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https://www.courtlistener.com/api/rest/v3/opinions/8493572/ | ORDER RE MOTION TO DETERMINE AMOUNT OF CLAIM OF BRADLEY & RILEY
PAUL J. KILBURG, Chief Judge.
This matter came before the undersigned on February 26, 2003. Claimant Bradley & Riley was represented by H. Raymond Terpstra II. Object or On Line Services, Inc. was represented by Thomas McCuskey. After hearing evidence and arguments of counsel, the Court took the matter under advisement. 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)(A) and (B).
*201FACTUAL OVERVIEW
Internet Navigator, Inc. [hereinafter “INI”] was incorporated in Iowa. The directors began to disagree about management of the corporation. Three directors/shareholders eventually filed two lawsuits against the other three director/shareholders. In the first lawsuit, (Suit 1), the three shareholders, Glick, Lohff, and Walden, [hereinafter “Plaintiffs”] sued INI and the other director/shareholders Bennett, Letsche, and Elbert [hereinafter “Defendants”], for improper accounting methods and corporate practices, breach of fiduciary duty, and fraud. Bradley & Riley represented Defendants and INI in Suit 1, which ended in settlement and release of Plaintiffs’ claims. As part of the settlement, INI confessed judgment to Plaintiffs. Plaintiffs then filed Suit 2, a derivative action. The Iowa District Court dismissed this suit as being duplicative of Suit 1, but not before Plaintiffs filed a motion to dismiss counsel. Bradley & Riley voluntarily ceased representation of INI in Suit 2.
INI failed to pay Plaintiffs under the Suit 1 settlement and eventually filed a Chapter 11 petition. By then, Plaintiffs had formed their own corporation, OnLine Services, Inc. [hereinafter “OLS”]. Plaintiffs assigned their claims to OLS. OLS and INI filed competing reorganization plans and this Court confirmed OLS’ plan in January, 2003. In re Internet Navigator, Inc., 289 B.R. 128, 133 (Bankr.N.D.Iowa 2003). Under OLS’ plan, all creditors are to be paid in full. OLS objects to Bradley & Riley’s claim for attorney’s fees in its representation of INI and Defendants in both state court suits. A hearing on the validity of Bradley & Riley’s claim was held on February 26, 2003.
FINDINGS OF FACT
INI was founded as an Iowa corporation on June 20, 1995 and opened for business as an internet service provider in September, 1995. Its initial articles of incorporation provided for a four-member board of directors. The initial board consisted of Royce Bennett (45,000 shares), Michael Glick (45,000 shares), Terry Letsche (30,-000 shares), and Von L. Elbert (30,000 shares). As part of INI’s acquisition of IA Net, Inc., Geoffrey Lohff became a member of INI’s board of directors in February, 1997. New stock was issued to Geoffrey Lohff (30,000 shares) and George Walden (7,500 shares).
Royce Bennett has been president of INI since 1995. Terry Letsche was vice-president from 1998-99. Michael Bell served on INI’s board of directors from 1997-2001. On September 11, 1997, the Articles of Incorporation were amended to delete Section D, which allowed preemptive rights to stockholders.
Plaintiff Glick alleges that conflict first emerged among the board members in 1997 on the issue of preemption of shareholder rights. Beginning in June, 1998, Glick and Lohff repeatedly inquired into INI’s financial records at board meetings. Glick testified via affidavit that he asked for Brad Hart’s (INI’s attorney and a partner at Bradley & Riley) assistance in obtaining copies of INI’s financial records. According to Glick, Hart acknowledged his entitlement to the records but did not assist in their procurement. Glick later received some of the financial information in August, 1998.
Also- in August, 1998, Glick, through counsel, contacted Brad Hart regarding the need to file suit on behalf of INI against other members of the board of directors. Hart stated that if Glick did wish to pursue the action, it would not be filed by his firm.
*202Glick testified that INI’s Board of Directors instructed Hart to release the legal billing records for INI, but that other persons at Bradley & Riley repeatedly told Glick that the firm was in the middle of its billing cycle. Glick testified that he did not receive a copy of the corporate billing records until post-petition. Plaintiff Loehff also testified that Hart at one time notified him that he would receive the corporate billing records and later was denied the records.
Donald Thompson, Bradley & Riley’s litigation counsel, notified James Bennett, attorney for Plaintiff Lohff, on January 6, 1999, that Bradley & Riley would provide him with a client ledger report for the fees billed to INI. Bradley & Riley believed that the actual itemized billing statements were protected by the attorney-client privilege.
On November 3, 1998, Plaintiffs Glick, Lohff, and Walden filed suit in Iowa District Court against INI and Defendants Bennett, Letsche, and Elbert. The initial claim sought the administrative dissolution of INI and complained that Defendants (a) improperly eliminated preemptive rights, (b) improperly booked approximately $110,000 in debt to INI, (c) improperly diluted Plaintiffs’ percentage interests, (d) faded to give Plaintiffs access to INI corporate records, (e) breached their fiduciary duty, and (f) committed fraud. Plaintiffs Lohff and Walden also claimed breach of fiduciary duty in regard to Defendants’ misrepresentation of INI’s financial condition in connection with the issuance of their shares. Count III of the petition claimed entitlement to INI’s financial records.
Because of their concerns regarding director mismanagement, Plaintiffs applied for an injunction or appointment of an auditor/receiver on November 17, 1998. On November 18, 1998, the Linn County District Court granted the injunction. Hearing on the appointment of an auditor/receiver was initially set for December 7, 1998, and then reset for December 21, 1998 and ultimately for January 14, 1999.
Bennett approached Bradley & Riley to represent all Defendants in this action (“Suit 1”). Bradley & Riley met with each Defendant and disclosed the potential for conflict of interest. The record contains the disclosure forms, but only one of the documents is signed by a Defendant. Bradley & Riley disclosed that (a) it was retained by INI to represent all Defendants, (b) while it did not appear there was any conflict of interest among the Defendants, there was that potential, (c) each Defendant must be willing to permit Bradley & Riley to disclose any information obtained from one Defendant to all other Defendants, (d) INI had the right to object to Bradley & Riley’s continuing representation for any reason, including a perceived conflict, and (e) each Defendant had to consent to Bradley & Riley’s continued representation.
On January 14, 1999, Plaintiffs released their claims against the individual Defendants, Bennett, Letsche, and Elbert. The release included all claims, known or unknown, “both at law and in equity, arising or related in any way, directly or indirectly, to their relationship and association with the Plaintiffs ...” The Court approved the parties’ written stipulation on January 15, 1999. The Order further provided that INI provide Plaintiffs with reasonable access to financial records.
Plaintiffs did not release their section 490.1330 claims against INI. Iowa Code section 490.1330 provides for a fair valuation (and accrued interest) of a dissenting shareholder’s shares in a dissenter’s rights action. The value of the Plaintiffs’ stock remained the sole issue in Suit 1 until its settlement in 2000.
*203On February 18, 1999, INI moved for a protective order in regard to discovery of billing records. Plaintiffs sought access to INI’s billing records on the grounds that the records were relevant to the valuation of their shares. On February 26,1999, the Iowa District Court sustained INI’s motion for a protective order regarding customer names, addresses, telephone and circuit identification numbers, and fee statements of Defendant’s counsel. Upon Plaintiffs motion to reconsider the order, the court, on April 13, 1999, ordered an in camera inspection of Bradley & Riley’s itemized statements of fees to ascertain which portions were covered by the attorney/client privilege.
On the same day that INI filed its Motion for Protective Order, Plaintiffs filed another lawsuit, EQCV034675 (“Suit 2”). Plaintiffs, on behalf of INI, alleged breach of fiduciary duty by the Defendants, specifically citing (a) Defendants allowing the corporation to be administratively dissolved in 1997 and 1998, (b) Defendants’ failure to pay Iowa sales tax when due, (c) Defendants’ failure to comply with Iowa law regarding the elimination of preemptive rights, (d) Defendants’ failure to provide Plaintiffs with INI documentation as requested, (e) Defendants’ wasting of corporate assets, (f) Defendants’ usurping of corporate opportunities for their own gain, and (g) Defendants’ improper accounting practices. Plaintiffs also alleged negligence in performance of Defendants’ duties as officers. Bennett, on behalf of INI, again retained Bradley & Riley to represent all named Defendants in this action. Bradley & Riley, after reviewing Plaintiffs claims and concluding they were without merit, disclosed potential conflict issues and obtained each Defendant’s consent to representation.
INI moved for summary judgment in Suit 2 on April 2, 1999, claiming that the release in Suit 1 barred Plaintiffs’ claims. Glick believed that a conflict of interest existed between Bradley & Riley and INI. In Suit 2, Plaintiffs, for the first time, filed a Motion to Disqualify Counsel on April 21, 1999, citing conflict of interest between the corporation and individual Defendants. On June 2, 1999, Glick moved at a special meeting of INI’s board of directors to retain new legal counsel. Glick’s motion failed.
Bradley & Riley filed a motion to withdraw as counsel on June 17, 1999. The court sustained the motion on July 1,1999.
The parties argued the summary judgment motion in Suit 2 in January, 2000. The Iowa District Court granted summary judgment on March 10, 2000. The court declared that Plaintiffs did not meet the Iowa exception that a shareholder has an individual cause of action if the harm to the corporation also damaged shareholders individually. Shareholders must show that the third party owed them a special duty. The Iowa District Court held that Plaintiffs did not do so in Suit 1 and therefore the release barred Suit 2.
In May, 2000 Plaintiff Glick and INI entered into a settlement agreement, known by the parties as the “Settlement and Mutual Release Agreement.” This document dismissed Glick’s appeal of both Suit 1 and Suit 2. Glick dismissed his Suit 1 claim with prejudice on June 9, 2000. In return, INI was to make settlement payments by March 17, 2001. INI did not do so, and Glick sued for breach of the agreement on April 23, 2001 (Suit 3).
After Plaintiff Glick filed Suit 3, INI and Glick entered into a Standstill Agreement, whereupon INI agreed to enter a confession of judgment upon the surrender of Glick’s stock. INI confessed judgment to Glick as follows:
a. $225,000 for his stock in INI
*204b. Eight percent interest beginning January 1, 1999 through the date of filing of this Confession of Judgment.
c. $67,500 for Glick’s expenses.
Plaintiffs Lohff and Walden settled with INI in September, 2000. They agreed to dismiss their appeals in both Suit 1 and Suit 2. Lohff and Walden dismissed their Suit 1 claims with prejudice on October 2,
2000. Unable to make payment under the settlement agreement, INI entered a Verified Confession of Judgment and Statement of Indebtedness on March 22, 2001. INI conceded that it was indebted to Lohff and Walden for money due in the following amounts:
a. $150,000 to Plaintiff Lohff
b. $37,500 to Plaintiff Walden
c. Eight percent interest per year beginning on January 1, 1999, through the date of filing of this Confession of Judgment, as computed by the Clerk of Court; and
d. $128,250 for expenses.
The court approved the confession of judgment on March 28, 2001. Unable to raise money to pay any of these obligations, INI filed for bankruptcy protection on June 29,
2001. Bradley & Riley filed its proof of claim on June 18, 2002, claiming $201,449.00 in attorney’s fees.
On January 22, 2003, the Bankruptcy Court for the Northern District of Iowa approved a plan for reorganization by OLS. OLS asserts that Bradley & Riley’s claim for legal services should not be allowed. It argues the amounts claimed due arise from Bradley & Riley’s representation of the individual Defendants, rather than INI. OLS does not object to $25,083.64 that INI owes Bradley & Riley for general corporate work. According to Bradley & Riley, of the remaining amounts owed, $20,295.44 was incurred by INI as a result of the derivative action (Suit 2) and $160,518.52 was incurred by INI as a result of the Shareholder suit (Suit 1).
EVIDENTIARY STANDARD
A claim filed under 11 U.S.C. § 501 that comports with the procedural requirements of Bankruptcy Rule 3001 is prima facie evidence of the validity and amount of such claim. In re Roberts, 210 B.R. 325, 328 (Bankr.N.D.Iowa 1997); Fed. R. Bankr.P. 3001(f)- Unless a party in interest objects to the claim it is deemed allowed. 11 U.S.C. § 502(a). If an objection to the claim is made, the court, after notice and a hearing, must determine the amount of the claim fixed as of the date of the petition. 11 U.S.C. § 502(b). With some enumerated exceptions, the validity of and defenses to such a claim are to be determined under state law. 11 U.S.C. § 502(b)(1); In re Hinkley, 58 B.R. 339, 348 (Bankr.S.D.Tex.1986).
Bankruptcy Rule 3001© places the burden of producing sufficient evidence to rebut the presumption of validity on the objecting party. In re Waterman, 248 B.R. 567, 570 (8th Cir. BAP 2000). Once this burden of production is met, the ultimate burden of persuasion as to the allowability of the claim resides with the creditor. Id. In this case, OLS, the proponent of the confirmed plan, objects to Bradley & Riley’s proof of claim. OLS bears the initial burden of producing evidence to rebut the presumptive validity of Bradley & Riley’s claim.
STATEMENT OF THE ISSUES
OLS’ claims are essentially threefold; 1) that the amount of Bradley & Riley’s claim is incorrect, 2) that payment to Bradley & Riley is prohibited by Iowa Code sections 490.853, 490.855, and Rowen v. LeMars Mut. Ins. Co., 230 N.W.2d 905 (Iowa 1975), and 3) Bradley & Riley must be denied *205payment pursuant to Iowa Code section 490.852. Bradley & Riley claim that Iowa Code section 490.852 compels the payment of the attorney’s fees in this case.
OLS argues that the precise amount of the claim remaining due is unclear, mainly due to characterizations on INI’s profit and loss statements and balance sheets. Testimony was offered at trial by both parties regarding the discrepancies in reporting actual losses and gains arising from accrual accounting methods. In the joint pre-trial statement, OLS acknowledged that it did not dispute the amount of Bradley & Riley’s claim. OLS now seems to challenge the amount paid to Bradley & Riley by INI based on the profit and loss statements. This argument is without merit. Bradley & Riley introduced as evidence INI’s balance sheet as of September, 2001. The balance sheet matches Bradley & Riley’s proof of claim filed on June 18, 2002. OLS has not met its burden to rebut the presumptive validity of Bradley & Riley’s claim in this regard.
EFFECT OF REORGANIZATION PLAN ON PAYMENT OF CLAIM
Under 11 U.S.C. § 507(a), administrative expenses allowed under Section 508(b) have priority in payment. Attorney’s fees rendered after the commencement of a case qualify for this priority. 11 U.S.C. § 503(b)(1)(A). It is unclear from Bradley & Riley’s invoices if any of the work it performed was after the commencement of the bankruptcy case. However, it is unnecessary to determine which of Bradley & Riley’s fees were incurred after commencement because under the approved reorganization plan, all claims are to be paid in full.
AUTHORITY TO CONTRACT ON BEHALF OF A CORPORATION
OLS’ primary objection is that Defendant Bennett improperly retained Bradley & Riley on behalf of INI in Suits 1 and 2. OLS claims that proper corporate procedures were not followed in the retention of Bradley & Riley for INI given that the individuals who engaged Bradley & Riley were themselves the targets of the litigation.
OLS claims that defendants did not meet the requirements of Iowa Code sections 490.853 and 490.855. Section 490.853 conditionally permits a corporation to “pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding.” Defendants never incurred expenses in the state court litigation. Bradley & Riley invoiced INI after Plaintiffs dismissed their claims against the Defendants on January 14, 1999. INI then began paying Bradley & Riley in June, 1999. Since Defendants did not incur any expenses, Iowa Code section 490.853 is not applicable.
Iowa Code section 490.855 relates back to section 490.851. Iowa Code section 490.851 conditionally authorizes a corporation to indemnify an individual who was made a party to a proceeding because the individual is or was a director. Section 490.855 outlines procedural requirements for director indemnification pursuant to 490.851. Section 490.855 mandates that any decision to indemnify pursuant to 490.851 must be made by a majority vote of a quorum consisting of directors not at the time parties to the proceeding. Only one board member, Michael Bell, was not a party in these proceedings. Defendants cannot use 490.855 as the basis for indemnification. Section 490.855 is not the basis for Bradley & Riley’s claim.
OLS suggested at trial that INI’s president, Royce Bennett, hired Bradley & Riley in violation of INI’s Bylaws. Iowa law provides that:
*206[t]he office of president in itself confers no power to bind the corporation, but his power must be obtained from the articles of incorporation or a delegation of authority, directly or through the board of directors, expressly made or implied from the custom of doing business.
Ney v. Eastern Iowa Tel. Co., 162 Iowa 525, 144 N.W. 388, 385 (1913).
In this case, INI’s Bylaws expressly delegate the power to make contracts to its president. INI’s Bylaws provide that “the president is the principle executive officer and, subject to the control of the Board of Directors, shall in general supervise and control all of the business and affairs of the corporation.” INI Bylaws, Section 4.4. In addition, INI’s Bylaws expressly provide that its
[president, with the secretary or any other proper officer authorized by the Board of Directors, has the authority to sign contracts, except in cases where the signing and execution is expressly delegated to INI’s board of directors, the bylaws delegate the power to some other officer or agent, or the law requires the contract to be otherwise signed or executed.
INI Bylaws, Section 4.4.
There is no INI bylaw that expressly delegates the authority to retain counsel for litigation to an entity other than the president. Nor is there any other Iowa law to the contrary. Since Bradley & Riley already performed general corporate work for INI, Defendant Bennett orally retained Bradley & Riley to represent Defendants and INI. While there was no written contract to this effect, each written consent signed by Defendants acknowledged the dual representation and potential conflicts of interest. (Bradley & Riley Exhibits 8 and 18).
The issue here is the effect of the nature of the litigation. INI president Royce Bennett, on behalf of INI, contracted with Bradley & Riley for representation in litigation in which his conduct as president and director was at issue. OLS argues that Bradley & Riley’s dual representation of both INI and the Defendants constituted a conflict of interest and as such, Bradley & Riley should be denied payment.
Suit 1 was labeled a derivative suit by Judge Hibbs when she awarded summary judgment in favor of Defendants in Suit 2 on March 10, 2000. In doing so, Judge Hibbs characterized Suit 2 as duplicative of Suit 1, where plaintiffs signed a release of claims in exchange for a settlement. Until Judge Hibbs’ order for summary judgment in Suit 2, the parties classified Suit 1 as a dissenters’ rights suit. Hibbs relied on Cunningham v. Kartridg Pak Co., 332 N.W.2d 881, 883 (Iowa 1983), which held that any action by shareholders against the corporation or its directors is a derivative action unless the shareholder pleads specific harm in his or her individual capacity.
A derivative action is a unique judicial device by which those who hold the public franchise may seek redress in behalf of the corporation for wrongs done to it. Rowen v. LeMars Mut. Ins. Co., 230 N.W.2d 905, 916 (Iowa 1975). In a derivative action, the corporation is a nominal defendant and should take a strictly neutral part. State ex rel. Weede v. Bechtel, 244 Iowa 785, 56 N.W.2d 173, 200 (1952); Holden v. Construction Mach. Co., 202 N.W.2d 348, 367 (Iowa 1972). Shareholders in a derivative action seek recovery on behalf of the corporation, with any recovery awarded to the corporation. Meyer v. Fleming, 327 U.S. 161, 167, 66 S.Ct. 382, 90 L.Ed. 595 (1946); Holi-Rest, Inc. v. Treloar, 217 N.W.2d 517, 523 (Iowa 1974); 18 C.J.S Corporations § 397 (1990); Comment, Independent Representation for *207Corporate Defendants in Derivative Suits, 74 Yale L.J. 524 (1965)[hereinafter “Independent Representation in Derivative Suits”].
OLS is correct in noting that when a president, who can make decisions on behalf of a corporation, is also the defendant in a suit brought on behalf of the corporation, a potential conflict of interests is present. Rowen, 230 N.W.2d at 914. This potential conflict of interest is enough to disqualify counsel. Id. In Row-en, the Iowa Supreme Court noted that there was “considerable force” in the law firm’s argument that disqualification should await some inquiry into the merits of the action. Id. at 915. The Rowen court was concerned that if the action is without merit, the expense of independent counsel for the corporation would be unjustified. Id. But the court noted that fair inquiry into the merits of the claim may be prevented unless the corporation is represented at the outset by independent counsel. Id. Ultimately, the interests of the stockholders are better protected by requiring independent counsel, as it will assure that the merits of the action will not be obscured by a conflict of interest of corporate counsel. Id. This benefit justifies the cost. Id.
In Suit 1, the shareholders did not plead specific harm, so the action would seem to be derivative, yet the corporation did not receive any benefit. This litigation was only deemed derivative ex post-facto by the court. If this action was a derivative action, then Bradley & Riley could have been disqualified upon request by plaintiffs before the conclusion of the litigation under Rowen. Plaintiffs never petitioned for disqualification to the court during Suit 1 and when plaintiffs did so during Suit 2, Bradley & Riley voluntarily withdrew representation.
Because of the length of the delay by Plaintiffs before moving to disqualify Bradley & Riley, the Court will examine its standing to now raise the issue. Disqualification of counsel is an equitable remedy which may be barred by laches. Kluht v. Mitchell, 199 Iowa 1163, 199 N.W. 294, 295 (1924) (reversing a denial to hear a motion to disqualify counsel made at the outset of trial, as objecting attorney gave notice of intent to do so). The Seventh Circuit Court of Appeals has stated that “[t]he motion to disqualify counsel should be filed at the infancy of the litigation to rectify the evils of dual representation and to escape the bar of laches”. Cannon v. U.S. Acoustics, Corp., 398 F.Supp. 209, 213 n. 2 (N.D.Ill.1975), aff'd in part, rev’d in part, 532 F.2d 1118 (7th Cir.1976).
When a party delays for several years before motioning for disqualification, courts are less likely to grant the motion. Marco v. Dulles, 169 F.Supp. 622, 632 (S.D.N.Y.), appeal dismissed, 268 F.2d 192 (2d Cir.1959), overruled on other grounds, 496 F.2d 800, 806 (2d Cir.1974)(noting that motions to disqualify counsel are equitable in nature and should be made with “promptness and reasonable diligencé after the facts become known to it,” and thus rejecting a motion to disqualify counsel submitted more than 20 years after the cause of action was initiated). A motion for disqualification filed four years into a suit has also been denied. Milone v. English, 306 F.2d 814, 818 (D.C.Cir.1962) (rejecting, based upon Marco v. Dulles, a motion to disqualify counsel made four years after litigation commenced and after the settlement decree in a labor dispute).
Finding the bright line for “infancy” of the litigation becomes more difficult as the length of the delay decreases. One court has permitted a three-year delay when coupled with a lack of prejudice to the non-moving party. Emle Indus. Inc. v. Paten-*208tex, Inc., 478 F.2d 562, 574 (2d Cir.1973). Courts take different positions when the motion is filed close to the one year mark. See Lewis v. Shaffer Stores Co., 218 F.Supp. 238, 239 (S.D.N.Y.1963) (denying a motion to disqualify counsel for conflict of interest in a derivative suit because plaintiff delayed for almost a year before making such motion); Earl Scheib, Inc. v. Superior Court for Los Angeles County, 253 Cal.App.2d 703, 61 Cal.Rptr. 386, 390 (1967) (distinguishing Milone v. English and Marco v. Dulles and allowing a motion to disqualify counsel in a conflict of interest case where motion was filed less than one year after answer of the complaint by the firm). See also Independent Representation in Derivative Suits, supra, at 527, Henry Lee, Derivative Actions-Row-en v. LeMars Mutual Insurance Co.— Disqualification of Corporate Counsel and Appointment of Independent Counsel, 2 J. Corp. L. 174,178 n. 34 (1976).
While many factors can have an impact when considering a delayed motion to disqualify counsel, this Court does not feel it necessary to further examine the facts in this case. The parties have not cited and this Court is aware of no case that has dealt with disqualification of counsel after a case has been settled. The reason is obvious. It defies logic that a court would grant this equitable right at such a late date. The parties agreed to a mutually beneficial resolution of the dispute. To reopen the suit by allowing disqualification would be to void the settlement. In this case, Plaintiffs do not challenge the validity of the settlement; they seek to benefit from it while attacking the means by which they obtained it.
It is only because OLS is now required to pay Bradley & Riley that this issue is before the court. It is the conclusion of this Court that the time has passed for OLS to claim disqualification of Bradley & Riley. In accepting the confession of judgment, Plaintiffs implicitly acknowledged INI’s liabilities. This conclusion is consistent with the long-standing principle that “[e]quity aids the vigilant and not those who slumber on their rights”. Ramiller v. Ramiller, 236 Iowa 323, 332, 18 N.W.2d 622, 626 (1945); Willow Tree Invs. Inc. v. Wilhelm, 465 N.W.2d 849, 850 (Iowa 1991).
Even if all of the foregoing were not applicable, the denial of Bradley & Riley’s fees, in total or in part, does not necessarily follow. Disqualification at any point does not equate to a denial of fees. In Remen, the Supreme Court of Iowa declined to enjoin payment of any fees for services that the corporation had incurred. Rowen, 230 N.W.2d at 916. Additionally, while it is true that trustees have a panoply of powers above that of a debtor, in this case no innocent party is harmed by the payment of Bradley & Riley’s claim. See 11 U.S.C. § 544(b); In re Fordu, 209 B.R. 854, 863 (6th Cir. BAP 1997). For these reasons, the Court will allow Bradley & Riley’s proof of claim to be paid under the confirmed Chapter 11 plan.
INDEMNIFICATION OF DIRECTORS
Even if OLS had not waived arguments for disqualifying Bradley & Riley, on review of the entire record, the Court finds that Defendants were wholly successful on the merits in Suits 1 and 2. As such, INI, and OLS as its successor, are compelled to pay the directors’ legal fees pursuant to Iowa Code section 490.852. Section 490.852 reads:
Unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party because the director is or was a director of the corporation against *209reasonable expenses incurred by the director in connection with the proceeding.
Defendants are either present or former directors of INI and OLS does not assert that Defendants’ expenses were unreasonable. Normally, the defendant/director would make the claim for indemnification. See e.g., Rudebeck v. Paulson, 612 N.W.2d 450 (Minn.Ct.App.2000), Sherman v. American Water Heater Co., 50 S.W.3d 455 (Tenn.Ct.App.2001). While Defendants are not claiming indemnification directly, they do so de facto through Bradley & Riley, as payment of indemnification will be remitted to the firm. The result would be the same even if a different firm represented Defendants.
OLS argues that Defendants did not adhere to INI’s Bylaws regarding indemnification of officers. Iowa Code section 490.852 mandates indemnification unless limited by a corporation’s articles of incorporation. INI’s articles of incorporation do not limit the scope of Iowa Code section 490.852. Article VII(B) of INI’s Articles of Incorporation state that
[i]f the Iowa Business Corporation Act is amended after the effective date of these Articles to authorize the further elimination of limitation of the liability of directors, then the Lability of directors shall be eliminated to the full extent authorized by the Iowa Business Corporation Act, as so amended.
Iowa Code section 490.852 was in effect at the time INI’s Bylaws were created. Acts 1989 (73 G.A.) Ch. 288, § 100, eff. Dec. 31, 1989. Article VII(B) incorporates any future changes under the Iowa Business Incorporation Act regarding director liability into INI’s Articles of Incorporation. This implies that INI did not intend to deviate from Iowa law in regard to director liability. Hence, INI’s Articles of Incorporation do not limit Iowa Code section 490.852.
INI’s Bylaws also include a section on director indemnification. Section 5.1 of INI!s Bylaws proscribes a means by which an INI director may secure indemnification. In order for a director to obtain indemnification against any liability incurred in a legal proceeding, the board of directors must make a determination that the director met the standards of conduct within Section 5.1. Section 5.1 is not applicable here because Defendants did not incur any liability.
Section 490.852 of the Iowa Code was adopted from § 8.52 of the Model Business Corporation Act (“MBCA”). The purpose of statutes such as § 8.52 is to ensure that capable persons serve as officers, directors, employees, or agents of corporations by assuring that their reasonable legal expenses will be paid. Model Business Corp. Act § 8.52 cmt.(1984) (amended 1994), cited in American Bar Association, Changes in the Model Business Corporation Act — Amendments Pertaining to Indemnification and Advancements for Expenses, 49 Bus. Law. 741, 749 (1994) [hereinafter Changes in Model Act]; Mayer v. Executive Telecard Ltd., 705 A.2d 220, 222 (Del.Ch.1997).
The official comment to MBCA § 8.52 states that a defendant is “ ‘wholly successful’ only if the entire proceeding is disposed of on a basis which does not involve a finding of Lability.” Model Business Corp. Act § 8.52 cmt. (1984) (amended 1994), cited in Changes in Model Act, supra, at 763. “Liability” under the Iowa Code and the MBCA, is defined as the “obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding.” Iowa Code § 490.850(4); Model Bus. Corp. Act. § 8.50(5) (1984) (amended 1994): The comment to MBCA § 8.52 also notes that *210procedural defenses not related the merits qualify as “wholly successful”. Model Bus. Corp. Act § 8.52 cmt. (1984)(amended 1994), cited in Changes in Model Act, supra, at 763; Sherman, 50 S.W.3d at 461.
Moreover, the term “wholly successful” was added to deal with instances where a defendant was successful on some of the counts, or partially successful. This was a rejection of the state of Delaware’s allowance for indemnification upon some, but not all, of the claims. Model Bus. Corp. Act § 8.52 cmt. (1984) (amended 1994), cited in Changes in Model Act, supra, at 763; Merritt-Chapman & Scott Corp. v. Wolfson, 321 A.2d 138 (Del.Super.Ct.1974); Waskel v. Guaranty Nat’l Corp., 23 P.3d 1214, 1219 (Colo.Ct.App.2000).
When interpreting state statutes based on MCBA § 8.52, courts have held that being “wholly successful or otherwise” is dependent upon payment of a money judgment in the underlying litigation. Waskel, 23 P.3d at 1219; Waltuch v. Conticommodity Serv., Inc., 88 F.3d 87, 95-96 (2d Cir.1996), Safeway Stores, Inc. v. National Union Fire Ins. Co., 64 F.3d 1282, 1289-90 (9th Cir.1995) (holding that directors who admitted no liability and paid no money as part of the settlement were “successful” and thus entitled to mandatory indemnification).
Dismissal and settlement or dismissal with prejudice also constitute “wholly successful.” Sherman, 50 S.W.3d at 461 (holding that an officer that obtained dismissal of suit via settlement and did not incur any liability was “successful on the merits or otherwise” and therefore entitled to mandatory indemnification); Wisener v. Air Express Int’l Corp., 583 F.2d 579, 583 (2d Cir.1978) (holding that “success on the merits or otherwise” is broad enough to cover a termination of claims by agreement without any payment or assumption of liability); Galdi v. Berg, 359 F.Supp. 698, 701 (D.Del.1973) (holding that dismissal without prejudice did not fall within 8 Del.C. § 145(c)); B & B Inv. Club v. Kleinert’s Inc., 472 F.Supp. 787, 790 (E.D.Pa.1979).
Courts also do not make a distinction between the defense of suits brought by third parties and suits brought by or on behalf of the corporation. Waskel, 23 P.3d at 1219; MCI Telecomm. Corp. v. Wanzer, 1990 WL 91100, *8 (Del.Super.).
Lastly, the term “wholly successful” has nothing to do with moral exoneration. The only requirement is escape from adverse judgment. Waskel, 23 P.3d at 1219 (noting that the indemnification-seeking party’s lack of good faith is irrelevant to a “wholly successful” inquiry); Waltuch, 88 F.3d at 96, Landmark Land Co. v. Cone, 76 F.3d 553, 567 (4th Cir.1996); Fleischer v. Fed. Deposit Ins. Corp., 1998 WL 351572, *2 (D.Kan.).
In this case, plaintiffs dismissed their claims against Defendants in Suit 1. Summary judgment was awarded in Defendants’ favor in Suit 2. Defendants were sued in their capacity as directors of INI and did not incur any personal liability. Contrary to OLS’ assertion that defendants confessed judgment, it was INI that confessed judgment. While OLS’ expert testified that the directors are de facto the corporation and therefore liable, this is not a correct statement of the law. Plaintiffs accepted the settlement and released Defendants from any liability. As such, Defendants were “wholly successful”. This Court concludes that no showing has been made by OLS which allows it to avoid payment of its claim under the approved Chapter 11 Plan.
WHEREFORE, OLS has not met its burden under Bankruptcy Rule 3001(f). Bradley & Riley’s claim is valid.
*211FURTHER, Bradley & Riley’s claim in the amount of $201,449 is to be paid under the approved reorganization plan.
SO ORDERED this 22nd day of April, 2003. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493573/ | ORDER GRANTING BANK OF AMERICA’S MOTION FOR RELIEF FROM THE AUTOMATIC STAY AND DENYING CONFIRMATION
STEVEN H. FRIEDMAN, Bankruptcy Judge.
THIS CAUSE came on to be heard on May 5, 2003 upon Bank of America’s Motion for Relief from the Automatic Stay and upon Bank of America’s Objection to *264Confirmation of Debtor’s Chapter 13 Plan. On December 10, 2002, the debtors initiated the instant case by filing a voluntary petition under Chapter 13 of the Bankruptcy Code. On March 20, 2003, Bank of America filed the instant motion and objection to confirmation. Subsequently, on March 27, 2003, the debtors filed a response to Bank of America’s objection to confirmation.
Bank of America, N.A., Successor to Barnett Bank, N.A. (“Bank of America”) held a first mortgage on the debtors’ principal residence. Bank of America began a foreclosure action against the debtors in state court. On August 12, 2002, Bank of America obtained a summary final judgment of foreclosure which set a foreclosure sale of the debtors’ real property located at 965 18th South West, Vero Beach, Florida 32962 (the “Property”). The Property is legally described as:
LOT 21, BLOCK 85, VERO BEACH HIGHLANDS UNIT 5, ACCORDING TO THE PLAT THEREOF, AS RECORDED IN PLAT BOOK 8, PAGE 55, OF THE PUBLIC RECORDS OF INDIAN RIVER COUNTY, FLORIDA.
On September 30, 2002, a public sale of the Property was conducted, and Bank of America was the highest bidder. On that same date, the Clerk of the Circuit Court issued a Certificate of Sale. Thereafter, on October 11, 2002, the Clerk of the Circuit Court issued a Certificate of Title reflecting that title to the Property had vested in favor of Bank of America. Nearly two months later, on December 10, 2002, the debtors filed their chapter 13 petition. Included in the debtors’ First Amended Chapter 13 Plan is a provision to cure the default and reinstate their mortgage.
Section 1322(c)(1) of the Bankruptcy Code provides:
(c) Notwithstanding subsection (b)(2) and applicable non-bankruptcy law—
(1) a default with respect to, or that gave rise to, a lien on debtor’s principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable non-bankruptcy law ...
11 U.S.C. § 1322(c)(1). Several courts have examined the issue as to when, in the foreclosure process, property is deemed to be sold. In In re Jaar, 186 B.R. 148 (Bankr.M.D.Fla.1995), the bankruptcy court, pursuant to Section 1322(c)(1), examined .state law to determine when property is sold at a foreclosure sale. The court held that “in Florida, a residence is sold within the meaning of. Section 1322(c)(1) at the time that the certificate of sale is filed by the clerk of the state court.” Id. at 154. The court stated that “[ujsing the certificate of sale as the point in Florida where a debtor’s right to cure defaults and reinstate a mortgage terminates is consistent with the provisions of § 1322(c)(1).” Id.
Similarly, in In re Reid, 200 B.R. 265 (Bankr.S.D.Fla.1996), Bankruptcy Judge Mark adopted the reasoning of In re Jaar and held that where the debtor filed a Chapter 13 case after her residence was sold at foreclosure sale, but before a certificate of title was issued, the debtor’s property interest terminated before the bankruptcy case was filed. Thus, Judge Mark determined that “the debtor’s right to cure her mortgage terminated under Florida law prior to the filing of her Chapter 13 case.” Id. Likewise, the Eleventh Circuit held that the right to cure a default through a Chapter 13 plan in bankruptcy terminates as of the date of the sale of the mortgaged property. In re Smith, 85 F.3d 1555, 1560 (11th Cir.1996). The court in In re Smith reasoned that “the flexibility of a Chapter 13 plan does not ... extend to debts that have been satisfied through a foreclosure sale” and found it imperative “to strike a balance between *265the rights of a debtor under the bankruptcy laws and the legitimate economic interest in encouraging lenders to invest in home mortgages.” Id.
Sub judice, the Property was sold prior to the debtors’ filing the instant bankruptcy, and the Clerk of the Circuit Court issued both a Certifícate of Sale and a Certifícate of Title prior to the debtors’ filing of this case. Thus, pursuant to 11 U.S.C. § 1322(c)(1) and the above-mentioned case law, the debtors had no interest in the property when they filed for bankruptcy protection. Accordingly, the debtors could not cure the default and reinstate their mortgage. Notwithstanding the fact that the debtors had no interest in the Property upon the filing of this bankruptcy, and notwithstanding the debtors’ inclusion of a provision to cure and reinstate their mortgage in their First Amended Chapter 13 Plan, the Chapter 13 Trustee had no objection to confirmation of the debtors’ plan. The Court is at a loss to understand how the Trustee could acquiesce as to confirmation under these circumstances. The debtors clearly did not hold title to the Property as of the petition date, and thus, the plan as proposed is incapable of being confirmed.
Finally, on May 5, 2003, literally hours after the Court conducted this hearing and before the Court issued a ruling on the instant motion and objection, the debtors filed a Motion to Convert Chapter 13 Case to Chapter 7 Case (“Conversion Motion”) and a Withdrawal of First Amended Plan (“Withdrawal”) and Consent to Bankruptcy Court Granting Bank of America’s Motion for Stay Relief (“Consent to Stay Relief’). The Court views the filing of the Conversion Motion, Withdrawal and Consent to Stay Relief to be a desperate attempt to circumvent the Court’s rendition of a ruling on the referenced matters. Accordingly, it is
ORDERED that
(1) Bank of America’s Motion for Relief from the Automatic Stay is granted.
(2) Confirmation of the debtors’ First Amended Chapter 13 Plan is denied.
(3) In accordance with its request incorporated in its Motion for Relief from the Automatic Stay and based upon the proffer of counsel for Bank of America, Bank of America is awarded attorneys’ fees of $800.00 and costs of $75.00 which were incurred in the filing of its Motion for Relief from the Automatic Stay.
(4) The debtors’ Motion to Convert Chapter 13 Case to Chapter 7 Case and Withdrawal of First Amended Plan and Consent to Bankruptcy Court Granting Bank of America’s Motion for Stay Relief are deemed a nullity. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493574/ | MEMORANDUM OF DECISION
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on the Trustee’s application to compromise the estate’s claim against Universal Properties Group, Inc. and Nicholas Cambio (hereinafter collectively referred to as “Cambio”). Because I feel this Court presently is without jurisdiction, I am unable to act upon the Application. Assuming, however, for appellate purposes, that the matter is properly before me, the parties have provided absolutely no reason or justification to approve the proposed compromise, so I would deny the Application for that reason.
TRAVEL AND BACKGROUND
A four day trial on the merits was held in this Court on February 28, 29, March 1, and 2, 2000, to determine the ownership of 44 undeveloped lots in Edgartown, Massachusetts. The Trustee claimed a one-half interest in the property, while Cambio asserted sole title to the entire property. After the hearing was concluded, but while the ownership issue was under advisement by this Court, Cambio clandestinely sold the entire property for $3.9 million, kept the proceeds, and concealed the sale and the receipt of nearly four million dollars from the Trustee. When news of Cam-bio’s mischief1 surfaced, the Trustee requested and obtained a temporary restraining order. With his hand in the cookie jar up to his armpit, Cambio placed 1 million dollars in escrow pending a determination of the ownership of the subject property.
On January 8, 2001, I ruled in a twenty-two page opinion that Stephen Block was the owner of an undivided one-half interest in the real estate, and that said interest became property of the estate upon the filing of the petition. See Wallick v. Cambio (In re Block), 259 B.R. 498 (Bankr.D.R.I.2001). Pursuant to 11 U.S.C. § 363(h), the Trustee was authorized to sell the property, with the costs of sale to be borne equally by the parties. Block, 259 B.R. at 507.
On appeal of the January 2001 Order, the District Court heard oral arguments, reserved decision, and reportedly urged the parties to discuss settlement. At a mediation session before a magistrate judge, Cambio offered the Trustee $425,000 for his interest in the property, and a settlement report and recommendation was approved by the district judge. The report also provided that “the trustee is willing to petition the Bankruptcy Court for approval of said settlement if the settlement is recommended by Magistrate Judge Hagopian and said recommendation is accepted/approved by Chief Judge Ronald Lagueux.” See Settlement Report, p. 2.
The posture of this proceeding is: (1) an appeal is pending before the District Court; (2) no remand has been issued; (3) the District Court judge has accepted the Magistrate Judge’s recommendation to settle this claim for $425,000; and (4) the parties have returned to this Court for “approval” of the settlement.
The general rule is that once a notice of appeal has been filed, the lower court loses jurisdiction over the subject matter of the appeal. As stated in 9 Moore’s Federal Practice, 2d ed., ¶ 203.11, pp. 734-36:
*292“The filing of a timely and sufficient notice of appeal has the effect of immediately transferring jurisdiction from the district court to the court of appeals with respect to any matters involved in the appeal.... Thus, after a notice of appeal is timely filed, the district court has no power to vacate the judgment, or to grant the appellant’s motion to dismiss the action without prejudice, or to allow the filing of amended or supplemental pleadings.”
(Footnotes omitted.) [sic] Accord, Ruby v. Secretary of the U.S. Navy, 365 F.2d 385 (9th Cir.1966), en banc, cert. denied, 386 U.S. 1011, 87 S.Ct. 1358, 18 L.Ed.2d 442 (1967); Corn v. Guam Coral Co., 318 F.2d 622 (9th Cir.1963); Resnik v. La Paz Guest Ranch, 289 F.2d 814 (9th Cir.1961). This rule is clearly necessary to prevent the procedural chaos that would result if concurrent jurisdiction were permitted.
Bennett v. Gemmill (In re Combined Metals Reduction Co.), 557 F.2d 179, 200 (9th Cir.1977); see also Jusino v. Zayas, 875 F.2d 986, 990 (1st Cir.1989) (“Technically, the district court lacked jurisdiction at that time and, before granting reconsideration, should have issued a brief memorandum asking us to remand”); The Aetna Casualty & Surety Co. v. Markarian (In re Markarian), BAP No. MW 96-031, slip op. at 4-6, 33 Bankr.Ct.Dec. 603 (1st Cir. BAP November 20, 1998) (finding that once a case was on appeal, the bankruptcy court lacked jurisdiction to approve the parties’ settlement on the merits, or to dismiss the adversary proceeding). See 28 U.S.C. § 2106, which provides:
The Supreme Court or any other court of appellate jurisdiction may affirm, modify, vacate, set aside or reverse any judgment, decree, or order of a court lawfully brought before it for review, and may remand the cause and direct the entry of such appropriate judgment, decree, or order, or require such further proceedings to be had as may be just under the circumstances.
Put simply, before me is a proposed compromise agreed to by the parties, recommended by a magistrate judge, and approved by a district judge, all before the District Court — with no mandate or remand issued.
Having expressed my jurisdictional concerns, I nevertheless feel compelled to express my disagreement with the proposed settlement. My ruling as to ownership was based on findings clearly adverse to Cambio on all issues of fact, credibility, and law, and for Cambio to walk away with nearly $3.5 million, based on the record before this Court is difficult to imagine. See Block, n. 9, 259 B.R. at 507.
I found at the conclusion of the hearing on the merits, and am still convinced that Cambio and the Trustee are 50-50 partners in the proceeds of the sale by Cambio.
It is the practice of this and other bankruptcy courts, prior to approving a proposed settlement, to consider the following factors:
1. The probability of success in the litigation;
2. The difficulties, if any, to be encountered in the matter of collection;
3. The complexity of the litigation involved and the expense, inconvenience and delay necessarily attending it; and
4. The paramount interest of creditors and proper deference to their reasonable views.
In re Hydronic Enterprise, Inc., 58 B.R. 363, 365 (Bankr.D.R.I.1986). The application of each of these factors militates against the proposed settlement. The parties have revealed here only that the com*293promise figure of $425,000 is a “negotiated sum,” and that Cambio started “much lower than $425,000.” No doubt he did, but without some detail as to what new facts were presented to support the compromise, there is no way to assess its reasonableness, nor has any reason been given for me to depart from the findings and conclusions in my January 8, 2001 decision. For example, was the $3.9 million sale price considered? What weight was given to Nick Cambio’s testimony, which was rejected virtually in its entirety by this Court, see 259 B.R. at 507, or the specific findings that the majority of Mr. Cambio’s testimony was “neither persuasive nor credible”? Id. at 504. Did the parties acknowledge that Cambio’s claim for detrimental reliance damages, including development and marketing expenses and professional fees, was rejected because he presented absolutely no evidence to support this claim? Id. at 501, 506-07. As presented here, there is no indication of how the proposed number was arrived at. In the circumstances, I would deny the application to compromise, and refer the matter to the United States Attorney pursuant to 18 U.S.C. § 3057(a).
I also defer ruling on the fee application of Trustee’s counsel until the adversary proceeding is concluded, when the benefit of his services to the estate will be more ascertainable.
. The seriousness of Cambio's actions are described conservatively in this civil litigation, but may well amount to criminal conduct in another forum. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493575/ | MEMORANDUM OPINION
DOUGLAS O. TICE, Jr., Chief Judge.
Hearing was held May 21, 2002, on the motion of Pleasants Investments IV Limited Partnership to dismiss the chapter 11 case of Lands Stewards, L.C., and to transfer venue of the remaining jointly administered cases, or alternatively, to transfer venue of all of these cases, and related filings with respect to the motion.
At the conclusion of hearing the Court ruled from the bench that the motion would be denied. This opinion supplements the court’s bench ruling.
Findings of Fact.
Eaglehead at Lake Linganore is a planned unit real estate development with entitlement for over 5,000 residential dwellings units and commercial space, located on more than 3,700 acres surrounding a private 215-acre lake in Frederick, Maryland. Prior to the filing of this chapter 11 case, the fee title to a significant amount of the undeveloped land at Eagle-head was held by several of the debtors and Frank P. Ellis, IV.
Pleasants Investments IV Limited Partnership is currently the holder of a number of secured notes from several of the debtors and Mr. Ellis. In connection with amounts allegedly due and owing under its notes, Pleasants Investments demanded payment of $9,291,732.60 on or before April 19, 2002.
Recognizing the development potential for Eaglehead, Calvert Development SK Group, L.C. (Calvert SK), a Virginia based developer, conducted due diligence to assess the depth of the financial problems of certain of the debtors. Calvert SK determined that the financial problems could be resolved and sought a method to invest its expertise and resources to provide a turnaround of the project.
Calvert SK created debtor Land Stewards, L.C., on April 10, 2002, to acquire Eaglehead from its existing owners. Land Stewards is based in Richmond, Virginia. Its members are Calvert SK and Ellis, LLC. While Calvert SK and Land Stewards have overlapping equity interests, the ownership of the respective entities is not identical. Ellis, LLC, is a member of Land Stewards but has no ownership interest in Calvert SK.
Shortly after the creation of Land Stewards and immediately before the commencement of these bankruptcy cases, Land Stewards acquired substantially all of the equity interests of affiliated debtors Hamptons, LLC, Eaglehead Corporation, Linganore Development Group, Development Resources, Inc., Linganore Homes, Inc., and Pinehurst Vistas, LLC (collectively, together with Eagle Stream Development Associates, the Affiliate Debtors); Land Stewards is a general partner of Eagle Stream Development Associates. In addition, Land Stewards purchased substantially all of the real property at Eaglehead owned by Mr. Ellis.
In exchange, Land Stewards assumed substantially all of (a) the non-insider indebtedness of the Affiliate Debtors and (b) *367Mr. Ellis’ debt associated with the Eagle-head project.1
Upon purchasing the Eaglehead real property and controlling interests in the Affiliate Debtors, debtor Land Stewards and its principals decided to seek the protections of Bankruptcy Code Chapter 11. Accordingly, on April 18, 2002, debtors commenced their respective reorganization cases by filing in this court voluntary petitions for relief under chapter 11. On April 30, 2002, the court entered an order providing for the joint administration of these chapter 11 cases, and the debtors are operating as debtors-in-possession.
Debtors’ employees and their principal legal and business advisors are Virginia residents. Calvert SK’s legal and business advisors are located in Richmond, Virginia.
Pursuant to its acquisition agreements, Calvert SK has committed to provide $5,000,000.00 of capital to the debtors. At the time of the hearing on the instant motion, debtors had filed a motion for an order authorizing post-petition debtor-in-possession financing pursuant to 11 U.S.C. § 364 that seeks authority and approval of a $3,000,000.00 post-petition financing facility with Calvert SK.
Position of Parties.
In its motion, Pleasants Investments asks the court to (a) dismiss the bankruptcy case of Land Stewards based upon an allegation of bad faith filing under the “new debtor syndrome” and, thereafter, transfer the remaining cases of the Affiliate Debtors to the Bankruptcy Court for the District of Maryland based upon lack of jurisdiction or (b) exercise this court’s discretion to transfer all the pending bankruptcy cases to the Bankruptcy Court for the District of Maryland. Pleasants’ request for change of venue is based upon its assertion that Virginia had no connection with the Eaglehead project, its principals, or creditors, until April 17, 2002, the day before the petition date. The evidence submitted in support of the Pleasants motion at the hearing was the following documentary evidence:
(a) Articles of Organization dated April 16, 2002 for ELLIS, LLC; (b) Virginia State Corporation Commission inquiry dated April 24, 2002 — Land Stewards, L.C.; (c) Virginia State Corporation Commission inquiry dated April 24, 2002 — Calvert Development SK Group, L.C.; (d) Lands Stewards, L.C. Sum*368mary of Schedules, Schedules A-H, Statement of Financial Affairs; and (e) Land Stewards, L.C. — First Day papers (Voluntary Petition, Exhibit A to Voluntary Petition, List of Creditors Holding 20 Largest Unsecured Claims, List of Equity Security Holders, Declaration of Divisional Venue, Land Stewards, L.C.’s Consent of Majority of Class A Common Units dated April 17, 2002, Land Stewards, L.C.’s Consent of Sole Holder of Class B Common Units dated April 17, 2002, Calvert Development SK Group, L.C., Consent of All Holders of Membership Interests dated April 17, 2002).
In opposition to the motion, debtors’ position is that Pleasants failed to demonstrate (a) that the Land Stewards’ case was filed with the requisite subjective bad faith or (b) that any plan for reorganization is objectively futile. In addition, debtors assert, the facts and circumstances of these cases do not justify a venue transfer to the District of Maryland.
Discussion and Conclusions of Law.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).
I. The Court Finds That Dismissal of the Land Stewards Case is Neither Warranted Nor Justified.
Pleasants’ dismissal argument is without merit. It has failed to demonstrate either (a) that the Land Stewards’ case was filed with the requisite subjective bad faith or (b) that any plan for reorganization is objectively futile. Accordingly, under the standards prescribed by the United States Court of Appeals for the Fourth Circuit in Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir.1989), the relief requested in the motion must be denied. As the Fourth Circuit stated: “a stringent test is necessary to accommodate the various and conflicting interests of debtors, creditors, and the courts.... ” 886 F.2d at 701.
A. Subjective Bad Faith.
Pleasants asserts that “this is a classic example of ‘new debtor syndrome’ ” which demonstrates the subjective bad faith of Land Stewards. Mot. to Dismiss Case of Land Stewards, L.C., at ¶ 20. In support, Pleasants claims subjective bad faith is established because Land Stewards was formed “on the eve of bankruptcy with the sole business purpose of immediately filing for bankruptcy protection after first entering into a series of presently undisclosed transactions.... ” Mot. to Dismiss, at ¶ 20. The mere fact that a newly created entity has sought the protection of chapter 11 does “not suffice to establish the subjective lack of good faith that is a prerequisite to summary dismissal.” Carolin, 886 F.2d at 704. In fact, the Fourth Circuit held that the Bankruptcy Code manifestly sanctions, if not encourages, transactions like the Land Stewards’ transactions. Specifically, the Fourth Circuit stated:
By providing for interim' emergency relief, including an automatic stay of creditor self-help efforts, the bankruptcy code manifestly sanctions' — -indeed encourages — not only the eleventh-hour invocation of its protection, but the last minute appearance of new management armed with fresh capital. “It is quite common and not inappropriate for a debtor to use chapter 11 to obtain a respite from a creditor or creditors aggressively seeking to collect on a debt, even when execution is imminent ....” (citations omitted) In such circumstances, a last ditch attempt to forestall imminent financial collapse would obviously further the purposes of Chapter 11 if it ultimately facilitated the emergence *369of new investors offering an “infusion of capital” and previously unavailable “management expertise.”
Carolin, 886 F.2d at 703-04 (citing In re McStay, 82 B.R. 763, 768 (Bankr.E.D.Pa.1988) and Meadowbrook Investors’ Group v. Thirtieth Place, Inc. (In re Thirtieth Place, Inc.), 30 B.R. 503, 505 (9th Cir. BAP 1983)).
Calvert SK created Land Stewards as the vehicle to salvage the Eaglehead project. Evidence at hearing suggests that Land Stewards has the financial resources and business expertise to complete the development. This is the type of situation envisioned by the Fourth Circuit in Caro-lin.
A review of the transaction documents and the circumstances surrounding these cases do not demonstrate that the cases were filed in bad faith. Debtors assert, and the court finds, that they filed the bankruptcy cases to preserve the value of the debtors’ assets for the benefit of all creditors.
B. Objective Futility of Reorganization.
In addition to failing to establish subjective bad faith, Pleasants also fails on the objective element of the Fourth Circuit’s test. Pleasants did not present any evidence which demonstrates that a plan for reorganization of Land Stewards is objectively futile as required under Carolin.
In fact, the court heard evidence at hearing suggesting the likelihood that debtors may achieve a reorganization within a reasonable time.
The value of a debtor’s assets is a principal component of determining objective futility. See In re Dunes Hotel Assocs., 188 B.R. 162, 169-71 (Bankr.D.S.C.1995). Debtors presented undisputed evidence that the value of Debtors’ assets was more than $34,000,000.00 and that total non-insider indebtedness is approximately $15,158,000.00.
In summary, Pleasants has failed to demonstrate that this case was filed in subjective bad faith or that any plan for reorganization is objectively futile. Accordingly, there is no basis or justification to dismiss these cases.
II. The Court Finds No Basis For A Transfer of Venue.
In its motion, Pleasants also seeks to change the venue of these cases to the District of Maryland. Pleasants has the burden of proof on this motion by a preponderance of the evidence. See In re Campbell, 242 B.R. 740, 746 (Bankr.M.D.Fla.1999); In re Blumeyer, 224 B.R. 218, 221 (Bankr.M.D.Fla.1998) (citing In re Manville Forest Prods. Corp., 896 F.2d 1384, 1390-91 (2d Cir.1990); In re Jolly, 106 B.R. 299 (Bankr.M.D.Fla.1989)). Furthermore, in cases such as these where the existing venue is entirely appropriate, this Court exercises its power to transfer cases cautiously. In re Enron Corp., 274 B.R. 327, 342 (Bankr.S.D.N.Y.2002); In re Campbell, 242 B.R. at 746; A.R.E. Mfg. Co., Inc. v. D & M Nameplate, Inc. (In re A.R.E. Mfg. Co., Inc.), 124 B.R. 912, 914 (Bankr.M.D.Fla.1991); In re Walter, 47 B.R. 240, 241 (Bankr.M.D.Fla.1985).
In considering whether to transfer these cases, the factors to be considered are:
a. The proximity of creditors of every kind to the Court;
b. The proximity of the debtor to the Court;
c. The proximity of the witnesses necessary to the administration of the estate;
d. The location of the assets;
*370e. The economic administration of the estate; and
f. The necessity for ancillary administration if bankruptcy (liquidation) should result.
See In re Commonwealth Oil Ref. Co., 596 F.2d 1239, 1247 (5th Cir.1979), cert. denied, 444 U.S. 1045, 100 S.Ct. 732, 62 L.Ed.2d 731 (1980).
A. Economic Administration of the Estate Supports the Current Venue.
The most important consideration in deciding whether to transfer venue of these cases is where economic administration of a chapter 11 ease can best be accomplished. See In re Enron Corp., 274 B.R. at 348; In re Commonwealth Oil Ref. Co., 596 F.2d at 1247; In re Int'l Filter Corp., 33 B.R. 952, 956 (Bankr.S.D.N.Y.1983). While Pleasants asserts in its motion that the economic administration of these cases would benefit from a transfer to Maryland, it presented no evidence in support of this position.
The economic administration of a bankruptcy estate involves “the need to obtain post-petition financing, the need to obtain financing to fund reorganization, and the location of the sources of such financing and the management personnel in charge of obtaining it.” Huntington Nat’l Bank v. Indus. Pollution Control, Inc. (In re Indus. Pollution Control, Inc.), 137 B.R. 176, 182 (Bankr.W.D.Pa.1992); see also In re Int'l Filter Corp., 33 B.R. at 956; In re Enron Corp., 274 B.R. at 348; In re Garden Manor Assocs., L.P., 99 B.R. 551, 554-55 (Bankr.S.D.N.Y.1988) (court denied motion to transfer even when sole asset was located in another jurisdiction because ability to raise capital, renegotiate loan terms and likely sources of capital were located in current venue).
Land Stewards, a Virginia entity, and its majority member Calvert SK, a Virginia entity, have committed to obtain over $5,000,000.00 to fund debtors’ reorganization. Furthermore, debtors have filed a DIP financing motion, seeking the authority to obtain post-petition financing from Calvert SK in an amount not to exceed $3,000,000.00.
The personnel in charge of obtaining and funding the financing are all in Virginia. Calvert SK is represented by Richmond counsel. Robert C. Wilcox, the debtors’ designee and manager of the Land Stewards, and his business professionals and advisors are Virginia residents. All of debtors’ employees are Virginia residents. The ability to raise capital, renegotiate loan terms and likely sources of capital are all Virginia based, and, accordingly, Virginia is the more appropriate venue. In re Garden Manor Assocs., 99 B.R. at 555; see also In re Enron Corp., 274 B.R. at 348.
The preponderance of the evidence does not demonstrate that the economic administration of these estates is better in Maryland. In fact, the evidence suggests that the economic administration of these cases is better in Virginia.
B. Proximity of Creditors of Every Kind Supports Current Venue.
Debtors concede that most of the creditors are located in Maryland, a fact not determinative that the cases should be transferred to Maryland. See In re Indus. Pollution Control Inc., 137 B.R. at 181. A significant percentage of creditors are located elsewhere. For example, seven out of twenty of the largest unsecured creditors are located outside of Maryland. No creditor other than Pleasants has expressed a concern over the Virginia venue. In fact a number of creditors have expressed a desire for these cases to proceed in Virginia, and the court heard testimony from several of them.
*371Accordingly, Pleasants has failed to establish by a preponderance of the evidence that the proximity of creditors of every kind to the Maryland bankruptcy courts justifies transfer of these pending chapter 11 cases to Maryland.
C. Proximity of the Debtors to the Court Supports the Current Venue.
Debtor Land Stewards, a Virginia entity, submitted evidence that it possesses the necessary financial resources and the business expertise to develop the real property at Eaglehead. Robert C. Wilcox, a Virginia resident, is the designee of all the debtors. He has over 30 years experience developing large residential and commercial projects in Virginia and elsewhere. All of debtors’ employees are Virginia residents. While the Affiliate Debtors are Maryland entities, (a) they have no employees other than Virginia residents, and (b) they have been unable to obtain the necessary financial resources to develop the property at Eaglehead.
Pleasants failed to establish by a preponderance of the evidence that the proximity of the debtors to this court justifies the transfer of these pending chapter 11 cases to Maryland.
D. Proximity of Witnesses Necessary for the Administration of the Estates Supports the Current Venue.
The witnesses who are likely to testify in these cases in connection with the administration of these estates are Robert C. Wilcox, who resides in Virginia, and debtors’ consultant Frank P. Ellis, IV, who resides in Alabama and Maryland. At worst, Mr. Ellis is within an easy driving distance of this district, and he would not be greatly inconvenienced by having to testify in this district. These facts demonstrate that Virginia is the more appropriate venue. See In re Industrial Pollution Control Inc., 137 B.R. at 181.
Pleasants claims that its representatives will be witnesses in these proceedings. They may or may not. However, a mere shift of inconvenience from one party to another will not suffice for a change of venue pursuant to 28 U.S.C. § 1412. Russell, Bankruptcy Evidence Manual, 2002 Ed., § 301.33. In addition, given the close proximity of Maryland to Virginia, the court determines that Pleasants will not be greatly inconvenienced by the Virginia venue. See In re Indus. Pollution Control, Inc., 137 B.R. at 181.
E.Location of Assets Does Not By Itself Justify a Change of Venue.
Debtors concede that all of their real property is located in Maryland, and, if liquidation should result, the real property to be liquidated is in Maryland. However, given the goal of rehabilitation, this is not an important factor here and should not be the basis for the transfer of venue of these chapter 11 cases. See In re Commonwealth Oil Ref. Co., 596 F.2d 1239, 1248 (5th Cir.1979) (holding that the location of the assets is not as important where the ultimate goal is rehabilitation rather than liquidation).
In the Court’s opinion, a change of venue to Maryland is not warranted.
Conclusion
Pleasants has failed to demonstrate that: (a) these cases were filed with the requisite subjective bad faith, (b) any plan for reorganization is objectively futile, or (c) a change of venue is in the interest of justice or for the convenience of all parties.
Accordingly, for these reasons and the reasons stated from the bench on May 21, *3722002, the court will enter an order denying the motion.
. These transactions are described in a series of documents which were introduced into evidence. The documents include: (a) Letter of Intent and Addendum to LOI; (b) Assumption of Debt Agreement; (c) Closing Agreement; (d) Letter Agreement dated 4/17/02; (e) Consulting Agreement; (f) two Deeds; (g) Membership Interest Assignment Agreement (Pine-hurst); (h) Membership Interest Assignment Agreement (Hamptons); (i) Partnership Interest Assignment Agreement (LDG); (j) Partnership Interest Assignment Agreement (Eagle Stream) (without Exhibit A); (k) Stock Assignment Agreement (Eaglehead); (l) Stock Assignment Agreement (LHI); (m) Stock Assignment Agreement (DRI) (without Exhibit A); (n) Trademark Assignment (Pinehurst); (o) Trademark Assignment (Hamptons); (p) Trademark Assignment (Eagle Stream); (q) Trademark Assignment (LHI); (r) Trademark Assignment (Eaglehead); (s) Trademark Assignment (LDG); (t) Trademark Assignment (DRI); (u) Pledge and Security Agreement; (v) Purchase Money Deed of Trust and Security Agreement (Land Stewards); (w) Guaranty Agreement (Hamptons); (x) Guaranty Agreement (Pinehurst); (y) Guaranty Agreement (LDG); (z) Guaranty Agreement (LHI); (aa) Indemnity Deed of Trust and Security Agreement (Pinehurst); (bb) Indemnity Deed of Trust and Security Agreement (LDG); (cc) Indemnity Deed of Trust and Security Agreement (LHI); (dd) Indemnity Deed of Trust and Security Agreement (Hamptons); (ee) Guaranty Fee Agreement (LHI); (ff) Guaranty Fee Agreement (LDG); (gg) Guaranty Fee Agreement (Pinehurst); (hh) Guaranty Fee Agreement (Hamptons); and (ii) Operating Agreement of Land Stewards, L.C. (collectively, the "Transaction Documents”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493577/ | OPINION
LARRY LESSEN, Bankruptcy Judge.
This matter is before the Court on the Plaintiffs’ Complaint to Determine Dis-chargeability of Debt and Defendant’s Answer thereto. A trial was held on March 31, 2003.
Sometime in the later 1990s — the record isn’t clear when and the date doesn’t matter — Timothy J. Pistorius and his son Peter (collectively “Plaintiffs”) entered into a year-to-year lease whereby they rented a farm with tillable acres and hog facilities near Blue Mound, Illinois, from James and Charlene Beckett. Plaintiffs decided to set up a hog operation on the rented farm and, in or about 1998, Plaintiffs, Ronald L. DeOrnellas (“Defendant”), and Richard L. Stiltz entered into a verbal agreement to form a partnership to own and run a hog operation. Defendant and Mr. Stiltz contributed some hogs; Plaintiffs bought additional hogs and equipment and the partnership known as Rosedale Pork Farm (“Rosedale” or “the partnership”) was born. Plaintiffs were to own a 70% interest in the partnership; Mr. Stiltz and the Defendant were to each own a 15% interest. Robert DeOrnellas, Defendant’s father, was hired as farm manager and came to live on site. Defendant later moved into the same house.
The partnership leased certain equipment (a farrowing house, a grinder/mixer, a vacuum tank, trailers) from Telemark for use in the hog operation. Plaintiffs sold corn to the partnership for use as feed for the hogs. The partnership utilized an *452American Express credit card for making smaller purchases.
On August 1, 2000, the Becketts terminated the farm lease as of January 18, 2001. The Becketts expressed their dissatisfaction with the manner in which the lessees were handling manure disposal, pest control, and disposal of carcasses. The evidence at trial indicated that the herd was at this point affected with a deadly and insidious virus known as Porcine Reproductive and Respiratory Syndrome, or PRRS, and the testimony indicated that there was a consequent high mortality rate. Following receipt of notice of termination of the lease, the partners began looking to buy or lease another farm or facility for the hog operation, but were initially unsuccessful. The hogs remained on the Beckett property until the fall of 2001.
In March, 2001, Mr. Stiltz requested and received the partnership’s financial records from the Plaintiffs. In April, 2001, Defendant and Mr. Stiltz stopped using the partnership checking account at the State Bank of Blue Mound and instead began depositing the partnership proceeds in Farmers State Bank & Trust of Jacksonville, Illinois. On July 23, 2001, Plaintiffs filed suit in state court against Defendant, Mr. Stiltz and Rosedale Pork Farm for damages and for an accounting.
In September, 2001, Robert DeOrnellas purchased a building site with hog barns near Lincoln, Illinois. In September and October, 2001, the livestock owned by the partnership were moved from the Beckett farm near Blue Mound to the Lincoln site by Defendant and his father. Defendant subsequently closed the account at Farmers State Bank & Trust in Jacksonville and opened an account at Illini Bank in Lincoln.
By this point, the PRRS virus was decimating the herd and things went from bad to worse. Defendant filed his voluntary petition in bankruptcy on May 6, 2002. Plaintiffs filed their adversary action on August 1, 2002.
The adversary complaint includes a number of factual allegations which Plaintiffs contend merit finding Defendant’s debt to Plaintiffs nondischargeable. In fact, Plaintiffs’ Complaint alleges facts which could give rise to causes of action under provisions of 11 U.S.C. § 523(a)(2)(A), § 523(a)(4), and § 523(a)(6). However, the Complaint only refers to Section 523 without designating any specific subsection. Defendant’s pretrial statement refers only to 11 U.S.C. § 523(a)(4); Plaintiffs’ pretrial statement refers only to 11 U.S.C. § 523(a)(4) and § 523(a)(6).
