers do not qualify for the charitable contribution exception of 11 U.S.C. § 548(a)(2) because the Debtor is not a "natural person” and, therefore, the Transfers do not fit the definition of "charitable contribution” set forth in § 548(d)(3).
. Exhibit T-l 5, ¶ 2(d).
. Campus Crusade also argues that each transfer must be reviewed individually to determine whether the debtor actually intended to defraud creditors at the time it made the particular transfer. Because Burry admitted that 97% of the sales reported for years 1994 to 1998 never actually took place, the Ponzi scheme was ongoing through-out the period in which the Transfers were made, thereby providing evidence of the debtor's ongoing intent to defraud creditors.
.Tr. at p. 18-19.
. This section corresponds with Bankruptcy Code § 546(a), which requires an action under § 544 or § 548 to be brought within the earlier of (a) the time the case is closed or dismissed; or (b) the later of (i) two years after the order for relief; or (ii) one year after the appointment of the first trustee.
. Bankruptcy Code § 548(a)(1)(B) and PUF-TA § 5104(a)(2) contain similar language for avoiding transfers under a constructive intent theory. However, as stated in n. 12, infra, PUFTA has a longer "reach-back” period than Bankruptcy Code § 548. Section 5104(a)(2) of PUFTA states as follows:
§ 5104. Transfers fraudulent as to present and future creditors.
(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:
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.
Bankruptcy Code § 548(a)(1)(B) provides:
11 U.S.C. § 548. Fraudulent transfers and obligations.
(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—
*113(B)(i) received less than reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(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.
. In his memorandum of law, the trustee admits that he carries the burden of proof, by a preponderance of the evidence standard, regarding his claim to avoid the Transfers under Bankruptcy Code § 548(a)(1)(B), but he does not discuss his burden of proof under § 5104(a)(2) of PUFTA. Generally, courts addressing burdens of proof under PUFTA’s constructive fraud provisions have assumed that the UFCA's shifting burden formulations should be employed in PUFTA. I have been unable to locate, however, any decision applying PUFTA which examines this issue in-depth.
. P.L. 479, No. 70, § 1 (Dec. 3, 1993)(effec-tive February 1, 1994).
. The Third Circuit Court of Appeals discussed briefly shifting burdens of proof in 718 Arch St. Assoc., Ltd. v. Blatstein (In re Blatstein; In re Main, Inc.), 192 F.3d 88 (3d Cir.1999), indicating that the shifting burden of proof standard, described in the Elliott case, would continue to apply in cases under PUFTA. Blatstein, 192 F.3d at 98. But the Court of Appeals’ decision in Blatstein turned on the issue of actual fraud; the Court did not rule on the district court’s disposition of the trustee’s constructive fraud claims. The Blat-stein panel expressly recognized this and itself noted that its discussion of constructive fraud was "not necessary for our result.” Id. See also 718 Arch St. Assoc., Ltd. v. Blatstein (In re Blatstein), 260 B.R. 698, 715-16 (E.D.Pa.2001)(Yohn, J.)(deciding that the portion of the Blatstein decision discussed above is dicta). Relying upon this language in Blatstein, some bankruptcy courts have continued to apply the shifting burden of proof standard in cases involving a constructive fraud theory under § 5104(a)(2) or § 5105 of PUFTA. See Walsh v. Gutshall (In re Walter), 261 B.R. 139, 143 (Bankr.W.D.Pa.2001); Krasny v. Nam (In re Nam), 257 B.R. 749, 767 (Bankr.E.D.Pa.2000).
.Committee Comment — 1993, No. 1 to 12 Pa.C.S.A. § 5101 provides that "This chapter [PUFTA], and the comments to this chapter, were drafted by a committee (the 'Committee') of the Section on Corporation, Banking and Business Law of Pennsylvania Bar Association, with the assistance of the Joint State Government Commission. The comments are *114part of the legislative history of this chapter under 1 Pa.C.S. § 1939 (relating to use of comments and reports).”
."The fraudulent conveyance provisions of the Bankruptcy Code are modeled on the UFCA and uniform interpretation of the two statutes is essential to promote commerce nationally.” Moody v. Security Pacific Business Credit, Inc., 971 F.2d 1056, 1067-68 (3d Cir.1992) quoting United States v. Tabor Court Realty Corp., 803 F.2d 1288, 1298-99 (3d Cir.1986). Although the Moody court was comparing § 548 and the UFCA, the principle is still vital today, viz., interpretation of the virtually identical provisions of § 548(a)(1)(B) and § 5104(a)(2) should be consistent if at all possible, including how the burdens of proof are imposed and whether or when they are to be shifted.
. While no § 5105 claim was asserted by the trustee, I can perceive no reason why the burden(s) of proof on a § 5105 claim should not be approached the same way as in a § 5104 claim.
. Exhibit T-l 5, ¶ 2(d).
. Campus Crusade argues that the trustee cannot prevail under a constructive fraud theory because the trustee failed to prove that the Debtor was insolvent at the time of the *116Transfers. Campus Crusade also argues that the definition of insolvency for a partnership, in both the Bankruptcy Code (11 U.S.C. § 101 (32)(B)) and PUFTA (12 Pa.C.S.A. § 5102(c)), requires an analysis of whether the partnership’s debts are greater than the aggregate of all of the partnership’s assets and the general partners’ nonpartnership assets (i.e., the sum of the excess value of each general partner's nonpartnership assets over the general partner's nonpartnership debts). Id. The trustee's accountant testified that he considered Burry’s assets in his analysis of the Debtor’s insolvency and determined that Burry, who filed his own chapter 7 proceeding in this district, case no. 99-16038 SR, was also insolvent. (Tr. at p. 16). However, Campus Crusade argued that Edward Still-man, who claims to have been a limited partner of the Debtor, should be found to be a general partner of the Debtor, based upon his actions of signing tax returns and soliciting investments, thus requiring Stillman’s assets to be included in any analysis of the Debtor’s solvency. There are two problems with this argument. First, the evidence presented at trial (none of which was presented by Campus Crusade) is not sufficient to support a finding under Pennsylvania law that Stillman exercised sufficient control over the Debtor to be treated as a general partner. Block v. Commissioner of Internal Revenue, 1980 WL 4369 (U.S.Tax Ct.) 41 T.C.M. (CCH) 546 (1980); Gast v. Petsinger, 228 Pa.Super. 394, 402, 323 A.2d 371, 375 (1974). Second, the test for constructive fraud under § 5104(a)(2) of PUFTA does not require a finding of insolvency. The Transfers can be deemed constructively fraudulent, even without an analysis of the Debtor’s balance sheet solvency. Under PUFTA, insolvency is a factor only under § 5105. Similarly, in Bankruptcy Code § 548, insolvency is a factor only in § 548(a)(l)(B)(ii)(I). Accordingly, both PUF-TA and the Bankruptcy Code provide independent bases for avoiding constructively fraudulent transfers without proving balance sheet insolvency.
. The Transfers that were made from the Debtor to defendant within one year before the date of the filing of the Debtor's petition are also avoidable fraudulent transfers under 11 U.S.C. § 548(a)(1)(A) and (B). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493398/ | RULING ON FEE APPLICATION AND MOTION SEEKING DISGORGEMENT OF FEES
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
Hal M. Hirsch (“Hirsch”), on April 18, 2002, filed a final report as trustee of the consolidated Chapter 7 estates of Colonial Realty Company, Jonathan Googel and *300Benjamin Sisti (“the consolidated estates”), some 12 years following the filing of the 1990 involuntary petitions which commenced these cases. Hirsch became the Chapter 7 trustee, and his law firm, Gainsburgh & Hirsch, LLP (“G & H”), became attorneys for the trustee in May 1991. Hirsch represents that during his trusteeship he distributed to creditors, secured and unsecured, approximately $130,000,000 and commenced over 2,000 adversary proceedings. As trustee, Hirsch periodically received commissions1 totaling approximately $1,100,000 and G & H received legal fees of approximately $8,500,000. For most of the consolidated estates’ existence, Christopher R. Bel-monte (“Belmonte”), as attorney for the unsecured creditors’ committee (“creditors’ committee”), appointed pursuant to Bankruptcy Code § 705,2 and the United States Trustee (“UST”) have been of valuable assistance to the court in presenting informative positions during the countless hearings held on fee applications and other matters. Hirsch originally filed his final report in January 2001. The latest modified final report, filed April 18, 2002, to which no objection has been received, reflects changes to the report required by the UST.
Before the court is G & H’s application for (1) final approval of interim compensation paid for period May 24, 1991 through March 31, 1997; (2) legal fees of $19,546.64 and expenses of $204.79 for the period from October 1, 2001 through February 28, 2002; and (3) $40,000 as a reserve for future legal fees. The creditors’ committee, after securing G & H’s consent to (1) reduce the fee request to $17,013.88 (plus $204.79 in disbursements) and (2) reduce the requested fee reserve to $20,000, supports the granting of G & H’s application. The UST not only opposes the fee application for the period from October 1, 2001 through February 28, 2002 in its entirety, but has filed a motion seeking disgorgement of fees from G & H in the amount of $255,855 for the period of April 1997 through September 2002. Both UST’s objection to G & H’s application and UST’s motion contend that the services rendered by G & H in the stated amounts were essentially trustee duties for which G & H is not entitled to compensation.3 Hearings on the application and motion concluded on June 13, 2002.
II.
A.
The June J, 1997 Order
The court, on June 4, 1997, had entered an Order (“the Order”), agreed to and *301presented to the court by Hirsch, G & H, the creditors’ committee and the UST on G & H’s motion, which established revised compensation terms for Hirsch and G & H going forward from April 1, 1997 to the conclusion of the consolidated estates. The Order which modified a court order entered on October 17, 1991, further resolved, under terms contained in the Order, a number of outstanding disputes, such as UST’s objections to prior compensation requests and Hirsch and G & H’s claims to fees, commissions and expense hold-backs. Under the Order, Hirsch waived all statutory trustee commissions subsequent to October 1996; G & H was to receive a contingent fee of 20 percent of recoveries in remaining matters to be litigated, and to receive fees on an hourly basis equal to 75 percent of its hourly rates for non-litigated matters, plus 75 percent reimbursement of its out-of-pocket disbursements and expenses. G & H was to continue to file monthly statements seeking compensation for non-litigation matters, as in the past, with procedures for objection to remain in effect.4
B.
The December 21, 2000 Hearing
The court, on December 21, 2000, held hearings on several fee applications, including one filed by G & H for $20,233, based upon hourly fees for the period of June 2000 through October 2000. After discussions between G & H and the creditors’ committee, G & H reduced its request to $18,000. The UST had objected to the G & H fee application contending that G & H’s services primarily dealt with trustee services such as preparing the final report,5 and, thus, were not compensable. From the discussion that ensued at this hearing, it became clear that the parties differed on how to interpret the Order that they had drafted after months of negotiation. They conceded the Order was ambiguous on the issue of whether future trustee duties, such as preparing the final report, were to be fulfilled at no cost to the consolidated estates, were to be performed by G & H at its reduced hourly rate, or were to be compensated on some other basis.
Belmonte suggested to the court that in light of the ambiguity in the Order and G & H’s fee application probably being tantamount to a final application, an $18,000 legal fee be approved. The UST noted that all experienced Chapter 7 trustees, such as Hirsch, were aware that preparing the final report was clearly a trustee’s duty not separately compensated for, aside from the statutory commission. See In re Howard Love Pipeline Supply Company, 253 B.R. 781, 791 (Bankr.E.D.Tex.2000) (preparing the trustee’s final report is a trustee service “the compensation for which has been and will continue to be subject to the § 326(a) statutory limitation.”); In re Dorn, 167 B.R. 860, 867 (Bankr.S.D.Ohio 1994) (“The Court understands that the closing and final report process is necessarily detailed and time *302consuming and subject to amendments; however, by statute the trustee and not any professional or paraprofessional retained or employed by the trustee is responsible for closing the case and filing final accounts.”)- The G & H attorney present (not Hirsch) stated that the trustee’s final report would be filed in January 2001, and that nowhere in the Order was there a provision which indicated that the considerable work necessary to close the consolidated estates would be noncompensable. The court ruled that taking into account the unique history of the consolidated estates,6 the conceded ambiguity in the Order, the claimed approaching closing of the consolidated estates, and the recommendation of the creditors’ committee, a fee of $18,000 be approved.
III.
The June IS, 2002 Hearing
At the June 13, 2002 hearing the parties, in large part, repeated the arguments made at the December 21, 2000 hearing on both the G & H fee application and the UST motion for disgorgement. No party presented witnesses or sought the introduction of documents in support of their pleadings.
The UST requested that the court, in effect, reverse its conclusion reached at the December 21, 2000 hearing, deny the application and grant the motion. Bel-monte argued, in accordance with a written statement he filed on behalf of the creditors’ committee, that the creditors’ committee believed UST’s motion for disgorgement was unjustified. He stated that the creditors’ committee had reviewed all G & H monthly fee applications at the time each was filed, made objections where indicated, and, in most instances, achieved fee reductions to which G & H consented. As a party who negotiated the Order, Bel-monte stated the services rendered by G & H and objected to by the UST should be compensable. Hirsch asserted the Order did not contemplate that necessary services to close the consolidated estates were not to be compensated. He emphasized the multi-million-dollar waiver of G & H hold-back fees achieved by the Order.
IV.
CONCLUSION
The court reaches the following conclusions after giving due consideration to the arguments made by the parties. At the December 21, 2000 hearing, the parties represented, and the court so understood, that the consolidated estates were about to close with Hirsch to file his final account within the following two weeks. He did so, but it took another 15 months before Hirsch and the UST ultimately agreed on the proper contents of the final report. Without allocating blame for this delay (there is no record to support any such conclusion) the court believes the creditors of the consolidated estates should not shoulder the cost of such delay. It clearly could not have been the intent of the Order to saddle the consolidated estates with the much larger cost of compensating G & H to perform trustee duties in return for Hirsch waiving the very modest trustee commission then foreseeable. Hirsch and *303G & H, as resolved by the Order, were neither overpaid, as the UST intimates, nor underpaid for the work performed. G & H has abandoned any claim for a fee enhancement for its services.
The court denies G & H’s application for $19,546.64 and expenses of $204.79. The court also denies the request for a reserve of $20,000 for future legal fees for which no basis was established. Hirsch will remain responsible for completing all trustee duties involved in the closing of the consolidated estates at his and G & H’s non-compensable expense. G & H’s application, as to the period May 24,1991 through March 31, 1997, is approved. The court concludes that the UST motion for fee disgorgement by G & H is not sustainable for the reasons stated by the creditors’ committee; G & H has not, in the overall, received excessive fees; the lack of an adequate record; and in light of all the described circumstances. It is
SO ORDERED.
. Bankruptcy Code § 326(a) limits Chapter 7 trustees' maximum reasonable compensation to certain percentages of monies turned over "by the trustee to parties in interest.”
. Bankruptcy Code § 705 provides:
(a) At the meeting under section 341(a) of this title, creditors that may vote for a trustee under section 702(a) of this title may elect a committee of not fewer than three, and not more than 11, creditors, each of whom holds an allowable unsecured claim of a kind entitled to distribution under section 726(a)(2) of this title.
(b) A committee elected under subsection (a) of this section may consult with the trustee or the United States trustee in connection with the administration of the estate, make recommendations to the trustee or the United States trustee respecting the performance of the trustee’s duties, and submit to the court or the United States trustee any question affecting the administration of the estate.
.UST's motion also contends that G & H charged excessive fees in preparing its fee applications. See Bankruptcy Code § 330(a)(6) ("Any compensation awarded for the preparation of a fee application shall be based upon the level and skill reasonably required to prepare the application.”).
. Under the October 17, 1991 order, G & H filed detailed monthly compensation applications with the court, which applications were served on, among others, the creditors' committee and the UST. If no objections to the applications were filed within 10 days thereafter, Hirsch was authorized to pay G & H 75 percent of the amount sought. G & H was to apply every 120 days for a court order seeking approval of the compensation received.
. Bankruptcy Code § 704, entitled "Duties of trustee,” provides, in pertinent part:
The trustee shall—
(9) make a final report and file a final account of the administration of the estate with the court and with the United States trustee.
. See In re Colonial Realty Company, 980 F.2d 125, 127 (2d Cir.1992) ("Colonial was involved in the formation and syndication of approximately sixty real estate limited partnerships throughout the United States.... Thousands of Colonial investors suffered significant losses with the Colonial collapse, and claims filed by creditors total billions of dollars.”); FDIC v. Colonial Realty Company, 966 F.2d 57, 58 (2d Cir.1992) ("[The consolidated estates] maintained ownership interests in at least 132 separate entities in at least 40 states.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493400/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
HAROLD C. ABRAMSON, Bankruptcy Judge.
This adversary proceeding was brought by Robert Milbank, Jr., the Chapter 7 Trustee of the Debtor’s bankruptcy estate to: i) object to the Proofs of Claim filed by Tomlin Properties; ii) determine whether Debtor’s capital account in Tomlin Properties, a Texas general partnership (“TP”) is burdened with a negative balance as a result of a series of inaccurate accounting methods with respect to transfers of property and partnership assets and, iii) determine whether the Trustee is entitled to turnover of $35,431.88 in the Registry of the Court.
*377The Debtor and his father, Dan Tomlin (the “Debtor’s Father”) were each 50% partners in Tomlin Properties which is a Texas general partnership. Tomlin Properties had a written partnership agreement which established the rights, interests and duties of the partners and the manner in which the partnership was supposed to be managed. Tomlin Properties did not own real estate in its own name; rather, Tomlin Properties owned fractional interests in joint ventures which owned real estate. On most occasions, Tomlin Properties managed the various joint ventures which in turn owned land.
In 1984, the Debtor’s Father died. Following his death, the Debtor, as the surviving 50% partner, managed the affairs of Tomlin Properties from 1984 to the petition date of July 21, 1999. Upon filing bankruptcy, the Trustee became the owner of the Debtor’s 50% interest in Tomlin Properties. At the time of the bankruptcy filing, Tomlin Properties owned fractional interests in approximately twelve (12) joint ventures which owned valuable real estate. The Trustee has been advised that the valuable assets of Tomlin Properties are being liquidated for distribution to the interest owners of Tomlin Properties. The Trustee has not received any distributions from the liquidation of Tomlin Properties assets due to an alleged $912,813.00 negative capital account. Tomlin Properties has filed two proofs of claim asserting the negative capital account. The Trustee has objected to the proofs of claim alleging that the Debtor’s Tomlin Properties capital account is not negative.
Tomlin Properties has taken the position that five (5) transactions which occurred while the Debtor was managing Tomlin Properties caused the Debtor’s capital account to become negative by the amount of $912,313.00. The first transaction was a transfer of an escrow account in the amount of $200,000 and office furniture and fixtures from TP to TPI in 1984. The transaction was initially booked and reported on the partnership tax return as a sale. It was later recharacterized as a “disproportionate distribution” to Debtor in the amount of $520,040. The last four transactions occurred from 1989 through 1993 and were substantially similar to each other. The specific transactions, which are set forth in detail below are transactions involving: i) Lebanon Joint Venture; ii) Plano Parkway II Joint Venture; iii) Lewisville Commercial Joint Venture; and iv) a settlement involving Plano Parkway II Joint Venture.
The common theme in all of these transactions is that the Debtor, allegedly acting on behalf of Tomlin Properties, the partnership, pledged Tomlin Properties’ partnership assets to secure obligations of Tomlin Properties, Inc. (“TPI”), a corporation. When Tomlin Properties ultimately lost the assets it had pledged through foreclosures or otherwise, Tomlin Properties inappropriately recorded the transactions as disproportionate distributions to the Debtor since the Debtor owned 97% of the stock of TPI. As a result of the alleged disproportionate distributions, the Debt- or’s capital account at Tomlin Properties appeared negative.
The manner in which Tomlin Properties recorded the transactions was erroneous and not in accordance with generally accepted accounting principals and partnership law. By making the Debtor appear to have his most valuable asset encumbered by a negative capital account, the Debtor was able to discourage judgment creditors from levying on his most valuable asset, his interest in Tomlin Properties. Despite the alleged negative capital account, the Debtor continued to receive partnership distributions as if his capital account were not negative.