Section 523(a)(2)(A) of the Bankruptcy Code provides that a discharge in bankruptcy does not discharge an individual debtor from any debt for money, property, or services to the extent obtained by false pretenses, a false representation, or actual fraud. 11 U.S.C. § 523(a)(2)(A). In order for a plaintiff to prevail under § 523(a)(2)(A), he or she must prove that (i) the debtor made false statements which he knew to be false, or which were made with such reckless disregard for the truth as to constitute willful misrepresentations;
(ii) the debtor possessed the requisite scienter, i.e. he actually intended to deceive the plaintiff, and (iii) to his detriment, the plaintiff justifiably relied on the representations. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 446, 133 L.Ed.2d 351 (1995); In re Mayer, 51 F.3d 670, 673 (7th Cir.1995), cert. denied 516 U.S. 1008, 116 S.Ct. 563, 133 L.Ed.2d 488 (1995); In re Sheridan, 57 F.3d 627, 635 (7th Cir.1995); In re Scarlata, 979 F.2d 521, 525 (7th Cir.1992). The plaintiff must prove each element by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, *453286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Section 523(a)(4) of the Bankruptcy Code provides that a discharge in bankruptcy does not discharge an individual debtor from any debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. In order for a plaintiff to prevail under § 523(a)(4), he must prove either (i) that the debtor committed fraud or defalcation while acting as a fiduciary, (ii) that the debtor is guilty of embezzlement, or (in) that the debtor is guilty of larceny. Again, a plaintiff must prove the case by a preponderance of the evidence. Id.
Under § 523(a)(6), a discharge in bankruptcy does not discharge a debtor from a debt for “willful and malicious injury by a debtor to another entity or property of another entity.” 11 U.S.C. § 523(a)(6). Under the Supreme Court’s decision in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), in order for a debt to be nondischargeable under this provision, it must be a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Discussing the standard to be applied in cases involving conversion of collateral under § 523(a)(6) after Kawaauhau, the court in In re Kidd, 219 B.R. 278, 285 (Bankr.D.Mont.1998), stated:
[A] creditor, in order to prevail under § 523(a)(6), must demonstrate by a preponderance of the evidence, that the debtor desired to cause the injury complained of, or that the debtor believes that the consequences were substantially certain to result from the debtors (sic) acts. In other words, in the case of a conversion, a creditor must show that a debtor, when converting collateral, did so with the specific intent of depriving the creditor of its collateral or did so knowing, with substantial certainty, that the creditor would be harmed by the conversion. This subjective test focuses on whether the injury was in fact anticipated by the debtor and thus insulates the innocent collateral conversions from non-dischargeability under § 523(a)(6).
Though the standard in these cases may have changed, it remains clear that each case must be determined on its unique facts. Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934); In re Endicott, 254 B.R. 471 (Bankr.D.Idaho 2000). Again, the plaintiff must prove each element by a preponderance of the evidence. Grogan v. Garner, supra.
First, Plaintiffs contend that the Defendant sold a feed grinder/mixer which was owned by Telemark and leased to Rosedale and that Defendant failed to apply the proceeds of the sale to the lease. Plaintiff contends that such sale constitutes actual fraud and also constitute embezzlement, larceny, and defalcation while acting as a fiduciary of Rosedale and its partners.
At trial, Defendant testified that he sold the grinder/mixer in 2001 for $1,500 and that the proceeds were deposited in the Ulini Bank account and used to pay partnership expenses. Defendant also testified that he had the permission of Telemark representative Carla Mickey (sp?) to do so. Defendant’s testimony was credible was unrebutted, and the burden of proof rests with the Plaintiffs. Accordingly, Defendant prevails on this point.
Plaintiffs next contend that, while in control of operations of Rosedale, Defendant failed to maintain sufficient records of the livestock owned by Rosedale and that he commingled the partnership livestock with that owned by Defendant personally so that it became impossible to determine which animals belonged to Rosedale, all in violation of his fiduciary duty to Rosedale.
*454Defendant testified that at all times the ownership of all of the hogs in his care was discernible by National Swine Registry ear notches; hence, the physical commingling of hogs caused no confusion and resulted in no actual commingling of partnership and personally-owned livestock. Again, Defendant’s testimony was credible and unrebutted. Plaintiffs failed to meet their burden of proof. Accordingly, Defendant prevails on this point.
Plaintiffs next contend that Defendant reinstated a canceled American Express credit card formerly used by the. partnership and continued to use the card without authority and incurred debts which he refused to pay.
Defendant concedes that he used the American Express card in September, 2001; however, he contends that the purchases were made on behalf of the partnership, ie. to move the herd to Lincoln from Blue Mound. The documentary evidence indicates that the account was charged 22 times at gas stations between Blue Mound and Lincoln for a total of $702.48. Defendant denies any knowledge that the account was closed and he denies reinstating the card.
Contentions that Defendant reinstated a canceled card and that he changed the billing address on the account in order to conceal his ongoing fraudulent activity were simply not proven. It was also not shown that any charges to the account were for other than partnership purposes. The circumstantial evidence certainly supports the Defendant’s position. Accordingly, Defendant prevails on this point.
Plaintiffs contend in their Complaint that Defendant sold or converted an Allis Chalmers tractor owned by Timothy Pisto-rius. No evidence or testimony was presented; hence, Defendant prevails on this point.
Plaintiffs further assert that Defendant sold animals belonging to Rosedale for cash and failed to deposit the proceeds; rather, he converted the proceeds to his own use. Again, there was no evidence or testimony presented on this point.
Plaintiffs next allege that, in April, 2001, Defendant and Mr. Stiltz abandoned the Rosedale checking account at State Bank of Blue Mound and thereafter deposited proceeds from sales of hogs into a joint personal account of their own use. Plaintiffs further assert that no financial information was subsequently provided to the Plaintiffs.
Defendant testified that he had no signing authority on the account at State Bank of Blue Mound. He also testified- — and that testimony was unrebutted — that Timothy Pistorius wanted to close the account at State Bank of Blue Mound, whereupon Defendant opened the account at Farmers & Merchants State'Bank of Jacksonville. Although the argument has been repeatedly proffered, there has been no evidence offered which indicates that partnership funds were used for personal purposes. Again, Defendant’s testimony provided a plausible explanation for his actions in opening a new account, and Plaintiffs provided very little to rebut this explanation.
Finally, Plaintiffs contend that, from April 27, 2001, to October 10, 2001, Defendant withdrew funds in excess of $13,600 from the partnership account for his own use. Again, Plaintiffs failed to offer evidence at trial to support this contention. Accordingly, Defendant prevails on this issue.
During the trial, the Court heard a great deal from Plaintiffs about their dissatisfaction with how Defendant, his father, and Mr. Stiltz ran the business. Inexplicably, Plaintiffs — who were, after all, 70% owners — never seemed to be very interested in monitoring operations of Rosedale until it *455became pretty clear that the venture was failing. Defendant, his father, and Mr. Stiltz may have been tending to the daily operations of Rosedale, but they were not “in control” of the partnership to the exclusion of Plaintiffs, as Plaintiffs have repeatedly suggested. Plaintiffs failed to exercise various statutory rights under the Uniform Partnership Act of the State of Illinois, 805 ILCS 205 et seq. Plaintiffs were never denied physical access to the premises, in Blue Mound' or in Lincoln; Plaintiffs were always aware of where the hogs were. Plaintiffs never sought to remove the hogs from the Lincoln situs. By the time the hogs were moved to Lincoln, the herd was so infected with PRRS that the partnership venture was languishing. It is clear to the Court that the partnership’s losses came about primarily as a result of the PRRS epidemic rather than from mismanagement or self-dealing on the part of Defendant. Plaintiffs’ view appears be that it was Defendant’s responsibility to protect Plaintiffs’ investment and, because Defendant was more involved in daily operations than Plaintiffs, Plaintiffs could take no action to look out for their own investment in the venture and hold Defendant liable for losses because he was running the daily operation. That position is untenable.
For the reasons set forth above, the Court finds that Plaintiffs have failed to meet their burden of proof and that the debts subject to this adversary proceed are dischargeable in Defendant’s bankruptcy. The Complaint is dismissed.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
ORDER
For the reasons set forth in an Opinion entered this day,
IT IS HEREBY ORDERED that the debts subject to this adversary proceeding be and are hereby declared dischargeable in Defendant’s bankruptcy proceeding.
IT IS FURTHER ORDERED that Plaintiffs’ Complaint be and is hereby dismissed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493578/ | DREHER, Bankruptcy Judge.
This is an appeal from an order of the bankruptcy court denying Debtor’s motion to assume a real property lease, and from a subsequent order denying the motions of Debtor and Citizens National Bank of Greater St. Louis to alter or amend the judgment. For the reasons stated below we reverse and remand.
FACTS
Debtor, Crystalin, L.L.C (“Debtor”) is a limited liability company formed for the purpose of purchasing and operating Crystal Highlands Golf Course (“the golf course”). The golf course is located in Jefferson County, Missouri.
The golf course was built on land originally owned by the Union Pacific Railway (“Union Pacific”). In the early 1980s, Union Pacific formed Appellee, Selma Properties Inc. (“Selma”), which took title to the land and built an exclusive resort and meeting facility on part of the land. The facility was to be used for Union Pacific business activities. In the late 1980s, Union Pacific decided the facility needed an adjacent golf course which could be used by guests who visited the facility. Because Selma could not fully utilize the course, the development of the golf course was structured through a long-term lease of the real property to a golf course developer who would be responsible for building and maintaining a public course which Selma could also use.
On June 1, 1987, Selma entered into a Lease Agreement (“the Lease”) with Crystal Highlands Golf Club, Inc (“CHGCI”). Pursuant to the Lease, CHGCI was required to build, operate and maintain an 18-hole public golf course on the leased property. The term of the Lease expires on May 31, 2027.
Section 1 of the Lease (“the quality standards”) provides, in part, that:
[The] golf course shall be suitable for Championship play and shall be maintained on a level equivalent to other first rate courses in the St. Louis, Missouri area.
#
The Facilities shall be constructed, maintained, operated and renewed in strict conformity with and in accordance with current guidelines of the USGA and PGA or successor organizations.1
*460Section 2(a) of the Lease granted Selma free access and use of the golf course for 20 persons per day, subject to certain exceptions for tournament and league play. There was no monthly rental payment; instead the lessee was obliged to pay Selma 10% of lessee’s “net income” as that term was defined in the Lease. The parties agree that the golf course has never had any “net income” that would have triggered an obligation to pay monetary rent. However, the Lease contained a number of other covenants, including the lessee’s obligation to insure the property, pay real estate taxes, and comply with the quality standards. The Lease provided that failure to comply with any of these obligations would constitute an event of default, provided such default was not cured within the time period set forth in the Lease.
In Section 14 of the Lease, Selma also granted an option to purchase the leased property at any time during the term of the Lease at a price established by an appraisal process set forth in the Lease. The process involved the parties agreeing to an appraiser, or by each party selecting its own appraiser, with a third to be selected by the first two, and required that “[the]... appraisers ... be instructed to appraise the Premises as if vacant and to base the appraisal upon the value of comparable unimproved property ... ”. The Lease further provided that if the lessee purchased the property at the appraised price, Selma must transfer title to the lessee by quitclaim deed; provided, however, that the lessee’s covenants, including the covenant of continuing operation in accordance with the quality standards and the grant of Selma’s use rights under Section 2(a), would run with the land until May 31, 2027. This section further stated that the breach of any of these covenants would entitle Selina to repurchase the property.
CHGCI designed and constructed the golf course. The course opened for play in the fall of 1988. In February 1996, Selma consented to the assignment by CHGCI of its rights and interest in the Lease to Healthquarters of Crystal Highlands, LLC (“Healthquarters”). Debtor is an affiliate of Healthquarters. Healthquarters borrowed the funds to acquire CHGCI’s interest in the Lease from a local bank. Three years later, on February 26, 1999, Debtor obtained a $4.5 million loan from Citizens National Bank of Greater St. Louis (“CNB”). The Lease was assigned to Debtor with Selma’s consent. Debtor then granted CNB a security interest in Debt- or’s leasehold interest in the golf course, as well as a deed of trust on Incline Village, a second golf course owned by Healthquarters. The loan proceeds were used to pay off the existing indebtedness on the golf course and to finance certain improvements to both golf courses. In addition to a Leasehold Deed of Trust from Debtor to CNB, Debtor, Selma, and CNB also signed a Landlord’s Waiver and Consent Agreement which provides, in relevant part, as follows:
2. Mortgage.... Borrower [Debtor] and Lender [CNB] upon the occurrence of an event of default under the Financing Agreements shall be able to sell, assign, transfer or otherwise convey Borrower’s interest in the Lease to any third party, with the prior written consent of Landlord [Selma], which such consent shall not be unreasonably withheld or delayed, provided that all monetary defaults under the Lease are either cured or provided for by an approved third party and that the transferee, purchaser, or assignee assumes the obli*461gations of the Borrower under the Lease, effective as of the date of the transfer and attorns to Landlord.
* * * * * *
6. Lender’s Right to Cure and Notice. Landlord hereby covenants and agrees that it will give written notice to Lender of the occurrence of any default or event of default by Borrower under the Lease at the same time Landlord gives such notice to Borrower and Lender shall have the right, but not the obligation, to cure any such default within thirty (30) days after Lender’s receipt of notice from the Landlord; ....
The golf course has never done well. Between 1988 and 2001 revenue declined steadily, the result of increasing competition in public courses in the area and a highway improvement project that has hindered access to the course. While the course was under professional management during the 2002 golf season, revenue showed some improvement, but the course continued to experience consistent net losses. In 2001, for example, it lost over $600,000; and by 2001, the course was burdened with approximately $4.5 million in debt, approximately $4 million owed to CNB and about $500,000 owed to a second commercial lender. Although Debtor sporadically paid down long term debt, finances were so poor that CNB had to reimburse Selma for its payment of real estate taxes in 2001 and 2002 in the sum of $40,000, and to also pay $20,000 to the professional manager hired to operate the course in 2002. While the experts for each side differed as to the amount of deferred maintenance on the course, they both agreed that the golf course needed some attention. The estimates of costs to improve the course ranged from $350,000 to $900,000.
In spite of this poor economic picture, at least two offers to purchase Debtor’s leasehold interest in the golf course had been made. One group of investors approached Selma in the fall of 2001 and offered to purchase the course for $1.8 million. In the Spring of 2002, the company hired to manage the golf course expressed interest in purchasing the golf course for $2.1 million. Neither expression of interest was pursued because, at least in part, the potential purchasers needed assurances that the Lease was not in default and Selma would not provide that assurance.
The relationship between Debtor and Selma was somewhat acrimonious from the start. On numerous occasions, Selma expressed dissatisfaction with the conditions on the course and called attention to the quality standards. From time to time, Debtor did not timely pay insurance premiums or real estate taxes as they came due. These defaults, however, were always cured and Debtor attempted to satisfy Selma’s complaints by improving operations and making improvements to the course. Nonetheless, the matter came to a head when, by letter dated January 17, 2002, Selma gave written notice that events of default had occurred under the Lease. The specific alleged defaults were: 1) nonpayment of the 2000 and 2001 real estate taxes; 2) unauthorized assignment of the Lease; 3) nonpayment of rent; 4) failure to provide a certificate of insurance; and 5) inadequate maintenance and operation of the golf course in violation of the quality standards.
On February 22, 2002, Debtor notified Selma that Debtor was exercising its option to purchase the property. On the same day, CNB also purported to do so. Debtor and CNB subsequently hired an appraiser and notified Selma of the selection. Selma, however, refused to appoint an appraiser. It took the position that Debtor was in default under the Lease, as *462a consequence of which a purchase was futile because of Selma’s right under the Lease to repurchase the property if Debt- or was in default.
On February 22, 2002, Debtor also filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. Debt- ■ or continued in possession of the course throughout the 2002 golf season and hired a professional manager to improve conditions and performance at the course. The manager oversaw operations, improved the condition of the golf course, and attempted to raise revenues and operate at a profit. Throughout the reorganization process Debtor contended that its reorganization plan consisted of selling the course, either to CNB or to a third party, and not continuing operations.
On May 3, 2002, Debtor filed a motion to assume the Lease (“the motion to assume”) pursuant to Section 365 of the Bankruptcy Code. Debtor argued that it was not in default under the Lease and that, in its business judgment, assumption was beneficial to the estate. It made this judgment based, in part, on the fact that the Lease contained a favorable monetary rent provision and an extremely favorable purchase option which Debtor had exercised. Selma opposed that motion. It argued that there were defaults under the Lease which were not capable of being cured and that Debtor could not provide adequate assurance of cure and assurance of future performance under the Lease. Before the commencement of a lengthy evidentiary hearing, Selma acknowledged that there were no defaults under the Lease other than the alleged failure of the Debtor to meet the quality standards. The remaining defaults either never existed or were cured within the allowed time period.
The bankruptcy court announced its decision from the bench on October 8, 2002, and issued its order on October 30, 2002. It held that Debtor was not in default under the Lease. The bankruptcy court assumed that there were maintenance and operational lapses at the golf course, but further held that the condition of the course was no worse than other high quality, championship type courses in the St. Louis area. The course was “suitable for championship play and ... maintained on a level equivalent to other first rate courses in the St. Louis, Missouri area.” This finding has not been challenged on appeal.
The bankruptcy court went on, however, to deny Debtor’s motion to assume because, in the court’s view, assumption was not in Debtor’s best interest. The bankruptcy court based its rejection of Debtor’s business judgment decision on essentially three findings: 1) there were not then any pending offers to purchase or assign the Lease; 2) Debtor did not have sufficient assets to fund needed repairs, capital improvements and maintenance requirements at the golf course, and 3) the Lease was not a favorable asset in the bankruptcy sense, nor an attractive asset to third parties.
Debtor timely moved under Federal Rule of Bankruptcy Procedure 9023, incorporating Federal Rule of Civil Procedure 59(e), to alter or amend the judgment, arguing that circumstances had changed. In addition to arguing that the bankruptcy court had improperly applied the business judgment test, Debtor urged that, in the absence of a finding that Debtor was in default under the Lease, Selma no longer had a right to refuse to move forward with the appraisal process. Debtor further argued that, at the suggestion of Selma’s counsel, this very issue had been deferred subject to a further look once the default issue was resolved. Debtor pointed out that during trial Debtor had urged the *463court to require Selma to appoint its appraiser. To this, Selma’s counsel said:
That we ought to find out if this lease is going to be assumed or rejected. That’s what the debtor asked for in its motion ... We don’t think it’s appropriate at this time that we’d ask that this request for interim relief, at this time at least, be denied until the parties could brief it or do whatever the debtor wants to do in a subsequent motion, to have it then properly before the court and give us a chance to respond ...
Debtor further pointed out that at trial CNB had made clear its willingness to fund the cure of any defaults the court found and to purchase or finance the purchase of the golf course in order to protect the value of its collateral. To make clear CNB’s affirmance of that position, the Debtor appended to its motion a written offer dated October 11, 2002, from CNB to finance Debtor’s purchase of the golf course from Selma at the value determined by the appraisers. This financing commitment was contingent only on Debtor’s agreement to sell the golf course and Incline Village to CNB for $4,288,465.43, the amount of CNB’s secured claim in the case plus $100,000.
On November 22, 2002, the bankruptcy court denied the motion. Both CNB and Debtor (“Appellants”) appeal the October 30 order and the November 22 order.
DECISION
I. STANDARD OF REVIEW
We review the bankruptcy court’s conclusions of law de novo and its findings of fact for clear error. Tax 58 v. Froehle (In re Froehle), 286 B.R. 94, 96 (8th Cir. BAP 2002). “A finding [of fact] is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Waterman v. Ditto (In re Waterman), 248 B.R. 567, 570 (8th Cir. BAP 2000) (citing Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)).
In this appeal, the determination of the proper legal standard to be applied to Debtor’s motion to assume the Lease is a legal conclusion, which we review de novo. Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, 1047 (4th Cir.1985). The bankruptcy court’s determination that assumption of the lease was not in the best interest of the estate is a finding of fact reviewed under the clearly erroneous standard. See Four B. Corp. v. Food Barn Stores, Inc. (In re Food Barn Stores, Inc.), 107 F.3d 558, 562 (8th Cir.1997). The bankruptcy court’s denial of a motion pursuant to Rule 59(e) is reviewed for abuse of discretion. Concordia College Corp. v. W.R. Grace & Co., 999 F.2d 326, 330 (8th Cir.1993).
II. THE BUSINESS JUDGMENT TEST
The first issue raised by Appellants is whether the bankruptcy court applied the proper test in denying Debtor’s motion to assume. We conclude that the bankruptcy court applied the proper test. Section 365(a) provides that, with exceptions not applicable here, “the trustee [or debtor-in-possession], subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a). In deciding whether to approve a debtor-in-possession’s motion to assume, reject, or assign an unexpired lease or executory contract, the bankruptcy court used a business judgment test. See Food Barn, 107 F.3d at 566 n. 16. This test is not an onerous one and does not require the *464bankruptcy court to place “itself in the position of the trustee or debtor-in-possession and determining whether assuming the [lease] would be a good business decision or a bad one.” Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir.1993), cert. dism., 511 U.S. 1026, 114 S.Ct. 1418, 128 L.Ed.2d 88 (1994). In the Eighth Circuit, the business judgment test consists of two parts. Initially, the assumption of a lease must be in the “exercise of a sound business judgment” showing benefit to the estate. In re Global Int’l Airways, 35 B.R. 881, 886 (Bankr.W.D.Mo.1983). It is Debtor’s burden to prove that lease assumption benefits the estate. Id. at 888.
As stated in Orion Pictures, in reviewing a trustee’s or debtor-in-possession’s decision to assume an executory contract, then, a bankruptcy court sits as an overseer of the wisdom with which the bankruptcy estate’s property is being managed by the trustee or debtor-in-possession, and not, as it does in other circumstances, as the arbiter of disputes between creditors and the estate. Although the court uses a business judgment test in deciding whether to approve a trustee’s motion to assume, reject, or assign an unexpired lease or executory contract, this entails a determination that the transaction is in the best interest of the estate.
In re Tama Beef Packing, Inc., 277 B.R. 407 (Bankr.N.D.Iowa 2002)(citing Nostas Assocs. v. Costich (In re Klein Sleep Prods., Inc.), 78 F.3d 18, 25 (2d Cir.1996))(“Th[e] decision [to allow a debtor to assume an unexpired lease] required a judicial finding — up-front—that it was in the best interests of the estate (and the unsecured creditors) for the debtor to assume the lease .... ”). “Where the trustee’s request is not manifestly unreasonable or made in bad faith, the court should normally grant approval ‘as long as [the proposed action] appears to enhance [the] debtor’s estate.” Food Barn, 107 F.3d at 566 n. 16, (quoting Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309 (5th Cir.1985), (emphasis added)).
If the initial test is met, the bankruptcy court should not interfere with the trustee or debtor-in-possession’s business judgment “except upon a finding of bad faith or gross abuse of their ‘business discretion.’ ” Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d at 1047. If Debt- or cannot show a benefit to the estate, the bankruptcy court does not need to make a finding of bad faith or gross abuse of discretion. Food Barn, 107 F.3d at 558 n. 16. Although the bankruptcy court found no material default in the Lease, it is within the discretion of the bankruptcy court to approve or disapprove assumption of an unexpired lease and the bankruptcy court may deny a motion to assume an unexpired lease where Debtor fails to demonstrate a benefit to the estate even if the Lease is not in default. See, e.g., In re Gateway Apparel, Inc., 210 B.R. 567, 571 (Bankr.E.D.Mo.1997) (“Gateway Apparel /”) (denying motion to assume unexpired real property leases which were not in default).
In this case, Selma never alleged that Debtor’s decision to assume was made in bad faith or constituted a gross abuse of discretion. The only issue before the bankruptcy court was whether assumption was likely to benefit the estate. Debtor argued that assumption would lead to sale and a quick end to Debtor’s chapter 11. At the time of the evidentiary hearing, however, no sale was pending and all offers to purchase were withdrawn. Nevertheless, the evidence was also clear that Selma’s insistence as to the existence of a default was preventing CNB, and possibly others, from making an offer prior to the hearing.
*465As a result of the bankruptcy court’s finding that no default existed, we need not reach the issue of whether the bankruptcy court, while applying the proper test, erred in initially denying Debtor’s motion and ordering the Lease rejected. Once the bankruptcy court determined that no default existed under the Lease that a prospective purchaser need immediately cure, CNB, in the period between the bankruptcy court announcing its finding and the actual entry of the order, made an offer to Debtor to purchase the property. In light of this offer, it became apparent that the proposed assumption would enhance the estate, and the bankruptcy court abused its discretion in not granting Debt- or and CNB’s motion to alter or amend the judgment. CNB’s counsel reiterated and confirmed, during oral argument on appeal, that the offer is still outstanding.
III. DEBTOR AND CNB’S MOTIONS TO ALTER OR AMEND JUDGMENT
Appellants timely filed a motion to alter or amend the judgment under Federal Rule of Bankruptcy Procedure 9023 that made Federal Rules of Civil Procedure 59(e) applicable to this proceeding. Rule 59(e) states that “[a]ny motion to alter or amend a judgment shall be filed no later than 10 days after entry of the judgment.” FED. R. CIV. P. 59(e).
Although the rule identifies the time within which such a motion must be filed, it does not otherwise establish the criteria by which the court is to assess the merits of the motion. However, the Eighth Circuit Court of Appeals quoted with approval the Seventh Circuit Court of Appeals’ statement that the ‘limited function’ of a motion for reconsideration is ‘to correct manifest errors of law or fact or to present newly discovered evidence.’
DeWit v. Firstar Corp., 904 F.Supp. 1476, 1495 (N.D.Iowa 1995)(citing Hagerman v. Yukon Energy Corp., 839 F.2d 407, 414 (8th Cir.1988)) (quoting Rothwell Cotton Co. v. Rosenthal & Co., 827 F.2d 246, 251 (7th Cir.1987), as amended, 835 F.2d 710 (7th Cir.1987)). Rule 59(e) is not intended to allow parties to introduce new evidence that was subject to discovery prior to trial, tender new theories, or raise arguments which could have been offered or raised prior to judgment. See Innovative Home Health Care, Inc. v. P.T.-O.T. Assocs. of the Black Hills, 141 F.3d 1284, 1286 (8th Cir.1998).
In addition, the bankruptcy court has broad discretion in determining whether to grant a motion to alter or amend judgment, and we will not reverse absent a clear abuse of discretion. See Hagerman, 839 F.2d at 414. A motion made pursuant to Rule 59 affords relief only in extraordinary circumstances. Dale & Selby Superette & Deli v. United States Dep’t of Agric., 838 F.Supp. 1346, 1348 (D.Minn.1993). But the rule allows the bankruptcy court “to correct its own errors, sparing the parties and appellate courts the burden of unnecessary appellate proceedings.” Charles v. Daley, 799 F.2d 343, 348 (7th Cir.1986). And under the unique facts of this case we find that extraordinary circumstances did exist and that denial of Debtor and CNB’s motions to alter or amend the judgment constitutes an abuse of discretion.
The bankruptcy court should have recognized that new circumstances existed once it determined that the Lease was not in default. Those circumstances were manifested by CNB’s offer to finance and purchase made after the bankruptcy court’s announcement of its decision on the record, but prior to the bankruptcy court’s October 30, 2002 order. Although this offer cannot be considered “newly discov*466ered evidence” since it did not exist at the time of trial, see Strobl v. New York Mercantile Exch, 590 F.Supp. 875, 878 (S.D.N.Y.1984), aff'd, 768 F.2d 22 (2d Cir.), cert. denied, 474 U.S. 1006, 106 S.Ct. 527, 88 L.Ed.2d 459 (1985)(quoting Campbell v. American Foreign S.S. Corp., 116 F.2d 926 (2d Cir.1941)); see also United States v. Hall, 324 F.3d 720, 723 n. 5 (D.C.Cir.2003) and the cases cited therein, CNB’s offer was a foreseeable result of the bankruptcy court’s finding that the Lease was not in default and it must be considered in light of the evidence presented at trial, including CNB’s stated intent during trial that it was willing to make such an offer and Selma’s statements during trial that a later motion was to be expected.
When the bankruptcy court found the Lease not in default, it allowed CNB the ability to purchase the property without fear of curing, or Debtor being unable to cure. The bankruptcy court’s hesitance to allow assumption should have substantially dissipated with CNB’s offer. This offer could not have been made prior to the bankruptcy court’s decision. With CNB’s offer that included an offer to provide $100,000.00 for the benefit of the estate,2 assumption of the Lease easily meets the business judgment test and the bankruptcy court abused its discretion by failing to amend the judgment to allow for assumption of the Lease.
Furthermore, although delineated as a motion under Rule 59(e) the bankruptcy court could also have granted the motion under Federal Rule of Civil Procedure 60(b)(6).
[T]he standards for relief from judgment under Rules 59(e) and 60(b) ... require the court ultimately to consider how justice can best be served, not whether or not the attorneys for the losing side have done their job in identifying the basis for the relief the party may wish to obtain.
DeWit, 904 F.Supp. at 1506 (emphasis in original).
Rule 60(b)(6) states that “[o]n motion and upon such terms as are just, the court may relieve a party or a party’s legal representative from a final judgment, order, or proceeding for the following reasons: ... (6) any other reason justifying relief from the operation of the judgment.” Rule 60(b)(6), like Rule 59(e), was intended to provide relief only where “exceptional circumstances prevented the moving party from seeking redress through the usual channels.” Atkinson v. Prudential Property Co., Inc., 43 F.3d 367, 373 (8th Cir.1994) (citations omitted). The court in Atkinson went on to observe that “[e]xeeptional circumstances are not present every time a party is subjected to potentially unfavorable consequences as a result of an adverse judgment properly arrived at. Rather, exceptional circumstances are relevant only where they bar adequate redress.” Atkinson, 43 F.3d at 373-74. Just as we determine exceptional circumstances warranting relief under Rule 59(e), we conclude that those circumstances would also warrant relief from the judgment under Rule 60(b)(6), although not specifically plead by CNB and Debtor.
CNB’s offer, coming on the heels of the bankruptcy court’s finding that the Lease *467was not in default, immediately contradicted the bankruptcy court’s assumption that the Lease was not a favorable asset of the estate or an attractive asset to third parties. It also mitigated the bankruptcy court’s concern that there were no pending offers to purchase or assign the Lease and that Debtor did not have sufficient assets to fund needed repairs, capital improvements and maintenance requirements. Considering CNB’s offer, a direct result of the bankruptcy court’s decisiqn, the bankruptcy court abused its discretion in not amending its factual finding to reflect that assumption of the Lease would be in the best interests of the estate.
Accordingly, the decision of the bankruptcy court to deny Debtor and CNB’s motions to alter or amend the judgment is reversed. We remand for entry of an order vacating the October 30, 2002 order and entering an order approving the Debt- or’s assumption of the Lease.
. The testimony at trial indicated there are not and never have been USGA or PGA guide*460lines for course construction, maintenance or operation.
. Even if these funds did nothing more than pay the administrative expenses of the estate or allow Debtor a chance at reorganization, the funds provide a benefit to the estate sufficient to meet the requirement of the business judgment test. See, e.g. Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800 (9th Cir.1994)(broadly interpreting “benefit to the estate” under 11 U.S.C. § 550(a)); In re GP Express Airlines, Inc., 200 B.R. 222, 230 (Bankr.D.Neb.1996)(finding Debtor unable to reorganize without assumption). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493579/ | ORDER
JAMES G. MIXON, Chief Judge.
This matter is before the Court upon an objection by a creditor in this chapter 13 case to a proposed modification of the plan by Johnny Vincent (“Debtor”). The creditor objects on the basis that the modification does not pay the full amount of the creditor’s allowed claim.
This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (L) & (0)(2000), and the Court has jurisdiction to enter a final judgment in this.case.
The relevant facts pertain to the conflict between the amount listed on the creditor’s amended proof of claim and the treatment accorded the claim under the Debt- or’s chapter 13 plan. On October 8, 1998, the Debtor filed a voluntary petition for relief under the provisions of chapter 13 of the United States Bankruptcy Code. Schedule A listed a house located in Phillips County, Arkansas, which the Debtor valued at $28,500.00. The Debtor scheduled IMC Mortgage (“IMC”) as a secured creditor holding a lien in the house mentioned above to secure a claim of $22,700.00.1
A plan of reorganization was attached to the original petition which provided for payments to be made in the sum of $930.00 monthly for a period of 60 months. The plan listed no long-term debts. The treatment of IMC’s secured claim was to pay the value of the collateral listed at $22,700.00 in full over the life of the plan at the rate of $378.33 per month without payment of any interest.
On January 28, 1999, Wilson & Associates filed an entry of appearance on behalf of IMC. On March 15, 1999, IMC filed a pleading styled “Motion to Modify Plan” and on March 23, 1999, a motion for adequate protection. The motion to modify was treated as an objection to confirmation.
On April 22, 1999, the Debtor modified his plan to pay IMC’s claim of $23,309.09 plus an arrearage of $544.00, but did not provide for payment of interest on the claim. On May 4, 1999, an order was entered submitted by IMC’s counsel withdrawing the motion to modify plan, reciting that the Debtor had modified his plan to pay IMC’s pre-petition arrearage claim at the rate of $46.00 per month and the ongoing mortgage payment at $477.65 a month.2 Thereafter, IMC’s claim of *469$23,309.09, which did not include a claim for interest, was allowed by order dated May 12, 1999, and on June 4, 1999, the plan was confirmed.
Two years later, on May 22, 2001, IMF filed an amended secured claim in the amount of $30,449.06, and on June 11, 2001, the Debtor filed an objection to the claim as untimely and as being inconsistent with the previously filed claim. In connection with the Debtor’s objection to claim, Fairbanks Capital Corporation, successor to IMC, (“Fairbanks”) filed a motion to compel the Debtor to comply with discovery requests on September 12, 2001. That motion was set for hearing on October 5, 2001. The motion was granted by agreement, and an order was entered on October 9, 2001, which provided, in part, that Debtor “shall have until October 12, 2001, to serve undersigned counsel with responses to the Interrogatories or Fairbanks Capital Corporation shall be entitled to submit an ex parte Motion and Order in which Debtor’s Objection to the [amended] claim filed by Fairbanks Capital Corporation on May 22, 2001, is overruled.” (Court file, Order, Oct. 9, 2001 at 1.)
Fairbanks filed a motion on October 17, 2001, seeking the ex parte order overruling the Debtor’s objection to the claim because the interrogatories were never answered. Accordingly, an order overruling the Debtor’s objection was entered on October 23, 2001. An order allowing the amended claim was entered on May 24, 2001, without further objection by the Debtor. However, the Chapter 13 Trustee testified that her office did not change the payment amount due Fairbanks because the confirmed plan was never modified to address a different treatment of Fairbanks’ claim.
On April 24, 2002, the Debtor sent notice to the Trustee of a proposed modified plan, which proposed to pay a lump sum of $17,336.56 to be used to pay the full unpaid balance of Fairbanks’ original claim. Fairbanks objected to the modified plan, and it is that objection that is currently before the Court. Fairbanks argues that the modified plan should not be confirmed because it does not propose to pay the full amount of the allowed amended claim of $30,449.06.
In conjunction with its objection to modified plan, Fairbanks served the Debtor with “amended” requests for admission of fact on July 11, 2002. The Debtor never responded to the requests, and on August 22, 2002, Fairbanks filed a motion to have the requests for admission of fact deemed admitted pursuant to Federal Rule of Bankruptcy Procedure 7036. The motion to deem requests admitted was heard on March 4, 2003, and the Debtor offered no resistance to the motion. By Order entered April 8, 2002, these requests were deemed admitted. The only fact established by the requests for admission of fact not already established by other evidence is that the Trustee’s case summary dated April 25, 2002, reflects that the base plan total amount is the sum of $78,115.96 and that the Debtor has only paid $70,611.41.3
In her argument to the Court on January 13, 2003, counsel for Fairbanks acknowledged that the modified claim for $30,449.06 was filed because both the confirmed plan and Fairbank’s original claim made no provision for the payment of interest. The amended claim on its face shows that it includes some unearned interest which will accrue post-petition only *470if the plan is completed over the original 60 months, and the claim also includes interest accrued post-petition even though interest is specifically not provided for in the plan.
DISCUSSION
An unappealed order confirming a chapter 13 plan generally is accorded res judicata effect as to all issues pertaining to the plan that were raised or could have been raised at confirmation In re Andersen, 179 F.3d 1253, 1258 (10th Cir.1999); In re Szostek, 886 F.2d 1405, 1408 (3d Cir.1989); Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1054 (5th Cir.1987); 8 Collier on Bankruptcy ¶ 1327.02[1] (Alan N. Resnick & Henry J. Sommer, et al. eds., 15th ed. rev.2002).
One of the issues finally determined by an order of confirmation is payment of interest on a claim. In re Pardee, 193 F.3d 1083, 1086 (9th Cir.1999); In re Szostek, 886 F.2d at 1411-12; In re Echevarria, 212 B.R. 185 (1st Cir. BAP 1997), aff'd, 141 F.3d 1149, 1998 WL 166146 (1998); In re Hebert, 61 B.R. 44, 46-47 (Bankr.E.D.La.1986); 8 Collier on Bankruptcy at ¶ 1327.02[l][e]. But see In re Lemons, 285 B.R. 327, 333 (Bankr.W.D.Okla.2002)(sanetioning under Rule 9011 counsel of debtor seeking to discharge interest on student loans through the plan rather than through adversary proceeding).
IMC, represented by counsel, objected to confirmation of the original plan which resulted in an amended plan. The original plan and amended plan unambiguously provided that no interest would be paid on IMC’s secured claim. The record is silent why Fairbanks agreed to this treatment of their claim because it was clearly entitled to interest. 11 U.S.C. § 1325(a)(5)(B)(2000). In light of Fairbanks’ subsequent efforts to modify its claim to allow interest, an inference may be drawn that there was a mistake or misunderstanding on the part of Fairbanks’ counsel at the time the plan was confirmed.
IMC’s amended claim of $30,449.06 is not, in substance, an amended claim at all, but rather an attempted modification of the previously confirmed plan. The Debt- or’s objection to the amended claim would be sustainable because treatment of IMC’s claim has already been determined by the final order confirming the plan and is res judicata on that issue. 8 Collier on Bankruptcy at. ¶ 1327.02[2]. See, e.g., In re Taylor, 280 B.R. 711 (Bankr.S.D.Ala.2001) (disallowing home mortgage creditor’s amended proof of claim for interest on note when creditor previously failed to object to confirmation of Debtor’s plan proposing to pay debt without interest).
However, the Debtor’s objection to the amended claim was overruled as a sanction for failing to comply with an agreed discovery order of this Court. The claim was allowed by Court Order entered on May 24, 2001, in the amount of $30,449.06. Therefore, under these very unique circumstances, the objection to the Debtor’s modified plan is sustained. The plan must pay IMC’s claim of $30,449.06 in full and any unpaid balance will not be subject to the discharge provided in 11 U.S.C. § 1328 because the Debtor is precluded from objecting to the amended claim as a sanction for violating this Court’s Order of discovery. Fed. R. Bankr.P. 7037(b). See, e.g., In re Hutter, 207 B.R. 981, 987 (Bankr.D.Conn.1997) (entering default judgment for trustee in adversary proceeding when defendant failed to comply with discovery).
IT IS SO ORDERED.
. IMC held a claim secured solely by a security interest in the Debtor’s principal residence. The last payment on IMC's claim is due May 18, 2010. Therefore, it is a long-term claim as provided by 11 U.S.C. § 1322(c).
. This amount was not the regular monthly mortgage payment as specified in the original promissory note. It is unclear from the plan whether the Debtor was including the arrear-age payment as part of the monthly payment to IMC of $477.56 and if so, whether the monthly payment would decrease after the arrearage was paid and for how many months the Debtor intended to pay on IMC’s claim. *469However, the amount of the debt, $23,309.09, clearly did not provide for interest.
. Apparently, the Debtor paid the lump sum payment to the Trustee and the Trustee has disbursed it to Fairbanks. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493580/ | ORDER DENYING MOTION FOR SANCTIONS
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on the motion of the Defendant, Kenneth Marsella to disqualify Plaintiffs counsel, Steven Rodio, Esq., and on Ro-dio’s motion for sanctions against the Defendant, alleging that the disqualification motion lacked any foundation in fact or law. At the conclusion of the hearing on the disqualification issue, and finding no conflict of interest on the part of Attorney Rodio, I denied Marsella’s motion for disqualification and set the sanctions motion for an evidentiary hearing. At the conclusion of that hearing, at which Messrs. Marsella and Rodio testified, the Defendant requested additional time to produce documentary evidence. I granted the request and concluded the hearing on the sanctions motion on January 19, 2003. Upon review of the entire record it is clear *558that Rodio has failed to satisfy the safe harbor provision of Rule 9011 prior to filing his request for sanctions. Therefore, the motion must be denied.
While Rodio does not reference any legal authority in his papers, such motions are authorized under Fed. R. Bankr.P. 9011, which states in part:
If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation.
(1) How initiated
(A) By motion
A motion for sanctions under this rule shall be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision (b). It shall be served as provided in Rule 7004. The motion for sanctions 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).
Fed. R. Bankr.P. 9011(c) (emphasis added). The rule requires a two-step process when initiated by motion(l) the party seeking sanctions must serve the motion on the opposing party and then must wait at least twenty-one days; (2) if after twenty-one days the offending motion or pleading has not been withdrawn'by the opposing party, then (and only then) may the sanctions motion be filed with the Court. In re Russ, 218 B.R. 461, 468 (Bankr.D.Minn.1998), rev’d on other grounds, 187 F.3d 978 (8th Cir.1999); In re Kelsey, 2001 WL 34050741 (Bankr.D.Vt.2001). This procedure allows a party to avoid the imposition of sanctions by withdrawing the offending motion within the safe harbor period. Ro-dio’s failure to provide Marsella the opportunity to withdraw the motion for disqualification is fatal to the motion for sanctions. See In re Kelsey, 2001 WL 34050741 (Bankr.D.Vt.2001); Martins v. Charles Hayden Goodwill Inn School, 178 F.R.D. 4, 7 (D.Mass.1997) (Construing the safe harbor provision under F.R.C.P. 11 which is substantially similar to Rule 9011); Waters v. Walt Disney World Co., 237 F.Supp.2d 162 (D.R.I.2002) (Same). Accordingly, the Motion for sanctions is DENIED.
In order to salvage some of the time and energy expended in hearing the testimony of Messrs. Marsella and Rodio on the sanctions issue, I also rule that the evidence to date does not establish a basis for Rodio’s disqualification, and that any motion to reconsider based on the entire record would be denied.
The ruling herein on the sanctions issue renders that question moot, and the hearing scheduled for January 30 is vacated. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493583/ | DECISION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after a Trial on the Plaintiffs Complaint to Determine Dischargeability and the Defendant’s Counterclaim thereto. The gravamen of the Parties’ dispute centers on whether a check, written on the Defendant’s account for Nine Thousand Six Hundred and 11/100 dollars ($9,600.11) and later returned marked NSF, was issued by the Defendant with no expectation that there would ever be sufficient funds in the account to cover the indebtedness. The statutory authority upon which the Plaintiff bases its cause of action is 11 U.S.C. § 523(a)(2)(A) which provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title *727does not discharge an individual debtor from any debt-
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by-
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition[.]
In turn, the Defendant’s counterclaim is based, in substance, on fraud for the Plaintiffs alleged misrepresentation concerning the amount that would be charged for the goods and services supplied by the Plaintiff. In addressing the claims brought by the Parties, the Court will begin by setting forth the relative facts of this case.
In July of 2001, the Defendant’s husband, who operated his own contracting business known as “R & B Construction,” entered into an agreement to dig a pond. In order to fulfill this obligation, the Defendant’s husband contracted to rent certain pieces of digging equipment from the Plaintiff. As security for this transaction, the Defendant’s husband, who was a new customer, was required to submit a blank check to the Plaintiff which, according to a representative of the Plaintiff, was a standard business practice at this time for new customers.
On July 23, 2001, the Defendant’s husband, as required, delivered 'a blank check to the Plaintiff. As it pertains to this check, the undisputed facts of this case revealed a number of things: First, the check, which was signed by the Defendant as the drawer, was issued from an account maintained solely by the Defendant, and not the Defendant’s husband. Second, contemporaneous to the time the Defendant issued the check, her account, which never had significant sums of money in it, was frequently overdrawn due to difficulties with a restaurant business. Third, the Defendant’s husband, not the Defendant, filled in the Plaintiff as the named payee.
On July 24, 2001, the Plaintiff delivered the rental equipment according to the terms of its agreement with the Defendant’s husband. (Plaintiffs Exhibit G). This equipment was then picked up by the Plaintiff on September 5, 2001. Based upon the length' of this rental period, the Plaintiff then issued an invoice in the amount of Nine Thousand Six Hundred and 11/100 dollars ($9,600.11), after which point the Plaintiff, after filling in the invoice amount, attempted to negotiate the blank check signed by the Defendant. (Plaintiffs Exhibit E). On or about September 25, 2001, however, this check was returned marked NSF. (Plaintiffs Exhibit A). Thereafter, in an attempt to rectify this matter, the Plaintiff sent a letter to R & B Construction regarding the nonpayment of the account, after which time the Defendant’s husband made three payments on the account: a payment of $500.00 on October 10, 2001; a payment of $100.00 on October 11, 2001; and a payment of $100.00 on October 18, 2001. (Plaintiffs Exhibit B & Joint Exhibit No. 1). At the same time, the Plaintiff, on October 18, 2001, sent a letter to the Defendant regarding the possibility that legal action would be taken against her if the check was not made “good” within 10 days. (Plaintiffs Exhibit C). However, the possibility of any legal action was eventually foreclosed when, on January 14, 2002, both the Defendant and her husband filed a petition in this Court for relief under Chapter 7 of the United States Bankruptcy Code.
At the Trial held in this matter, neither of the Parties disputed the veracity of the above-stated facts. However, beyond these facts there exists an entirely different account of events. On the one hand, the Defendant’s husband put forth to the *728Court that it was his agreement with the Plaintiff that his lease of the Plaintiffs digging equipment would only be about one week in duration. Furthermore, based upon this time period, it was his understanding that he would owe the Plaintiff approximately Two Thousand One Hundred dollars ($2,100.00). As it pertains to this understanding, the Defendant’s husband testified as follows:
First, approximately one week after he received the rental equipment, the Defendant’s husband stated that he notified a representative of the Plaintiff that the equipment could be picked up. Second, the Defendant’s husband testified that he was only charging the property owner Eight Thousand dollars ($8,000.00) to dig the pond, well under the Nine Thousand Six Hundred and 11/100 dollars ($9,600.11) eventually invoiced by the Plaintiff. Finally, and although he was not able to completely dig the pond on account of bad weather, the Defendant’s husband stated that he had been paid a large portion of the contract price, and thus had the funds available to pay the Plaintiff Two Thousand One Hundred dollars ($2,100.00).
Also corresponding to the above account of events, the Defendant related to the Court that she did not have anything to do with her husband’s contracting business. When asked why she issued a check from her personal checking account for her husband’s contracting business, the Defendant explained that she and her husband kept separate accounts and that her husband, for this particular transaction, had asked her to issue a blank check. The Defendant, however, stated that she was not under the impression that it would be the Plaintiff who would fill in the amount on the check. Similarly, the Defendant related to the Court that she did not in any manner foresee that the blank check issued to the Plaintiff would be tendered for payment in the amount of Nine Thousand Six Hundred and 11/100 dollars ($9,600.11).
The Plaintiff, on the other hand, gave an entirely different account of events. Of particular importance in this regard is that, according to the Plaintiff, no notice was imparted to it that the Defendant’s husband was finished using its rental equipment. In fact, according to Plaintiff, it picked up the equipment because it had not heard from the Defendant’s husband despite its repeated attempts to contact him. Additionally, and contrary to the Defendant’s husband’s recollection of events, the Plaintiff maintains that for the rental of the digging equipment it had quoted a much larger figure than Two Thousand One Hundred dollars ($2,100.00).
LEGAL ANALYSIS
The Plaintiff in this case seeks a determination that the claim it holds against the Defendant is a nondischargeable obligation pursuant to § 523(a)(2)(A) of the Bankruptcy Code. As such a determination concerns the dischargeability of a particular debt, this matter is a core proceeding over which this Court has been conferred with the jurisdictional authority to enter final orders. 28 U.S.C. § 157(b)(2)(I).
A creditor seeking to except a debt from discharge under § 523(a)(2)(A) must establish the existence of each of the following elements by a preponderance of the evidence:
(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth;
(2) the debtor intended to deceive the creditor;
(3) the creditor justifiably relied on the false representation; and
(4) the creditor’s reliance was the proximate cause of its loss.
*729Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir.1998). In making a determination as to whether these elements have been satisfied, it is well-established that, as with other exception to nondischargeability, such exceptions to discharge are to be construed strictly against the creditor. Id. at 281. Thus, if there is room for an inference of honest intent, the question of nondischargeability must be resolved in favor of the debtor. ITT Fin. Servs. v. Szczepanski (In re Szczepanski), 139 B.R. 842, 844 (Bankr.N.D.Ohio 1991).
As is common in most cases brought pursuant to § 523(a)(2)(A), the primary issue raised in this case is whether the Defendant acted with the requisite intent to deceive the Plaintiff. In In re Rembert, the Sixth Circuit Court of Appeals addressed this issue and held that “[w]hether a debtor possessed an intent to defraud a creditor within the scope of § 523(a)(2)(A) is measured by a subjective standard.” Id. at 281, citing Field v. Mans, 516 U.S. 59, 70-72, 116 S.Ct. 437, 444, 133 L.Ed.2d 351 (1995). Going further, the Sixth Circuit went on to state that a court, in ascertaining a debtor’s subjective intent, is to look at the totality of the circumstances. Id. at 282. In particular, the Sixth Circuit held that what a court needs to do is examine all of the evidence and thereafter make a determination as to whether such “evidence leads to the conclusion that it is more probable than not that the debtor had the requisite fraudulent intent.” Id. citing Chase Manhattan Bank v. Murphy (In re Murphy), 190 B.R. 327, 334 (Bankr.N.D.Ill.1995).
In looking at all of the circumstances of this case, one of the most prominent features is the lack of any sort of direct representation made by the Defendant to the Plaintiff; that is, the Defendant merely signed a blank check which was later transferred to the Plaintiff. In this respect, the Court is not aware of any legal principle which, in the absence of other facts corroborating facts, would cause the drawer of blank check to become liable in fraud for an unlimited amount. For example, it has been held by the Supreme Court of the United States that “a check is not a factual assertion at all” and thus does not “make any representation as to the state of [the drawer’s] bank balance.” Williams v. United States, 458 U.S. 279, 284-85, 102 S.Ct. 3088, 3091-92, 73 L.Ed.2d 767 (1982). Similarly, the Sixth Circuit Court of Appeals has held that a check does not make any representation, and thus it cannot make any misrepresentation. Stewart v. East Tenn. Title Ins. Agency, Inc. (In re Union Sec. Mortgage Co.), 25 F.3d 338, 341 (6th Cir.1994).
Nevertheless, a direct representation, although it should be accorded a significant amount of evidentiary weight, is not the sine qua non of a cause of action under § 523(a)(2)(A). See, e.g., AT&T Universal Card Services v. Mercer (In re Mercer), 246 F.3d 391, 404 (5th Cir.2001) (en banc) (“When one has a duty to speak, both concealment and silence can constitute fraudulent misrepresentation; an overt act is not required.”). In this respect, the Plaintiff, at the Trial held on this matter, attempted to show that both the Defendant and her husband together engaged in a common scheme to defraud/misrepresent it. In doing so, the Plaintiff called the Court’s attention to these two particular facts: (1) the checking account maintained by the Defendant never had sufficient funds in it to cover the amount of the Plaintiffs invoice; and (2) at the time the Defendant wrote the check in question, the Defendant’s account was frequently overdrawn. However, after considering this matter, it is evident to the Court that a *730couple of significant weaknesses — both factual and legal — exist with the position posited by the Plaintiff.
First, factually speaking, there does not exist sufficient evidence in this case to find that the Defendant played any more than a passive role in her husband’s construction business. As such, there is nothing to suggest that the Defendant was aware, at the time she signed the blank check, that she would become liable for a debt of just under Ten Thousand dollars ($10,000.00). Consequently, this Court simply cannot find anything nefarious about the Defendant failing to maintain sufficient funds in her checking account to cover the Plaintiffs invoice.
However, even if this were not the case, the Court is not convinced that the Defendant’s husband actually sought to misrepresent/defraud the Plaintiff. For example, the Defendant’s husband, after he completed his digging work, made payments on his obligation to the Plaintiff totaling Seven Hundred dollars ($700.00). In this respect, it is well-established that partial payments on á debt mitigate heavily against a finding of fraudulent intent. See, e.g., Oetker v. Bullington (In re Bullington), 167 B.R. 157, 161 (Bankr.W.D.Mo.1994). Also going against the existence of any fraudulent intent is the fact (which was not contested) that the Defendant’s husband was charged by the Plaintiff significantly more for the rental of the digging equipment than what he was receiving for digging the pond, thereby lending credence to the assertion by the Defendant’s husband that he did not expect to be charged approximately Ten Thousand dollars ($10,000.00) for the rental of the equipment. Finally, it should be noted that, contrary to a common badge of fraudulent intent, both the Defendant and her husband did not immediately seek to file for bankruptcy relief after incurring their debt to the Plaintiff. See Household Credit Serv. v. Ettell (In re Ettell), 188 F.3d 1141, 1145 (9th Cir.1999); National Bank of Commerce v. Lazar, 192 B.R. 161, 164 (W.D.Tenn.1995). Accordingly, given these conclusions, the Court cannot find that any sort of scheme existed between the Defendant and her husband to defraud the Plaintiff.
Also, in addition to the above factual issues, the Plaintiff has, in essence, argued that the Defendant should be found liable for fraud, as a matter of law, on the basis that, while experiencing financial difficulties and with limited funds in her checking account, she issued a check which was later returned NSF. As the following explains, however, there exist a couple of inherent weakness with this legal argument. First, the Sixth Circuit Court of Appeals, in In re Rembert, made it very clear that the mere fact that a debtor may be experiencing financial difficulties at the time of the alleged fraudulent transaction is not enough to find that the debt was, in fact, incurred fraudulently. Id. at 281. Second, it has also been held that the mere issuance of a “bad check,” standing alone, is not a sufficient ground for a determination that a debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). In re Strecker, 251 B.R. 878, 882 (Bankr.D.Colo.2000); Tusco Grocers, Inc. v. Coatney (In re Coatney), 185 B.R. 546, 548-50 (Bankr.N.D.Ohio 1995). As was explained in New Austin Roosevelt Currency Exchange, Inc. v. Sanchez (In re Sanchez):
Generally, the utterance of a bad check, without more, is insufficiént to show a false misrepresentation. This is because a check is not a “statement”; rather, it is an order to a drawee bank to pay the face amount upon presentment, supported by a promise to remunerate the bank in the future or to make good on the check if it is dishonored. However, *731circumstantial evidence can be introduced to show that the issuance of a bad check was intended to defraud a creditor.
277 B.R. 904, 909 (Bankr.N.D.Ill.2002), citing Williams v. United States, 458 U.S. 279, 284, 102 S.Ct. 3088, 73 L.Ed.2d 767.
Therefore, for these reasons, it is the holding of this Court that a debtor who, while experiencing financial difficulties writes a check which later turns out not to have sufficient funds in the account to cover the indebtedness, will not necessarily be deemed to have committed an act proscribed by § 523(a)(2)(A) unless additional corroborating evidence is offered in support. Accordingly, in this case, since there exists (as was explained earlier) insufficient corroborating evidence to find that the Defendant, or for that matter her husband, acted with the requisite intent to defraud/misrepresent the Plaintiff, the Court cannot find the exception to discharge set forth in § 523(a)(2)(A) is applicable. Accordingly, any legal obligation that the Defendant had to the Plaintiff as a result of the blank check she issued to the Plaintiff will be a dischargeable debt in bankruptcy. Before concluding, however, one final issue needs to be addressed.
The Defendant, in her answer to the Plaintiffs complaint, asserted a counterclaim against the Plaintiff. The basis for this counterclaim was that the Plaintiff had misrepresented the amount that would be charged for the goods and services supplied by the Plaintiff. However, absolutely no substantiating evidence was presented supporting this contention. As such, the Court will dismiss the Defendant’s counterclaim.
In reaching all of 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 any monetary obligation of the Defendant, Melissa Grilliot, to the Plaintiff, Busch, Inc., stemming from the Defendant’s issuance of a check with insufficient funds, be, and is hereby, determined to be a DISCHARGEABLE DEBT.
It is FURTHER ORDERED that the counterclaim of the Defendant, Melissa Grilliot, be, and is hereby, DISMISSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493584/ | *742
MEMORANDUM
MARCIA PHILLIPS PARSONS, Bankruptcy Judge.
In this adversary proceeding, the debtor seeks to avoid a prepetition garnishment of her bank account under 11 U.S.C. § 522(h) and a determination that the defendant has violated the automatic stay by its actions in refusing to turnover the garnished funds. Presently before the court is the defendant’s motion for summary judgment based on judicial estoppel, the debtor’s alleged bad faith, the alleged untimeliness of the debtor’s exemption claim, the absence of trustee approval to the avoidance action, and the lack of a willful stay violation. For the reasons discussed below, the motion will be granted. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A),(B),(E),(K) and (0).
I.
The debtor Deborah Elaine Saults filed a voluntary petition for relief under chapter 7 on August 30, 2001, and received a discharge on December 6, 2001. The instant adversary proceeding was commenced by the debtor against the defendant First Tennessee Bank (“First Tennessee”) on February 6, 2002. The debtor states in the complaint that First Tennessee held a prepetition judgment against the debtor in the amount of $3,235.49 and that in late July or early August 2001, First Tennessee issued an execution on the joint account of the debtor and her husband at AmSouth Bank. In response to the execution, Am-South took the sum of $1,611 from the joint account and mailed it to the Washington County General Sessions Court Clerk, who received the funds on August 28, 2001. Thereafter on September 20, 2001, after the debtor’s August 30, 2001 bankruptcy filing, the clerk of the court mailed a check for the funds to First Tennessee’s attorney. The debtor alleges that these monies are still being held by the attorney or that he has remitted them to First Tennessee.
Based on these facts, the debtor alleges that the involuntary transfer to First Tennessee is avoidable by the chapter 7 trustee as a preferential transfer under 11 U.S.C. § 547(b), that the trustee has not sought to avoid the tansfer and in fact has filed a report of abandonment, that the debtor has amended her Schedule C to claim the funds exempt, and that thus, the transfer may be avoided by the debtor pursuant to 11 U.S.C. § 522(h). The debt- or also alleges that First Tennessee’s actions were willful violations of various subsections of 11 U.S.C. § 362, the automatic stay provision. The debtor seeks a judgment for the amount taken from her bank account, plus compensatory damages for the alleged stay violations, including attorney fees and expenses, and sanctions.
On August 12, 2002, First Tennessee filed a motion for summary judgment, supported by the affidavit of its attorney, Frederick L. Conrad, Jr., and the debtor’s responses to certain interrogatories. First Tennessee maintains that there is no genuine issue of material fact and it is entitled to judgment as a matter of law.
The first basis for judgment in First Tennessee’s favor is grounded on the doctrine of judicial estoppel. First Tennessee asserts that the debtor took the position with the state court that the bank funds did not belong to her. First Tennessee maintains that because of this assertion, the debtor is precluded by judicial estoppel from exempting the funds in her bankruptcy case. The second basis for the summary judgment motion is that the debtor’s bad faith bars her from amending her Schedule C to claim the transferred bank monies as exempt. The third ground is *743that the debtor cannot claim the exemption because it was not asserted before the execution took place. The fourth premise is that the debtor has not obtained the chapter 7 trustee’s approval for the release of the funds to the debtor. The fifth and final assertion is that First Tennessee has not willfully violated the automatic stay.
The debtor responded to First Tennessee’ motion on August 23, 2002, by filing her personal affidavit and a statement of facts which she alleges establish that there is a genuine issue of material fact, precluding summary judgment. Each of First Tennessee’s bases for summary judgment will be addressed in seriatim.
II.
Rule 56 of the Federal Rules of Civil Procedure, as incorporated by Fed. R. Bankr.P. 7056, mandates the entry of summary judgment “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” “When reviewing a motion for summary judgment, the evidence, all facts, and any inferences that may be drawn from the facts must be viewed in the light most favorable to the nonmoving party.” Poss v. Morris (In re Morris), 260 F.3d 654, 665 (6th Cir.2001)(citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). To prevail, the nonmovant must show sufficient evidence to create a genuine issue of material fact and from which the court could reasonably find for the nonmovant. Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). “Entry of summary judgment is appropriate ‘against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.’” Id. (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265, (1986)). In other words, a nonmoving party has the affirmative duty to direct the court’s attention to specific portions of the record upon which it seeks to rely to create a genuine issue of material fact. Id. See also Street v. J.C. Bradford & Co., 886 F.2d 1472 (6th Cir.1989).
III.
First Tennessee’s judicial estoppel argument is premised on the debtor’s actions in state court. From the statements in the documents filed by the parties, it appears undisputed that after the general sessions court issued the execution to levy on the debtor’s bank accounts, the debtor pro se filed a motion to quash the execution, stating that “money taken from checking acc [sic] belonged to my husband not to me.” In her response to interrogatories, the debtor explained this statement, saying “my husband had given me $1,496.64 which came from his business to deposit into the joint checking account at AmSouth Bank and to use those funds to pay his personal bills.” Notwithstanding this explanation, First Tennessee contends that the debtor’s denial of ownership prevents her from “claiming in subsequent litigation (such as this proceeding) that the funds did in fact belong to her (to allow her to exempt them).”
“Federal standards govern the application of judicial estoppel in federal court.” Warda v. Commissioner, 15 F.3d 533, 538 n. 4 (6th Cir.1994). In its most recent pronouncement on the issue, the Sixth Circuit Court of Appeals stated the following:
The doctrine of judicial estoppel “forbids a party ‘from taking a position inconsis*744tent with one successfully and unequivocally asserted by the same party in a prior proceeding.’ ” Teledyne Indus., Inc. v. Nat’l Labor Relations Bd., 911 F.2d 1214, 1217 (6th Cir.1990). Courts apply judicial estoppel in order to “preserve the integrity of the courts by preventing a party from abusing the judicial process through cynical gamesmanship, achieving success on one position, then arguing the opposing to suit an exigency of the moment.” Teledyne, 911 F.2d at 1218. The doctrine applies only when a party shows that his opponent: (1) took a contrary position; (2) under oath in a prior proceeding; and (3) the prior position was accepted by the court. Id.
Griffith v. Wal-Mart Stores, Inc., 135 F.3d 376, 380 (6th Cir.1998). Furthermore, judicial estoppel is to be “applied with caution to avoid impinging on the truth-seeking function of the court because the doctrine precludes a contradictory position without examining the truth of either statement.” Id. at 382.
Applying the three criteria for application of judicial estoppel to the present case, there is no evidence before this court that the debtor’s prior statement was made under oath, even assuming that the debtor took a contrary position before that court. And, contrary to accepting the debtor’s statement that the bank funds did not belong to her, i.e., by granting her motion to quash, the state court, according to Mr. Conrad’s affidavit, dismissed the debtor’s motion to quash for failure to prosecute, thus allowing the execution to proceed. Accordingly, First Tennessee is not entitled to summary judgment based on judicial estoppel.
First Tennessee’s second basis for its summary judgment motion is premised on the debtor’s alleged bad faith, which it contends precludes the debtor from exempting the transferred bank funds. As evidence of the debtor’s bad faith, First Tennessee cites the debtor’s initial statement in state court that the.funds did not belong to her, the fact that the debtor did not claim an exemption in these funds until after her discharge, and what it characterizes as debtor’s “fail[ure] to properly identify the funds in her list of assets filed in this Court.” In her statement of financial affairs filed on September 11, 2001, within two weeks of her bankruptcy filing, the debtor stated in response to question 4(b) which asks for a description of property attached, garnished or seized within the preceding year that “$1200 [was] taken from joint checking account of Deborah and Elaine Saultz [sic].” The next reference to these funds was when the debtor amended her Schedule C on January 18, 2002, after having received a discharge on December 6, 2001, to assert a $1,600 exemption in “[fjunds seized by First Tennessee Bank on August 28, 2001.”
In response to these contentions, the debtor states 'in her affidavit that “the garnishment amount was listed erroneously in my petition because at the time I signed my petition, I did not have the bank statement showing the exact amount taken .... ” The debtor asserts in her “Statement of Facts” that “the other owner of the account was incorrectly listed as Elaine Saults” and notes that her full name is Deborah Elaine Saults. As further explanation in her affidavit, the debt- or states “I did not claim the property as exempt or list the claim against the bank on schedule B because I was not aware that I had a right to pursue such funds. Upon learning that I could file an action under 11 U.S.C. § 522(h), I authorized my attorney to pursue this matter.” The debtor argues in her response to First Tennessee’s summary judgment motion that her explanations show that there is a genuine issue as to the material facts.
*745The court agrees with the debtor in this regard. The Sixth Circuit Court of Appeals has often reiterated that a debtor’s good faith is an inherently factual determination adjudged from a totality of the circumstances. See, e.g., Trident Assocs. Ltd. P’ship v. Metro. Life Ins. Co. (In re Trident Assocs. Ltd. P’ship), 52 F.3d 127, 131 (6th Cir.1995)(“Good faith is an amorphous notion, largely defined by factual inquiry.”). Thus, summary judgment on this issue is inappropriate.
The third argument raised by First Tennessee in favor of summary judgment is that the debtor’s exemption claim was untimely. First Tennessee asserts that under Tennessee state law, an exemption is waived unless it is raised prior to the filing of the execution. First Tennessee notes that this court has rejected such a position in another case, but seeks to distinguish that holding or alternatively, requests the court to reconsider.
Earlier this year, in In re Lafoon, 278 B.R. 767 (Bankr.E.D.Tenn.2002), this court held that the debtor’s prepetition, procedural waiver of an exemption under Tennessee law did not preclude the debtor from avoiding in bankruptcy a lien which impaired that “waived” exemption. The Lafoon decision was subsequently affirmed by the district court. See In re Lafoon, No. 2:02-CV-77 (E.D. Tenn. June 13, 2002). While this ruling was made with respect to avoidance of judicial liens under 11 U.S.C. § 522(f)(1) rather than as a preferential transfer under § 522(h), this court noted in Lafoon that a wage garnishment may be both a preferential transfer and a judicial lien. In re Lafoon, 278 B.R. at 770. Similarly, in the present case, because the defendant’s garnishment is potentially avoidable under § 522(f) as well as § 522(h), this court will apply the La-foon holding to the facts herein.