*378The Trustee has challenged the proofs of claim representing the negative capital account for the following reasons:
a. The Tomlin Properties Partnership Agreement does not authorize disproportionate distributions;
b. Tomlin Properties ignored the alleged existence of the negative capital account and made sizeable distributions to or for the benefit of the Debtor while the Debtor allegedly had a negative capital account;
c. Tomlin Properties incorrectly accounted for a § 754 of the Internal Revenue Code “Stepped Up Basis” in the Tomlin Properties Capital Accounts of Debtor’s partners, Erline Tomlin and the Estate of Daniel 0. Tomlin, Sr., resulting in the erroneous inflation of the other partners’ capital accounts and giving the illusion that Debtor’s capital account was greatly reduced in comparison;
d. The transfers which allegedly account for a vast majority of the negative capital account were transfers of assets from Tomlin Properties for the benefit of a third party, TPI. The Texas Revised Partnership Act, which controls since the Tomlin Properties written partnership agreement was silent on this matter, only allows a partner’s capital account to be debited or credited, if the partner in the proper conduct of the business of the partnership makes a contribution in addition to his agreed-upon contribution; and
e. Tomlin Properties failed to keep accurate and coherent books and records, enhancing the illusion of a negative capital account to the detriment of Debtor’s creditors.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 151, and the standing order of reference in this district. This matter is a core proceeding, pursuant to 28 U.S.C. § 157. After considering the evidence presented at the hearing, the Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052:
FINDINGS OF FACT
1. Background
1.1 Tomlin Properties, Inc. (“TPI”) was incorporated in the State of Texas on July 7,1983.
1.2 Debtor owned 97% of the stock of TPI.
1.3 TPI’s corporate charter was forfeited on August 17,1993.
1.4 On August 1, 1983, Debtor and his father entered into a Restatement and Amendment of Partnership Agreement of Tomlin Properties (“TP Partnership Agreement”).
1.5 On April 20, 1984, Debtor and his father entered into Amendment No. One to the Restatement and Amendment of Partnership Agreement of TP.
1.6 The Debtor and his father each owned a 50% interest in TP.
1.7 On April 21, 1984, Debtor and his father entered into a Sales Commission Agreement under which all commissions paid or received by the partnership attributable to sales or purchases of real property occurring after the death of either Partner shall be allocated to the surviving partner.
1.8 Debtor’s father died on April 29, 1984.
1.9 On May 1, 1984, TP, conveyed the rights to the commissions to TPI.
1.10 In 1984, TPI became the operating company for TP.
*3791.11 From 1984 to 7/21/99 the Debtor, as the sole surviving partner, managed TP.
1.12 From 7/21/99 to present TP has been managed by Land Advisors, Inc. (“LAI”) through Roger Lindsey and/or Tomlin’s son.
1.13 On 7/21/99 Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code.
1.14 Robert Milbank, Jr. is the Chapter 7 Trustee of the Debtor’s bankruptcy estate.
2. The Partnership Agreement
2.1 Section 2.01(B) of the TP Partnership Agreement provides that Debtor and his father each owned a 50% interest in TP.
2.2 Paragraph 3.01 of the TP Partnership Agreement designates Daniel O. Tomlin, Sr., the Debtor’s father, and Debtor as “original partners.”
2.3 Section 3.01(j) provides that the original partners have the power to manage, control, administer, and operate the business and affairs of the partnership, and do or cause to be done any and all acts, and incur and pay for any and all fees, costs and expenses, and execute, acknowledge, deliver, and file for record any and all instruments and documents of every kind and character, necessary or advisable or appropriate, in the sole and absolute discretion of any such Original Partner to carry out the purposes and conduct the business and affairs of the Partnership....
2.4 Section 3.02 of the TP Partnership Agreement specifically prohibits any partner from taking any action which may prevent the carrying out of the business of the partnership without the joinder of the other partners.
2.5 Section 4.01(B) of the TP Partnership Agreement provides that the net loss or net profit of the partnership for each year shall be allocated to the Partners in proportion to their respective percentage interests in the Partnership.
2.6 Section 4.02(A) of the Agreement provides for distributions and allocations to partners. It provides that the “cash flow” of the Partnership shall be allocated and distributed to the partners in direct proportion to their respective percentage interests in the partnership.
2.7 Section 4.02(C) and (D) of the TP Partnership Agreement provide for two types of distributions:
(a) Distributions from the net cash proceeds from the sale of property by the Partnership, less any allowance for cash reserves, are to be made to the partners proportion to their respective percentage interests in the partnership.
(b) “Cash flow” distributions are to be made to the partners within thirty days after the end of each calendar year.
2.8 Paragraph 4.02(B) of the partnership agreement defines “cash flow” as gross receipts from all sources, less (i) all expenditures of any kind made by the Partnership, including, but not limited to, taxes, insurance, escrow payments, amortization charges paid with respect to all indebtedness of the Partnership, and (ii) “cash reserves.”
2.9 Paragraph 4.02(C) provides that distributions of net cash proceeds from the sale of the property owned by the Partnership ... are to be made in proportion to the partners’ respective percentage interests of the partnership.
2.10 Paragraphs 4.02(D) and (E) of the partnership agreement provide for two types of distributions: (1) Distributions of the net cash proceeds from any sale of *380property, less any allowance for cash reserves to be made within 30 days after the receipt of same by the partnership or at such earlier time as deemed appropriate by the Manager after the end of each calendar year, and (2) Distributions of excess proceeds, over the principal amount of the mortgage as a result of refinancing any mortgage constituting a lien against property owned by the Partnership, to be made within thirty days after receipt of the proceeds by the Partnership.
2.11 Paragraph 8.01 of the TP Partnership Agreement prohibits a partner’s interest from being assigned, sold, transferred, mortgaged, hypothecated, or otherwise disposed of without the prior written consent of the other partners. (Emphasis Added).
2.12 The TP Partnership Agreement does not expressly authorize partners to receive disproportionate distributions of partnership assets.
2.13 Based on the above, the Court finds that the TP Partnership Agreement does not provide for disproportionate distributions to any partner and that the written consent of all partners is required to pledge or assign a partner’s interest in the partnership property.
2.14 Based on the above, the Court finds that nothing the TP Partnership Agreement or the Texas Revised Partnership Act authorizes either Debtor’s transfer of partnership assets or the resulting debit to Debtor’s partnership capital account. These transactions were part of a larger scheme by Debtor to place his assets beyond the reach of his creditors.
3. Distributions to the Tomlin Family Trusts
3.1Upon the death of the Debtor’s Father, a sizeable decedent’s estate was created (hereinafter referred to as the “Estate of Daniel 0. Tomlin, Sr.”). Included in this estate was the Debtor’s father’s 50% interest in TP.
3.2 The Debtor was the administrator of the Estate of Daniel O. Tomlin, Sr.
3.3 Following the death of the Debtor’s Father, the Debtor continued to be a 50% partner in TP, Debtor’s Father’s 50% interest became owned 25% by Erline Tomlin and 25% by the Estate of Daniel O. Tomlin, Sr.
3.4 In July, 1985, the Estate of Daniel Tomlin, Sr. filed an Estate Tax Return showing approximately $2,400,000 in estate tax due.
3.5 In 1985, distributions of interests in the Estate of Daniel O. Tomlin, Sr. were made to Carolyn Hurst (Debtor’s sister) and to trusts established for the benefit of Dan Tomlin, III, Dena Tomlin, and Debbie Tomlin (Debtor’s children); and for the benefit of Wendy Hurst and Sharolyn Hurst (Carolyn Hurst’s children) hereinafter referred to as the Tomlin Family Trusts.
3.6 In the early 1990’s, the Internal Revenue Service pursued the Tomlin Family Trusts as transferees of property of the Estate of Daniel O. Tomlin, Sr. and sought to collect the estate tax owed by the Estate of Daniel 0. Tomlin, Sr. from the transferees.
3.7 In January, 1994, when enforced collection by the IRS was imminent, the interests held by the Tomlin Family Trusts were conveyed back to the Estate of Daniel 0. Tomlin, Sr.
4. Section 754 Adjustments
4.1 Pursuant to sections 754 and 743 of the Internal Revenue Code, upon the transfer of partnership property from a deceased partner, the spouse and the transferees of the deceased partner’s interest in the partnership can receive a *381step-up in basis to fair market value at the date of death.
4.2 Certain step-up in basis adjustments were made to the TP partnership interests of the Estate of Daniel 0. Tomlin, Sr. and Erline Tomlin ( Debtor’s mother) pursuant to a timely election made by TP.
4.3 Treas. Reg Sec. 1.704-l(b)(2)(iv)(m) prohibits a partnership from reflecting the basis adjustments provided for in 26 U.S.C. Section 754 in partnership capital accounts.
4.4 In contravention of the provisions of the Treasury Regulations, the basis adjustments were reflected in the TP capital accounts of the Estate of Daniel 0. Tomlin, Jr. and Erline Tomlin.
4.5 A worksheet prepared by Phil Bivona, the TP partnership CPA, shows that the capital accounts of Daniel 0. Tomlin, Sr. and Erline Tomlin reflected erroneous and impropeh upward adjustments in the amount of $1,053,327 as of December 31, 1998.
4.6 The erroneous inclusion of the Section 754 adjustments rendered it virtually impossible for an outsider to determine the correct balance of the capital accounts.
4.7 TP’s expert testified that in order to balance the capital accounts, you would need to compare the partnership tax returns and attached reconciliations and the Partnership’s work papers from 1984 to the present time.
4.8 Based on the above, the Court finds that the improper accounting treatment of the basis adjustments artificially inflated the capital accounts of the Estate of Daniel 0. Tomlin, Sr. and Erline Tomlin by approximately $1,053,327, as of December 31, 1998, making Debtor’s capital account appear negative in comparison.
4.9Based on the above, the Court finds that the improper accounting treatment of the basis adjustments was part of a larger scheme by Debtor to place his assets beyond the reach of his creditors.
5. Transfers of TP Partnership Property to TPI
5.1 TP alleges that in 1984, Debtor transferred $200,000 in escrow funds as well as furniture and fixtures from TP to TPI. The total value of the cash and other property which was allegedly transferred to Debtor was $520,040, which was debited to Debtor’s capital account. The furniture and fixtures were valued by TP at book value for purposes of the transfer.
5.2 The transfer was initially booked by TP as an account receivable from TPI for accounting purposes. In 1985, TP improperly recharacterized the transaction to reflect a distribution to Debtor, despite the fact that in 1984 it had reported the transaction on TP’s 1984 partnership return as a sale and had initially booked the transaction as an account receivable from TPI.
5.3 In 1984, TPI became the operating company for TP, managing its properties and overseeing its business affairs.
5.4 TP had salary, rent and outside service fee deductions in excess of $700,000.00 per year for the years prior to TPI taking over as its management company. During the time TPI managed TP, there were no deductions by TP for salaries, rent, management fees or other outside services.
5.5 TP commenced paying management fees in the amount of $60,000.00 a year after TPI dissolved and continues to pay management fees to LAI, a corporation owned on paper by Debtor’s family.
5.6 On April 21, 1984, Debtor and his father entered into a Sales Commission Agreement under which all commissions *382paid or received by the partnership attributable to sales or purchases or real property occurring after the death of either partner shall be allocated to the surviving partner.
5.7 On May 1, 1984, two days after the death of Debtor’s father, Debtor signed an Assignment of Commission rights, transferring the right to sales commissions from TP to TPI. The agreement executed on April 24, 1984, gave nothing to TP. The rights to commissions were transferred to the surviving partner; i.e., to Debtor. Notwithstanding the earlier agreement, Debtor signed the Assignment as Managing Partner of TP and as Chairman of the Board of TPI, placing the valuable commission rights beyond the control of his creditors.
5.8 The Assignment of Commissions was predicated upon TPI performing management functions for TP. The transfer of funds and property to TPI from TP were contributions to capital by TP in anticipation of future services to be performed by TPI in accordance with the flawed Assignment of Commissions from Debtor to TPI.
5.9 Fortuitously, the Assignment of commission rights was flawed in such a way as to permit Debtor to reclaim the valuable commission rights at a later time on the basis that TP had no commission rights to transfer. The commission rights are currently claimed to be the property of LAI, a corporation in which Debtor claims to own no interest.
5.10 At the same time Debtor was alienating his commission rights, he managed to book the transfer of the escrow fund and the furniture and fixtures in such a way as to further dilute his personal assets by reducing his TP capital account.
5.11 Debtor has no knowledge or recollection of the transfer of any property from TP to TPI. Thus the Court questions whether the transfers actually occurred.
5.12Based on the above, the Court finds that nothing in the TP Partnership Agreement or the Texas Revised Partnership Act authorizes either Debtor’s transfer of partnership assets or the resulting debit to Debtor’s partnership capital account. These transactions were part of a larger scheme by Debtor to place his assets beyond the reach of his creditors.
6. The SASA Transaction
6.1 TP, through Roger Lindsey alleges that in 1985, an entity known as Commercial 29, which was owned by TPI, purchased real property from Plano Parkway II, giving Plano Parkway II a note for part of the purchase price. TP alleges that San Antonio Savings Association (“SASA”) agreed to lend funds to Commercial 29 to enable it to make the note payments to Plano Parkway II. TP alleges that Debtor, who owned TPI and was the Managing Partner of TP, guaranteed the note of Commercial 29 to SASA. Mr. Lindsey has no personal knowledge of the above transaction since he first became employed by TPI in November, 1986.
6.2 TP, through it’s current manager, LAI, alleges that SASA threatened to discontinue its funding of Commercial 29 and a settlement resulted under which SASA would continue funding Commercial 29’s payments to Plano Parkway II if a portion of the proceeds of the sale of the property by Commercial 29 was given to SASA through TP. A debit in the amount of $953,560 was made to Debtor’s capital account upon the foreclosure on the basis that Debtor has personally guaranteed the note of TPI. LAI was not involved in the transaction since it was not incorporated until 1990.
6.3 TP has not produced the note, the security agreement, or the foreclosure doc*383uments. Moreover, the Debtor, has no recollection of the transaction.
6.4 The same interest in Plano Parkway II was pledged to MBank.
6.5 As part of the same settlement with SASA, $300,000 was allegedly paid by TP to MBank, because TP’s interest in Plano Parkway II was allegedly pledged to MBank. The $300,000 paid to MBank was treated as an account receivable from TPI to TP on the books and records of TP, and did not result in a debit to Debtor’s capital account. The payment retained by SASA was treated as a disproportionate distribution to Debtors.
6.6 Debtor has no memory or knowledge of the transaction with San Antonio Savings Association despite the fact he was managing TP from 1984 — 1999, although he testified that he had the consent of the other TP partners.
6.7 Carolyn Hurst, a partner in TP, has no memory or knowledge of the transaction with San Antonio Savings Association.
6.8 Based on the above, the Court finds that nothing the TP Partnership Agreement or the Texas Revised Partnership Act authorizes either Debtor’s transfer of partnership assets or the resulting debit to Debtor’s partnership capital account. These transactions were part of a larger scheme by Debtor to place his assets beyond the reach of his creditors.
7. The MBank Transactions Overview
7.1On April 12, 1990, MBank allegedly gave notice that a line of credit note executed by TP on May 23, 1988, was in default and made demand for immediate full payment of the note in the original amount of $2,500.000. TP alleges that MBank received the proceeds of notes which were payable to the various joint ventures that had allegedly been pledged by TP.
7.2 TP alleges that in 1990, MBank foreclosed on note payments due to Lebanon Joint Venture, Plano Parkway II Joint Venture, and Marsh 544 Joint Venture in satisfaction of a pledge by TP to MBank to secure the debt of TPI to MBank. TP debited the Debtor’s TP capital account by $205,654 due to the foreclosure. TP reduced the Debtor’s capital account by $205,654 alleging that this debit was justified since the Debtor had personally guaranteed the note of TPI.
7.3 TP, through it’s current manager, LAI, alleges that in 1991, MBank foreclosed on note payments due to Lebanon Joint Venture, Plano Parkway II Joint Venture, and Marsh 544 Joint Venture in satisfaction of a pledge by TP to MBank to secure the debt of TPI to MBank. A debit in the amount of $76,935 was made to Debtor’s capital account upon the foreclosure on the basis that Debtor had personally guaranteed the note of TPI.
7.4 TP, through it’s current manager, LAI, alleges that in 1992, MBank foreclosed on note payments due to Lebanon Joint Venture and Plano Parkway II Joint Venture in satisfaction of a pledge by TP to MBank to secure the debt of TPI to MBank. A debit in the amount of $115,500 was made to Debtor’s capital account upon the foreclosure on the basis that Debtor had personally guaranteed the note of TPI.
7.5 TP, through it’s current manager, LAI, alleges that in 1993, MBank foreclosed on note payments due to Lebanon Joint Venture in satisfaction of a pledge by TP to MBank to secure the debt of TPI to MBank. A debit in the amount of $22,428 was made to Debtor’s capital account upon the foreclosure on the basis that Debtor had personally guaranteed the note of TPI.
*3848. Plano Parkway II Pledges to MBank
8.1 Paragraph 5.1 of the original Plano Parkway Joint Venture Agreement dated May 28, 1976 designated TPI as the manager of the joint venture property. Paragraph 5.1(c) provides that the Manager of the Joint Venture shall at no time have authority to “possess venture property or assign the right of the venture or its Ven-turers in specific venture property for other than a venture purpose.” (Emphasis added).
8.2 Paragraph 7.1(c) of the Joint Venture Agreement provides that making an assignment for the benefit of creditors is an event of default of the Joint Venture Agreement.
8.3 On June 15, 1983, an Agreement of Venturers of Plano Parkway Joint Venture to Divide Joint Venture was executed creating the Plano Parkway II Joint Venture.
8.4 Paragraph 1(b) of this Agreement lists the joint venturers as TP, John Lawrence, John W. Rhea, Jr., C.J. Thomsen, Northwestern Parkway, Inc. and Eastern Parkway, Inc.
8.5 Paragraph 2 of the Agreement incorporates the terms and provisions of the original Joint Venture Agreement dated May 28,1976.
8.6 The Agreement was not signed by a representative of Tomlin Properties, Inc.
8.7 TP has produced consents from Messrs. Lawrence, Rhea, Thomsen and an entity known as V.N. Dnar Investments which purport to agree to the transfer of TP’s interest in Plano Parkway II to Debt- or and the subsequent execution of a security agreement pledging Debtor’s interest in Plano Parkway II to MBank.
8.8 TP has produced no consent from Northwestern Parkway, Inc. or Eastern Parkway, Inc. as Venturers in Plano Parkway II Joint Venture to the transfer or pledge of TP’s interest.
8.9 The Debtor, who was managing TP from 1984 — 1999 has no knowledge of the transactions involving Plano Parkway II.
8.10 Paragraph 8.01 of the Restatement and Amendment of Partnership Agreement of Tomlin Properties dated August 1, 1983, provides that the interest of a partner in the partnership “may not be sold, transferred, mortgaged, hypothecat-ed, or otherwise disposed of without the prior written consent of the other partners.”
8.11 TP has produced no documents evidencing the consent of the other partners of TP to the alleged transfer or pledge of TP’s interest in Plano Parkway II.
8.12 TP has produced no documents transferring TP’s interest in Plano Parkway II to Debtor.
8.13 TP has produced no security agreement pledging debtor’s interest in Plano Parkway II to MBank.
8.14 Debtor, who was managing TP, has no knowledge or memory of the MBank transaction, except that he testified he had the consent of the other partners.
8.15 Carolyn Hurst, Debtor’s sister and a partner in TP, has no knowledge or memory of the MBank transaction.
8.16 TP has continued to carry its interest in Plano Parkway II on its books and records despite the alleged transfer or pledge of its interest.
8.17 TP has continued to list its interest in Plano Parkway II on its partnership tax return despite the alleged transfer or pledge of its interest.
8.18 Based on the above, the Court finds that nothing the TP Partnership Agreement or the Texas Revised Partner*385ship Act authorizes either Debtor’s transfer of partnership assets or the resulting debit to Debtor’s partnership capital account.
9. Lebanon Joint Venture Pledge to MBank
9.1 Paragraph 5.1 of the Lebanon Joint Venture Agreement dated January 15, 1980, designates TPI as the manager of joint venture property.
9.2 Paragraph 5.1(c) provides that the Manager of the Joint Venture shall at no time have authority to “possess venture property or assign the right of the venture or its Venturers in specific venture property for other than a venture purpose.” (Emphasis added).
9.3 Paragraph 7.1 of the Joint Venture Agreement provides that making an assignment for the benefit of creditors is an event of default of the Joint Venture Agreement.
9.4 TP has produced no documents evidencing the consent of the other venturers in Lebanon Joint Venture to the transfer or pledge of TP’s interest in Lebanon Joint Venture.
9.5 TP has produced no documents evidencing the consent of the other partners of TP to the alleged transfer or pledge of TP’s interest in Lebanon Joint Venture.
9.6 TP has produced no security agreement pledging TP’s interest in Lebanon Joint Venture to MBank.
9.7 Debtor, who was managing TP, has no knowledge or memory of the MBank transaction; however, Debtor recalls that he agreed to the pledge on behalf of the Estate of Daniel 0. Tomlin, Sr. and that Erline Tomlin agreed to the pledge.
9.8 Carolyn Hurst, Debtor’s sister and partner in TP, has no knowledge or memory of the MBank transaction.
9.9 TP has continued to carry its interest in Lebanon Joint Venture on its books and records despite the alleged transfer or pledge of its interest.
9.10 TP has continued to list its interest in Lebanon Joint Venture on its partnership tax return despite the alleged transfer or pledge of its interest.
9.11 Based on the above, the Court finds that nothing the TP Partnership Agreement or the Texas Revised Partnership Act authorizes either Debtor’s transfer of partnership assets or the resulting debit to Debtor’s partnership capital account.
10. Marsh 544 Joint Venture Pledge to MBank
10.1 Paragraph 6.5(a)(iv) of the Marsh 544 Joint Venture Agreement dated December 19, 1972, provides that a venturer must obtain the consent of 100% of the Joint Venturers to use Venture Property as collateral for any loan or obligation of the Joint Venturer, subject to the provisions of paragraph 9.6 of the Agreement.
10.2 Paragraph 9.6 of the Agreement provides that a Joint Venturer may pledge, encumber, or create a security interest in his Distributive Share of the joint venture in connection with a loan to such Joint Venturer only if the holder of the security interest agrees in writing that its security interest may not be foreclosed until thirty days’ notice of such foreclosure or proposed sale, or any other disposition of the Distributive Share is given to the Venture Manager.
10.3 The Line of Credit Note executed on October 26, 1986, with MBANK provides that the bank can declare the Note in default and foreclosure without further notice or action by the bank.
10.4 Paragraph 7.1 of the Marsh 544 Joint Venture Agreement dated December *38619, 1972, provides making an assignment for the benefit of creditors is an event of default of the Joint Venture Agreement.
10.5 TP has produced no documents from MBANK to the Venture Manager agreeing to the terms of Paragraph 9.6 of the Agreement.
10.6 Based on the above, the Court finds that TP has failed to produce any credible evidence that the alleged transfers to MBANK occurred, were guaranteed by Debtor, or were done in compliance with the Joint Venture Agreement, the Partnership Agreement, or Texas Partnership law and had no effect on Debtor’s capital account.
11. Lewisville Commercial Pledges to Bonham Bank
11.1 Paragraph 5.1 of the Lewisville Commercial Joint Venture Agreement dated June 22, 1981, designates TPI as the manager of the Joint Venture.
11.2 Paragraph 5.1(c) provides that the Manager of the Joint Venture shall at no time have authority to “possess venture property or assign the right of the venture or its Venturers in specific venture property for other than a venture purpose.” (Emphasis added).
11.3 Paragraph 7.1 of the Joint Venture Agreement provides that making an assignment for the benefit of creditors is an event of default of the Joint Venture Agreement.
11.4 Paragraph 5.1 of the Joint Venture Agreement permits the Manager to bind the Venture on his signature, provided it is accompanied by an acknowledged affidavit that he has authority to undertake any act and/or has the necessary votes or consents of the Joint Venturers to take any such act.
11.5 TP has produced a “certificate” signed by Debtor alleging that the other joint venturers agree to the pledge of TP’s interest in Lewisville Joint Venture to Bonham State Bank as assignee of Willow Bend National Bank and asserting that the assignment is not an event of default. The certificate is not an affidavit and it is not acknowledged as required by the Joint Venture Agreement.
11.6 Debtor has produced no Note to Bonham Bank executed by TPI.
11.7 Debtor has produced an unsigned Security Agreement between TP, TPI and Bonham Bank.
11.8 The Debtor testified that he had the consent of the other partners.
11.9 Based on the above, the Court finds that TP has failed to produce evidence that the alleged transfers to Bon-ham Bank occurred, were guaranteed by Debtor, or were done in compliance with the Joint Venture Agreement and the Partnership Agreement. Accordingly, the portion of TP’s Proof of Claim representing this transaction will be disallowed.
11.10 TP alleges that in 1991, Bonham State Bank foreclosed on interests in Lew-isville Commercial Joint Venture pledged by TP to secure the debt of TPI to Bon-ham State Bank. A debit in the amount of $390,040 was made to Debtor’s capital account upon the foreclosure on the assumption that Debtor had personally guaranteed the note.
11.11 The Debtor, who managed TP from 1984 to 1999 has no memory or knowledge of the transactions in question, other than to assert that he had the consent of the other partners..
11.12 Based on the above, the Court finds that nothing the TP Partnership Agreement or the Texas Revised Partnership Act authorizes either Debtor’s transfer of partnership assets or the resulting *387debit to Debtor’s partnership capital account.
12. TP’s Failure to Maintain Accurate and Coherent Books and Records
12.1 TP’s accounting records merely consist of a cash journal in which cash transactions are recorded. TP maintains no other books and records other than a tax return which is prepared and submitted in October following the end of the calendar year.
12.2 Lack of accounting records on behalf of TP required the witnesses for TP to base their testimony on the cash journal and other worksheets prepared by Mr. Bivona, who was not available to testify. There were no original records, such as checks, bank statements or ledgers.
12.3 It is not possible to determine TP’s assets, TP’s debts, and TP’s receivables from an examination of the cash journal. Therefore, the Court finds that the testimony from the figures of Mr. Bivona without the underlying documents available for review is not credible.
12.4 The transfer of cash and other property in 1984 was initially treated on the books and records of TP as a sale. The transfer was later reclassified on TP’s books in 1985 as a distribution to Debtor. The transfer was reported on the 1984 partnership tax return as a sale.
12.5 The alleged foreclosure by San Antonio Savings Association resulted in a transfer of cash or a cash equivalent to both San Antonio Savings Association and MBANK because both financial institutions held pledges of TP’s interest in Plano Parkway II Joint Venture. The payments to SASA and MBank were treated differently for accounting purposes.
12.6 Allegedly, approximately $958,560 was transferred to San Antonio Savings Association and was treated as a distribution to Debtor with respect to his capital account. Alegedly, approximately $300,000 was received by MBANK as a result of the same settlement and was treated as an account receivable from TPI on the books of TP.
12.7 TP’s partnership tax returns have continuously reflected that TP owned an interest in Plano Parkway II Joint Venture, Lebanon Joint Venture, Marsh 544 Joint Venture, and Lewisville Commercial Joint Venture despite its allegations in this lawsuit that it’s interests in these joint ventures were transferred to Debtor.
12.8 TP has carried accounts receivable from various family members and from TPI on its books as “current assets” for ten years.
13. Short Year Election Error
13.1 Debtor filed bankruptcy on July 21, 1999. Pursuant to 26 USC § 1399 of the Internal Revenue Code (the “Internal Revenue Code”), a Debtor can terminate his individual taxable year as of the date of filing bankruptcy. This results in two taxable entities for the year in which the bankruptcy was filed; i.e., the Debtor for the prepetition period and the bankruptcy estate for the postpetition period. The Debtor did not make a short year election pursuant to Section 1398 with respect to the 1999 tax year.
However, TP’s accounting treatment for the year 1999 erroneously reflected that the Debtor’s interest in the Partnership terminated for tax purposes upon the filing of the bankruptcy. TP issued two K-l’s with respect to Debtor’s interest in TP. The K-l issued by TP to Debtor allocated all losses to the Debtor. The K-l issued to the Trustee allocated all income to the trustee. Section 1398(f)(1) provides that a transfer (other than by sale or exchange) of an asset from the debtor to the estate *388shall not be treated as a disposition for purposes of any provision of the Internal Revenue Code. 26 U.S.C., Section 708(b)(1)(B) provides that only a sale or exchange of a partner’s entire interest in a partnership closes the partnership’s taxable year with respect to the partner.
13.2Based on the above, the Court finds that only one K-l should have been issued for 1999. The K-l should have been issued to the Trustee.
14. The Bankruptcy
14.1 On July 21, 1999, the Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code.
14.2 Robert Milbank, Jr. is the acting Chapter 7 Trustee of the Debtor’s bankruptcy estate.
14.3 On November 9, 1999, Tomlin Properties filed Proof of Claim No. 11 as a secured claim in the amount of $412,313.00. The claim purports to be secured by set off rights relating to Debtor’s alleged negative capital account in Tomlin Properties.
14.4 On December 2, 1999. Tomlin Properties filed Proof of Claim No. 16 as an unsecured claim in the amount of $912,313.00, alleging the negative capital account as the basis of the proof of Claim.
14.5 On December 6, 2000, Trustee filed his objections to Claims of Tomlin Properties and Request for Declaratory Judgment (“Complaint”).
15. Inconsistent Treatment of Negative Capital Account
15.1On June 26, 1998, the Debtor signed a Uniform Residential Loan Application in which he swore under penalty of perjury that he had listed all his assets and liabilities. The alleged negative capital account at TP was not listed as a liability.
15.2 On December 11, 1998, the Debtor signed a Uniform Residential Loan Application in which he swore under penalty of perjury that he had listed all his assets and liabilities. The alleged negative capital account at TP was not listed as a liability.
15.3 On December 3, 1999, Roger Lindsey as the Controller of TP filed an Affidavit wherein he asserted in paragraph 8 that “certain distributions in the amount of $35,431.88 are to be made on account of Tomlin’s interest in the Partnership.”
15.4 Roger Lindsey testified that he was not sure he was the Controller of TP.
15.5 TP has taken inconsistent positions regarding the existence of a negative capital account and its effect on distributions to Debtor.
15.6 TP has made no efforts to offset the alleged negative capital account from distributions due to Debtor in the eight years TP alleges the negative capital account has existed.
15.7 TP has sold partnership property postpetition and has not reported the sale or the existence or amount of a potential distribution to the Trustee, as successor to Tomlin’s partnership interest as property of the estate.
15.8 In contravention of the Sales Commission Agreement of April 21, 1984, Debtor’s commission rights have been diverted to LAI, a corporation owned and purportedly controlled by Tomlin family members, other than Debtor. In fact, the Debtor controls the Corporation through his son and other employees.
15.9 Despite the allegations that Debt- or’s interest in TP is burdened by a negative capital account in the amount of $912,313.00, distributions of bonuses continue to be made to Debtor with respect to his interest in TP through an entity known as “Land Financial Advisors,” in spite of *389Roger Lindsey’s testimony that “the first money to be paid to Dan Tomlin was going to be retained to balance his capital account.”
15.10 Based on the above, the Court finds that the assertion of a negative capital account was a scheme devised by Debt- or to dilute the value of his largest asset to the detriment of his creditors.
15.11 Any Conclusion of Law more appropriately considered a Finding of Fact is incorporated herein.
CONCLUSIONS OF LAW
16. Proofs of Claim
16.1 Section 502(a) of Title 11 of the United States Code provides that a claim, proof of which is filed, is deemed allowed unless a party in interest objects. Simmons v. Saveli (In ve Simmons), 765 F.2d 547, 551-52 (5th Cir.1985).
16.2 In this case, the Trustee’s objection to the claims of TP was brought as an adversary proceeding, pursuant to Fed. R. Bankr.P. 3007.
16.3 The Trustee, as the objecting party, has the burden of producing evidence that rebuts the claim. California State Board of Equalization v. Official Unsecured Creditor’s Committee (In re Fidelity Holding Co. Ltd.), 837 F.2d 696, 698 (5th Cir.1988). He must produce evidence that is “of probative force equal to that of the creditor’s proof of claim.” Simmons, 765 F.2d at 552. Then, the burden shifts to TP, as the claimant, who carries the ultimate burden of persuasion. Fidelity Holding Co. Ltd., 837 F.2d at 698.
16.4 The Court concludes that the Trustee put forth enough evidence to shift the burden to TP. TP has failed to prove its claim. It had no original documents to support its claim and had to rely on Mr. Bivona’s opinions and worksheets. The accountant witnesses for TP merely interpreted Mr. Bivona’s papers. This proof was not reliable and not credible.
17. Section 754 Adjustments
17.1 Section 754 of the Internal Revenue Code1 provides that if a partnership files an election, the basis of partnership property shall be adjusted, in the case of a transfer of a partnership interest, in the manner provided by Section 743. 26 U.S.C. Section 754.
17.2 Sec. 743(b)(1) provides that a transferee of partnership property upon the death of a partner shall increase the adjusted basis of the partnership property by the excess of the basis to the transferee partner of his interest in the partnership over his proportionate share of the adjusted basis of the partnership property. Simply put, the transferees get a step-up in basis on the transferred property to fair market value on the date of transfer. 26 U.S.C. Section 743(b)(1); Estate of Dupree v. United States, 391 F.2d 753 (5th Cir.1968).
17.3 Treas. Reg. Sec. 1. 704-l(b)(2)(iv)(m) provides that the Section 743 adjustments to basis are not to be reflected in either the partnership books or the partner’s capital accounts. The regulation further states that subsequent capital account adjustments for distributions, depreciation, depletion, amortization, and gain or loss with respect to such property will disregard the effect of such basis adjustment.
Treas. Reg. Sec. 1.743(j)(l) provides 754 adjustments are to be made with respect to the transferee only and that no adjust*390ment is made to the common basis of the partnership property.
Treas. Reg. Sec. 1.743(j)(2) provides that these adjustments to the transferee’s distributive shares do not affect the transferee’s capital account.
17.4 Section 754 and Section 743 adjustments are intended to shield gain on the disposition of inherited partnership property; they should not be reflected on the partnership books or the partner’s capital accounts.
17.5 As a result of the erroneous inclusion of the Section 754 adjustments in the capital accounts, the capital accounts of the Estate of Daniel 0. Tomlin, Jr. and Erline Tomlin were inflated by $1,053,317 as of December 31,1998.
17.6 The erroneous upward adjustments of the other partners’ capital accounts made Debtor’s capital account appear more negative in comparison.
18. The Partnership Agreement
18.1 Except for certain matters not at issue in this case, a partnership agreement governs the relations of the partners and between the partners and the partnership. Texas Revised Partnership Act, Article 6032b-1.01, Section 1.03(a)(1997).
18.2 A Partnership Agreement is any agreement, written or oral, of the partners concerning a partnership. Texas Revised Partnership Act, V.A.T.S. Article 6032b-1.01, Section 1.01(12)(1997).
18.3 “Capital Account” means the amount of a partner’s original contribution to a partnership, which consists of cash and the agreed value of any other contribution to the partnership, increased by the amount of additional contributions made by that partner and by profits credited to that partner under Section 4.01(b), and decreased by the amount of distributions to that partner and by losses charged to that partner under Section 4.01(b). Texas Revised Partnership Act, V.A.T.S. Art. 6132b — 1.01(2X1997).
18.4 Section 6132b-4.01(b) provides that partners are entitled to be credited with an equal share of the partnership’s profits and is chargeable with a share of the partnership’s losses, whether capital or operating, in proportion to the partner’s share of the profits. Texas Revised Partnership Act, V.A.T.S., Sec. 6132b-4.01(b)
18.5 Art. 6132b-4.01(c) provides as follows:
(а) Disproportionate Payment or Advance. A partner who, in the proper conduct of the business of the partnership or for the preservation of its business or property, reasonably makes a payment or advance beyond the amount the partner agreed to contribute, or who reasonably incurs a liability, is entitled to be repaid by the partnership and to receive interest from the partnership from the date of the payment or advance or the incurrence of the liability.
Texas Revised Partnership Act, V.A.T.S. Art. 6132(b) — 4.01 (1997).
18.6 The Texas Partnership Act will be looked to for guidance in construing and interpreting a partnership agreement only when the agreement is silent on the matter. Park Cities Corp. v. Byrd, 534 S.W.2d 668, 672 (Tex.1976); Kahn v. Seely, 980 S.W.2d 794 (Tex.App.San Antonio 1998, rev. denied).
18.7 Where the Partnership Agreement does not provide for less than unanimous consent, agreements of the partners constituting partnership agreements must be unanimous. Aztec Petroleum Corp. v. MHM Co., 703 S.W.2d 290 (Tex.App.Dallas 1985, no rev.).
18.8 A partnership agreement is a contract and is to be construed like any *391other contract. Park Cities Corp. v. Byrd, 534 S.W.2d 668, 672 (Tex.1976); Kahn v. Seely, 980 S.W.2d 794 (Tex.App.San Antonio 1998, rev. denied).
18.9 A partnership agreement can be amended only in compliance with the partnership agreement. Aztec Petroleum Corp. v. MHM Co., 703 S.W.2d 290 (Tex.App.Dallas 1985, no writ.).
18.10 If the partnership agreement does not permit less than unanimous amendments, then the partnership agreement can be amended only with the consent of all the partners. Partnership Act Sec. 4.01(i).
18.11 The allocation of income, gain, expense, and losses is governed by the partnership agreement or, to the extent there is no partnership agreement, the Partnership Act. Park Cities Corp. v. Byrd, 534 S.W.2d 668, 672 (Tex.1976).
18.12 There is no provision in the Partnership Agreement executed by Debtor or Texas partnership law that permits a distribution of partnership assets to a partner under the circumstances of this case.
18.13 Partnership property does not belong to a partner as his separate property. A member of the partnership cannot unilaterally grant a security interest in partnership property. Hogan v. Hogan, 234 Ark. 383, 352 S.W.2d 184 (1961).
18.14 In order to perfect a security interest in personal property, a UCC-1 must be filed. Tex.Bus. & Comm.Code, Sec. 9.302 (Vernon 1991).
18.15 The alleged “disproportionate distributions” to Debtor were not authorized by the Partnership Agreement and were therefore transfers for the benefit of all partners with their consent, or they were gifts or loans from his partners which would have been documented outside the partnership agreement. The alleged “disproportionate distributions” would have had an equal effect on all partners’ capital accounts.
18.16 Debtor testified that he agreed, individually and as the executor of the Estate of Daniel O. Tomlin, Sr. to the transfer of property and cash to TPI as well as the pledge of TP property as collateral for the loans of TPI to MBANK, Bonham State Bank, and SASA.
18.17 Debtor and Roger Lindsey testified that Erline Tomlin consented to the transfer of property and cash from TP to TPI as well as the pledge of TP’s property as collateral for the loans of TPI to MBank, Bonham State Bank, and SASA. Thus, all the interest owners of TP consented to transfers which allegedly made Debtor’s capital account at TP negative.
18.18 In light of the unanimous consent of all the TP interest holders to the transfer of assets by TP, TP was acting in its partnership capacity and not in the interest of the Debtor. The accountant for TP disregarded the TP Partnership Agreement and the relevant facts by booking the transactions as disproportionate distributions to the Debtor. The accountant, Mr. Bivona, prepared whatever Mr. Tomlin requested.
19. Erroneous Treatment of Foreclosures
19.1 A guarantor steps into the shoes of the initial creditor. The guarantor is subrogated to the rights of the initial creditor. Upon payment of the debt by the guarantor, the debtor’s obligation to the creditor becomes an obligation to the guarantor. It is not a new debt but rather shifts the original debt from the creditor to the guarantor who steps into the creditor’s shoes. Section 166 of the IRC addresses guarantors, endorsers, indemnitors and *392those who act in a manner essentially equivalent to such. Putnam v. Commissioner, 352 U.S. 82, 77 S.Ct. 175, 1 L.Ed.2d 144 (1956).
19.2 There is an implied promise of repayment to a surety or guarantor on the part of the principal debtor. A guarantor is answerable for the debt, default or miscarriage of another. A guarantor does not have original, primary and direct liability. His liability is contingent upon certain conditions. He is not bound by the original agreement but rather by his own independent undertaking. However, when a guarantor must make good on an obligation, he has a right to recover from the principal debtor through equitable subrogation. Howell v. Commissioner, 69 F.2d 447 (8th Cir.1934).
19.3A party who is under an obligation to satisfy the debt of another finds its remedy in the equitable doctrine of subro-gation. His rights run against the original debtor. Aetna Life Insurance Co. of Hartford v. Middleport, 124 U.S. 534, 8 S.Ct. 625, 31 L.Ed. 537 (1888).