With respect to First Tennessee’s assertion that Lafoon is distinguishable from the present case, First Tennessee notes that in Lafoon, the funds were still in possession of the state court while in the present case the funds are in the creditor’s hands and the debtor has received a discharge. These distinctions, however, do not compel a different result. For preference purposes, a transfer pursuant to a garnishment occurs when the writ of garnishment attaches to the debtor’s monies rather than when they were paid over to the judgment creditor. See Holdway v. Duvoisin (In re Holdway), 83 B.R. 510, 513-14 (Bankr.E.D.Tenn.1988). Nonetheless, a “debtor’s interest in garnished funds is not terminated until the court pays the funds over to the creditor.” In re Lafoon, 278 B.R. at 770. Because in the present case the garnished funds had not been forwarded to the defendant at the time of the bankruptcy filing, the debtor retained an interest in the monies which could be claimed exempt. See Credit Bureau of Hopkinsville v. Richardson (In re Richardson), 52 B.R. 237, 239 (Bankr.M.D.Tenn.1985).
Furthermore, mere entry of the discharge order does not bar the debt- or’s exemption claim or a § 522(h) avoidance action by the debtor. Under Fed. R. Bankr.P. 1009, “[a] voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed.” See also Lucius v. McLemore, 741 F.2d 125, 127 (6th Cir.1984) (affirming validity of Rule 1009 but noting that “[c]ourts may still refuse to allow an amendment where the debtor has acted in bad faith or where property has been concealed”). The debt- or’s bankruptcy case was still open when she amended Schedule C to assert the exemption in the bank funds. And, the timeliness of the present avoidance action *746is governed by 11 U.S.C. § 546(a).1 See Schroeder v. First Union Nat'l Bank (In re Schroeder), 178 B.R. 93, 94 (Bankr.D.Md.1994), rev’d on other grounds, 182 B.R. 723 (D.Md.1995)(debtor’s right to avoid preferential transfer under §§ 547 and 522(h) is subject to limitations period set forth in 11 U.S.C. § 546(a)). Without going into details regarding the specifics of that statute, suffice it to say that an adversary proceeding commenced within one year of the chapter 7 filing and before the bankruptcy case is closed is timely under § 546(a). Accordingly, First Tennessee’s summary judgment motion will be denied to the extent it is based on arguments regarding the timeliness of debtor’s exemption claim.
First Tennessee’s next basis for summary judgment is that the trustee’s approval has not been procured and that if First Tennessee released the funds to the debtor without the trustee’s authorization, First Tennessee could be liable to the trustee. Although not in direct response to this argument, the debtor asserts that upon learning she had a right to pursue the funds, she authorized her attorney to amend Schedules B and C to list the asset and claim the exemption, that “[b]y filing an amended exemption, the Trustee gained an additional 30 days to object to the exemption,” and that “[b]y failing to object to the exemption, the Trustee’s prior release of his interest in the funds of the estate applied to the claimed amended exemption.”
As previously noted, the debtor is seeking to avoid and recover the transfer of funds to First Tennessee pursuant to section 522(h) of the Bankruptcy Code, which permits a debtor to avoid transfers that are avoidable by trustees under sections 544, 545, 547, 548, 549, or 724(a), if the trustee does not attempt to avoid those transfers. See 11 U.S.C. § 522(h).2 As indicated by the debtor, § 522(h)(2)’s requirement that these transfers are not being avoided by the trustee can be met by a debtor claiming an exemption in the property and the trustee’s failure to object to the exemption claim. See Baker v. Kas Enters. (In re Baker), 246 B.R. 379, 382 (Bankr.E.D.Mo.2000.); Pruitt v. Gramatan Investors Corp. (In re Pruitt), 72 B.R. 436, 440 (Bankr.E.D.N.Y.1987).
In the present ease, while the debtor did file an amendment to her Schedule C in order to claim an exemption in the transferred funds, the certificate of service attached to the amendment does not evidence that the amendment was served on Margaret B. Fugate, the chapter 7 trustee in this case, as required by Fed. R. Bankr.P. 1009(a) (“The debtor shall give notice of the amendment to the trustee and to any entity affected thereby.”). *747And, neither the bankruptcy case file nor the docket in the bankruptcy case indicate that the debtor ever amended her Schedule B to show the monies transferred to First Tennessee Bank as an asset of the estate, notwithstanding her statement in this adversary proceeding to the contrary. In the absence of evidence before the court that the trustee has waived her right to avoid the transfer in this case, either by not objecting to the debtor’s exemption claim after notice or by abandonment after scheduling of the asset by the debtor, see Kottmeier v. United States (In re Kottmeier), 240 B.R. 440, 443 (M.D.Fla.1999) (“[T]he vast majority of courts ... require] that an asset be scheduled before it can be abandoned.... ”); the court is unable to find that § 522(h)(2)’s required showing has been established.
First Tennessee’s concern that it was at risk if it released funds to the debtor without the approval of the trustee is legitimate. “[I]f an entity in possession of estate property receives notice of the bankruptcy filing but nonetheless transfers the property to anyone other than the trustee, it does so at its peril. In the absence of the property itself the trustee in such instance is entitled to recover the value of the estate property from the entity making the transfer.” In re Borchert, 143 B.R. 917, 919 (Bankr.D.N.D.1992). In In re Robertson, the chapter 7 trustee brought an action against Peat, Marwick for the value of funds constituting property of the estate which it had transferred to the debtor postpetition. Redfield v. Peat, Marwick, Mitchell and Co. (In re Robertson), 105 B.R. 440 (Bankr.N.D.Ill.1989). Peat, Marwick moved for summary judgment, asserting that the debtor had claimed the funds exempt, that no objection to the exemption had been filed, and that therefore the funds were no longer property of the estate at the time of their transfer to the debtor. Id. at 442. The court rejected this argument because the debtor’s exemption claim had been late-filed without notice, motion, or leave of court. The court observed that in light of these circumstances, an exemption “is not entitled to the automatic allowance that Bankr.R. 4003(a) gives to a timely filed exemption claim if it is not timely objected to. He who seeks to benefit by the Bankruptcy Rules must abide by them.” Id. at 450.
This court realizes that the debtor’s failure to schedule the asset and to serve the amended exemption schedule on the trustee was probably inadvertent and can be remedied so that she can, hereafter, obtain the trustee’s “approval” (or waiver) of her prosecution of this avoidance action. Absent such approval, however, the debtor’s § 522(h) action is premature.3 First Tennessee’s summary judgment motion in this regard will be granted.
The last basis of First Tennessee’s motion for summary judgment is that no willful violation of the automatic stay has occurred. First Tennessee argues that its “actions have at all times been appropriate,” that “[t]he funds were not sought from the Court, but rather arrived due to Plaintiffs actions or lack thereof,” that the debtor failed to properly identify the funds or claim them exempt before discharge, *748and that First Tennessee has been holding the funds pending a request from the trustee. In response, the debtor states that by refusing to surrender possession of the funds, First Tennessee exercised control over property of the estate in violation of 11 U.S.C. § 362(a)(3).
There is some support for the debtor’s position. In In re McCall-Pruitt, 281 B.R. 910, 911 (Bankr.E.D.Mich.2002), the court held that the creditor’s postpetition acceptance of funds from the state of Michigan pursuant to a prepetition garnishment filed against the debtor’s income tax refund was in violation of the automatic stay, citing the duty of a creditor to halt collection proceedings after a bankruptcy petition is filed. See also In re Zunich, 88 B.R. 721, 724 (Bankr.W.D.Pa.1988)(creditor’s action in retaining funds mailed to it postpetition pursuant to prepetition garnishment violated stay).
Other courts, under similar facts, have disagreed, although offering different rationales for their shared conclusion that a creditor does not violate the automatic stay by refusing to.turnover monies received pursuant to a prepetition execution. For example, the courts in In re Bernstein and In re Quality Health Care held that stay violations require an affirmative act on the part of a creditor, disagreeing with TranSouth v. Sharon (In re Sharon), 234 B.R. 676 (6th Cir. BAP 1999), wherein the Sixth Circuit Bankruptcy Appellate Panel held in the chapter 13 context that a creditor’s postpetition refusal to surrender collateral repossessed prepetition constituted a violation of the automatic stay. See In re Bernstein, 252 B.R. 846, 849 (Bankr.D.C.2000); Gouveia v. IRS (In re Quality Health Care), 215 B.R. 543, 572 (Bankr.N.D.Ind.1997). The Eighth Circuit Bankruptcy Appellate Panel held that a postpe-tition transfer of wages pursuant to a garnishment perfected prepetition when the wages were earned did not violate the stay because the debtor under Arkansas law had no property interest in the wages at the time his bankruptcy case was commenced. James v. Planters Bank (In re James), 257 B.R. 673, 678-79 (8th Cir. BAP 2001). This holding provides no guidance to the facts of the instant case since, as previously noted, “[ijn Tennessee the debtor’s interest in garnished funds is not terminated until the court pays the funds over to the creditor.” In re Lafoon, 278 B.R. at 770 (quoting In re Richardson, 52 B.R. at 240).
The most instructive case on this issue is In re Giles, a bankruptcy decision rendered earlier this year, wherein four days prior to the filing of the debtor’s bankruptcy case, a judgment creditor of the debtor served a writ of garnishment on the bank at which the debtor maintained two bank accounts. See In re Giles, 271 B.R. 903, 904 (Bankr.M.D.Fla.2002). Upon the bankruptcy filing, the debtor made demand upon the creditor to release the garnishment and when the creditor refused, the debtor filed a motion for sanctions for violation of the automatic stay. Id. Observing that under Florida law, the service of the writ of garnishment created a lien upon the bank accounts, the bankruptcy court questioned “whether taking no action to release funds that are subject to [the creditor’s] lien violates the automatic stay.” Id. at 906. The Giles court answered the question in the negative, based on the Supreme Court’s holding in Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995).
The bankruptcy court observed that in Strumpf, the Supreme Court had concluded that a bank’s administrative freeze on the debtor’s bank account in order to preserve the bank’s right of setoff did not violate the automatic stay since if the bank *749were required to release the funds “it would divest the creditor of the very thing that supports the setoff.” In re Giles, 271 B.R. at 906 (quoting Strumpf, 516 U.S. at 20, 116 S.Ct. 286). Noting that both the right to setoff and secured status are protected by the Bankruptcy Code, the Giles court concluded that requiring the judgment creditor to release its garnishment lien “would give the debtor the right to use of the funds to the detriment of [the judgment creditor’s] garnishment hen rights contrary to the principles recognized in Strumpf” and that the creditor’s refusal to release the garnishment “takes nothing from the Debtor because the Debtor’s rights in the Bank Accounts are subordinate to [the judgment creditor’s] hen rights.” In re Giles, 271 B.R. at 906. The Giles court also observed that “where a creditor’s lien might be destroyed if its collateral were released, the creditor must be provided adequate protection before being required to essentially turn over the account that is the subject of its lien by releasing its garnishment.” Id. See also In re Olivas, 129 B.R. 122, 126 n. 9 (Bankr.W.D.Tex.1991)(court concluded that judgment creditor’s postpetition refusal to release its prepetition garnishment did not violate the automatic stay in light of creditor’s right to adequate protection, noting that to hold otherwise “would be tantamount to stripping the Bank of its property right without [due process of law]”).
Tennessee law is similar to Florida law with respect to the effect of a writ of garnishment.4 “The service of the garnishment fixes a lien on the debt or effects in the hands of the garnishee.... ” Eggleston v. Third Nat’l Bank in Nashville (In re Eggleston), 19 B.R. 280, 284 (Bankr.M.D.Tenn.1982)(quoting Beaumont v. Eason, 59 Tenn. (12 Heisk.) 417 (1873)). Thus, like the judgment creditor in the Giles decision, if the defendant in the present case were required to turnover the garnishment funds to the debtor, it would “divest the creditor of the very thing that supports [its hen].”5 See Strumpf, 516 U.S. at 20, 116 S.Ct. 286. And, even though the debtor may be able to avoid the lien under § 522(f) or (h), until the lien has actually been avoided, the defendant has an interest in the funds that is superior to the debtor’s. See In re Bernstein, 252 B.R. at 848 n. 2 (fact that lien would be avoidable as a preference adds nothing to the automatic stay analysis: “until any such hen is avoided as a preference, it remains a hen”); In re Olivas, 129 B.R. at 126 (vulnerability of garnishment hen to avoidance does not raise a duty under § 362(a)).
Based on the foregoing, the court concludes that the defendant’s postpetition receipt of funds garnished prepetition and the defendant’s refusal to turn the funds over to the debtor did not constitute violations of the automatic stay by the defen*750dant.6 As such, the defendant is entitled to summary judgment on this issue.
IV.
An order will be entered in accordance with this memorandum opinion.
. 11 U.S.C. § 546(a) states as follows:
An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of—
(1) the later of—
(A) 2 years after the entry of the order for relief; or
(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or election occurs before the expiration of the period specified in subpar-agraph (A); or
(2) the time the case is closed of dismissed.
. 11 U.S.C. § 522(h) states as follows:
The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if—
(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and
(2) the trustee does not attempt to avoid such transfer.
. As previously noted, the defendant’s lien is potentially avoidable not only under § 522(h), but also § 522(f)(1) as a judicial lien. However, even under § 522(f)(1), the debtor must establish that the lien impairs an exemption to which the debtor is entitled. See In re Liston, 206 B.R. 235, 237 (Bankr.W.D.Okla.1997). Until proper notice of an amended exemption claim is provided and the requisite 30-day objection period provided by Fed. R. Bankr.P. 4003(b) has expired, the debtor cannot demonstrate an exemption entitlement. See, e.g., In re Moore, 269 B.R. 864, 867-68 (Bankr.D.Idaho 2001).
. The effect of a writ of garnishment is determined by the laws of the state in which the writ issues. In re Coston, 65 B.R. 224 (Bankr.D.N.M.1986).
. In some respects, this situation is similar to one created when an automobile mechanic retains an automobile as collateral for an unpaid repair bill. Under the laws of many states, the mechanic is required to retain possession of the automobile in order to maintain perfection of its statutory lien. Under these circumstances, the mechanic does not violate the automatic stay by refusing to release the automobile because of the exception to the automatic stay set forth in 11 U.S.C. § 362(b)(3), which provides that the filing of a petition does not stay “any act to perfect, or maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b) of this title.’’ See, e.g., Boggan v. Hoff Ford, Inc. (In re Boggan), 251 B.R. 95 (9th Cir. BAP 2000).
. The court recognizes that the general sessions clerk’s transfer of the funds postpetition was a technical violation of the automatic stay and as such voidable or in the alternative, subject to avoidance as a postpetition transaction under 11 U.S.C. § 549. See In re Jackson, 260 B.R. 473 479 (Bankr.E.D.Mo.2001). Even so, the stay violation did not result in any damages to the debtor since the funds remained subject to the defendant's garnishment lien whether they had been transferred to the defendant or remained in the possession of the state court. Furthermore, it is important to contrast the facts of the present case with the facts of In re Timbs, 178 B.R. 989 (Bankr.E.D.Tenn.1994), wherein the garnishment continued postpetition and as such was sanctionable as violative of the automatic stay. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493586/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
(Doc. No. 330)
ALEXANDER L. PASKAY, Chief Judge.
The matter under consideration in this confirmed Chapter 11 case is a Motion for Summary Judgment, filed by Byron F. Deming (Deming). The Motion is filed in this contested matter, which involves an objection to the allowance of an unsecured claim, filed by Picker Financial Group, LLC (Picker). The claim involved is *801Claim No. 122, which was filed as an unsecured claim in the amount of $1,921,162.07.
The events leading up to the Objection under consideration are somewhat complex, and a recap of the procedural as well as the relevant factual events should be helpful. On March 21, 2001, Health America Medical Group, Inc. (Debtor) filed its Voluntary Petition for relief under Chapter 11 of the Bankruptcy Code. Prior to the commencement of this Chapter 11 case, Picker and Bay Area Medical Group, now known as the Debtor, entered into an “Equipment Lease (With All Schedules)” (Original Lease). Under the Original Lease, Picker leased to the Debtor certain medical equipment. The schedules, each entitled “Equipment Schedule No._,” were comprised of seven separate schedules constituting “independent leases.” Copies of the Original Lease and all schedules were attached to the proof of claim of Picker (Claim No. 56).
On April 23, 2001, the Debtor filed Emergency Motion to Reject Executory Contracts (Doc. No. 48), which included its contract with Picker. On May 16, 2001, this Court entered an Order, granted the Debtor’s motion, and the Original Lease was rejected. On May 24, 2001, Picker filed Claim No. 56, asserting a general unsecured claim in the amount of $4,348,553.15, based on rejection damages.
On June 20, 2001, Picker filed Emergency Motion for Payment of Administrative Rent Claim (Doc. No. 82). Picker sought an allowance of administrative rent in the amount of $432,674.10 for post-petition use of the equipment in question by the Debt- or, a per diem charge of $3,807.49, attorney’s fees of $31,989, and costs of $1,819.83.
Picker’s Emergency Motion was scheduled for hearing in due course. However, prior to the scheduled hearing, Picker and the Debtor filed a joint motion and sought approval of a compromise. The Motion, filed on January 9, 2002, was entitled “Motion and Notice of Proposed Compromise of Controversy of Picker Financial Group, LLC’s Application for Administrative Rent Claim, Secured Claim and General Unsecured Claim” (Doc. No. 194). The Motion, in paragraph 5, stated:
The parties propose a compromise of Picker’s claims, as set forth in the letter agreement attached hereto at Exhibit “A.” (Emphasis added).
The Motion was accompanied by a Letter Agreement, identified as Exhibit “A” (Agreement). The Agreement provided, inter alia, that:
a. Picker would reduce its administrative claim from over $376,482.93 to $75,000;
b. The Debtor would enter into a new lease for certain equipment;
c. The Debtor agreed to execute a promissory note, with payments totaling $359,194.02, for the purchase of miscellaneous equipment; and
d. In the event the contingencies do not occur, Picker may pursue its administrative claim.
It is without dispute that the Debtor did, in fact, enter into a new lease (Current Lease) for certain of the equipment covered by the Original Lease and also agreed to purchase certain miscellaneous equipment from Picker. On February 20, 2002, this Court entered an Order and approved the compromise (Doc. No. 223). On April 29, 2002, this Court entered an amended Order approving the compromise, which was amended only for the purpose of attaching the Agreement as an exhibit to the amended Order (Doc. No. 257). It should be pointed out that the Order in Paragraph 5 provided as follows: The compromise as set forth in the letter *802agreement attached to the Motion does not effect Picker’s unsecured claim as filed.
On March 4, 2002, Deming moved for reconsideration of the Order Approving the Compromise (Doc. No. 234). This Court denied the motion, but authorized Deming to file an Objection to Picker’s general unsecured claim, which was Claim No. 56. On May 6, 2002, Deming filed an Objection to Claim No. 56, contending among other things, that Picker had failed to mitigate its damages by failing to include the amount Picker would receive under the Current Lease. Deming also filed a Motion for Summary Judgment contending that the relevant facts were without dispute and his Objection should be sustained as a matter of law. On August 19, 2002, this Court granted Deming’s Motion for Summary Judgment, but authorized Picker to file an amended proof of claim that reflected Picker’s mitigation of the rejection damages. On September 10, 2002, Picker filed Claim No. 122, its amended proof of claim, reducing its general unsecured claim from $4,348,553.15 to $1,921,162.07.
In the claim, Picker gave credit to the Debtor as mitigation of its rejection damages based on the Current Lease obtained pursuant to the compromise. Picker calculated its rejection damages pursuant to Section 16 of the Original Lease, which inter alia, provided as follows:
Upon the occurrence of any Event of Default, Lessor may at its option do any or all of the following: ... (iii) declare all sums due and to become due hereunder for the full term of the applicable schedule(s) immediately due and payable; (iv) recover from Lessee, as liquidated damages for loss of a bargain and not as a penalty, an amount equal to the Casualty Value (as such term is defined in Section 12) due under any Schedule, which amount shall become immediately due and payable; (v) sell, dispose of, ... use or lease any Equipment as Lessor, in its sole discretion may determine; and (vi) exercise any other right or remedy which may be available to it under the Uniform Commercial Code or applicable law .... In the event that Lessee shall have paid to Lessor the liquidated damages referred to in (iv) above, Lessor hereby agrees to pay to Lessee, promptly after receipt thereof, all rentals or proceeds received from the relet-ting or sale of the Equipment during the balance of the term of the Schedule for such Equipment (after deduction of all expenses incurred by Lessor), said amount never to exceed the amount of the liquidated damages paid by Lessee. Lessee shall in any event remain fully liable for reasonable damages as provided by law and for all costs and expenses incurred by Lessor on account of such default, including but not limited to all court costs and reasonable attorney fees. The term “Casualty Value” is defined in Section 12 of the pre-petition rejected lease as:
“... as of the date of determination, the sum of (a) the aggregate of all rentals for the remaining term of the Schedule relating to such Equipment, discounted to present value at such date at the rate of five percent (5%) per annum, plus (b) the estimated fair market value of such Equipment, at the end of such term, as determined by Lessor in its sole discretion.”
(Ex. B. to Claim No. 122).
On July 19, 2001, the Debtor filed its Disclosure Statement and its Plan of Reorganization (Doc. Nos. 117 and 118). Both the Plan and the Disclosure Statement provided for the treatment of approximately $6 million non-insider general unsecured claims, which were treated under Class 18 in the Plan. It is fair to infer that this *803amount included Picker’s general unsecured claim. On October 19, 2002 and on November 20, 2001, the Debtor filed its supplemental Disclosure Statement and first amendment to supplemental Disclosure Statement, in which it disclosed the settlement of Picker’s administrative claim but did not supplement the Disclosure Statement to reflect any compromise of Picker’s former general unsecured claim. (Doc. Nos. 160 and 174).
On December 27, 2001, this Court entered an Order and approved the Disclosure Statement, as supplemented and amended. On April 11, 2002, this Court conditionally confirmed the Debtor’s Plan of Reorganization (Doc. No. 252). The Order incorporated the provisions of the compromise between Picker and the Debt- or, but was silent concerning the treatment of Picker’s general unsecured claim. On April 29, 2002, this Court entered the Order Confirming the Debtor’s Plan with finality (Doc. No. 262).
Deming filed his Motion for Summary Judgment on November 27, 2002. This Court considered the Motion in due course and on February 3, 2003, entered an Order taking the same under advisement.
It is the contention of Deming that the relevant facts, as appear from this record, are without dispute and, based on the same, his Objection should be sustained and Claim No. 122 should be disallowed. This contention is based on the following propositions urged by Deming.
The primary thrust of Deming’s challenge of the unsecured claim of Picker is based on two propositions. First, it is contended by Deming that the record is clear and is without dispute that the Debt- or and Picker entered into a new lease, the Current Lease, for certain equipment and this was, as a matter of fact, a novation of the contract, which was rejected. Therefore, Picker has no rejection damage claims, which could be allowed.
It is well established and the proposition cannot be gainsaid that while a novation of a contract is well recognized its validity depends on whether or not the new agreement intended to discharge all valid existing obligations under the substituted lease and in fact replaced the old contract. See In re C.M. Systems, Inc., 89 B.R. 947 (Bankr.M.D.Fla.1988); T & N v. Pennsylvania Ins. Guar. Ass’n., 44 F.3d 174 (3rd Cir.1994). Next, although it is not clear from this record, it appears that the Current Lease was only for certain of the previously leased equipment and not all of the equipment. Consequently, the terms of the Current Lease might very well be substantially different from the terms of the Original Lease. For the reasons stated, it is clear and this Court is satisfied that the execution of the Current Lease was not a novation. Thus, it would not be a bar to award damages for rejection of the Original Lease.
The next proposition urged by Deming is based on the contention that this Court’s Order, which approved the compromise of the administrative claim of Picker, included a compromise of all claims of Picker, including the unsecured claim under consideration. While it is true that the Motion to Compromise filed by the Debtor sought a compromise of Picker’s claims [sic] in plural, this might at first blush indicate that it was intended to deal with all claims of Picker. However, this record does not support such conclusion. At the time the Debtor filed the Motion to Compromise, there was no controversy between the Debtor and Picker concerning Picker’s general unsecured claim. Moreover, Picker also had, in addition, to the unsecured claim, a secured claim in the amount of $484,500.00, which was a blanket lien on all the assets of the Debtor. In *804addition, the Order entered on Deming’s Motion for Reconsideration specifically authorized Deming to file an objection to Picker’s general unsecured claim No. 56. - Had this unsecured claim of Picker been subsumed and included by the compromise, this provision in the Order would have been meaningless and superfluous.
It is without dispute that in the amended Disclosure Statement, filed by the Debtor, the Debtor informed the creditors of the compromise, of the administrative claim, but made no mention of Picker’s general unsecured claim. And, the Order conditionally confirming the Plan of Reorganization entered April 12, 2002, was silent concerning the specific treatment of Picker’s general unsecured claim, which was part of the unsecured claims in Class 18.
Based on the foregoing, this Court is satisfied that neither the theory of novation nor the claimed effect of a compromise of the administrative claim would present a bar to consider the damage claim of Picker for rejection of the Original Lease by the Debtor.
In the present instance, Picker relies on Paragraph 16 of the Original Lease, which provides, inter alia, the several different options available to the lessor in the event the lease is breached. Subclause (iv) permits the lessor to rely on the liquidated damage provision in the lease and specifically states that it is not deemed to be a penalty. As a general proposition, whether or not liquidated ' damages are accepted depends on the intentions of the parties and the nature of the contract. The intention must be determined by an objective standard, particular whether the sum named is not proportionate to the actual damages. The fact that the term “liquidated damages” or “penalty” is used in the contract is not controlling. The prime factor in determining whether or not the sum stipulated to be paid as a result of a breach is to be regarded as liquidated damages or as a penalty, is whether the sum fixed is just compensation for damages resulting from the breach. In order for the liquidated damage provision to be upheld, the damages resulting from the breach must not be readily ascertainable. Lefemine v. Baron, 573 So.2d 326 (Fla.1991).
It is presumed that if the actual damages are difficult to ascertain, fixing liquidated damages is justified. However, when the actual damages are readily ascertainable and the stipulated sum is disproportionate to the fixed amount, it will be regarded as penalty regardless how the provision was characterized in the contract. North Beach Investments, Inc. v. Sheikewitz, 63 So.2d 498 (Fla.1953); Stenor v. Lester, 58 So.2d 673 (1952). It is inevitable that in determining the amount of damages suffered, the Court must take into account to what extent these damages were mitigated by the lessor.
According to Deming under the applicable law, which is the law of the State of Ohio, a lessor of a rejected lease is entitled only to claim damages representing those amounts which were due and owing at the time of the filing, that is lease payments accrued but not paid, and actual damages resulting from the rejection. In re Steiner, 50 B.R. 181 (Bankr.N.D.Ohio 1985). “Actual damages” may be something less than the “actual amount of rent which would have been paid under the contract.” Id. at 184-185. For instance, it cannot be gainsaid that the lessor did not suffer any rejection damages if it has released the property in question for more and for the same length or longer period of time than it was leased under the Original Lease. This would be clearly an unac*805ceptable windfall to which the lessor is not entitled.
In the present instance, the rejection damages suffered by Picker are easily ascertainable and requires nothing more than a mathematical calculation to determine the actual damages suffered by Picker. This is so because this record is undisputed that upon rejection, Picker immediately entered into a new lease with the Debtor for some of the equipment and sold some of the equipment to the Debtor. It is quite evident that if the amount to be paid under the new lease (Current Lease) to Picker and the monies realized from the sale of the equipment equals or is in excess of the sum Picker would have received under the Original Lease, had that lease been fully performed, Picker suffered no damages.
Moreover, some of the components of the liquidated damages claimed by Picker have no relationship whatsoever to the actual breach or the damages flowing from the breach, such as late charges and attorney’s fees. In sum, this Court is satisfied that the liquidated damage provision of the lease may not be enforced and, therefore, Picker will have to prove with competent evidence the actual damages it suffered as a result of the breach.
In light of the fact that the amount, which Picker will recover from the Current Lease, plus the amount Picker recovered from the sale of some of the equipment, the other terms of the Current Lease, and whether independent payment of the liquidated damages are reasonable are all unclear and in dispute, this Court is satisfied that these issues cannot be resolved by summary judgment.
Deming filed the Motion under consideration and Picker did not file its own motion for summary judgment. While authorities are not in complete agreement whether or not it is appropriate to grant summary judgment to a non-moving party, the majority of courts concluded that it is appropriate to grant summary judgment against the movant even though the opposite party has not actually filed a motion for summary judgment. See Gerber v. Longboat Harbour North Condominium, Inc., 757 F.Supp. 1339, 1341 (M.D.Fla.1991), citing In re Caravan Refrigerated Cargo, Inc., 864 F.2d 388 (5th Cir.1989). See also Goldstein v. Fidelity and Guar. Ins. Underwriters, Inc., 86 F.3d 749, 751 (7th Cir.1996).
Based upon the foregoing, this Court is satisfied that in the present instance it is appropriate to grant the summary judgment in favor of Picker and against Deming on the issues of the novation and the effect of the compromise, and to grant Picker an entitlement to an unsecured claim but to sustain the Objection as to the amount on Claim No. 122, without prejudice for this Court to conduct a final evi-dentiary hearing on the amount of Picker’s unsecured claim, specifically, the appropriate method to compute the rejection damages which could be awarded to Picker.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment be, and the same is hereby, granted in part and denied in part. The Motion, as filed by Deming is granted in part and the Objection is sustained as to the amount of Picker’s unsecured claim. It is further
ORDERED, ADJUDGED AND DECREED that summary judgment is entered in favor of Picker and Picker is entitled to an unsecured claim in proper amount ultimately to be determined by this Court. It is further
ORDERED, ADJUDGED AND DECREED that the Motion for Summary *806Judgment be, and the same is hereby, denied as to the computation of rejection damages, and the same shall be set for a Final Evidentiary Hearing to be held on May 7, 2003, beginning at 2:00 p.m. at Courtroom 9A, Sam M. Gibbons United States Courthouse, 801 N. Florida Ave., Tampa, Florida. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493587/ | Memorandum of Decision
WILLIAM C. HILLMAN, Bankruptcy Judge.
I. Introduction
The matter before the Court is the Motion By Creditor Countrywide Home Loans, Inc., as Servicing Contractor For *830Bank of New York, For Order Confirming That Automatic Stay Does Not Preclude Conclusion Of Foreclosure Sale And/Or For Nunc Pro Tunc Relief from Automatic Stay (the “Motion”). Because the auction sale did not satisfy the Statute of Frauds at the time Alan A. Grassie (the “Debtor”) filed for bankruptcy, he had the right to redeem 97 Rear Swifts Beach Road, Ware-ham, Massachusetts, (the “Property”). As such, I will deny that part of the Motion seeking an order and reschedule a hearing on that part of the Motion seeking stay relief in light of this ruling.
II. Facts
'The parties agree on the facts in this case. The Debtor is the co-owner and co-mortgagor of the Property with his non-debtor spouse. The Bank of New York, by assignment, holds a first mortgage on the Property. Countrywide (the “Creditor”), as servicing contractor for the Bank of New York, filed a foreclosure complaint in the Massachusetts Land Court (“Land Court”) on August 8, 2002. The Land Court issued judgment on the Creditor’s foreclosure complaint on "October 22, 2002 and granted the Creditor the right to foreclose on the Property.
At 10:33 a.m. on November 26, 2002, the auctioneer commenced the auction for the Property. An agent of the Creditor was present for the auction. William P. Ba-chant (the “Purchaser”) submitted the winning bid of $211,000 and the auction concluded at 10:48 a.m. At 10:50 a.m., the Purchaser submitted his $5,000 deposit and signed the memorandum of sale. Neither the auctioneer nor the agent of the Creditor signed the memorandum of sale at the time the Purchaser signed. No witness signed the memorandum of sale.
At 11:04 a.m. on November 26, 2002, the Debtor filed his bankruptcy petition. On December 4, 2002, the auctioneer signed the memorandum of sale and the agent of the Creditor signed as witness.
I held a hearing on the Motion on January 16, 2003 and took this matter under advisement at that time. Both parties filed briefs in support of their arguments.
III. Analysis
The Creditor argues that the stay does not apply because the foreclosure sale was valid and the Debtor had no interest in the Property when he filed his petition. The Debtor contends that the memorandum of sale was not properly executed so that he had the right to redeem the Property and list the property in his bankruptcy petition. The controlling issue is whether the completion of the auction sale combined with the Purchaser’s signature on the memorandum of sale satisfied the Statute of Frauds and terminated the Debtor’s equity of redemption. If the Statute of Frauds was not satisfied and the Debtor retained the equity of redemption as of his petition date, the automatic stay would prevent the continuance of “a judicial, administrative, or other action or proceeding against the debtor.” 11 U.S.C. § 362(a)(1); see also § 362(a)(2).1
A debtor retains the equity of redemption of mortgaged property until the land has been sold pursuant to the power of sale. Mass. Gen. Laws ch. 244, § 21; In re Dow, 250 B.R. 6, 8 (Bankr.D.Mass.2000); see Wellman v. U.S., 25 *831F.Supp. 868, 869 (D.Mass.1938). The power of sale is a completed sale that occurs upon the execution of the memorandum of sale. The execution of the memorandum of sale terminates a debtor’s equity of redemption. See In re Dow, 250 B.R. at 8; Williams v. Resolution GGF OY, 417 Mass. 377, 384, 630 N.E.2d 581 (1994).
The execution of a memorandum of sale occurs when the parties have complied with the Statute of Frauds. Weiner v. Slovin, 270 Mass. 392, 393-94, 169 N.E. 64 (1930); see Outpost Cafe, Inc. v. Fairhaven Sav. Bank, 3 Mass.App.Ct. 1, 3, 322 N.E.2d 183 (1975) (a memorandum of the sale at an auction is necessary in order to satisfy the Statute of Frauds). In Massachusetts, the Statute of Frauds requires in pertinent part:
No action shall be brought... [u]pon a contract for the sale of lands, tenements or hereditaments or of any interest in or concerning them... [ujnless the promise, contract or agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or by some person thereunto by him lawfully authorized.
Mass. Gen. Laws. ch. 259, § 1.
Whether the parties complied with the Statute of Frauds depends upon whether the party to be charged signed the memorandum of sale. At the time of the bankruptcy filing, only the Purchaser had signed. Neither the auctioneer, as agent for the Creditor, nor the Creditor itself signed the memorandum of sale.2 The Creditor contends that the Purchaser’s signature was sufficient as the Purchaser was the party to be charged. The Creditor relies on a number of Massachusetts bankruptcy and state cases that have stated that the right to redeem mortgaged property terminates as early as when the memorandum is executed by the purchaser. In re Dow, 250 B.R. at 8; In re Theoclis, 213 B.R. 880, 882 (Bankr.D.Mass.1997); Brown v. Financial Enterprises Corp., 188 B.R. 476, 482 (Bankr.D.Mass. 1995); Outpost Cafe, 3 Mass.App.Ct. at 7, 322 N.E.2d 183. Implicit in these cases is that the seller’s signature was on the memorandum of sale prior to the purchaser’s signing because the enforcement of the sale by the purchaser is only effective under the Statute of Frauds against the seller after the seller has signed.
The law in Massachusetts concurs with many other jurisdictions that the “party to be charged” is the defendant or the party to be charged with the legal action. Old Colony R.R. Corp. v. Evans, 72 Mass. 25, 32-33 (1856) (when a defendant, whether vendor or vendee, has signed a contract, the defendant may be bound to perform his contract while the other may avoid his obligation by reason of the Statute of *832Frauds); Weseley Software Dev. Corp. v. Burdette, 977 F.Supp. 187, 143 (D.Conn.1997) (memorandum must be signed by party to be charged in the legal proceeding, not the party to be bound by contract); Sill v. Ocala Jewelers, Inc., 210 So.2d 458, 460 (Fla.App.1968) (“the Statute of Frauds is intended for the benefit of both the seller and the purchaser of land, and that ‘the party to be charged’ referred to in the statute shall be construed to mean the person against whom liability is asserted, whether that person be the alleged seller or buyer of the land in question”).
The effect of the Purchaser’s signature is that the Purchaser could be compelled to continue his purchase. The Purchaser’s signature has no significance on the Creditor’s disposition of the Property. To compel a seller to transfer real estate, the seller must have signed the memorandum of sale for it to be enforceable under the Statute of Frauds. Espy v. Eells, 349 Mass. 314, 317, 207 N.E.2d 918 (1965) (necessary for purchaser to prove existence of adequate memorandum signed by the seller in order to compel specific performance of transfer of real property); Smith v. Int’l Paper Co., 87 F.3d 245, 247 (8th Cir.1996) (when party to be charged is the putative seller of real estate, there must be a writing signed by the seller reflecting a promise to sell); Showcase Realty, Inc. v. Whittaker, 559 F.2d 1165, 1167 (9th Cir.1977) (lack of sellers’ signatures in their individual capacities automatically precluded the possibility of an enforceable contract against them).
The Purchaser’s signature, in this matter, did not bind the Creditor to convey the Property. Without the Creditor’s signature or the signature of the auctioneer as an agent for the Creditor, the Purchaser cannot compel the Creditor to transfer the Property. Therefore, unlike the cases upon which the Creditor relies, the party to be charged here is the Creditor. Because the Creditor did not sign the memorandum of sale prior to time the Debtor filed his petition, the memorandum did not extinguish the Debtor’s equity of redemption. Accordingly, because the Debtor retained his equity of redemption at the time of his filing, the Property remained in the Debtor’s bankruptcy estate. The automatic stay therefore applies to the Property and prevents completion of the transfer of the Property to the Purchaser.
IY. Conclusion
For the above reasons, I will enter an order denying that part of the Motion seeking an order regarding the application of the stay. I will reschedule a hearing on that part of the Motion that seeks relief from stay in light of this ruling.
. The Creditor asserts that the auctioneer’s signature on the memorandum of sale was simply a ministerial act that does not transgress the automatic stay. The Creditor is mistaken in this assertion. The execution of a memorandum of sale far exceeds the bounds of ministerial acts, which are essentially clerical in nature. See Soares v. Brockton Credit Union, 107 F.3d 969, 974 (1st Cir.1997).
. An auctioneer may act as an agent for both the purchaser and the seller at an auction sale. Weiner, 270 Mass. at 394, 169 N.E. 64; Giolitto v. Dingolo, 251 Mass. 38, 40, 146 N.E. 226 (1925). Both parties are bound under the Statute of Frauds to the memorandum of sale that an auctioneer executes on their behalf. Rix v. Dooley, 322 Mass. 303, 307, 77 N.E.2d 233 (1948). Failure of the auctioneer to make any memorandum of the sale as required by the Statute of Frauds results in no enforceable sale. See Weiner, 270 Mass. at 394, 169 N.E. 64. Moreover, an auctioneer's authority does not extend beyond the time of the sale unless the seller expressly bestows additional authority on the auctioneer beyond the performance of the auction. Id.; White v. Dahlquist Mfg. Co., 179 Mass. 427, 433, 60 N.E. 791 (1901). The fall of the hammer at the auction signifies the acceptance of the bid and an agreement between the parties, but will not alone terminate a debtor’s equity of redemption under the Statute of Frauds. See In re Dow, 250 B.R. at 8; Williams, 417 Mass. at 384, 630 N.E.2d 581; Way v. Mullett, 143 Mass. 49, 52, 8 N.E. 881 (1886). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493588/ | MEMORANDUM OPINION
ROBERT G. MAYER, Bankruptcy Judge.
THIS CASE was before the court on December 10, 2002, on the motion of Syed H. Zaidi and Shaheen Zaidi to reopen this chapter 7 case and Mr. Zaidi’s Supplementary Memorandum filed on December 11, 2002. The court has reviewed the entire bankruptcy file.
This chapter 7 case was commenced by Syed H. Zaidi and Shaheen Zaidi who filed a voluntary petition pursuant to chapter 7 of the United States Bankruptcy Code in this court on September 25, 1998. The debtors scheduled a medical malpractice *862claim on Schedule B, item 15, in the amount of $21,500.00. They also claimed the asset exempt on Schedule C pursuant to § 34-28.1 of the Code of Virginia. The amount claimed exempt was $21,500.00. This claim of exemption claimed the entire malpractice claim as exempt.
The first meeting of creditors was scheduled for, held on and concluded on October 22, 1998. No objection to the debtors’ claim of the medical malpractice claim was filed within 30 days after the conclusion of the first meeting of creditors. In fact, no objection to any property claimed exempt was ever filed by any party in interest. The debtors were granted a discharge on December 31, 1998. The trustee filed a no distribution report on July 23, 1999 and the case was closed on July 27,1999.
Mr. Zaidi now seeks to reopen the case. The principal purpose is to determine whether the medical malpractice claim was or remains property of the estate and more particularly whether it was property of the estate on particular dates. Mr. Zaidi asserts that his bankruptcy counsel, the trustee, and his medical malpractice counsel acted improperly with respect to this asset, and if it was property of the estate at particular times, seeks to have the conduct of his attorneys and the trustee reviewed by this court.
The court is authorized to reopen cases to administer assets to accord relief to the debtor or for other cause. 11 U.S.C. § 350(b). However, the court should not reopen a case if to do so would accomplish no purpose or would be futile. Thompson v. Commonwealth of Virginia (In re Thompson), 16 F.3d 576, 581-82 (4th Cir.1994) cert. den. 512 U.S. 1221, 114 S.Ct. 2709, 129 L.Ed.2d 836 (1994); In re Carberry, 186 B.R. 401 (Bankr.E.D.Va.1995)(reopening case to schedule omitted creditor would be futile). Thus, the question presented is whether there is any relief that the court may grant to the debtor.
The central issue is whether the medical malpractice claim and settlement proceeds were property of the bankruptcy estate, and if so, the period of time during which they were property of the estate. All property (with certain exceptions, none of which are applicable here) becomes property of the estate upon the commencement of a bankruptcy case. 11 U.S.C. § 541. A case is commenced by the filing of a voluntary petition in bankruptcy, 11 U.S.C. §§ 301, 302. The treatment of property of the estate is different under the Bankruptcy Code of 1978, the law now in effect, than it was under the Bankruptcy Act of 1898. Under the Bankruptcy Act of 1898, exempt property did not become property of the estate. It was not administered by the bankruptcy court. Lockwood v. Exchange Bank, 190 U.S. 294, 23 S.Ct. 751, 47 L.Ed. 1061 (1903). In 1978, Congress intentionally expanded the scope of property of the estate to include all property including property that might be claimed exempt. Exemptions are provided under § 522 of the Bankruptcy Code. The exemptions that may be claimed are those provided in § 522(d) (the federal bankruptcy exemptions) or under § 522(b)(2), (nonbankruptcy exemptions) unless a state has opted out of the federal bankruptcy exemptions in which case only those exemptions allowable under § 522(b)(2) are available. 11 U.S.C. § 522(b)(1). Virginia has opted out of the federal exemptions. Virginia Code § 34-3.1. Consequently, in Virginia, debtors may only claim those exemptions allowed under § 522(b)(2). These include those allowable under state exemptions. One state exemption is § 34-28.1 which exempts personal injury recoveries, which includes medical malpractice claims. In order to claim an exemption in *863bankruptcy, the exemption must be scheduled on Schedule C of the debtor’s schedules.
Mr. Zaidi properly scheduled the malpractice claim on Schedule B and properly exempted it on Schedule C. The trustee and creditors had 30 days from the conclusion of the first meeting of creditors within which to object to his claims of exemptions. F.R.Bankr.P. 4003(b). If no objection is filed within that period, the exemption is allowed and the property ceases to be property of the estate. Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). In this case, neither the trustee nor any creditor filed an objection to the claim of exemption of the medical malpractice claim. On November 21, 1998, 30 days after the conclusion of the first meeting of creditors, all claims of exemption were allowed and, specifically, the medical malpractice claim ceased to be property of the bankruptcy estate. Consequently, the medical malpractice claim (which includes any settlement proceeds) was property of the bankruptcy estate from September 25, 1998, through November 21,1998.
Mr. Zaidi focuses on an order entered by the Circuit Court of Arlington County, Virginia, ordering disbursement of the proceeds of the medical malpractice claim. Mr. Zaidi stated that the total recovery from the medical malpractice action was $20,000.00. There was a dispute between his attorneys and him as to the disposition of the recovery. The recovery was paid into the Circuit Court in the case he brought against his medical provider. This relieved his medical provider of further liability, but permitted the court to determine the proper allocation of the funds between Mr. Zaidi and his attorneys. The fund increased because of interest earned on it. On December 19, 1998, an order disbursing the funds was presented to the Circuit Court. The order was endorsed by his two medical malpractice attorneys, by the bankruptcy trustee, and Mr. Zaidi. Mr. Zaidi endorsed it “seen and objected to court disregarded contract provision for binding arbitration”. Notwithstanding Mr. Zaidi’s objection, the court entered the order authorizing the disbursement of the funds on that date. At the time the order was entered, all of the parties who had an actual or potential interest in the fund were before the court.
At the time the order was actually entered by the court, the trustee had no further interest in the fund because the claim of exemption had been allowed and the property had ceased to be property of the bankruptcy estate. The Circuit Court was assured by the endorsement of the four individuals that everyone who had or could have asserted an interest in the funds was before the court and that all arguments about the proper disposition of the fund could be presented. In light of Mr. Zaidi’s handwritten objection on the order, it appears that Mr. Zaidi presented his objection to the court. If he did not actually present his objection to the court in person, he could have and, more importantly, the court knew of the objection. The court overruled the objection. The proper action at that time, if he continued to be aggrieved by the order, was for Mr. Zaidi to take an appeal to the Supreme Court of Virginia. The record is unclear as to whether such an appeal was taken. The funds were disbursed to his medical malpractice lawyers.
Reopening the case will not assist in the determination of when the medical malpractice claim was property of the estate. There are no factual issues in dispute on this issue. It is a question of law which can be determined by a review of the record. Any court can make that determination, if necessary. It is clear on the face *864of the record that the bankruptcy estate’s interest in the fund ended on November 21, 1998, and that the funds ceased to be property of the estate on that date.
Reopening this case cannot affect the December 18, 1998, order entered by the Circuit Court of Arlington County. The time to appeal to the Virginia Supreme Court has expired. Moreover, this court does not sit as an appellate court to review state court judgments. District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983); Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923).
Mr. Zaidi argues that there is further reason to reopen the case, to sanction the attorneys and the trustee for what Mr. Zaidi considers improper conduct. He asserts that the trustee endorsing the order after the claim of exemption had been allowed and after the medical malpractice claim was no longer property of the estate was improper: It is, however, common for a trustee to endorse such orders. The purpose is to-provide comfort to the parties and the applicable court that the bankruptcy estate’s interest, if any, has been properly represented. There is nothing per se improper about a trustee providing such comfort.
There is a more fundamental problem with Mr. Zaidi’s request to sanction the trustee. Under the Bankruptcy Act of 1898, the bankruptcy court appointed trustees and supervised them. In 1978, however, Congress decided that it was more appropriate to separate the judicial function and the administrative function. The judicial function in bankruptcy cases is handled by the bankruptcy courts and the bankruptcy judges. The administrative function is handled by the trustees who are appointed and supervised by the United States Trustee. The Office of the United States Trustee is a part of the Executive Branch of the federal government. It is located within the Department of Justice. The intention was to provide independence to the trustees and assure that their appointments were not’ depen-dant upon the bankruptcy judges before whom they appeared. This avoids an appearance of impropriety and assures the trustees of their ability to exercise their independent judgment before the court without fear of judicial repercussions. This does not mean that they are not accountable for their administrative actions. The supervision of the panel trustees is a function of the Office of the United States Trustee and is independent of whether a case is opened or closed. If the Office of the United States Trustee believes that there was an impropriety, it has the ability to supervise the trustee independently of the court. Consequently, seeking to reopen the case to review the conduct of the chapter 7 trustee which is properly the function of the Office of the United States Trustee, is not appropriate. That supervisory function is vested in the Office of the United States Trustee not the court. In this particular case, it appears that the Office of the United States Trustee investigated Mr. Zaidi’s complaints and responded to them. There remains nothing for this court to do.1
Mr. Zaidi also apparently seeks to have the court determine the proper allocation of the fee and review the conduct of his personal injury attorneys. If there was professional misconduct of the personal injury lawyers, Mr. Zaidi should pursue the matter with the Virginia State Bar which *865regulates the conduct of attorneys. It would be inappropriate for this court to become involved in such action. The two attorneys had no connection with the bankruptcy court. They did not appear in this court nor pursue any suits in this court in relation to this case. This matter is best left to the state agencies responsible for handling complaints against attorneys.
Nor is the court in a position to adjudicate the propriety of the disposition of the funds paid into the Circuit Court of Arlington County, Virginia. This is a state court function which was completed by the Circuit Court almost four years ago. As indicated above, this court does not sit as an appellate court to review state court actions, particularly where that state court action has nothing to do with this bankruptcy proceeding.
The debtor has not suggested any other reason to reopen the bankruptcy case. The reasons suggested are not sufficient to justify the case to be reopened.
Mr. Zaidi objects to considering the United State Trustee’s response which was filed after five days before the hearing in this matter. It was filed on December 6, 2002. The hearing was four days later. See Local Bankruptcy Rule 5010-1. The court always exercises its independent judgment even when there is a default to determine whether there are consequences of the default. Ryan v. Homecomings Financial Network, 253 F.3d 778 (4th Cir.2001). Here, even if no response had been filed by the United States Trustee, the court would have reviewed Mr. Zaidi’s motion and denied it. The court will deny the motion to reopen.
. Mr. Zaidi asserts that there was a fraud perpetrated on this court. The record does not support this assertion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493589/ | DECISION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon the Plaintiff/Trustee’s Motion for Summary Judgment. In this Motion, the Plaintiff/Trustee requests that this Court grant judgment on his Complaint to recover from the Defendant a certain account receivable which the Debtor shows due and owing. The facts underlying this Motion are briefly as follows:
On September 17, 2001, the Debtor, Metropolitan Environmental Inc., filed a petition in this Court for relief under Chapter 11 of the United States Bankruptcy Code. Later, on March 28, 2002, the Debtor’s case was converted to Chapter 7. The Plaintiff, Bruce French, was thereafter appointed as trustee.
On November 7, 2002, the Trustee commenced the instant action to collect One Thousand Thirty-eight dollars ($1,038.00) on a certain account receivable which the Debtor’s records showed was due and owing. As it relates to this debt, the facts presented evidence that on November 1, 2001, the Defendant issued a check in the *898amount of One Thousand Thirty-eight dollars ($1,038.00) to Systran Financial Service Corporation with whom the Debtor had a factoring arrangement.
On January 31, 2003, the Plaintiff/Trustee filed the instant Motion for Summary Judgment. Therein it was stated:
Defendant is in default by failing to respond to Trustee’s Complaint to collect an Account Receivable.
The instant motion is tendered, rather than one for default judgment, so that the Court may consider the impact, if any, of payments being made to a third party, allegedly for the debtor’s benefit.
(Doc. No. 4).
DISCUSSION
An action to collect on an account' receivable is a core proceeding. 28 U.S.C. § 157(b)(2)(E); In re National Equipment & Mold Corp., 60 B.R. 133, 136 (Bankr.N.D.Ohio1986). Thus, this case is a core proceeding.
This cause comes before the Court upon the Plaintiffs Motion for Summary Judgment. The standard for summary judgment is set forth in Fed.R.Civ.P. 56, which is made applicable to this proceeding by Bankruptcy Rule 7056, and provides for in pertinent part:' A movant will prevail on a motion for summary judgment if, “the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In order to prevail, the movant must demonstrate all the elements of the cause of action. R.E. Cruise, Inc. v. Bruggeman, 508 F.2d 415, 416 (6th Cir.1975). Thereafter, upon the movant meeting this burden, the opposing party may not merely rest upon their pleading, but must instead set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). Inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita v. Zenith Radio Corp., 475 U.S. 574, 586-88, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).
Pursuant to the facts set forth above, the single issue raised in this matter may be phrased as this: May the Plaintiff, as the trustee of the Debtor’s bankruptcy estate, recover from the Defendant a debt that the Debtor still shows as due and owing, when the payment of that debt, although having been made, was not tendered to the Debtor, but was instead tendered to a factor with whom the Debtor had contracted?
Upon a debtor filing for bankruptcy, the trustee succeeds to those interest held by the debtor as of the commencement of the case. Thus, in stepping into the shoes of the debtor, the trustee may assert those prepetition causes of action possessed by the debtor. Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340 (3rd Cir.2001). However, the converse is also true: Absent specific authority to the contrary, the trustee is subject to the same defenses that could have otherwise been asserted by the defendant had the action been instituted by the debtor. Id. In this regard, the Defendant in this case defends against the Trustee’s Complaint on the grounds that any obligation it had to pay on its account with the Debtor was discharged when it paid the Debtor’s factor, Systran Financial Service Corporation.
Factoring is defined as the “sale of accounts receivable of a firm to a factor *899at a discounted price.” Capital City Fin. Group, Inc. v. Mac Const. Inc., 48 UCC Rep.Serv.2d 1128, fn. 1, 2002 WL 2016332 (Ohio App. 5th Dist.2002), citing Black’s Law Dictionary 592 (6th Edition, 1990). In return for selling the accounts receivable at a discounted price, the seller receives two immediate advantages: (1) immediate access to cash; and (2) the factor assumes the risk of loss. Id. The term factoring is also used when a business, instead of actually selling outright their accounts receivable, assigns their accounts. Ohio JuR.3d, Secured Transactions § 76. However, regardless of whether this case involves an actual sale of accounts receivable or merely the assignment of such accounts, the Court, for the reasons that will now be explained, finds that the Defendant’s payment to the Debtor’s factor, Systran Financial Service Corporation, affords a valid defense against the Trustee’s Complaint to Recover on the Debtor’s Account Receivable.
First, an outright sale of property, in the absence of any right of redemption or other agreement to the contrary, terminates the seller’s interest in the property. Thus, by selling its account receivable, the Debt- or, and thus by implication the Trustee, lost their interest in the account, and therefore neither has any right to collect on the account. Under essentially the same reasoning, the same result is also reached if the arrangement between the Debtor and its factor were not an actual sale, but was rather an assignment of accounts.
Ohio law defines an assignment as “a transfer or setting over of property, or of some right or interest therein, from one person to another, and unless in some way qualified, it is properly the transfer of one’s whole interest in an estate, or chattel, or other thing.” State ex rel. Leach v. Price, 168 Ohio St. 499. 504, 156 N.E.2d 316, 320 (1959). Thus, pursuant to this definition, it would follow that unless the Debtor’s factoring agreement with Systran Financial Service Corporation was in some way qualified (and there is no evidence to support this), the Trustee’s right to collect on the account immediately terminated upon its assignment.
Finally, even if one were to set aside the foregoing legal arguments, basic principles of equity support the position that the Trustee is not entitled to a recovery against the Defendant. This is because the Debtor’s estate was presumably remunerated by Systran Financial Service Corporation for the sale/assignment of its account receivable. Thus, to now allow the Trustee to receive payment on this account receivable would, in essence, allow the Debtor’s estate a double recovery. In addition, even if the Debtor did not receive remuneration for the sale of its account receivable, common sense would dictate that the Trustee’s cause of action is not against the Defendant, but is instead against the Debtor’s factor, Systran Financial Service Corporation.
In reaching the conclusions found herein, the Court has considered all of the evidence, exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in this Decision.
Accordingly, it is
ORDERED that the Motion for Summary Judgment submitted by the Plaintiff/Trustee, Bruce French, be, and is hereby, DENIED.
It is FURTHER ORDERED that the Complaint of the Plaintiff/Trustee to Collect an Account Receivable, be, and is hereby, DISMISSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493590/ | *895
MEMORANDUM OPINION AND ORDER
JERRY W. VENTERS, Bankruptcy Judge.
Farmland Industries, Inc., and its affiliated debtors in these Chapter 11 proceed*896ings have asked the Court to give its blessing to the termination of numerous retiree benefit programs and employment agreements. The requests raise an issue of first impression for the Court — whether a Chapter 11 debtor’s proposed termination of retiree benefits must comply with the procedures and requirements of 11 U.S.C. § 1114 when the debtor has an absolute right under the pre-bankruptcy plan documents to unilaterally terminate those benefits.
There are two motions before the Court. The first is the Debtors’ Motion for Order Authorizing the Termination of Certain Retiree Benefits Under Group Term Life Insurance Policy with Minnesota Life Insurance Company (Document # 1688)(the “Retiree Benefits Motion”). The second is the Debtors’ Motion for Order Authorizing (I) the Termination of Certain Executive and Director Benefits and (II) Rejection of Certain Executory Employment Agreements (Document # 1689)(the “Executive Benefits Motion”). Both Motions were filed on December 11, 2002. The Court conducted a hearing on both Motions on January 28, 2003, at the United States Courthouse in Kansas City, Missouri, and took the Retiree Benefits Motion under advisement at that time. Because of a scheduling conflict for counsel, the Court held a continued hearing on February 11, 2003, on the Objections of twelve retired executives1 to the Executive Benefits Motion and then took that Motion under advisement as well. The Court has reviewed the pleadings and relevant case law, has considered the evidence adduced at the hearings and the arguments of counsel, and is now ready to rule.2
For the reasons set out below, the Court will deny the Debtors’ Retiree Benefits Motion(Document # 1688) in its entirety for the Debtors’ failure to comply with 11 U.S.C. § 1114. The Court will deny that portion of the Executive Benefits Motion (Document # 1689) that requests approval for the termination of retiree benefits as defined in 11 U.S.C. § 1114(a), and will grant that portion of the Executive Benefits Motion that proposes to terminate the retirement benefits for various current and former executives and directors. The Court will also grant the Debtors’ request, included in the Executive Benefits Motion, to reject the employment agreements of four former executives.
FACTUAL FINDINGS AND BACKGROUND3
A. Retiree Benefits Motion
In the Retiree Benefits Motion, the Debtors4 seek Court approval to termi*897nate certain life insurance benefits provided for their retired employees under a group term life insurance policy with Minnesota Life Insurance Company (“Minnesota Life”). The life insurance program was started in 1977. The Minnesota Life policy has been in effect only since October 1, 2001; prior to that time, the life insurance coverage had been provided under a policy issued by American United Life Insurance Company. The policy provides life insurance for approximately 2,200 former or retired employees (“Retirees”), as well as an unstated number of currently active employees. The employees are divided into six classes under the policy, but the Debtors do not seek to terminate life insurance coverage for all six classes of employees. They seek only to terminate the life insurance benefits for current Retirees and, prospectively, the obligation to provide life insurance for active employees as they retire in future years.5 The amount of life insurance coverage for the active employees and the Retirees varies in each class. Most of the Retirees have coverage in excess of $10,000, and some have up to $50,000 of coverage. The monthly cost of premiums to the Debtors is approximately $63,000.00, or $756,000.00 a year. This cost will increase as active employees with the insurance coverage retire and become eligible for additional life insurance benefits. Farmland provides the benefits at no cost to the Retirees; the Retirees have never contributed to the life insurance program. (McCoy Affidavit, ¶ 18)
Farmland retained the right to unilaterally terminate or amend the life insurance program without the consent of the Retirees. (McCoy Affidavit, ¶ 11; Debtors’ Ex. 33, p. 2; Debtors’ Ex. 34, p. 21) This is not the first time Farmland has altered or restricted the life insurance program. In 1988, Farmland limited the group of people eligible for life insurance to those who were already employed by Farmland. In 2001, Farmland altered the program to further restrict eligibility in the program. (McCoy Affidavit, ¶ 16) As the policyholder, Farmland has the ability to terminate the insurance policy with Minnesota Life at any time, upon 31 days’ written notice to Minnesota Life. (Debtors’ Ex. 32, p. 10) Although it seeks to terminate the group insurance policy, Farmland has arranged with Minnesota Life for the Retirees to obtain alternative life insurance coverage at their own expense if the Retiree Benefits Motion is granted; however, the objecting Retirees contend that this option is not viable because the cost of the replacement life insurance is prohibitive. For example, Calvin Elliott, one of the objecting Retirees, stated to the Court that it would cost him $970.00 a year for $10,000 of insurance coverage, the maximum he would be permitted to obtain under the program.6
The Official Committee of Unsecured Creditors and the Bondholders Committee both supported the termination of benefits *898as proposed in the Retiree Benefits Motion.
B. Executive Benefits Motion
In the second Motion before the Court, the Executive Benefits Motion, the Debtors seek to terminate several programs or plans providing a variety of benefits for certain current and former executive employees (the “Executives”) and members of the Farmland Board of Directors (the “Board”). The programs that this Motion seeks to terminate are the Farmland Industries, Inc. Executive Deferred Compensation Plan (the “Deferred Comp Plan”);the Farmland Industries, Inc. Supplemental Executive Retirement Plan (the “SERP”); the Union Equity Deferred Compensation Plan (the “Union Equity Plan”); life insurance provided to current and former members of the Board (the “Director Life Plan”); supplemental life insurance benefits to members of the Board (the “Supplemental Life Plan”); a deferred compensation plan for the Board (the “Director Deferred Comp Plan”); and life insurance benefits under a split-dollar life insurance arrangement offered to certain Executives (the “Executive Life Plan”).7
It is uncontested that the Executive Benefits Plans expressly give Farmland the right to terminate or modify the various programs and benefits. Farmland states that termination of the Executive Benefits Plans will provide over $16 million to the bankruptcy estate, primarily as a result of the cancellation of life insurance policies that were purchased to help Farmland fund the various programs and benefits. The cash surrender values payable to Farmland on the various insurance policies can be summarized as follows:
Executive Life Plan $4,150,000.00
SERP 4,100,000.00
Union Equity Plan 5,600,000.00
Director Life Plan & Supplemental Life Plan 2,599,000.00
1. Executive Deferred Compensation Plan
Under the Deferred Comp Plan, certain executives of the Debtors were allowed to defer portions of their salaries until a later date (specified by the Executives) so as to gain certain tax benefits. Approximately 138 current and former employees of the Debtors participate in the Deferred Comp Plan. In addition to their deferred compensation, the Executives are entitled to receive an additional distribution, called a Retirement Adjustment Payment, to replace the loss in retirement benefits that occurs because of the salary deferral.8 Section 11 of the Deferred Comp Plan (Debtors’ Ex. 22) authorizes the Farmland Board, in its absolute discretion, to suspend, amend, modify, or terminate the Plan at any time, without notice to the participating Executives.
Farmland states that the Debtors’ liabilities to the Executives participating in the Deferred Comp Plan are about $14.4 million for deferred compensation and $2.5 million in Retirement Adjustment Payments. All of these amounts were incurred prior to the Petition Date and are unfunded. According to the Motion, the Board of Directors of Farmland suspended the Deferred Comp Plan as of May 30, 2002, immediately prior to the filing of the Chapter 11 bankruptcy.
*899
2. Supplemental Executive Retirement Plan
The SERP, according to the Motion, is a non-qualified benefit plan designed to supplement pension payments for Executives who are affected by the limitations contained in Sections 401(a)(17) and 415 of the Internal Revenue Code relating to pension calculations. Under this plan, the Debtors have agreed to replace all or a portion of the employer-provided pension benefits lost by the Executives as a result of those limitations. Fifty-two current and former employees of the Debtors were receiving payments under the SERP as of the Petition Date. The Debtors ceased making payments under the SERP as of the Petition Date and have made no payments with respect to the SERP since the bankruptcy filing.
The Debtors state that the current amount of liabilities payable to participants in the SERP is about $9 million, and that, pursuant to Section 9 of the SERP, all amounts due to participants are general unsecured claims. However, the Debtors maintain a number of life insurance policies that, while not directly related to the SERP, are intended to assist the Debtors in satisfying the liabilities associated with the SERP. The Debtors contend that the insurance policies, which have a cash surrender value of about $4.1 million, are property of the bankruptcy estate, and they seek to surrender the policies so as to realize their cash values for the Debtors’ estates.
3. Union Equity Plan
The Union Equity Plan is an informal name given to several agreements entered into by the Debtors and certain employees who worked for Union Equity Cooperative Exchange when it was acquired by Farmland in 1992. Under this plan, the Debtors agreed to pay the affected employees specified sums in installments over 10 years after the employees’ retirements. The Debtors have agreements with 11 former employees (nine of whom were receiving payments prior to the Petition Date) and one current employee. The Debtors assert that all obligations under the Union Equity Plan are general unsecured claims. As a means of helping fund these obligations, the Debtors purchased several life insurance policies, which now have a cash surrender value of about $5.9 million. As with the other life insurance policies, the Debtors assert that the insurance policies are property of the estate and that the participants in the Union Equity Plan do not have any claim or interest in the policies.
The Debtors contend that the agreements between Farmland and the Union Equity Plan participants are not executory contracts, but are simply “promises to make payments at specified times.” To the extent that the Court should determine that the agreements constitute executory contracts, the Debtors ask that they be allowed to reject the contracts pursuant to 11 U.S.C. § 365. Terminating the Union Equity Plan would not subject the Debtors to any additional liabilities.
4.Director Life Insurance Plan
Under the Director Life Plan, the Debtors provide each member of the Farmland Board of Directors with a life insurance policy in the face amount of $100,000. Upon a member’s retirement, the policy is reduced to $50,000. Currently, the Debtors provide life insurance to 20 active Board members and 28 retired Board members, at an annual cost of $246,739.51. In connection with this Plan, the Debtors have entered into Split Dollar Agreements with the directors, which provide that the Debtors are the owners of the insurance policies and require that the Debtors pay *900the premiums thereon, and the individual directors designate the beneficiaries of the policies. The Split Dollar Agreements entered into with individuals who became members of the Board prior to 1999 are slightly different than those executed in 1999 and thereafter. The pre-1999 Split Dollar Agreements allow the Debtors to terminate the arrangement at any time and to discontinue the life insurance without the Board member’s consent, although the Debtors must provide the members with notice of termination of the program. The Split Dollar Agreements entered into in 1999 and thereafter prevent the Debtors from terminating an individual’s life insurance after the individual has completed his or her term on the Board or has retired or become disabled. Additionally, the director would have the option to buy out the applicable policy for the lesser of (i)' the Debtors’ interest in the policy or (ii) the cash surrender value of the policy.
The Debtors assert that those current and retired Board members who are subject to the pre-1999 Split Dollar Agreements would have no claim against the Debtors because the Debtors have the right to cancel the life insurance benefits unilaterally, at any time and without the member’s consent. As for those members who are covered by Split Dollar Agreements entered into in 1999 and thereafter, their life insurance benefits have vested and those individuals would possibly have a claim against Farmland with respect to those benefits, the Debtors state.
Under the agreements, the current and former Board members have the right to purchase their life insurance policies from the Debtors. Because some of the individuals affected might not be able to obtain other life insurance coverage, Farmland intends to give the members the option to purchase their insurance policies so as to continue the coverage at their own cost. The Debtors would, however, be permitted to realize the cash surrender value of the policies. In addition to saving over $246,000 a year in insurance premiums, the Debtors would realize about $2.4 million in proceeds from surrender of the policies.
5. Supplemental Director Life Insurance Plan
In addition to the regular Director Life Plan, the Debtors maintain a program to provide supplemental life insurance benefits to Board members who are elected to the Board for a second term. This Plan provides each eligible Board member with an additional $100,000 in life insurance coverage. Presently, 16 active Board members and five retired Board members participate in the Supplemental Life Plan. As with the Director Life Plan, Farmland has entered into Split Dollar Agreements with the Board members participating in the Plan. Participating members are the owners of their individual insurance policies, but they are required to collaterally assign the policies to Farmland during their terms on the Board. Farmland is obligat- ’ ed to pay the cost of the premiums on each individual’s policy for the longer of 10 years or the length of time the individual serves on the Board after election to a second term. After an individual retires, Farmland pays the insurance premiums indirectly by making the amount of the premium payment to the individual under a Director Compensation Continuation Plan, and the individual in turn pays the required premium to the insurance company. The Director Compensation Continuation Plan would be unnecessary if the Supplemental Life Plan is terminated.