19.4 One who rests on subrogation stands in the place of one whose claim he has paid, as if the payment giving rise to the subrogation had not been made. He cannot jump back and forth in time and present himself at once as the unpaid claimant, and again, under the conditions as they have changed because payment was made (citations omitted). United States v. Munsey Trust Co. of Washington, 332 U.S. 234, 108 Ct.Cl. 765, 67 S.Ct. 1599, 91 L.Ed. 2022 (1947).
20. Tax Treatment of the Guarantee
20.1 26 U.S.C. Section 166 provides that there shall be allowed as a deduction any debt which becomes worthless within the taxable year. 26 U.S.C. Section 166
20.2 Section 166 defines business bad debt as a debit created or acquired in connection with a trade or business of the taxpayer or as a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business. It defines a nonbusiness bad debt as any debt other than a business bad debt. 26 U.S.C. Section 166.
20.3 The Treasury Regulations provide that a taxpayer who enters into a transaction for profit, but not in the course of their trade or business to act as (or in a manner essentially equivalent) to a guarantor, endorser, or indemnitor of a debt obligation who makes a payment on such obligation shall treat the transaction as a business bad debt in the taxable year in which the payment is made or in which the right to subrogation became worthless. Treas. Reg. 1.166-9(a).
20.4 Treas. Reg. Sec. 1.166-9(e) provides that consideration is not limited to the receipt of money or property. Thus, where a taxpayer can demonstrate that the agreement was given without direct consideration in the form of cash or property but in accordance with normal business practice or for a good faith business purpose, worthless debt treatment is allowed with respect to a payment in discharge of part or all of the agreement if the conditions of this section are met.
20.5 The legislative history of Treas. Reg. Sec. 1.166-9(e) permits the improvement of business relations as “adequate consideration.” It provides as follows:
In the case of a guaranty agreement, however, it is not always easy to tell whether the transaction has been entered into for profit on the part of the guarantor. It is not uncommon for guaranty agreements to provide for no direct consideration to be paid to the guarantor. Often this may be because the guarantor is receiving indirect con*393sideration in the form of improved business relationships. On the other hand, many other guaranties are given without consideration as a matter of accommodation to friends and relatives.
The Congress believes that a bad debt deduction should be available in the case of a guaranty related to the taxpayer’s trade or business, or a guaranty transaction entered into for profit. However, no deduction should be allowed for a “gift” type of situation. Thus, the Congress intends that for years beginning in 1976 (in the case of guaranties made after 1975) and thereafter, the burden of substantiating is to be on the guarantor, and that no deduction is to be available unless the guaranty is entered into as part of the guarantor’s trade or business, or unless the transaction has been entered into for profit, as evidenced by the fact that the guarantor can demonstrate that he has received reasonable consideration for giving the guaranty. For this purpose, reasonable consideration could include indirect consideration; thus, there the taxpayer can substantiate that a guaranty was given in accordance with normal business practice, or for bona-fide business purposes, the taxpayer would be entitled to his deduction even if he received no direct monetary consideration for giving the guaranty. On the other hand, a father guaranteeing a loan for his son would ordinarily not be entitled to a deduction even if he received nominal consideration for giving the guaranty (emphasis added).
Public Law 94-455, 94th Cong, 2d Sess. (Oct 4, 1976) (The Tax Reform Act of 1976).
20.6For accounting purposes, TP should have taken a nonbusiness bad debt deduction in the year in which its property was foreclosed upon for the loans of TPI. The losses associated with the foreclosures should have been borne by the TP partners in the exact ratio of the partnership interests they held; i.e., 50/25/25, resulting in no disproportionate distribution to Debtor.
20.4 Business bad debts are treated as ordinary losses. Nonbusiness bad debts are treated as short-term capital losses. 26 U.S.C. Sec. 166.
20.5 The loss sustained by a guarantor unable to recover from the debt- or is by its very nature a loss from the worthlessness of a debt. This has been consistently recognized in the administration of the internal revenue laws which, until the decisions of the Court of Appeals in conflict with the decision below, have always treated guarantors’ losses as bad debt losses. Putnam v. Commissioner, supra, at 83, 77 S.Ct. 175.
20.6 The proper accounting treatment by TP of the alleged pledge and foreclosure of partnership assets as collateral for TPI’s loan was to treat the loss as a non-business bad debt from TPI to TP.
20.7 The losses associated with the alleged pledges and foreclosures would have an equal effect on each of the partner’s capital accounts and would not be a “disproportionate distribution” to Debtor.
20.8 If the alleged pledges and transfers were for the benefit of the partnership, each of the partner’s capital accounts should have been equally debited.
20.9 If the alleged pledges and foreclosures were not made by TP for the benefit of its business relations with TPI, then the alleged “disproportionate distributions” to Debtor were either gifts or loans by his partners which would have been documented outside the partnership agreement and which would have an equal effect on all the partner’s capital accounts.
*39420.10 There is no provision in the Partnership Agreement for disproportionate distributions.
20.11 Mr. Bivona treated the foreclosures as disproportionate distributions in admitted contravention of the Partnership Agreement and partnership law.
20.12 Based on Exhibit 8 to Mr. McKee’s expert report, according to the calculations of Mr. Bivona the Debtor’s capital account balance as of December 31, 1998, was $1,323,215.00.
20.13 While taxpayers are free to organize their affairs as they choose, once having done so, taxpayers generally are held to the tax consequences of their choice. Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 94 S.Ct. 2129, 40 L.Ed.2d 717 (1974).
21. Turnover of Property of the Estate
21.1 The evidence established that on August 20, 1999, Airport Apartments JV sold real property it owned and received $1,770,810.70 in sales proceeds. Tomlin Properties owned a 5% interest in Airport Apartment JV and received $70,863.74 on behalf of its interest in the venture. Shortly after receiving the sales proceeds from Airport Apartment JV, Tomlin Properties paid one-half of the proceeds (i.e., $35,431.88) to the partners in Tomlin Properties, other than the Debtor. Despite the existence of an alleged negative capital account of approximately $912,000.00, Tomlin Properties chose to ignore the negative capital account and make a distribution of the remaining one-half of the proceeds (i.e., $35,431.88) to the Debtor. However, since the Debtor had attempted to pledge his distribution rights from Airport Apartments JV to Roger Lindsey and others, the $35,431.88 distribution was to be paid directly to the parties holding a security interest in the distribution.
21.2 By prior Court order the $35,431.88 distribution to be made for the benefit of the Debtor has been placed into the Registry of the Court. In a prior adversary proceeding, the Court has determined that the security interest in the $35,431.88 was unperfected. In the instant adversary proceeding, the Trustee has requested turnover of the $35,431.88 under Section 542 of the Bankruptcy Code. The Court grants the turnover request and will direct the Clerk of the Court to pay the amount of $35,431.88 plus all accrued interest on such sum to the Trustee.
21.3 Tomlin Properties has taken inconsistent positions on the Debtor’s entitlement to the Airport Apartments JV distribution depending upon who it believed would be the recipient of such funds. When Tomlin Properties believed that the security interest holders which included Mr. Lindsey would receive the funds, the distribution was to be made. However, if the Trustee was to be the recipient, the distribution would not be made due to the concern over the negative capital account. The testimony of Mr. Roger Lindsey, the Controller of Tomlin Properties conclusively established that the distribution should be made despite the Debtor’s alleged negative capital account. Mr. Lindsey testified that Tomlin Properties decided to make the distribution despite the negative capital account. The Debtor’s bankruptcy schedules shows that the Debtor received distributions totaling $211,691.70 in December, 1997 and in February, 1999 for joint venture interests allegedly pledged to Mr. Lindsey and others. These distributions were made for the Debtor’s benefit in complete disregard of any negative capital account issues. Thus, based upon Mr. Lindsey’s testimony and Tomlin Properties’ prior course of dealing with similar distributions, the Trustee is entitled to the $35,431.88 distribution from Airport Apartments JV.
*39521.4 Pursuant to 11 U.S.C. §§ 521(4), 541(a) and § 542(a), the $35,431.87 is property of the estate which should have been surrendered to the Trustee. The $35,431.87 was wrongfully retained by Tomlin Properties for its own benefit and to the detriment of the estate. Therefore, the Trustee is entitled to interest at the rate of nine percent (9%) per annum on this amount, which is payable from September 20, 1999 to the date turned over to the Trustee.
21.5 Based upon the foregoing the Court concludes that: (1) TP’s Proofs of Claim Nos. 11 and 16 are disallowed; (2) As of July 21, 1999, the Debtor’s capital account with TP was not negative; and (3) The Trustee is entitled to turnover of the $35,431.88 of funds in the Registry of the Court plus all interest which has accrued on such sum.
21.6 Any Finding of Fact more appropriately deemed a Conclusion of Law is incorporated herein.
A separate order will be entered consistent with this decision.
. All references to the “Internal Revenue Code” herein refer to the Internal Revenue Code of 1954 which was in effect at the time of Daniel O. Tomlin, Sr.’s death.. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493401/ | MEMORANDUM OPINION
PATRICIA M. BROWN, Bankruptcy Judge.
This matter came before the court on the Debtors’ objection to the Trustee’s notice of intent to settle Mr. Cope’s unlawful employment practices lawsuit against his employer and the Trustee’s objection to the Debtors’ claim of exemption in $10,000 to be paid to Mr. Cope as “emotional distress damages” as part of that settlement.
FACTS
At the time this bankruptcy was filed Mr. Cope had a pending lawsuit against his employer for unlawful employment practices. The Debtors valued the lawsuit at $130,000 and claimed 75% of those funds as exempt under ORS 23.185 which allows a debtor to exempt 75% of any wages due owing at the time of a bankruptcy filing.
On November 2, 2000, the Trustee filed objections to the claimed exemption stating “Discrimination Claim is of Record, suit claims only part of damages and lost wages. Trustee has no objection to 75% of wage portion of any award being exempt.” The Debtors did not respond to the Trustee’s objection and, therefore, the Debtor’s exemption was disallowed.
On December 13, 2000, The Trustee then filed a Motion to Settle and Compromise the state court lawsuit on “terms that the defendants insist on remaining confidential.” The Motion also stated that “[t]he proceeds from the settlement are sufficient to pay all the debtors’s scheduled claims.” The Motion further stated that the settlement included an award of statutory attorney fees that would be paid directly to the Debtors’ state court counsel and that the balance of the settlement funds would be paid to the trustee for distribution to creditors.
The Debtors timely objected to the Motion to Settle and Compromise on the grounds that 1) the settlement required them to waive exemptions and forfeit their interest in otherwise exempt property and 2) their bankruptcy counsel had not been informed of any settlement negotiations between their personal injury attorney and the trustee nor of the agreement to waive the Debtors’ claim of exemption. The Debtors also moved for an extension of time to amend their exemptions.
On February 1, 2001, the Debtors filed amended schedules in which they claimed 75% of the proceeds of the lawsuit exempt as wages and claimed an additional $10,000 exempt as payment for personal bodily injury under ORS 23.160(l)(k). The Trustee filed objections to the Debtors’ claim of exemption under ORS *51823.160(1)(K). The Debtors did not respond to the Trustee’s objection.
Following an initial hearing on the Debtors’ Objections to the Trustee’s Notice of Settlement and the Debtors’ Motion to extend Time to Amend Schedules, the court directed the parties to submit briefs on the issue of whether Oregon law allows an exemption for emotional distress damages absent a showing that the debtor suffered actual physical injury.
DISCUSSION
A debtor’s right to claim exemptions is governed by § 522(d) of the Bankruptcy Code. This sections provides, in pertinent part:
(b) ... 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. ... Such property is:
(1) property that is specified under subsection (d) of this section, unless the State law that is applicable to the debtor under paragraph 2(A) of this subsection specifically does not so authorize; or, in the alternative,
(2) any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor’s domicile has been located for the 180 days immediately preceding the date of the filing of the petition, or for a longer portion of such 180-day period than in any other place....
In this case the Debtors’ domicile was located in Oregon for the 180 day period prior to filing of the bankruptcy petition. Oregon has opted out of the federal bankruptcy exemptions. ORS 23.305. Thus the court must look to the Oregon exemption statutes to determine the Debtors’ right, if any, to exempt the funds at issue.
The Debtors claim that the funds at issue may be exempted under ORS 23.160(l)(k) which allows a debtor to exempt a:
“right to receive, or property that is traceable to, a payment or payments, not to exceed a total of $10,000, on account of personal bodily injury of the debtor....”
The trustee contends that this section does not allow the Debtors to exempt funds received as emotional distress damages absent a showing that the distress was the result of bodily injury suffered by a debtor. In support of this contention he cites In re Hanson, 226 B.R. 106 (Bankr.D.Idaho 1998).
In Hanson the court applied Oregon law and held that proceeds of a debtor’s sexual harassment lawsuit against her employer were not exempt under ORS 23.160(l)(k) absent a “clear showing ... that she suffered some type of appreciable physical injury....” Id. at 108. In reaching this conclusion the court noted that the “personal bodily injury exemption under Oregon law ... is very similar to Idaho’s exemption in that it narrows the definition of personal injury by adding the term ‘bodily’ ” Id. at 109. The court noted it “had construed the term ‘bodily injury’ under the Idaho statute to refer ‘to actual physical injury, and not pain and suffering consisting only of mental and emotional trauma.’ ” Id. at 108 It based this conclusion on the fact that the “legislature’s use of [the] additional descriptive term [bodily] must have been significant, or it is mere sur-plusage.” Id.
The Debtors contend that the Hanson decision was wrongly decided because it misconstrues Oregon law regarding a plaintiffs right to recover emotional *519distress damages. Under Oregon law emotional distress damages are generally not recoverable absent a showing of actual physical injury. However, such damages are allowed, without a showing of physical injury if they arise from 1) a specific intent to inflict emotional distress; 2) intentional misconduct by a person in a position of responsibility and with knowledge that it would cause grave distress; or 3) there is conduct that infringes upon a legally protected interest apart from the claimed distress. Bennett v. Baugh, 961 P.2d 883, 888, 154 Or.App. 397 (1998); affirmed in part, reversed in part, 329 Or. 282, 985 P.2d 1282 (1999).
The Debtors argue that:
“[t]here would be no logical reason why the Oregon legislature would allow an exemption for emotional distress damages for someone who is physically impacted, but deny someone who suffers equally, simply because she received the damages based upon a different, yet no less recognized, theory under Oregon law. Further, it would be inequitable for emotional distress damages to be exempt under the general rule, but not exempt under the three exceptional circumstances recognized by Oregon law.” Debtors’ Memorandum in Support of Claimed Exemption, page 3.
As a preliminary matter, I note that it is not the function of this court to decide whether the laws enacted by the legislature are “logical.” Rather, our function is to interpret those laws and apply them to the facts of the case at hand. That said, there are a number of rules governing judicial interpretation of statutory provisions. Among these are the following:
“The interpretation of a statutory provision must begin with the plain meaning of its language. Where statutory language is unambiguous the judicial inquiry is complete. It is a cardinal principal of statutory construction that a court must give effect, if possible, to every clause and word of a statute. When the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language.”
In re Bonner Mall Partnership, 2 F.3d 899, 908 (9th Cir.1993).
In this case the Oregon statute at issue allows a debtor to exempt up to $10,000 in funds received “on account of personal bodily injury of the debtor.” ORS 23.160(l)(k). Prior to 1995, this exemption could not be used to exempt funds received on account of “pain and suffering or compensation for actual pecuniary loss.” The statute was amended in 1995 to eliminate the restriction on exemptions for funds received on account of pain and suffering or actual pecuniary loss. However, it did not eliminate the requirement that the funds to be exempted arise from “personal bodily injury.” Thus the plain language of the current statute allows an exemption for funds received as compensation for pain and suffering only if the pain and suffering arise from a bodily injury.
The Debtors further argue that the term “bodily” does not necessarily require actual physical injury to the debtor and that “it is just as plausible that the legislature used the term ‘bodily’ to differentiate between injury to a person’s self and injury to personal property.” I disagree. If the legislature merely intended to differentiate between injury to person and injury to property it could have done so by simply allowing a deduction for personal injury. It did not do so. Rather, it chose to allow an exemption only for funds received on account of personal “bodily” injury. The use of the modifier “bodily” after the word “personal” implies a legislative intent to limit this exemption to funds received on *520account of a physical injury to the body of the debtor.
I find, therefore that the Debtors may not claim an exemption in funds traceable to emotional distress damages absent a showing that the distress arose from actual physical injury. I will set the matter for an evidentiary hearing to address the issue of whether the debtor suffered such injury. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493430/ | MEMORANDUM OPINION
JOHN T. LANEY, III, Bankruptcy Judge.
On April 15, 2002, the court held a hearing on the motion of Willie and Bessie Scott (“Debtors”) to compel Wells Fargo Home Mortgage, Inc. (“Respondent”) to pay the premium on a mortgage insurance policy. At the conclusion of the hearing, the court took under advisement the issue of whether Debtors are entitled to recover attorney fees from Respondent. The parties were given an opportunity to submit briefs. After considering the evidence, the parties’ oral arguments and briefs, and the applicable statutory and case law, the court will deny Debtors’ request for attorney fees.
FACTS
On or about February 4, 1987, Debtors purchased real property located at 2405 Dawson Street, Columbus, Georgia, 31903 (“property”). This purchase was financed by' a loan from Georgia Federal Bank, FSB. Debtors granted to Georgia Federal Bank, a security interest in the property by executing a Security Deed. (See Debtors’ Motion, Doc. # 12, Exh. “A”). The mortgage was later acquired by First Union Mortgage Corporation (“First Union”). Sometime after 1995, Respondent acquired the mortgage. Apparently, these transfers of Debtors’ mortgage to First Union and subsequently, to Respondent were a result of an assignment or these entities becoming successors in interest.1
On or about September 27, 1995, Debtors purchased a Disaster Mortgage Pro*406tection Policy (“DMP”) from Ace USA (“Ace”). The DMP provided for a payoff of the mortgage in the event of certain defined disasters which rendered the property uninhabitable. The premium for the DMP was $3.23 per month.
On August 1, 2001, Debtors filed a voluntary petition under Chapter 13 of the Bankruptcy Code (“Code”). In a letter dated November 30, 2001, Ace notified Debtors that effective January 1, 2002, the DMP would be canceled for non-payment of premiums. (See Doc. # 12, Exh. “B”).
On December 12, 2001, Debtors filed a motion to compel Respondent to pay the DMP premium. On January 16, 2002, Respondent filed a response. Although Debtors had already filed their motion, they sent a letter to Respondent indicating that they would have to “seek a ruling” from the court if Respondent did not reinstate the DMP. (See Doc. # 17, Exh. “2”). After several continuances, the court held a hearing Debtors’ motion on April 15, 2002.
According to Debtors, the Security Deed requires Respondent to remit payments to Ace from escrow. Debtors argue that Respondent’s failure to make these payments creates a false mortgage default. Therefore, Debtors allege that this conduct is an attempt by Respondent to collect on a prepetition debt.
Respondent, however, contends that it had a right to terminate payments to Ace in spite of the Debtors’ bankruptcy. Respondent argues that it terminated payment to Ace because of Debtors post-petition default, not for Debtors failure to make payments on a prepetition debt. Respondent also asserts that it has no duty to pay DMP premiums through escrow because the “mortgage insurance payments” to which the Security Deed refers do not apply to the DMP payments. (Doc. # 12, Exh. “A”, para. 2). Basically, the DMP was not an item required to be paid through escrow. The DMP was a policy which Debtors voluntarily purchased. Had the DMP been a requirement pursuant to the Security Deed as Debtors assert, the policy would have been in effect since 1987, when the Security Deed was originally executed.
On or about March 1, 2002, Respondent reinstated the DMP by paying the premium. Therefore, Debtors concede that their motion is now moot. However, the issue of whether Debtors are entitled to attorney fees has not been resolved.
Debtors argue that bringing this motion and litigation were the only means they had to force Respondent to reinstate the DMP. Accordingly, Debtors contend that they are entitled to recover $921.78 in attorney fees from Respondent. This amount represents 7.2 hours at $125.00 per hour plus out-of-pocket expenses of $21.78.
Respondent argues, however, that there was no need for Debtors to bring this motion. Debtors never contacted Respondent upon receiving the notice of cancellation to explain that post-petition payments were to be funded through the Chapter 13 Trustee’s office. Had Debtors attempted such contact, Respondent submits that this issue could have been resolved easily without litigation. Furthermore, it is agreed that neither the contract nor the Code authorizes attorney fees in a motion to compel proceeding. Accordingly, Respondent argues that Debtors should not be allowed to recover attorney fees.
DISCUSSION
Under the “American Rule,” “the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys’ fee from the loser.” Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 247, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975). Howev*407er, wilful violation of a court order, bad faith or oppressive conduct, or recovery of a common fund for the benefit of others may operate as an exception to the American Rule. See id. at 243 n. 6, 95 S.Ct. 1612. Also, the Court has recognized statutory or contractual provisions which authorize attorney fees to the prevailing party as exceptions to the American Rule. Id.
In this case, the only possible exception is whether there is an applicable statute authorizing attorney fees. Therefore, the court must determine whether federal or state law would govern. This inquiry depends on whether the underlying dispute involves a question of state contract law or solely a question of federal bankruptcy law. See BankBoston v. Sokolowski (In re Sokolowski), 205 F.3d 532, 535 (2d Cir.2000); see also Johnson v. Righetti (In re Johnson), 756 F.2d 738, 741 (9th Cir.1985) (noting that state law applies with respect to attorney fees in breach of contract disputes).
Because this issue involves a dispute over Respondent’s obligation pursuant to a provision in the Security Deed, the court finds that this issue amounts to a breach of contract dispute. Because the Security Deed was executed in Georgia and concerns Georgia real estate, Georgia law is applicable.
Debtors rely on O.C.G.A. sections 13-6-9 and 13-6-11. O.C.G.A. § 13-6-9 provides that “[a]ny necessary expense which one of two contracting parties incurs in complying with the contract may be recovered as damages.” Typically, Georgia courts have interpreted this code section to apply to those “reasonable and necessary costs” of fulfilling the contract. See Gainesville Glass Company v. Don Hammond, Inc., 157 Ga.App. 640, 642, 278 S.E.2d 182, 185 (1981); (citing Crawford & Assoc., Inc. v. Groves-Keen, Inc., 127 Ga. App. 646, 194 S.E.2d 499 (1972)). This means the measure of damages suffered by the failure of one party to perform its part to the other party. See id. (citing State Highway Dep’t v. Knox-Rivers Constr. Co., 117 Ga.App. 453, 160 S.E.2d 641 (1968)).
The pertinent question is whether “damages” in O.C.G.A. § 13-6-9 encompasses attorney fees, however, the court does not need to get to that inquiry. As the court in Gainesville Glass held, the plaintiff has the burden of proving that the items of expense it incurred were necessary under the contract. See id. As Respondent points' out in its brief, Debtors have failed to show that Respondent even had a duty under the Security Deed to pay the premium. In the absence of evidence that Respondent had such an obligation under the Security Deed, the court finds that Debtors have failed to meet their burden under this subsection.
The other subsection on which Debtors rely provides that:
The expenses of litigation generally shall not be allowed as a part of damages; but where the plaintiff has specially pleaded and has made prayer therefor and where the defendant has acted in bad faith, has been stubbornly litigious, or has caused the plaintiff unnecessary trouble and expense, the jury may allow them.
O.C.G.A. § 13-6-11. The law is clear that an award of attorney fees under this statute are “ancillary and recoverable only where other elements of damages are recoverable.” Barnett v. Morrow, 196 Ga. App. 201, 202, 396 S.E.2d 11, 12 (1990); See also Cleary v. Southern Motors, et al., 142 GaApp. 163, 165, 235 S.E.2d 623, 625 (1977); Willis v. Kemp, 130 Ga.App. 758, 761, 204 S.E.2d 486, 490 (1974).
*408The court acknowledges those cases which allow the recovery of attorney fees in equity where no monetary damages were recovered but equitable relief such as an injunction or specific performance was .granted. See Clayton v. Deverell, 257 Ga. 653, 655, 362 S.E.2d 364, 366 (1987); Golden v. Frazier, 244 Ga. 685, 687, 261 S.E.2d 703, 705 (1979); Adams v. Cowart, 224 Ga. 210, 215,160 S.E.2d 805, 809 (1968).
However, in those cases, the plaintiffs prevailed and obtained the equitable relief which they sought. “There is no authority for the proposition that merely seeking equitable relief, which for whatever reason is unobtainable, entitles one to recovery under O.C.G.A. § 13-6-11.” Barnett, 196 Ga.App. at 203, 396 S.E.2d at 13.
In the instant case, there is no evidence demonstrating that Debtors would have prevailed in their motion to compel. Merely because Debtors sought such relief which became moot when Respondent agreed to reinstate the premium does not amount to prevailing as defined under the cases.
As to the other arguments under O.C.G.A. § 13-6-11 asserted by Debtors, they are likewise unpersuasive. Debtors argue that Respondent was stubbornly litigious and there was no bona fide dispute as to Respondent’s obligation under the Security Deed.
First, a refusal to pay a disputed claim or debt is not the equivalent of being stubbornly litigious. See Gordon v. Ogden, 154 Ga.App. 641, 642, 269 S.E.2d 499, 501 (1980) (holding that a refusal to pay a disputed claim is not equivalent to stubborn litigiousness nor does it amount to unnecessary trouble and expense); Palmer v. Howse, 133 Ga.App. 619, 621, 212 S.E.2d 2, 4 (1974).
In the case before the court, Respondent merely refused to pay a disputed claim. The evidence demonstrates that there was a genuine dispute as to Respondent’s liability under the Security Deed. Therefore, Respondent was merely refusing to pay the premium because it disputed that it had an obligation to do so. Accordingly, the court finds that Respondent was not being stubbornly litigious in this regard.
As to Debtors’ assertion that there was no bona fide dispute, this is contrary to the evidence. At the motion hearing, Respondent argued that the language in the Security Deed was not applicable to the policy at issue. Therefore, a bona fide dispute remained as to whether Respondent had an obligation under the Security Deed to reinstate the policy. The fact that Respondent later agreed to pay the premium and reinstate the policy does not indicate that there was an absence of a bona fide dispute. Based on the evidence, the court finds that there was a bona fide dispute.
CONCLUSION
The court finds that neither O.C.G.A. § 13-6-9 nor O.C.G.A. § 13-6-11 authorize Debtors to recover attorney fees. Under § 13-6-9, Debtors have failed to demonstrate that Respondent had a duty to pay the premium. Therefore, Debtors have failed to meet their burden to show that the motion to compel was a necessary expense.
The court also finds that Respondent was not stubbornly litigious as defined under § 13-6-11. Accordingly, the court will deny Debtors request to recover attorney fees from Respondent.
An order in accordance with this Memorandum Opinion will be entered.
. Although the parties do not dispute that Respondent acquired the Mortgage after 1995, the court notes that Debtors’ schedules reflect that Debtors incurred their indebtedness to Respondent in 1989. (See Schedule “D”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493432/ | MEMORANDUM OPINION
ROBERT E. NUGENT, Bankruptcy Judge.
This is an adversary proceeding pursuant to 11 U.S.C. § 5471 to avoid General Motors Acceptance Corporation’s (“GMAC”) lien in the debtors’ 2000 Chevrolet Tahoe. The Trustee contends that perfection of GMAC’s hen in the debtors’ vehicle constitutes a preference under § 547(b) and is avoidable. The debtors purchased the vehicle in Oklahoma but promptly brought the vehicle to Kansas where they reside. The issues presented are: (1) whether Oklahoma law or Kansas law governs the issue of perfection; and (2) when GMAC became perfected.
The trustee contends that under the multistate transaction provision of Kan. Stat. Ann. § 84-9-103(2)(b) (1996), Kansas law governs the issue of perfection because only Kansas issued a certificate of title for the vehicle. The trustee reasons that since GMAC perfected its lien under Kansas law, at the earliest, on the date of the *708Kansas title application, its perfection was within ninety (90) days of the debtors’ bankruptcy filing. GMAC, applying Oklahoma law, contends that it perfected its lien within the twenty (20) day safe harbor provision of § 547(c)(3) and therefore, the trustee may not avoid its lien in the vehicle.
This case was submitted to the Court upon stipulated facts and exhibits and the briefs of the parties. The Court has reviewed the parties’ submissions and is now prepared to rule. The controlling facts are as follow.
The debtors reside in Goddard, Kansas. On May 13, 2000 the debtors entered into a purchase agreement, security agreement and retail installment contract for the purchase of a 2000 Chevrolet Tahoe from a dealership in Oklahoma. The note and security interest were assigned by the Oklahoma dealership to GMAC. The vehicle arrived in Kansas on May 19 or May 20.
On May 13, 2000, the Oklahoma dealership executed a lien entry form under Oklahoma law. The lien entry form reflected the lien in the debtors’ vehicle and that GMAC was the assignee of the secured party. The lien entry form also indicated the debtors’ Kansas address. On May 24, 2000, the lien entry form, together with an application for an Oklahoma certificate of title for a vehicle, a certificate of origin, and an odometer disclosure statement were delivered to a motor license agent with the Oklahoma division of motor vehicles. The application for an Oklahoma certificate of title was not signed by the debtors although they were shown as owners on the application.
On May 24, 2000, the Oklahoma Tax Commission (“OTC”) issued a lien receipt with respect to the debtors’ vehicle. The lien receipt shows a lien fee of $10.00 was paid, that GMAC is the lien holder, and a lien date of May 24, 2000. No certifícate of title was ever issued by the Oklahoma authorities.
On June 14, 2000, the debtors applied for a Kansas certificate of title on the vehicle. A Kansas certificate of title was issued on July 12, 2000. GMAC’s lien is noted on the Kansas certificate of title.
On August 2, 2000, the debtors filed for bankruptcy relief under Chapter 7. On July 6, 2001, the trustee filed his adversary complaint against the debtors and GMAC, seeking to avoid GMAC’s lien in the vehicle as an alleged preference under § 547(b). GMAC defends by claiming that it became perfected during the 20-day safe harbor provision of § 547(c)(3) and therefore, its lien may not be avoided and preserved by the trustee.
ANALYSIS
At the outset, this Court is confronted with determining whether the provisions of former or revised Article Nine apply to the choice of law issue. The trustee relies upon the old multi-state transaction provision, former KaN. Stat. Ann. § 84 — 9—103(2)(b) (1996), in concluding that Kansas law controls the issue of GMAC’s perfection. The trustee asserts that “[t]his case pre-dates ‘new’ Article 9.” The new code provisions dealing with multi-state transactions are found at Kan. Stat. ANN. §§ 84-9-303, 84-9-316 (Supp. 2001). The Court notes that this adversary action was filed July 6, 2001, subsequent to the effective date of Article 9, as revised by the Kansas Legislature.2
*709Kan. Stat. Ann. § 84-9-702(c) (Supp. 2001) provides:
This act [Article 9 as revised] does not affect an action, case, or proceeding commenced before this act takes effect. [Emphasis supplied].
If the “action, case, or proceeding” is commenced after the July 1, 2001 effective date, Article 9, as revised, applies. The Court must therefore determine as a preliminary matter whether the bankruptcy case filing (August 2, 2000) or the adversary case filing (July 6, 2001) is the controlling date for purposes of deciding whether the old or revised version of the multi-state transaction provision of Article 9 governs this preference dispute.
In an analogous case involving the enactment of the Bankruptcy Reform Act of 1994 (“1994 Act”), a bankruptcy court concluded that the bankruptcy ease filing was the controlling date.3 As in this case, the bankruptcy case was filed prior to the effective date of the 1994 Act but the adversary proceeding was filed after the effective date. In holding that the bankruptcy case filing was controlling, the bankruptcy court reasoned that the bankruptcy case includes adversary proceedings arising within the case:
First American’s argument, while disingenuous, does not pass muster. Although First American is correct that the word “case” is not synonymous with the term “adversary proceeding,” neither are the words mutually exclusive. Generally, in the bankruptcy context, the word “case” is a term of art which refers to “that which is commenced by the filing of a petition; it is the ‘whole ball of wax,’ the chapter 7, 9,11,12 or 13 case.” 5 Collier on Bankruptcy ¶ 1109.02 (15th ed.1993). Adversary proceedings, on the other hand, are su-bactions which are raised within a “case” and are commenced by the filing of a complaint, [citations omitted] ...
185 B.R. at 253.
The court also rejected the argument that an adversary proceeding was separate and distinct from a bankruptcy case.
First American admits in its brief that the 94 Act may not be applicable to this chapter 11 bankruptcy case, but argues that the amendment still controls this adversary proceeding by limiting the word “case” narrowly to the bankruptcy case itself and treating this adversary proceeding as an entirely separate action, such that even though the 94 Act would not apply to this chapter 11 case, it would still be applicable to this adversary proceeding. However, as stated above, “case” as traditionally used in the bankruptcy context, refers not only to that which is commenced by the filing of a petition, but also to all proceedings arising therein, such as this preference adversary proceeding.
No other result makes sense. There would be no adversary proceeding but for the filing of the case....
185 B.R. at 254.4
This Court agrees with the Blevins case and others like it.5 The Court therefore *710holds that the date of the bankruptcy case filing is the controlling date for determining whether the old or revised version of Article 9 should • apply. Accordingly, this Court concludes that the case was commenced within the meaning of Kan. Stat. Ann. § 84-9-702(c) (Supp.2001) on August 2, 2000 — the date the bankruptcy case was filed and therefore, the former multi-state provision of Article 9 governs.
The Choice of Law Issue
The code provision dealing with multi-state transactions is Kan. Stat. Ann. § 84-9-103 (1996). It applies to multi-state transactions involving security interests in differing types of collateral. Kan. Stat. Ann. § 84-9-108(2) applies to goods covered by a certificate of title. It provides as follows:
(a) This subsection applies to goods covered by a certificate of title issued under a statute of this state or of another jurisdiction under the law of which indication of a security interest on the certificate is required as a condition of perfection.
(b) Except as otherwise provided in this subsection, perfection and the effect of perfection or nonperfection of the security interest are governed by the law ... of the jurisdiction issuing the certificate until four months after the goods are removed from that jurisdiction and thereafter until the goods are registered in another jurisdiction, but in any event not beyond surrender of the certificate. After the expiration of that period, the goods are not covered by the certificate of title within the meaning of this section.
(c) Except with respect to the rights of a buyer described in the next paragraph, a security interest, perfected in another jurisdiction otherwise than by notation on a certificate of title, in goods brought into this state and thereafter covered by a certificate of title issued by this state is subject to the rules stated in paragraph (d) of subsection (1).
Kan. Stat. Ann. § 84-9-103(l)(d), in turn provides:
When collateral is brought into and kept in this state while subject to a security interest perfected under the law of the jurisdiction from which the collateral was removed, the security interest remains perfected, but if action is required by part 3 of this article6 to perfect the security interest, (i) if the action is not taken before the expiration of the period of perfection in the other jurisdiction or the end of four months after the collateral is brought into this state, whichever period first expires, the security interest becomes unperfected at the end of that period ...; (ii) if the action is taken before the expiration of the period specified in subparagraph (i), the security interest continues perfected thereafter;
The trustee’s argument for applying Kansas law focuses exclusively on subsection (2)(b). He argues that the law of the jurisdiction issuing the certificate of title applies and since only Kansas issued a certificate of title on the debtors’ vehicle, the issue of perfection is governed by Kansas law. As the Court reads the language of subsection (2)(b), it contemplates the situation where the vehicle that is brought into this state is subject to a certificate of title issued by another state. In that instance, the law of the jurisdiction issuing *711the certificate of title governs. This was the factual situation in In re Trotter7 wherein Judge Robinson applied subsection (2)(b).
Subsection (2)(b) does not apply to these facts. Rather, these facts fit squarely under subsection (2)(c), because the debtors brought their vehicle from Oklahoma into Kansas without a certificate of title, and thereafter applied for and obtained a certificate of title issued by Kansas. Subsection (2)(c) is given only passing reference in the Official Comments where the drafters state:
If a vehicle not described in the preceding paragraph (i.e., not covered by a certificate of title) is removed to a certificate state and a certificate is issued therefor, the holder has the same 4-month protection [as provided for in paragraph (l)(d) ] ....
KaN. Stat. ANN. § 84-9-103 (1996), cmt. ¶ 4(d). While respected scholars refer to this subsection as relating to the transfer of vehicles from states where certificates of title are not mandatory to certificate states,8 nothing in the statute’s wording suggests that its application is limited to such transfers or prevents its application to the circumstances presented here. In other words, if a creditor succeeds in having its hen noted on a certificate of title in the “first” state, it is rewarded by Kan. Stat. Ann. § 84 — 9—103(2)(b) (1996) by remaining perfected beyond the four months until the “second” state issues a certificate. If, as in this ease, the secured creditor merely perfects without the issuance of a certificate, its perfection is limited in duration to four months.
Where a security interest in a vehicle has been perfected, but no certificate of title issued by the “first” state, Kan. Stat. Ann. § 84 — 9—103(2)(c) directs us to subsection (l)(d) of section 9-103 for the perfection rules. A reading of subsections (2)(c) and (l)(d) together requires this Court to determine whether GMAC’s lien was perfected under Oklahoma law even though no certificate of title was issued by Oklahoma. If so, upon removal of the vehicle to Kansas, GMAC had four months in which to re-perfect its security interest under Kansas law and to comply with Kan. Stat. Ann. § 84-9-302(3)(c). If GMAC’s lien was noted on a certificate of title subsequently issued by Kansas (within the four month period), GMAC was continuously perfected. If not, GMAC’s lien became unperfected upon the expiration of the four month period. Accordingly, the Court will now examine whether GMAC’s lien was perfected under Oklahoma law in the absence of a certificate of title issued by the Oklahoma authorities.
Perfection Under Oklahoma Law
The trustee argues that no certificate of title was issued by Oklahoma and there has not been substantial compliance with the requirements for perfection. The trustee further claims that the application for an Oklahoma certificate of title was defective because it was not signed by the debtors. GMAC argues that it became perfected upon issuance of the lien receipt by the Oklahoma authorities and that it substantially complied with the legal requirements for perfecting its security interest in the debtors’ vehicle.
Under Oklahoma law, perfection of a security interest in a motor vehicle is *712governed by Okla. Stat. tit. 47, § 1110, which provides, in relevant part:
A.1.... a security interest in a vehicle as to which a certificate of title may be properly issued by the Oklahoma Tax Commission shall be perfected, only when a lien entry form, and the existing certificate of title, if any, or application for a certificate of title and manufacturer’s certificate of origin containing the name and address of the secured party and the date of the security agreement and the required fee are delivered to the Tax Commission or to a motor license agent.... When a vehicle title is presented to a motor license agent for transferring or registering and the documents reflect a lien holder, the motor license agent shall perfect the lien pursuant to subsection G of Section 1105 of this title....
2. Whenever a person creates a security interest in a vehicle, the person shall surrender to the secured party ... the signed application for a new certificate of title, on the form prescribed by the Tax Commission, and the manufacturer’s certificate of origin. The secured party shall deliver the lien entry form and the required lien filing fee within twenty-five (25) days as provided hereafter with ... the application for certificate of title and the manufacturer’s eer-tificate of origin to the Tax Commission or to a motor license agent. If the lien entry form, the lien filing fee and the ... application for certificate of title and the manufacturer’s certificate of origin are delivered to the Tax Commission or to a motor license agent within twenty-five(25) days after the date of the lien entry form, perfection of the security interest shall begin from the date of the execution of the lien entry form ... [Emphasis supplied].
Thus, under Oklahoma law, a secured party can perfect its lien in the vehicle prior to issuance of the certificate of title.9 In short, the secured party becomes perfected upon delivery of the following documents to the Tax Commission or motor license agent: a lien entry form, an application for certificate of title; a manufacturer’s statement of origin; and the lien filing fee.10 In the instant case, all of the above documents were' delivered to a motor license agent on May 24, 2000, at which time the motor license agent accepted the documents and issued a “lien receipt” form.11 The lien entry form and the application for certificate of title both clearly indicate the existence of a lien, the identity of the secured party, and the name and address of the debtors.
*713The trustee, however, citing to subsection A.2. of § 1110, contends that the debtors’ failure to sign the application for certificate of title is fatal to GMAC’s perfection in Oklahoma. The Court would observe that there is no reference in the language of subsection A.l. to a “signed application” in order for perfection to occur.
In any event, the Court concludes that the debtors’ failure to sign the application for certificate of title, even if required for perfection, is not fatal because GMAC substantially complied with the statutory requirements for perfection. The Oklahoma courts have recognized the substantial compliance doctrine in similar circumstances and the Court finds those cases persuasive.12 Here, where all of the essential information (ie. existence of lien, description of vehicle, GMAC as secured party, and name and address of debtors) is available to any interested party searching the records in Oklahoma, the failure to have the debtors’ signature on the application for certificate of title is a minor defect, not seriously misleading, and not fatal to GMAC’s perfection in Oklahoma.13
Having concluded that GMAC perfected its hen under Oklahoma law no later than May 24, 2000, the Court further concludes under KAN. STAT. ANN. § 84-9-103(l)(d) and § 84-9-302(3)(c) that GMAC perfected its hen under Kansas law within four months from the time the vehicle arrived in Kansas. In short, GMAC has been continuously perfected since May 24, 2000.