Terminating the Supplemental Life Plan would save the Debtors about $50,000 a year in insurance premiums. Farmland would also be positioned to recover from the participants approximately $75,000 in *901premiums paid on their behalf, pursuant to the Split Dollar Agreements.
6. Director Deferred Compensation Plan
The Director Deferred Comp Plan is similar to the Executive Deferred Comp Plan for the Executives. It allows Board members to defer their compensation in much the same way the Executives are permitted to defer their compensation. Only four Board members have participated in this program. Farmland has current liabilities of approximately $109,000 to the directors, and has not set aside any funds to cover these liabilities. The documents establishing the Plan allow Farmland to discontinue the program at any time. Terminating the Plan will limit further liabilities under the Plan.
7. Executive Split Dollar Life Insurance Plan
Under the Executive Life Plan, the Debtors and the .Executives share the costs of premiums for the Executives’ life insurance coverage. Participating active Executives receive life insurance equal to two-and-one-half times their annual compensation; this amount is reduced by one-half upon retirement. Seventeen active employees and 60 retired employees participate in the Executive Life Plan. The Executives receive the life insurance coverage pursuant to individual Split Dollar Agreements with Farmland. There are two different Split Dollar Agreements involved in the Executive Life Plan. Both forms of Agreement authorize Farmland to terminate the Agreement, subject to the right of the employee to purchase the life insurance policy providing coverage for the employee. The Split Dollar Agreements executed in 1997 and thereafter provide that the Executive’s benefit fully vests upon the Executive’s attainment of retirement eligibility, whereas those Agreements executed prior to 1997 contain no such provision. Therefore, the Debtors believe that the benefits provided under the 1997 and later Split Dollar Agreements are “retiree benefits” within the meaning of 11 U.S.C. § 1114 and they do not seek to terminate those benefits. However, the Debtors do seek to terminate the benefits provided to those Executives with Split Dollar Agreements entered into prior to 1997.
Although they have offered no evidence of the savings that might be realized by terminating just the Executive Life Plan, the Debtors state that the benefits received do not justify its continuation.9 The Debtors would receive approximately $4.1 million from the surrender of the life insurance policies under this Plan.
The termination of the Executive Life Plan was objected to by twelve retired Farmland executives (the “Retired Executives”), who asserted that they were, in large part, induced to retire by Farmland’s promise that the life insurance policies would be kept in force. Jack Warren, one of the Retired Executives, believed that his right to the insurance coverage had vested prior to his retirement, based on a document he received from Farmland in 1990 stating that vesting in the Split Dollar Life Insurance program would occur after 10 years with the company and upon reaching the age of 55. (Retired Executives’ Ex. 102) Warren also believed that, upon his retirement, his life insurance would be paid up for the rest of his life, based on another document he received in 1990. (Retired Executives’ Ex. 108) How*902ever, Warren acknowledged on cross examination that he had received and signed a new agreement in 1993 that gave Farmland the right to terminate the life insurance. Warren testified that many of the Retired Executives made retirement decisions based on having the insurance coverage in effect for the rest' of their lives.
At the hearing on February 11, counsel for the Retired Executives argued that the proposed termination of the split-dollar life insurance policy should be denied because Farmland had failed to meet its burden under § 1114(g)(3) of the Bankruptcy Code. Counsel further argued that Farmland’s decision to terminate these life insurance policies was bad business judgment because it was his belief that the Debtors would receive more cash if they waited until the death benefits were paid on the policies rather than taking the cash surrender values currently available. A summary report of the Retired Executives’ benefits showed that Farmland would receive $2,619,325 in cash upon termination of their life insurance coverage. (Rainey Ex. 101)
C. Termination of Employment Agreements
In addition to requesting Court approval to terminate all of the Plans set out above, the Debtors also seek to reject four employment agreements that the Debtors contend are executory contracts. These are the employment agreements (the “Employment Agreements”) of the former president and chief executive officer of Farmland, Robert W. Honse (“Honse”); the former chief financial officer of Farmland, John F. Berardi (“Berardi”); the former president of Farmland Foods, Inc., William Fielding (“Fielding”); and another former president and chief executive officer of Farmland, H.D. Cleberg (“Cleberg”) (collectively, the “Former Officers”). Under the terms of the Employment Agreements, the Debtors remain obligated to pay severance and other benefits to the Former Officers and — in return — the Former Officers are obligated to provide consulting services as needed, cooperate with the Debtors, and refrain from competition or interference with the Debtors’ businesses. The Debtors’ costs under these Employment Agreements exceed $120,000.00 per month. Under the agreement with Cleberg, the Debtors are obligated to make two remaining payments of $450,000.00 each.
Honse objected to the Debtors’ Motion on grounds that his Employment Agreement was not an executory contract, because Honse had no remaining material obligations under his Employment Agreement. Although counsel for Honse presented this argument at the hearing on January 28, he did not adduce any evidence in support of the argument.
Fielding filed a qualified objection to the Motion, arguing that his termination by Farmland was “without cause” as defined in his Employment Agreement, and stating that he is entitled to liquidated damages equal to two years’ base salary and various other payments. He requested additional time to file an amended Proof of Claim to present these claims. By stipulation with the Debtors (Document # 1960), Fielding was permitted to file an amended Proof of Claim to include all of his claims with respect to the Employment Agreement. Therefore, Fielding’s objection is deemed withdrawn.
Calvin Elliott, one of the Retirees covered by the SERP, filed an objection stating that Farmland employees understood that, once payments had commenced under the SERP, that was an irrevocable benefit and that provisions of the Plan allowing for unilateral termination by Farmland only applied to those employees *903who had not yet elected to retire in partial reliance on the Plan. If a covered employee had not retired, he or she would be able to adjust retirement plans with the knowledge that the supplemental retirement benefits would not be available upon one’s retirement. This understanding was widespread among Farmland employees, Elliott stated. Elliott appeared at the hearing on January 28 but did not testify, although he did address the Court with respect to the Retiree Benefits Motion.10
The Official Committee of Unsecured Creditors and the Bondholders Committee both supported the termination of benefits as proposed in the Executives Benefits Motion.
Additional facts will be developed as necessary in the following discussion to resolve the issues before the Court.
DISCUSSION
A. The standard for approval of the Motions
The Debtors state that the standard to be employed in ruling on the Motions is similar to the business judgment rule that would apply for the acceptance or rejection of an executory contract under § 865 of the Bankruptcy Code (“Code”), and therefore the business judgment standard should apply. Under the business judgment standard, the question is whether the termination of the retiree benefits is in the Debtors’ best economic interests, based on the Debtors’ best business judgment in the circumstances. See In re Food Barn Stores, Inc., 107 F.3d 558, 567, fn. 16 (8th Cir.1997); In re Steaks to Go, Inc., 226 B.R. 35, 37 (Bankr.E.D.Mo.1998). This standard is satisfied when a debtor shows that the action to be taken will benefit the estate; it need not show that continued performance would result in an actual loss of value from the estate. In re Audra-John Corporation, 140 B.R. 752, 755-56 (Bankr.D.Minn.1992). “[T]he [Bankruptcy] Code favors the continued operation of a business by a debtor and a presumption of reasonableness attaches to a debtor’s management decisions.” In re Johns-Manville Corp., 60 B.R. 612, 615-16 (Bankr.S.D.N.Y.1986).11
With respect to the Employment Agreements of the Former Officers, the Court agrees with the Debtors that the business judgment rule applies, because the Court finds that the Employment Agreements are, indeed, executory contracts. However, with respect to the remainder of the Motions, the Court believes that, if § 1114 is applicable to the proposals to terminate the retiree benefits, a balancing of the equities standard would apply. In National Labor Relations Board v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984), the United States Supreme Court adopted a balancing of the equities test in determining whether a collective bargaining agreement should be rejected pursuant to 11 U.S.C. § 1113. Because of the similarities between §§ 1113 and 1114 (discussed here-*904inbelow), the Court believes that the balancing of the equities test should be applied to any request to terminate retiree benefits.12
B. Application of Section § 1114
A threshold question that must be resolved is whether § 1114 of the Code applies to the Debtors’ proposed actions. With the exception of one part of the Executive Life Plan, the Debtors contend that § 1114 does not apply to the Motions. They contend that § 1114 is inapplicable when, as here, the insurance benefit program or plan, by its own terms, allows an employer to modify or terminate the program unilaterally. To the contrary, the objecting Retirees assert that § 1114 is applicable, and that it prohibits the Debtors from terminating their benefits, at least at this juncture.
The resolution of this question is not so easy as it might initially appear. Since its enactment in 1988, § 1114 “has spawned diverse and sometimes inconsistent interpretations and theories as to the substantive and procedural standards necessary for modification of retiree benefits, (footnote omitted) Expressed colloquially, these interpretations are all over the lot.” In re Ionosphere Clubs, Inc., 134 B.R. 515, 517 (Bankr.S.D.N.Y.1991) There are very few reported cases in which the courts have sought to divine the intentions of Congress in enacting § 1114; the Court’s research has disclosed only one Circuit Court of Appeals decision on the issue. There are no reported Eighth Circuit cases on this issue. What few cases there are are distinctly and almost evenly divided. Some have held that a Chapter 11 debtor must comply with the provisions of § 1114 before it can lawfully modify or terminate the health and welfare benefits of retirees. Others hold that, where the debtor has the pre-bankruptcy right to terminate the benefits, § 1114 does not apply.
In this Court’s view, § 1114 prohibits a debtor from terminating or modifying any retiree benefits (as defined in that section) during a Chapter 11 case unless the debtor complies with the procedures and requirements of § 1114, regardless of whether the debtor has a right to unilaterally terminate the benefits.
Section 1114 provides, in relevant part: (e)(1) Notwithstanding any other provision of this title, the debtor in possession, or the trustee if one has been appointed under the provisions of this chapter (hereinafter in this section “trustee” shall include a debtor in possession), shall timely pay and shall not modify any retiree benefits, except that-
(A) the court, on motion of the trustee or authorized representative, and after notice and a hearing, may order modification of such payments, pursuant to the provisions of subsections (g) and (h) of this section, or
(B) the trustee and the authorized representative of the recipients of those benefits may agree to modification of such payments,
after which such benefits as modified shall continue to be paid by the trustee.
sf< % s|i % ^
*905(f)(1) Subsequent to filing a petition and prior to filing an application seeking modification of the retiree benefits, the trustee shall-
(A) make a proposal to the authorized representative of the retirees, based on the most complete and reliable information available at the time of such proposal, which provides for those necessary modifications in the retiree benefits that are necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably; and
(B) provide, subject to subsection (k)(3), the representative of the retirees with such relevant information as is necessary to evaluate the proposal.
(2) During the period beginning on the date of the making of a proposal provided for in paragraph (1), and ending on the date of the hearing provided for in subsection (k)(l), the trustee shall meet, at reasonable times, with the authorized representative to confer in good faith in attempting to reach mutually satisfactory modifications of such retiree benefits.
(g) The court shall enter an order providing for modification in the payment of retiree benefits if the court finds that-
(l) the trustee has, prior to the hearing, made a proposal that fulfills that requirements of subsection (f);
(2) the authorized representative of the retirees has refused to accept such proposal without good cause; and
(3) such modification is necessary to permit the reorganization of the debtor and assures that all creditors, the debt- or, and all of the affected parties are treated fairly and equitably, and is clearly favored by the balance of the equities;
11 U.S.C. § 1114(e)(1), (f), and (g)(l)-(3).
Retiree benefits are defined in § 1114(a):
(a) [F]or purposes of this section, the term “retiree benefits” means payments to any entity or person for the purpose of providing or reimbursing payments for retired employees and their spouses and dependents, for medical, surgical, or hospital care benefits, or benefits in the event of sickness, accident, disability, or death under any plan, fund or program (through the purchase of insurance of otherwise) maintained or established in whole or. in part by the debtor prior to filing a petition commencing a case under this title.
11 U.S.C. § 1114(a).
Prior to the enactment of § 1114, the Code provided no special protection to the retired, nonunion salaried employees of bankrupt companies. A debtor was generally able, pursuant to § 365 of the Code, to reject contracts that provided welfare benefits to retirees. In re SPECO Corporation, 195 B.R. 674, 677 (Bankr.S.D.Ohio 1996). Retirees whose benefits were terminated would simply have a claim against the debtor for any vested benefits to which they were entitled. Susan J. Stabile, Protecting Retiree Medical Benefits in Bankruptcy: The Scope of Section 111k of the Bankruptcy Code, 14 Cardozo L.Rev.1911, 1918-19 (1993) (hereinafter “Stabile”).13
In July 1986, LTV Steel Company and three mining subsidiaries filed a Chapter 11 bankruptcy petition, and shortly thereafter announced that they would cease paying health benefits to approximately 78,000 retirees and their dependents. The affected retirees were both former salaried *906employees who received benefits under programs terminable at will and former union employees whose benefits were governed by collective bargaining agreements. Congress reacted swiftly. Within days, the Senate passed a bill ordering LTV to reinstate the benefits, and soon thereafter the House passed a bill to protect union retiree benefits by explicitly • including them within the protection of § 1113 of the Code. Neither of these bills was finally enacted into law, but Congress did enact stopgap legislation designed to maintain the status quo while it addressed the issues more thoroughly. Finally, in June 1988, it enacted the Retiree Benefits Bankruptcy Protection Act of 1988 (“RBBPA”), which codified § 1114 of the Code. Stabile, at p.1927.
Considered in the light of these historic events, the meaning and purpose of § 1114 seem clear — to require a Chapter 11 debt- or to timely pay and not modify any retiree benefits unless the bankruptcy court orders otherwise or the debtor and representatives of the benefit recipients agree to some modification. Nevertheless, courts examining the statute have found it to be ambiguous and, relying on the somewhat ambiguous or at least inconsistent statements of the debating legislators, have held that the statute was not intended to prevent a debtor from terminating retiree benefits if the debtor had a pre-petition right to terminate those benefits. See In re Doskocil Companies Incorporated, 130 B.R. 870 (Bankr.D.Kan.1991); In re North American Royalties, Inc., 276 B.R. 860 (Bankr.E.D.Tenn.2002). The Debtors rely on these cases in arguing that § 1114 does not apply to the pending Motions.
The first place to look for the meaning and purpose of a statute is in the language of the statute itself. Where the statute is clear and unambiguous, there is no need to resort to the legislative history to discern its meaning. “[A]s long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute.” United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240-41, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). “Going behind the plain language of a statute in search of a possibly contrary congressional intent is ‘a step to be taken cautiously’ even under the best of circumstances.” United States v. Locke, 471 U.S. 84, 105 5.Ct. 1785, 1793, 85 L.Ed.2d 64 (1985) (citations omitted). “The legislative purpose is expressed by the ordinary meaning of the words used.” Id. “There is a basic difference between filling a gap left by Congress’ silence and rewriting rules that Congress has affirmatively and specifically enacted.” Id. There is a strong presumption that Congress expresses its intended purpose through the language of the statute. Ardestani v. INS, 502 U.S. 129, 135-36, 112 S.Ct. 515, 520, 116 L.Ed.2d 496, 505 (1991) (quoting Rubin v. United States, 449 U.S. 424, 430, 101 S.Ct. 698, 702, 66 L.Ed.2d 633 (1981)). Where the statute is clear, the court should look to the legislative history only to determine whether there is clearly expressed legislative intention contrary to the language which would require questioning the strong presumption that Congress expresses itself through the language of the statute. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 1947, 147 L.Ed.2d 1, 7 (2000).
On its face, the language of the statute is clear. “Notwithstanding any other provision of this title, the debtor in possession, or the trustee... shall timely pay and shall not modify any retiree benefits...” unless the court approves those modifications pursuant to subsections (g) and (h) of *907§ 1114 or an agreement for modification has been reached with the authorized representative of the recipients of the benefits. 11 U.S.C. § 1114(e)(1) (emphasis added). The prohibition is on the modification of any retiree benefits, and “retiree benefits” are defined broadly in § 1114(a) to encompass payments to any entity or person for the purpose of providing or reimbursing payments for medical, surgical, or hospital care benefits or benefits in the event of sickness, accident, disability, or death under any plan, fund, or program maintained or established by the debtor pre-petition. 11 U.S.C. § 1114(a). “Modification” was surely intended to include termination, inasmuch as termination of benefits would be an even more drastic action than would mere changes in benefits. A modification is “a change in something; an alteration.” Black’s Law Dictionary, 7th Ed.1999.
There is nothing in the language of the statute 'to suggest that Congress intended to allow the termination of retiree benefits in those instances where the debtor has the right to unilaterally terminate those benefits under the language of the plan or program at issue. While they assert this right in the pending Motions, the Debtors have not pointed to any language in the statute that would create such an exception. Nor can they, for it does not exist. In fact, if one were to accept the Debtors’ argument, the statute would be eviscerated and rendered virtually meaningless. Any debtor — most debtors, more than likely— would be able to point to language in the underlying documents establishing voluntary programs such as the Debtors’ giving them the right to unilaterally terminate the programs. With that exception granted, the statute would essentially only apply to collective bargaining agreements or other bargained-for programs, and the legislative history makes it clear that such limitations were not intended. The language of the statute is all-encompassing.
Overall, the legislative history of § 1114 is consistent with the plain language of the statute. Although the RBBPA had its origin in the threat of LTV to cease paying retiree benefits pursuant to the terms of a collective bargaining agreement, the sponsors of the legislation made it clear that the provisions of the RBBPA applied whether or not a collective bargaining agreement is in effect. “This legislation protects retired employees who are covered by a collective bargaining agreement, as well as those where no collective bargaining agreement is in effect.” 133 Cong.Rec. 21,099 (statement of Sen. Hef-lin) (emphasis added). Even more persuasive is this passage from the legislative history:
[The bill].. .requires a company to continue paying for these [retiree health] benefits even after the termination of a collective bargaining agreement. Only if a company can prove a modification is absolutely necessary and that it treats everyone fairly can a court, after a hearing, order any modification.
Retiree Benefits Security Act of 1987: Hearings on S. 54-8 Before the Subcomm. on Courts and Administrative Practice of the Senate Comm, on the Judiciary, 100th Cong., 1st Sess. 14 (1987) (statement of Sen. Metzenbaum). See In re Chateaugay Corporation, 945 F.2d 1205, 1212 (2nd Cir.1991) (dissent of Restand, J.).
Additional support for this interpretation of § 1114 may be found in other actions taken by Congress at the same time it approved the RBBPA. For one thing, Congress added paragraph (13) to the plan confirmation standards of § 1129(a) of the Code to require that a plan must provide for the continued funding of retiree benefits at the level set by agreement or by court approval, for the duration of the *908period the debtor has obligated itself to provide such benefits. 11 U.S.C. § 1129(a)(18).14 For another, any payment for retiree benefits required to be made before plan confirmation was given administrative expense status under § 503 of the Code. See § 1114(e)(2).15 Lastly, in § 1114(j), Congress excluded retiree benefits claims from the provisions of § 502(b)(7), which places a limitation on claims for damages resulting from the termination of an employment contract.16 When these enactments are considered together, it becomes abundantly clear that Congress knowingly acted to provide special protections for retiree benefits when it enacted § 1114.
A consideration of § 1118 of the Code provides further support for the Court’s understanding of § 1114. Section 1113 authorizes a court to approve a Chapter 11 debtor’s rejection of a collective bargaining agreement only if the court finds that the debtor (or trustee) has submitted the debt- or’s proposed modifications of the agreement to the authorized representative of the employees covered by the agreement, the authorized representative has refused to accept the proposal, and the balance of the equities favors rejection. 11 U.S.C. § 1113(c). Sections 1113 and 1114 contain virtually identically worded requirements for approval of any proposed modifications — that the modifications are necessary to permit the reorganization of the debtor, and that all creditors, the debtor, and all affected parties are treated fairly and equitably. See § 1113(b) and § 1114(f). In both cases, the debtor must provide the authorized representatives with all relevant information necessary to evaluate the proposal. § 1113(b)(1)(B); § 1114(f)(1)(B). It is clear that § 1113 is designed to provide protections to employees and retirees who are covered by collective bargaining agreements, and that § 1114 is designed to provide protections to those retirees who are covered by other plans, funds, or programs established and maintained by Chapter 11 debtors prior to their filing bankruptcy.
Moreover, Congress doubtlessly recognized that retirees as a class are unique in a bankruptcy proceeding and that they are deserving of special protection. Stabile, at p.1946. As a general rule, retirees are particularly vulnerable when their former employer goes bankrupt, because qf their ages, their reduced incomes, and their inability to replace the benefits (medical coverages or life insurance, typically) that are being terminated. Unlike business and trade creditors, retirees are unable to set aside reserves for possible losses or to pass along their losses to other customers. Stabile, at p.1947. In the instant case, there was testimony that some of the retirees made their decisions to retire on the *909basis of Farmland’s promises to continue the life insurance benefits for the rest of their lives, and there was testimony that replacing the life insurance benefits would be inordinately, and perhaps prohibitively, expensive for the retirees. All of these suggest a sound basis and rationale for Congress’ according special protections to retirees who are caught up in a Chapter 11 proceeding.17
The swiftness with which Congress acted to protect the LTV retirees and their families is also evidence of Congress’ intent to provide special protections for retirees. Stabile, at p.1949.
“The clear purpose of the Act [RBBPA] is to give the bankruptcy court power to resolve the competing interests of retirees, debtors and creditors, if agreement as to continuation and level of benefits cannot be reached. The health benefits of retirees are not to be terminated by any action until the bankruptcy court has time to act.” Chateaugay, 945 F.2d at 1218 (dissent of Restani, J.) (emphasis added). In summary, § 1114 requires that a Chapter 11 debtor continue to pay all retiree benefits unless either the trustee or debtor in possession and an authorized representative of the retirees agree to a proposed modification or, absent such agreement, the trustee or the debtor in possession convinces the court that a proposed modification is necessary to permit the debtor’s reorganization and is equitable.18
Based on the foregoing discussion, the Court holds that the provisions of § 1114 are, indeed, applicable to the Debtors’ Motions insofar as those Motions seek to modify or terminate the retiree benefits of their former employees, as “retiree benefits” are defined in § 1114(a).
However, Farmland contends that § 1114 is not applicable to the Debtors’ termination of benefits under the Deferred Comp Plan, the SERP, the Union Equity Plan, and the Director Deferred Comp Plan, because the benefits provided by those plans are not “retiree benefits” as defined in § 1114(a). The Court agrees. The benefits provided under those Plans are either deferred compensation benefits or benefits based on retirement. They are not payments or reimbursements for medical, surgical, or hospital care, nor are they benefits payable in the event of sickness, accident, disability, or death, as retiree benefits are defined in § 1114(a). Therefore, the Court finds that the Deferred Comp Plan, the SERP, the Union Equity Plan, and the Director Deferred Comp Plan do not fall within the coverage and provisions of § 1114, and that the proposed termination of those Plans should be considered under the business judgment standard. Likewise, the proposed termination of the four former executives’ Employment Agreements are outside the provisions of § 1114. All of the other benefit programs and plans encompassed by the Motions are subject to the provisions of § 1114.
C. Appointment of Committee pursuant to § 1114(d)
Having determined that § 1114 applies at least in part to the Debtors’ *910Motions, the Court must now decide whether to appoint a committee of retired employees to serve as the authorized representative for the recipients of the benefits that the Debtors seek to terminate. Several of the objecting Retirees have requested that such a committee be appointed. Section 1114(d), which governs the appointment of a committee, states:
(d) The court, upon a motion by any party in interest, and after notice and a hearing, shall appoint a committee of retired employees if the debtor seeks to modify or not pay the retiree benefits or if the court otherwise determines that it is appropriate, to serve as the authorized representative, under this section, of those persons receiving any retiree benefits not covered by a collective bargaining agreement.
11 U.S.C. § 1114(d).
The Court believes that the statute accords the Court discretion in the appointment of a committee of retired employees, and further determines that it is not appropriate to appoint a committee at this time. Because the Court is denying the Debtors’ Motions to terminate the retirees’ benefits, no useful purpose would be served by the appointment of a committee. Unless and until Farmland seeks to modify or terminate these plans in accordance with the procedures outlined in § 1114, there is no need for the appointment of a committee. Appointment of a committee at this time would simply delay things further, at considerable expense to the Debtors, and would not change the final result. North American Royalties, 276 B.R. at 868.
Therefore, the Retirees’ request for appointment of a committee under § 1114(d) will be denied. However, should the Debtors appeal the Court’s decision herein, the Court will appoint a committee so as to assure that the Retirees are adequately represented on appeal.
D. Retiree Benefits Motion
As discussed hereinabove, the Court has determined that § 1114 of the Code applies to the Debtors’ proposals to terminate the life insurance benefits provided for their retired employees under a group term life insurance policy with Minnesota Life. The question then is whether the Debtors have complied with the requirements of § 1114 for the termination of such benefits. There is a total lack of evidence to demonstrate such compliance.
Before filing an application to modify any retiree benefits, a debtor must submit the proposed modifications' to the authorized representative of the retirees, providing the most complete and rehable information available at the time to show that the modifications are necessary to permit the reorganization of the debtor and assuring that all creditors, the debtor, and all affected parties are treated fairly and equitably. § 1114(f)(1)(A). Additionally, the debtor must provide the retirees’ representative with such relevant information as is necessary to evaluate the proposal. § 1114(f)(1)(B). Finally, between the time of making a proposal and the hearing date, the debtor must meet with the retirees’ representative and confer in good faith in an attempt to reach mutually satisfactory modifications in the benefits. § 1114(f)(2).
Here, the Debtors have not alleged that they have complied with the dictates of § 1114. In fact, they assert that the requirements of § 1114 are inapplicable. As a result, the Debtors did not ask the Court to appoint a retirees’ committee, as required by § 1114(d), and did not submit their proposals to any authorized representative of the Retirees. The Debtors have not presented any evidence directly *911to the Retirees or any authorized representative to demonstrate why the terminations are necessary or that the retirees are being treated fairly and equitably. Because the Debtors have failed to comply with the requirements of § 1114, the Debtors’ Retiree Benefits Motion must be denied.19 Due to this noncompliance, we do not reach the merits of the Motion.
E. Executive Benefits Motion
1. Director Life Plan, Supplemental Life Plan, Executive Life Plan
Under the Director Life Plan, the Supplemental Life Plan, and the Executive Life Plan, the Debtors have provided varying amounts of life insurance benefits under various arrangements to Farmland’s directors and top executives. Because these plans and programs provide benefits in the event of death, they constitute “retiree benefits” within the meaning of § 1114(a) and are therefore governed by the provisions of § 1114 that have been set out above. As with the Retiree Benefits. Motion, the Debtors have presented no evidence that they have complied with those requirements, and the Court finds that the Debtors have not, in fact, complied with the requirements of § 1114. Therefore, the Debtors’ request to terminate the Director Life Plan, the Supplemental Life Plan, and the Executive Life Plan must be denied at this time.
This does not mean, however, that the Debtors are prohibited from changing the types of life insurance provided so that they could receive the very substantial amount of cash surrender value that has been built up in the present life insurance policies, provided that such changes do not constitute modifications of the Plans under § 1114. Since no evidence was offered on the point, the Court is uncertain whether the Debtors could surrender the present policies and receive the cash surrender value, then replace the policies with term life insurance policies that might be less costly to the Debtors. Or perhaps the life insurance is not necessary at all, but that is a business decision best left to the Debtors. And, as with the other retiree benefits, there is nothing to prohibit the Debtors from terminating these Plans after the Debtors have obtained confirmation of a plan of reorganization.
2. Deferred Comp Plan, SERP, Union Equity Plan, Director Deferred Comp Plan
The Deferred Comp Plan, the SERP, the Union Equity Plan, and the Director Deferred Comp Plan are plans or programs established by the Debtors that provide for the payment of deferred compensation and enhanced retirement benefits. These plans or programs, therefore, are not encompassed within § 1114, and the Debtors need not comply with the requirements of § 1114 in order to terminate these plans or programs. The question is whether the Debtors have exercised sound business judgment in determining that termination of the plans or programs is in the Debtors’ best economic interests.
According to the Executive Benefits Motion and the McCoy Affidavit, the Debtors’ liabilities to the participants in the Deferred Comp Plan, the SERP, and the Director Deferred Comp Plan are at least $26 million (no amount of liability is stated for the Union Equity Plan). Although it is *912quite likely that the Executives affected by the termination of these Plans will file general unsecured claims for the amounts they might be owed, it appears to the Court that the Debtors have properly exercised their business judgment in deciding to terminate these Plans. Terminating the Plans should result in the Debtors’ being required to pay much less than the $26 million théy are presently obligated to pay under the Plans, although the exact amount to be paid will not be determined until a plan of reorganization is approved and all claims have been allowed or disallowed. Further, terminating the Plans will stop the accrual of further liabilities. Therefore, the Court will approve the Debtors’ termination of the Deferred Comp Plan, the SERP, the Union Equity Plan, and the Director Deferred Comp Plan.
F. Rejection of Employment Agreements
The final issue to be dealt with is the request by the Debtors that they be permitted to reject the Employment Agreements of four Former Officers who once held some of the top executive offices in Farmland.
Farmland contends the Employment Agreements are executory contracts and can be rejected in these Chapter 11 proceedings pursuant to 11 U.S.C. § 365, which permits a debtor in possession to reject executory contracts, subject to the Court’s approval. 11 U.S.C. § 365(a); Steaks to Go, Inc., 226 B.R. at 37. The Bankruptcy Code does not define “executory contract;” however, the Eighth Circuit has defined executory contract as a contract under which the Debtor and other party both are obligated, and that failure of either to complete performance would constitute a material breach excusing the other of performance. Northwest Airlines, Inc. v. Klinger (In re Knutson), 563 F.2d 916, 917 (8th Cir.1977)(quoting V. Countryman, Executory Contracts in Bankruptcy, Part I, 57 Minn.L.Rev. 439, 460 (1973)).
Honse, the former president and chief financial officer of Farmland, contends that his obligations to provide consulting services, cooperate with the Debtors, and refrain from competition and interference do not rise to the level of material future performance, and therefore his Employment Agreement is not an executory contract subject to rejection by the Debtor. Honse relies on In re Spectrum Information Technologies, Inc., 190 B.R. 741 (Bankr.E.D.N.Y.1996), to argue that merely “standing by” and “behaving oneself’ are not “material.” The court in Spectrum applied the Countryman test and held that the former officers’ obligations did not rise to the level of material future performance. The court examined several agreements and found that the obligations of the former officers were merely vestiges of previous agreements. Spectrum, 190 B.R. at 748.
Turning to Honse’s obligations in this case, the Employment Agreement provides in pertinent part:
9. Consulting. If Executive qualifies for Severance Benefits under Paragraph 7(a), Executive agrees to make him- ' self available to the Company as needed to consult for a period of one year following termination of employment. Executive shall be available to consult up to an average of forty (40) hours per month. Executive shall be entitled to reasonable compensation for his time in providing such consulting services and to reimbursement of his out of pocket expenses.
*913(Debtors’ Ex. 31)(emphasis added) In addition to consulting services, Section 10 of the Employment Agreement specifies other obligations that Honse agreed to, such as nondisclosure of confidential information, non-interference, non-competition, and cooperation in claims. (Debtors’ Ex. 31) Unlike the employment contracts examined by the court in Spectrum, Honse’s Employment Agreement contains several obligations which, taken together, rise to the level of material future performance. The Court has no evidence before it to indicate that Honse’s obligations were anything other than what is stated in the Employment Agreement. The agreement of a former president and chief financial officer of a major corporation to not disclose confidential information, to not compete with the company, and to assist the company in evaluating claims would seem to be highly pertinent and material obligations, even if the former executive is never asked to do anything else. Honse has not shown that he has been relieved of his contractual obligations. Therefore, the Court finds that material obligations are present on both sides of Honse’s Employment Agreement and that the contract is executory.20
The Court may approve rejection of an executory contract where the Debtors show that they have complied with the business judgment standard. Food Barn Stores, 107 F.3d at 567, n. 16. In this case, the Employment Agreements are not necessary to the Debtors’ post-petition operations and are no longer beneficial to the Debtors. The Former Officers are not likely to provide any meaningful services to the Debtors in these reorganization proceedings. Terminating the Employment Agreements will provide a benefit to the estates, in view of the fact that the Debtors’ costs under the contracts exceed $120,000 a month, and $900,000 is still owed to Cleberg on his contract. Therefore, the Court will approve the rejection of the Former Officers’ Employment Agreements.
Based on the foregoing discussion, it is, therefore
ORDERED that the Debtors’ Motion for Order Authorizing the Termination of Certain Retiree Benefits Under Group Term Life Insurance Policy with Minnesota Life Insurance Company (Document # 1688) be and is hereby DENIED, without prejudice to a later refiling in compliance with 11 U.S.C. § 1114. It is
FURTHER ORDERED that the Debtors’ Motion for Order Authorizing (I) the Termination of Certain Executive and Director Benefits and (II) Rejection of Certain Executory Employment Agreements (Document # 1689) be and is hereby GRANTED in part and DENIED in part as follows:
A. The Debtors’ request to terminate the benefits under the Farmland Industries, Inc. Executive Deferred Compensation Plan, the Farmland Industries, Inc. Supplemental Executive Retirement Plan, the Union Equity Deferred Compensation Plan, and the Director Deferred Compensation Plan be and is hereby GRANTED.
B. The Debtors’ request to terminate the Employment Agreements of Robert W. Honse, John F. Berardi, William Fielding, and H.D. Cleberg be and is hereby GRANTED.
*914C. The Debtors’ request to terminate the Director Life Insurance Plan, the Supplemental Director Life Insurance Plan, and the Executive Split Dollar Life Insurance Plan be and is hereby DENIED, without prejudice to a later refiling in compliance with 11 U.S.C. § 1114.
. James Rainey, Earl Knauss, Carl Cage, Dave Fulton, Lewis Linville, Jerry Schwab, Charles Wolff, Jack Warren, Harry Platz, Don R. Rogers, James Atwood, and Glen Skold objected to the proposed termination of the Debtors’ Executive Split Dollar Life Insurance Plan, which provides life insurance for the objectors.
. This Court has jurisdiction of the pending matter pursuant to 28 U.S.C. § § 1334 and 157. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). This Memorandum Opinion and Order constitutes the Court's findings of fact and conclusions of law pursuant to Rule 7052, Fed.R.Bankr.P., made applicable to these contested Motions by Rule 9014, Fed.R.Bankr.P.
. The Court’s factual findings are based largely on the Affidavit and the Supplemental Affidavit of Holly D. McCoy, Vice President for Human Resources of Farmland, which were offered in evidence, without objection, by the Debtors in support of the Motions. Also, none of the factual allegations in either- of the Motions has been challenged.
. There are five Debtors in these jointly administered Chapter 11 proceedings: Farmland Industries, Inc., Farmland Foods, Inc., SFA, Inc., Farmland Pipe Line, Inc., and *897Farmland Transportation, Inc. Their bankruptcy petitions were filed on May 31, 2002 (the "Petition Date”). They will be referred to herein as "Debtors” or as "Farmland.”
. The Debtors are not proposing to terminate the life insurance benefits of approximately 120 disabled former employees. The Court previously approved the continuation of those benefits in an Order entered on June 5, 2002, shortly after the Debtors filed their bankruptcy petitions on May 31, 2002. The average amount of coverage for the disabled former employees is about $73,000 a person.
. Although there are some 2,200 retired employees affected by the Debtors' proposed termination of the insurance coverage, only four filed formal objections to the Retiree Benefits Motion. One of the objectors, Donald Marsh, is now deceased. (Docket Entry # 2889)
. The Court will refer to the benefit plans described above collectively as the "Executive Benefits Plans.”
. A loss in retirement benefits occurs because retirement benefits are calculated according to the salary paid. If an Executive elected to defer a portion of his or her compensation, retirement benefits would be calculated on the salary actually paid, not on the amount of salary paid plus any deferred amount.
. McCoy states in her Affidavit that the Debtors would eliminate approximately $383,000 in annual costs with the termination of the Executive Life Plan, the Director Life Plan, and the Supplemental Life Plan. (McCoy Affidavit, ¶ 35)
. The Court received approximately 15 letters and handwritten notes from persons stating that they were retired Farmland employees and objecting to the Debtors’ proposal to terminate the life insurance benefits. The letters were scanned and docketed. However, the writers did not appear for the hearings and did not testify; therefore, their letters and notes cannot be considered by the Court.
. The Debtors assert that the benefit plans at issue are not executory contracts within the compass of § 365. However, they ask that, if the Court finds that the plans are executory contracts, the Debtors be permitted to reject them pursuant to the business judgment rule. The Court finds that the benefit plans are not executory contracts, so the Debtors’ alternative request is rendered moot.
. The Supreme Court listed a number of factors that should be examined by a bankruptcy court in determining whether the "balance of the equities” favors rejection of a collective bargaining agreement, and stated that the court "must consider not only the degree of hardship faced by each party, but also any qualitative differences between the types of hardship each must face.” Bildisco & Bildisco, 465 U.S. at 526, 104 S.Ct. 1188. Because this Court finds that the Debtors have not complied with the requirements of § 1114 in the first instance, further discussion of the factors to be considered under the balancing of the equities test is unnecessary.
. Stabile's article contains an excellent analysis of the history and development of § 1114, as well as informed guidance as to the correct interpretation of the statute.
.Section 1129(a) provides:
(a) The court shall confirm a plan only if all of the following requirements are met:
* ifc ¡|í 5j« !ji s|t
(13) The plan provides for the continuation after its effective date of payment of all retiree benefits, as that term is defined in section 1114 of this title, at the level established pursuant to subsection (e)(1)(B) or (g) of section 1114 of this title, at any time prior to confirmation of the plan, for the duration of the period the debtor has obligated itself to provide such benefits.
11 U.S.C. § 1129(a)(13).
. Section 1114(e)(2) provides:
(2) Any payment for retiree benefits required to be made before a plan confirmed under section 1129 of this title is effective has the status of an allowed administrative expense as provided in section 503 of this title.
11 U.S.C. § 1114(e)(2)
. Section 1114(j) states: No claim for retiree benefits shall be limited by section 502(b)(7) of this title. 11 U.S.C. § 1114(j).
. The cynic also might suggest that there were more voters among the 78,000 LTV retirees and their families than there are in bankrupt corporations.
. The Court’s reading of § 1114 finds support in In re SPECO Corporation, 195 B.R. 674 (Bankr.S.D.Ohio 1996), In re Ames Department Stores, Inc., 1992 WL 373492 (S.D.N.Y.1992); and In re New York Trap Rock Corporation, 126 B.R. 19 (Bankr.S.D.N.Y.1991).
. Lest the Retirees become too comfortable in the Court’s ruling, it should be pointed out that there is nothing to prevent the Debtors from terminating the life insurance program after the confirmation of a plan of reorganization in these Chapter 11 proceedings. See 11 U.S.C. § 1129(a)(13).
. Honse was the only Former Officer to object to the rejection of his Employment Agreement on the basis that it was not an executory contract. The Court finds that the remaining agreements are also executory contracts, for the same reasons stated in the body. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493591/ | DEASY, Bankruptcy Judge.
Empresas Berrios d/b/a Mueblerías Berrios (the “Creditor”) appeals the order of the bankruptcy court dated July 17, 2002 (the “Order”) in which the Court sustained the objection of Francisco J. Esteves Ortiz (the “Debtor”) to the Creditor’s proof of claim insofar as it asserts status as a secured creditor. For the reasons discussed below, the order of the bankruptcy court is affirmed.
I. Jurisdiction and Standard of Review
An order on an objection to claim is a final appealable order. See Neal Mitchell Assoc. v. Braunstein (In re Lambeth Corp.), 227 B.R. 1, 6 (1st Cir. BAP 1998) (citations omitted); see also In re Saco Local Dev. Corp., 711 F.2d 441 (1st Cir.1983) (discussing bankruptcy appellate panel jurisdiction).
The Bankruptcy Appellate Panel (the “Panel”) has jurisdiction over this appeal under 28 U.S.C. § 158(a)(1) and (b). In determining the merits of an appeal, a bankruptcy court’s conclusions of law are reviewed de novo. See, e.g., Prebor v. Collins (In re I Don’t Trust), 143 F.3d 1, 3 (1st Cir.1998); Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco Int’l, Inc.), 132 F.3d 104, 107 (1st Cir.1997).
II. Background
The material facts are not in dispute. On July 2, 2000, the Debtor purchased certain home furnishings and appliances for personal, family or household use (“Consumer Goods”) from the Creditor. At the time of the purchase the parties executed an installment sales contract (the “Contract”) which the Creditor filed with the Registry of Commercial Transactions at the Office of the Secretary of State of *160the Commonwealth of Puerto Rico. On August 1, 2001, the Debtor filed a petition under Chapter 13 of the Bankruptcy Code. On August 15, 2001, the Creditor filed a proof of claim asserting a secured claim in the amount of $2,845.06, together with an objection to confirmation of the Debtor’s Chapter 13 plan on the grounds that the plan did not provide for payment of its secured claim and that it failed to provide adequate protection. In response, the Debtor objected to the Creditor’s claim of secured status on the basis that the Contract did not create a valid perfected security interest in the Consumer Goods under applicable Puerto Rico law. A pre-trial conference was held on February 1, 2002, and because there was no factual dispute the issue was submitted to the bankruptcy court on a stipulated record and briefs of the parties. The evidentiary record consisted of a copy of the Contract in Spanish, a copy of the official translation of the form of the Contract registered with the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico and a copy of the proof of claim filed by the Creditor. On July 17, 2002, the bankruptcy court issued the Order sustaining the Debtor’s objection to the secured status of the Creditor’s claim, on the ground that the Contract failed to create a security interest under applicable law of the Commonwealth of Puerto Rico.
III. Discussion
The sole issue in this appeal is whether the Contract, and the recording of the Contract, created a valid perfected security interest in the Consumer Goods purchased by the Debtor. Puerto Rico’s version of Article 9 of the Uniform Commercial Code is contained in the Code of Commerce, Chapter 55 of Title 19 of the Laws of Puerto Rico (the “Commercial Transactions Act”). 19 P.R. Laws Ann. § 2001-2207. The resolution of this appeal involves interpretation of the term “security agreement” employed in the Commercial Transactions Act. See 19 P.R. Laws Ann. § 2053(l)(a).
A. Historical Background
In order to analyze the Commercial Transactions Act, it is necessary to briefly examine the history and current status of commercial law in the Commonwealth of Puerto Rico. The Uniform Commercial Code, which has been adopted in the fifty states of the United States, does not apply generally in Puerto Rico. See Ennio M. Colon Garcia et al., Puerto Rico: A Mixed Legal System—MERCANTILE LAW, 32 Rev. Jur. U.I.P.R. 274 (1998) (citing Acevedo v. Citibank, 115 D.P.R. 768, 769 (1984)). Prior to 1996, the primary source of commercial law in Puerto Rico was the Code of Commerce, which was initially adopted in 1829 from the first commercial code of Spain and was amended in 1855 and 1885. Id. The Code of Commerce was “left in force upon arrival of United States forces in Puerto Rico” and was revised again in 1932. Id.
Prior to 1996, the Conditional Sales Act1 and the Retail Installment Sales Act2 regulated consumer credit transactions that created a lien in favor of the creditor as security for an installment loan made to the consumer buyer. In 1996, due to the presence of large financial institutions from the continental United States doing business in Puerto Rico, the Commonwealth adopted several sections of Article 9 of the Uniform Commercial Code in the *161Commercial Transactions Act.3 The Commercial Transactions Act repealed the Conditional Sales Act.4 However, the adoption of portions of Article 9 of the Uniform Commercial Code has not negated the influence of prior civil law.
Retaining civil law influence has been due partly to the hierarchical order ... which laws in Puerto Rico have. At the top level are the special mercantile laws. The next level that follows special mercantile laws is the Code of Commerce which is a general law. The Code of Commerce is applicable when there is no conflict of laws and when the controversy is not included in the special laws. In the absence of an applicable law, then the uses of commerce are observed.
32 Rev. Jur. U.I.P.R. at 277. Likewise, the Code of Commerce provides:
Commercial transactions, be they consummated by merchants or not, whether they are specified in this Code or not shall be governed by the provisions contained in the same; in the absence of such provisions, by the commercial customs generally observed in each place; and in the absence of both, by those of the common law.
10 P.R. Laws Ann. § 1002. Accordingly, subject to certain exceptions which are not relevant to this case, the provisions of the Commercial Transactions Act apply to “any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods.” 19 P.R. Laws Ann. § 2002(l)(a).
A security interest is enforceable against a debtor and third parties only if (1) the debtor has signed a security agreement which (2) contains a description of the collateral, (3) value has been given and (4) the debtor has rights in the collateral. 19 P.R. Laws Ann. § 2053(1). In this case it is undisputed that all of these requirements have been satisfied if the Contract constituted a “security agreement” within the meaning of the Commercial Transactions Act.
Virtually all of the states adopting the Uniform Commercial Code define a “security agreement” as “an agreement which creates or provides for a security interest.” Cf. Mass. Gen. Laws. Ann. ch. 106, § 9-102(73) (2001); N.H.Rev.Stat. Ann. § 382-A:9-102(73) (2001). However, the definition of “security agreement” was not included in the Commercial Transactions Act, even though the term is used throughout the Act. See 19 P.R. Laws Ann. §§ 2005, 2051 and 2053(l)(a). The Panel has been unable to determine if this omission was intentional or inadvertent. However, the Panel is not aware of, and the parties have not cited, any provision of the Civil Code of Puerto Rico that would define in any way the term “security agreement.”
The Commercial Transactions Act provides that “[ejxcept as otherwise provided in § 2004 of this title on excluded transactions, §§ 2001-2207 of this title apply ... [t]o any transaction (regardless of form) which is intended to create a security interest in personal property.... ” 19 P.R. Laws Ann. § 2002(2)(a). Puerto Rico law further provides that the provisions of the Code of Commerce are to be liberally construed and applied to promote the underlying purposes of modernizing the law of *162commercial transactions, permit the continued expansion of commercial practices and to make uniform the law among the various jurisdictions. 19 P.R. Laws Ann. § 401, made applicable to the Commercial Transactions Act by 19 P.R. Laws Ann. § 2005(4).
The Panel finds that the omission of the definition of “security agreement” from the text of the Commercial Transactions Act is not material to this appeal because the silence of the legislature is cured by its express direction to interpret the Commercial Transactions Act liberally to modernize the law of commerce and make the law uniform among the various jurisdictions. The Puerto Rico Legislature recognized in its Statement of Motives for the Commercial Transactions Act the economic integration of the Puerto Rico financial industry with its United States counterpart, and intended that the Commercial Transactions Act place Puerto Rico commercial law on par with the world markets in general and in particular with comparable uniform legislation of the United States.5 Following the directive of the Puerto Rico legislature, this Panel shall interpret the term “security agreement” in a manner consistent with other jurisdictions in the continental United States which have adopted the Uniform Commercial Code, if that interpretation does not conflict with other applicable provisions of Puerto Rico law.
B. Enforceable Security Interests under the Commercial Transactions Act
The passage of the Commercial Transactions Act has fundamentally changed Puerto Rican law governing installment sales of goods in consumer transactions. Under prior law (the Conditional Sales Act) a seller retained title to the goods sold until the buyer had completed payment. Carina Mercury, Inc. v. Igaravides, 344 F.2d 397, 400 (1st Cir.1965). However, a reservation of title, accompanied by delivery of the goods to a buyer, was void as against subsequent purchasers, pledgees or mortgagees in good faith, and other third parties, unless the contract was filed in accordance with the terms of the Conditional Sales Act. Id.; In re Sigo Corp., 336 F.Supp. 402, 404 (D.P.R.1971).
Under the Commercial Transactions Act the Debtor must have signed a security agreement if the Creditor is to have a valid perfected security interest in the goods. A valid security agreement cannot exist until the parties to the transaction have agreed to create or grant a security interest in favor of the creditor. See William C. Hillman, Documenting Secured Transactions, chapter 4 (19th ed.1999). The sine qua non of a security agreement is a document that shows, “to an objective observer, that the debtor intended to transfer an interest in personal property as security to a creditor.” White & Summers, Uniform Commercial Code, Sec. 31-3(a) (5th ed.2002) (emphasis in the original). Although the agreement between the parties need not follow any particular form, it must indicate an intent to create a security interest. Id. Documents which standing alone describe a loan or describe collateral or may even have been recorded are not sufficient to create a security interest. In re Bollinger Corp., 614 F.2d 924, 927 (3d Cir.1980) (finding a promissory note standing alone is not sufficient to act as a security agreement); In re Numeric Corp., 485 F.2d 1328, 1331-32 (1st Cir.1973) (holding a financing statement alone does not establish that in fact a security agreement has been agreed upon); In re Arctic Air, Inc., 202 B.R. 533 (Bankr.D.R.I.1996) (financing statement with a list of collateral and invoices for goods sold and delivered not sufficient to *163act as a security agreement); In re John Oliver Co., 129 B.R. 1, 2-3 (Bankr.D.N.H.1991) (financing statement containing language “to cover my interests” not sufficient to create a security interest); Bossingham v. Bloomington Prod. Credit Ass’n (In re Bossingham), 49 B.R. 345, 349 (S.D.Iowa 1985) (financing statement not sufficient to create a security interest in the absence of language which objectively indicates such an intent), aff’d, 794 F.2d 681 (8th Cir.1986).
It is not necessary that the parties sign a separate document labeled as a security agreement. So long as several documents collectively indicate an intent to create a security interest, they may together satisfy the requirements necessary for an enforceable security agreement. In re Bollinger, 614 F.2d at 929 (finding a promissory note, financing statement, series of letters and the course of dealing between the parties sufficient evidence of an intent to create a security interest); In re Numeric Corp., 485 F.2d at 1332 (financing statement and board of director’s resolution, taken together, constitute a security agreement); In re Bossingham, 49 B.R. at 349 (financing statement and handwritten agreement, when read together, satisfy the objective test with respect to showing an intention of the parties to create a security interest).
In this appeal, it is undisputed that the transaction in question involved the extension of credit in connection with the purchase of consumer goods. Under the Commercial Transactions Act, unlike the Conditional Sales Act, it is not necessary for the Creditor to record a financing statement in order to perfect a purchase money security interest in collateral consisting of consumer goods. See 19 P.R. Laws Ann. § 2007 (defining purchase money security interest), § 2009 (defining consumer goods), § 2102(l)(d) (listing exceptions to the filing requirement).
C. The Creditor’s Position
Against the backdrop of the legal history of the Commercial Transactions Act in Puerto Rico and decisions under the Uniform Commercial Code in the fifty states that have adopted it, the Creditor advances four arguments in support of its position that its claim is secured by a valid perfected security interest.
1. The Retail Installment Sales Act
The Creditor’s first argument is that the enactment of the Commercial Transactions Act did not supersede, alter or amend the Retail Installment Sales Act, Chapter 36 of Title 10 of the Laws of Puerto Rico. See 19 P.R. Laws Ann. §§ 731, et seq. The Creditor contends that the Retail Installment Sales Act continues to control the form and content of conditional sales contracts in Puerto Rico. The Creditor supports this argument by directing the Panel to the provisions of the Commercial Transactions Act which provide that although a transaction is subject to the Commercial Transactions Act, it is also subject to the Retail Installment Sales Act, and any similar consumer legislation, and that in case of conflict between the provisions of the Commercial Transactions Act and any such statute, the provisions of such statute control. 19 P.R. Laws Ann. § 2053(4).
The Creditor’s argument is not persuasive. The Retail Installment Sales Act does not contain any provisions regarding the form or content of security agreements or the creation of security interests. The Retail Installment Sales Act does mandate certain content identifying the parties, the sales price, the identification of the goods or services sold and the details of the credit portion of the transaction. See 10 P.R. Laws Ann. § 742. However, nothing in the Retail Installment Sales Act prescribes any form or content regarding the creation of a security interest. Accordingly, the Panel finds nothing in the Retail *164Installment Sales Act that conflicts with the Commercial Transactions Act.6
2. Creation of a Security Interest Under The Commercial Transactions Act
The Creditor correctly states that there is no magic language required to constitute a security agreement. “A writing or writings, regardless of label, which adequately describes the collateral, carries the signature of the debtor, and establishes that in fact a security interest was agreed upon, [satisfies] the formal requirements of the statute and the policies behind it.” In re Numeric Corp., 485 F.2d at 1331 (emphasis added) (citations omitted). The Creditor also correctly notes that a security interest is not enforceable unless it has attached and that the requirements for attachment are set forth in the Commercial Transactions Act. See 19 P.R. Laws Ann. § 2053(1).
The Creditor contends that all of the requirements for a valid perfected (i.e. enforceable) security interest were satisfied in its transaction with the Debtor. Specifically, the Creditor maintains that the Debtor signed a security agreement containing a description of the collateral, value had been given and the Debtor had rights in the collateral. See 19 P.R. Laws Ann. § 2053. The Debtor does not dispute that value had been given or that the Debtor had rights in the collateral. The only question before the bankruptcy court, and in this appeal, is whether the sole document in the stipulated evidentiary record signed by the Debtor, the installment sales contract, constitutes a security agreement.
The Contract is a single piece of paper with provisions on both sides. The front side of the Contract identifies the Debtor, lists his name and address, contains a description of the goods purchased and certain consumer credit transactional information required by the Retail Installment sales Act and federal truth in lending law.7 Immediately above the description of goods on the front side of the Contract are the words “By signing this contract the BUYER acquires from the SELLER subject to the terms set forth in this agreement the following goods.” The balance of the front side of the Contract contains a detailed description of the goods “acquired” by the Debtor from the Creditor and financial disclosures regarding the credit terms of the purchase. Below the disclosure of credit terms and above the Debtor’s signature, in bold type, are the words “Note: the terms and conditions on the back of this document are integral [sic] part of this installment sale.”
The back side of the Contract contains five numbered sections, a disclosure of the Creditor’s right to late charges and attorney fees, a form for assignment of the installment sales contract and an acknowledgment by the buyer that an exact copy of the contract was tendered to him or her on or before the sale date. Of the five numbered paragraphs two deal with the credit portion of the transaction (paragraphs 1 and 4), two deal with buyers obligations with respect to the goods purchased (paragraphs 2 and 3) and one deals with the contract itself (paragraph 5). It is the last paragraph which is most pertinent to this appeal. Paragraph 5 on the back side of the Contract provides:
5. The parties acknowledges [sic] that this is the only written document con*165taining all the terms and conditions for the sale of goods herein described, and that there are no other agreements either written or oral between the parties with respect to such goods.
This paragraph, in effect, integrates into the one document all of the discussions and agreements between the parties to the Contract. Accordingly, under the express terms of the contract and the stipulation between the parties, any intention to create a security interest must be found within the four corners of the Contract, or not at all.8
The language in the Contract merely reflects an agreement that the Creditor is extending consumer credit to the Debtor and the Debtor is purchasing from the Creditor certain consumer goods identified in the Contract. There is no express language in the Contract creating or granting a security interest or reserving title to the Creditor until the balance of the purchase price is paid. The Creditor has been unable to point to any language in the Contract which evidences a consensual agreement between the parties to create or provide for a security interest. The absence of any evidence of such an intent by the parties alone is sufficient to sustain the ruling by the bankruptcy court. As no security interest was created under the provisions of the Commercial Transactions Act, the attachment necessary to result in an enforceable security interest did not occur. 19 P.R. Laws Ann. § 2053.
3. Lack of Notice of Repossession Rights Under the Commercial Transactions Act
In general, a secured creditor has the right upon default to take possession of the collateral. 19 P.R. Laws Ann. § 2203. However, in a consumer credit transaction a notice of the right to take possession must be given in the space immediately preceding the signature of a consumer debtor. 19 P.R. Laws Ann. § 2203(2). The Contract does not contain this required notice. The bankruptcy court held that such a provision was a mandatory element of a security agreement in a consumer transaction. The Creditor argues that this holding was erroneous because the Commercial Transactions Act permits a secured creditor in a consumer transaction to waive the remedy of repossession without resort to judicial process. The Panel notes that in view of the integration clause in paragraph 5 on the reverse side of the Contract and the absence of any language waiving any available remedies elsewhere in the Contract, the Creditor’s contention is without merit. The Panel also questions why a secured creditor in a consumer transaction would knowingly waive the right to repossess collateral in the event of default. However, since no security interest was created by the Contract, the Panel need not decide the legal effect of the omission of the notice required under 19 P.R. Laws Ann. § 2203(2).
4. Filing Not Required Under the Commercial Transactions Act
The Creditor argues that the bankruptcy court erred when it held that the filing of a proper financing statement was required to perfect any security interest the parties intended to create in favor of the Creditor. The Panel does not agree with the Creditor that the bankruptcy court held that filing was required. Rather, it appears that the bankruptcy court merely pointed out that an installment sales con*166tract was not a security agreement if it failed to create a security interest, and that recording of such a defective contract could not cure such a defect. It is clear that if a valid purchase money security interest had been created in this consumer credit transaction, filing would not have been necessary for perfection. See 19 P.R. Laws Ann. § 2102(l)(d). Accordingly, even if the Creditor’s characterization of the bankruptcy court’s holding is correct, any error was harmless because no security interest was created between the parties. See, e.g., United States v. Rosales, 19 F.3d 763, 766 (1st Cir.1994); United States v. Ladd, 885 F.2d 954, 957 (1st Cir.1989).
IV. Conclusion
For the reasons set forth above the Panel finds that the bankruptcy court did not err when it found that the Contract was not a security agreement within the meaning of the Commercial Transactions Act. Accordingly, the Order is AFFIRMED.
. Act No. 61 of April 13, 1916; 10 P.R. Laws Ann. §§ 31-41.
. Act No. 68 of June 19, 1964, as amended; 10 P.R. Laws Ann. §§ 731, et seq.
. Act 208 of August 17, 1995, as amended by Act No. 241 of September 19, 1996; 19 P.R. Laws Ann. §§ 2001-2207. Puerto Rico has not adopted the Uniform Commercial Code in its entirety. The Commercial Transactions Act adopted only portions of Articles 5, 7, 8 and 9 of the Uniform Commercial Code. The Commercial Transactions Act became effective January 1, 1998.
. Act 241 of September 19, 1996, § 17.
. Act 241 of September 19, 1996.
. In fact, the Retail Installment Sales Act may arguably require that the creation of the security interest be contained within the same document as the retail sales installment contract itself. See 10 P.R. Laws Ann. § 741.
. The bankruptcy court did not consider whether the Contract was in compliance with the Retail Installment Sales Act or federal truth in lending laws, and that issue was not raised by the parties or considered by the Panel in this appeal.
. It appears that the substance of paragraph 5 is required under the terms of the Retail Installment Sales Act, 10 P.R. Laws Ann. § 741(1). Accordingly, it may not be possible in a consumer credit transaction governed by Puerto Rico law to find an intention by the parties to create a security interest by looking to multiple documents. In any event, the parties to this appeal are not making any such argument. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493593/ | ORDER GRANTING TAX COLLECTOR’S MOTION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
THIS MATTER came before the Court on Motion by the Alachua County Tax Collector, a creditor, seeking an allowance of an administrative expense claim for 2002 ad valorem real estate and tangible personal property taxes. The Debtor, Moltech Power Systems, Inc., opposed the Motion. A hearing was held on January 9, 2003. For the reasons stated below, The Alachua County Tax Collector’s Motion for Allowance of Administrative Expense Claim will be GRANTED. This is a Core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (B).
The Debtor filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code on May 22, 2001, and continues to operate as the Debtor in Possession. At the date of filing, the Debtor owned two parcels of real property as well as tangible personal property located on one of the parcels. The land and tangible property are a part of the Debtor’s battery manufacturing facility in Alachua County, Florida. The Debtor owes real estate and tangible personal property taxes for the above property for the 2002 tax year.
The Alachua County Tax Collector (Tax Collector) is seeking an administrative expense claim for the post-petition 2002 real and personal property taxes pursuant to 11 U.S.C. § 503(b)(1)(A) and (B) and by doing so achieve a first priority under § 507(a)(1)1. The Debtor argues that the Tax Collector is not entitled to an allowance as an administrative expense. First, the Debtor contends that ad valorem property taxes against real estate and personal property are secured by first-lien positions against the property and are therefore secured claims entitled to treatment under § 506(a) and thus being so cannot achieve administrative expense status. Further, these secured claims merit treatment under the Debtor’s plan of reorganization under §§ 1129(a) (7) (A) (ii) and 1129(b)(2)(A). Additionally, the Debtor’s ad valorem tax obligations are not allowable administrative expenses under § 503(b)(1) of the Bankruptcy Code because administrative expense claims are solely for unsecured claims.
11 U.S.C. § 503(b)(1)(B) states:
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including-(1)(B) anytax-
(i) incurred by the estate, except a tax of a kind specified in section 507(a)(8) of this title...
In support of its position, the Debtor cites to In re Florida Engineered Construction Products, Corp., 157 B.R. 698 (Bankr.M.D.Fla.1993). That case dealt with the issue of whether or not property taxes accruing during the tax year when the petition was filed could be an administrative expense. There, the Chapter 11 debtor filed in August of 1991 and taxes were assessed in November of 19912. The tax collector argued that the *65taxes which accrued during 1991 should be recognized as cost of administration under § 503(b)(1)(B). The court first looked at the character of ad valorem taxes under these facts and held that the tax collector’s claim is a secured claim. Id. at 700. That being determined, the court asked whether a secured claim can be allowed as an administrative expense under § 503. The court interpreted § 503 to encompass only unsecured claims. Id. Therefore, the property taxes that were incurred by the debtor pre-petition, but incurred by the estate after the commencement of the case were not entitled to be an administrative expense. Id. (emphasis added). However, not only can Florida Engineered be distinguished, but a closer reading makes a case for the Alachua County Tax Collector.
First, this case does not deal with prepetition taxes. Here, the Debtor filed on May 22, 2001, and the Tax Collector seeks taxes for the calendar year of 2002, not before or during the year the debtor filed. Second, in arriving at its holding, Florida Engineered, makes a distinction between pre-petition and post-petition ad valorem property taxes in relation to a Chapter 11 debtor in possession. That court states that § 503(b)(l)(B)(i) “accords administrative claim status for taxes incurred by the estate after commencement of the ease, other than unsecured claims for taxes specified in § 507(a)(7), i.e., pre-petition taxes.” Further, in arriving at its holding, Florida Engineered relies on the analysis used in In re Carlisle Court, Inc., 36 B.R. 209 (Bankr.D.C.1983). In brief, the Car-lisle court determined that post-petition property taxes, assessed post-petition and incurred by the estate after commencement of the case are not secured claims and can receive administrative expenses status entitled to first priority under § 507(a)(1). Florida Engineered, at 700; citing Carlisle Court, at 218; see also 1819, Ltd. v. Florida Dept. of Revenue, 154 B.R. 364 (Bankr.S.D.Fla.1993)(revisiting earlier holding that stated, pursuant to § 503(b)(l)(B)(i), post-petition property taxes are administrative expenses of the estate payable in full on or before the effective date of the Chapter 11 plan).
Other courts use a two-prong test to determine if an expense can be classified as an administrative expense. In re R.H. Macy & Co., Inc., 176 B.R. 315 (S.D.N.Y.1994)(District Court reverses Bankruptcy Court and finds the city’s post-petition property tax claim, even though a secured claim, is entitled to administrative expense treatment) citing In re OPM Leasing Servs., Inc., 68 B.R. 979, 982 (Bankr.S.D.N.Y.1987). First, the tax must be incurred by the estate. Second, the tax must not be specified in § 507(a)(8) i.e. be unsecured and assessed before the commencement of the case. Here, the facts reveal that the Alachua County taxes were incurred by the estate and are not the type specified in § 507(a)(8). Under this test, the taxes at issue are entitled to treatment as an administrative expense under § 503(b)(1)(B).
The Debtor also supports is position with this Court’s earlier ruling in In re Point Restaurant and Oyster Bar, 86 B.R. 252 (Bankr.N.D.Fla.1988). However, that case does not apply because there the taxes were assessed pre-petition, and the specific property involved came into the debt- or’s estate already subject to the tax. Id. at 254. Thus, the holding that the taxes were not an expense of the debtor that was incurred in the administration of the estate was limited to the specific facts surrounding that case.
*66In conclusion, after reviewing the facts, the evidence and case law submitted at the hearing, as well as the argument of the parties, and being fully advised in the premises, I hold that the Alachua County Tax Collector does hold an administrative expense claim, pursuant to 11 U.S.C. § 503(b)(1)(B), for the 2002 ad valorem real estate and tangible personal property taxes owed. Actual dollar amounts are to be determined at a subsequent hearing.
Therefore, it is
ORDERED AND ADJUDGED that the Alachua County Tax Collector’s Motion for Allowance of an Administrative Expense Claim for 2002 taxes is hereby GRANTED.
. The Tax Collector also seeks to include as an administrative expense, the accrued interest at a statutory rate of 18% interest and a 3% mandatory charge as so provided in Fla. Stat. §§ 197.172(4) and (1) respectively. At the Hearing, the parties agreed they had to meet to determine a sum certain tax amount.
. Florida Engineered states that the debtor's taxes were assessed in November of 1991, in *65truth, however, pursuant to § 192.042 of the Florida Statutes, they were assessed (incurred) in January 1, 1991, and actually became payable in November of 1991. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493595/ | ORDER
RICHARD D. TAYLOR, Bankruptcy Judge.
Before the Court is the defendant’s motion for reconsideration of the order entered by this Court on June 23, 2003, awarding the debtors actual damages in the amount of $120.00 and attorney fees of $2,500.00.
Defendant cites no authority for his motion for reconsideration under the Bankruptcy Code or Federal Rules of Bankruptcy Procedure. A motion for reconsideration is allowable under either Federal Rule of Bankruptcy Procedure 9023,1 which incorporates Federal Rule of Civil Procedure 59(e), Motion to Alter or Amend Judgment, or under Federal Rule of Bankruptcy Procedure 9024,2 which incorporates Federal Rule of Civil Procedure 60, Relief From Judgment or Order. Under Rule 9023, “reconsideration is proper when there has been a manifest error of law or fact, when new evidence has been discovered, or when there is a change in the law.”3 The defendant now asserts in his motion that awarding damages for the debtors’ inability to use trailers in possession of the defendant results in the Court “condon[ing] behavior that violates Arkansas law.”
The defendant asserts the debtors would have used the trailers unlawfully.
In the first instance, the defendant’s motion for reconsideration under Rule 9023 is not timely. Any motion for reconsideration under Rule 9023 must be filed no later than 10 days after the entry of the judgment.4 The Court issued its order on June 23, 2003. The defendant filed his motion for reconsideration on July 7, 2003, more than 10 days after the order was entered. Therefore, the Court has no jurisdiction to hear the motion for reconsideration under Rule 9023.
Conversely, under Federal Rule of Bankruptcy Procedure 9024, “relief from an order can be granted for a clerical mistake or for mistake, inadvertence, surprise, excusable neglect, newly-discovered evidence, fraud, misrepresentation, misconduct, where the order is void or has been satisfied, released, or discharged or is no longer equitable, or for any other reason justifying relief from the order.”5 *197The defendant has failed to allege any of the stated reasons for the Court to reconsider its order except, perhaps, “any other reason justifying relief from the operation of the judgment.”
The reason given by the defendant to justify relief from the order is that the Court improperly granted actual damages to the debtors. The defendant argues that by granting the debtors damages, the Court “condones behavior that violates Arkansas law.” The violation alleged was that the debtors may have used the trailers on Arkansas roads without proper registration. The fact that debtors may have been in violation of Arkansas law had they had the ability to use the trailers is not relevant to this Court’s finding that the defendant violated the automatic stay by failing to return the trailers to the debtors. The damages awarded to the debtors were a result of the Court’s finding that the defendant violated the automatic stay, and were to compensate the debtors for their inability to use their property possessed by the defendant.
Granting a motion for reconsideration under Rule 9024 is generally viewed with disfavor by the courts.6 The issues raised by the defendant in his motion for reconsideration are issues that could have been raised at the hearing, and do not introduce sufficient reason to justify relief from this Court’s June 23, 2003, order.
For the reasons stated above, the defendant’s motion for reconsideration is denied.
IT IS SO ORDERED.
. Hutchins v. Fordyce Bank and Trust Co. FDC (In re Hutchins), 216 B.R. 1, 9 (Bankr.E.D.Ark.1997).
. Crofford v. Conseco Fin. Serv. Corp. (In re Crofford), 277 B.R. 109, 113 (8th Cir. BAP 2002)
.Hutchins, 216 B.R. at 9.
. Federal Rule of Bankruptcy Procedure 9023(e).
. Crofford, 277 B.R. at 113; see also Federal Rule of Bankruptcy Procedure 9024.
. Bowman v. Jack Bond (In re Bowman), 253 B.R. 233, 240 (8th Cir. BAP 2000). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493596/ | MEMORANDUM
TIMOTHY J. MAHONEY, Chief Judge.
Before a United States Bankruptcy Judge for the District of Nebraska regarding Defendants’ Motion for Summary Judgment, Filing No. 76, and Plaintiffs Preliminary Objection/Resistance to Defendant’s Motion for Summary Judgment, Filing No. 96. Appearances: Paul Bennett Bran, Robert V. Ginn, and T. Randall Wright for the plaintiff; Frank M. Schepers and William Lamson, Jr., for the defendants. This memorandum contains findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052 and Federal Rule of Civil Procedure 52. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(A), (H), and (0).
Procedural History
Early in this ease, and prior to an answer being filed, the defendants filed a motion to dismiss. After hearing oral arguments on the motion, the undersigned treated the motion to dismiss as a motion for summary judgment and considered the confirmed plan, the order confirming the plan, and the disclosure statement supporting the confirmed plan as evidence. Based upon consideration of those documents, an order was entered granting the motion to dismiss. The motion was granted on two legal theories, the first being that the plan itself precluded the complaint because the complaint was filed more than 180 days after the effective date of the plan. The second legal basis was that there were no material issues of fact and that judgment should be entered as a matter of law in favor of the defendants.
Shortly after that order was entered, the plaintiff filed a motion to alter or amend judgment, pointing out that the court had erroneously considered materials outside the complaint itself, that the parties had not agreed that the motion to dismiss should be treated as a motion for summary judgment, and requesting that the order be vacated. The order was vacated on the basis that matters outside the complaint had been considered.
After a procedural journey to the district court sitting in its appellate capacity and sitting in a capacity whereby the district court reviewed certain determinations made by this court concerning a refusal to permit a post-confirmation amendment to the confirmed plan, the matter was once again referred to the undersigned for resolution of dispositive matters, up to the time when the case would be ready for a pretrial conference, which is to be held by Magistrate Judge Piester.
Recently, upon a motion for partial summary judgment, the undersigned determined that one prong of the original decision, that the plan itself barred the bringing of this complaint more than 180 days after the effective date of the plan, was incorrect. The language of the confirmed plan was analyzed and it was determined that the bringing of this complaint was not barred by the language of the plan. That order is now before the *213district court on a motion for leave to appeal.
There remains before the court a motion for summary judgment filed by the defendants shortly after they filed their answer, and a motion filed by the defendants to bar discovery until the court makes a determination with regard to the motion for summary judgment.
After filing the most recent order dealing with the 180-day bar date issue, the court invited the parties to comment upon the question of whether oral argument on the motion for summary judgment is necessary. As has been the situation with regard to many other matters in this adversary proceeding, counsel for the parties cannot agree. Counsel for the plaintiff, by letter to the court dated June 6, 2003, asserts that there is no need for oral argument or for determination on the merits of the motion for summary judgment until discovery is allowed. The letter once again reiterates the plaintiffs position that there are fact issues remaining, particularly dealing with whether a transfer of property “to or for the benefit of a creditor” occurred, and whether the company formed by investors to acquire the debtor’s stock from the defendants, Contemporary Industries Holdings, Inc. (“CIH”), ever had “dominion and control” over the proceeds of the lenders’ loans which were used to pay the shareholders. Counsel for the defendants, on the other hand, suggest that the issues raised in the motion for summary judgment require a decision as a matter of law on both of the matters raised by the plaintiff. Counsel for defendants suggest there is no real reason for oral argument, and definitely no reason to allow discovery because a final determination of the rights of the parties may be made by reviewing the complaint itself, the disclosure statement, the final order approving stipulation for use of cash collateral, the order confirming the debtor’s amended assented-to plan and the amended assented-to plan.
Although this court did not rule on the defendants’ motion requesting a bar to discovery pending disposition of the motion for summary judgment, Magistrate Judge Piester, during the time the case was pending before the district court, did stay discovery. Chief District Judge Kopf, in his Memorandum and Order once again referring the matter to the bankruptcy court, commented that Magistrate Judge Piester had entered such an order and that it was within the discretion of the bankruptcy judge to consider whether discovery related to factual matters is necessary or whether the motion for summary judgment can be ruled upon as a matter of law, as it was in the original order filed in response to the initial motion to dismiss.
Having considered the letter of June 6, 2003, from counsel for the plaintiff and the letter of June 10, 2003, from counsel for the defendants, and having now reviewed once again the plaintiffs second amended complaint, the disclosure statement, the final order approving stipulation for use of cash collateral, the order confirming the debtor’s amended assented-to plan and the amended assented-to plan, I find, without the necessity of oral argument, that the motion for summary judgment should be denied and discovery should be authorized. There are several issues of material fact which preclude summary judgment and which will be discussed below.
The Case
The second amended complaint, Filing No. 53 in the adversary proceeding, is brought by Contemporary Industries Corporation (“CIC”), the debtor and debtor-in-possession, and the Official Committee of Unsecured Creditors of CIC (the “Committee”) against certain named defendants *214(collectively referred to as “the defendants”) and against any persons or entities that were direct or indirect transferees of the subject property transferred or its proceeds, identified as the “Doe Defendants.” The complaint alleges that the defendants, former shareholders of CIC, received from CIC more than $26 million in exchange for their shares, and that the transfer of the money, which was property of the debtor, is avoidable.
The adversary proceeding is brought pursuant to Rule 7001(1) and (7) of the Federal Rules of Bankruptcy Procedure and Sections 105(a), 544(a) and (b), 550 and 551 of the Bankruptcy Code, and the Nebraska Uniform Fraudulent Transfer Act, Neb.Rev.Stat. §§ 36-701 through 36-712 (1996) (the “NUFTA”). The plaintiffs state that the adversary proceeding is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (H) and (O). Defendants admit that the adversary proceeding is a core proceeding and the court so finds.
The Position of the Defendants
Defendants assert that it is clear from the materials submitted in their index of evidence that they received no transfer of CIC’s property, or that even if they did, the transfer cannot be avoided as a matter of law because not all necessary parties are before the court and therefore the leveraged buyout (“LBO”) transaction cannot be “collapsed” to allow the court to deal with the substance of the transaction.
The Relief Requested
This complaint was filed to avoid a fraudulent transfer and to recover property or its value for the benefit of the estate pursuant to 11 U.S.C. § 544 and 11 U.S.C. § 550, using the Nebraska Uniform Fraudulent Transfer Act (“NUFTA”), Neb.Rev.Stat. §§ 36-701 to -712 (1996). Separate and distinct from the NUFTA claims, in Count No. VI, the complaint asserts that the cash transfers to the defendants constitute excessive and/or illegal distributions under applicable non-bankruptcy law. In addition, the complaint asserts at Count No. V that the transfer of approximately $26.5 million in cash to the defendants unjustly enriched each defendant to the extent of their receipt of such transfers or the proceeds thereof. Under both counts, the plaintiff requests damages in the aggregate amount of the actual transfers that each defendant received.
Motion for Summary Judgment
The defendants filed a motion for summary judgment, Filing No. 76. The motion is supported by the index of evidence, Filing No. 78, and a brief. The substance of the motion, as argued in the brief, is that in order for the plaintiff to avoid a transfer under the Bankruptcy Code and under the Nebraska version of the UFTA, there must actually be a transfer of the property of the debtor to or for the benefit of the defendants. The defendants assert that the complaint does not allege any transfer of property of the debtor to the defendants. Specifically, the defendants claim the complaint does not allege that the cash the defendants received in consideration for conveyance of their shares to CIH originated from or was transferred by the debtor, CIC. The complaint, according to the movants, also does not seek to set aside any transfer of property of the debt- or to any of the defendants. The movants claim that the complaint, when discussing transfers of property by the debtor, refers only to the act of the debtor in granting liens on debtor’s assets, which liens represent security for loans from Bank One and Allied to CIH, the entity that purchased the shares from the defendants and thereupon became the owner of the debtor. It is the position of the defendants that the *215complaint does not attempt to avoid the liens granted by the debtor. Defendants claim, as a matter of law, that the avoidance of the liens granted to the lenders is a condition precedent to any action against the defendants.
Additionally, the defendants assert that CIH, Bank One, Allied, and the investors are necessary and indispensable parties to whom and for whose benefit certain of the transfers alleged in the complaint were made.
Summary Judgment Standard
Summary judgment is appropriate only if the record, when viewed in the light most favorable to the non-moving party, shows 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) (made applicable to adversary proceedings in bankruptcy by Fed. R. Bankr.P. 7056); see, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Morgan v. Rabun, 128 F.3d 694, 696 (8th Cir.1997), cert. denied, 523 U.S. 1124, 118 S.Ct. 1809, 140 L.Ed.2d 947 (1998); Get Away Club, Inc. v. Coleman, 969 F.2d 664, 666 (8th Cir.1992); St. Paul Fire & Marine Ins. Co. v. FDIC, 968 F.2d 695, 699 (8th Cir.1992).
In ruling on a motion for summary judgment, the court must view the facts in the light most favorable to the party opposing the motion and give that party the benefit of all reasonable inferences to be drawn from the record. Widoe v. District No. 111 Otoe County Sch., 147 F.3d 726, 728 (8th Cir.1998); Ghane v. West, 148 F.3d 979, 981 (8th Cir.1998).
The court’s role is simply to determine whether the evidence in the ease presents a sufficient dispute to place before the trier of fact.
At the summary judgment stage, the court should not weigh the evidence, make credibility determinations, or attempt to determine the truth of the matter. Rather, the court’s function is to determine whether a dispute about a material fact is genuine.... If reasonable minds could differ as to the import of the evidence, summary judgment is inappropriate.
Quick v. Donaldson Co., Inc., 90 F.3d 1372, 1376-77 (8th Cir.1996) (internal citations omitted). See also Bell v. Conopco, Inc., 186 F.3d 1099, 1101 (8th Cir.1999) (on summary judgment, court’s function is not to weigh evidence to determine truth of any factual issue); Mathews v. Trilogy Communications, Inc., 143 F.3d 1160, 1163 (8th Cir.1998) (“When evaluating a motion for summary judgment, we must ... refrain from assessing credibility.”).
To withstand a motion for summary judgment, the nonmoving party must submit “sufficient evidence supporting a material factual dispute that would require resolution by a trier of fact.” Austin v. Minnesota Mining & Mfg. Co., 193 F.3d 992, 994 (8th Cir.1999) (quoting Hase v. Missouri Div. of Employment Sec., 972 F.2d 893, 895 (8th Cir.1992), cert. denied, 508 U.S. 906, 113 S.Ct. 2332, 124 L.Ed.2d 244 (1993)). In this respect, the nonmoving party “must do more than simply show that there is some metaphysical doubt as to the material facts; [it] must show there is sufficient evidence to support a jury verdict in [its] favor.” Chism v. W.R. Grace & Co., 158 F.3d 988, 990 (8th Cir.1998). “[T]he mere existence of a scintilla of evidence in favor of the nonmoving party’s position is insufficient to create a genuine issue of material fact.” Rabushka ex rel. United States v. Crane Co., 122 F.3d 559, 562 (8th Cir.1997) (internal quotation *216marks omitted) (quoting In re Temporomandibular Joint (TMJ) Implants Prods. Liab. Litig., 113 F.3d 1484, 1492 (8th Cir.1997)), cert. denied, 523 U.S. 1040, 118 S.Ct. 1336, 140 L.Ed.2d 498 (1998).
Conclusions of Law and Discussion
This action is brought pursuant to 11 U.S.C. §§ 544 and 550, NUFTA, and common-law claims of unjust enrichment and statutory claims of illegal distribution.
The Bankruptcy Code at 11 U.S.C. § 544(b)(1) provides that the debtor-in-possession, exercising the powers of a trustee, may avoid any transfer of an interest of the debtor in property that is voidable under applicable law by a creditor holding an unsecured claim. There were one or more creditors holding unsecured claims against CIC when the transactions occurred on December 21, 1995. The applicable non-bankruptcy law in this case is found in NUFTA, Neb.Rev.Stat. §§ 36-701 to -712.
The debtor-in-possession, exercising state law avoidance powers under 11 U.S.C. § 544, receives the benefit of a state law statute of limitations, which in the case of the NUFTA is four years from the date of the transfer. Neb.Rev.Stat. § 36-710. The debtor-in-possession receives this benefit if the action under Section 544 is commenced not later than two years after the entry of the order for relief. 11 U.S.C. § 546(a)(1)(A).
This adversary proceeding was filed within two years from the entry of the order for relief and within four years from the transactions complained of.
Transfer of Property of Debtor
The complaint alleges one or more transfers of property of the debtor are avoidable under the NUFTA.
The undisputed fact, as stated in the complaint, is that $26.5 million of the $38 million obtained from Bank One, Allied, and the investors to finance the purchase of defendant-shareholders’ stock through the LBO was used to pay shareholders.
To avoid a transfer under NUFTA, the transfer sought to be avoided must have been made by the debtor. Neb.Rev. Stat. §§ 36-705 and -706. A transfer is defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.” Neb.Rev.Stat. § 36-702(12). Under NUFTA, a creditor may reach assets transferred by the debtor if the transfer was fraudulent. Before there can be a fraudulent transfer under NUFTA, there must be a transfer of property in which the debtor has an interest. Essen v. Gilmore, 259 Neb. 55, 60, 607 N.W.2d 829, 834 (2000).
The second amended complaint alleges at paragraph 30 that CIC and its affiliates borrowed $9 million from Allied. The disclosure statement, at page 6-7, Article 11(A)(3), makes the same assertion. Defendants state they are without sufficient knowledge to either affirm or deny the allegation and therefore deny it. (Answer, ¶ 30). At paragraph 33 of the second amended complaint, plaintiff asserts that the funds obtained from loans and investments, including the $9 million from Allied to CIC and affiliates, were used to purchase defendants’ shares of stock in CIC. In defendants’ answer at paragraph 33, they deny plaintiffs allegations concerning the use of $7.5 million of those funds, but admit receipt by defendants of approximately $26 million and admit approximately $2 million of the funds were paid as brokers’ fees.
*217At paragraph 34, the second amended complaint alleges:
In order to finance the LBO, the defendants intended or understood that the Companies would grant blanket liens on all of their assets to Bank One and Allied as security for repayment of the more than $30 million of Senior Debt and Subordinated Debt that was incurred for the purpose of enabling the defendant-shareholders to sell their stock in CIC and its affiliates to the Investors through CIH as the acquisition vehicle.
Defendants deny the allegation. (Answer, ¶ 34).
The assertions, admissions, and denials just referred to create issues of material fact. First, the loan from Allied to CIC and affiliates created a property interest in CIC for at least a portion of the $9 million. Whether some, or all, of CIC’s interest in the loan proceeds from Allied was paid to defendants on the stock purchase is a question of material fact. Whether CIC or CIH ever had dominion and control over the loan funds is a question of material fact. Whether defendants intended or understood the use of CIC’s assets, as alleged in paragraph 34 of the second amended complaint, is a question of material fact. Whether the transfer of CIC’s interest in the Allied loan proceeds, if it occurred, was with actual intent to hinder, delay, or defraud any creditor of CIC or whether such transfer was made without CIC recovering a reasonably equivalent value in exchange, are issues of material fact. Whether debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer are issues of material fact. Whether defendants are “initial transferees” of the transfer of the Allied loan proceeds is a question of material fact. Whether defendants, by receiving any of the Allied loan proceeds, received an illegal distribution, is a question of material fact. Whether defendants were unjustly enriched by receipt of property of CIC is a question of material fact.
In conclusion, because there is a fact question concerning the basic issue in this case — whether property of the debtor, its share of loan proceeds from the Allied loan, was transferred to defendants — summary judgment cannot be granted. If there was such a transfer of property of the debtor, then the other issues of material fact listed above also preclude summary judgment.
The motion for summary judgment is denied. Separate order will be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493597/ | MEMORANDUM OF DECISION ON MOTION FOR SUMMARY JUDGMENT
ALBERT S. DABROWSKI, Chief Judge.
I. INTRODUCTION
This adversary proceeding seeks to avoid and recover alleged preferential transfers made to the Defendant pursuant to a wage garnishment. The Defendant’s pending summary judgment motion asserts that the subject transfers are not preferential under Bankruptcy Code Section 547 because (i) as a matter of law a “transfer” of a debtor’s interest in his wages occurs only at a time 20 days after service of a wage execution upon his employer, and (ii) such date in this case transpired more than 90 days prior to the Debtor’s bankruptcy petition.
As detailed herein, the Court agrees with the position of the Defendant. Consequently, the instant Motion for Summary Judgment will be GRANTED.
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 matter 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)(A), (F).
III.PROCEDURAL BACKGROUND
1. On February 17, 1999 (hereafter, the “Petition Date”), the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
2. By Complaint dated April 3, 2000, the Debtor commenced this adversary proceeding to avoid and recover, under Bankruptcy Code Sections 547(b) and 550, payments made within the 90 days prior to the Petition Date to the Defendant from the Debtor’s employer pursuant to a garnishment of the Debtor’s wages.
3. The Defendant answered the Complaint, and thereafter filed the instant Motion for Summary Judgment.
4. Coincident with the January 16, 2003 conversion of the Debtor’s bankruptcy case from Chapter 11 to Chapter 7, Bonnie C. Mangan was appointed trustee of the Debtor’s bankruptcy estate. Ms. Mangan was thereafter substituted as Plaintiff herein as the real party in interest in her capacity as estate trustee.
IV.FACTS NOT IN GENUINE ISSUE
The following facts are not in genuine issue—
1. On September 15, 1994, the Defendant’s predecessor (hereafter, the “Bank”), obtained a deficiency judgment in the Connecticut Superior Court (hereafter, “Superior Court”) against Charles Atwood Flanagan (heretofore and hereafter, “Debtor”) in the amount of $124,225.26.
2. On October 24, 1994, the Superior Court issued a wage execution in favor of the Bank against the Debtor pursuant to Section 52-361a of the Connecticut General Statutes (hereafter, “Wage Execution”).
3. At all relevant times the Debtor was employed by Thompson & Peck, an insurance agency in which he was an equity security holder. On November 14, 1994, *295the Wage Execution was served upon Thompson & Peck, which thereafter complied with its duties as a garnishee under C.G.S. § 52-361a.
4. Garnishment pursuant to the Wage Execution of compensation earned by the Debtor at Thompson & Peck resulted in certain monetary transfers to or on behalf of the Defendant in the 90 days preceding the Petition Date (hereafter, the “Payments”).
5. The Payments enable the Defendant to receive more than it would receive if the Payments had not been made and it received payment on its debt to the extent provided by the provisions of the Bankruptcy Code applicable to this Chapter 7 case.
6. At all times relevant to this proceeding the Debtor was “insolvent” within the meaning of 11 U.S.C. § 101(32) (1999).
Y. DISCUSSION
Federal Rule of Civil Procedure 56(c), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7056, directs that summary judgment should enter when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.”
In the present matter, the heart of the dispute between the parties does not relate to the operative facts. Indeed, this Court determines that there are no facts in genuine issue which are material to a determination of this proceeding. Thus, the decisive question before the Court at this time is whether the Defendant is entitled to judgment as a matter of law. That legal issue is focused narrowly on the question of whether the Payments constituted “transfer[s] of an interest of the debtor in property” within the meaning of Section 547(b) of the Bankruptcy Code.1
Not surprisingly, the Defendant directs this Court’s attention to, inter alia, In re Riddervold, 647 F.2d 342 (2d Cir.1981), as arguably controlling precedent on the question of the recovery of wage execution payments as preferential transfers. In Riddervold, a panel of the Second Circuit Court of Appeals construed New York wage execution law to conclude that no transfer of an interest of the debtor occurs when the debtor’s employer makes a garnishment payment to a levying officer on behalf of a garnishing creditor pursuant to the direction of a previously served wage execution. The Circuit Court explained that under New York law service of a wage execution upon the debtor’s employer “works a novation” whereby the percentage of the debtor-employee’s compensation entitled to be garnished is thereafter owed by the employer “not to the employee but to the sheriff for the *296benefit of the judgment creditor.” Id. at 346.
Therefore, to the extent that Connecticut wage execution law is congruent with the New York law construed in Riddervold, that decision would appear to be authoritative in cases such as that at bar. Nonetheless, several bankruptcy courts have recently revisited Riddervold’s authority in light of Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). E.g., In re Arway, 227 B.R. 216 (Bankr.W.D.N.Y.1998). In Arway the bankruptcy court gleaned from Barnhill a federal law rule that wage garnishment transfers of debtor property occur at the time(s) the employer honors the garnishment through payment for the benefit of the creditor, not at the earlier point at which service of the wage execution upon the employer is deemed complete.
For the reasons which follow, this Court declines to follow the lead of Arway; concluding instead that the holding of Riddervold remains persuasive and authoritative.
A. Barnhill’s Impact.
Arway premised its departure from Riddervold on a perceived clarification of applicable law made by the United States Supreme Court in Barnhill. Arway read the following language in Barnhill effectively to overrule Riddervold’s focus on state law in determining whether wage garnishment payments are “transfer[s] of an interest of the debtor in property”—
“What constitutes a transfer and when it is complete” is a matter of federal law. McKenzie v. Irving Trust Co., 323 U.S. 365, 369-370, 65 S.Ct. 405, 89 L.Ed. 305... (1945). This is unsurprising since... the statute itself provides a definition of “transfer.” But that definition in turn includes references to parting with “property” and “interest in property.” In the absence of any controlling federal law, “property” and “interests in property” are creatures of state law. Id., at 370, 65 S.Ct. 405; Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136... (1979).
503 U.S. at 397-98, 112 S.Ct. 1386.2
With due respect to the Arway court, this Court does not read Barnhill to have any material implications for the Riddervold analysis. It is important to note that in the quoted excerpt from Barnhill, Chief Justice Rehnquist cites directly to the United States Supreme Court’s decisions in McKenzie and Butner for the proper division of analysis between state and federal law. Because McKenzie and Butner both predate Riddervold — as do the subject Bankruptcy Code provisions, i.e. Sections 101(54) and 547(e) — the Riddervold Court must be presumed to have known and applied the appropriate source of law for its analysis. Barnhill simply broke no new ground with respect to the presently contested issues.
Riddervold appropriately looked to state law as the source for resolution of the disputed issue before it. The fact that federal law defines “transfer”3 only leads to the conclusion that the Payments here were “transfers” from one entity to another, it does nothing to help answer the question of what and/or whose property interests were being transferred via the Payments. This latter question — going to *297the nature of the property interest transferred — is appropriately determined by state law.
In addition, the fact that federal law governs the timing of a given transfer does not inform the issue at bar. For instance, exclusive reference to Section 547(e)(3)’s declaration that a preferential transfer “is not made until the debtor has acquired rights in the property transferred” puts the proverbial “cart before the horse” since the question which must be asked first is, as it was in Riddervold, whether the debtor ever had any rights in the funds transferred from the employer to, or for the benefit of, the creditor. In the same posture of the present dispute, Riddervold determined that under New York law a debtor does not possess property rights in the funds utilized by his employer to make garnishment payments to a creditor. Thus it was logically unnecessary for Riddervold to discuss the question of when the debtor acquired rights in such subject funds.
In sum, Barnhill supports, not undermines, Riddervold’s referencing of state law in determining the voidability of payments made to a creditor within the preference period window pursuant to a wage execution served and otherwise perfected prior to the opening of that window. Accordingly, in the proceeding at bar the Court must determine under Connecticut law whether the Payments were transfers of property interests of the Debtor.
B. Determination of Connecticut Law.
In Riddervold, the Second Circuit held that preference period payments made by a debtor’s employer to a creditor, in compliance with a wage execution perfected under New York law prior to the opening of the preference window, did not constitute “transfer[s] of property of the debt- or”. 647 F.2d at 346. That holding answers, under New York law, the precise question posed under Connecticut law by the matter at bar. Thus, to the extent that Connecticut law tracks the wage execution law of New York, Riddervold controls the outcome of the instant matter.
The Connecticut Supreme Court has not had occasion to opine on the question of whether funds paid by a debtor’s employer to a creditor of the debtor pursuant to a wage execution constitute transfers of the debtor’s property. This Court is free, then, to ascertain Connecticut law independently. In that process the Court finds Riddervold enlightening. Riddervold explained that
... after the sheriff has taken the stép described in N.Y.C.P.L.R. § 5231(d), the debtor has no property or interest in property subject to the levy which can be transferred. Service of the income execution on the employer in effect works a novation whereby the employer owes 10% of the employee’s salary not to the employee but to the sheriff for the benefit of the judgment creditor.
Id. The Circuit Court found this determination “substantiated” by N.Y.C.P.L.R. § 5231(e), which established the legal liability of the employer for the installments due pursuant to an income execution.4 Id. The Court also found its analysis consistent with earlier Circuit authority — under the Bankruptcy Act and a former codification of the New York wage execution— which endorsed the view that a wage execution operates as a “continuing levy”. Id. 0citing In re Sims, 176 F. 645 (S.D.N.Y. *2981910) (L. Hand, J.) and In re Wodzicki, 238 F. 571 (S.D.N.Y.1916) (Mayer, J.)).
The Connecticut wage execution law implicated in the present proceeding is not materially different from that construed by the Court in Riddervold. Like New York law, Connecticut law provides for employer liability in the event of non-compliance with a wage execution. See C.G.S. § 52-361a(g) (1998).5 In addition, the Connecticut statute explicitly utilizes the term “continuing levy” when describing the nature and effect of a duly served and perfected wage execution. See C.G.S. § 52-361a(d) (1998).6 Consequently, this Court views Riddervold as authoritative in the present context.7 The Payments were not transfers of an interest of the debtor in property, and accordingly are not avoidable as preferential under Section 547 of the Bankruptcy Code.
VI. CONCLUSION
For the foregoing reasons the motion of the Defendant for summary judgment will be GRANTED by separate order.
ORDER ON MOTION FOR SUMMARY JUDGMENT
The above-captioned contested matter having come on for hearing before this Court; and the Court having this day issued its Memorandum of Decision on Motion for Summary Judgment, in accordance with which
IT IS HEREBY ORDERED that the Defendant’s Motion for Summary Judgment (Doc. I.D. No. 15) is GRANTED.
. Bankruptcy Code Section 547(b) provides in relevant part as follows:
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—
... 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) (1999).
. Barnhill decided an issue different from the one presently at bar. It answered the question of when a transfer of payment by a check occurs — upon delivery or, subsequently, upon clearing the maker’s depository institution.
. 11 U.S.C. § 101(54) defines transfer as “eveiy mode, direct or indirect, absolute or conditional, voluntaiy or involuntary, of disposing of or parting with property or with an interest in property....”
. N.Y.C.P.L.R. § 5231(e) (1981) provided, inter alia, that if an employer "shall fail to so pay the sheriff, the judgment creditor may commence a proceeding against ... [the employer] for accrued installments.”
. C.G.S. § 52-361a(g) provides, inter alia, "[i]f the employer fails or refuses to pay the earning levied against to the levying officer, the employer may be subjected to a turnover order pursuant to section 52-356b and, on a finding of contempt, may be held liable to the judgment creditor for any amounts which he has so failed or refused to pay over.”
. C.G.S. § 52-361a(d) provides, inter alia, "[o]n service of the execution on the employer, the execution shall automatically be stayed for a period of twenty days and shall thereafter immediately become a lien and continuing levy on such portion of the judgment debtor's earnings as is specified therein....”
.Judge Alan H.W. Shiff, of this Court, followed Riddervold in a case arising under Connecticut’s wage execution law. In re Certain, 30 B.R. 379 (Bankr.D.Conn.1983). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493598/ | MEMORANDUM OPINION
DOUGLAS O. TICE, Jr., Chief Judge.
Hearing was held July 25, 2001, on a motion by the estate of Daniel B. Delaney for resolution of a disputed § 702 trustee election and on the Delaney estate’s objection to the U.S. Trustee’s report of disputed election. At conclusion of the hearing, the matter was taken under advisement. For the reasons stated herein, the Delaney estate’s objection to the report of disputed election will be overruled. The court holds that the Delaney estate’s claim is disputed for purposes of § 702(a)(1), and it was not qualified to request the election of a trustee under § 702(b).
Procedural History and Positions of the Parties.
On May 4, 2001, the U.S. Trustee filed a report of disputed election. The report details the history of this bankruptcy case and the circumstances surrounding the election. The trustee believes that the Delaney estate’s election of Marc Albert, interim trustee, is subject to a bona fide dispute and pending a resolution by the court, Albert continues in office.
*385On May 15, 2001, the Delaney estate filed an objection to the trustee’s report and a motion for resolution of a disputed § 702 trustee election.1 The Delaney estate’s motion goes into great detail about the probate issues and resulting monetary judgment giving rise to its claim against debtor. It argues that the claim is “not disputed in the classic sense of the word” and that the claim is not adverse to the debtor’s estate because the claim was tested in probate court and should be given full faith and credit. Delaney Objection, p. 10. Moreover, the Delaney estate asserts that its claim is not materially adverse to other unsecured creditors because the only point at issue is the claim’s amount. Finally, the Delaney estate asserts its belief that debtor’s appeal of the probate court judgment has no merit and that its interest in dismissing the appeal does not put it in conflict with other unsecured creditors.
On June 27, 2001, debtor filed a motion in opposition to the Delaney estate’s objection. Debtor asserts three arguments as to why the interim trustee should remain in the case. First, debtor argues that the Delaney estate’s motion should be stricken “because it is fatally tainted with defamatory and false statements of fact.”2 Debt- or’s Response, at 2. Neict, debtor asserts that because there was never a trial on the merits in the probate court, the principles of res judicata and collateral estoppel do not apply and the judgment is not entitled to full faith and credit. Finally, debtor asserts that the Delaney estate failed to provide a sound legal or factual justification to challenge the trustee’s report.
The U.S. Trustee did not file a response to these motions, and he took a neutral position at the hearing held July 25, 2001.
Findings of Fact.
1. The Election Dispute.
Debtor filed for relief under chapter 7 on February 27, 2001. On February 28, 2001, Sherman B. Lubman was appointed interim chapter 7 trustee.
Prior to debtor’s § 341 meeting of creditors, counsel for the Delaney estate contacted the U.S. Trustee and requested an election of a permanent chapter 7 trustee pursuant to § 702. On April 4, 2001, the interim chapter 7 trustee initiated debtor’s § 341 meeting of creditors and the U.S. Trustee attempted to hold the election. At that time, counsel for the Delaney estate informed the parties that he was not prepared for the election because the party he intended to nominate backed out at the last minute. The election was cancelled and the interim trustee conducted the § 341 meeting.
Debtor’s § 341 meeting was continued to May 2, 2001. Counsel for the Delaney estate informed the parties that the election should be held on that date.
On May 2, 2001, the U.S. Trustee conducted the election. Those present at the election included: debtor, debtor’s counsel, counsel for the Delaney estate and three creditors.
Debtor’s counsel objected to the election because debtor disputes the Delaney estate’s claim. The U.S. Trustee proceeded *386with the election and stated that he would submit a report so that the court could resolve the matter.
Counsel for the Delaney estate nominated Marc Albert. A creditor nominated the interim trustee. It was decided that it was not necessary to vote on the interim trustee because he would become permanent if the vote on Albert’s nomination failed. Counsel for the Delaney estate voted the unsecured portion of its claim in favor of Albert.
The U.S. Trustee filed his report of disputed election and asked the court to resolve the issue of whether the Delaney estate is entitled to vote due to the possible disputed nature of its claim.
2. The Delaney Estate’s Proof of Claim.
The Delaney estate filed a proof of claim in this case based on a judgment it received from the D.C. Superior Court, probate division, for approximately $514,000.00 plus interest. Debtor has appealed the probate court’s ruling.
Debtor’s schedule D, which was filed on March 13, 2001, prior to the § 341 meeting, lists the Delaney estate as a secured creditor and indicates in the appropriate place that the claim is disputed.3
On May 11, 2001, debtor filed an objection to the Delaney estate’s proof of claim. No answer was received, and an order was entered on July 10, 2001, disallowing the claim.4
The interim chapter 7 trustee conducted an initial investigation into the Delaney estate’s claim, and he found that debtor’s appeal is pending in D.C. If the appeal is successful, debtor’s bankruptcy estate stands to receive approximately $600,000.00. If the appeal is not pursued then, effectively, debtor has no estate to administer.
The Delaney estate vigorously asserts that the probate court’s ruling should be upheld, and it will oppose debtor’s attempts to have that ruling overturned on appeal. The Delaney estate also would oppose any efforts by the chapter 7 trustee to avoid the judgment lien secured by debtor’s real property.
Conclusions of Law.
The election of a trustee is governed by 11 U.S.C. § 702, which states:
A creditor may vote for a candidate for trustee only if such creditor — (1) holds an allowable, undisputed, fixed, liquidated, unsecured claim of a kind entitled to distribution under section 726(a)(2), 726(a)(3), 726(a)(4), 752(a), 766(h), or 766(i) of this title; (2) does not have an interest materially adverse, other than an equity interest that is not substantial in relation to such creditor’s interest as a creditor, to the interest of creditors entitled to such distribution; and (3) is not an insider.
11 U.S.C. § 702(a).
Federal Rule of Bankruptcy Procedure 2003 also governs elections. Specifically, Rule 2003(b)(3) states that
a creditor is entitled to vote at a [§ 341] meeting if, at or before the meeting, the creditor has filed a proof of claim or a writing setting forth facts evidencing a *387right to vote pursuant to § 702(a) of the Code unless objection is made to the claim or the proof of claim is insufficient on its face.
Fed. R. Bankr. P. 2003(b)(3).
Since a creditor may be excluded from voting if there is an objection to its claim, the court must determine whether this requires a written objection be filed with the court prior to the § 341 meeting, or whether some other form of objection suffices.5
In this case, debtor’s schedule clearly states that the claim of the Delaney estate is disputed. Moreover, counsel for debtor orally objected to the claim at the § 341 meeting prior to the election. Debtor did not file a written objection to the Delaney estate’s proof of claim until after the § 341 meeting.
The Bankruptcy Code does not expressly address the required level of formality of the objection, and this court has not addressed this issue previously. There is case law to support debtor’s position that a written objection to a proof is claim is not required. See In re Sforza, 174 B.R. 656 (Bankr.D.Mass.1994); 9 Collier on Bankruptcy, ¶ 2003.02[2][d] (Lawrence P. King, ed., 15th ed. rev.1997). Cases that follow this line of reasoning hold that a written objection is not required because raising an oral objection merely “preserve[s] determination of the issue of eligibility for the Court by way of the United States Trustee’s report of the disputed election and a motion timely filed, both as
provided in Rule 2003(d).” In re Sforza, 174 B.R. at 658.
Once an oral objection is made, the U.S. Trustee will submit his report of disputed election and it will be up to the court to determine whether the objection has merit. Frivolous objections will be overruled. Because an oral objection merely preserves the issue for the court, this court concludes that debtor’s listing of the claim as disputed on her schedules and her oral objection to the claim at the § 341 meeting is a sufficient basis for the court to determine that the Delaney estate’s claim is disputed.
The next issue the court must address is whether debtor’s objection to the election was frivolous. Without reaching the merits of debtor’s objection to the Delaney estate’s proof of claim, the court holds that the objection to the election was not frivolous. Debtor appealed the probate court’s ruling.6 There is a question as to the value of debtor’s real property that is subject to the Delaney estate’s judgment lien and, therefore, the amount of the unsecured portion of the claim is unknown at this time. Moreover, debtor listed the claim as disputed on her schedule and later filed a written objection to claim.
Considering all of the circumstances, the Delaney estate’s claim is “disputed” for purposes of § 702(a)(1), and it is not entitled to vote for a candidate for trustee.7 Moreover, the Delaney estate was not qualified to request the election of a trustee under § 702(b). Therefore, Albert’s nomination fails, and the interim trustee *388will become the permanent chapter 7 trustee.
A separate order will be entered.
. Federal Rule of Bankruptcy Procedure 2003(d)(2) states in part: "Unless a motion for the resolution of the dispute is filed no later than 10 days after the United States trustee files a report of a disputed election for trustee, the interim trustee shall serve as trustee in the case.” The court notes that the Delaney estate’s objection was received eleven days after the trustee filed his report.
. Debtor's motion included a motion to strike for violation of Rule 11(b). This was not raised at hearing and is outside the scope of this opinion.
. Schedule D reflects that the Delaney estate has a judgment lien on debtor’s real property. The amount of claim is listed as $500,000.00. The market value of property subject to the lien is listed as $321,167.00. The unsecured portion of the claim is listed as $178,833.00.
. At hearing, counsel for the Delaney estate asserted that he never received debtor's objection to the proof of claim or the order disallowing the claim. The parties agreed to submit a consent order vacating the order disallowing the claim.
. The Delaney estate asserts that its claim is not disputed because no one filed a written objection to its proof of claim prior to the § 341 meeting.
. The court makes no finding as to whether the issues on appeal have merit.
.Since the court holds that the claim is disputed pursuant to § 702(a)(1) it does not reach the issue of whether the Delaney estate has a materially adverse interest to the other creditors under § 702(a)(2). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493600/ | ORDER ON MOTION FOR RELIEF FROM STAY FILED BY NUVELL FINANCIAL SERVICES CORP.
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the motion for relief from stay filed by Nuvell CR Corp-NAL c/o Nuvell Financial Services Corp. (“Nuvell”) on May 22, 2003. Nuvell seeks relief in order to exercise its state-law remedies with respect to its collateral, a 1998 Chevy C-1500 pick-up truck titled in the name of Gary W. Hart, one of the debtors herein. The motion was served on the debtors, the debtors’ attorney, the chapter 13 trustee, and the United States Trustee and contained the 20-day notice required by Local Bankruptcy Rule 9013-l(a).
On June 9, 2003, the Court put on an order continuing the stay and setting a hearing for June 26, 2003. The order provided that any response to the motion must be filed by the earlier of twenty (20) days after the motion was served or three (3) days prior to the hearing.
The debtors did not file a response within the 20-day period, and on June 16, 2003, *750Nuvell filed a certificate of proper service and lack of response. Under the authority granted by Local Bankruptcy Rules 4001-1(d), 9013-l(a) and 9021-l(a), the clerk on June 18, 2003, issued an order granting Nuvell relief from stay. The clerk’s order was entered and served through BNC on June 20, 2003.
On June 24, 2003, the debtors filed a memorandum in opposition to Nuvell’s motion and requested a hearing. The certificate of service indicated that the debtors served their memorandum on Nuvell’s attorney on June 19, 2003. On June 26, 2003, the Court conducted a hearing. The sole issue to be determined is whether the Court should vacate the clerk’s order because the debtors served their memorandum contra prior to entry of the order. The Court answers the question in the negative.
A response to a motion for relief from stay which is not filed within either the time set forth in the notice or the period specified by the order continuing stay and setting hearing will not act to stop the issuance of a clerk’s order where the certificate of proper service and lack of response is not filed prematurely even though the clerk’s order may not have been “entered” when the belated response was served. If the movant properly notices the motion and receives no response within the time the local bankruptcy rules require the movant to wait before filing a certificate of no response, a late response will be ineffective to defeat the certificate of no response and the resulting clerk’s order, absent an incorrect service address or other legal defect. The high volume of motions for relief from stay, the existence of the procedure set forth in the local bankruptcy rules, and the need for clarity in these processes requires this result.
Based on the foregoing, the Court declines to vacate the clerk’s order granting Nuvell relief from the automatic stay.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493601/ | ORDER GRANTING MOTION TO DISMISS COMPLAINT
AUDREY R. EVANS, Chief Judge.
Defendant’s motion to dismiss for failure to state a claim upon which relief may be granted under Federal Rule of Bankruptcy Procedure 7012(b)(6), and the Debtor’s response, are before the Court. No application has been made for a hearing in this matter.
On September 13, 2002, the Plaintiff and Debtor, James H. Williams (the “Debtor”), filed the complaint in this matter against Defendant, Sacramento County Department of Child Support Services (the “Defendant”) to determine the dischargeability of certain debts owed Defendant. The Defendant moves to dismiss the complaint on the grounds that the Debtor has failed to state a claim upon which relief may be granted. Specifically, the Defendant argues that Debtor has failed to state a claim because the debt he seeks to have declared dischargeable is a debt for child support, and child support obligations are non-dis-chargeable pursuant to 11 U.S.C. § 523(a)(5).
In 1977, the Debtor was ordered to make child support payments as a result of a Divorce Decree entered in a Sacramento County, California court of record (the “California Court Order”). That debt was subsequently assigned to the Defendant who registered the order in the Chancery Court of Pope County, Arkansas in November 1994, pursuant to Ark.Code Ann. § 9-17-605 et seq. At that time, the Defendant calculated the child support arrearage at $158,635.23. Contempt proceedings against Defendant followed, and in March 1995, an agreed order signed by Debtor and the Arkansas Office of Child Support Enforcement was entered which found that the amount subject to being collected under the applicable statute of limitations was $73,667.74 (the “Arkansas Court Order”). Debtor alleges that any obligation he owed to Defendant was transferred to the Arkansas Child Support Enforcement Unit due to the entry of the Arkansas Court Order, and therefore seeks to have any debt owed to the Defendant declared dischargeable.
Section 523(a)(5) excepts from discharge child support obligations. In determining whether a debt is non-dischargeable under § 523(a)(5), a bankruptcy court decides nothing more than whether the obligation is in the nature of child support. See Draper v. Draper, 790 F.2d 52 (8th Cir.1986) (citing In re Harrell, 754 F.2d 902, 906 (11th Cir.1985)). The Debtor concedes that the debt he seeks to have declared non-dischargeable is a child support obligation, but seeks to have the amount of that obligation determined by the Court. Debtor’s response to Defendant’s Motion to Dismiss states:
5. That the Plaintiff agrees that child support is non-dischargeable, but maintains that the child support debt is the judgment the Defendant obtained in the Arkansas Court pursuant to its request.
6. ... The Plaintiff believes that the child support debt he owes is the judgment obtained by the Defendant in the State Court of Arkansas.
Because there is no dispute that the debt arising from the California Court Order is a debt for child support, the Court finds that the Debtor has not stated facts upon which relief may be granted, and the Defendant’s Motion to Dismiss must be granted. Furthermore, this Court is without jurisdiction to determine the amount of *810the Debtor’s child support obligation; such a determination would constitute an advisory opinion. See In re Harrell, 754 F.2d at 907 (“The parties do not agree on the amount of debtor’s arrearage. We decide here only that debtor’s obligation is not dischargeable in bankruptcy. The precise terms under which debtor’s obligation can be enforced must be determined by the appropriate state court, if necessary.”). See also In re Ward, 188 B.R. 1002, 1006-1007 (Bankr.Ala.1995). Accordingly, if Debtor seeks a determination that the Arkansas Court Order modified the California Court Order, he must pursue that relief in State Court. It is hereby
ORDERED that the Defendant’s motion to dismiss complaint is GRANTED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493603/ | ORDER ALLOWING RECOUPMENT OF MEDICAID OVERPAYMENTS BY THE NORTH CAROLINA DEPARTMENT OF HEALTH AND HUMAN SERVICES
GEORGE R. HODGES, Chief Judge.
This matter is before the court on Notice of Intent to Recoup Medicaid Over-payments filed by the North Carolina Department of Health and Human Services. For the reasons stated below, the court has concluded that the State is permitted to recoup pre-petition Medicaid overpay-ments.
Jurisdiction
1. Jurisdiction is proper pursuant to 28 U.S.C. §§ 157 and 1334.
2. This matter came before the court after proper notice, and all parties are properly before the court. The parties each filed memoranda supporting their positions. The court has considered those papers and the arguments of counsel at a hearing on January 23, 2002.
Factual Background
3. The debtor in this case, District Memorial Hospital, filed a Chapter 11 reorganization proceeding on June 6, 2000.
*4534. The debtor is a charitable, non-stock, non-profit hospital in Andrews, North Carolina. Since filing its bankruptcy petition, the debtor has continued to operate in the ordinary course of business pursuant to 11 U.S.C. §§ 1107 and 1108.
5. On November 30, 2001, the debtor and Murphy Medical Center, Inc., an unsecured creditor and a party in interest, jointly filed a First Amended Disclosure Statement and Plan. The court entered an order on December 12, 2001, confirming this Plan of Reorganization, which in essence provides for purchase of the debtor’s assets by Murphy Medical Center and continuation of certain hospital operations at the Andrews facility.
6. The North Carolina Department of Health and Human Services, Division of Medical Assistance (“DMA”) is the State agency responsible for administering and managing North Carolina’s Medicaid Plan and Program. N.C. Gen. Stat. § 108A-25 (2001). The purpose of the Medicaid Program is to provide funding for individuals “whose income and resources are insufficient to meet the cost of necessary medical services.” 42 U.S.C.A. § 1396 (West 1992 & Supp.2001). The Program is funded with federal, state, and county dollars. 42 U.S.C.A. § 1396; N.C. Gen. Stat. § 108A-54 (2001).
7. The debtor provided medical services to Medicaid recipients pursuant to a Medicaid Participation Agreement1 entered into with the DMA. The debtor and the DMA executed a Provider Agreement that became effective on February 1, 2000. Prior to that date, an Agreement executed in October 1994, was in effect. For the purposes of the matter currently before the court, there is no material difference in the terms of the two agreements.
8. Pursuant to the Provider Agreement with the debtor, the DMA makes estimated payments to the debtor throughout each fiscal year for claims for Medicaid services rendered. The Provider Agreement permits the DMA to recover over-payments, penalties, or invalid payments due to errors of the provider and/or the DMA and its agents. A final cost report is submitted at the end of each fiscal year, and overpayments and underpayments are reconciled at that time.
9. Reconciliations have shown that the debtor was overpaid for Medicaid services in 1998 and 1999; the debtor was underpaid for Medicaid services in 1991 and 2000. Pursuant to a pre-petition repayment schedule requested by the debtor and dated March 1, 2000, the debtor repaid $1,872.00 in interest and $41,585 in principal. The remaining amount owed by the debtor to the DMA for net overpay-ments is $44,652.00.
10. The DMA seeks to recoup this $44,652.00 in net pre-petition overpay-ments from the years 1998 and 1999 against post-petition Medicaid reimbursement payments.
Discussion
11. North Carolina’s Medicaid Program is based on federal law and funded in part by federal funds. See 42 U.S.C.A. § 1396 et seq.; N.C. Gen. Stat. § 108A-25; § 108A-54 (2001). The federal Medicaid system provides for installment payments to the states followed by adjustments to reflect overpayments and underpayments.2 *45442 U.S.C.A. § 1396b(d); 42 C.F.R. § 447.30 (2002) (providing for withholding the federal share of payments to Medicaid providers to recover Medicaid overpay-ments). Mirroring this scheme, the State’s Administrative Code requires the State to recoup overpayments made to health care providers by the DMA. N.C. Admin. Code tit. 26, r. 26G.0707 (2001). In accordance with these federal and state laws and regulations, recovery for over-payments is provided for in the Provider Agreement between the debtor and the DMA in this case.
12. Bolstering these statutory provisions for recoupment is the common law recoupment right that may be asserted in bankruptcy. See Reiter v. Cooper, 507 U.S. 258, 265 n. 2, 113 S.Ct. 1213, 122 L.Ed.2d 604 (1993). The Supreme Court has recognized that recoupment is appropriate in bankruptcy cases as a counterclaim arising from the same transaction between the debtor and a non-debtor party. Id. (emphasis added). Two requirements must be met for recoupment to be allowed: an overpayment must have been made, and both the creditor’s claim and the amount owed the debtor must have arisen from a single contract or transaction. In re Kosadnar, 157 F.3d 1011, 1014 (5th Cir.1998). Because funds subject to recoupment are not the debtor’s property, the automatic stay imposed upon the filing of a bankruptcy petition does not bar recoupment. In re Malinowski, 156 F.3d 131 (2d Cir.1998). Instead, the trustee in bankruptcy takes the estate property subject to any recoupment rights. In re Holford, 896 F.2d 176, 178 (5th Cir.1990) (citation omitted); In re Madigan, 270 B.R. 749, 754 (9th Cir. BAP 2001). The equitable doctrine of recoupment is not limited to pre-petition claims; therefore, recoupment “may be employed to recover across the petition date.” Sims v. U.S. Dep’t of Health and Human Serv. (In re TLC Hosps., Inc.), 224 F.3d 1008, 1011 (9th Cir.2000).
13. Because both the Medicare and Medicaid Programs provide for the recovery of overpayments, common law recoupment claims are a recurring theme in bankruptcy cases involving health care providers. See, e.g., TLC Hosps., 224 F.3d 1008; United States v. Consumer Health Serv. of Am., Inc., 108 F.3d 390 (D.C.Cir.1997); University Med. Ctr. v. Sullivan (In re University Med. Ctr.), 973 F.2d 1065 (3d Cir.1992). However, the Circuit Courts that have addressed this issue have employed different analytical approaches and adopted differing definitions of what constitutes the “same transaction” for the purposes of recouping overpayments. Compare TLC Hosps., 224 F.3d at 1012 (holding that the “distinctive Medicare system of estimated payments and later adjustments” met the court’s understanding of a single transaction), and Consumer Health Serv., 108 F.3d at 394 (holding that the federal Medicare statute’s provision for adjustments for prior overpayments was dispositive on the issue of recoupment), with University Med. Ctr., 973 F.2d at 1081-82. (holding that each audit year constituted a single transaction for purposes of recouping Medicare overpayments from a bankrupt health care provider).
14. The Fourth Circuit has not addressed this issue.3 Two recent decisions *455in this district, however, did address re-coupment claims for Medicaid overpayments made to health care providers who subsequently filed for Chapter 11 protection. See In re Colonial Health Investors, LLC, No. 00-51124 (Bankr.W.D.N.C. Oct. 16, 2001), appeal docketed, No. 5:01CV-187-V (W.D.N.C. Oct. 30, 2001); In re Quality Link-Bertie, LP, No. 00-51125 (Bankr.W.D.N.C. Oct. 16, 2001), appeal docketed, No. 5:01CV186-V (W.D.N.C. Oct. 30, 2001). The decisions in these cases were based on the reasoning of the Third Circuit’s decision in University Med. Ctr. and concluded that each audit year constituted a single transaction.4 In reaching these conclusions, the court distinguished the D.C. Circuit’s opinion in Consumer Health Serv. by noting that it dealt with federal statutes implementing the federal Medicare Program rather than with the State’s implementation of its Medicaid Program. However, this court is not persuaded that this is a distinction of any substance. While states are not required to participate in the Medicaid Program, they must, once accepted into the program, comply with the federal Medicaid statute and regulations. Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 65 L.Ed.2d 784 (1980). Ultimately the implementation of the Medicaid Program is controlled by federal regulations.
15. As noted above, recovery for over-payments is explicitly called for in the federal law that created the Medicaid Program and in corresponding State statutes and regulations. However, to allow re-coupment, the court must find that the State’s recoupment claim arose from the “same transaction” as the overpayment. Reiter, 507 U.S. at 265 n. 2,113 S.Ct. 1213. While a continuous commercial relationship characterized by multiple occurrences does not necessarily constitute one transaction, this court finds that the distinctive Medicare and Medicaid systems of estimated payments and later adjustments do constitute a single transaction for recoupment purposes. TLC Hosps., 224 F.3d at 1012. Such an exchange of funds may stretch over an extended period of time, reflecting a continuous balancing process between the parties. Id. Nevertheless, Congress has indicated that a hospital provider’s stream of services is to be considered one transaction for the purposes of any claim the government has against the provider. Consumer Health Serv., 108 F.3d at 395. This relationship is not analogous to multiple, separate equipment purchases from a single supplier — which are *456clearly separate transactions. Instead, the DMA’s relationship with a provider hospital is the hospital’s lifeblood, particularly in the case of a rural hospital such as the debtor. This relationship contemplates a reliable, uninterrupted flow of funds essential to the hospital’s operations, subject to annual audit and adjustment, but always continuing to flow. It is — by agreement and by practical operation — one continuous transaction. This reasoning, as articulated by the Ninth Circuit and the District of Columbia Circuit, supports recoupment for overpayments across different cost years. Id. at 395; TLC Hosps., 224 F.3d at 1012.
16. In contrast, the Third Circuit has held that, because the federal Medicare Act regulations contemplate an annual account reconciliation, each audit year constitutes a single transaction for purposes of recouping overpayments.5 University Med. Ctr., 973 F.2d at 1081-82. The Third Circuit stated that to find that the ongoing relationship with the health care provider justified recoupment for pre-petition over-payments from post-petition advances would be to “contort the [recoupment] doctrine beyond any justification for its creation.” Id. at 1082; contra Consumer Health Serv., 108 F.3d at 395 (remarking that an audit is only a snapshot in time and is not relevant to determining what constitutes a transaction).
17. Here, the court is persuaded by the arguments presented in Consumer Health Serv. and TLC Hosps. and adopts the reasoning of those decisions. The court recognizes that these cases dealt specifically with Medicare- — not Medicaid — recoupment, but the court concludes that this is not a significant distinction for several reasons. The federal law that created the Medicaid Program and engendered the State Medicaid Program provided for re-coupment of overpayments made to the States. In accordance with the requirements for implementing Medicaid in this State, North Carolina statutes and regulations provide for recoupment of overpay-ments made to health care providers. The continuous balancing process outlined in the parties’ Provider Agreement is based on these federal and state law provisions. Therefore, application of the rules from Consumer Health Serv. and TLC Hosps. requires a holding that the ongoing stream of services, advances, and reconciliations constitutes a single transaction, and that recoupment be allowed in this case.
18.In ruling to allow recoupment, the court notes that other bankruptcy courts have allowed recoupment for overpayments for Medicare and Medicaid services. See, e.g., In re AHN Homecare, L.L.C., 222 B.R. 804 (Bankr.N.D.Tex.1998); In re Southern Inst. for Treatment & Evaluation, Inc., 217 B.R. 962 (Bankr.S.D.Fla. 1998); In re CDM Management Serv., Inc., 226 B.R. 195 (Bankr.S.D.Ind.1997); In re Heffernan Memorial Hosp. Dist., 192 B.R. 228 (Bankr.S.D.Cal.1996); but see, e.g., In re Sun Healthcare Group, Inc., 245 B.R. 779 (Bankr.D.Del.2000); In re Healthback, 226 B.R. 464 (Bankr.W.D.Okla.1998); In re St. Francis Physician Network, 213 B.R. 710 (Bankr.N.D.Ill.1997). Directly on point here is the CDM Management Serv. decision, which involved a state agency’s attempt to *457recoup for pre-petition Medicaid advances. 226 B.R. at 197. Recoupment was allowed pursuant to a single, continuing provider agreement that was still in effect. Id. (distinguishing the Third Circuit’s holding in University Med. Ctr.). As noted above, a similar agreement is present in the case at bar.
19. Additionally, the court holds that recoupment is appropriate in this case based on equitable considerations. The Medicaid system of advance payments for estimated costs has maintained the debtor hospital’s cash flow.6 TLC Hosps., 224 F.3d at 1014. Because overpayments are inherent to the Medicaid system, it is fair to adjust for them regardless of whether a bankruptcy has intervened. Id. Moreover, recoupment is also proper because the excess monies advanced to the debtor are not part of the bankruptcy estate. In re Holford, 896 F.2d at 178. Allowing recoupment, therefore, prevents the debtor from benefitting from the ongoing Provider Agreement while rejecting its burdens. See In re Tidewater Mem’l Hosp., 106 B.R. 876, 884 (Bankr.E.D.Va.1989) (citations omitted).
20. Public policy considerations also support allowing recoupment in this case. The DMA does not operate the Medicaid Program for its own interests, but rather administers public funds to assist in making health care services available to those who could not otherwise afford them. See In re Tri County Home Health Serv., 230 B.R. 106, 113 (Bankr.W.D.Tenn.1999). Likewise, the Medicaid Program was not instituted for the purpose of benefitting health care providers. Id. at 114. The business benefit that the debtor derives from participating in the Medicaid Program is incidental to the Program’s purpose as a health insurance system. Id. Moreover, the relationship between the DMA and the debtor is not an ordinary business relationship; rather the debtor acts as a surrogate in implementing an important governmental social welfare program. In re Advanced Prof'l Home Health Care, Inc., 94 B.R. 95, 97 (E.D.Mich.1988). Treating the DMA as an ordinary creditor would distort this unique relationship. Id. While the court must necessarily consider a broad range of interests in bankruptcy cases, these public policy concerns support the court’s decision to permit the State to recoup pre-petition overpayments from the debtor.
Conclusion
21.For the reasons stated above, the court concludes that the State may properly assert its right to recoup pre-petition overpayments of Medicaid claims from the debtor.
It is, therefore, ORDERED that the State is entitled to recoup pre-petition overpayments of Medicaid claims from funds owing the debtor post-petition.
. The parties refer to the Medicaid Participation Agreements at issue here as "Provider Agreements,” and the court will do so as well.
. Federal regulations do not require states to repay overpayments made to health care providers when those amounts have become un-collectible because the provider has declared bankruptcy or gone out of business. 42 C.F.R. §§ 433.312(b); 433.318 (2002).
. Subsequent to denying the State's recoupment claims, the court issued orders in both Colonial Health Investors and Quality Link-Bertie concluding that the Provider Agreements at issue were executory contracts, and that pursuant to 11 U.S.C. § 365, the debtors would have to cure any monetary defaults in order to assume those agreements. Although based on a different theory, the results in those cases are the same as in the case here in that the DMA would be reimbursed for over-payments. However, in both Colonial Health Investors and Quality Link-Bertie, the court found that the DMA had waived monetary cures.
. The University Med. Ctr. ruling actually reflects a middle position. In re Healthback, L.L.C., 226 B.R. 464, 478 n. 20 (Bankr.W.D.Okla.1998). The Third Circuit did not hold that each separate and discrete provision of service and corresponding payment equates to one transaction. Id. Nor did it find that the continuous open-ended relationship of advance payments followed by reconciliations constitutes a single transaction. Id. Instead, it focused on the cost year in defining the boundary for separate transactions. Id. at 478.
. A contrary view is that allowing recoupment "rewards the recouping creditor for being lucky enough to have had an uncompleted contract at the date of bankruptcy.” In re St. Francis Physician Network, 213 B.R. at 720. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493604/ | Memorandum Decision
BRUCE W. BLACK, Bankruptcy Judge.
This case is before me on cross-motions for summary judgment. The bare-bones issue is dischargeability of taxes under section 523(a)(l)(B)(ii)1 of the Bankruptcy *534Code2. Because of a decisional split in the circuits, each party has more specifically framed the issue in the way most conducive to resolution in its favor. The debtors, John and Beatrice Miniuk (“debtors”), believe the only question I need to resolve is whether the Internal Revenue Service (“IRS”) Form 1040’s they filed are “returns” for purposes of section 523(a)(1)(B). On the other hand, the IRS believes that a debtor who does not submit a Form 1040 until after the IRS has already assessed the tax liability should not be allowed to discharge that liability in bankruptcy. Both parties ask me to delineate a bright-line rule. Although I decline to establish any such bright-line rule under either party’s theory of the case, for the reasons set forth below, I do find the IRS’ arguments more persuasive on the particular facts before me. Accordingly, the debt is held to be nondischargeable under the Bankruptcy Code.
Jurisdiction
Jurisdiction over this matter lies under 28 U.S.C §§ 1334. Venue is proper under 28 U.S.C. § 1409. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
Standards for Summary Judgment
The pendency of cross motions for summary judgment does not require that one of the motions be granted. 10A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2720 (3d ed.1998). Each motion must be evaluated independently. Pursuant to Federal Rule of Civil Procedure 56, incorporated into the bankruptcy realm by Federal Rule of Bankruptcy Procedure 7056, summary judgment may be granted “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.”3
Facts
The debtors did not file timely tax returns for the years 1989 and 1990, and did not seek any extensions of time to file.4 With respect to the missing 1989 returns, the IRS began a taxpayer delinquency investigation on June 27, 1991 and notified the debtors via the U.S. postal service.5 The debtors did not respond to the notice. Between October 2, 1991, and December 9, 1991, utilizing information gathered from various reporting third-parties, the IRS prepared and filed a substitute for return6 on behalf of the debtors. A thirty-day *535letter was sent to the debtors informing them of their tax liability. Again, debtors did not respond. Because of their non-responsiveness, the IRS sent debtors a statutory notice of deficiency via certified mail on February 11, 1992. This notice was returned to the IRS non-deliverable, but a forwarding address was provided. On February 1, 1993, the IRS mailed a new statutory notice of deficiency to the debtors via certified mail, and this notice was not returned. The statutory notice of deficiency allows delinquent filers ninety days to respond before tax liability is assessed. The debtors did not respond to the delinquency notice and the 1989 tax liability was assessed on July 19, 1993, and notice of the assessment was mailed to the debtors.
With respect to 1990, essentially the same procedure was followed. The IRS began the delinquency investigation on May 29,*1992; completed the substitute for return on March 29, 1993; mailed the statutory notice of deficiency on May 22, 1993;7 and assessed the tax liability on November 8,1993.
In the meantime, on May 22, 1993, John Miniuk attended an IRS-sponsored “non-filer” program designed to help non-filers get back on track. At the program, he was advised to file all of the missing returns, including the ones for the years that had already been assessed, because voluntary filing of missing returns is an IRS prerequisite for entering into an installment payment agreement. In July 1993, Mr. Miniuk sent a letter to the IRS stating that he would have all of his missing returns filed by August 1993. The Miniuks, however, did not file the returns in August of 1993. Instead, on June 22, 1994, they filed for Chapter 7 bankruptcy protection. The next day, on June 23, 1994, the Mi-niuks submitted their Form 1040 for 1989 to the IRS. A few weeks later, on July 13, 1994, they submitted their Form 1040 for 1990 to the IRS. The debtors received their Chapter 7 discharge on November 3, 1994 and believed their tax liability had been discharged. They were not aware that the tax debt had not been discharged until the IRS began sending them deficiency notices again.
Once the debtors realized that their tax liability had not been discharged, they contacted the IRS and agreed to an installment payment plan. The debtors made ten payments into the plan, from June of 1995 through March of 1996, and then defaulted on their payments. Shortly thereafter, the debtors sought a two-year forbearance from the IRS.8 The IRS granted the forbearance through August 1998. After the forbearance expired in 1998, the debtors did not resume payments, and the IRS continued routine collection attempts until May 17, 2001, when the debtors filed their second Chapter 7 bankruptcy case. The debtors were granted a discharge in this second case on September 13, 2001.
*536
Parties’ Assessment of the Issues
The debtors’ primary argument is that the returns they filed in 1994 should qualify as returns because they constitute an “honest and reasonable” attempt to satisfy the tax law.9 They argue that section 523(a)(1)(B) does not specify whether the return must be filed before or after assessment, and claim that to hold otherwise thwarts the plain language of the Bankruptcy Code by requiring debtors to know the intricacies of internal IRS procedures. They base their contentions on the Craw-ley10 opinion out of the bankruptcy court for the Northern District of Illinois, and two cases, Nunez11 and Savage,12 out of bankruptcy appellate panels in the Ninth and Tenth Circuits. These three cases hold that the court must simply look to the debtor’s intent at the time of filing the return. The debtors’ second argument is based on the proposition that the returns filed by the Miniuks did have a tax purpose. When the debtors filed their Form 1040’s, the IRS compared them to the substitutes for returns it had prepared, and used the information from the Form 1040’s to reduce the debtors’ tax liability. The debtors believe that since the IRS used the Form 1040’s to adjust the liability, its actions are determinative that the Form 1040’s had a purpose.
The IRS’ position is that an assessment of taxes, made after the deficiency proceedings described above are complete, precludes a later-submitted Form 1040 from constituting a “return ... required to be filed” for purposes of section 523(a)(1)(B). The IRS argues that the Miniuks’ effort in filing a return four years late is not an honest attempt to comply with the tax laws, but rather was an effort to start the clock running so they could meet the time requirements of the Bankruptcy Code for discharging taxes. The IRS also argues that the plain language argument elevates the public policy goal of granting debtors a “fresh start” to a level above the equally significant public policy goal of maintaining a voluntary tax reporting system. The IRS supports this claim by pointing out that the Court of Appeals for the Sixth Circuit has upheld the IRS’s position on the basis that to hold otherwise inappropriately violates the integrity of the taxing system.
Analysis
A. Hindenlang13 and the Fact-Based Approach to Resolution of Pre/ Post-Assessment Issues
At the outset I will note that the Seventh Circuit has not made a dispositive *537determination with respect to pre/post assessment dischargeability of taxes. The Sixth Circuit is the only court of appeals to have squarely ruled on this issue, though the Ninth Circuit has resolved a closely related matter. In the Sixth Circuit case, U.S.A. v. Hindenlang,14 the facts are quite similar to the facts in the instant case. In Hindenlang, the debtor did not file tax returns for the years 1985-88. The IRS sent thirty-day deficiency letters and received no response. It prepared substitutes for returns and sent them to Hindenlang. Again, Hindenlang did not respond. The IRS then sent him a formal notice of deficiency and waited the requisite ninety days for a response. When Hindenlang did not respond, the IRS assessed the deficiencies. Two years after the assessments, Hindenlang filed Form 1040’s nearly identical to the substitutes the IRS had prepared. Slightly more than two years after filing the Form 1040’s, Hindenlang filed for Chapter 7 relief. The bankruptcy and district courts discharged the debts. The Sixth Circuit reversed.