CONCLUSION
Applying the former Kansas multi-state transaction provision of KaN. Stat. Ann. § 84-9-103 (1996), the Court concludes that the facts of this case fall under subsection (2)(c), rather than (2)(b), and the Court must first look to Oklahoma law to determine whether GMAC perfected its lien under Oklahoma law. For the reasons set forth above, the Court concludes that GMAC became perfected under Oklahoma law no later than May 24, 2000, when it delivered the required documents and fee to the motor license agent and received a lien receipt. GMAC was thereafter continuously perfected under Kan. Stat. Ann. § 84 — 9—103(l)(d) and Kan. Stat. Ann. § 84-9 — 302(3)(c) when Kansas issued a certificate of title noting GMAC’s lien thereon. Accordingly, GMAC easily falls within the twenty-day safe harbor provision of § 547(c)(3).14 The Court holds that the trustee may not avoid and preserve GMAC’s lien in the debtors’ vehicle. Judgment should be entered for General Motors Acceptance Corporation on the trustee’s preference complaint and a Judgment on Decision shall enter this day.
. All statutory references are to the Bankruptcy Code, 11 U.S.C. § 101, et seq. unless otherwise specified.
. See Kan. Stat. Ann. § 84-9-701 (Supp.2001) Revisor’s Note (revised Article 9 became effective July 1, 2001).
. In re Blevins Elec., Inc., 185 B.R. 250 (Bankr.E.D.Tenn.1995).
. See also, In re Shearer, 167 B.R. 153 (Bankr.W.D.Mo.1994) (rejecting contention that the case was commenced at the filing of the adversary complaint and noting that a case in bankruptcy is commenced by the debtor's filing of a bankruptcy petition, and any subsequent litigation involving the estate, is simply a part of the case as a whole).
.See Blevins, 185 B.R. at 256, n. 10; In re Republic Trust and Savings Co., 897 F.2d 1041, 1044-45 (10th Cir.1990) ("Were we to accept appellants’ interpretation ... different legal standards might apply in the same bank*710ruptcy case due to a trustee’s decision to commence adversary proceedings on separate dates.”).
. Kan Stat. Ann. § 84-9-302(3)(c) (1996) provides for perfection of a security interest in vehicles.
. 264 B.R. 216 (Bankr.D.Kan.2001).
. See 4 James J. White & Robert S. Summers, Uniform Commercial Code § 31-32 (4th ed.2002); Barkley Clark, The Law of Secured Transactions under the Uniform Commercial Code, ¶ 12.03 (rev’d ed.2002); In re Toderian, 151 B.R. 467 (Bankr.M.D.Tenn. 1992).
. It appears a certificate of title was never issued by Oklahoma because the debtors never registered the vehicle in Oklahoma and paid fees. The debtors had 30 days from the date of purchase to register the vehicle and pay applicable fees and taxes. Only upon the registration and payment of fees and taxes would a certificate of title have been issued by Oklahoma. Because the debtors lived in Kansas and the vehicle had already been taken back to Kansas, the debtors would have had no reason to register the vehicle in Oklahoma. See Okla. Stat. tit. 47, § 1110A.4 and A.7.
. Liberty National Bank and Trust Co. Of Oklahoma City v. Garcia, 686 P.2d 303, 306 (Okla.App.Ct.1984) (In a case where the taxing authorities failed or neglected to note the creditor's lien on the certificate of title it issued, creditor was not left unperfected; the perfection of a security interest in a vehicle under Oklahoma law is accomplished where the required forms and fees are placed in the possession of the Oklahoma Tax Commission or a motor license agent.).
.The requisite documents were delivered May 24, 2000, within 25 days of the lien entry form, and therefore, GMAC was perfected as of May 13, 2000 — the date of execution of the lien entry form. See Okla. Stat tit. 47, § 1110A.2.
.See e.g., In re Hembree, 635 P.2d 601 (Okla.1981) (omission of secured party's signature on lien entry form was not fatal to perfection of security interest in vehicle); In re Suddarth, 232 B.R. 789 (N.D.Okla.1999), aff'd 201 F.3d 449, 1999 WL 1188835 (10th Cir.1999) (omission of date of security agreement from the lien entry form did not invalidate the lien); In re Casee, 2000 WL 33800188 (Bankr.N.D.Okla. July 12, 2000) (following Sud-darth ).
. Hembree, supra at 603-04 (Policy underlying perfection and recordation of security interests is to provide notice); Suddarth, supra at 792. (substantial compliance standard under UCC also applies to perfection of security interests in vehicles; substantial compliance is achieved if the deviation from the strict requirements of the perfection statute do not seriously mislead.).
. The parties stipulated that the vehicle was purchased on May 13, 2000 and arrived in Kansas on May 19 or May 20. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493433/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JERRY A. FUNK, Bankruptcy Judge.
This adversary proceeding came on for trial on February 28, 2002. Upon the evidence, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
Plaintiff and Defendant were married. On June 15, 1999 the Circuit Court in and for St. Lucie County (the “Circuit Court”) entered a Final Judgment of Dissolution of Marriage (the “Final Judgment”) terminating the parties’ marriage. The Final Judgment incorporated a Mediation Agreement (the “Mediation Agreement”) entered into by the parties on March 10, 1999. The Mediation Agreement provided, among other things, that Defendant was solely responsible for the payment of Plaintiffs Sallie Mae/First Union Student Loan in the amount of $10,700 plus interest.
On July 23, 2001 Defendant filed a petition under Chapter 7 of the Bankruptcy Code. On or about October 18, 2001 Plaintiff filed a motion for enforcement and contempt in the Circuit Court. On November 13, 2001 Plaintiff instituted this adversary proceeding seeking to except the student loan debt from Defendant’s discharge pursuant to 11 U.S.C. § 523(a)(5) or alternatively § 523(a)(15). On February 12, 2002 the Circuit Court entered an order on Plaintiffs motion for enforcement and contempt (the “Contempt Order”). Paragraph 2 of the Contempt Order provided: “[I]t is the Trial Court’s opinion that [Defendant’s] obligation under the parties’ June 15, 1999 [Final Judgment] to pay [Plaintiffs] student loan obligation should not be dischargeable in [Defendant’s] bankruptcy petition. This Court deems it more of a support financial obligation.”
CONCLUSIONS OF LAW
The sole issue before the Court is whether Defendant’s obligation to pay Plaintiffs student loan is excepted from Defendant’s discharge pursuant to 11 U.S.C. § 523(a)(5) or § 523(a)(15).
Section 523(a)(5) of the Bankruptcy Code provides:
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, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State of 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)(2002).
If a marital obligation is in the nature of alimony or support, it is nondischargeable pursuant to 11 U.S.C. *744§ 523(a)(5). Cummings v. Cummings, 244 F.3d 1263, 1264 (11th Cir.2001). An obligation is in the nature of alimony or support if the parties intended the obligation to function as alimony or support. Id. at 1265. Although federal bankruptcy law controls whether an obligation is in the nature of support, state law provides guidance. Id. Additionally, state courts have concurrent jurisdiction with bankruptcy courts to determine whether an obligation is in the nature of alimony or support for § 523(a)(5) purposes. Id.; Adkins v. Adkins, 191 B.R. 941, 943 (Bankr.M.D.Fla.1996).
In the instant case the Circuit Court has already determined that Defendant’s obligation to pay Plaintiffs student loan was in the nature of support and should not be discharged in Defendant’s bankruptcy. 28 U.S.C. § 1738 requires that this Court accord full faith and credit to the judicial proceedings of state courts. See In re Hight, 2001 WL 1699694, at *2 (Bankr.M.D.N.C. February 26, 2001). In determining whether to give collateral es-toppel effect to a state court judgment, the bankruptcy court must apply that state’s law of collateral estoppel. In re St. Laurent, 991 F.2d 672, 676 (11th Cir.1993).
The Court must determine the pre-clusive effect of the Contempt Order by looking to the Florida law of collateral estoppel. Under Florida law the following elements must be established in order for collateral estoppel to be invoked: (1) the issue at stake must be identical to the one decided in the prior litigation; (2) the issue must have been actually litigated in the prior proceeding; (3) the prior determination of the issue must have been a critical and necessary part of the judgment in that earlier decision; and (4) the standard of proof in the prior action must have been at least as stringent as the standard of proof in the later case. Id. at 675.
The issue at stake, whether Defendant’s obligation to pay Plaintiffs student loan was in the nature of support and should therefore be excepted from discharge, is identical to the issue decided by the Circuit Court. The issue was actually litigated in the Circuit Court. Both parties were represented by counsel and submitted the issue to the Circuit Court for determination. The critical and necessary element operates to ensure that the issue decided in the prior case was necessary to the judgment in the prior case. It is clear that the Circuit Court’s determination that the obligation was in the nature of support was the very essence of the Contempt Order. Finally, because the standard of proof in dischargeability actions is preponderance of the evidence, the standard of proof in the Circuit Court proceeding could not have been less stringent. Because all of the elements of collateral es-toppel are satisfied, Defendant is estopped from arguing that his obligation to pay Plaintiffs student loan debt is not in the nature of support. The obligation is therefore non-dischargeable pursuant to § 523(a)(5). Having found that the debt is non-dischargeable pursuant to § 523(a)(5), the Court need not address whether the debt is excepted from discharge pursuant to § 523(a)(15). The Court will enter a separate Judgment consistent with these Findings of Fact and Conclusions of Law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493435/ | DREHER, Bankruptcy Judge.
This is an appeal from an order of the bankruptcy court1 denying Appellant’s motion to reinstate the bankruptcy case and an order denying Appellant’s motion to reconsider. For the reasons stated below, we affirm.
BACKGROUND
On August 31, 2001, upon motion of the Standing Chapter 13 Trustee, John V. La-Barge, Jr. (“Trustee”), the bankruptcy court issued an order dismissing this bankruptcy case. On September 6, 2001, the Debtor, Robert P. Ciralsky (“Debtor”), filed a motion seeking to have the bankruptcy court reconsider its ruling and reinstate the case.2 The Trustee objected to Debtor’s motion. Subsequently, Debtor requested several continuances which the bankruptcy court granted. The motion was initially set for hearing on December 13, 2001, continued to January 3, 2002, and finally heard on February 7, 2002. Debtor did not appear at the hearing. Susan Foerster (“Foerster”), who is not an attorney, appeared on Debtor’s behalf to request yet another continuance. The bankruptcy court denied Foerster’s request for a continuance and denied the motion to reconsider and reinstate. Debtor then *917filed another motion for reconsideration, which the bankruptcy court also denied. Debtor appeals both from the order denying his motion to reinstate the bankruptcy case and from the order denying his motion to reconsider.
DISCUSSION
A bankruptcy court’s decision on a motion to reinstate a case is within the discretion of the bankruptcy court and will be reviewed only for an abuse of discretion. See Svoboda v. Educational Credit Mgmt. Corp. (In re Svoboda), 264 B.R. 190, 195 (8th Cir. BAP 2001)(noting that decisions on Rule 59(e) motions are subject to review under the abuse of discretion standard). An abuse of discretion will only be found if the lower court’s judgment was based on clearly erroneous factual findings or erroneous legal conclusions. Barger v. Hayes County Non-Stock Coop., 219 B.R. 238, 243 (citing Mathenia v. Delo, 99 F.3d 1476, 1480 (8th Cir.1996)). “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.” Id. (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)). The bankruptcy court gave Debtor ample opportunity to appear and be heard on the issue of whether his case should be reinstated. Debtor presented no evidence to warrant the bankruptcy court’s reinstatement of his case and did not advance any appropriate basis for altering or amending the bankruptcy court’s judgment. The motion to reinstate simply reiterated factors that the bankruptcy court had already taken into account on the Trustee’s motion to dismiss. Our review of the record reveals no abuse of discretion.
Nor did the bankruptcy court err in denying Debtor’s motion for reconsideration of the order denying reinstatement. The motion to reconsider was governed by Bankruptcy Rule 9024 which incorporates Federal Rule of Civil Procedure 60. See Fed. R. Bankr.P. 9024. Debtor offered no support for altering the bankruptcy court’s decision as to reinstatement and the circumstances of his case did not warrant the extraordinary relief provided by Rule 9024. Once again, this motion was nothing more than a re-argument of positions Debtor had taken in earlier motions. See Rosebud Sioux Tribe v. A & P Steel, Inc., 733 F.2d 509, 515 (8th Cir.1984); Kieffer v. Riske (In re Kieffer-Mickes, Inc.), 226 B.R. 204, 210 (8th Cir. BAP 1998).
CONCLUSION
Accordingly, having found no error, we affirm the bankruptcy court’s orders denying reinstatement of the bankruptcy case and denying the motion to reconsider.
. The Honorable Barry S. Schermer, United States Bankruptcy Judge for the Eastern District of Missouri.
. Ciralsky also filed an amended motion on September 10, 2001. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493437/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JERRY A. FUNK, Bankruptcy Judge.
This case came before the Court upon Debtors’ Objection to Claim 18 filed by the Internal Revenue Service. The Court conducted a hearing on November 21, 2001 at which the parties stipulated to the following facts.
STIPULATED FACTS
Debtor Paul B. Chauncey, III is a general partner of Chauncey Commercial Concrete Construction, a Florida Partnership (the “partnership”). Debtor Paul B. Chauncey, III owns a one-half interest in the partnership. The partnership owes employment taxes reflected by Claim 18 filed by the Internal Revenue Service (the “Service”). There is no dispute that the amounts reflected on the proof of claim correctly state the delinquent tax liabilities of the partnership.
The partnership’s 941 return for the first quarter of 2000 was filed on April 8, 2000. The 941 returns for the third and fourth quarters of 2000 were filed on March 8, 2001. The 940 return was filed on March 8, 2001. The assessments made against the partnership were not also made against the individual partners. This is the normal administrative practice of the Internal Revenue Service.
On March 15, 2001 Debtors filed a voluntary petition under Chapter 13 of the Bankruptcy Code.
At the hearing the Court instructed the parties to submit memoranda of law. The issue is whether a separate tax assessment against an individual partner for employment taxes incurred by the partnership is required to establish liability against the individual partner. Upon the stipulated facts and the memoranda of the parties, the Court makes the following Conclusions of Law.
CONCLUSIONS OF LAW OBJECTION TO CLAIM STANDARDS
Objections to claims are governed by 11 U.S.C. § 502(a), providing that “A *36claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.” Section 502(b) provides, “... [I]f such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount.... ” A proof of claim filed in accordance with the rules “shall constitute prima facie evidence of the validity and amount of the claim.” Fed. R. Bankr.P. 3001(f) (2002). The burden of proof is on an objecting party to produce evidence “equivalent in probative value to that of the creditor to rebut the prima facie effect of the proof of claim. However, the burden of ultimate persuasion rests with the claimant.” In re VTN, Inc., 69 B.R. 1005, 1008 (Bankr.S.D.Fla.1987) (citing In re DeLorean Motor Co. Litig., 59 B.R. 329 (E.D.Mich.1986)).
CONTENTIONS OF THE PARTIES
Debtors contend that Debtor Paul Chauncey is not liable for the partnership’s Debtors argue that a valid assessment is a prerequisite to tax collection and that §§ 6201, 6203, and 7701 of the Internal Revenue Code, taken together, require an individual assessment against a partner before his liability for tax debts of the partnership is fixed.1 Debtors argue that the liability of an individual is a two-pronged analysis requiring: 1) a legal basis for imputed liability (such as state partnership laws) and 2) compliance with the assessment procedures set forth in the Internal Revenue Code.
The Service argues that the assessment of a tax liability is essentially a bookkeeping notation by which a taxpayer’s liability is formally recorded but is not necessary to establish liability. The Service further argues that it can bring suit to reduce an un-assessed liability to judgment even if it has not assessed the taxes against a delinquent taxpayer. The Service points out that a partner’s liability for employment taxes of a partnership is a function of state law and that its right to bring suit and to obtain a judgment against Debtor Paul Chauncey is sufficient to give it an allowable claim.
ANALYSIS
There is no provision of the Internal Revenue Code which governs the collection of a partnership’s employment tax liabilities from its partners. Partners are jointly and severally liable for the tax debts of their partnerships and partners’ *37liability is a function of state law rather than the assessment provisions of the Internal Revenue Code. Ballard v. United States, 17 F.3d 116, 118 (5th Cir.1994); Calvey v. United States, 448 F.2d 177, 179 (6th Cir.1971). No circuit court has specifically addressed the issue of whether a separate tax assessment against a general partner is required to establish liability against the partner for an employment tax liability incurred by the partnership.
Debtors rely on two related California district court decisions affirming the bankruptcy court’s holdings that a partner must be individually assessed to be liable for the tax obligations of the partnership. See United States v. Galletti, 2001 WL 752652 (C.D.Cal. March 23, 2001); United States v. Briguglio, 2001 WL 429820 (C.D.Ca. March 23, 2001). In Galletti and Briguglio, the debtors were general partners in a partnership against which the Service had assessed taxes of approximately $427,000.00. The Service had not assessed taxes against the debtors individually in their capacities as general partners. The Service filed proofs of claim in the debtors’ bankruptcy cases. The debtors objected to the claims, asserting they were invalid because the Service had not assessed them individually. The bankruptcy court held the tax assessment against the partnership was not effective to bind the partners individually. The court based its decision on the following: 1) a partnership is liable for taxes required to be deducted or withheld; 2) under California law a judgment must be entered against a partner in order for the partner to be liable for the debts of the partnership; 3) a taxpayer must be validly assessed to be liable for tax obligations; and 4) the decision in El Paso Refining, Inc. v. Internal Revenue Service, 205 B.R. 497 (W.D.Tex.1996) in which the district court affirmed the bankruptcy court’s holding that a lien against a partner for the partnership’s taxes was void because the Service did not assess the partner dirfectly. The district court in Galletti and Briguglio seized on a distinction between assessment and liability and assessment and collection. “The Debtors do not dispute their liability as partners; rather, they dispute Appellant’s attempt to collect taxes without individual assessments.” Galletti, 2001 WL 752652 at *4; Briguglio, 2001 WL 429820 at *4.
The Court does not quarrel with the Galletti and Briguglio bankruptcy court’s finding that a partnership is liable for taxes required to be deducted or withheld. The Court also agrees that California law requires that a judgment be entered against a partner in order for a creditor to attach the partner’s assets for debts of the partnership.2 However, the bankruptcy court’s finding that California law requires a judgment against a partner in order for the partner to be held liable for the debts of the partnership and the court’s statement that “it naturally follows that in order for partners to be jointly and severally liable for tax liabilities, they must be assessed separately” are without merit. As the Service points out, a judgment is not necessary to make a debtor jointly and severally liable for a partnership’s debts. State partnership laws establish a partner’s liability. Debtor Paul Chauncey’s liability stems from his liability under Florida law for all obligations of the part*38nership.3 Additionally, although an assessment imbues the Internal Revenue Service with certain administrative methods by which to collect taxes, liability for federal taxes does not depend upon whether the Internal Revenue Service has made a valid assessment. Goldston v. United States, 104 F.3d 1198, 1200 (10th Cir.1997). The Service may still bring suit to bring suit to reduce an un-assessed liability to judgment. United States v. Jersey Shore State Bank, 781 F.2d 974, 979 (3d Cir.1986).
11 U.S.C. § 101(5)(A) defines a claim as a “right to payment, whether or not such right is reduced to judgment, liquidated, un-liquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” The Internal Revenue Service’s right to look to Debtor Paul Chauncey for payment of the partnership’s tax obligations is sufficient to give the Service an allowable claim. The Court holds that a separate tax assessment against an individual partner for employment taxes incurred by the partnership is not required to establish liability against the individual partner.
CONCLUSION
A separate tax assessment against an individual partner for employment taxes incurred by the partnership is not required to establish liability against the individual partner. The Court will therefore overrule Debtors’ objection to Claim 18 filed by the Internal Revenue Service.
. Sections 6201, 6203 and 7701 of the Internal Revenue Code respectively provide in pertinent part:
§ 6201 Assessment authority
(a) Authority of Secretary. — The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title, or accruing under any former internal revenue law, which have not been duly paid by stamp at the time and in the manner provided by law.