The Sixth Circuit began its discussion by pointing out that the Internal Revenue Code15 does not define “return,” but instead uses the term conceptually to encompass any statement, form, or list required to be submitted by various IRS regulations. Neither does the Internal Revenue Code specify when a purported return no longer qualifies as a return. For bankruptcy purposes, the court found that the Bankruptcy Code simply adopts the IRS’ conceptual definition of “return” and does not impart any meaning to the term that the Internal Revenue Code would not impart to it. The court also acknowledged and applied the Beard16 test.
The Sixth Circuit went on to state that the general purpose of section 528 is to prevent debtors from defrauding a wide variety of creditors and therefore, by implication, contains a good faith requirement. With respect to taxes, the court said that section 523(a)(l)(B)(ii) was designed with a two year waiting period to prevent debtors from postponing filing of tax returns until the eve of bankruptcy and then seeking discharge shortly thereafter. It said the two year period essentially gives the IRS notice and time to act before the tax debts can be discharged.
After resolving those preliminaries, the Sixth Circuit turned to the heart of the matter, which in its view turned out to be a burden of proof issue. The lower courts in Hindenlang had decided that any facially valid return filed by the debtor shifted the burden of proving particularized evidence of dishonesty to the IRS. The Sixth Circuit disagreed. The court acknowledged that creditors must prove exceptions to discharge by a preponderance, and acknowledged that exceptions are strictly construed in favor of debtors. However, it held as a matter of law that a Form 1040 does not qualify as a return if it no longer serves any tax purpose or if it has no effect under the revenue code. Applying that standard to the facts, the court held that when a debtor does not respond to any deficiency notices and the IRS is forced to go through the time-consuming and expensive assessment process to determine an individual’s tax liability, the IRS has met its burden of showing that the debtor’s actions were not an honest or reasonable attempt to meet the requirements of the tax law.
Ultimately, the court said that if it did not find this way, a debtor who filed a tax *538return after assessment would be better off in bankruptcy than a debtor who did not, even though the late-filed return served no purpose. In the court’s view, “such a result would create an unjustifiable inconsistency in the law,”17 and would not serve the purpose of section 523. Therefore, the Form 1040 filed by the debtor after the taxes had been assessed was not an honest and reasonable attempt at compliance with tax laws and did not qualify as a “return” for purposes of the Bankruptcy Code.
The Sixth Circuit did not declare that a return filed post-assessment could never satisfy the requirements of section 523(a)(l)(B)(ii). Instead, the court simply established that a fact-based inquiry would in most instances be necessary to resolve the dischargeability issue.
In the Ninth Circuit, an essentially fact-based inquiry has also been established for resolution of section 523(a)(1)(B) questions. Again, the facts of U.S.A. v. Hatton,18 (“Hatton /”) in many ways resemble the facts of the case at bar. In Hatton I, the debtor failed to file his tax return, was notified by the IRS, and ignored the notice. Subsequently, the IRS prepared a substitute return, again notified the debt- or, again was ignored, and finally assessed. Four years later, after the IRS had repeatedly sent delinquency notices, placed a lien on debtor’s property, and ultimately threatened to garnish his wages and seize his property, the debtor agreed to meet with the IRS. After slogging through six months of negotiations, the debtor finally agreed to an installment plan. He made payments under the plan for about three years, then filed for Chapter 7 protection.
The bankruptcy court and a bankruptcy appellate panel agreed that the issue was whether the substitute for return the IRS prepared on debtor’s behalf, coupled with the installment agreement the debtor had signed, satisfied the section 523(a)(l)(B)(I) requirement that a “return” be filed. Both of these courts determined that the debtor’s “cooperation” with the IRS, including his partial performance under the installment agreement, “provided the equivalence of a required return” 19 and therefore excused the debtor from the requirement of filing a voluntary Form 1040.
The Ninth Circuit disagreed and in Hat-ton IP20 reversed the decision of the bankruptcy appellate panel. The court applied the Beard, test and found two independent grounds for reversal. First, the court found that the technical requirement of physically filing a return had never been met. The court dismissed the notion that the substitute for return plus the installment agreement amounted to a voluntary fifing of a “return.” More to the point for purposes of the instant case, however, was the second holding which was that the debtor’s purported “cooperation” with the IRS was not an honest and reasonable attempt to satisfy the requirements of the revenue code. Rather, the Ninth Circuit held that the debtor’s “belated acceptance of responsibility”21 occurred only after he had made numerous attempts to evade paying his taxes and after the IRS essentially had him backed into a corner.
B. The Miniuks’ Reliance on the Plain Language Theory
The reversal of the lower Hatton court makes a significant impact on the Miniuks’ *539argument. The Miniuks rely solely on three cases to support their theory of the case. The holdings in two of the cases, however, have been called, into question because of their reliance on the now-overruled Hatton I. In the first, U.S.A. v. Nunez,22 the debtor failed to file nine years’ worth of tax returns, four years of which the IRS assessed. One year after the assessments, the debtor filed Form 1040’s for the missing years that were virtual duplicates of the substitutes for returns the IRS had prepared. Three years later the debtor filed a Chapter 7 petition and immediately filed an adversary complaint to have the tax liability discharged. The IRS argued that the Form 1040’s filed were not returns because they served no tax purpose and were not filed in good faith. The debtor argued that the forms were filed in good faith because he filed them after attending an amnesty program. The bankruptcy appellate panel held for the debtor, citing two specific reasons: 1) the plain language of section 523(a)(1)(B) does not use assessment as a trigger, and 2) the good faith inquiry begins and ends with whether the form filed by the debtor satisfies the criteria for a return “on its face.”23 As noted, however, the appellate panel relied heavily on its prior decision in Hatton I for this conclusion. After the overruling of that case, at least two courts have questioned the continued utility of Nunez as precedent, and I join them. In Hetzler v. U.S.A.,24 the court noted that the Nunez holding has been “substantially weakened”25 by the reversal of Hatton I. Similarly, in Moroney v. U.S.A., the Eastern District of Virginia noted that the “effect of the Hatton II decision is unsettled”26 with respect to Nunez, though it then went on to disavow the “on its face” holding of Nunez and adopted the fact-based approach of Hindenlang.
The second case afforded much weight by the Miniuks is the Crawley27 decision rendered by Judge Squires, a colleague of mine on this court. Judge Squires felt the facts of the case before him presented a choice between the conflicting results of Hindenlang and Nunez. After reviewing those cases, Judge Squires determined that the Nunez plain language approach was preferable. He concluded that Congress would have specified assessment as a trigger for nondischargeability if it had intended to.28 Additionally, in following Nunez, Judge Squires held that good faith inquiry should be narrowly focused to include only the debtor’s intent at the time he files a return. Again, I note that the Nunez holding is now of suspect authoritative value because of its possible abrogation by the Ninth Circuit’s Hatton II decision. Thus, Crawley’s reliance upon Nunez also calls into doubt its prece-dential value and I decline to follow Craw-ley.
The third case cited by the Miniuks is Savage v. I.R.S.,29 a Tenth Circuit bankruptcy appellate panel decision, which has not been abrogated or reversed by the Tenth Circuit. Savage stands for the *540same premise as do Nunez and Crawley; i.e. that the plain language of section 523(a)(1)(B) does not contain any reference to IRS assessment or non-assessment of taxes. As previously stated, I find that such a restrictive reading does not properly take into account the import of voluntary reporting to the integrity of the taxation system, and I also decline to follow its holding.
Though not cited in the Miniuks’ briefs, a second case decided by a colleague of mine on this court is Payne v. U.S.A.30 In Payne, Judge Schmetterer agreed with both the Nunez and Crawley decisions. Since the Miniuks did not cite to the Payne decision, I will not delve deeply into it. I will simply state that my reasoning with respect to Nunez and Crawley applies to the Payne decision also.
C. IRS’ Use of the Late-Filed Returns
The Miniuks’ second argument asserts that because the IRS reduced their tax liability based on the returns they filed, there was a tax purpose for the returns. This argument appears to arise from a footnote in the Hindenlang case31 which suggests that if a debtor can show a legitimate tax purpose for the return, it might be possible for him to satisfy the fourth prong of the Beard test.32 I do not agree with the Miniuks’ appraisal of the IRS’ use of their returns. The IRS treated the 1989 and 1990 returns as requests for abatement and as such the returns were only used to verify the information that the IRS had itself compiled in order to reduce the assessments on the Miniuks’ behalf.
Additionally, the Miniuks argue that they filed late returns for 1989, 1990, and 1994, but that the IRS is only contesting the 1989 and 1990 liabilities. They claim that from their perspective all three returns are the same, that they cannot understand the difference, and that they should not be held accountable for knowing the intricacies of IRS procedure. This argument has very little substance. The IRS has made clear that it is not contesting the 1994 liability only because it never completed an assessment for that year. According to the IRS, the format of the returns themselves is irrelevant. Its position is fairly straightforward and not especially confusing.
The Sixteenth Amendment33 granted to Congress the power to create an income tax. In designing the present income tax system, Congress commingled a method for voluntary self-assessment with means of penalization for non-compliants. The system as a whole serves to accomplish two underlying goals. The first is to ensure uniform reporting by all taxpayers, without which verification of reported information and collection of taxes owed would be improbable if not impossible.34 The second is to prevent the needless expenditure of public funds in the investiga*541tion and pursuit of evaders.35 The returns filed by the Miniuks did absolutely nothing to serve either of these purposes and in fact benefitted no one but the Miniuks themselves. Their contrary assertion is not well-taken.
D. Walsh Presents an Alternative to Hindenlang for Resolution of the Issue
While my primary basis for resolution of this case is derived from the analysis expounded in Hindenlang, I also believe that the analysis in Walsh v. U.S.A.,36 presents a rational alternative basis for resolution. The facts in Walsh are simply a variation on the theme repeated throughout this writing. The disposition of the case, on the other hand, departed from Hindenlang’s focus on the definition of “return,” and instead focused on the construction of the phrase “return, if required” from section 523(a)(1)(B).
In Walsh, the debtor did not voluntarily file his Form 1040’s. The IRS proceeded to assessment and eventually garnished his wages. Three years later, the debtor went to an IRS office and was given assistance in preparing the missing returns, which he then filed on the appropriate IRS Form 1040’s.
The Walsh court looked at the forms filed by the debtor and determined that they were income tax returns under any dictionary definition and in common parlance. The court then turned to the Beard test and determined that the forms most certainly satisfied the first three prongs; i.e. the Form 1040’s 1) purported to be returns, 2) were executed under penalty of perjury, and 3) contained sufficient data to allow calculation of the tax. Upon attempting to apply the “honest and reasonable” prong, however, the court hit upon what it felt was an unnecessary snag. The court felt that examining the debtor’s intent at the time he filed what is obviously an income tax return, missed the whole point of section 523(a)(1)(B) and the IRS’ role in the assessment process.37
The court reasoned that once the IRS completed the entire assessment process, any return filed by a debtor is simply no longer “required.” More pointedly, any action by a debtor after the assessment is complete is no longer voluntary in any sense, as the debtor, at that point, has forced the IRS into a costly investigation and is now being pursued by the IRS for collection. The court found this view of the phrase “return, if required” to be the most logical and held that, “once the tax obligation has been fixed and liquidated via assessment, the process is done and the return is no longer ‘required’ to further it.” 38
I agree with Walsh and would also find the Miniuks’ debt nondischargeable under its rationale.
Conclusion
Applying the foregoing analysis to the facts at hand, I believe the IRS has set forth a stronger argument and is entitled to summary judgment. The facts bear out *542that the Miniuks were not familiar enough with the bankruptcy laws to get their taxes discharged the first time they filed bankruptcy in 1994. They filed their tax returns the day after they filed for Chapter 7 protection, hoping to have their tax debt discharged in the bankruptcy case. Unfortunately for them, this particular timing was not satisfactory for purposes of the Bankruptcy Code. However, by the time they filed their second bankruptcy in 2001, they knew how to get their taxes discharged under a technical application of the words of the Bankruptcy Code. Additionally, it appears that Mr. Miniuk simply lied about receiving notices from the IRS. Though he may not have received each and every notice, he acknowledged in his deposition that “he began receiving notices again.”
While the bankruptcy courts are somewhat split on the issue before me, the weight of authority of the Sixth and Ninth Circuits tips the balance in favor of the IRS’ position rather than the Miniuks’. The courts finding for the IRS conclude that the plain meaning rule does not take into consideration the legislative history of section 523(a)(1)(B), nor the absurd result that a debtor who times things properly and files a meaningless return can be rewarded for non-compliance with the tax laws, while a debtor who does not file the meaningless return will not see his taxes discharged. It appears that the plain meaning rule allows even the least credible of debtors to escape on a technicality. Additionally, while the public policy of the Bankruptcy Code is to give a fresh start to an honest unfortunate, compliance with the Internal Revenue Code and the integrity of the tax system are equally important public policy positions. The plain meaning analysis pays little heed to that aspect of the issue.
In choosing to follow the Hindenlang line of cases, I am adopting a fact-based test which requires some showing of good faith on the part of a debtor, but does not set up a bright-line pre/post assessment standard. I believe adoption of the plain meaning analysis could ultimately force the IRS to be less lenient in accepting installment agreements or requests for forbearance because of the likelihood of abuse. The Miniuks asked the IRS for a two year forbearance. That amount of time allowed them to fit into the technical time-frame set out by the Bankruptcy Code for dischargeability of taxes. After the forbearance period ended, the Miniuks did not make any payments under the installment plan they had previously agreed to, and they continued to resist the IRS’s attempts at collection. Then, after the statutory six-year period for filing a second Chapter 7 finally expired, the Miniuks did in fact file a second Chapter 7 case to have their tax debt discharged. As noted, the two-year provision of section 523(a)(l)(B)(ii) is essentially a notice period for the IRS that allows the IRS to begin proceedings to collect taxes.39 In the case at bar, the IRS was diligent and fair in its pursuit of the Miniuks. The IRS entered into an agreement with the Miniuks and gave them a forbearance to accommodate their request. It would be most unfair for me to now penalize the IRS for granting a forbearance that appears in retrospect to have fit nicely into the Miniuks’ plan to get their taxes discharged. This is particularly true because Mr. Miniuk had, and still has, a job that pays him $120,000 a year.
In short, I find that the returns filed by the Miniuks were not an honest and reasonable attempt at compliance with the tax laws. On the contrary, when the Miniuks *543filed their returns their intent was simply to get their tax liabilities discharged in bankruptcy. Therefore, I conclude that the taxes owed to the IRS for the years 1989 and 1990 should be nondischargeable.
For the reasons stated herein, the motion of the Internal Revenue Service for summary judgment is GRANTED, and the Miniuks’ cross motion for summary judgment is DENIED. This Opinion will serve as findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. A separate judgment will be entered pursuant to Federal Rule of Bankruptcy Procedure 9021.
. Section 523(a)(l)(B)(ii) reads as follows:
"(a) A discharge under section 727 ... does not discharge an individual debtor *534from any debt—
(1) for a tax ...
(B) with respect to which a return, if required—
(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition ...”
. 11 U.S.C. § 101-1330.
. Fed. R. Bankr.P. 7056
. The debtors also failed to file a return for 1992, but the IRS is not disputing discharge-ability of that liability because the IRS had not yet done an assessment for that year.
. The Debtors' complaint alleges that they never received notice of the assessments. Evidence submitted by the IRS, including John Miniuk's own deposition testimony, squarely meets and convincingly refutes this claim. Therefore, unless otherwise noted, I will conclude that debtors received proper notice and were well aware of their delinquent position with respect to the IRS.
. Under 26 U.S.C. 6020(b) the IRS is authorized to prepare and file an income tax return on behalf of an individual if that individual fails to do so himself. The IRS may utilize whatever information it has available, or that it can obtain through testimony or otherwise. A return filed pursuant to this procedure is called a substitute for return.
. This notice of deficiency was returned to the IRS by the post office with no forwarding address available. However, the IRS sent a notice of assessment in November 1993 and three more notices of balance due in December 1993, January 1994, and February 1994 which were not returned. The Miniuks then provided updated address information to the IRS in February 1994.
. Mr. Miniuk submitted into evidence an affidavit, signed on August 26, 2002, that states that he lost his job in 1996 and upon his request the IRS granted him a forbearance. However, in his deposition testimony given on January 6, 2003, Mr. Miniuk says that he changed jobs in 1996 and began working for Phillips Chevrolet in Frankfort, Illinois, where is still employed to date. He makes no mention of being unemployed for any significant length of time in his deposition.
. The "honest and reasonable" language is prong four of a four-part test, derived from two U.S. Supreme Court cases, Germantown Trust Co. v. Commissioner, 309 U.S. 304, 60 S.Ct. 566, 84 L.Ed. 770 (1940), and Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 55 S.Ct. 127, 79 L.Ed. 264 (1934), and culled into being by the tax court in Beard v. Commissioner, 82 TC 766, 1984 WL 15573 (1984). The test, generally called the Beard test, has become the most widely accepted test for deciding if a filed document constitutes a return. The test says that in order for a document to qualify as a return it must:
1) purport to be a return
2) be executed under penalty of perjury
3) contain sufficient data to allow calculation of the tax
4)represent an honest and reasonable attempt to satisfy the requirements of the tax law.
Cases under section 523(a)(l)(B)(ii) tend to have the first three. It is typically the "honest and reasonable” prong that is not satisfied.
. Crawley v. U.S.A. (In re Crawley), 244 B.R. 121 (Bankr.N.D.Ill.2000).
. U.S.A v. Nunez (In re Nunez), 232 B.R. 778 (9th Cir. BAP 1999).
. Savage v. I.R.S. (In re Savage), 218 B.R. 126 (10th Cir. BAP 1998).
. U.S.A. v. Hindenlang (In re Hindenlang), 164 F.3d 1029 (6th Cir.1999).
. Id.
. 26 U.S.C. § 1 et seq.
.See note 9.
. Hindenlang, 164 F.3d at 1035.
. 216 B.R. 278 (9th Cir. BAP 1997).
. U.S.A v. Hatton (In re Hatton), 216 B.R. 278, 283 (9th Cir. BAP 1997).
. U.S.A. v. Hatton (In re Hatton), 220 F.3d 1057, 1061 (9th Cir.2000).
. Id., at 1061.
. U.S.A. v. Nunez (In re Nunez), 232 B.R. 778 (9th Cir. BAP 1999).
. Id. at 783.
. Hetzler v. U.S.A., 262 B.R. 47 (Bankr.D.N.J.2001).
. Id. at 53.
. Moroney v. U.S.A. (In re Moroney), 2002 WL 31777588 (E.D.Va.2002).
. Crawley v. U.S.A. (In re Crawley), 244 B.R. 121 (Bankr.N.D.Ill.2000).
. Crawley, at 127.
. Savage v. I.R.S. (In re Savage), 218 B.R. 126 (10th Cir. BAP 1998).
. Payne v. U.S.A. (In re Payne), 283 B.R. 719 (Bankr.N.D.Ill.2002).
. See footnote seven in U.S.A. v. Hindenlang, wherein the Sixth Circuit left open the possibility that a debtor could prove either 1) that the return did fulfill some tax purpose, or 2) that the untimely filing was in fact an honest and reasonable attempt to fulfill the reporting requirements.
. The Hindenlang court was also quick to state that even a showing of legitimate tax purpose would not be a foolproof method for insuring dischargeability. It pointed out that such a showing might still not be enough to overcome an IRS showing that the filing was not an honest and reasonable attempt at compliance.
. U.S. Const. amend. XVI.
. Commissioner of Internal Revenue v. Lane-Wells, Co., 321 U.S. 219, 223, 64 S.Ct. 511, 88 L.Ed. 684 (1944).
. Walsh v. U.S.A. (In re Walsh), 260 B.R. 142, 148-149 (Bankr.D.Minn.2001).
. Walsh v. U.S.A. (In re Walsh), 260 B.R. 142 (Bankr.D.Minn.2001).
. The court did not disagree with the Beard test in toto. Rather, it felt that the Beard test should not be utilized except in the same context as it was formulated for. In Beard, the issue concerned an IRS form that had been so completely physically altered that it was no longer recognizable as the form it purported to be. In Walsh, there was no physical alteration of the form and the court felt that Beard was not applicable to the case before it.
.Walsh, 260 B.R. 142 at 151.
. Hindenlang, at 1032. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493605/ | MEMORANDUM OPINION3
JUDITH K. FITZGERALD, Chief Judge.
Before the court is a Motion for Sanctions against Debtor by his nondebtor *57spouse, Donnalyn McGrath.4 Movant asks that Debtor be held in contempt for failure to comply with orders of this court requiring him to respond to discovery requests in state court actions (seeking divorce, support, alimony, equitable distribution of marital assets and liabilities and child custody). Movant also requests that this court order the immediate incarceration of Debtor5 during which time he must provide full details of his business and include methods of verifying the same relative to his self-employment. Further, Movant requests imposition of counsel fees and costs in addition to expenses of $2,000 but has filed nothing to substantiate the request.6 Nonetheless, given the number of hearings and counsel’s time involved just appearing before this court, $2,000 is a reasonable sum and will be approved. Movant was permitted to supplement her Motion for Sanctions and Debtor to respond. Both have done so.7
The gravamen of the instant motion is that Debtor has failed to comply with orders of this court and the Court of Common Pleas of Allegheny County, Pennsylvania, and has thereby caused Movant to incur substantially greater attorney fees as she seeks to enforce child custody, child support and other obligations through the state court system. This court voided a bench warrant issued by a Hearing Officer of the Court of Common Pleas after the automatic stay took effect and ordered Debtor to respond to all discovery requests made in the state court action and to provide the bankruptcy trustee and this court with answers to interrogatories and requests for admissions for the years 1999, 2000, and 2001. Debtor was also ordered to timely file his tax returns for the year 2000. Debtor timely filed with this court the answers to interrogatories and responses to a request for production of documents on April 30, 2001. Thereafter Movant filed the first motion for sanctions alleging that Debtor did not produce
documentation which verifies his tax return entries, nor Debtor’s earnings, car and truck expenses, materials, invoices, jobs, fees, income, nor any means whatsoever of objectively verifying and calculating Debtors’ gross income or cost of goods in calculating Debtor’s earnings.
Dkt. No. 42 at ¶ 3. By order dated October 22, 2001, this court granted Movant relief from stay to pursue only custody matters in state court and reserved enforcement of all financial components of the issues to itself. Dkt. No. 87. At a hearing held October 12, 2001, this court also entered an oral order requiring that
(1) operating reports be brought current by Debtor by November 20, 2001, and kept current thereafter or the case would be dismissed;
*58(2) all of Debtor’s jobs (Debtor is a carpenter) were to have a written contract, estimate, receipts and invoices for materials, documentation of each job including customer name or location, bids, payments, advances, profit or loss from each job, etc. He was also to deposit all cash receipts into a single checking account noting the source of the cash and listing the name, address, and telephone number of the customer or other entity from which the check was received. Any checks written to cash by Debtor were to include a notation of the purpose (notations such as “supplies” were unacceptable by the terms of the; order)8 and any job associated with the withdrawal;
(3) counsel for Debtor was to produce all documents in her office for inspection and copying at Movant’s expense and that such inspection was to be completed by December 7, 2001;
(4) the motion for sanctions was to be supplemented and a response by Debtor was voluntary. The oral order was later memorialized in a written order dated November 1, 2001, which was submitted by Movant’s counsel and modified by the court.
The supplement to the motion for sanctions alleges that Debtor continues in his noncompliance with orders of the Court of Common Pleas and this court. Debtor’s response states that he has complied with the Bankruptcy Court’s orders to the “best of his ability” and that repeated allegations of lack of compliance are “unfounded” and attempts at obtaining sanctions were “harassing”.
It appears from the Statements of Operations filed by Debtor subsequent to the November 1, 2001, order that Debtor has not complied with that order. Invoices merely state a last name of a customer, no address or other information as required by the November 1 order, and insufficient detail regarding costs of materials, payments to Debtor, expenses Debtor incurred, etc.
With respect to the initial motion for sanctions, Movant argues that numerous jobs were conspicuously unreported by Debtor, based on her comparison of Debt- or’s records with his testimony before the Hearing Officer in the Family Division of the Court of Common Pleas. She also contended that Debtor “unilaterally retrieved all of the documents” from his attorney’s office before Movant was finished reviewing them. Motion for Sanctions, Dkt. No. 42, at ¶ 14. Debtor argued that Movant had had enough time to review the documents. Nonetheless, the order of November 1, 2001, required Debt- or’s counsel to produce all documents through April 30, 2001, for inspection and copying at Movant’s expense no later than November 15, 2001. Movant was ordered to complete her inspection by December 7.
The supplement to the motion for sanctions was filed in January of 2002 and referred to deficiencies in Debtor’s testimony to the Court of Common Pleas Hearing Officer in October of 2001 before this court entered the November 1 order. It is apparent that Debtor’s record keeping leaves much to be desired. For example, his testimony before the Hearing Officer on October 18, 2001, indicates that on a particular job after April 1, 2001, he earned $500 per week and that he worked 10 to 12 weeks at that particular location. Exhibit L, Family Division Transcript of October 18, 2001, at 8, 15-16. He also testified that he deposited payments in his *59account at Iron and Glass Bank. Id. at 16. However, his bank statement from that month does not reflect any $500 deposits. There are only 3 deposits and they are in the amounts of $618.35, $250.00, and $576.98. There is no explanation or accounting for the rest of the income he testified that he had. The Statement of Operations provides no detail. This single example is representative of the information Debtor has supplied to this court. However, he testified that the people for whom he is working keep track of his hours when he is paid on an hourly basis. Dkt. No. 96, Exhibit L, Family Division Transcript of October 18, 2001, at 9. He also testified that he has no subcontractors or crew working for him but calls on people he knows in different trades. Id. at 17. Movant points out that Debtor submitted receipts during a time period when he was out of the country but his answer to the supplement to the motion for sanctions states that “co-workers hired for the jobs he was employed with occasionally purchased material for [him] when it was the co-worker’s turn ... and ... the receipt would still be attributed to” Debtor. Answer to Supplement, Dkt. No. 98, at ¶ 5(i). The answer also states that he produced cash receipts for the period when he was in Sweden as material was purchased “on his behalf’. Id. at ¶ 5(e). This is a credible explanation.
In adjudicating the motion for sanctions we are asked to decide if Debtor complied with this court’s orders. We find that even after the November 1, 2001, order, Debtor persisted in failing to provide detail which would enable a party in interest or the court to analyze his income and expenditures. He also failed to file monthly operating reports as required.
At the hearing held on October 12, 2001, we ordered Debtor’s counsel to produce all documents in her office for Movant’s inspection between November 15, and December 7, 2001. Movant has not denied that records were made available to her between November 15 and December 7, 2001. We conclude that Debtor has complied with this part of our orders.
On October 12, 2001, we also ordered Debtor to identify every future job by entering into a written contract, preparing an estimate, and keeping receipts and invoices for material purchases. In Mov-ant’s supplement to the motions for sanctions, she lists specific categories of Debt- or’s non-compliance with our orders. Movant alleges that Debtor admitted, at the October 18, 2001, hearing before the Hearing Officer of the Court of Common Pleas that he failed to disclose, in two separate responses to discovery, a number of jobs he had from which he earned income additional to that he reported to the state court for child support determination. At the hearing in the Family Division on October 12, 2001, the jobs were referred to by their local addresses: Arch Street, Walnut Street, Cypress Drive, and Wilbert Street. Referring to Debtor’s responses to discovery, wherein he was asked to identify all of his jobs in 1999, we are unable to determine whether Mov-ant’s allegations are correct inasmuch as at the October 18, 2001, hearing the jobs were referred to by street names and in the answers to interrogatories the jobs were referred to by locations within the Pittsburgh metropolitan area (e.g., Grafton, Greentree, Castle Shannon, Pleasant Hills). See Dkt. No. 79, Exhibit 16, at Interrogatory No. 2. However, in her supplement to the motion for sanctions, Dkt. No. 96 at 4-5, ¶ 5(b), Movant identified Arch Street as being on the North Side of Pittsburgh, the Walnut Street job as in the Shadyside area, the Cypress Drive job in Scott Township and the Wilbert Street in Mt. Washington. When asked *60at the Family Division October 18 hearing whether he worked at the Walnut Street address in February of 2000 he answered, “I guess. Once again, you guys know more about me than I do.” Family Division Transcript of October 18, 2001, Dkt. No. 96, Exhibit L, at 48. It is not clear whether omission of the information in the answers to interrogatories was intentional or careless. However, under the Bankruptcy Code, Debtor has an obligation to provide information regarding his financial affairs and he consistently fails to do so.
Next, Debtor answered Movant’s Interrogatories by indicating that his gross income for 1999 was $86,050. 1999 U.S. Individual Income Tax Return, Form 1040, Dkt. No. 96, Exhibit R, Schedule C, Profit or Loss From Business. However, bank statements for 1999 indicate that there were deposits for at least $47,854.9 In his testimony before state court Hearing Officer Bingman on October 25, 2001, Dkt. No. 96, Exhibit M, 13 days after our oral order of October 12, 2001, memorialized in the November 1, 2001, order, Debtor indicated that the difference between the gross receipts of $36,050 listed on his 1999 federal income tax return and the total bank deposits, could be accounted for by referring to two other amounts — approximately $14,000 cashed in from the UGMA accounts and $4,486 he held for a youth soccer team.10 Despite such testimony, the UGMA account statements provided by Movant, Dkt. No. 96, Exhibit S, show that by September of 1998 the balance in the UGMA account was zero. Debtor was the only custodian of that account. He apparently also was the only signatory on the soccer team account. Hence, the difference between Debtor’s testimony of approximately $36,000 in gross revenue for 1999 and, at the minimum, more than $48,000 in deposits into Debtor’s bank accounts during that year are not explained by transfers from the UGMA and soccer club accounts. Nothing in the record explains the disparity between the amount of bank deposits for 1999 and the amount that the bank statements of record indicate passed through his account.
Finally we examine the monthly statements which Debtor has submitted responsive to our order of November 1, 2001. Such order required Debtor to submit monthly detailed reports of his business activity to include, at the minimum, a full accounting of the sources of his income in traceable and documentable manner. He was prohibited from engaging in any transaction
not fully and completely accounted for and completely documented such that all receipts and expenditures may be traced from the point of receipt until such time as Debtor is no longer affected by or in anyway [sic] related to the use of said receipt or expenditure.
Order of November 1, 2001, Dkt. No. 88, at HI.
Debtor was also to
account for all financial aspects of any and all jobs, employments, or endeavors, including keeping and documenting each *61job, employment and endeavor in identifiable units or packets, such as the name of the customer or location of the work, including, but not limited to, bids, invoices, contracts, supplies, materials, receipts, and payments or advances from the customer or jobbers, all expenditures, all payments to helpers and subcontractors, hours and days worked or associated with the job, employment, and endeavor, the completion date, and the profit or loss from said job, employment and endeavor....
Id. at ¶ 2. He was
prohibited from obtaining, purchasing, selling, supplying, transferring, acquiring, and conveying anything related to his business which is not completely documented, accounted for and, if applicable, specifically associated with and noted as to the specific job, endeavor, and employment with which it relates.
Id. at ¶ 7. Debtor further was “prohibited from dealing in undocumented and unaccounted for cash”. Id. at ¶ 4.
Movant argues in her Supplement to Motion for Sanctions that Debtor has repeatedly failed to comply with these directives. Our examination of the monthly statements submitted by Debtor and the other materials Debtor has submitted11 since the order of November 1, 2001, constrains us to agree. Neither the monthly statements nor the other materials (copies of bank statements and cancelled checks) contain the specificity which the order clearly required. Further, although Debt- or was to submit statements of operations monthly from November, 2001, forward, the only ones which have been filed are an Amended Monthly Statement of Operations for November, 2001,12 an Amended Statement of Operations for December, 2001,13 a Monthly Statement of Operations for January, 2002 (all three of which were filed and February 21, 2002)14 and Monthly Financial Reports for February, March, April, and May, 2002 (all of which were filed July 1, 2002).15 On January 24, 2003, Debtor filed monthly financial reports for September, through December, 2002. Dkt. Nos. 163 through 166. No monthly financial reports were filed for June, July or August of 2002 and none have been filed for any period in 2003.16
We find Debtor in civil contempt of this court’s orders. An appropriate order will be entered.17
*62JUDGMENT ORDER AND FINDING OF CIVIL CONTEMPT
AND NOW, this 4th day of September, 2008, for the reasons expressed in the foregoing Memorandum Opinion, it is ORDERED, ADJUDGED, and DECREED that Movant’s Motion for Sanctions, including a finding of civil contempt of court is GRANTED and judgment is entered in favor of Donnalyn McGrath and against John C. McGrath in the amount of $2,000 as reimbursement of counsel fees and costs, payable directly (i.e., not through the Chapter 13 Trustee’s Office) to Donna-lyn McGrath by Debtor in installments of $500 per month, the first payment of which is due on October 6, 2008, and each installment due on the 6th day of each month (i.e., November, 2003; December, 2003; and January 2004) thereafter until fully paid.
It is FURTHER ORDERED that on or before October 20, 2003, Debtor shall file and serve on Trustee all delinquent monthly operating reports.
It is FURTHER ORDERED that the request to incarcerate John C. McGrath for noncompliance with prior orders until he complies is deferred. Upon affidavit of default filed and served on Debtor and Trustee by Donnalyn McGrath for John C. McGrath’s failure to timely pay an installment of the attorney fees awarded herein or filed and served by the Chapter 13 Trustee on Debtor, Ms. McGrath and her counsel, for Debtor’s failure to timely file and serve all delinquent monthly operating reports, the court shall set a hearing to determine additional sanctions which may include incarceration, additional monetary sanctions, relief from stay to Donnalyn McGrath, and/or dismissal of the case.
. The court’s jurisdiction was not at issue. This Memorandum Opinion constitutes our findings of fact and conclusions of law.
.On June 14, 2001, Movant filed an initial motion for sanctions at Docket No. 42. Debt- or filed a response on July 9, 2001. On July 13,2001, Movant filed a second motion for sanctions at Docket No. 63 to which no answer appears on the docket. However, on October 22, 2001, an order was entered requiring counsel for Movant to file a supplement to the motion for sanctions. On November 2,2001, at Docket No. 88, a modified order was entered granting the motion for sanctions at Docket No. 63. Thereafter, on January 18, 2002, Movant filed a "Supplement to Motion for Sanctions" at Docket No. 96 to which Debtor filed an answer on February 4, 2002, at Docket No. 98.
. The request for incarceration is deferred.
. Movant also requested that this court refer certain federal income tax returns of Debtor’s to the IRS for "review, investigation, and audit”. Motion for Sanctions, Dkt. No. 42, at ¶ 4. This request is denied.
. Since the motion for sanctions was filed an order confirming Debtor’s plan as modified was entered on October 10, 2002.
. On October 12, 2001, this court ordered Movant's counsel to prepare the order signed on November 1, 2001, and to present it to Debtor’s counsel before submitting it to the court.
. Addition of the deposits shown on the 1999 bank statements, Dkt. No. 96, Exhibit U, total this amount. However, statements for January and April are not included in Exhibit U and November's statement is incomplete. Movant asserts that Debtor’s 1999 bank deposits total $55,000, Dkt. No. 96, at ¶ 5(g).
. The soccer team money was held in a separate account, see Dkt. No. 96, Exhibit Q, but he testified that it passed through his personal account. Id. at Exhibit M, Family Division Transcript of October 25, 2001, at 42. Further, Exhibit Q contains bank statements from September of 2000 through April of 2001. There is no information for 1999 in Exhibit Q with respect to the soccer account.
. See Dkt. No. 79, Exhibit 9, 2001 Bank Statements.
. See Dkt. No. 102.
. See Dkt. No. 103.
. See Dkt. No. 104.
. See Dkt. Nos. 128 through 131.
. Interim Chapter 13 Procedures adopted as of November 19, 2002, provides that monthly operating reports shall be served on the Chapter 13 Trustee, not filed with the court. See Chapter 13 Procedure # l.C.3. However, the order governing the filing of reports in this case predated the Chapter 13 Procedures currently in effect. Furthermore, this court has the discretion to enter orders "necessary or appropriate to carry out the provisions of” the Bankruptcy Code, 11 U.S.C. § 105, and has done so in this case. In addition, Fed. R.Bankr.P.2015(c)(1) requires a chapter 13 debtor engaged in business to perform duties prescribed by Fed.R.Bankr.P.2015(a)(2) through (a)(4) which, inter alia, require the debtor to file reports required by § 704(8). Section 704(8) requires the filing of "periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as ... the court requires”.
.This court previously stated that Debtor’s failure to comply with the obligation to file monthly operating reports would result in dismissal of the bankruptcy case. Inasmuch as the ruling on the motion for sanctions has been delayed, the bankruptcy case will not be dismissed at this time. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493606/ | ORDER ON APPLICATION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., ET AL., TO RETAIN CARLILE PATCHEN & MURPHY, LLP AS LOCAL COUNSEL (Relating to Pleading No. 978)
DONALD E. CALHOUN, JR., Bankruptcy Judge.
This matter came before the Court for hearing upon the Application of the Official Committee of Unsecured Creditors of National Century Financial Enterprises, Inc., et al., To Retain Carlile Patchen & Murphy, LLP as Local Counsel (“Application”) and the Objection of the United States Trustee to Application of the Official Committee of Unsecured Creditors of National Century Financial Enterprises, Inc., et al. To Retain Carlile Patchen & Murphy, LLP as Local Counsel (“Objection”).
A.Procedural History
At the conclusion of the hearing, the Court requested the Committee to further address the issue of whether or not the representation of Carlile Patchen & Murphy LLP (“Carlile”) of Highland Hospital Association and Highland Behavioral Services, Inc. (referred to collectively as “Highlands”) in this case constituted a prohibition of the Committee’s retention of Carlile. In response to that request, the Creditors’ Committee filed a Supplemental Affidavit of Leon Friedberg in Support of the Application of the Official Committee of Unsecured Creditors To Retain Carlile Patchen & Murphy, LLP as Local Counsel (“Supplemental Affidavit”) and a Supplemental Memorandum in Support of Application of the Official Committee of Unsecured Creditors of National Century Financial Enterprises, Inc., et al. To Retain Carlile Patchen & Murphy, LLP as Local Counsel (“Supplemental Memorandum”).
B. Statement of Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1384(b) and the General Order of Reference entered in this district. This is a core proceeding under 28 U.S.C. § 157(b)(2).
C. Arguments of the Parties
Within the Application, the Creditors’ Committee represents that it desires to retain Carlile pursuant to 11 U.S.C. § 1103(a) to assist Ballard Spahr Andrews & Ingersoll, LLP (“Ballard Spahr”) as local counsel in the performance of, among other things, the following tasks:
a. advise the Committee with respect to its rights, powers, and duties in these cases;
b. assist and advise the Committee in its consultations with Debtors relative to the administration of these cases;
c. assist the Committee in analyzing the claims of Debtors’ creditors and in negotiating with such creditors;
d. assist with the Committee’s investigation of the acts, conduct, assets, liabilities and financial condition of *121Debtors and of the operation of Debtors’ businesses;
e. assist the Committee in its analysis of, and negotiations with, Debtors or any third party concerning matters related to, among other things, the terms of a plan or plans of reorganization for Debtors;
f. assist and advise the Committee with respect to its communications with the general creditor body regarding significant matters in these cases;
g. represent the Committee at all hearings and other proceedings;
h. review and analyze all applications, orders, statements of operations, and schedules filed with the Court and advise the Committee as to their propriety;
i. assist the Committee in preparing pleadings and applications as may be necessary in furtherance of the Committee’s interests and objections; and
j. perform such other legal services as may be required and are deemed to be in the interests of the Committee in accordance with the Committee’s powers and duties as set forth in the Bankruptcy Code.
(Application, pp. 2-3). In support of the Application, the Creditors’ Committee attached the Affidavit of Leon Friedberg in Support of the Application of the Official Committee of Unsecured Creditors to Retain Carlile Patchen & Murphy, LLP as Local Counsel (“Affidavit”). Within that Affidavit, Mr. Friedberg on behalf of Car-lile, in pertinent part, makes the following disclosures:
a.Carlile does not represent, and has not represented, any entity other than the Committee in matters related to these chapter 11 cases except as set forth below.
b. Prior to November 18, 2002, the (“Petition Date”), Carlile represented debtor National Century Financial Enterprises, Inc. (“NCFE”), with respect to discrete litigation matters, which representation ended in October 1998, Carlile’s then-partner in charge of the NCFE engagement left Carlile in September 1998, and that former partner continued the representation of NCFE with his subsequent law firm. Carlile has not represented NCFE since October 1998.
c. Prior to the Petition Date, Carlile represented the following clients in matters unrelated to these chapter 11 cases: Huntington National Bank, Fifth Third Bank, Provident Bank, and Bank One. Carlile has not represented these clients in any matters related to the Debtors’ Case, nor will Carlile represent the Committee in matters directly adverse to these clients.
d. From approximately late December 2002 through February 2003, Carlile represented Highland Hospital Association and Highland Behavioral Health Services, Inc. (together, “Highlands”) with respect to the Debtors’ Bankruptcy Cases. As of February 28, 2003, with the consent of both Highlands and the Committee, Carlile has terminated and withdrawn from its representation of Highlands in all matters, including in this case, wherein Highlands will engage other counsel. Carlile will not represent the Committee in any matters in which the Committee and Highlands are directly adverse.
e.
(Affidavit, pp. 3-4).
In its Objection, the Office of the United States Trustee (“Trustee”) raises issue *122with the fact that Carlile represented Highlands as legal counsel in an adversary proceeding brought by the Debtor. In support of the Objection, the Trustee argues that Carlile’s representation of Highlands ceased only recently. The Trustee further argues that such representation presents a patent conflict of interest, which should preclude Carlile’s appointment. Finally, the Trustee argues that the Carlile firm should supplement its disclosure about prior representation of the Debtor to fully disclose its specific services and potential impact upon the current case.
In response to the Trustee’s Objection and the Court’s request for the Committee to further address Carlile’s representation of Highlands, the Committee filed its Supplemental Affidavit and Supplemental Memorandum. In its Supplemental Memorandum, the Committee argues that “all considerations relevant to Carlile’s retention under 11 U.S.C. § 1108(b), and all applicable professional and ethical considerations and rules have been fully, carefully, and forthrightly dealt with under the highest professional standards and practices with respect to all relevant policies.” (Supplemental Memorandum, p. 8). Highlands expressly consented to Carlile’s proposed engagement as local counsel and expressly waived any potential disqualification based upon the prior representation. Further, the Committee argues that it was not a party to the adversary proceeding naming Highlands as defendants and that Highlands were dismissed from the adversary with prejudice. Finally, the Committee argues that an express carve-out has been made to prevent Carlile from representing the Committee or certain identified parties in matters directly adverse to each other.
For purposes of this Order, the Court will review the arguments made by each of the parties and issue its decision based upon its review of the case file, pleadings, and arguments presented at the hearing and supplements submitted since the hearing.
D. 11 U.S.C. § 1103
The Creditors’ Committee seeks to employ Carlile pursuant to 11 U.S.C. § 1103. That section provides, in pertinent part, as follows:
(a) At a scheduled meeting of a committee appointed under section 1102 of this title, at which a majority of the members of such committee are present, and with the court’s approval, such committee may select and authorize the employment of such committee of one or more attorneys, accountants, or other agents, to represent or perform services for such committee.
(b) An attorney or accountant employed to represent a committee appointed under section 1102 of this title may not, while employed by such committee, represent any other entity having an adverse interest in connection with the case. Representation of one or more creditors of the same class as represented by the committee shall not per se constitute the representation of an adverse interest.
11 U.S.C. § 1103.
E. Discussion
1. Bankruptcy Rule 2014(a) Disclosure.
Bankruptcy Rule 2014(a) requires a professional to submit an employment application stating “to the best of applicant’s knowledge, all of the person’s connections with the debtor, creditor, and any other party in interest-” Fed. R. Bankr.P. 2014(a). See Exco Resources, Inc. v. Milbank, Tweed, Hadley & McCloy LLP (In re Enron), 2003 WL 223455 at *4 (S.D.N.Y.2003). Bankruptcy Rule 2014(a) *123requires Carlile to ensure that all relevant connections are brought to light. Id. at *5. See also In re Leslie Fay Cos., Inc., 175 B.R. 525, 533 (Bankr.S.D.N.Y.1994). In reviewing the Application and the Supplemental Affidavit, the Court finds that Carlile’s disclosures are sufficiently forthright and detailed.
2. Adverse Interest Determination.
The Bankruptcy Code grants to committees the power to employ professionals. 11 U.S.C. § 1103(a). Congress liberalized certain restrictions for representation of creditors’ committees by amending 11 U.S.C. § 1103(b) in 1984. See, In re National Liquidators, Inc., 182 B.R. 186, 191 (S.D.Ohio 1995). Amended and post-1984 Section 1103(b) prohibits dual representation where the representation “of one or more creditors of the same class as represented by the committee shall not per se constitute the representation of an adverse interest.” 11 U.S.C. § 1103(b). However, “to hold an adverse interest” is not a defined term in the Bankruptcy Code. In re National Liquidators, Inc., 182 B.R. at 191.
In this particular case, Carlile represented Highlands, defendants in an adversary proceeding brought by Debtors. That representation was limited to a short three-month duration, to filing responsive pleadings in the adversary proceeding, and filing a statement of issues relating to a Scheduling Order and Notice entered on December 3, 2002. Subsequent to undertaking the representation of Highlands, Carlile disclosed expressly to Highlands its potential representation of the Committee and disclosed to the Committee its past representation of Highlands, NCFE, and related parties. Highlands entered into a disengagement letter with Carlile, and the Committee entered into an engagement letter with Carlile. Both such letters recognized that Carlile would participate in a carve out procedure to avoid even the possibility of appearance of a future conflict.
In reviewing this situation, the Court must actually examine the factors in order to determine if Carlile “holds an adverse interest.” The Court cannot merely rubberstamp the employment of Carlile just because Highlands has consented to its proposed engagement and expressly waived any potential disqualification based upon prior representation. The Court independently must review the facts of this case while recognizing that the Committee’s choice of counsel is entitled to a certain amount of deference. In re Enron, 2003 WL 223455 at *3.
In reviewing the facts of this case, 11 U.S.C. § 1103(b) is violated if Carlile represents both the Committee and another party, with an interest adverse to the committee, in matters related to the bankruptcy proceeding. Id. at *7. See Daido Steel Co., Ltd. v. Official Committee of Unsecured Creditors, 178 B.R. 129, 132 (ND.Ohio 1995). Section 1103(b) is not violated if Carlile represents an entity with an adverse interest in a matter unrelated to the National Century bankruptcy case or in a matter that predates its representation of the committee. See, In re Enron, 2003 WL 223455 at *7. Based upon the facts presented, the Court finds that Section 1103(b) is not violated.
In this case, Carlile did not and does not represent Highlands and the Committee at the same time. Carlile took precautions to disclose potential conflicts, and Highlands no longer remain as defendants in the adversary proceeding brought by Debtors. Further, Carlile has limited its scope of employment to preclude any adverse interest conflicts.
Again, in making this decision, the Court cautions that in such cases, factors *124need to be independently reviewed in order to determine if the attorney, accountant, or other professional holds an adverse interest. The Court must be very cautious in the case of a professional withdrawing from its representation of one party to represent another.1 In this case, the Court has made its independent review and has determined that Carlile meets the requirements and limitations of 11 U.S.C. § 1103(b).
Throughout this case, the Court has been very open and direct about its concerns of unnecessary duplication of professional services and retention of professionals. The Court, through this decision, continues to caution Carlile and those other professionals involved that it will continue to review all subsequent professional fee applications and employment applications with these same concerns in mind. Further, the Court cautions Carlile that it is required to supplement its disclosures.
F. Conclusion
Based upon the foregoing, the Court hereby approves the Application of the Official Committee of Unsecured Creditors of National Century Financial Enterprises, Inc., et al., To Retain Carlile Patchen & Murphy LLP as Local Counsel and denies the Objection of the United States Trustee to Application of the Official Committee of Unsecured Creditors of National Century Financial Enterprises, Inc., et al. To Retain Carlile Patchen & Murphy LLP as Local Counsel. The Court further denies the Objection of the United States Trustee to the Application of the Official Committee of Unsecured Creditors of National Century Enterprises, Inc., et al., To Retain Carlile Patchen & Murphy LLP as Local Counsel.
IT IS SO ORDERED.
. The Court in its review in no way wishes to impart any doubt about Carlile’s ability for professional qualifications to represent the Committee as local counsel. The Carlile firm is knowledgeable and experienced in representing committees, debtors, and creditors in complex bankruptcy proceedings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493609/ | ORDER ON MOTION TO COMPEL ING CAPITAL MARKETS LLC TO COMPLY WITH SUBPOENA AND MOTION TO QUASH DEPOSITION SUBPOENA AND FOR PROTECTIVE ORDER
DONALD E. CALHOUN, JR., Bankruptcy Judge.
This matter came before the Court for hearing upon Plaintiffs’ Amedisys, Inc.’s *141Motion to Compel ING Capital Markets LLC to Comply With Subpoenas, the Motion of ING to Quash Deposition Subpoenas and For Protective Order, and related responsive pleadings filed under seal and subject to a protective order.
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 proceeding pursuant to 28 U.S.C. § 157(b)(2). Before getting to the legal analysis, a brief factual and procedural history is in order.
I. CASE PROCEDURAL HISTORY
On November 8, 2002, Plaintiffs commenced an action in the United States District Court, Southern District of Ohio, Eastern Division (Civ. No. C2 02 1105) against JP Morgan Chase Manhattan Bank (“Trustee”), NPF VI, NPFS, NCFE and Lance Poulsen. Within the complaint, Plaintiffs demanded, inter alia, the turnover of $7.3 million which purportedly represented the proceeds of non-purchased accounts receivable. On November 18, 2002, National Century Financial Enterprises, Inc. and its related subsidiaries filed their Chapter 11 petitions within this Court. On or about December 19, 2002, the United States District Court for the Southern District of Ohio, Eastern Division, transferred to this Court the proceeding pending before it. That transferred ease was assigned Adversary Proceeding No. 02-2576.
On February 19, 2003, this Court held a status conference regarding the transferred case. On February 21, 2003, the Plaintiffs filed their First Amended Complaint. The Defendants named in the First Amended Complaint were JP Morgan Chase Manhattan Bank, as Trustee, NPF VI, Inc., National Century Financial Enterprises, Inc., and National Premier Financial Services, Inc. However, the First Amended Complaint did remove JP Morgan as a defendant to certain causes of action. ING Capital Markets LLC was not named as a defendant in the First Amended Complaint.
A. Relief Sought in Adversary Proceeding
In Count One of the First Amended Complaint, Plaintiffs seek a declaratory judgment against all the Defendants. Plaintiffs seek entry of a declaratory judgment declaring the parties’ respective rights and obligations, including, inter alia, the parties’ respective rights and obligations under the sale agreements, the Trust Agreement and related documents, and the parties’ respective rights and obligations in connection with the funds in the possession or control of the Trustee for the NCFE entities. (First Amended Complaint, p. 13).
In Count Two of the First Amended Complaint, Plaintiffs seek a declaration from this Court declaring that the Plaintiffs’ cash in possession or control of the Trustee or the NCF entities — approximately $7.3 million — is an unjust enrichment to Defendants occurring by mistake or fraud. (First Amended Complaint, p. 14). In Count Three of the First Amended Complaint, Plaintiffs seek a turnover and return of Amedisys’ funds in the amount of at least $7,337,569.00. (First Amended Complaint, p. 14).
In Count Four of the First Amended Complaint, Plaintiffs seek a determination that the NCFE entities have specifically breached the sale agreements by failing, inter alia, to timely and properly return funds to the Amedisys entities, failing to properly maintain the lock box accounts, failing to properly maintain a detailed accounting record of all deposits and withdrawals from the reserve accounts, and improperly allocating, distributing and *142commingling such funds. (First Amended Complaint, p. 15). In Count Five of the First Amended Complaint, Plaintiffs seek specific performance mandating that the NCFE entities remit not less than the $7,337,569.00 amount to the Amedisys entities. (First Amended Complaint, pp. 15-16). In Count Six of the First Amended Complaint, Plaintiffs request a judgment entry determining that the NCFE entities have breached their fiduciary duties by failing and refusing to take actions to ensure the distribution of funds to the Amed-isys entities. (First Amended Complaint, p. 16).
In Count Seven of the First Amended Complaint, Plaintiffs seek a judgment determining that the NCFE entities made fraudulent and misleading representations upon which the Plaintiffs relied. The allegations in Count Seven are against all Defendants, except the Trustee. (First Amended Complaint, pp. 16-17).
In Count Eight of the First Amended Complaint, Plaintiffs seek an order for accounting of books and records from all named Defendants. (First Amended Complaint, p. 17). In Count Nine of the First Amended Complaint, Plaintiffs seek an order removing NPFS as a servicer. The allegations in Count Nine only are against Defendant NPFS. (First Amended Complaint, p. 18). Finally, in Count Ten of the First Amended Complaint, Plaintiffs seek entry of an order determining that the diversion and pledging of certain funds resulted in an intentional conversion of funds that are property of the Plaintiffs, contrary to the sale agreements and trust agreement, for which, as a proximate and direct result, Plaintiffs have been irreparably harmed. The allegations in Count Ten are against all Defendants, except the Trustee. (First Amended Complaint, p. 18).
B. Discovery Dispute
On June 12, 2003, the Plaintiffs issued certain subpoenas: (a) a subpoena duces tecum directed to ING; (b) a deposition subpoena directed to Robert Novick; (c) a deposition subpoena directed to John Cos-ta; and (d) a Federal Rule of Civil Procedure 30(b)(6) subpoena directed to ING. Based upon their representations, the parties to this discovery dispute seem to be in agreement that the subpoenas sought documents relating to four (4) separate topics: (a) Amedisys, (b) the conditions under which NPF VI, National Century Financial Services, Inc., National Century Financial Enterprises, Inc., or JP Morgan would release funds to third parties; (c) the conditions or criteria for NPF VI to purchase accounts receivable from third parties; and (d) an approximately $47 million amortization payment paid by JP Morgan to ING in November, 2002. At the hearing, the parties represented that as a result of certain discussions between Plaintiffs and ING, ING has agreed to produce certain non-privileged and non-confidential documents responsive to the first three topics set forth above. ING agreed to produce these documents in order to be cooperative and to show its good faith. However, a dispute still remains regarding ING’s production of documents related to the payment JP Morgan made to ING in November of 2002. ING maintains that such documents are completely irrelevant to the issues in this case.
Further, ING contends that Mr. Costa and Mr. Novick have no knowledge concerning the demands made by the Plaintiffs for approximately $7.3 million. ING farther states and contends that it is undisputed that JP Morgan has funds in its accounts far in excess of the $7.3 million demanded by the Plaintiffs. To the extent that the Plaintiffs prove their entitlement to any portion of the demanded $7.3 million, ING contends that JP Morgan has *143sufficient funds to satisfy the judgment. Therefore, ING contends that any payments made to it are irrelevant to the outcome of the adversary proceeding pending before this Court. ING contends that since the persons noticed for deposition are without knowledge concerning the underlying facts in this litigation, they should not be burdened with the obligation to appear for depositions in this case.
II. ANALYSIS
This Court has reviewed the motions, the responses, and the depositions and documents submitted in support of ING’s position and Amedisys’ position. Many of these documents have been filed under seal pursuant to a protective order entered into between the relevant parties involved in this issue. Therefore, the Court will not specifically identify or disclose passages from depositions and documents filed under seal.
In reviewing the depositions and documents filed under seal, the Court does not find any passages that state or cause the Court to conclude that ING made any determination as to whether or not Amedi-sys would be paid. The crux of the ING communications as presented in the depositions dealt with ING’s declaration of a principal amortization event. In reviewing the First Amended Complaint, the Defendants’ answers, and the issues raised within this adversary proceeding, the Court cannot find the relevance of ING’s declaration of a principal amortization event as relating to allegations contained within the Ten Counts of the First Amended Complaint.
The Court is well aware that the scope of discovery is broad. It is well settled that a motion to compel discovery should be granted when the discovery sought is both relevant and proper. See, Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 840, 351, 98 S.Ct. 2380, 57 L.Ed.2d 253 (1978). However, a motion to compel discovery should not be granted when the Court is unable to find that the discovery sought is both relevant and proper. In this particular case, the Court does not find that the information sought by Amedi-sys is such.
III. CONCLUSION
Therefore, the Court hereby GRANTS ING Capital Market LLC’s Motion to Quash Deposition Subpoenas and For Protective Order. The Court hereby QUASHES the document subpoena to the extend that it requires production of documents relating to the amortization payment made to ING in November 2002, and all other items in the document subpoena not specifically agreed to by the parties as represented to this Court. Further, the Court hereby QUASHES the deposition subpoenas in their entirety. Accordingly, the Plaintiff Amedisys, Inc.’s Motion to Compel is DENIED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493610/ | *145
OPINION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT
DONALD E. CALHOUN, JR., Bankruptcy Judge.
This matter came before the Court upon the Motion for Summary Judgment filed by the Chapter 7 Trustee (“Trustee’s Motion”), the Motion of Defendant, Jack D. Holstein, for Summary Judgment (“Holstein’s Motion”), Memorandum In Opposition to Motion for Summary Judgment filed by Chapter 7 Trustee (“Holstein’s Memo Contra”), Memorandum Contra to Motion of Defendant, Jack D. Holstein, for Summary Judgment (“Trustee’s Memo Contra”), Reply to Memorandum Contra Motion of Defendant, Jack D. Holstein, for Summary Judgment (“Holstein’s Reply”), and Trustee’s Reply to Defendant’s Memorandum Contra to Motion for Summary Judgment filed by Chapter 7 Trustee (“Trustee’s Reply”).
I. FACTS
The parties presented factual summaries in their Motions. Based upon the Court’s review of these summaries, the following facts are not disputed:
In January of 1996, Crescent Communities, Inc. (“Crescent”) through its president, Michael J. Young (‘Young”), purchased 28.368 acres of real estate located in Montgomery County, Ohio, subject to a purchase money mortgage. Crescent intended on developing the real property as a residential community. On February 12, 1998, the real property went into foreclosure as a result of Crescent’s failure to pay the mortgage. The real property was appraised at $240,000.00 in the foreclosure proceeding and was sold at sheriffs sale on August 7,1999.
On or about August 13, 1999, Holstein executed a certain real estate purchase contract with option to repurchase (the “Contract”). At the time of execution of the Contract, the real property was subject to an order authorizing the sale of the property at foreclosure sale, and an auction had taken place where there was a successful third party bidder. Pursuant to the Contract, Holstein agreed to assist Crescent in reacquiring the real property. Holstein further agreed to pay the amount necessary for Crescent’s right of redemption to be exercised, including interest through the date of payment. Holstein agreed to pay the purchase price directly to Crescent or on Crescent’s behalf to an appropriate authority of Montgomery County, Ohio. In no event, however, was the purchase price to exceed $215,000.00.
The Contract provided that, at closing, Crescent would deliver to Holstein those documents, authorities, records, building plans, site plans, etc., that would be helpful in connection with the ownership, development or resale of the real property. Pursuant to paragraph three of the Contract, Crescent was given the right to repurchase the real property from Holstein. The option to repurchase was to be exercised at any time on or before the sixtieth day following the closing by delivering to Holstein an exercise price. The exercise price was determined as $240,000.00 within fourteen days of closing, $250,000.00 within fourteen to thirty days after closing, and $275,000.00 within thirty to sixty days after closing.
In support of the Trustee’s Motion, Young and Crescent state that Holstein had invested in Crescent to help with capital requirements and management of the business in 1997. Holstein had agreed to personally guarantee certain development loans required for development and to aid Young in the management of business. In consideration of these things, Crescent agreed to grant Holstein an eighteen per*146cent (18%) interest in Crescent, represented by a share certificate of ninety (90) shares. (Trustee’s Motion, Exhibit C.) In response, Holstein claims that at no time was he issued valid shares in Crescent. (Holstein’s Memo Contra, Holstein Affidavit.)
The closing occurred on August 13,1999. At the closing, Crescent, through Young, executed and delivered the general warranty deed to Holstein. Holstein gave to Young, for Crescent, an official check made payable to the Montgomery County, Ohio, Clerk of Courts in the amount of $210,000.00. That amount was the amount necessary to redeem the real property from the sheriffs sale. At the end of the closing, Young took the official check and the general warranty deed to record them at the courthouse. Young deposited the official check with the Montgomery County, Ohio, Clerk of Courts. Young did not get the general warranty deed recorded.
According to Trustee’s Motion, Young claimed that the general warranty deed was rejected from being recorded because it contained a faulty legal description. Young further claimed that he and Holstein met with Crescent’s surveyor and engineer, Luis G. Riancho, who had performed previous services for Crescent. He, according to Young, refused to correct the legal description until he was paid $6,000.00 of over $20,000.00 previously owed for his surveying services. (Trustee’s Motion, p. 4). In response, Holstein fails to comment upon or refute Young’s claims regarding the meeting with Rian-cho.
In April of 2000, Holstein filed complaints in Franklin County and Montgomery County, Ohio, for specific performance under the Contract and for injunctive relief to prevent the sale of the real property. The Franklin County, Ohio, Common Pleas Court complaint was dismissed, and the Montgomery County, Ohio, Common Pleas Court complaint was transferred to the Franklin County, Ohio, Common Pleas Court. On January 17, 2002, Crescent filed its Chapter 7 bankruptcy proceeding.
Holstein filed a motion to lift stay to allow the Franklin County, Ohio Court of Common Pleas (“State Court”) to decide the ownership issue of the real estate. On April 10, 2002, this Court entered an order granting the requested relief from stay. The Trustee then moved the State Court to be made a party, but said motion was denied. On July 11, 2002, a State Court magistrate issued a decision and found that the property belonged to Holstein. The State Court magistrate found that the real property had been his since August 13, 1999. Over objections by Young and Crescent, the State Court judge adopted the magistrate’s decision through a Journal Entry Overruling Defendant’s Objections to Magistrate’s Decision filed July 25, 2002, and Adopting Magistrate’s Decision filed July 11, 2002 (“Journal Entry”). Young and Crescent filed a notice of appeal, and the appeal is pending before the Tenth District Court of Appeals, Franklin County, Ohio.
In the Journal Entry, the State Court judge made the following statement:
Defendants [referring to Crescent and Young] apparently continue to miss the distinction between trustee’s ownership powers in the bankruptcy estate, which arise in the property of the debtor as a matter of law immediately upon the filing of a bankruptcy petition, and the trustee’s avoidance powers, which permit the trustee to avoid certain transfers that may have been made prior to the filing of the petition. 11 U.S.C. 544. This court has ruled that Plaintiff [referring to Holstein] is the legal and equitable owner of the disputed property, and *147that the implied consent of the parties ....
(Journal Entry, pp. 4-5.)
On August 30, 2002, the Trustee filed her adversary proceeding complaint. In the first cause of action, the Trustee alleges that the “conveyance of an interest in the real estate and other assets of Crescent Communities, Inc. is voidable by the Plaintiff/Trustee since said transfer was accomplished when said corporation was engaged or about to be engaged in a business or transaction for which the remaining assets of the corporation were unreasonably small in relation to business or transaction, and/or the Debtor intended to incur or reasonably should have believed that it would incur debts beyond its ability to pay as they became due.” (Complaint, page 2). In the first cause of action, the Trustee further alleges that the conveyance was fraudulent as to the creditors because it was made without receiving a reasonably equivalent value in exchange for said conveyance.
In the second cause of action, the Trustee alleges that the transfer was to an insider and that the debtor corporation retained control of the property transferred after said transfer. (Complaint, page 2). Again, the Trustee alleges that the transfer was of substantially all of the assets of the debtor corporation and that the value of the consideration received was not reasonably equivalent to the value of the assets transferred.
In the third cause of action, the Trustee requests, in the event that she is successful in vacating the transfer of real and personal property of the debtor corporation to the Defendant, that the Defendant be found not to have a lien on said property as a result of and for value given. The Trustee seeks this relief based upon 11 U.S.C. § 548(c).
Through the adversary proceeding, the Trustee seeks to avoid the transfer of the real property and the other personal property pursuant to 11 U.S.C. § 544. The Trustee claims that the transfer was fraudulent under Ohio Revised Code § 1336.04. On October 10, 2002, the Trustee filed a motion to sell the property free and clear of liens in Case No. 02-50593. The Trustee has a buyer for the real property and the personal property for a purchase price of $575,000.00. However, the motion to sell has been continued.
Through Trustee’s Motion, she seeks an order granting summary judgment on the basis that the transfer of the real and personal property by Crescent to Holstein was fraudulent. Through Holstein’s Motion, he seeks an order granting him summary judgment on the basis that he paid a reasonably equivalent value for the purchase of the assets at issue. The parties have fully briefed this matter for the Court, and it is now ready for decision.
II. JURISDICTION
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 proceeding under 28 U.S.C. § 157(b)(2)(H).
III. SUMMARY JUDGMENT STANDARD OF REVIEW
Rule 56(c) of the Federal Rules of Civil Procedure, incorporated by Bankruptcy Rule 7056 provides:
[Summary judgment] ... shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
*148The purpose of a motion for summary judgment is to determine if genuine issues of material fact exist to be tried. Lashlee v. Sumner, 570 F.2d 107, 111 (6th Cir. 1978). The party seeking summary judgment bears the initial burden of asserting that the pleadings, depositions, answers to interrogatories, admissions and affidavits establish the absence of genuine issues of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir.1989). The burden on the moving party is discharged by a “showing” that there is an absence of evidence to support a nonmoving party’s case. Celotex Corp., 477 U.S. at 325, 106 S.Ct. 2548. Summary Judgment will be appropriate if the nonmoving party fails to establish the existence of an element essential to its case, and on which it will bear the burden of proof. Celotex Corp., 477 U.S. at 322, 106 S.Ct. 2548. Thus, the ultimate burden of demonstrating the existence of genuine issues of material fact lies with a nonmoving party. Lashlee, 570 F.2d at 110-111.
The fact that the parties have filed cross motions for summary judgment does not change the standards upon which courts must evaluate summary judgment motions. Taft Broadcasting Co. v. United States, 929 F.2d 240, 248 (6th Cir.1991). Courts still must resolve each motion on its own merits drawing all reasonable inferences against the moving party in each instance. Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1391 (Fed.Cir.1987). Where genuine issues of material fact remain, neither motion should be granted. Id.
IV. DISCUSSION
A. 11 U.S.C. § 544
Section 544, which permits a trustee to avoid transfers under applicable law, provides in pertinent part as follows:
[T]he trustee may avoid any transfer of an interest of the debtor in property for any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
11 U.S.C. § 544(b)(1).
B. Ohio Revised Code Sections
Ohio Revised Code § 1336.04(A) provides two alternative means in which a transaction may be deemed fraudulent, namely: (i) actual fraud pursuant to § 1336.04(A)(1); and (ii) constructive fraud pursuant to § 1336.04(A)(2). Specifically, Ohio Revised Code § 1336.04 provides as follows:
(A) A transfer made or an obligation incurred by a debtor is fraudulent as to a creditor, whether the claim of a creditor arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation in either of the following ways:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor;
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and if either of the following applies:
(a) The debtor 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;
(b) The debtor intended to incur, or believed or reasonably should have believed that he would incur, *149debts beyond his ability to pay as they became due.
Ohio Revised Code § 1336.04.
The Ohio General Assembly has codified certain elements of proof, commonly known as “badges of fraud.” O.R.C. § 1336.04(B). In determining actual fraud, consideration is given to the following relevant factors:
(1) Whether the transfer or obligation was to an insider;
(2) Whether the debtor retained possession or control of the property transferred after the transfer;
(3) Whether the transfer was disclosed or concealed;
(4) Whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;
(5) Whether the transfer was of substantially all of the assets of debtor;
(6) Whether the debtor absconded;
(7) Whether the debtor removed or concealed assets;
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of obligation incurred;
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred;
(11) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.
O.R.C. § 1336.04(B). “If the party alleging fraud is able to demonstrate a sufficient number of badges, the burden of proof then shifts to the defendant to prove that the transfer was not fraudulent.” Baker & Sons Equipment Co. v. GSO Equipment Leasing, Inc. (1993), 87 Ohio App.3d 644, 650, 622 N.E.2d 1113.
Constructive fraud requires proof of non-receipt of reasonably equivalent value to the value of the asset transferred. O.R.C. § 1336.04(A)(2). “Unlike actual fraud under O.R.C. § 1336.04(A)(1), constructive fraud under O.R.C. § 1336(A)(2) focuses more on effect of the transaction rather than the intent with which they were undertaken. Constructive fraud may exist when the debtor has no actual intent to hinder, delay, or defraud an existing or future creditor.” Aristocrat Lakewood Nursing Home v. Mayne (1999), 133 Ohio App.3d 651, 666, 729 N.E.2d 768.
C. Analysis
(1) Badges of Fraud
Ohio law is very clear that “badges of fraud” are circumstances so frequently attending fraudulent transfers, that the inference of fraud arises from them. See Cardiovascular & Thoracic Surgery of Canton, Inc. v. DiMazzio, (1987) 37 Ohio App.3d 162, 166, 524 N.E.2d 915. In the present case, the State Court has ruled that Holstein is the legal and equitable owner of the disputed property. This transfer was to an insider. Crescent, a debtor corporation, transferred the property to Holstein, who had previously invested in Crescent to help with capital requirements and management of the business back in 1997. Holstein had personally agreed to guarantee certain development loans required for development and to aid Young in the management of the business. In consideration of these things, Crescent agreed to grant Holstein an eighteen percent (18%) interest. While there is some dispute as to whether or not these *150shares were actually issued, the Court finds that Holstein was in a position to assert control of the Debtor. The assertion of control was evidenced by Holstein’s involvement in the Contract.
Second, the Debtor obviously retained possession or control of the property transferred after the transfer. Crescent retained both the real property and the personal property. While Holstein eventually did file a complaint in the Franklin County Court of Common Pleas, Crescent retained both possession and control.
Third, in effect, the transfer was not made public and was concealed. Until the filing of the State Court action, a full eight (8) months after the closing, the transfer was not made of record or noticed.
Fourth, the transfer was obviously made after Crescent had been sued or threatened with suit. The transfer resulted after a foreclosure action was filed against Crescent. The very purpose of the transfer resulted from the foreclosure suit against Crescent.
Fifth, in reviewing the bankruptcy schedules, the Court finds that the real property and personal property were virtually and substantially all of the assets of Crescent. The transfer to Holstein resulted in the transfer of substantially all of the assets of Crescent, with the exception of the name.
In reviewing this matter, the Court cannot make a finding as to badges six and seven. The parties presented no facts showing that the Debtor absconded and none showing that the Debtor removed or concealed assets. Badges six and seven have not been proven in the present case.
However, the Court does find that the transfer was for considerably less than the reasonable equivalent of the value of the assets transferred. In reviewing the Contract, it shows that Crescent was to transfer more than its right of redemption in the real estate to Holstein in exchange for payment of the right to redemption amount, being $210,000.00. As stated in the Contract and as stated in the magistrate’s decision adopted by the State Court Journal Entry, Holstein purchased and received a recordable general warranty deed to the real property; a resolution of seller’s board of directors, duly served by an appropriate officer of seller, authorizing the transaction contemplated by the Contract; and such other documents as could reasonably be determined by Holstein’s legal counsel to be necessary or appropriate in order to consummate the transactions contemplated by the Contract (including, but not limited to, plans, engineering or architectural drawings, building plans, site plans, and building permit applications and permits) used by Crescent, or that would be useful to Holstein, in connection with the ownership, development or resale of the Property. (Contract, paragraph 5.)
Within the foreclosure action, the real estate, and only the real estate was appraised at $240,000.00. Under paragraph 2 of the Contract, Holstein agreed to pay a redemption amount of up to $215,000.00 for the real property and all of the plans, permits, drawings, and site plans. Holstein only paid $210,000.00. Based upon the foregoing and as for badge number eight, the Court finds that the transfer was for considerably less than the reasonable equivalent value of the assets transferred.
Finally, in reviewing Crescent’s bankruptcy schedules, they clearly show that the Debtor’s assets after subtracting the value of the above assets, total $9,464.00.1 *151At the same time as the above transfers, Henry H. Stick, Trustee, had a claim in excess of $119,000.00, and Luis Riancho had a claim in excess of $20,000.00.2 Further, the Court finds that this transfer left Crescent with unreasonably small assets in relation to its historical level of assets. As stated above, the assets were transferred without the Debtor receiving a reasonably equivalent value in exchange for the transfer. See Aristocrat, 133 Ohio App.3d at 668, 729 N.E.2d 768. Based upon the foregoing, the Court finds that Crescent was insolvent or became insolvent shortly after the transfer was made. The Court finds that the Ninth and Tenth badges of fraud have been proven by the Trustee.
V. CONCLUSION
Based upon the foregoing, the Court finds that there is competent, credible evidence to support a finding that the transfer from Crescent to Holstein was a fraudulent transfer under O.R.C. § 1336.04(A)(1). The numerous badges of fraud shown in this case support such a finding. Profeta v. Lombardo, (1991) 75 Ohio App.3d 621, 628, 600 N.E.2d 360. The Court finds that the Defendant has failed to rebut presumption of fraud created by the badges of the fraud proven by the Trustee. Based upon the foregoing, this Court finds and concludes that the transfer is voided pursuant to 11 U.S.C. § 544.
The Court recognizes that Trustee seeks relief based upon 11 U.S.C. § 548(c) in the third cause of action of the adversary proceeding. However, neither party argued nor briefed this issue in their Motions. The Court is unable to dispose of this issue properly upon the Motions as they were presented.
Based upon the foregoing, the Court hereby grants the Trustee’s Motion for Summary Judgment, in part, by ruling that the transfer is voided pursuant to 11 U.S.C. § 544, and denies Holstein’s Motion for Summary Judgment.
IT IS SO ORDERED.
. On Schedule A, Debtor listed the same real estate as described herein as having a market *151value of $600,000.00. On Schedule B, Debtor listed: a checking account containing $64.00; a security deposit of $9,400.00, a counterclaim against Jack Holstein for breach of agreement at $1.00; and plans for the Crescent Pond Estates Subdivision as having a market value of $30,000.00. No other assets are listed in the schedules found in Case No. 02-50593.
. Proof of Claim No. 1 filed in Case No. 02-50593 states a claim on behalf of Henry H. Stick, Trustee, for money loaned in the amount of $119,933.15. Attached to the Proof of Claim form is a Certificate of Judgment filed in the Montgomery County Court of Common Pleas on June 7, 2000. The Certificate of Judgment is based upon a judgment granted in the case known as Henry H. Stick, Trustee v. Vista Ridge Inc., et al., Case No. 96 CV 0146. Proof of Claim No. 2 is a claim in the amount of $23,500.00 by Luis G. Riancho Associates, Inc. in the amount of $23,500.00. Attached to that Proof of Claim are invoices for the time period of May 1994 through November, 2001.
Further, Plaintiff named Henry H. Stick, Trustee, as a defendant in this adversary proceeding. In his answer, Mr. Stick stated that he has a lien on the subject real property by virtue of a Certificate of Judgment issued against Michael J. Young and Crescent Communities, Inc., in the amount of $55,000.00 with interest at 18% per annum from June 29, 1995 plus costs, issued by the Montgomery County Common Pleas Court, No. 00-JG-07-17953 and filed in the Franklin County Common Pleas Court on July 7, 2000. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493611/ | MEMORANDUM OPINION
DOUGLAS O. TICE, JR., Chief Judge.
Hearing was held on January 15, 2003, on motion for summary judgment by the United States of America, the defendant in this adversary proceeding. The court took the matter under advisement and allowed trustee 15 days to file a response to defendant’s motion. The court then entered an order continuing the trial pending resolution of the motion for summary judgment. On February 4, 2003, plaintiff filed a response to defendant’s motion and filed a cross-motion for summary judgment. Defendant filed a reply in support of its original motion.
For the reasons stated, the court will grant defendant’s motion for summary judgment that its efforts to recover the overpayments to debtor constituted a valid equitable recoupment. Plaintiffs cross-motion for summary judgment will be denied.
Findings of Fact.
Debtor, at all times relevant to this matter, was a member of the United States Marine Corps. He enlisted with the Marines in 1973 by signing an enlistment contract and has since entered into seven enlistment agreements extending his service. Debtor’s most recent enlistment history is as follows: on April 28, 1998, debt- or signed an Enlistment/Reenlistment Document extending his service to April 27, 2001; on March 7, 2000, he signed an Agreement to Extend Enlistment by eleven months to March 28, 2002, effective April 28, 2001; finally, on January 15, 2002, debtor requested and received a sixteen-month extension of enlistment and is scheduled for retirement on March 31, 2003.
Members of the U.S. Marine Corps are compensated twice per month at a statutory rate fixed by Congress. Debtor’s pay was fixed at the rate of E-9 with over 26 years, which is the highest rate of pay for an enlisted member of the Marine Corps. As part of their total compensation, members of the Marine Corps receive a basic allowance for housing (BAH). The allowance is paid to a member directly if he lives in non-military housing. If the member subsequently accepts military housing, the BAH is paid to the housing unit in which he resides.
On March 30, 2000, debtor reported for duty at the Army’s Quartermaster School in Fort Lee, Virginia. Debtor initially lived in non-military housing while at Fort Lee. As a result, he was paid a BAH entitlement of $853.00 per month in addition to his military compensation. 'On May 23, 2000, debtor moved into military housing. Debtor was required to report his change of residence to the Administrative Section at Fort Lee by delivering an Assignment to Family Housing letter. The Administrative Section was never notified and debtor continued to receive monthly payments of $853.00 through October 1, 2001. In September 2001 a routine housing audit of Fort Lee was conducted and it was discovered that BAH payments were being made to debtor during the time he lived in military housing. The audit determined that debtor had received a total overpayment of $14,728.47.
In order to recover the overpayments, a computation of the amount to be withheld *265from debtor’s pay was made based on the projected end date of debtor’s active service at the time (March 28, 2002). Subsequently, the sum of $1,475.00 was withheld from debtor’s compensation for the following dates: November 15, 2001; November 30, 2001; December 14, 2001; December 31, 2001; January 15, 2002; February 1, 2002; and February 15, 2002.
Debtor filed a voluntary petition under chapter 7 on January 30, 2002. Once the government became aware of the bankruptcy filing it returned the post-petition payments withheld from debtor on February 1 and 15, 2002.
Position of the Parties.
Trustee
Plaintiffs complaint seeks to recover the BAH cash deductions from debtor’s military pay during the 90-day period immediately preceding the filing of debtor’s chapter 7 petition. Plaintiff concedes that there was an overpayment to debtor but argues that the defense of recoupment is inapplicable because defendant’s claims arise out of two separate transactions. Plaintiff argues that defendant’s obligation to make BAH payments to debtor was different from its obligation to pay debt- or’s basic compensation. As a result, plaintiff contends that the issue must properly be analyzed as a setoff pursuant to 11 U.S.C. § 553.
United States
Defendant asserts that debtor was not entitled to the BAH payments sent between May 23, 2000 and October 1, 2001.
Defendant maintains that the BAH over-payments debtor owed to defendant and the military pay that defendant owed to debtor are mutual debts that grew out of the same contract, namely debtor’s enlistment agreement. Consequently, application of the doctrine of recoupment is warranted, and the defendant’s actions would not violate the Bankruptcy Code.
Discussion and Conclusions of Law.
Summary Judgment
Summary judgment will be granted “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56 (as incorporated by Fed. R. Bankr.P. 7056). A party moving for summary judgment bears the initial burden of demonstrating that there is no genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In determining whether this showing has been made, the court must assess the evidence in the light most favorable to the party opposing the motion. See, e.g., Charbonnages de France v. Smith, 597 F.2d 406 (4th Cir.1979). Summary judgment is appropriate only where there are no “disputes over facts that might affect the outcome of the suit”; it is not concerned with peripheral or irrelevant facts. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The Fourth Circuit has previously ruled that summary judgment should not be granted “even where there is no dispute as to the evidentiary facts in the case but only as to the conclusions to be drawn therefrom.” Pierce v. Ford Motor Co., 190 F.2d 910, 915 (4th Cir.1951).1
*266If the moving party demonstrates that there is no genuine issue of material fact, the burden shifts to the nonmoving party to demonstrate that there is indeed a genuine issue for trial. See RGI, Inc. v. Unified Indus., Inc., 963 F.2d 658, 661 (4th Cir.1992). Rule 56 states that
[w]hen a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party’s pleading, but the adverse party’s response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.
Fed.R.Civ.P. 56(e). Summary judgment “is favored as a mechanism to secure the ‘just, speedy and inexpensive determination’ of a case” when the requirements of Rule 56 are met. Thompson Everett, Inc. v. National Cable Adver., L.P., 57 F.3d 1317, 1322-23 (4th Cir.1995) (quoting Fed. R.Civ.P. 1).
The parties agree that summary judgment is appropriate in this case because there is no dispute as to any material fact regarding the subject transactions. The parties dispute whether defendant’s actions in this case constituted an impermissible setoff under the Bankruptcy Code or a valid equitable recoupment.2
1) Plaintiff argues that defendant has the power to increase or decrease debtor's compensation. Defendant responds that, while possible, these actions may be taken only in extraordinary circumstances, such as violations of the Uniform Code of Military Justice, and not in the ordinary course of debtor’s employment.
2) Plaintiff claims that, in order to receive BAH payments, debtor was required to affirmatively demonstrate that he lived in non-militaiy housing on a monthly basis. Defendant considers this statement to be erroneous and unsupported.
The dispute over these issues is peripheral to the question of the applicability of the doctrine of recoupment and does not raise an issue of material fact that would defeat a ruling on summary judgment.
Defendant filed a motion for summary judgment that its recovery of the BAH overpayments was a valid recoupment against its obligation to issue debtor’s basic military pay. Plaintiff filed a cross-motion for summary judgment stating that these obligations arose from two separate transactions, making the doctrine of re-coupment inapplicable. Plaintiffs motion asserts that the transaction is more appropriately treated as a setoff under 11 U.S.C. § 553.
The court will examine the applicability of setoff versus recoupment under these facts.
Setoff
The right of setoff is preserved by § 553 of the Bankruptcy Code.3 Setoff is similar to recoupment in that it “allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the ‘absurdity of making A pay B when B owes A.’ ” Citizens Bank, 516 U.S. at 18, 116 S.Ct. 286 (citations omitted). Setoff may be distinguished from recoupment in that a creditor’s right *267of setoff is unaffected by bankruptcy laws only where the mutual obligations arose pre-petition. See, e.g., Anes v. Dehart (In re Anes), 195 F.3d 177, 182 (3d Cir.1999). Further, setoff “may be accomplished even if the countervailing claims arise from separate transactions.” Thompson v. Board of Trustees, Fairfax County Police Officers Ret. Sys. (In re Thompson), 182 B.R. 140,152 (Bankr.E.D.Va.1995).
For a creditor to preserve its setoff rights under 11 U.S.C. § 553, it must meet four conditions: 1) the creditor must hold a pre-petition claim against the debtor; 2) the creditor must owe a debt to the debtor that arose pre-petition; 3) the obligations are mutual; 4) the obligations are valid and enforceable. See 11 U.S.C. § 553(a); 5 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy, ¶558.01[1], at 553-7 (15th ed. rev.2002). The court is not required to allow obligations to be offset even if these conditions are met. Such a decision “lies within the equitable discretion of the trial court.” DuVoisin v. Foster (In re Southern Indus. Banking Corp.), 809 F.2d 329, 332 (6th Cir.1987); Kentucky Cent. Ins. Co. v. Brown (In re Barbar Corp.), 177 F.3d 439, 447 (6th Cir.1999).
Recoupment
Recoupment is an equitable doctrine that has long been applied in the bankruptcy context. See, e.g., University Med. Ctr. v. Sullivan (In re University Med. Ctr.), 973 F.2d 1065, 1079 (3d Cir. 1992). A number of courts have viewed the doctrine of recoupment as a “nonstatutory exception to the automatic stay.” In re Thompson, 182 B.R. at 147; see also Tidewater Mem’l Hosp., Inc. v. Bowen (In re Tidewater Mem’l Hosp., Inc.), 106 B.R. 876, 881 (Bankr.E.D.Va.1989). The Fourth Circuit has defined recoupment as “the right of the defendant to have the plaintiffs monetary claim reduced by reason of some claim the defendant has against the plaintiff arising out of the very contract giving rise to the plaintiffs claim.” First Nat’l Bank of Louisville v. Master Auto Serv. Corp., 693 F.2d 308, 310 n. 1 (4th Cir.1982).
In order for the doctrine to apply, two threshold issues must be satisfied. First, the source of the defendant’s claims must be a contract, as opposed to a government entitlement program. Second, the claims must arise out of the same contract. See In re Thompson, 182 B.R. at 147.
As to the first issue, the Third Circuit has ruled that overpayments under government entitlement programs are not subject to the doctrine of recoupment. See Lee v. Schweiker, 739 F.2d 870 (3d Cir.1984). In Lee, the Third Circuit held that recoupment of social security overpay-ments was impermissible because the payments were a statutory entitlement and not the result of a contract between the government and the debtor. 739 F.2d 870, 876 (stating that a social welfare statute entitling a party to benefits is not a contract and that the obligation to repay an overpayment is a separate debt that is subject to the Bankruptcy Code); see also Anes v. Dehart (In re Anes), 195 F.3d 177, 183 (3d Cir.1999) (holding that a city employee’s obligation to repay a loan taken from her retirement fund and the city’s obligation to pay debtor’s salary do not arise under the same contract).
Second, the claims recovered by defendant must arise from the same contract. There are two prevailing standards for determining whether corresponding liabilities fall under the same transaction. The first is the “logical relationship test” and the second is the more restrictive “integrated transaction test.”
*268The logical relationship test defines transaction broadly. The term “ ‘may comprehend a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship.’ ” Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.8d 1392, 1402 (9th Cir.1996) (quoting Moore v. New York Cotton Exch., 270 U.S. 593, 610, 46 S.Ct. 367, 70 L.Ed. 750 (1926)). The Fifth Circuit elaborated on this test by stating that “ ‘a debtor may not assume the favorable aspects of a contract (post-petition payments) and reject the unfavorable aspects of the same contract (the obligation to repay pre-petition overpayments by means of recoupment).”’ Kosadnar v. Metropolitan Life Ins. Co. (In re Kosadnar), 157 F.3d 1011, 1016 (5th Cir.1998) (quoting Aetna Life Ins. Co. v. Bram (In re Bram), 179 B.R. 824, 826 (Bankr. E.D.Tex.1995)).
The second test requires that “both debts must arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations.” University Med. Ctr. v. Sullivan (In re University Med. Ctr.), 973 F.2d 1065, 1081 (3d Cir.1992). The court stated that the test for applying a “non-statutory, equitable exception to the automatic stay, should be narrowly construed.” Id. However, this approach has been criticized as being so restrictive that it “may be used to deny recoupment in virtually every case.” 5 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy, ¶ 553.10[1], at 553-104 (15th ed. rev.2002).
The Recovery of BAH Funds was a Valid Equitable Recoupment
As discussed below, the facts of this case indicate that the relevant obligations grew out of a single contract between the parties. Consequently, the doctrine of recoupment will be applied. No further discussion of the right of setoff is necessary.
The Debts Were Based on Contractual Rights
Plaintiff argues that the BAH payments are analogous to a government entitlement and represent a separate transaction. The court finds that the rationale in the Lee v. Schweiker line of cases is inapplicable to the present case. In Lee, the government sought recovery of overpayments of Social Security benefits to debtor through deductions in debtor’s monthly benefits for the eight months following discovery of the overpayments. Debtor challenged the deductions made post-petition and in the 90 days prior to filing her petition. The court found that “[sjocial welfare payments, such as social security, are statutory ‘entitlements’ rather than contractual rights.” Lee v. Schweiker, 739 F.2d 870, 876 (3d Cir.1984). It further stated that the “obligation to repay a previous overpayment is a separate debt subject to the ordinary rules of bankruptcy.” Id. As the debts did not arise from the same transaction, the court could not apply the doctrine of re-coupment and the government’s efforts to recoup its debt were found to be in violation of the automatic stay. Id.
Here, the BAH payments to debtor are made as a direct result of debtor’s enlistment contract with the Marine Corps. Each member of the Marine Corps receives a BAH as part of his total compensation package. The court finds it instructive that the BAH payments are made through the life of debtor’s service regardless of any action by the debtor. The only variance is whether these payments will be made to him (if he lives in non-military housing) or to his housing unit (if he lives in military housing). If debtor did not enter into the enlistment contract with the Marine Corps he would not have received *269any BAH payments. The BAH is a direct result of debtor’s contractual agreement with defendant and is not a government entitlement.
The Debts Arose From the Same Contract
Under either the logical relationship or the integrated transaction tests, the BAH overpayments to debtor and the subsequent recovery of those overpayments through debtor’s military pay occurred under the same transaction. Debtor signed an Enlistment/Reenlistment Document on April 28, 1998, that extended his service to the defendant through April 27, 2001. Pri- or to the expiration of that agreement, on March 7, 2000, debtor signed an Agreement to Extend Enlistment. The extension took effect on April 28, 2001, allowing debtor’s service to continue uninterrupted through March 28, 2002.
The material terms of the agreements between defendant and debtor on April 28, 1998, and March 7, 2000, are the same. Debtor would continue serving as a Master Gunnery Sergeant in the U.S. Marine Corps at the pay rate of E-9 with over 26 years and would receive a basic allowance for housing payment if he resided in nonmilitary housing. The enlistment extensions simply extended the life of the original agreement but introduced no new terms. Debtor may not claim that the defendant’s obligation to issue his military pay was separate from its obligation to pay his basic allowance for housing. Neither of these obligations would exist if the debt- or did not enter into the enlistment agreement with defendant.
It is apparent the debtor’s BAH payments are intertwined with his basic compensation. It would be inequitable to allow him to benefit from an increase in the latter without satisfying the obligations of the former. Defendant’s actions would satisfy the integrated transaction test and would, therefore, also meet the logical relationship test.
Balance of the Equities
When applying the doctrine of recoupment, courts must be “ ‘guided by basic principles of equity.’” Tidewater Mem’l Hosp., Inc. v. Bowen (In re Tidewater Mem’l Hosp., Inc.), 106 B.R. 876, 882 (Bankr.E.D.Va.1989). As part of its equitable foundation, an important function of the doctrine is to prevent unjust enrichment. See In re Peterson Distrib., Inc., 82 F.3d 956, 960 (10th Cir.1996). The court must consider whether any party would receive a windfall. Under these facts, it appears that trustee and the unsecured creditors would unfairly benefit from a return of the recovered funds. Debtor received funds that did not belong to him through either an oversight by defendant or lack of diligence by debtor. It would be inequitable for the court to require defendant to disgorge the overpayments recovered to remedy this oversight. This would be tantamount to forcing defendant to pay back its own money, which it mistakenly paid to debtor, so that unsecured creditors may share in the distribution of an asset that never belonged to debtor. Clearly, the equities in this case weigh heavily in favor of defendant.
For the reasons stated, the court will grant the motion for summary judgment by defendant and will deny plaintiffs cross-motion for summary judgment.
A separate order will be entered.
. The court in Pierce set out an elevated standard for summary judgment based on its concern that premature entry of summary judgment may deprive litigants of their right to trial. The court clarified that summary judgment was appropriate where it was apparent that no issue of fact was necessary "to clarify the application of the law.” Pierce, 190 F.2d *266at 915. The facts of this case readily satisfy the heightened standard for summary judgment in Pierce. As both parties have filed motions for judgment, neither party will be deprived of a right to trial if judgment is entered against one.
. The court notes that the parties differ on the following points:
. The Bankruptcy Code does not create any rights of setoff. Instead, it preserves any set-off rights that are available under applicable non-bankruptcy law. Citizens Bank v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493613/ | ORDER — MOTION FOR DETERMINATION OF VIOLATION OF AUTOMATIC STAY
RUSSELL J. HILL, Bankruptcy Judge.
On April 2, 2003, the court conducted a hearing on Trustee’s Motion for Determi*364nation of Violation of Automatic Stay in the above captioned case. The trustee Deborah L. Peterson, appeared on her own behalf; Charles L. Smith, attorney of record, appeared for Debtors, Kenneth L. and Georgia M. Majors; Assistant United States Attorney, Laquita Taylor-Phillips appeared for the United States, on behalf of the Internal Revenue Service; and Donald J. Pavelka, Jr., attorney of record, appeared for creditor Midstates Bank, N.A. At the conclusion of the hearing, the court dictated its ruling into the record and this memorandum decision memorializes that ruling.
The court has jurisdiction of this matter pursuant to 28 U.S.C. §§ 157(b)(1) & 1334 and order of the United States District Court for the Southern District of Iowa. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). The court, upon review of the pleadings, evidence, and arguments of counsel, now enters its findings and conclusions pursuant to Fed. R. Bankr.P. 7052.
Findings of Fact
1. Kenneth L. and Georgia M. Majors (hereinafter Debtors) filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code on March 29, 2002.
2. Debtors scheduled two tracts of real estate as assets of the estate, to-wit:
a. A tract located at 110 S. 8th Street, Missouri Valley, Iowa, hereinafter referred to as the commercial lot and building, and,
b. A tract located at 15429 Cornelia LN, Missouri Valley, Pottawattamie County, Iowa, (hereinafter the homestead property).
3. Debtors claimed the homestead property as exempt on Schedule C.
4. The commercial property has a fair market value of approximately $125,000.00 with an encumbrance of approximately $83,400.00, and the homestead property has a fair market value of approximately $125,000.00, with an encumbrance of approximately $39,500.00.
5. Midstates Bank is the creditor holding secured claims on both tracts of real estate.
6. Debtors received their discharge on June 26, 2002.
7. Debtors may only claim a portion of the homestead property as exempt.
8. Trustee has never abandoned the estate’s interest in either tract of real estate.
9. On December 6, 2002, the Department of the Treasury — Internal Revenue Service (hereinafter the IRS) filed a proof of claim reflecting an unsecured priority claim and an unsecured general claim in the amount of $57,127.09 and $8,717.69, respectively.
10. On September 13, 2002, Trustee served a Notice of a Motion for Compromise or Settlement of Controversy. The IRS received this notice which specifically provided for the sale of the commercial real estate and a loan to be granted by Midstates Bank to Debtors.
11. The IRS never objected to this proposed compromise and settlement.
12. On October 18, 2002, the court approved Trustee’s Notice of a Motion for Compromise or Settlement of Controversy.
13. Pursuant to said order, Trustee employed a real estate agent to sell the commercial property.
14. On January 21, 2003, the IRS filed its notice of lien against Debtors in the Harrison County Recorder’s office. (See Exhibit A to the IRS Objection to Trustee’s Motion for Determination of Violation of Automatic Stay filed on March 17, 2003).
*36515. The commercial real estate is located in Harrison County.
16. On February 12, 2003, the IRS filed its notice of hen against Debtors in the Pottawattamie County Recorder’s Office.
17. The homestead real estate is located in Pottawattamie County.
18. The IRS has never petitioned this court for relief from the provisions of the automatic stay pursuant to 11 U.S.C. § 362.
19. Trustee and Debtor’s attorney have attempted to resolve this matter with the IRS, but as of February 26, 2003, the date of the filing of Trustee’s Motion for Determination of Violation of Automatic Stay, there was no response from the IRS.
20. As a result of the filing of the above two notices of liens, Trustee has been unable to sell the commercial real estate. Also, Debtors have been unable to accomplish their duties under the court approved settlement by completing a loan with Midstates Bank, so they can pay money into the estate to comply with the order of October 18, 2002.
DISCUSSION
This matter comes before the court on Trustee’s Motion Trustee’s Motion for Determination of Violation of Automatic Stay. Trustee alleges that the IRS violated the automatic stay by filing notices of liens in Harrison and Pottawattamie counties. Trustee argues that the filing of the notices were attempts by the IRS to perfect hens on the commercial and homestead property.
The IRS acknowledges that it filed the notices but disputes that the acts were violations of the automatic stay. It argues that the stay lifted when Debtors received their discharge. IRS further argues that the notices were filed in the names of the Debtors and were not intended to encumber property of the bankruptcy estate. Accordingly, IRS disputes that it willfully violated the automatic stay.
The automatic stay provisions of the Bankruptcy Code are found in § 362. That section provides in relevant part:
(a)Except as provided in subsection (b)of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—
(4) any act to create, perfect, or enforce any lien against property of the estate;
(c)Except as provided in subsections (d), (e), and (f) of this section—
(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate; and
(2) the stay of any other act under subsection (a) of this section continues until the earliest of—
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied.
11 U.S.C. § 362(a) & (c).
The Code defines “entity” to include person and governmental unit. 11 U.S.C. § 101(15). “Governmental unit” includes the United States, and any department, agency, or instrumentality of the United States except the United States Trustee while serving as a trustee in a bankruptcy case. 11 U.S.C. § 101(27). Therefore, the *366automatic stay provision encompasses action by the United States Attorney, and the IRS.
“The automatic stay is a self-executing provision of the Code and begins to operate nationwide, without notice, once a debtor files a petition for relief.” In the Matter of Scharff, 143 B.R. 541, 542 (Bankr.S.D.Iowa 1992). In this case, Debtors filed their chapter 7 petition on March 29, 2002, and the automatic stay sprang into existence at that time. On June 26, 2002, Debtors received their discharge, and the stay ceased to enjoin in persona collection their nondischarged debts, if any. See 11 U.S.C. § 362(c)(2)(C). However, the stay remained in effect in relation to the property of the estate that was under control of Trustee. See 11 U.S.C. § 362(c)(1). Accordingly, any action by the IRS to perfect a lien in the estate property constitutes a violation of the automatic stay.
As noted above, the IRS filed notices of hens against Debtors in the Harrison County Recorder’s office on January 21, 2003, and in the Pottawattamie County Recorders office on February 12, 2003. At the time of their filings, the IRS had notice of Trustee’s Motion for Compromise or Settlement of Controversy, and the court’s order of October 18, 2002, granting said motion. The court finds that the IRS knew of Trustee’s plans to sell the property located in each of the counties at the time that it filed the lien notices. Said notices created a cloud on the title of the property, preventing the consummation of the sale of the property. Accordingly, the court finds that the IRS attempted to perfect its hen in the commercial property and the homestead property, and in so doing violated the automatic stay.
The court notes that violations of the automatic stay are void. LaBarge v. Vierkant (In re Vierkant), 240 B.R. 317, 322 & 325 (8th Cir. BAP 1999). Acts taking in violation of the automatic stay have no effect and are a nullity. Barnett Bank of Southeast Georgia, N.A. (In re Ring), 178 B.R. 570, 578 (Bankr.S.D.Ga. 1995). Consequently, the notices are not effective against the commercial property and the homestead property. However, in order to assure that the title to the property is cleared, the court will order the IRS to release the above notices.
Finally, in her motion, Trustee requested sanctions against IRS pursuant to 11 U.S.C. § 362(h). Money damages are available for willful violations of the automatic stay. Section 362(h) provides:
(h) An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.
11 U.S.C. § 362. “A willful violation of the automatic stay occurs when the creditor acts deliberately with knowledge of the bankruptcy petition.” Knaus v. Concordia Lumber Company (In re Knaus), 889 F.2d 773, 775 (8th Cir.1989). It is not necessary that the creditor intended to violate the stay, only that the creditor knew of the bankruptcy and intended to do the violating act. Scharff, 143 B.R. at 543.
The United States has waived sovereign immunity for violations of the automatic stay. 11 U.S.C. § 106. Compensatory damages, costs, and attorney fees under § 362 may be awarded against the United States and its agencies. 11 U.S.C. § 106(a)(3). Any award for costs or fees must be consistent with the provisions and limitations of 28 U.S.C. § 2412(d)(2)(A). Id. However, punitive damages cannot be imposed against the United States or its agencies. Id. Any recovery against the United States must *367be offset against the debt owed. 11 U.S.C. § 106(c).
At the hearing, the court instructed Trustee that she could make further application for damages. If she chooses to do so, the court will address the propriety of an award after an opportunity is afforded to the IRS to respond.
ORDER
IT IS ACCORDINGLY ORDERED as follows:
1. Trustee’s Motion for Determination of Violation of Automatic Stay is GRANTED. The court determines that IRS violated the automatic stay provisions of 11 U.S.C. § 362.
2. IRS shall release both of the identified notices of liens within ten (10) days from the hearing date, April 2, 2003. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493614/ | MEMORANDUM OPINION AND ORDER
1
JERRY VENTERS, Bankruptcy Judge.
The Court takes up for ruling the cross-motions for partial summary judgment filed by Farmland Industries, Inc., (“Debt- or”) and Defendant Alliance Process Partners, LLC, d/b/a International Alliance Group (“Alliance”).2 The singular issue before the Court at this time is whether certain property at the Debtor’s refinery in Coffeyville, Kansas, is real or personal property for purposes of artisan’s liens asserted by Alliance.
The artisan’s hens claimed by Alliance are among more than seventy hens that are at issue in this Adversary Proceeding. The Debtor has asked the Court to determine the vahdity and priority of some seventy-four mechanic’s hens filed with respect to the refinery property, as weh as determining the vahdity and priority of the three artisan’s hens asserted by Alliance. Of the claimants involved in this Adversary Proceeding, Alliance is the only claimant that has asserted an artisan’s hen with respect to the refinery property.
On June 26, 2003, Alliance filed a motion for partial summary judgment (Document #250) requesting an Order from this Court declaring that the property subject to its hens is personal property. On July 18, 2003, the Debtor filed a cross-motion for partial summary judgment (Document # 260) seeking a declaration that the equipment described in Alliance's artisan’s hens is a part of the real property. The motions were properly supported by affidavits and documentary evidence. Each party opposed the other’s motion.3 The parties presented oral arguments on this issue on July 29, 2003, and the Court is now prepared to rule.
I. STANDARD OF REVIEW
Summary judgment is appropriate when the matters presented to the Court “show that there is no genuine issue as to any material fact and that the moving party is *386entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c); Fed. R. Bankr.P. 7056; Celotex v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265, 273 (1986). The party moving for summary judgment has the initial burden of proving that there is no genuine issue as to any material fact. Adickes v. S.H. Kress & Co., 398 U.S. 144, 161, 90 S.Ct. 1598, 1611, 26 L.Ed.2d 142 (1970). Once the moving party has met this initial burden of proof, the non-moving party must set forth specific facts sufficient to raise a genuine issue for trial, and may not rest on its pleadings or mere assertions of disputed facts to defeat the motion. Matsushita Electric Industrial Co., Ltd., v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (stating that the party opposing the motion “must do more than simply show that there is some metaphysical doubt as to the material facts”). The mere existence of a scintilla of evidence in support of the opposing party’s position will not be sufficient to forestall summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In ruling on a motion for summary judgment, “the evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor.” Id. at 255, 106 S.Ct. 2505.
II. BACKGROUND
The Debtor owns and operates a nitrogen fertilizer plant and oil refinery in Cof-feyville, Kansas. In the early 1940s the Debtor installed a Fluid Catalytic Cracking Unit (“FCC Unit”) for the purpose of upgrading gas and oil feedstock to higher value products. The useful life of this unit ended in the late 1970s, and in 1980 the Debtor replaced the old FCC Unit with a new one. In 2001, the FCC Unit was in need of repairs and upgrades4 and the Debtor contacted Reliant Energy Solutions, LLC (“Reliant”) to obtain financing for the project. The agreement with Reliant was a financing lease whereby Reliant would become the owner of the newly installed parts, and if the Debtor defaulted under the agreement, then Reliant could seize those parts. For various reasons, the financing lease agreement with Reliant was terminated and the Debtor contracted directly with Alliance to supply the parts and perform the necessary work to upgrade the FCC unit. After the Debtor failed to pay its invoices, Alliance filed personal property hens against the FCC Unit with the register of deeds in Montgomery County, Kansas.5
*387The largest parts of the FCC Unit— occupying approximately 56,000 square feet of the refinery — are the regenerator and reactor vessels, which are attached to a 135-foot tall steel frame. The regenerator head is welded to the regenerator vessel, and regenerator cyclones hang from the regenerator head inside the vessel. The reactor is perched above the regener-ator, and the two parts are connected by piping. The metal structure fencing in the regenerator and reactor vessels is connected to a concrete foundation by bolts. The entire structure was designed to withstand not only the dead load, but also a strong wind load and vibrations. When Alliance removed the old regenerator head in 2001, it was able to do so because the regenerator head was designed with lifting lugs for attaching crane cables. The mere delivery, set-up and use of the crane to replace the regenerator head in 2001 cost the Debtor approximately $520,000.00. While it would be possible to remove the FCC Unit, such removal would require cutting the FCC Unit into pieces for later reassembly. Without the FCC Unit, unsaleable portions of crude could not be upgraded into finished transportation fuels and the CoffeyviUe refinery would merely become a topping operation.
Used FCC Units are sold by dealers to other refineries in the United States and around the world. The FCC Unit at the CoffeyviUe refinery has a remaining useful life of approximately fifteen to twenty years. After AUiance performed the repairs and upgrades in 2001, the Debtor stated that its intention was to use the unit for the remainder of its useful life. In November 2001, the Debtor’s accountant executed a personal property/service sales tax exemption certificate on the FCC Unit, informing the Kansas Department of Revenue that it was exempt from the state sales tax because it met the statutory requirement of being machinery or equipment forming an essential part of an integrated production operation of a manufacturing processing plant. Likewise, in the schedules filed in this Chapter 11 bankruptcy proceeding, the Debtor lists as personal property some equipment that is identical to that installed by Alliance. Also in 2000, 2001, and 2002, the Montgomery County Appraiser’s Office classified the Debtor’s refinery plant and equipment as tangible personal property. At the same time, however, the Debtor classified ninety percent of the CoffeyviUe refinery as real property and only ten percent as personal property in its Montgomery County Commercial Property Tax Return.
III. DISCUSSION
As previously stated, the issue before the Court is whether the property against which AUiance has asserted artisan’s hens is personal property or real property. The determination of whether equipment is personal property or real property “can only be made from a consideration of aU the individual facts and circumstances attending the particular case.” Kansas City Millwright Co., Inc. v. Kalb, 221 Kan. 658, 562 P.2d 65, 70 (1977) (citing 35 Am.Jur.2d, Fixtures, § 1, p. 700). For tax purposes, the Kansas legislature defines “real property” as including not only the land itself, but also aU buddings, fixtures, and improvements. Kan. Stat. § 79-102. Concordant with the tax definition of real property, personal property is defined “as every tangible thing which is the subject of ownership, not forming part or parcel of real property-” § 79-102. Kansas courts have long recognized the difficulty in separating real from personal property, particularly in regard to fixtures. Atchison, Topeka & Santa Fe Railroad Co. v. Morgan, 42 Kan. 23, 21 P. 809, 811 (1889) (stating that “[i]t is frequently a *388difficult and vexatious question to ascertain the dividing line between real and personal property, and to decide upon which side of the fine certain property belongs.”)- To help determine whether personal property has become a fixture and thus a part of the real estate, the Kansas Supreme Court has developed a three-part test:
1. Is the property annexed to the realty?
2. Is the property adapted to the use of that part of the realty with which it is attached?
3. What is the intention of the party making the annexation?
Board of Education, Unified School District No. 4.64. v. Porter, 234 Kan. 690, 676 P.2d 84, 89 (1984); Winslow v. Bromich, 64 Kan. 300, 38 P. 275, 277 (1894); Stalcup v. Detrich, 27 Kan.App.2d 880, 10 P.3d 3, 8 (2000). All three of these requirements must be met before it can be said that personal property has become a fixture. Morgan, 21 P. at 812 (“It has been held that, before personal property can become a fixture by actual physical annexation, the intention of the parties and the uses for which the personal property is to be put must all combine to change its nature from that of the chattel to that of the fixture.”) (emphasis added).
1. Annexation to the Realty
“Annexation” is the union of property with a freehold. Webster’s Third New International Dictionary 87 (1981). The weight of the property and the structure needed to support it are not necessarily determinative of whether the property is real or personal. Porter, 676 P.2d at 89 (finding that a liquid propane tank weighing twelve to fourteen tons and supported by four-foot concrete piers was personal property). Property required to be assembled on site, built into the ground, and moveable only at considerable expense may be deemed annexed to the realty. In re Equalization Appeals of Total Petroleum, Inc. for Tax Year 1997 from Cowley County, Kansas [Total Petroleum], 28 Kan.App.2d 295,16 P.3d 981, 985-86 (2000) (holding that refinery property encased in sheet metal three inches thick, weighing as much as 175,000 pounds, interconnected with other property, and supported by towers built twenty feet into the ground with concrete foundations built to withstand 100 mph winds was annexed to the realty). Annexation may also depend on whether the property is readily replaced. Gafford Lumber & Grain Co. v. Eaves, 114 Kan.576, 220 P.512, 514 (1923) (citing Ford v. Cobb, 20 N.Y. 344 (1859), for the proposition that salt kettles embedded in brick arches were personal property when they could be removed by displacing a portion of brick at an inconsiderable expense and when the manufacturer required that the kettles be removed and reset annually). Items not actually or constructively annexed to the land and not intended to enhance the value of the property are not fixtures. Winslow, 38 P. at 278 (declaring that moveable sugar wagons used in a mill were personal property not enhancing the value of the realty).
Alliance argues that Kansas law requires an intent to make a piece of equipment a “permanent annexation” to the freehold before the equipment can become real property. Dodge City Water & Light Co. v. Alfalfa Irrigation & Land Co., 64 Kan. 247, 67 P. 462, 464 (1902). The Debtor’s Fed.R.Civ.P. 30(b)(6) representative testified that he thought “permanent” meant “forever,” and the FCC Unit was not “permanent” because it had a finite useful life. In the context of a real property discussion, however, “permanent” does not mean “forever;” rather, “permanent” means “fixed or intended to be *389fixed.” Webster’s Third New International Dictionary 1683 (1981). Consonant with Webster’s definition, Black’s Law Dictionary defines real property, in part, as “[l]and; that which is affixed to land; that which is incidental or appurtenant to land; that which is immovable by law.” Black’s Law Dictionary 1218 (6th ed., West 1990). Nothing in use will wear forever. The Rappahannock, 184 F. 291, 294 (2nd Cir.1911). Buildings, and the fixtures within them, do not last “forever,” yet- Kansas courts recognize the general rule that a building is normally considered part of the real estate. Stalcup v. Detrich, 27 Kan.App.2d 880, 10 P.3d 3, 8 (2000); American States Insurance Co. v. Powers, 262 F.Supp.2d 1245 (D.Kan.2003). “Permanent annexation” is a matter of degree subject to judicial discretion based on the facts and circumstances of a particular case. Kansas City Millwright Co., Inc. v. Kalb, 221 Kan. 658, 562 P.2d 65, 70 (1977).
In this case, the FCC Unit does not function in isolation.6 It is interconnected with other parts of the Coffey-ville refinery. The original FCC Unit at the Coffeyville Refinery was installed in the early 1940s and was not replaced until 1980. The principal parts of the FCC Unit — occupying approximately 56,000 square feet of the refinery — are suspended from steel framing reaching approximately 138 feet above ground. The steel framing is connected to concrete foundations by bolts and was built to withstand the dead load, a strong wind load, and vibrations. The mere delivery, set-up, and use of a crane to replace the regenerator head alone in 2001 cost the Debtor $520,000.00. When Alliance installed the regenerator head in 2001, it arrived in six pieces which were welded together on-site. To disassemble the FCC Unit, Alliance would be required to open the metal structure which encases the FCC Unit, disassemble the principal parts, move the heaviest parts by crane onto trucks for transport, and carefully match-mark the unit for later reassembly. Based on these facts, the Court finds that the FCC Unit is annexed to the realty because it is of considerable size and weight; it is encased in steel framing which is securely fastened to the land; it is moveable only at considerable expense and effort; moving the FCC Unit would require disassembly; and although the FCC Unit could be replaced, such an event only occurs every thirty-five to forty years.
2. Adapted to the Use of that Part of the Realty to which it is Attached
Evidence that land was used for a particular purpose — and that the property in question was used to further that purpose — is sufficient to show that the attached property is adapted to the use of the realty. Total Petroleum, 16 P.3d at *390985 (finding the adaptation element was met when a part of the property was still in use, the land was devoted to the placement of an oil refinery, some of the property was specifically constructed for placement on the land, to remove the property would require cutting it in pieces, and removal would result in environmental contamination). Cf. Stalcup, 10 P.3d at 8 (holding that a metal building did not appear to be particularly adapted to the use of the farm on which it sat because the particular type of building was found on farms all across the state). See also Porter, 676 P.2d at 89 (distinguishing Jackson v. State of New York, 213 N.Y. 34, 106 N.E. 758 (1914), on the basis that the machinery in question in Jackson was specially adapted to the particular manufacturing process; thus, it was adapted to the use of the realty).
Here, the Debtor used the land for the purpose of operating an oil refinery and for manufacturing nitrogen fertilizer. The FCC Unit directly furthered the Debtor’s refinery operation by upgrading “gas oil” to higher value products. Removal of the FCC Unit would reduce the refinery to a topping operation resulting in a failure to upgrade otherwise unsaleable portions of crude oil to finished transportation fuels. Also, to support the FCC Unit, the Debtor was required to build a massive structure that extended at least 135 feet above ground. Based on these facts, the Court finds that the FCC Unit is adapted to that part of the realty to which it is attached because it directly furthered the purpose for which the Debt- or used the land; and the Debtor provided a specifically built structure to meet the needs of the geographical location and to house the FCC Unit.7 Conversely, the FCC Unit would have no independent useful purpose if it were not part of a refinery.
3. The Debtor’s Intention in Annexing the FCC Unit
Even though a structure is annexed to the realty, the intention of the annexor may take precedence in determining that the structure is personal property. Stalcup, 10 P.3d at 8 (finding the parties intended a building to be personal property when there was an oral agreement that the building was to remain personal property, the building and land were taxed separately, and when separate funds were used in the building’s construction, to pay taxes, and to pay insurance). For example, trees — which are both annexed and adapted to the realty — are real property when they are grown in an orchard, but they are personal property if grown in a nursery. Morgan, 21 P. at 812 (Kan.1889) (holding that a pump and boiler installed by a railroad company were personal property because they were not intended to benefit the land and were merely used to operate the railroad). A party’s intention is determined at the time the property is annexed to the land. Total Petroleum, 16 P.3d at 985.
In this case, both parties presented evidence of the Debtor’s treatment of *391the FCC Unit in 2001. Alliance advanced several arguments in support of its position. It asserts that the FCC Unit has a resale value on a secondary market and that it has a finite useful life; thus, it was not intended to be part of the realty because it needed periodic replacement. Additionally, the Debtor treated the FCC Unit as personal property when it negotiated a financing lease with Reliant to pay for Alliance’s repairs and upgrades. Under that agreement, Reliant, as the lessor, would have had the ability to seize the parts that were ultimately installed by Alliance. Also, in November 2001, the Debt- or classified the FCC Unit as exempt from personal property/service sales taxes. Furthermore, in 2000, 2001, and 2002, the Montgomery County Appraiser’s Office classified the Debtor’s Coffeyville refinery as personal property. Finally, in the Debtor’s personal property schedules, it lists as personal property some equipment that is identical to that installed by Alliance. This objective evidence, Alliance argues, demonstrates that the Debtor never intended the FCC Unit to become part of its real property.
The Debtor, on the other hand, argues that an FCC Unit formed part of its integrated facility from the early 1940s, and at the time the current FCC Unit was installed in 1980, the Debtor intended to use the unit for the rest of its useful life. While the FCC Unit would not last “forever,” it was affixed to the realty in a massive support structure and it was not readily moveable. Also, the Debtor classified ninety percent of its facility as real property and only ten percent as personal property in its Montgomery County Commercial Property Tax Return. Regarding the proposed financing lease with Reliant, the Debtor asserted that the lease was terminated,8 that it ended up contracting directly with Alliance, and that the proper time frame for determining intent would be the early 1940s when the original FCC Unit was installed, or in 1980 when the unit was replaced. As for the Montgomery County Appraiser’s Office classification of the refinery as personal property, the Debtor asserted that the tax rate was the same for both real and personal property so there would have been no point in contesting the classification. Finally, the Debtor asserts that it is inequitable to look at its bankruptcy schedules to make a determination that the FCC Unit is personal property because those schedules were prepared in a short amount of time by attorneys who were not previously affiliated with the Debtor.
As this recitation of the conflicting evidence amply demonstrates, a genuine issue of material fact exists concerning the intentions of the Debtor in annexing the FCC Unit to the Coffeyville refinery. Because the Court may not consider the credibility or the weight of the evidence in deciding a motion for summary judgment, this matter will be set for an evidentiary hearing for a determination of the Debt- or’s intentions with respect to the annexation of the FCC Unit.
IV. ORDER
Therefore, it is
ORDERED that Defendant, International Alliance Group’s Motion for Partial Summary Judgment is DENIED. It is
FURTHER ORDERED that Plaintiff, Farmland Industries’s Cross-Motion for *392Partial Summary Judgment is GRANTED IN PART as follows:
A. The FCC Unit is annexed to the realty.
B. The FCC Unit is adapted to the use of the realty with which it is annexed.
In all other respects, Plaintiff’s Cross-Motion for Summary Judgment is DENIED. It is
FURTHER ORDERED that this matter will be set for an evidentiary hearing for a determination of the Debtor’s intentions with respect to the annexation of the FCC Unit.
. This Memorandum Opinion and Order constitutes the Court’s conclusions of law pursuant to Fed. R. Bankr.P. 7056. This is a core proceeding arising under 28 U.S.C. § 157(b)(2)(K). This Court has jurisdiction in this matter pursuant to 28 U.S.C. §§ 157(a) and 1334.
.The Debtors in the jointly administered Chapter 11 proceeding are Farmland Industries, Inc., Farmland Foods, Inc., Farmland Pipe Line Company, Farmland Transportation, and SFA, Inc. However, Farmland Industries, Inc., is the sole Plaintiff in this Adversary Proceeding.
.Cust-O-Fab Field Service Co. and its affiliated companies ("Cust-O-Fab”), which are among the Defendants, also filed an opposition to Alliance's motion. (Document # 264)
. Upgrading the FCC Unit was part of a larger "turnaround” project at the Coffeyville facility.
. Alliance asserts a priority right to the FCC Unit under Kansas's artisan’s lien statute, which provides:
Whenever any person ... shall perform work, make repairs or improvements or replace, add or install equipment on any ... personal property ... equipment of all kinds ... a first and prior lien on such personal property is hereby created in favor of such person performing such work ....
Kan. Stat. § 58-201.
The Debtor has stated that the amount of Alliance’s claim is $4,790,410.20, which reflects a $500,000.00 offset in compensation for contract damages. Cust-O-Fab Field Service, another construction company that performed work at the Coffeyville refinery, has asserted that the total lien claims against the refinery exceed $26,000,000.
Cust-O-Fab, in its opposition to Alliance’s motion, asserts that, if the Court determines that the FCC Unit is personal property, Alliance will have achieved a first lien position against those who asserted mechanic’s and materialmen's liens against the Coffeyville refinery at large. On the other hand, if Alliance is found to not have the artisan’s liens it claims, Alliance will become an unsecured creditor.
. Alliance argues that the Court should not consider any other part of the Coffeyville refinery because only the FCC Unit is subject to its lien. Thus, Alliance asserts that the metal structure encasing the FCC Unit, the concrete foundation, and any other appurtenant property is irrelevant to determining whether the FCC Unit is real or personal property. The Court rejects this argument. Contrary to Alliance's contentions, the FCC Unit does not operate in isolation. It requires a large support structure and access connections for products to ingress and egress. An alleged fixture’s connection with the land is essential in determining whether it is real or personal property. See Minnesota Co. v. St. Paul Co., 69 U.S. (2 Wall.) 609, 17 L.Ed. 886 (1864) (Nelson, Clifford, and Field dissenting) (stating that an object’s "connection with the land is looked at principally for the purpose of ascertaining whether [the] intent was that the thing in question should retain its original chattel character, or whether it was designed to make it a permanent accession to the lands.”). The need to consider the property as a whole is implicitly recognized in Kansas’s three-part test.
. Alliance asserts the FCC Unit is not adapted to the realty to which it is attached because the FCC unit is moveable and a secondary market exists for such units. Alliance likened the FCC Unit to a hot water heater. See First Federal Savings & Loan Association of Okaloosa County v. Stovall, 289 So.2d 32 (Fla. App.1974) (finding a hot water heater was personal property); contra, Ver Plank v. Bouwens, 6 Misc.2d 965, 164 N.Y.S.2d 596, 598 (N.Y.Civ.Ct.1957) (finding a hot water heater part of the real property). It is possible to move all things. The mere fact that a secondary market exists for removed property is not determinative of whether the property as annexed to the land is adapted to the use of the realty.
. The Debtor asserted that the proposed financing lease with Reliant was terminated because Reliant's right to "repossess” the FCC unit was a right without a remedy considering that the financing lease only covered the parts installed by Alliance, and in isolation those parts were useless. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493615/ | OPINION
MCFEELEY, Chief Judge.
Stephen Paul Wallace, Appellant/Debtor (“Wallace”) appeals an order of the bankruptcy court of the Northern District of Oklahoma that granted a default judgment to Appellee Patrick J. Malloy, III (“Mal-loy”). Wallace argues that the bankruptcy court erred when it found that he had failed to file an Answer. Wallace further contends that the court abused its discretion when it granted Malloy’s “Motion for a Nunc Pro Tunc Order” because the Motion and the Order were filed on the same date without notice to Wallace. We find no abuse of discretion and affirm.
I. Background
Wallace is the Trustee of the Stephen Paul Wallace Irrevocable Trust (“Trust”). The sole asset of the Trust is a limited partnership interest of 5.77% in a family partnership known as the Lorrice Wallace Family Partnership (“Partnership”) as well as certain annual distributions from that Partnership. Wallace is the beneficiary of the Trust.
Wallace filed for relief under Chapter 7 of the Bankruptcy Code. Malloy was appointed the Chapter 7 Trustee for Wallace’s estate. Malloy filed an adversary complaint (“Complaint”) on September 9, 2002, against Wallace as the Trustee of the Trust, (Wallace will hereinafter be “Appellant” when referring to him in this capacity) alleging that he had not honored the terms of the Trust and that as a result the *438Trust was illusory and all of its assets were property of the estate.1
Wallace filed an Answer to the Complaint. The Answer denied the allegations of the Complaint and made claims against third party defendants, Ronald Saffa (“Saf-fa”), Reece Morrel (“Morrel”), and David Fist (“Fist”), alleging fraud, breach of fiduciary duty, infliction of emotional stress and psychotropic drugs (“Third Party Complaint”). Malloy moved to strike the Answer and dismiss the Third Party Complaint (“Motion”) on the grounds that Wallace had answered in his individual capacity and not as Trustee of the Trust and therefore, the Answer had been filed by a non-party. Additionally, Malloy argued that the Third Party Complaint was improper because Wallace was not a party and had no standing to assert any claims with respect to assets of the estate.2
The bankruptcy court heard the Motion on December 4, 2002. At the hearing Wallace appeared pro se. There was no testimony or evidence presented. After questioning Wallace, the bankruptcy court determined that Wallace had answered the Complaint in his individual capacity and struck the Answer. The bankruptcy court further determined that there was no factual basis to sustain the allegations of the Third Party Complaint and struck it. An Order memorializing the oral ruling was entered on December 10, 2002. In the Order the bankruptcy court gave Appellant twenty additional days to file an answer. That Order was not appealed.
On January 13, 2003, Appellant filed an Emergency Request for Leave of Court for File Objection by Debtor of Not Receiving Notice of December 10, 2002 Order and Objection to Striking Original Pleading Prior to Order for Filing Restrictions (“Emergency Request”). In an Order entered January 14, 2003, the bankruptcy court struck the Emergency Request for the following reasons: failure to include a prayer for relief, failure to comply with court-ordered fifing restrictions, and ambiguity.3
Malloy advised Appellant by a letter dated January 7, 2003, that he intended to seek a default judgment within five days of the mailing of the letter. On January 24, 2003, Malloy filed a Motion for Default Judgment on the basis that Appellant failed to file an answer. The motion was heard on February 11, 2003.4 Appellant appeared pro se. Because no answer to the Complaint had been filed, the bankruptcy court treated the factual allegations of the Complaint as true and after reciting the procedural history of the Complaint, orally granted a judgment in favor of Mal-loy. A judgment memorializing the bank*439ruptcy court’s ruling was entered that same day.
On February 20, 2003, Malloy filed a Motion for Order Nunc Pro Tunc Amending Judgment {“Nunc Pro Tunc Motion”) to clarify that he was only to receive distributions from the Partnership attributable to the interest of the Trust. That Motion was granted on February 20, 2003, and a Nunc Pro Tunc Judgment was entered that same day.
II. Appellate Jurisdiction
The Bankruptcy Appellate Panel has jurisdiction over this appeal. An order granting a motion for a default judgment is a final order. MacPherson v. Johnson (In re MacPherson), 254 B.R. 302, 303 (1st Cir. BAP 2000). Appellant timely filed a notice of appeal. The parties have consented to this Court’s jurisdiction because they did not elect to have the appeal heard by the United States District Court for the Northern District of Oklahoma. 28 U.S.C. § 158(c)(1); Fed. R. Bankr.P. 8001; 10th Cir. BAP L.R. 8001-1.
III. Standard of Review
“For purposes of standard of review, decisions by judges are traditionally divided into three categories, denominated questions of law (reviewable de novo), questions of fact (reviewable for clear error), and matters of discretion (reviewable for ‘abuse of discretion’).” Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988); see Fed. R. Bankr.P. 8013.
The granting of a default judgment is reviewed for abuse of discretion. Dennis Garberg & Assocs., Inc. v. Pack-Tech Intern. Corp., 115 F.3d 767, 771 (10th Cir.1997). The abuse of discretion standard is also applied to the granting of a nunc pro tunc order. In re Land, 943 F.2d 1265, 1266 (10th Cir.1991). “Under the abuse of discretion standard: ‘a trial court’s decision will not be disturbed unless the appellate court has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances.’ ” Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir.1994) (quoting McEwen v. City of Norman, 926 F.2d 1539, 1553-54 (10th Cir.1991) (further quotation omitted)).
IY. Discussion
Appellant in his capacity as Trustee argues that the bankruptcy court abused its discretion in granting the Default Judgment because he answered within the time limits delineated in Federal Rule of Bankruptcy Procedure 7012 (“Rule 7012”). Alternatively, he appears to argue that he answered the Complaint when he “testified” at the hearings because his testimony put the factual allegations of the Complaint at issue.
Federal Rule of Bankruptcy Procedure 7055 makes Federal Rule of Civil Procedure 55 (“Rule 55”) applicable in adversary proceedings. Rule 55(c) provides that a judgment by default may be set aside in accordance with the provisions of Federal Rule of Civil Procedure 60(b) (“Rule 60(b)”).5 Relief under Rule 60(b) is *440extraordinary and may only be granted in exceptional circumstances. Bud Brooks Trucking, Inc. v. Bill Hodges Trucking Co., Inc., 909 F.2d 1437, 1440 (10th Cir. 1990). Under Rule 60(b), a court may set aside a default judgment “on motion and under such terms as are just” for any of the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud, (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party;
(4) the judgment is void;
(5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or
(6) or any other reason justifying relief from the operation of the judgment.
Fed.R.Civ.P. 60(b). Before the default will be set aside under one of the 60(b) standards, a movant must also demonstrate that its culpable conduct did not cause the default, the movant has a meritorious defense, and the plaintiff will not be prejudiced by setting aside the judgment (hereinafter referred to jointly as “Timbers criteria”). United States v. Timbers Preserve, 999 F.2d 452, 454-55 (10th Cir.1993). The defaulting party has the burden of proving that the default judgment should be set aside. Nikwei v. Ross School of Aviation, Inc., 822 F.2d 939, 941 (10th Cir.1987). Although not clearly articulated, Appellant appears to argue that he is entitled to Rule 60(b)(1) relief on the grounds of mistake.6
Rule 60(b)(1) provides for relief from default judgments under the “mistake” provision only under one of the following prongs: (1) a party has made an excusable litigation mistake or an attorney in the litigation has acted without authority from a party; or (2) the court has made a substantive mistake of law or fact in the final judgment or order. Yapp v. Excel Corp., 186 F.3d 1222, 1231 (10th Cir.1999). Here, Appellant argues mistake under both grounds. Appellant does not adequately support either argument, and Rule 60(b)(1) relief is not available in this case.
First, there is no evidence that an excusable litigation mistake was made. Ignorance of the rules or of the law is not enough to excuse a party’s compliance with court rules or orders. See 11 Charles Alan Wright, Arthur R. Miller 7 Mary Kay Kane, Federal Practice and Procedure § 2858, at 170 (1973). Additionally, the record indicates that Appellant did not misunderstand what the bankruptcy court ordered, but rather he wilfully failed to comply. In the first hearing, the bankruptcy court specifically instructed Appellant to file an Answer. In response, Appellant attempted to reinstate the answer through his Emergency Request. That the bankruptcy court denied the Emergency Request cannot later excuse Appellant’s failure to comply with the bankruptcy court’s initial order.
Alternatively, Appellant argues that he mistakenly thought he answered the Complaint because he put the factual allegations of the Complaint in dispute with the following oral statements at the default hearing:
*441I never had access to them [the Trusts]. I never created them. I never had any-input with them, [sic] ... I never received any statements from these trusts. I don’t know what assets are in these trusts.
Applt. Brief at 6. The record does not support this argument.
The alleged testimony was not testimony but part of Appellant’s opening statement at the default hearing.7 No evidence or testimony was presented at either hearing. Opening statements are not evidence. See Exeter Bancorporation, Inc. v. Kemper Sec. Group, Inc., 58 F.3d 1306, 1312 n. 5 (8th Cir.1995) (quoting United States v. Fetlow, 21 F.3d 243, 248 (8th Cir.1994), for the proposition that “ ‘[statements of counsel are not evidence’ and do not create issues of fact.”); Lang v. Lang (In re Lang), 293 B.R. 501, 513 (10th Cir. BAP 2003) (same); In re Nielsen, 211 B.R. 19, 22 n. 3 (8th Cir. BAP 1997) (statements of counsel are not evidence unless “expressly stipulated as admissible evidence”).
Second, Appellant has not shown that the bankruptcy court committed an error of law or fact under the second prong of the test. Failing to file a timely answer is grounds for entry of a default judgment under Rule 55(a). Appellant argues that he did not fail to appear because an Answer was filed, and the bankruptcy court erred in striking the Answer and his Emergency Request. A review of the entire record shows that the bankruptcy court did not abuse its discretion in striking the Answer and the Emergency Request. Furthermore, we note that the Order striking the Answer gave the Appellant twenty additional days to file an answer. The Appellant did not comply with that Order.
We decline to consider any of the other standards under Rule 60(b) because Appellant also cannot meet the Timbers criteria. Under Timbers, a party cannot obtain relief from a default judgment if its culpable conduct resulted in the judgment. “[A] party’s conduct will be considered culpable only if the party defaulted willfully or has no excuse for the default.” Timbers, 999 F.2d at 454 (citing 6 James W. Moore et ah, Moore’s Federal Practice ¶ 55.10[1] (2d ed.1992)). As previously discussed, Appellant cannot show that the default did not resulted from his culpable conduct.
Appellant also has not established that he has a meritorious defense. A meritorious defense is one that is “presented and presented in a timely enough fashion to permit the opposing party to question the legal sufficiency of the defense.” Olson v. Stone (In re Stone), 588 F.2d 1316, 1319 (10th Cir.1978). Factual allegations supporting a meritorious defense must be submitted to the court in a written motion, a proposed answer, or attached affidavits. Id. at 1319-20; see also Fidelity State Bank v. Oles, 130 B.R. 578, 586 (D.Kan.1991) (finding that “[t]o meet this step, the movant need only allege a version of the facts which, if true, would constitute a defense to the action.”). Oral testimony for the purpose of clarifying the written submissions may also be considered, but the admission of oral testimony is within the bankruptcy court’s discretion. Olson, 588 F.2d at 1320-21.
Appellant has proffered no facts to sustain his defense and therefore cannot establish that he has a meritorious defense.
Next, Appellant argues that his due process rights were violated because he re*442ceived no notice of the Nunc Pro Tunc Motion prior to the entry of the Nunc Pro Tunc Judgment. This argument fails.
A nunc pro tunc order is an equitable remedy that is used to rectify errors, omissions, or mistakes in previously entered orders. Ethyl Corp. v. Browner, 67 F.3d 941, 945 (D.C.Cir.1995). The term nunc pro tunc literally means “now for then.” Fierro v. Reno, 217 F.8d 1, 5 (1st Cir.2000) (quoting Black’s Law Dictionary 1097 (7th ed.1999)). “All courts have the inherent power to enter orders nunc pro tunc to show that their previous unrecorded acts ought to have been shown at that time.” Cairns v. Richardson, 457 F.2d 1145, 1149 (10th Cir.1972). A nunc pro tunc order cannot be entered to correct an order without an error, omission, or mistake. Central Laborers’ Pension, Welfare & Annuity Funds v. Griffee, 198 F.3d 642, 644 (7th Cir.1999) (stating “the only proper office of a nunc pro tunc order is to correct a mistake in the records; it cannot be used to rewrite history.”).
The Nunc Pro Tunc Judgment did not change the oral ruling made by the bankruptcy court. Although the bankruptcy court had orally ruled that only distributions from the Partnership that were attributable to the interests of the Trust were to be turned over to Malloy, the initial written judgment stated that “any and all distributions” from the Partnership were to be delivered to Malloy. The Nunc Pro Tunc Order rectified that mistake by correctly recording the bankruptcy court’s oral ruling. Appellant’s due process rights were not violated.
V. Conclusion
For the reasons stated above, the Default Order is AFFIRMED.
. We observe that Malloy did not name the Trust in the Complaint and the Trust is not a party to this appeal.
. Saffa and Morrel filed a motion to dismiss as did Fist. Neither of these Motions are part of our record. Both were heard at the hearing on the Plaintiff's Motion. Although Saffa, Morrel, and Fist are named in this appeal, Appellant has not asked for any relief with respect to the dismissal of the Third Party Complaint.