§ 6203 Method of assessment
The assessment shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary. Upon request of the taxpayer, the Secretary shall furnish the taxpayer a copy of the record of the assessment.
§ 7701. Definitions
a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—
(1) Person. — The term “person” shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.
(14) Taxpayer. — The term “taxpayer” means any person subject to any internal revenue tax.
. Florida law contains a similar provision. Fla. Stat. § 620.8307 provides in pertinent part:
Actions by and against partnership and partners 3) A judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partner's assets unless there is also a judgment against the partner.
. Fla. Stat. § 620.8306 provides in pertinent part: (1) Except as otherwise provided in subsections (2) and (3), all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by a claimant or provided by law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493570/ | DECISION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after a Hearing on the Debtors’ Objection to the Proof of claim filed by Cashland, Inc. At the Hearing, the Court held that it would *135take the matter under advisement, and permitted the Parties to file supplemental briefs in support of their respective positions. Within the time frame allowed, however, only Cashland submitted a supplemental brief. After reviewing this brief, together with all of the other materials submitted in this case, the Court, for the reasons that will now be explained, finds that the Debtors’ objection should be Overruled.
LEGAL DISCUSSION
At issue in this case is the validity of the proof of claim filed by Cashland, Inc. (hereinafter referred to as simply “Cash-land”). As the allowance or disallowance of claims against the estate are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(B), this Court has been conferred with the jurisdictional authority to enter final orders in this matter.
In a Chapter 13 case, a creditor must file a proof of claim in order to participate in a distribution of estate assets. See, e.g., In re Stewart, 247 B.R. 515, 521 (Bankr.M.D.Fla.2000) (“distributions pursuant to a chapter 13 .plan are predicated upon the filing of a proof of claim.”). Pursuant to 11 U.S.C. § 502(a), a proof of claim will be deemed to be allowed, and thus entitled to a distribution, unless objected to by a party in interest. In addition, once objected to, a proof of claim will only be disallowed if one of the grounds set forth in § 502 of the Bankruptcy Code is established.
As it applies thereto, the Debtors contend that Cashland’s proof of claim should be disallowed in its entirety because, in violation of § 502(b)(1), the claim is unenforceable under applicable law. In particular, the Debtors contend that Cashland’s claim violates O.R.C. § 1315.41(D) because it seeks treble damages. In opposition thereto, it is the position of Cashland that its proof of claim does not improperly seek treble damages, but instead merely seeks permissible liquidated damages in the amount of One Hundred Eighty-three dollars ($183.00). As it relates to this argument, Cashland asserts that in lieu of receiving liquidated damages, it would still be entitled to assert a claim of Two Hundred Twenty-eight and 33/100 dollars ($228.33) on account of accrued prepetition interest. In addition, Cashland has challenged the Debtors’ objection on procedural grounds; namely, that the Debtors were dilatory in filing their objection.
Relevant to the respective positions of the Parties are these particular facts:
On April 14, 2001, the Debtor, Michelle Gillis, obtained a payday advance loan from Cashland in the amount of $500.00. For the loan, the Debtor presented to Cashland two checks in the amount of $287.50 each. As a loan origination fee, the Debtor was charged $75.00. The terms of the Parties’ contract provided that the Debtor would be charged an annual percentage rate of 121.67% pursuant O.R.C. § 1315.35 to 1315.44.
On April 29, 2001, the Debtor’s checks were presented for payment, but were returned because of insufficient funds. As a result, Cashland incurred a check charge of $44.50.
On May 11, 2001, the Debtor paid $50.00 to Cashland.
On August 29, 2001, the Debtors filed a petition in this Court for relief under Chapter 13 of the United States Bankruptcy Code.
On September 21, 2001, the Court sent notice to Cashland of the Debtors’ bankruptcy petition. In said notice, the Court set January 30, 2002, as the deadline for creditors to file a proof of claim.
On October 4, 2001, Cashland filed a proof of claim as an unsecured creditor *136in the amount of $752.50. This amount was calculated as follows:
4/14/01 Checks $575.00
Returned Check fee $ 44.50
Payment Made -$ 50.00
Liquidated damages pursuant to O.R.C.
§ 2307.61(a)(1)(b), prorated to reflect partial payments $183.00
Total ' $752.50
On February 7, 2002, the Court confirmed the Debtors’ Chapter 13 Plan. In this plan, it was provided that the Debtors’ unsecured creditors were to be paid 100% of their allowed claims.
On June 8, 2002, the Debtors filed an objection to Cashland’s proof of claim.
In addition to the above information, the Parties do not dispute that Cashland is a check-cashing business and as such is regulated by Ohio law. See O.R.C. § 1315.35(A).
Section 2913.11 of the Ohio Revised Code, which is entitled “Passing Bad Checks,” makes it a crime for any person “with purpose to defraud, ... [to] issue or transfer or cause to be issued or transferred a check or other negotiable instrument, knowing that it will be dishonored.” In addition, to the criminal penalties imposed for a violation of this provision, O.R.C. § 2307.611 creates a civil cause of action for any party aggrieved by a person’s violation of § 2913.11. In pursuing a civil cause of action, § 2307.61(A)(1) permits- a party to pursue either compensatory damages or liquidated damages. For a party, such as Cashland, who seeks to recover liquidated damages, paragraph (A)(1)(b) of the statute provides two options: First, pursuant to subparagraph (i), the aggrieved party may recover “Two hundred dollars[.]” Second, as set forth in subparagraph (ii), the aggrieved party may recover “[t]hree times the value of the property at the time it was willfully damaged or was the subject of a theft offense .... ” In this case, of course, given that Cashland is attempting to recover, on a prorated basis, Two Hundred dollars ($200.00) in liquidated damages from the Debtor, it is apparent that Cashland is seeking to collect damages under subpara-graph (A)(l)(b)(i), and not subparagraph (A)(l)(b)(ii).
Recently, the Ohio State legislature established a regulatory scheme for businesses, such as Cashland, engaged in the practice of cashing checks. See O.R.C. § 1315.35 thru 1315.44. In doing so, the legislature, under paragraph (D) of § 1315.41, proscribed check-cashing busi*137nesses from collecting “treble damages pursuant to division (A)(l)(b)(ii) of § 2307.61 of the Revised Code in connection with any civil action to collect a loan after a default due to a check ... that was returned or dishonored for insufficient funds[.]” However, no equivalent provision was enacted which prohibited a check-cashing business from recovering the Two Hundred dollars ($200.00) in liquidated damages set forth in subparagraph (A)(l)(b)(i) of § 2307.61. Thus, given the specificity by which the Ohio State Legislature proscribed a check-cashing business from collecting certain types of damages, no such limitation will be inferred where it was not specifically stated. Accordingly, in this ease, since Cashland, as stated above, was clearly attempting to collect damages from the Debtor in accordance subparagraph (A)(l)(b)(i) of § 2307.61, O.R.C. § 1315.41(D) provides no basis for the Debtors’ objection.
Nevertheless, this does not automatically mean that Cashland is entitled to recover liquidated damages under subparagraph (A)(1)(b)® of § 2307.61. Of particular concern to the Court is the fact that, pursuant to the statutory structure of § 2307.61 as set forth above, a party receiving a • bad check is only entitled to recover liquidated damages if it is established that the issuer violated § 2913.11 by acting with the purpose to defraud. See H & W Door Co. v. Stemple, 1994 WL 116257 (Ohio App. 11th Dist.). In this case, however, no evidence supporting the Debtor’s actual violation of § 2913.11 has been presented. In fact, to the contrary, the fact that the Debtor made a payment to Cash-land strongly mitigates against any finding of fraudulent intent. See, e.g., Jack Master, Inc. v. Collins (In re Collins), 28 B.R. 244, 247 (Bankr.W.D.Okla.1983) (a subsequent partial payment mitigates the inference of an intent to defraud).
However despite these concerns, it is apparent that no harm will befall the Debtors by allowing Cashland to maintain its proof of claim in its present form. This is because Cashland has not included within its proof of claim a prepetition interest charge of Two Hundred Twenty-eight and 33/100 dollars ($228.33) which, in the absence of a liquidated damage charge, it would be clearly entitled to claim pursuant to both its contract with the Debtor and pursuant to O.R.C. § 1315.39(B). Thus, to have Cashland amend its proof of claim would merely replace a liquidated damage figure of One Hundred Eighty-three dollars ($183.00) with a higher interest rate charge.
Accordingly, for the above reasons, the Court finds that Cashland’s proof of claim should be allowed in its entirety. Given this decision, the Court at this time declines to address whether the Debtors’ objection should be disallowed for not being filed in a timely manner. 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 objection of the Debtors, Troy and Michelle Gillis, to the proof of claim filed by Cashland, Inc., be, and is hereby, OVERRULED.
It is FURTHER ORDERED that the proof of claim filed by Cashland Inc., be, and is hereby, Allowed in the amount of Seven Hundred Fifty-two and 50/100 dollars ($752.50).
. As applicable at-the time of the Parties' transaction, this statute provides, in relevant part:
(A) If a property owner brings a civil action pursuant to section 2307.60 of the Revised Code to recover damages from any person who willfully damages the owner’s property or who commits a theft offense, as defined in section 2913.01 of the Revised Code, involving the owner's property, the property owner may recover as follows:
(1) In the civil action, the property owner may elect to recover moneys as described in division (A)(1)(a) or (b) of this section:
(a) Compensatory damages that may include, but are not limited to, the value of the property and liquidated damages in whichever of the following amounts applies:
(b) Liquidated damages in whichever of the following amounts is greater:
(i) Two hundred dollars;
(ii) Three times the value of the property at the time it was willfully damaged or was the subject of a theft offense, irrespective of whether the property is recovered by way of replevin or otherwise, is destroyed or otherwise damaged, is modified or otherwise altered, or is resalable at its full market price. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494793/ | MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEBTORS’ MOTION TO DISMISS
DALE L. SOMERS, Bankruptcy Judge.
Debtors Jonathan I. Schupbach and Amy N. Schupbach (Debtors) move to dismiss Bank of Commerce & Trust Co.’s (Commerce) Complaint to Determine Dis-chargeability of Debt and Request to Determine Amount of Debt (Motion). Commerce opposes dismissal. The Court has jurisdiction.1
The Applicable Standard.
Debtors move to dismiss the claims against them under Bankruptcy Rule 7012(b), incorporating Civil Rule 12(b)(6), which provides for dismissal if the corn-*425plaint fails to state a claim upon which relief can be granted. Debtors contend the allegations fail to satisfy the standard adopted by the Supreme Court in Twombly2 and Iqbal.3 Under that standard, the motion to dismiss tests the legal sufficiency of the allegations — are they “a short and plain statement of the claim showing that the pleader is entitled to relief,” as required by Bankruptcy Rule 7008(a), which incorporates Civil Rule 8(a)(2). Satisfaction of this standard gives “the defendant fair notice of what the ... claim is and the grounds upon which it rests.”4 Further, to withstand a motion to dismiss, a complaint must contain enough allegations of fact, “accepted as true, to ‘state a claim to relief that is plausible on its face.’”5 “A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”6
Procedural Background.
Debtors filed for relief under Chapter 13 on July 16, 2011. Commerce was listed as an unsecured creditor on Schedule F and included in the mailing matrix. Notice was given that the meeting of creditors would be held on August 18, 2011, and that the deadline to object to Debtors’ discharge or to challenge the dischargeability of certain debts was October 17, 2011. One creditor filed a motion to extend time to object to discharge and/or to assert a dischargeability complaint on October 17, 2011. Commerce did not file a discharge-ability compliant or move to extend the time to do so on or before October 17, 2011.
During August 2011, two creditors and the Chapter 13 Trustee filed motions to dismiss, premised at least in part upon the allegations that Debtors’ unsecured claims exceeded the limits for Chapter 13 eligibility. Debtors filed a motion to convert to Chapter 11 on September 27, 2011. On October 24, 2011, Commerce filed a proof of secured claim for $748,748.72. A review of the attachments show that loans were made to Schupbach Investments, LLC, personally guaranteed by Debtors, and secured by life insurance, mortgages, rents, and other collateral.
The motion to convert to Chapter 11 was granted on November 14, 2011. On December 2, 2011 the clerk gave notice of the Chapter 11 case, of the meeting of creditors to be held on January 6, 2012, and of the March 6, 2012 deadline to file a complaint to determine dischargeability of certain debts. Commerce filed the Complaint on March 6, 2012.
Allegations of the Complaint.
Schupbach Investments, LLC has been engaged in the purchase, ownership, and sale of rental homes in low income areas of Wichita. Debtor Jonathan Schupbach has been the manager and owner of Schupbach Investments, and Debtor Amy Schupbach has been an officer and employee.
At various times, from September 2007 through April 2010, Debtors on behalf of Schupbach Investments, borrowed funds from Commerce for the purpose of renovating, modifying, and improving six par*426ticular homes which the Debtors were interested in acquiring and renovating on behalf of Schupbach Investments. Each loan was made after Debtors met with Commerce’s appraiser and informed him of the particular modifications and repairs planned for the specific property. The Debtors personally guaranteed the loans.
Commerce alleges that contrary to Debtors’ representations, none of the loan proceeds were used by the Debtors or Schupbach Investments to renovate the particular properties. Count I alleges a claim under § 523(a)(2)7 for excepting the loans from discharge based upon false pretenses, false representation, and actual fraud. Count II alleges a claim under § 523(a)(6) for excepting the loans from discharge for willful and malicious intent to injure Commerce. Count III requests judicial determination of the amount of nondischargeable debt under §§ 105 and 502.
Analysis.
A. Count I — The § 523(a)(2) claim was not timely filed and must be dismissed.
Debtors move to dismiss Count I as untimely filed more than 60 days after the date first set for the meeting of creditors, contending that the date of the meeting set in the Chapter 13 case controls. Commerce responds that the date first set for the meeting in the converted Chapter 11 case controls, and the Complaint was therefore timely.
The Bankruptcy Code does not address the time for filing an objection to dischargeability of a particular debt. The time is set by Bankruptcy Rule 4007(c). It provides that, except for complaints under § 523(a)(6) in Chapter 13 cases,
a complaint to determine the discharge-ability of a debt under § 523(c) shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a). The court shall give all creditors no less than 30 days’ notice of the time so fixed in the manner provided in Rule 2002. On motion of a party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be filed before the time has expired.
It is uncontroverted that Commerce did not file the Complaint or move to extend the time for doing so within 60 days of the first date set for the meeting of creditors in the Chapter 13 case but did file the Complaint within 60 days the first date set for the meeting on creditors in the Chapter 11 case.
The issue presented by the Motion to dismiss the § 523(a)(2) claim is whether, in a case which has been converted from a Chapter 13 to Chapter 11, a complaint to except a debt from discharge is timely if filed within 60 days after the first date set for the meeting of creditors in the converted case. There is no rule addressing this issue. There is no case law from Tenth Circuit or other courts. Perhaps this is because “[pjrior to BAPCPA, § 523(a)(2) and (a)(4) were not exceptions to discharge in a Chapter 13 case at the completion of payments under § 1328(a) and there was no reason to wonder whether the deadline for filing a complaint under Bankruptcy Rule 4007 would restart at conversion from Chapter 13 to Chapter 11.”8 To resolve the question, the Court considers general principles regarding conversion and objections to dischargeability.
*427Commerce suggests that the Court should follow the decision of the Eight Circuit Court of Appeals in F & M Marquette National Bank,9 which held that the conversion of a case from Chapter 11 to Chapter 7 generated a new time period for filing dischargeability complaints. The court reasoned that a new meeting of creditors is required upon conversion from Chapter 11 to Chapter 7. Since that meeting under Chapter 7 is a separate and distinct meeting unrelated to the meeting under Chapter 11, it held that the first date set for the Chapter 7 meeting of creditors was the relevant date under Rule 4007(c). The court observed that creditors are less likely to file dischargeability complaints in Chapter 11 than in Chapter 7 cases, since in a Chapter 11 proceeding a reorganization plan may provide for payment in full of their claims. Finding that the period to file complaints started anew after conversion from Chapter 11 to Chapter 7 avoided the possibility that a Chapter 11 debtor, knowing that creditors had not timely objected to discharge of particular debts, could then convert to a Chapter 7 case and obtain a full discharge.
Rule 1019, which addresses conversion of a Chapter 11, Chapter 12, or Chapter 13 proceeding to a Chapter 7 liquidation, was amended in 1987 to be consistent with the “holding and reasoning” of F & M National Bank.10 As to such Chapter 7 cases converted from Chapters 11, 12, or 13, subsection (3) of Rule 1019 was amended to provide that a new time period commences under Rule 4007 for filing a complaint to determine dischargeability, unless the case had previously been converted from Chapter 7 to Chapter 11, 12, or 13 and then reconverted to Chapter 7. Rule 1019(3) does not apply to this case since it is a conversion from Chapter 13 to Chapter 11. And, as stated above, the Rules are silent as to the time limits after conversion from Chapter 13 to Chapter 11.
Commerce argues that Rule 1019(3) should apply by analogy. The Court declines to do so. The rationale justifying for a new period to file a complaint in a converted Chapter 7 proceeding is not present when a Chapter 13 proceeding is converted to a Chapter 11 proceeding. A creditor has the same motivation to file an objection to discharge of a particular debt in the Chapter 13 proceeding as in the converted individual Chapter 11 proceeding. To hold that Rule 1019(2) applies by analogy and that the Rule 4007(c) time limit runs from both the first date set for the meeting of creditors in the Chapter 13 proceeding and in the Chapter 11 proceeding would give the creditor a “second bite at the apple” when there has been no change in the relevant discharge rights.
Under § 348, “[conversion of a case from a case under one chapter ... to a case under another chapter ... constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsections (b) and (c) of this section [which do not address § 523], does not effect a change in the date of filing of the petition, the commencement of the case, or the order for relief.” Hence, conversion does not create a new case, but it does require a new § 341 meeting, which *428shall be noticed within “a reasonable time after the order for relief.”11 The Court disagrees with the Eight Circuit as to the impact of § 548(a). Although the meetings of creditors held in the Chapter 13 proceeding and the subsequent Chapter 11 proceeding are distinct, it does not follow that there are two “first dates” for purposes Rule 4007(c). In this Court’s view, the plain meaning of the reference in Rule 4007(c) to the “first date set for the meeting of creditors” is to the first date set in the case. The conversion does not create a new case. In a case converted from Chapter 13 to Chapter 11, the first date set is the date initially set for the meeting in the Chapter 13 proceeding.
Debtors cite Citizens First National Bank12 which held that there is not a new period for filing dischargeability complaints in a case converted from Chapter 7 to Chapter 11. In that case, the creditor had urged the court to follow the rationale of F & M Marquette National Bank and Rule 1019(3), discussed above, but the court declined. It reasoned that the expectation of payment through a reorganization plan which may lull Chapter 11 creditors into not filing a complaint has no applicability when a case was commenced under Chapter 7 and then converted to Chapter 11. “Any failure to file such complaint, or to obtain an extension of time, during the pendency of the original Chapter 7 case results solely from creditor inaction. The fortuitous conversion of the Debtor’s Chapter 7 case to Chapter 11 after the time for objecting to discharge-ability has expired is no substitute for Plaintiffs failure to act timely.” 13
The Court agrees with this reasoning. The fortuitous conversion of Debtors’ Chapter 13 case to Chapter 11 should not give Commerce a second chance to timely object to discharge under § 523(a)(2). Such debts are excepted from discharge under both Chapter 1314 and Chapter 11.15 Both chapters provide an expectation of repayment through a court approved plan.
Finally, the Court holds that the notice date included in the Notice of Chapter 11 Bankruptcy Case,16 prepared by the clerk’s office when Debtors converted their case from Chapter 13 to Chapter 11, does not change the foregoing. It states, “Deadline to File a Complaint to Determine Dischargeability of Certain Debts: 3/6/12.” The notice is ambiguous. It states the deadline for objecting to “certain debts,” without defining what debts are included and without reference to debts for which timely objections had not been filed in the Chapter 13 case. The notice is included in a bankruptcy form sent by the clerk under Rule 2002(f) and did not enlarge Commerce’s rights.17 It was not the purpose of the notice of the bar date as to “certain debts” to revive dischargeability claims which were time barred in the Chapter 13 case. Commerce’s complaint objecting to discharge of its claims is not timely because it was filed within the date set by the Notice of Chapter 11 Bankruptcy Case.
For the foregoing reasons, the Court finds that the Complaint objecting to dis*429charge of Commerce’s claim under § 523(a)(2) is untimely and therefore must be dismissed.
B. Count II — The § 523(a)(6) claim satisfies the applicable pleading standard.
Debtors move to dismiss the § 523(a)(6) claim for failure to state a claim under the Iqbal and Twombly standard discussed above.18 Debtors argue that the allegations are mere formulaic recitations of the elements of a claim and lacks sufficient factual allegations.
The Complaint in Count II incorporates the factual allegations stated above and alleges: that Debtors knew the loan proceeds were to be used on the specific homes; that they knowingly, intentionally, wrongfully, and without justification used the loan proceeds for their benefit and enjoyment; that they injured Commerce when doing so; and that Debtors’ acts were willful, intentional, and malicious. The Court finds that Count II states a claim that is plausible on its face. “[T]he conversion of another’s property without the owner’s knowledge or consent, done intentionally and without justification and excuse, is a willful and malicious injury within the meaning of the [523(a)(6) ] exception.” 19 The factual allegations are sufficient to give Debtors notice of the claims against them.
The Motion to dismiss is denied as to Count II.
C. Count III — The request for judicial determination of amount owed will not be dismissed.
In its last Count, Commerce seeks a judicial determination of the amount which is nondischargeable. Debtors move to dismiss the count as unnecessary, arguing that Commerce has filed a proof of claim for $748,748.72 and the amount owed will be determined in the claims allowance process.
The Court will not dismiss the count. The Court reads the Complaint as seeking a determination of the amount which is nondischargeable, not the entire claim. This matter is properly determined in the adversary proceeding challenging dis-chargeability.
CONCLUSION.
Count I, the § 523(a)(2) claim was filed after expiration of the bar date set in the Chapter 13 case, which passed before the conversion to Chapter 11. Count I is dismissed. The motion to dismiss is denied as to Count II, objection to dischargeability under 523(a)(6), and Count III, for determination of the amount excepted from discharge.
The foregoing constitute Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure which makes Rule 52(a) of the Federal Rules of Civil Procedure applicable to this proceeding.
IT IS SO ORDERED.
. This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the District's bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (B). There is no objection to venue or jurisdiction over the parties.
. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
. Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).
. Iqbal, 556 U.S. at 663, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955).
. Id.
. 11 U.S.C. § 523(a)(2). All references in the text to title 11 shall be to the section only.
. Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, § 536.1, at ¶ 26 (4th ed. 2006), available at www.Ch13online.com.
. F & M Marquette Nat’l Bank v. Richards, 780 F.2d 24 (8th Cir.1985). Commerce also cites Goralnick v. Bromberg (In re Goralnick), 81 B.R. 570 (9th Cir. BAP 1987) and Gen. Elec. Credit Corp. v. Watts (In re Watts), 59 B.R. 779 (Bankr.N.D.Ala.1986), but both of these cases, like F & M Marquette Nat’l Bank, hold there is a new time limit for discharge-ability complaints after conversion to Chapter 7 and not conversion from Chapter 13 to Chapter 11.
. Fed. R. Bankr.P. 1019 advisory committee note to 1987 amendments to Rule 1019.
. 11 U.S.C. § 341.
. Citizens First Nat'l Bank v. Kirkpatrick (In re Kirkpatrick), 120 B.R. 309 (Bankr.S.D.N.Y.1990).
. Id. at 312.
. 11 U.S.C. § 1328(a)(2).
. 11 U.S.C. § 1141(d)(2).
. Dkt. 120, case no. 11-13633.
. See 28 U.S.C. § 2075 (bankruptcy rules shall not "abridge, enlarge, or modify any substantive right”).
. Debtors do not argue that Count II was filed after expiration of the bar date. Rule 4007(c) applicable to the § 523(a)(2) claim does not apply to the § 523(a)(6) claim. Under Rule 4007(d), the bar date for filing objections to discharge under § 523(a)(6) in an individual’s Chapter 13 case is set after the debtor moves for discharge under § 1325(b). In this case, no such bar date was set before conversion to Chapter 11.
. 4 Collier on Bankruptcy ¶523.12[4] (Alan N. Resnick & Henry J. Sommer eds.-in-chief, 16th ed.). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494794/ | MEMORANDUM OPINION
ROBERT H. JACOBVITZ, Bankruptcy Judge.
This matter came before the Court on the Plaintiffs and Defendant’s “Stipulation of Facts and Request for Judgment”. Docket No. 23, the “Stipulation.” The parties requested the Court to rule on the Plaintiffs Complaint (Docket No. 1), the Defendant’s Answer (Docket No. 12), and the Plaintiffs Motion to Enforce the Automatic Stay or for Preliminary Injunction Against the Defendant (Docket No. 7). On April 23, 2012, the parties submitted simultaneous briefs. The Court is asked to consider the following: (1) whether the automatic stay under 11 U.S.C. § 362 prevents Brad Hall and Associates, Inc. (“BH & A”, “Defendant”, or “Defendant-Creditor”) from selling 100% of the capital stock in the Debtor, Xtra Petroleum Transport, Inc. (“Xtra”, “Xtra Petroleum”, or “Plaintiff’, or “Plaintiff-Debtor”); and (2) if the automatic stay does not apply, whether the Court should enter a preliminary injunction that prevents BH & A from selling the stock at auction.
Jurisdiction and Venue
This is an adversary proceeding filed pursuant to Fed.R.Bankr.P. 7001(7). The Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(a) and (b). The parties stipulated that the adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(G),(N), and (O).
Procedural History
The Stipulation essentially consists of the parties’ joint request that the Court consider all testimony and exhibits presented during two days of trial held on February 28 and March 6, 2012, and that the Court take judicial notice of the case files for Case No. 11 — 12639—jll and Adversary Proceeding Nos. 11-1221-jll and 12-1155-jll. The trial addressed: (i) the Plaintiff-Debtor’s objection to the Defendant-Creditor’s claim in the underlying bankruptcy case (No. 11 — 12639—jll) and (ii) the Plaintiffs claims to avoid alleged preferential and fraudulent transfers under 11 U.S.C. § § 547 and 548 (Adversary No. 11-1221-jll). In between the two trial dates, the Plaintiff-Debtor filed this adversary proceeding. Following the trial in Adversary Proceeding No. 11-1221-jll, the Plaintiff and Defendant in this adversary proceeding (who were also the Plaintiff and Defendant in Adversary No. 11-1221-jll), reached a partial settlement. Under the partial settlement, the Plaintiff withdrew its objection to the timeliness of the Defendant’s filing of a proof of claim in the underlying bankruptcy case, and the Defendant agreed to the issuance of a temporary restraining order in this adversary proceeding to stop a scheduled sale of the stock. On April 11, 2012, the Court entered a memorandum opinion resolving the issues in the adversary proceeding related to the fraudulent and preferential *432transfer claims. See Adversary No. 11-1221, Docket No. 18.
For reasons explained below, the Court concludes that the automatic stay does not prevent the Defendant from selling the stock, and denies the Plaintiffs request for a preliminary injunction on the ground that the request for a preliminary injunction is rendered moot by the Court’s final decision regarding the scope of the automatic stay. The Court now enters the following findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7052.
FACTS
Kathy Parseghian (“Kathy” or “Ms. Par-seghian”) is the President of Xtra Petroleum and owns 100% of its capital stock (sometimes called the “Stock”). BH & A, a fuel supplier, has been involved in contentious on-and-off-again litigation with Kathy’s husband, Sarkis Parseghian (“Sarkis” or “Mr. Parseghian”), and at least one other party who is not Kathy or Xtra, since 2004. In 2004, BH & A obtained a default judgment in Idaho against Sarkis and one of Sarkis’s business interests, Savoy Truck Stop, a partnership, in the approximate amount of $718,313.68. See Plaintiffs Exhibit 2.1 That judgment went largely unpaid.
In 2008, after learning that Kathy was operating Xtra in New Mexico and receiving substantial assistance from Sarkis, BH & A domesticated the default judgment in New Mexico. In February 2008, BH & A filed a complaint in the Second Judicial District Court for the State of New Mexico (the “state court action”), alleging alter ego and fraudulent transfer claims against Xtra, Kathy, and Sarkis. See Plaintiffs Exhibit 3. After several orders on motions for summary judgment, BH & A’s only remaining claim in the state court action was the alter ego claim, and the remaining defendants were Xtra and Sarkis. See Plaintiffs Exhibits 5 and 6. Kathy was dismissed from the case. In the state court action, the parties completed discovery and other pretrial procedures, and a substantial pretrial order was entered on August 18, 2009. See Defendant’s Exhibit I. In September 2009, on the eve of trial, a settlement was reached of the remaining claims in the state court action. See Defendant’s Exhibit A.
The Settlement Agreement among BH & A, Xtra, and Sarkis (the “Settlement Agreement”) provided that Xtra would execute the following: (i) a deed of trust against Xtra’s real property, and (ii) a security agreement listing all of the stock of Xtra. Both the deed of trust and the security agreement were to be executed to grant liens to BH & A to secure a promissory note, payable to BH & A, to be executed by Xtra and Sarkis in the settlement amount. The Settlement Agreement also provides that the Stock would be held in escrow pending payment in full of the promissory note. The Settlement Agreement further provides that upon payment of the promissory note in full, the Stock would be returned to Kathy Parseghian and the deed of trust would be released and satisfied. See Id.
Although the Settlement Agreement so contemplated, no such deed of trust or security agreement was ever executed. Further, there is no evidence before the Court that any promissory note for the amount of the settlement, or any other amount, was ever executed. Moreover, although the Settlement Agreement provided that Xtra would execute a security agreement listing the Stock of Xtra as *433collateral for payment by Xtra and Sarkis under the promissory note, Xtra did not own its stock. Kathy Parseghian owned 100% of the Stock of Xtra. The Settlement Agreement does not name Kathy Parseg-hian as a party thereto. She executed the Settlement Agreement only as President of and on behalf of Xtra, but nevertheless delivered her Xtra Stock to an escrow agent. The Court has not been provided with any escrow instructions.
BH & A now seeks to enforce a lien against the Stock by selling the Stock at auction. On February 8, 2012, BH & A published and served a “Notice of Auction Sale of Common Stock.” BH & A scheduled the auction for March 12, 2012 at the Bernalillo County Courthouse. See Docket No. 1, Exhibit A, the “Notice.” BH & A reserved the right to credit bid the amount of its claim, which the Notice described as being for the sum of $558,101.76, plus various costs, fees, and taxes in the amount of $18,460.39. There is no evidence before the Court that BH & A scheduled the sale of the Stock pursuant to a court order or judgment. Therefore, the Court infers that the scheduled sale was a non-judicial sale.
The Plaintiff-Debtor seeks to stop the sale. After the parties’ partial settlement of Adversary Proceeding No. 11-1221 was stated on the record on March 6, 2012, a stipulated order was entered. The order enjoined the Stock auction “until after the Court has issued a ruling on the Debtor’s Motion for Preliminary Injunction.” See Docket No. 9. This ruling resolves that motion.
DISCUSSION
Plaintiffs Complaint, Motion to Enforce the Automatic Stay, and supporting Brief (“Plaintiffs Brief’) request the Court to determine that the automatic stay under subsections (a)(1), (a)(3), and (a)(4) of 11 U.S.C. § 362 prevents BH & A from selling the Stock. Xtra thereby asserts that BH & A’s sale of the Stock, without BH & A first obtaining relief from the automatic stay to collect the amount owing it under the Settlement Agreement, would be (i) an act to obtain property of the estate or to exercise control over property of the estate in violation of § 362(a)(3); (ii) an act to enforce a lien against property of the estate in violation of § 362(a)(4); and (iii) an act to attempt to collect or recover on a prepetition claim against Xtra in violation of § 362(a)(1). The Court disagrees.
1. Sale of the Stock Does Not Violate 11 U.S.C. § 362(a)(3) or (a)(4).
Sections 362(a)(3) and (a)(4) of the Bankruptcy Code apply only to acts affecting property of the estate. By the Plaintiffs own admission, the Stock is not property of the estate.2 Kathy Parseghian, not Xtra, owns the Stock. Because the Stock is not property of the estate, any act on the part of BH & A to sell the Stock would not violate 11 U.S.C § 362(a)(3) or (a)(4).
2. Sale of the Stock Does Not Violate 11 U.S.C. § 362(a)(1)
Xtra argues that, although Kathy Parseghian is not a debtor in a bankruptcy case and the Stock is thus not property of the estate, BH & A’s efforts to enforce its lien against the Stock constitute acts to collect its claim against the Debtor, Xtra, in violation of 11 U.S.C. § 362(a)(1). Xtra further argues that an “unusual circumstances” exception to the general rule that the automatic stay only applies to debtors *434applies here. The Court will address both arguments.
BH & A’s acts to enforce a lien against the Stock are not acts to recover a claim against Xtra
Section 362(a)(1) of the Bankruptcy Code provides, in relevant part:
(a) ... a petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities, of—
(1) ... [an act] to recover a claim against the debtor that arose before the commencement of the case under this title;
11 U.S.C. § 362(a)(1).
Xtra relies on In re Colonial Realty, 980 F.2d 125 (2nd Cir.1992). In Colonial Realty, the Second Circuit found that the automatic stay prevented the FDIC from pursuing a fraudulent transfer action against a third party to collect a debt owing by the debtor in bankruptcy to the FDIC. The fraudulent transfer action that the FDIC sought to pursue arose under a federal statute other than the Bankruptcy Code. The third party allegedly had received a fraudulent transfer from the debt- or against whom the FDIC had significant claims. The debtor also had a fraudulent transfer claim against the third party under the Bankruptcy Code. The Second Circuit concluded that the FDIC’s actions ran afoul of the 11 U.S.C. § 362(a)(1) proscription of acts “to recover a claim against the debtor” because “[ajbsent a claim against the debtor, there is no independent basis for the [FDIC’s] action against the [third party]. Moreover, the creditor can only recover property or value thereof received from the debtor sufficient to satisfy the creditor’s claim against the debtor.” In re Colonial Realty, 980 F.2d at 132, citing In re Saunders, 101 B.R. 303, 304-06 (Bankr.N.D.Fla.1989).
Here, because Kathy Parseghian herself has no personal liability to BH & A, enforcement of any lien against the Stock could not be characterized as an attempt to collect a debt owing by Kathy rather than Xtra. However, unlike the FDIC in Colonial Realty, BH & A does have a basis to enforce its claimed lien against the Stock that is independent of its effort to collect its claim against Xtra. The Settlement Agreement provides for a pledge of the Stock not only as collateral for a debt of Xtra to BH & A but also as collateral for a debt of Sarkis to BH & A. Thus, BH & A is seeking to enforce its claimed lien against the Stock to collect a debt of Sark-is independently of its claim against Xtra. Under the principles explicated in Colonial Realty, BH & A’s acts to enforce its claimed lien do not violate 11 U.S.C. § 362(a)(1). The Court also notes that, unlike in Colonial Realty, any effort by BH & A to enforce a lien against the Stock will not potentially diminish the assets of the Xtra bankruptcy estate.
The automatic stay does not encompass BH & A’s acts to enforce a lien against the Stock due to “unusual circumstances”
Alternatively, the Plaintiff contends that the automatic stay applies to the sale of the Stock under an “unusual circumstances” exception to the general rule that the automatic stay does not apply to non-debtors in chapter 11 cases.3 The Court disagrees.
*435The Tenth Circuit recognized a narrow exception to the general rule that the scope of the automatic stay does not extend to actions against non-debtors, explaining:
A narrow exception allows a stay to be imposed under section 362(a)(1) against a nonbankrupt party in “unusual situations” as “when there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.”
Oklahoma Federated Gold and Numismatics, Inc. v. Blodgett, 24 F.3d 136, 141-42 (10th Cir.1994), quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir.1986), cert. denied, 479 U.S. 876, 107 S.Ct. 251, 93 L.Ed.2d 177 (1986).
The facts before the Court do not establish such unusual circumstances. There is no evidence that there is such an identity between Xtra and Kathy Parseghian that Xtra may be said to be the real party defendant in relation to BH & A’s claim against the Stock owned by Ms. Parseghi-an, or that BH & A’s acts seeking to enforce a lien against the Stock are tantamount to asserting a claim against Xtra or its assets. In fact, the state court dismissed BH & A’s claim that Kathy Parseg-hian is the alter ego of Xtra.
There is also some authority for the proposition that the automatic stay may extend to acts against non-debtor parties “ ‘where stay protection is essential to the debtor’s efforts of reorganization.’ ” Forcine Concrete & Const. Co., Inc. v. Manning Equipment Sales & Service, 426 B.R. 520 (E.D.Pa.2010) (quoting McCartney v. Integra Nat. Bank North, 106 F.3d 506, 510 (3rd Cir.1997)). However, the Court need not decide whether this can constitute an “unusual circumstance” such that the automatic stay would extend to acts against non-debtor parties because there is no evidence before the Court that Xtra has a realistic prospect of reorganizing in its chapter 11 case. The Court would need such an evidentiary predicate to make the determination that preventing the sale of the Stock is essential to Xtra’s efforts to reorganize.
The Court thus finds that 11 U.S.C. § 362(a)(1) does not prevent the sale of the Stock.
3. The Request for a Preliminary Injunction is Moot
Plaintiffs Complaint contains two counts. Count I requests a declaratory judgment that the automatic stay prevents BH & A from selling the Stock to enforce its claimed lien. Count II requests the issuance of a preliminary injunction to prevent the sale of the Stock. The parties have asked the Court to make a final ruling on the merits of this Complaint. Once the Court makes a decision on the merits, a pending request for preliminary injunction is moot. A preliminary injunction is issued to safeguard a party’s position prior to a final decision on the merits. See 11A Wright, Miller & Kane Federal Practice and Procedure Civil 2d § 2948.3 (“The very purpose of an injunction under Rule 65(a) is to give temporary relief based on a preliminary estimate of the strength of plaintiffs suit, prior to the resolution at trial of the factual disputes and difficulties presented by the case.”). Because the Court has made a decision on the merits, Xtra’s request for temporary *436relief prior to a decision on the merits is moot.4
CONCLUSION
Based on the foregoing, the Court holds that the automatic stay imposed under 11 U.S.C. § 362 does not apply to BH & A’s proposed auction of the Stock, and that the motion for preliminary injunction is rendered moot by this decision. The Court will enter a separate order consistent with this memorandum opinion.
. All references to exhibits are references to exhibits admitted during the trial in Adversary Proceeding No. 11 — 1221—j 11 and the contested matter in the underlying bankruptcy case.
. See Docket 1, ¶ 38 and Docket 7, ¶ 38 (both state: "The stock sale is not an action to obtain property of the estate....”); Docket 25, p. 2 ("The stock itself is the property of Kathy Parseghian, not the Debtor.”).
. Chapter 11 of Title 11 contains no provision for a codebtor stay, whereas the other reorganization chapters of Title 11 do specifically provide for such a stay. See 11 U.S.C. §§ 1201, 1301, both of which are titled "Stay of action against codebtor.” See, also, Williford v. Armstrong World Industries, 715 F.2d at 127 (1983) (the Fourth Circuit takes note of Chapter ll's omission of a statute providing for a codebtor stay and the fact that the Fifth *435and Sixth Circuits have also found this analysis persuasive).
. Although the Court declines to rule on Xtra's request for a preliminary injunction, it does not appear that Xtra needs injunctive relief to protect it from a non-judicial sale of the Stock. It appears likely a non-judicial sale of the Stock would be ineffective. The Settlement Agreement dictates that it “be interpreted in accordance with the laws of the State of New Mexico.” This choice of law provision is enforceable pursuant to N.M.S.A. 1978 § 55-l-301(A). Because Kathy Parseg-hian, who owns the Stock, was not a party to the Settlement Agreement, BH & A would need to obtain a reformation of the agreement for it to bind Kathy individually. See, generally, Twin Forks Ranch, Inc. v. Brooks, 125 N.M. 674, 676-80, 964 P.2d 838 (App.1998) (describing requirements to reform a contract). Even if a court were to reform the Settlement Agreement so that it bound Kathy Parseghian individually to the promise to execute a security agreement, the Settlement Agreement is not by itself sufficient to create a security interest in the Stock. No security agreement granting a security interest in the Stock was ever executed. Stating an intention to grant a security interest does not create a security interest. A promise to pledge in the future is not itself a pledge. See, e.g., In re Dayton Suzuki, Inc., 27 B.R. 915 (Bankr.Ohio.1983) (court declines to find a security agreement existed when a party had previously pledged that it “will execute” one and then did not do so). | 01-04-2023 | 11-22-2022 |
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