. In his brief, Malloy claims that Wallace filed the Emergency Request in his individual capacity and not as Trustee of the Trust. We note that the bankruptcy court made no specific findings on this issue and the Order striking the Emergency Request was not appealed. Because it is a fact that has no relevance with respect to our disposition of this matter, for the purposes of this appeal we will assume without deciding that Appellant and not Wallace in his individual capacity filed the Emergency Request.
.At the hearing, Appellant asked for a stay of the bankruptcy proceeding pending criminal proceedings. The bankruptcy court denied the request.
. Rule 60(b) is incorporated into the Federal Rules of Bankruptcy Procedure through Rule 7002, which provides "[wjhenever a Federal Rule of Civil Procedure applicable to adversary proceedings makes references to another Federal Rule of Civil Procedure, the reference shall be read as a reference to the Federal Rule of Civil Procedure as modified in this Part VII.” Fed. R. Bankr.P. 7002. Federal Rule of Bankruptcy Procedure 9024 incorporates Rule 60(b) with some modifications not applicable here. See Fed. R. Bankr.P. 9024.
. In his brief, Appellant repeatedly refers to Federal Rule of Civil Procedure 12(b)(6), apparently believing that the default motion was granted on that basis.
. We also observe that it is unclear whether these statements refer to the Trust or the Partnership or both because repeatedly in his opening statement Appellant refers to the "trusts,” plural. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493616/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JERRY A. FUNK, Bankruptcy Judge.
This case came before the Court upon the Chapter 7 Trustee’s Objection to Claim 10 filed by Steve Watrel, P.A. (‘Watrel”) and Watrel’s response thereto. The Court conducted a hearing on January 22, 2002. The Court elected to take the matter under advisement and instructed the parties to file briefs in lieu of oral argument. Upon the evidence and the briefs of the parties, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
On January 8,1997 Debtor was involved in an automobile accident. Debtor retained Watrel to represent her in an action for personal injuries sustained as a result of the accident. In connection therewith, Debtor and Watrel entered into a written contingency fee agreement (the “fee agreement”) on January 16, 1997. The fee agreement provided that Watrel would receive S8/á % of any recovery obtained prior to litigation and 40% of any recovery obtained once litigation was initiated. (Watrel’s Ex. 3.) The fee agreement also provided that Debtor would reimburse Watrel for any costs advanced on her behalf. (Watrel’s Ex. 3.) In September, 1998 Debtor was involved in another automobile accident. Debtor also retained Watrel to represent her in an action for personal injuries sustained as a result of that accident.1
On January 27, 1999 Debtor filed a Chapter 7 bankruptcy petition. Gregory K. Crews (the “Trustee”) was appointed as trustee. (Doc. 1.) Debtor did not inform Watrel of the bankruptcy filing. On February 25, 1999 the Trustee sent a letter to Watrel advising him that the personal injury actions were property of the bankruptcy estate and asking Watrel whether he desired to continue representation on the estate’s behalf. (Trustee’s Ex. 2.)
On March 11, 1999, prior to any response by Watrel to the Trustee, Debtor converted her case to Chapter 13. (Doc. 11.) Mamie L. Davis was appointed as the new trustee. On May 7, 1999 Ms. Davis sent a letter to Watrel advising him that although the proceeds of any recovery were assets of the bankruptcy estate, he could deduct his attorney’s fee from any recovery. (Watrel’s Ex. 6.) By letter dated April 24, 2000, Watrel informed Ms. Davis that “my law firm cannot afford to pursue these cases financially if you intend to claim the full settlement amounts as property of the bankruptcy estate. In other words, we need an agreement that our law firm will be paid its attorney’s fees and costs at the time of settlement before the *467settlement proceeds are paid into Ms. Wilhelm’s estate”. (Watrel’s Ex. 8.)
Because of her failure to make confirmed plan payments, Debtor’s Chapter 18 case was reconverted to Chapter 7 on September 13, 2001. Crews was again appointed as the Chapter 7 trustee. On October 26, 2001 he sent a letter to Watrel advising him that the case had been reconverted and again expressing an interest in retaining Watrel to pursue the personal injury claims.2 By letter dated November 2, 2001 Watrel indicated his willingness to continue representation provided that “we are allowed to take our fees and costs out of the recovery prior to the proceeds going into the estate” (emphasis in original). (Trustee’s Ex. 6.) By letter dated November 8, 2001 the Trustee indicated that such an arrangement was not permitted. (Trustee’s Ex. 5.) By letter dated December 19, 2001 Watrel stated “... I must respectfully decline further representation in this matter... We can either file a substitution of counsel with the court or a Motion to Withdraw as counsel and stay the case until you select another attorney. By declining further representation, I am not waiving my law firm’s attorney’s fees and costs incurred to date.” (Watrel’s Ex. 12.)
On January 9, 2002 the Trustee retained Gregory A. Lawrence (“Lawrence”) to represent the Chapter 7 estate in pursuit of Debtor’s pre-petition personal injury claims.3 At the time Lawrence was retained, mediation in the state court litigation had already been scheduled. Lawrence represented the Trustee at mediation, during which the parties reached a $42,500.00 settlement. Lawrence also drafted and negotiated the terms of the releases. On August 29, 2002 the Trustee filed a motion for approval of the settlement. (Doc. 57.) On October 17, 2002 the Court entered Order Approving Compromise. (Doc. 64.)
On January 30, 2002 Watrel filed a secured proof of claim in the amount of $17,383.92, of which $14,612.50 represents attorney’s fees and $2,771.42 represents costs incurred in the personal injury actions.
CONCLUSIONS OF LAW
The Trustee objects to Claim 10 contending that Watrel forfeited all rights to compensation because his decision not to pursue the personal injury claims on behalf of the bankruptcy estate constituted a voluntary withdrawal from representation in a contingent fee ease before the contingency occurred.4
If an attorney representing a client under a contingent fee agreement voluntarily withdraws from representation prior to the occurrence of the contingency, the attorney forfeits all rights to compensation. Faro v. Romani, 641 So.2d 69, 71 (Fla.1994). However, “if the client’s conduct makes the attorney’s continued performance of the contract either legally impossible or would cause the attorney to violate an ethical rule of the Rules Regulating the Florida Bar, that attorney may *468be entitled to a fee when the contingency of an award occurs” (emphasis added). Id.
If an attorney representing a party under a contingent fee contract is discharged without cause before the contingency has occurred, the attorney is entitled to the reasonable value of his services, on the basis of quantum meruit, provided that the contingency successfully occurs. Rosenberg v. Levin, 409 So.2d 1016, 1021 (Fla.1982). The quantum meruit recovery cannot exceed the maximum contingent fee due under the agreement. Id.
Watrel argues that Debtor’s bankruptcy filing made his continued representation of Debtor legally impossible. Watrel points out that Debtor’s personal injury claims became property of the bankruptcy estate and that upon the filing only the Trustee had authority to settle or compromise the claims. Watrel also points out that his continued prosecution of the claim required the Court’s approval of his employment as special counsel for the Trustee. The Court finds that none of the foregoing made Watrel’s representation of Debtor “legally impossible”. A trustee’s request to employ special counsel, one routinely granted by the Court, does not create a “legal impossibility”. The only impediment to Watrel’s continued representation was his refusal to continue representation absent a guarantee from the Trustee that he could obtain his fees and costs out of any recovery prior to the proceeds going to the estate. The Court finds that the legal impossibility exception set forth in Rosenberg does not encompass an impossibility which the attorney himself created.
Alternatively, Watrel argues that there is an inherent conflict of interest in representing the debtor and the bankruptcy estate. Watrel points to the distribution scheme set forth in 11 U.S.C. § 726(a)(6), which provides that a debtor is entitled to any funds remaining in the estate after payment to all creditors. Wa-trel asserts that a Trustee’s primary interest in paying creditors and recovering his trustee compensation may clash with a debtor’s interest in receiving residual funds after the payment of all creditors. Watrel concedes that such a conflict did not arise in this case. An attorney representing a Chapter 7 trustee after having represented a debtor pre-petition must make a careful determination at the outset as to whether a conflict of interest between the trustee and the debtor will subsequently arise. Based upon Watrel’s November 2, 2001 letter to the Trustee indicating his willingness to continue representation, the Court finds that Watrel engaged in a careful and thoughtful analysis of the potential for a conflict of interest and concluded that no such conflict would arise. The Court finds that Watrel’s refusal to continue representation was borne not out of an attempt to avoid an ethical dilemma but rather out of a desire to be paid prior to the proceeds of any recovery going to the estate.
Finally, Watrel argues that Debt- or’s bankruptcy filing was a constructive discharge without cause. The mere filing of a bankruptcy petition does not discharge or terminate a debtor’s pre-petition attorney. As the Trustee points out, a contrary finding would create a hardship for bankruptcy estates, trustees, and ultimately unsecured creditors. If an attorney prosecuting a claim on a contingent basis is deemed to be discharged without cause upon the Ghent’s filing of a bankruptcy petition, the attorney would be entitled to a quantum meruit recovery up to the amount of the contingency. The trustee would be forced to retain and pay a second attorney. Such a double payment, which could theoretically equal 80% of the total *469recovery, would reduce the payment to the unsecured creditors. Additionally, upon the facts before it, the Court cannot find that the Trustee discharged Watrel. Within several weeks of the Trustee’s appointment upon re-conversion of the case, the Trustee attempted to obtain Watrel’s continued representation. However, despite the Trustee’s assurances to Watrel that he would likely be paid within four to six months rather than years, Watrel refused to continue in the case, stating “I must respectfully decline further representation in the matter.” The Court finds that Watrel voluntarily withdrew from representation and therefore forfeited all rights to compensation.
CONCLUSION
The Court finds that Watrel voluntarily withdrew from representation prior to a recovery by Debtor’s bankruptcy estate. Debtor’s bankruptcy filing did not make Watrel’s continued performance of the contract legally impossible. Additionally, Wa-trel’s representation of Debtor’s bankruptcy estate would not have caused Watrel to violate any ethical rule of the Rules Regulating the Florida Bar. Accordingly, Wa-trel forfeited all rights to attorney’s fees. Because Debtor’s obligation to reimburse Watrel for costs is not contingent upon Watrel obtaining a recovery, Watrel is entitled to reimbursement of his costs in the amount of $2,771.42. The Court will enter a separate Order consistent with these Findings of Fact and Conclusions of Law.
. Neither Watrel nor the Trustee submitted a fee agreement evidencing Watrel’s representation of Debtor in an action for personal injuries sustained as a result of the second accident. However, both the Trustee's Objection to Claim 10 and Watrel’s Response indicate that Debtor retained Watrel to represent her in both personal injury actions.
.The Trustee testified it is his practice to hire a debtor's pre-petition attorney to prosecute a claim on behalf of a debtor's bankruptcy estate because a debtor is more likely to cooperate with an attorney he or she previously retained. The Trustee also testified that he seeks to avoid paying two attorneys for the prosecution of one lawsuit.
. The state court entered an order substituting counsel in the pending injury cases.
. Although the Trustee's Objection appears to object to Claim 10 in its entirety, the Trustee concedes in his memorandum of law that Watrel is entitled to a claim for the costs he incurred on Debtor's behalf. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493617/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This Case is before the Court upon the Chapter 7 Administrative Claim filed by American Airlines, Inc. After a hearing on August 6, 2003 the Court makes the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
1. On August 7, 2002, an involuntary petition was filed on behalf of the Debt- or by American Airlines.
2. Before the filing of the involuntary petition American Airlines engaged the services of Presser, Lahnen & Edelman.
3. The CPAs of Presser, Lahnen & Edelman performed accounting services for the benefit of the estate both prior to the filing of the involuntary petition and through October 2000.
4. In May of 2000, the Trustee, Charles Grant, requested that the CPAs of Presser, Lahnen & Edelman perform certain tasks.
5. Although it was the Trustee who requested the services of Presser, Lah-nen & Edelman, American Airlines continued to pay for the firm’s services.
6. Between May 2000 and October 2001, American Airlines paid a total of *476$17,105.00 to Presser, Lahnen & Edel-man.
CONCLUSIONS OF LAW
The language of 11 U.S.C. § 327(a) and Bankruptcy Rule 2014 make it very clear that a professional will not be compensated or reimbursed for expenses if their employment has not received prior approval from the court.
11 U.S.C. § 327(a) states that a trustee: “. with the court’s approval, may employ one or more... professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.”
Bankruptcy Rule 2014(a) provides:
“An order approving employment of attorneys, accountants, appraisers, auctioneers, agents, or other professional persons pursuant to § 327, § 1103 or § 1114 of the Code shall be made only on application of the trustee or committee.”
As a general rule, administrative services will typically not be granted unless the court has authorized the services prior to them being performed. In re Sovereign Oil Company, 216 B.R. 666 (Bankr.M.D.FIa.1997). Ultimately, it is within the court’s discretion whether to approve administrative services on a nunc pro tunc basis. Id., In re First Security Mortgage Company Inc., 117 B.R. 1001 (Bankr.N.D.Okla.1990).
It is this Court’s holding that administrative orders should only be entered on a nunc pro tunc basis in the most extraordinary circumstances. Further, the Court’s strict adherence to the prior approval requirement of 11 U.S.C. § 327(a) and Bankruptcy Rule 2014 can be evidenced by the fact that the Court has never previously authorized an administrative expense on a nunc pro tunc basis. The instant case does not present the Court with an extraordinary circumstance. Therefore, even though the Trustee supports American Airline’s motion the Court sees no reason why it should grant the administrative expenses. If the Court were to hold otherwise, it would effectively be setting a precedent that would dimmish the requirements set forth by 11 U.S.C. § 327(a) and Bankruptcy Rule 2014.
If extraordinary circumstances were present in the instant case, the Court may have exercised its discretionary power to grant the motion. However, there are no extraordinary circumstances present. The instant case merely presents a situation to the Court in which there is money left over in the estate and American Airlines is attempting to make a claim to a portion of it. This clearly does not qualify as an extraordinary circumstance. Therefore, there is no reason for the Court to alter its position requiring strict adherence to the prior approval requirement of 11 U.S.C. § 327(a) and Bankruptcy Rule 2014.
Finally, the Court finds no merit to American Airlines argument that the Court’s prior approval was not necessary because the instant case was filed under an involuntary rather then voluntary basis. The Court holds that it makes no difference whether the bankruptcy petition was filed involuntarily or voluntarily for purposes of 11 U.S.C. § 327(a) and Bankruptcy Rule 2014’s prior approval requirement.
CONCLUSION
Based upon the foregoing, the Court denies the Chapter 7 Administrative Claim filed by American Airlines Inc. The Court will enter a separate order consistent with *477these Findings of Fact and Conclusions of Law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493652/ | MEMORANDUM OF DECISION ON MOTION FOR SUMMARY JUDGMENT
ALBERT S. DABROWSKI, Chief Judge.
I.INTRODUCTION
In this adversary proceeding Cadlerock Joint Venture, II, L.P., Assignee of D.A.N. Joint Venture, A Limited Partnership (hereafter, the “Plaintiff’) seeks to have the entry of the Debtors’ discharges denied. The Plaintiffs seven-count Complaint Objecting to Discharge, Doc. I.D. No. 1, generally alleges, inter alia, an orchestrated pattern of concealment of income and other assets by the Debtors in an attempt to subvert the legitimate efforts of creditors to collect on their debts. On November 4, 2003, the Plaintiff filed its ... Motion for Summary Judgment as to Counts One, Two and Four (hereafter, the “Motion”), Doc. I.D. No. 14, seeking summary judgment on Count One (Bankruptcy Code Section 727(a)(2)(A)), Count Two (Bankruptcy Code Section 727(a)(2)(B)), and Count Four (Bankruptcy Code Section 727(a)(4)(A)).1 For the reasons which follow, the Motion must be denied.
II. JURISDICTION
The United States District Court for the District of Connecticut has jurisdiction over the instant proceeding by virtue of 28 U.S.C. § 1334(b); and this Court derives its authority to hear and determine this matter 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)(J).
III. DISCUSSION
Federal Rule of Civil Procedure 56(c), made applicable to this proceeding by Fed*57eral Rule of Bankruptcy Procedure 7056, directs that summary judgment shall enter when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.”
When ruling on motions for summary judgment “the judge’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, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The moving party has the burden of showing that there are no material facts in dispute and all reasonable inferences are to be drawn, and all ambiguities resolved in favor of the non-moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970).
Local Rule 56(a) of the Local Civil Rules of the United States District Court for the District of Connecticut (heretofore and hereafter, “Local Rule(s)”) supplements Fed.R.Civ.P. 56(c) by requiring statements of material fact from each party to a summary judgment motion.2 Under the Local Rule 56(a)l, the material facts set forth in a movant’s statement “will be deemed to be admitted unless controverted by the statement required to be filed and served by the opposing party .... ” Local Rule 56(a) should be “strictly interpreted, and failure to properly controvert facts in opposing a summary judgment motion is an appropriate consideration in granting the motion.” Ross v. Shell Oil Co., 672 F.Supp. 63, 66 (D.Conn.1987) (construing former Local Rule 9(c)).
The purpose of Local Rule 56(a) is to aid the Court in the efficient disposition of motions for summary judgment, and thereby conserve valuable judicial resources. In this proceeding, through their *58lack of attention to the Local Rules, the Defendants have deprived the Court of the intended benefit of Local Rule 56(a). In most circumstances, the Defendants’ failure to file and serve a Local Rule 56(a)2 Statement3 would be grounds alone for the entry of summary judgment against them. Nevertheless, under the unique circumstances of this proceeding, the Court will not dispose of the Motion on a failure of strict compliance with the Local Rules, but rather, be guided by more fundamental principles of bankruptcy jurisprudence.
The relief of a bankruptcy discharge is not an absolute right, but rather, a privilege accorded only to debtors who conduct their financial affairs with honesty and openness. Despite this limitation on the discharge right, the law carries a “presumption” in favor of the debtor in discharge contests. This debtor-inclination derives from the observation that the denial of a discharge “imposes an extreme penalty for wrongdoing”. In re Chalasani, 92 F.3d 1300, 1310 (2d Cir.1996). Thus, Bankruptcy Code Section 727 “must be construed ... ‘liberally in favor of the bankrupt’ ”. Id. In addition, a party objecting to the granting of a discharge bears the ultimate burden of persuasion at trial. Fed. R. Bankr.P. 4005.
Therefore, given the extraordinary nature of discharge objections, it is also appropriate to apply strict scrutiny to motions for summary judgment filed by plaintiffs in such proceedings. Rare indeed will be the instance where the Court can adjudge with confidence, on a “paper” record alone, that a debtor engaged in discharge-disqualifying conduct with the statutorily-required level of scienter and intention. Pivotal factual issues involved in discharge proceedings often turn on the credibility of witnesses; and an essential tool in the Court’s assessment of credibility is its observation of the demeanor of such witnesses. Such observation is, of course, impossible in the context of a summary judgment matter.
The foregoing tenets apply with full force to the Court’s consideration of the instant Motion. While the Plaintiffs case appears formidable on paper, innocent explanations for the conduct presented are not entirely beyond the realm of reason.4 If bona fide explanations do exist, they cannot be established without the Debtors’ presentation of credible testimonial evidence. And given the law’s presumption in debtors’ favor in discharge proceedings, the Defendants here should be afforded an opportunity to present putatively exonerating testimony in person before this Court.
IV. CONCLUSION
For the foregoing reasons there remain genuine issues for trial in this adversary proceeding. The Plaintiffs Motion shall be DENIED by separate Order. Trial of this adversary proceeding shall occur as scheduled on March 22, 2004, at 10:00 a.m.
. In accordance with applicable local rules the Plaintiff supported the Motion with the following: (i) Local Rule 56(a) 1 Statement of Material Facts Not in Dispute, Doc. I.D. No. 16, and (ii) Plaintiff’s Memorandum of Law ..., Doc. I.D. No. 15. See fn. 2, infra. The Motion, Local Rule 56(a)l Statement, and related Memorandum of Law constitute three volumes of the official court file for this proceeding, being Volumes 2-4, inclusive. In response, the Debtor-Defendants, filed a three-page ... Reply [sic] Against Motion for Summary Judgment ... (hereafter, the "Opposition”), Doc. I.D. No. 19, supported by a one-page Affidavit of the Defendant, Joseph Sali-nardi. The Debtor-Defendants did not file the required Local Rule 56(a)2 Statement. The Plaintiff answered the Opposition with its ... Memorandum of Law in Reply to Defendant’s Opposition to Plaintiffs Motion for Summary Judgment, Doc. I.D. No. 20.
. Local Rule 56(a), entitled "Motions for Summary Judgment”, applicable to this proceeding by D. Conn. LBR 1001-l(b), states in pertinent part as follows:
1. There shall be annexed to a motion for summary judgment a document entitled "Local Rule 56(a)! Statement”, which sets forth in separately numbered paragraphs a concise statement of each material fact as to which the moving party contends there is no genuine issue to be tried. All material facts set forth in said statement will be deemed admitted unless controverted by the statement required to be filed and served by the opposing party in accordance with Local Rule 56(a)2.
2. The papers opposing a motion for summary judgment shall include a document entitled "Local Rule 56(a)2 Statement," which states in separately numbered paragraphs corresponding to the paragraphs contained in the moving party’s Local Rule 56(a)l Statement whether each of the facts asserted by the moving party is admitted or denied. The Local Rule 56(a)2 Statement must also include in a separate section entitled "Disputed Issues of Material Fact” a list of each issue of material fact as to which it is contended there is a genuine issue to be tried.
3. Each statement of a material fact by a movant in a Local Rule 5 6(a) 1 Statement or by an opponent in a Local Rule 56(a)2 Statement, and each denial in an opponent's Local Rule 56(a)2 Statement, must be followed by a specific citation to (1) the affidavit of a witness competent to testify as to the facts at trial and/or (2) evidence that would be admissible at trial. The affidavits, deposition testimony, responses to discovery requests, or other documents containing such evidence shall be filed and served with the Local Rule 56(a) 1 and 2 Statements in conformity with Fed.R.Civ.P. 56(e). Counsel and pro se parties are hereby notified that failure to provide specific citations to evidence in the record as required by this Local Rule may result in sanctions, including, when the movant fails to comply, an order denying the motion for summary judgment, and, when the opponent fails to comply, an order granting the motion.
. The filing of the Opposition does not fulfill the requirement of a "separate, discrete statement of ... facts.” See, e.g., Hoffman v. Adinolfi, O'Brien & Hayes (In re Sylvia), 185 B.R. 674, 676 (Bankr.D.Conn.1995) (decision under former Local Rule 9(c)).
. The Opposition alleges, inter alia, "many facts are in dispute” and "many conclusions of fact drawn by inference through separate facts simply are not true.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493653/ | OPINION
JOHN J. THOMAS, Chief Judge.
Chase Manhattan Mortgage Corporation has filed a Motion for Relief from the automatic stay alleging that the Debtor, Louise Young, has failed to pay post-bankruptcy property taxes as required by her confirmed plan. There is no dispute of the material facts, which were presented to me in the form of a Stipulation filed April 15, 2003 and an agreement that the Court could look to the entire record of the case to review exhibits and analyze documents.
At the outset, it should be noted that the Debtor initiated this Chapter 13 on November 14, 2001. Subsequently, her Plan was confirmed on February 7, 2002. Pursuant to claims litigation with the Debtor’s current mortgagee, EMC Mortgage Corporation, on April 2, 2002, the parties entered into a “Consent Order”, which was jointly executed by counsel for the parties and approved by the Court.
In a nutshell, the Plan and Consent Order effected a process by which the Debtor would “cure and maintain” the mortgage held by Movant over the life of Debtor’s Plan. Furthermore, the Debtor would “cramdown” Movant’s mortgage of approximately $105,000.00, to a value of $63,000.00, payable at a rate of 8.5% per annum.
Pursuant to the Plan and this agreement, the Debtor has made monthly payments of $776.00, an amount similar to her scheduled mortgage payments prior to the bankruptcy filing.
The Movant has applied the monthly receipt of $776.00 to an amortization of its total stripped-down principal obligation of $63,000.00, when amortized at 8.5% over the five years of the plan. Reference to appropriate tables suggest such a sum would require a regular payment of $1,292.54 to maintain current status and reduce the balance to zero at the conclusion of a five year term. Movant, relying on Associates Commercial Corp. v. Rash, 520 U.S. 953, 964, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997) and In re Session, 128 B.R. 147, 151 (Bankr.E.D.Tex.1991), argues the Code requires that cramdowns be paid in full over the life of the plan. That is the reason it applied the payment as it did.
The Debtor, on the other hand, maintains that the Plan incorporates the terms of the mortgage and the mortgage provides that the monthly payment shall include an escrow for property taxes to be used by the mortgagee to pay current taxes. The Debtor advances that the property taxes should have been paid using this escrow and the Movant’s failure to maintain this fund was a breach of the mortgage obligation.
Turning first to the Movant’s position, I acknowledge that there is case law that suggests a reading of 11 U.S.C. § 1325(a)(5) requires that a cramdown be effectuated within the life of the Plan and not be allowed to extend through the term of the mortgage sessions. Id.1
*177Notwithstanding that authority, the Plan and/or the Consent Order say no such thing. The Consent Order provides, “Debtor shall be required to abided (sic) by the terms and conditions as set forth in the mortgage, including but not limited to payment of real estate taxes and insurance.” (Consent Order Doc. #11.) In turn, the mortgage provides, at paragraph 2.
2. Monthly Payments of Taxes, Insurance and other Charges. Borrower shall include in each monthly payment, together with the principal and interest as set forth in the Note and any late charges, a sum for (a) taxes and special assessments levied or to be levied against the Property, ...
The mortgage then addresses the application of that receipt in paragraph 3.
3. Application of Payments. All payments under paragraph 1 and 2 shall be applied by Lender as follows:
First, to the mortgage insurance premium to be paid by Lender to the Secretary or the monthly charges by the Secretary instead of the monthly mortgage insurance premium;
Second, to any taxes, special assessments, leasehold payments or ground rents, and fire, flood and other hazard insurance premiums, as required;
Third, to interest due under the Note;
Fourth, to amortization of the principal of the Note;
Fifth, to late charges due under the Note.
(Proof of Claim # 1 at Exhibit A.)
The Debtor committed herself to pay the current taxes as provided in the mortgage. In turn, the mortgage also required Movant to maintain an escrow. Neither the Plan nor the Consent Order sets forth a monthly payment sufficient to allow the crammed-down sum of $63,000.00 to be amortized over the life of the Plan.
Regardless of whether the cramdown amount should have been paid over the life of the Plan, I am satisfied that the principles of finality compel a finding that the Movant has acceded to a different treatment by allowing the Plan to be confirmed. In re Szostek, 886 F.2d 1405, 1411 (3rd Cir.1989). The Plan requires the Movant pay the property taxes “as they become due”. The Debtor remains current with her commitments under the Mortgage, the Plan and the Consent Order. The Movant has shown no cause to have the automatic stay terminated.
An Order will follow.
ORDER
For those reasons indicated in the Opinion filed this date, IT IS HEREBY
ORDERED that Movant’s Motion for Relief from the Automatic Stay is Denied.
. See, however, dicta to the contrary in Sapos v. Provident Inst. of Savings, 967 F.2d 918, 922 (3d Cir.1992) (“a debtor who bifurcates an allowed claim under section 506(a) can use the cure and maintenance provisions of section 1322(b)(5) only if the debtor both pays arrearages within a reasonable time and continues to make the monthly payments due in *177accordance with the original terms of the note until the principal has been paid in an amount equal to the value of the property established under section 506(a).”) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493654/ | MEMORANDUM OPINION UPON REMAND FROM THE U.S. COURT OF APPEALS FOR THE FOURTH CIRCUIT
JAMES F. SCHNEIDER, Chief Judge.
On August 9, 1991, Jacob Fraidin, the Chapter 7 debtor, filed a voluntary Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the District of Columbia, which was later transferred to this district by order [Teel, B.J.], dated March 17, 1992. On December 29, 1993, this Court ordered the appointment of a Chapter 11 trustee.1
*241On April 13, 1994, the U.S. Trustee appointed Deborah Hunt Devan, Esquire, as Chapter 11 trustee. On April 11, 1995, this Court converted the case to a Chapter 7 proceeding. On April 12, 1995 Michael G. Rinn, Esquire, was appointed Chapter 7 trustee.2
On April 9, 1997, the instant complaint was filed by Michael G. Rinn, the Chapter 7 trustee against the debtor, Jacob Fraid-in, to avoid and recover fraudulent transfers, postpetition transfers and the turnover of property. On May 20, 1997, a scheduling conference was held at which time counsel for the plaintiff appeared but the defendant did not. On May 22, 1997, the defendant filed a motion to dismiss. On May 1, 1998, the defendant filed a motion to disqualify plaintiffs counsel. The motion to disqualify was denied by order dated May 19, 1998 [Teel, B.J.]. By order entered July 21, 1998, the motion to dismiss was denied, the plaintiff was provided 90 days to conduct discovery of the defendant and the plaintiff was ordered to file a more definite statement within 30 days.
On September 9, 1998, the trustee filed a motion to compel discovery and to deem facts admitted by Fraidin. On November 16, 1998, the plaintiff filed a second motion to compel discovery.
On April 14, 1999, a hearing was held on the motions to compel discovery and they were granted by Judge Keir by order [P. 34] entered on April 29, 1999. On May 14, 1999, the plaintiff filed a third motion to compel discovery. On May 26, 1999, the plaintiff filed a fourth motion to compel discovery. A telephonic hearing was conducted by this Court while the deposition was in progress during which Mr. Fraidin had refused to answer certain questions put to him by plaintiffs counsel. This Court overruled Mr. Fraidin’s objections to the questions and ordered him to answer them. By order [P. 39] entered *242June 4, 1999, this Court reduced to written order its oral directive to the debtor to answer the questions posed at the deposition in writing with 20 days, upon penalty of having the instant complaint granted against him. The debtor refused to respond to discovery requests, including refusing to attend duly scheduled depositions. When he did attend such a deposition, he improperly declined to answer numerous questions that this Court commanded him to answer. As a result, on January 8, 2001, this Court entered an order granting default judgement [P. 42], upon the plaintiffs Suggestion of Contempt Under Order Directing Jacob Fraidin To Answer All Questions Posed At Depositions. On March 14, 2001, this Court conducted a hearing on the trustee’s damage, and determined that the trustee’s claim against the defendant should be allowed in the amount of $1,659,077, plus attorney’s fees and costs of $4,179.00, plus interest at the rate of 5.58% from April 9, 1997. On April 4, 2001, a judgment [P. 50] was entered against the defendant in that amount.
This matter is now before the Court upon remand from the reversal of that judgment by the U.S. Court of Appeals for the Fourth Circuit in the unreported opinion of Fraidin v. Rinn (In re Fraidin), 34 Fed.Appx. 932, 2002 WL 1025092, decided May 22, 2002. The reason for the reversal was that after the trustee’s complaint was granted against the debtor upon the debt- or’s contemptuous refusal to respond to discovery,3 this Court held a hearing on the plaintiffs motion, denominated “ex parte motion for damages,” which the debtor failed to attend. The reversal was based upon the failure of this Court to give Fraidin an opportunity to produce evidence on the issue of damages, an anomalous result because the reason the complaint was granted against him was his refusal to provide discovery.4
*243After remand, this Court conducted a second hearing on damages on January 13-14, 2003, to which the debtor was invited to attend and which he in fact did attend. This second hearing has now permitted Fraidin to produce the very evidence he presumably withheld from the trustee in an attempt to dispute the trustee’s claim for damages. It should also be noted that the original hearing on remand scheduled by this Court for November 6, 2002, was continued at the debtor’s request so that he might obtain legal counsel to represent him. When the hearing was called on January 13, 2003, the debtor appeared without counsel and requested another postponement so that he might obtain subpoenas for the testimony of various representatives of the Department of Justice, which this Court denied. Fraidin claimed that he wanted an accounting from the trustee for funds Fraidin collected and turned over to him. However, the trustee did not claim that those collections were not turned over to him. His claim for damages was based upon four discrete categories of funds that were neither turned over to the trustee nor accounted for by Fraidin. In denying the debtor’s motion for a continuance, this Court noted on the record that the debtor had 67 days, from the date of the November 6, 2002, hearing to subpoena these witnesses, but did not do so under the very eve of the January 13, 2003, hearing.
The defendant attempted to use the hearing on damages to retry the complaint, including his liability which had already been established, and raised all manner of irrelevant and argumentative issues. Nevertheless, this Court attempted to keep the damages issue the focus of the two-day hearing on remand by constantly reminding him that his liability to the trustee was not at issue, only the amount of damages based on that liability.
The trustee, Michael G. Rinn, testified as to the basis for his damage claim in the amount of $1,659,511, which the trustee claimed is unaccounted for by the debtor and which is missing from the estate. Mr. Rinn testified that he reviewed the books and records of the estate, including the debtor’s business records, exhibits from other proceedings in the State court and the bankruptcy court in this case, including transcripts of hearings, and that he conducted an independent investigation of the debtor and his business dealings upon which the instant complaint was based. The amount of damages has four separate components: (1) cash in the amount of $595,435, which the debtor scheduled under penalties of perjury as cash on deposit when the bankruptcy case was filed; (2) funds received by the debtor from the decedent’s estate of the debtor’s mother in the amount of $289,575, and never accounted for by the debtor; (3) receipts from Barclay Mortgage Company in the amount of $391,426; and (4) the debtor’s 1989-90 interest income reported on his tax returns in the amount of $467,191. These figures total $1,743,627, against which the trustee credited the debtor the amount of $84,115, representing monies received by the estate attributable to the four categories, leaving a net amount owed to the debtor’s bankruptcy estate of $1,659,511. In addition, the trustee testified that he is indebted to his counsel for services rendered incident to this complaint in the amount of $4,179. The trustee’s testimony was corroborated *244by documentary evidence submitted at the hearing, including trustee’s counsel’s affidavit of counsel fees, copies of schedules, certificates of deposit, T-bill rates, monthly operating reports, and records of the receivership obtained against the debtor’s company, Pacific Mortgage Company.5 Cross-examination of the trustee by the debtor did not cause the trustee to alter his direct testimony as to the amount of damages. The trustee did not deny that he received more than $84,000 that the debtor had collected from various other sources not attributable to any of the four categories that the trustee previously enumerated. He disputed Fraidin’s claim that he ever received more than $300,000 from Fraidin. He did acknowledge the turnover of approximately $84,000 by Fraidin at the beginning of the case that was attributable to the four categories.
Andre Weitzman, Esquire, testified regarding his postjudgment collection efforts against Fraidin in certain State court litigation to the effect that Fraidin never produced bank records. The witness testified that he was appointed substitute personal representative for the decedent’s estate of Corinne Fraidin, the debtor’s mother, and that Fraidin received a distribution from that estate in the amount of $289,575 on April 3, 1991. The bankruptcy estate never received any payments from Fraidin from any of those funds, although Weitzman received $102,552 that he recovered against Fraidin’s sister from a judgment. He determined the amount Fraidin received by examining cancelled checks from the decedent’s estate account.
Fraidin testified that he opened debtor in possession accounts on the advice of counsel at the outset of the case. The monies were invested in high-yield mortgage accounts, not in certificates of deposit. Each month, according to him, operating reports were duly filed with the U.S. Trustee. He continued in control of his financial affairs until the appointment of the Chapter 11 trustee. With her approval, he continued to collect all monies due from his various mortgages. When the case was converted to Chapter 7 and the trustee was appointed, Fraidin continued to make collections and turn them over to the him. Fraidin claimed he did everything the trustee ordered him to do. He attempted to offer into evidence a number of letters that amounted to self-serving declarations, which were excluded. However, very tellingly, Fraidin declined to testify under oath that what he had said in his opening was truthful. He acknowledged that he has not filed income tax returns for himself and his various business entities and could not remember the last occasion when he did so.
The trustee’s counsel cross-examined Fraidin about his failure to provide an*245swers to questions at his deposition on May 22, 1999, and read into the record numerous questions that Fraidin refused to answer and account for estate funds and proceeds.
This Court is satisfied from all of the testimony and documentary evidence adduced at the two-day hearing that the debtor is indebted to the Chapter 7 trustee on behalf of the bankruptcy estate in the amount of $1,659,077, plus attorney’s fees and costs of $4,179.00, plus interest at the rate of 5.58% from April 9,1997.
Wherefore, having held a hearing on the trustee’s request for damages, this Court has determined that a judgment will be entered against the defendant in that amount.
ORDER ACCORDINGLY.
ORDER GRANTING JUDGMENT TO THE PLAINTIFF UPON REMAND FROM THE U.S. COURT OF APPEALS FOR THE FOURTH CIRCUIT
Based upon the memorandum opinion filed simultaneously herewith, this Court having held a second hearing on damages pursuant to the mandate of the Fourth Circuit Court of Appeals in the case of Fraidin v. Rinn (In re Fraidin), unreported opinion, 34 Fed.Appx. 932, 2002 WL 1025092, decided May 22, 2002, judgment is hereby rendered in favor of the plaintiff, Michael G. Rinn, Trustee, against the defendant, Jacob Fraidin, in the amount of amount of One Million, Six Hundred Fifty-Nine Dollars and seventy-seven cents ($1,659,077), plus attorney’s fees and costs in the amount of Four Thousand One Hundred Seventy-Nine Dollars ($4,179.00), plus interest at the rate of 5.58% from April 9,1997.
. In an unreported opinion in the case of Fraidin v. Weitzman (In re Fraidin), 1994 WL 687306, decided December 9, 1994, the Fourth Circuit Court of Appeals made the following statements in upholding this Court's appointment of a Chapter 11 trustee:
After Fraidin filed for protection under Chapter 11 of the Bankruptcy Code, two creditors with outstanding judgments against Fraidin moved for the appointment of a trustee. At the conclusion of a two-day hearing, the bankruptcy court stated that it was appointing a trustee because it had "absolutely no confidence in the debtor in terms of his capacity to honestly administer his own Chapter 11 bankruptcy.”
The bankruptcy court based its decision on what it called "a multitude of factors,” one of which was pre-petition dishonesty. Fraidin is a convicted felon, having been found guilty of theft while acting as a foreclosure trustee. See Fraidin v. State, 85 Md.App. 231, 583 A.2d 1065, cert. denied, 322 Md. 614, 589 A.2d 57 (1991). [Footnote: The Maryland Court of Special Appeals wrote: "The permissible picture emerges of Fraidin as an extremely clever manipulator of complicated commercial transactions who ... at least had avarice in his heart. To feed that avarice, he created at-times labyrinthine confusion. He then sought to exploit that confusion to his own advantage.” Fraidin, 583 A.2d at 1081.] More recently, Fraidin was found liable in a civil action for tortious interference with contract and civil conspiracy and was ordered to pay $1.5 million in punitive damages. Also, the bankruptcy judge found that Fraidin had used aliases as late as 1986, but did not disclose those names as required on the bankruptcy petition. Moreover, the bankruptcy court found that Fraidin had no credibility, given his "evasive, self-serving, unclear, and obviously not forthcoming” testimony during the hearing. ..
The decision of whether a debtor’s conduct justifies the appointment of a trustee is a matter committed to the discretion of the lower courts. See Committee of Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2d 239, 242 (4th Cir.1987). Here, the decision was made in the first instance by the bankruptcy court and affirmed by the district court. This court, as a second court of review, considers the decision of the bankruptcy court under the same standards that apply to the district court. Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir.1988). Thus, the *241question here is not whether this court would have appointed a trustee had it been deciding the question in the first instance, but whether the bankruptcy court abused its discretion in appointing a trustee. Findings of fact by the bankruptcy court are reviewable by this court only for clear error and legal questions are subject to de novo review. Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 399 (4th Cir.1992); Bankr.R. 8013....
We conclude that the findings of the bankruptcy court — that Fraidin had engaged in a prolonged pattern of dishonest conduct and had no credibility at the hearing — are supported by the record. Section 1104(a)(1) expressly provides that dishonesty, whether before or after the filing of the bankruptcy petition, justifies the appointment of a trustee. The bankruptcy court considered Fraidin's evidence of his proper conduct regarding his bankruptcy case, but nonetheless found that his pattern of dishonesty justified the appointment of a trustee. We find no abuse of discretion and accordingly affirm the order of the district court.
Id.
. The Fourth Circuit affirmed the conversion to Chapter 7 in an unreported opinion styled Fraidin v. Weitzman (In re Fraidin), 1997 WL 153826, decided April 3, 1997, in which it held:
In order to convert a case from Chapter 11 to Chapter 7, a bankruptcy court must first determine that there is cause for the conversion. 11 U.S.C. § 1112(b); In re Superior Siding & Window, Inc., 14 F.3d 240, 242-43 (4th Cir.1994)...
The bankruptcy court relied upon Fraid-in’s inability to effectuate a plan as its basis for ordering conversion, and the record substantiates that finding. The trustee explained at length that Fraidin would not be able to obtain confirmation of a reorganization plan. Indeed, Fraidin has never submitted a plan for approval. The bankruptcy court did not abuse its discretion in converting the case to a Chapter 7 proceeding.
Id.
. The propriety of the January 5, 2001, order, that entered the default judgment against Fraidin, was not the subject of the appeal to the Fourth Circuit because his appeal from that order was dismissed with prejudice by the district court and the dismissal was not appealed further.
. The Fourth Circuit explained its rationale for the decision:
Following the entry of default judgment, the bankruptcy court is not required to hold a hearing to determine the amount of damages. See Fed. R. Bankr.P. 7055 (adopting Fed.R.Civ.P. 55 in bankruptcy court adversary proceedings); Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir.1997); James v. Frame, 6 F.3d 307, 310 (5th Cir.1993). However, if the court does hold a hearing, it must provide the parties with an opportunity to be heard. See Transatlantic Marine Claims Agency, 109 F.3d at 111 (court could not merely accept plaintiff’s unsupported statement of damages). Rather, "[a]n elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). An ex parte hearing, such as that conducted by the bankruptcy court, violates a litigant’s right to due process if the litigant was thereby denied the "opportunity to participate in determination of the relevant issues” and suffered unfair prejudice. Guenther v. Comm’r, 889 F.2d 882, 884 (9th Cir.1989).
Here, although Fraidin received notice of the scheduled hearing to determine the amount of damages, the notice clearly stated that the hearing was to be “ex parte." Thus, Fraidin was denied the opportunity to challenge the Trustee’s evidence as to the amount of damages, and he was thereby prejudiced. See id. Because he was not afforded an opportunity to present contrary evidence, cross-examine the Trustee’s witnesses and evidence, or challenge the determination or reasonableness of the attor*243neys’ fees awarded, we find that Fraidin was denied due process. See Mullane, 339 U.S. at 314, 70 S.Ct. 652; see also Roadway Express, Inc. v. Piper, 447 U.S. 752, 767, 100 S.Ct. 2455, 65 L.Ed.2d 488 (1980) ("Like other sanctions, attorney’s fees certainly should not be assessed lightly or without fair notice and an opportunity for a hearing on the record.").
34 Fed.Appx. 932.
. The following exhibits were admitted into evidence at the hearing:
Trustee's Exhibit No. 1: Fraidin's bankruptcy schedules that he filed under penalty of perjury; Trustee’s Exhibit No. 2: an exemplified copy of the final judgment order entered in Rinn v. Pacific Mortgage Inv. Group, Adv. Pro. No. 97-5511, which enjoined the debtor and his agents from transferring and concealing assets of the debtor's various business entities and appointing Mr. Rinn as their receiver; Trustee's Exhibit No. 3: an exemplified copy of the order of this court that substantively consolidated the receivership over the debt- or’s business entities with the debtor's bankruptcy case; Trustee's Exhibit No. 4: Money rates published in The Wall Street Journal dated January 3, 1989; Trustee's Exhibit No. 5: Money rates published in The Wall Street Journal dated Dec 29, 1998; Trustee’s Exhibit No. 6; a binder containing monthly operating reports filed by Fraidin during the pendency of his Chapter 11 proceeding; and Trustee’s Exhibit No. 7: a verified statement of the trustee’s attorney's fees, pursuant to the January 8, 2001, order of this Court, in the amount of $4,179. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493655/ | OPINION
MARLAR, Bankruptcy Judge.
This is an appeal from the bankruptcy court’s order awarding attorney’s fees to a party responding to frivolous motions. We REVERSE and REMAND.
FACTS
Debtor filed a chapter 13 bankruptcy case on May 16, 2001. Appellant David Chase did not formally appear as counsel until one month later, but he was involved in the case from the outset.
The court converted the case to chapter 11 on its own motion because the debtor was ineligible for chapter 18 relief and later converted it to chapter 7 on the United States trustee’s motion.
Thereafter, Chase filed two serial motions to re-convert the case to chapter 13 even though the debtor remained ineligible for chapter 13 relief.
In connection with the second motion to convert, the court sua sponte ordered the debtor and Chase to show cause why the case should not be dismissed “with prejudice” and with Federal Rule of Bankruptcy Procedure Rule 9011 (“Rule 9011”) sanctions.
The court’s 30-page Order to Show Cause (“OSC”) itemized questionable actions during the bankruptcy case, including Chase’s “filing of a misleading (or fraudulent), meritless, harassing, bad faith motion(s) to convert coupled with his prior bad faith conduct throughout this case.”
Following hearing, the court found that Chase filed the two motions to convert in “bad faith” and sanctioned Chase but not the debtor, who agreed to dismissal “with prejudice.”
Although Chase omitted that sanction order from the excerpts of record supplied to us, the clerk’s docket reveals that it required Chase to pay $1,000 to the United States, imposed an education requirement, and invited fee applications from others:
(3) any harmed party seeking to recover attorney fees under 9011 on account of the filing of the 2 motions to dismiss shall file declarations and proposed orders.
Clerk’s Docket Item 121. Chase did not appeal the penalty.
Appellee Kosmala, the chapter 7 trustee, accepted the court’s invitation and requested an award of $3,593 as attorney’s fees arising from the motions to dismiss.
Chase’s written response offered nothing to posit an issue of fact that would warrant an evidentiary hearing.
The court, noting that it had previously determined that the motions had been filed in “bad faith,” awarded the full $3,593 as reasonable attorney’s fees and costs.
This appeal ensued.
JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. §§ 1334 and 157(b)(1). We have jurisdiction under 28 U.S.C. § 158(a)(1).
ISSUE
Whether fee-shifting sanctions can be awarded on the court’s motion under Rule 9011.
*374
STANDARD OF REVIEW
We review an award of sanctions under Rule 9011 for an abuse of discretion. Barber v. Miller, 146 F.3d 707, 709 (9th Cir.1998); Miller v. Cardinale (In re Deville), 280 B.R. 483, 492 (9th Cir. BAP 2002). A bankruptcy court necessarily abuses its discretion if it bases its decision on an erroneous view of the law or clearly erroneous factual findings. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990).
DISCUSSION
Acting pursuant to Rule 9011(c)(1)(B), the court ordered Chase to pay Kosmala’s attorney’s fees. The problem is that the sanctions awarded on the court’s own motion may not include shifting of fees. See Fed. R. Bankr.P. 9011(c)(2). It is settled law of this circuit that, under Rule 9011, “the court, while empowered to order payment of a penalty into court when acting on its own initiative, cannot shift attorney’s fees and other expenses directly resulting from the violation except upon motion of a party. Fed. R. Bankr.P. 9011(c)(2). Thus, if the court acted on its own initiative, a monetary award other than payment of a penalty into the court would have been unauthorized.” Polo Bldg. Group, Inc. v. Rakita (In re Shubov), 253 B.R. 540, 546 (9th Cir. BAP 2000) (citing Miller, 146 F.3d at 711). See also Markus v. Gschwend (In re Markus), 313 F.3d 1146, 1151 (9th Cir.2002)(“It is clear that attorneys’ fees and expenses incurred as a result of violating Bankruptcy Rule 9011 can be shifted only at the motion of one of the parties, and only after the rule-offending party has been given the benefit of the Rule’s 21-day safe harbor.”); Deville, 280 B.R. at 494.
Here, the fee-shifting was done on the court’s own initiative, and not by a party’s motion as required. The fact that the court invited the motion does not suffice to qualify it as made under Rule 9011(c)(2) because the motion contemplated by Rule 9011(c)(2) is the motion provided for by Rule 9011(c)(1), which requires mandatory compliance with the Rule 9011(c)(1) “safe harbor” procedure.
CONCLUSION
The order requiring Chase to pay Kos-mala’s attorney’s fees was unauthorized by Rule 9011(c)(1)(B).1 We, therefore, REVERSE that portion of the bankruptcy court’s order imposing sanctions against Chase,2 and REMAND for any further sanction proceedings in accordance with this disposition.
. We cannot agree with Judge Klein's thoughtful and painstaking attempt to find a basis to affirm. The arguments that he sets forth in favor of construing Judicial Code section 1927 to give bankruptcy courts the power to impose section 1927 sanctions are better left to resolution by the Ninth Circuit. There are two obstacles to our acceptance of those arguments at this level: we view the analysis in Perroton v. Gray (In re Perroton), 958 F.2d 889 (9th Cir.1992) and our statements in our own prior decisions that section 1927 is not available to bankruptcy courts Deville, 280 B.R. at 494 and Determan v. Sandoval (In re Sandoval), 186 B.R. 490, 495-96 (9th Cir. BAP 1995), which was followed by our colleagues on another bankruptcy appellate panel (see Smolen v. Hatley (In re Hatley), 227 B.R. 757, 761 (10th Cir. BAP 1998), aff'd, 194 F.3d 1320 (10th Cir.1999)) as binding on this panel. See Ball v. Payco-Gen. Am. Credits, Inc. (In re Ball), 185 B.R. 595, 596-98 (9th Cir. BAP 1995).
. The underlying sanctions order, finding that Chase violated Rule 9011 and ordering him to pay sanctions into the court and to take a law school bankruptcy course, is not on appeal, is final, and is still in force. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493656/ | KLEIN, Bankruptcy Judge,
dissenting.
Although the majority is correct that Rule 9011 cannot support the award that is *375appealed, the error is harmless because we should affirm on the basis of 28 U.S.C. § 1927.
We are compelled to refrain from reversing on account of error that does not affect the substantive rights of the parties. 28 U.S.C. § 2111; Fed.R.Civ.P. 61, incorporated by Fed. R. Bankr.P. 9005. Hence, we are authorized to affirm for another reason supported by the record. Dittman v. California, 191 F.3d 1020, 1027 n. 3 (9th Cir.1999); Shubov, 253 B.R. at 547.
Although Rule 9011 no longer suffices to support an award shifting fees on the court’s own motion, there is available to the bankruptcy court more potent sanctioning authority that does authorize fee-shifting awards.
The bankruptcy court’s thirty-page Order to Show Cause and its subsequent determination document what plainly is “bad faith” conduct by appellant.
Where “bad faith” conduct is involved, there are two heavier caliber weapons than Rule 9011: Judicial Code § 1927 and “inherent authority” sanctions. 28 U.S.C. § 1927; Chambers v. NASCO, 501 U.S. 32, 42-47, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991); Caldwell v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir.1996) (“Rainbow Magazine ”).
The differences in “bad faith” conduct sufficient to trigger fee shifting as Judicial Code § 1927 sanctions and Rainbow Magazine inherent authority sanctions are largely a matter of degree. In this instance, the appellant’s “bad faith” litigation conduct may not be bad enough to warrant Rainbow Magazine inherent authority sanctions, but is, in my view, ample to justify sanctions under Judicial Code § 1927.
The difficulty on this account, however, is that we have in the past assumed, but not squarely decided, that bankruptcy judges may not impose Judicial Code § 1927 sanctions. Our premise has been that the Ninth Circuit holds that bankruptcy courts are not “courts of the United States” for purposes of the Judicial Code. Perroton v. Gray (In re Perroton), 958 F.2d 889, 893 (9th Cir.1992) (28 U.S.C. § 1915).
Upon scrutiny of the language of Judicial Code § 1927, however, it is not essential that sanctions under that provision be imposed by a “court of the United States.” I shall proceed to explain.
Judicial Code § 1927, entitled “Counsel’s liability for excessive costs,” provides:
Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.
28 U.S.C. § 1927.
Under the law of this circuit, § 1927 sanctions in the form of shifting costs, expenses, and fees may be imposed upon an attorney who acts either recklessly or in “bad faith.” Fink v. Gomez, 239 F.3d 989, 993 (9th Cir.2001).
Chase’s motions that were determined to have been filed in “bad faith” fit squarely within the zone of conduct addressed by § 1927. The determination that Chase acted in “bad faith” in filing the two conversion motions necessarily subsumes recklessness. The sanctions imposed are precisely those permitted by § 1927, which section appears to be tailored to the situation at hand. The key question is whether a bankruptcy judge is authorized to impose § 1927 sanctions.
*376It is an open question in the Ninth Circuit, which has not squarely ruled on the question, whether a bankruptcy judge is authorized to impose § 1927 sanctions.
Our decisions regarding the use of § 1927 in bankruptcy are not consistent. We have said, in a decision that was affirmed by the Ninth Circuit without a square holding on the question, that § 1927 sanctions may be imposed by bankruptcy judges. Mortgage Mart. Inc. v. Rechnitzer (In re Chisum), 68 B.R. 471, 473 (9th Cir. BAP 1986), aff'd, 847 F.2d 597 (9th Cir.1988); accord, Norwood Fed. Sav. & Loan Ass’n v. Guiltinan (In re Guiltinan), 58 B.R. 542, 545 (Bankr.S.D.Cal.1986) (Adler, B.J.).
We have, however, assumed in other instances that § 1927 is not in the bankruptcy judge’s arsenal in this circuit. E.g., Miller v. Cardinale (In re Deville), 280 B.R. 483, 494 (9th Cir. BAP 2002); Determan v. Sandoval (In re Sandoval), 186 B.R. 490, 495-96 (9th Cir. BAP 1995).
Our assumption that § 1927 is not available has been based on an easy, but dubious, extrapolation of a Ninth Circuit decision holding that the bankruptcy appellate panel lacks authority to authorize in forma pauperis proceedings under 28 U.S.C. § 1915. In re Perroton, 958 F.2d at 893. There, the Ninth Circuit reasoned that a bankruptcy court is not a “court of the United States” for purposes of 28 U.S.C. § 451 and that, hence, bankruptcy courts lack authority to make in forma pauperis determinations under 28 U.S.C. § 1915.
While we have assumed that Perroton’s analysis of the status of bankruptcy courts regarding § 1915 applies equally to § 1927, we have not heretofore closely examined the question. On closer scrutiny, flaws emerge that change the picture. In short, it does not follow from Perroton that § 1927 cannot be used by bankruptcy judges.
I submit that bankruptcy judges can impose § 1927 sanctions, despite Perroton, for a number of reasons.
First, the Ninth Circuit has itself recently assumed that bankruptcy judges may impose § 1927 sanctions. Holding that federal sanctions law trumped state sanctions law in a particular situation, it reversed a bankruptcy court’s sanctions award under state law, noting that the bankruptcy court could on remand consider an award under federal sanctions law, which it described as including § 1927. Galam v. Carmel (In re Larry’s Apt., LLC), 249 F.3d 832, 840 (9th Cir.2001).
Second, Perroton did not purport to decide the specific question of a bankruptcy judge’s § 1927 authority. Under its facts, the narrow question was whether the bankruptcy appellate panel created pursuant to 28 U.S.C. § 158(b)(1) had in forma pauperis authority under § 1915. The answer, which was in the negative, focused on the status of bankruptcy courts without distinguishing between a bankruptcy court and a bankruptcy appellate panel, and did not mention § 1927. Thus, Perroton is of limited precedential value.
Third, the statutory language of § 1927, unlike § 1915, is not limited to Article III judges. Rather, § 1927 authorizes courts of any territory of the United States to impose its sanctions, in addition to the “courts of the United States” upon which the Perroton panel focused.
This introduces an ambiguity not present in § 1915 relating to whether other non-Article III judges might also be implicitly authorized to impose § 1927 sanctions. Indeed, much of the analysis in Perroton constituted a fruitless quest for some indication that Congress intended for § 1915 power to be exercised by judges who lack Article III tenure. In contrast, evidence of non-Article III intent is on the *377face of § 1927. Thus, regardless of whether bankruptcy courts are “courts of the United States” under § 451, bankruptcy judges may apply § 1927.
Fourth, in light of subsequent Ninth Circuit authority, the better reading of Perroton is that, to the extent its § 451 “court of the United States” analysis applies, a § 1927 sanctions question is, at a minimum, a “noncore” proceeding under 28 U.S.C. § 157(c) over which the bankruptcy court has authority to make a report and recommendation.
Specifically, the Ninth Circuit’s analysis in Perroton rests on an unexplored premise that the bankruptcy court is a separate court from the district court. The Perro-ton panel did not consider the implications of the statutes providing that the bankruptcy court is a “unit” of the district court that exercises much of the jurisdiction of the district court with respect to bankruptcy matters. 28 U.S.C. §§ 151, 157 & 1334.
Nor did the Perroton panel consider the fact that a district court, which is unquestionably a “court of the United States” under § 451, is entitled to withdraw the reference of a bankruptcy case and handle it itself. In the face of a withdrawn reference, it would then have had to face the larger question of whether § 1915 applies in bankruptcy, the outcome of which was probably not really in doubt in view of the fact that the Supreme Court had held that fees could be required in bankruptcy as a condition of discharge and the fact that nothing about the 1978 Bankruptcy Code suggested a change in that aspect of bankruptcy law. United States v. Kras, 409 U.S. 434, 444-46, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973).
These omitted questions operate to limit the utility of the Perroton § 1915 decision as a § 1927 precedent. Questions lurking in a record that are neither brought to the attention of the court nor ruled upon are not regarded as having been so decided as to constitute precedents. Galam, 249 F.3d at 839, quoting Webster v. Fall, 266 U.S. 507, 511, 45 S.Ct. 148, 69 L.Ed. 411 (1925). Instead, one must attend to the holdings of cases, rather than their dicta. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 379, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994).
Fifth, in an analogous situation subsequent to Perroton, the Ninth Circuit did deal directly with the jurisdictional statutes fixing the relationship of the district and bankruptcy courts and concluded that they are not, as had been assumed in Perroton, separate courts. Rather, it held that “bankruptcy courts are, for jurisdictional purposes, inseparable from the district court” and do not need to be separately described in legislation that refers to the power of district courts to award fees. United States v. Yochum (In re Yochum), 89 F.3d 661, 669 (9th Cir.1996) (26 U.S.C. § 7430).
Although Yochum distinguished Perro-ton as arising under a different title of the United States Code, Yochum’s reasoning regarding the structure of the courts, and the unitary relationship for jurisdictional purposes, cannot be gainsaid.
Reading Perroton in light of Yochum, implies that a § 1927 sanctions issue in the bankruptcy court is, at a minimum, a “non-core” proceeding that a bankruptcy judge may resolve unless the parties insist upon a decision by the district court under the report and recommendation procedure. 28 U.S.C. § 157(c); Fed. R. Bankr.P. 9033. Chase did not insist upon the report and recommendation procedure.
Sixth, the absence of § 1927 sanctioning authority (or even the requirement of a report and recommendation) would leave a nonsensical lacuna in bankruptcy sanctioning authority. It is beyond cavil that the bankruptcy court has the heavy artillery of “inherent authority” sanctioning power as recognized in Rainbow Magazine. If the *378bankruptcy court has the more powerful sanctioning authority, it makes no sense for there to be a gap in the continuum that leaves the court without a lighter, more-accurate weapon that could be used without overkill.
In short, I would hold that the plain language of § 1927 demonstrates that Congress did not mean to limit § 1927 sanctions to Article III judges. In the alternative, I would hold that, even if the authorization for other non-Article III courts to impose § 1927 sanctions does not warrant an inferential authorization for bankruptcy judges, § 1927 sanctions are, at a minimum, “noncore” proceedings that a bankruptcy judge may properly entertain in the same fashion as any other “noncore” matter.
Chase’s conduct is squarely covered by § 1927. At best, his conduct was reckless. Since I would affirm on the basis of Judicial Code § 1927,1 DISSENT. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493657/ | MEMORANDUM OPINION AND ORDER DENYING MOTION FOR JUDGMENT ON THE PLEADINGS (DOCKET # 48)
SIDNEY B. BROOKS, Chief Judge.
THIS MATTER comes before the Court on the Motion for Judgment on the Pleadings filed on September 26, 2003 (“Motion”) by defendants Larry Stroud (“Stroud”) and Brad Van Hull (“Van Hull”) (Docket # 48) and the Response thereto filed by Jeffrey A. Weinman, the Chapter 7 Trustee (“Trustee”) on October 16, 2008 (Docket # 50). The Court, having reviewed the file and being advised in the premises, makes the following findings, conclusions and Order.
For the reasons set forth herein, the Motion will be DENIED.
I. FACTS
The Trustee filed a Complaint to Avoid Preferential Transfers Under Sections 547 and 550 of the Bankruptcy Code on February 7, 2003, against Miscio & Stroud, Inc. (“M & S”), Stroud individually, and Van Hull individually. The Complaint alleges that Debtor Steele’s Market, Inc. (“Debt- or”) filed a petition for relief under Chapter 11 on February 8, 2001, which was later converted to a Chapter 7 case on November 15, 2001. The Trustee alleges that Debtor made two separate payments totaling $29,000 to M & S within ninety days prior to the filing of the bankruptcy petition. The Complaint alleges that M & S subsequently transferred these payments to Stroud and Van Hull in separate installments. The Complaint asserts two claims for relief. The first claim contends that the transfer of funds to M & S, totaling $29,000, are voidable as a preference pursuant to 11 U.S.C. § 547(b). The second claim in the Complaint states:
In the alternative, Miscio & Stroud, Inc. upon receipt of the funds was obligated to immediately disburse the funds to Larry Stroud and Brad Van Hull. Therefore, Miscio & Stroud, Inc. was merely a conduit, and Larry Stroud and Brad Van Hull are initial transferees.
(emphasis added) FI. CompL, ¶ IS. The Trustee alleges that the transfers to Stroud and Van Hull are voidable as preferences pursuant to 11 U.S.C. § 547(b).
M & S failed to file an Answer to the Complaint. On July 2, 2003, the Trustee filed Trustee’s Notice of Intent to Apply for Default Judgment Against Defendant M & S (Docket # 28). On July 9, 2003, the Trustee filed Trustee’s Motion for Entry of Default and Default Judgment Against M & S (Docket # 30). Gary Callahan, counsel for M & S, by letter filed with the Court on July 10, 2003 (Docket # 34), stated that M & S “agrees to accept the default judgment” against M & S. He stated further, in this correspondence, that the entity M & S had been dissolved.1 On July 15, 2003, the Court entered an Order *450Granting Default Judgment Against M & S and a Default Judgment (Docket # s 34 and 35). The Order Granting Default Judgment provides, “This judgment is a final judgment within the meaning of Fed. R.Bankr.P. 54(b).... Therefore, it is ordered, adjudged and decreed that final judgment be and hereby is entered in favor of the Trustee and against Defendant M .& S in the amount of $29,000, plus reasonable costs and attorney’s fees.”
II. SUMMARY OF THE PENDING MOTION AND RESPONSE THERETO AND ARGUMENTS BY THE PARTIES
Defendants Stroud and Van Hull filed their Motion on September 25, 2003 (Docket # 48). Stroud and Van Hull contend that the Trustee specifically pled the two claims for relief in the Complaint in the mutually exclusive alternative. Therefore, the Trustee set up a situation where he could either have judgment against M & S as the initial transferee or he could claim that M & S was merely a conduit entitling him to judgment against Stroud and Van Hull only. Defendants Stroud and Van Hull contend that because the Trustee obtained a default judgment against M & S, Defendants Stroud and Van Hull claim that the Trustee is now barred from seeking judgment against them on his mutually exclusive second claim for relief. Stroud and Van Hull claim that the principles of issue and claim preclusion as well as the doctrine of election of remedies prevents the Trustee from obtaining a further judgment against them on a cause of action pled specifically in the alternative.
The Trustee filed Trustee’s Response to Motion for Judgment on the Pleadings on October 16, 2003 (Docket # 50). The Trustee argues that he simply followed accepted procedure in moving for a default against M & S and claims that Defendants Stroud and Van Hull are now seeking to exploit the situation. The Trustee argues that is would simply be inequitable for the Court to prevent the Trustee from pursuing the funds in the hands of Stroud and Van Hull, especially when M & S has been dissolved. The Trustee contends that issue preclusion is not applicable in this situation because the default did not resolve the issue of whether Stroud and Van Hull are initial transferees under 11 U.S.C. § 550. The Trustee argues that the doctrine of claim preclusion is also inapplicable in this case because claim preclusion requires a judgment on the merits in an earlier action. Because there has not been a previous suit, the Trustee contends that claim preclusion does not apply. Finally, the Trustee claims that the doctrine of election of remedies should not be applied in this instance because the purpose of the doctrine, namely to prevent double recovery, forum shopping, and harassment of defendants by dual proceedings, are not present in this case.
III. DISCUSSION
A. Standard for Judgment on the Pleadings
Bankruptcy Rule 7012(c) provides that, “After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings.” In reviewing a motion for judgment on the pleadings, the Court must take all allegations contained in the non-moving party’s pleadings as true, and all allegations of the moving party which are denied as false. Hamilton v. Cunningham, 880 F.Supp. 1407, 1410 (D.Colo.1995). Judgment on the pleadings may only be granted by the Court if, upon facts so admitted or denied, the moving party is clearly entitled to judgment as a matter of law. Id. “A motion for judgment on the pleadings is designed to dispose of cases *451where material facts are not in dispute and judgment on the merits can be rendered based on the content of the pleadings and any facts of which the court will take judicial notice.” Id.
B. Election of Remedies, Claim and Issue Preclusion
This is a fairly close issue. The facts of this case are unique and, to make matters more complicated, there appears to be very little, if any, case law directly on point.2 A plain reading of the complaint suggests that the two causes of action were pled in the alternative and are based upon the same set of facts and transactions. Accordingly, because judgment has entered based upon the first cause of action against M & S, it would appear that the second claim for relief, pled in the mutually exclusive alternative as a conduit theory, cannot lie against Stroud and Van Hull. On the other hand, this would appear to be an inequitable result given that the Trustee cannot recover any of the funds from the dissolved entity M & S, against whom the judgment has been entered.
1. The Doctrine of Election of Remedies as Applied to this Case
Of the three legal doctrines which Stroud and Van Hull cite in support of their request for judgment on the pleadings, election of remedies appears to be the most viable. But, under the facts and circumstances of this case, it cannot stand. The doctrine of election of remedies requires the plaintiff to choose between inconsistent remedies available on the same set of facts and prevents the plaintiff from recovering twice for the same wrong. Elliott v. The Aspen Brokers, Ltd., 825 F.Supp. 268, 269 (D.Colo.1993). A plaintiff may plead mutually exclusive or inconsistent theories of recovery but must generally chose between the alternate theories at the time of judgment. Id. Given that the Trustee sought and received a judgment against M & S, the alternative theory seemingly would not be available to the Trustee under the doctrine of election of remedies.
Under the facts of this case, however, it would appear from the scant record before this Court, that the Trustee could not recover twice here. Consequently, there is no election of remedies issue here. Moreover, this Court has very serious questions about the apparent snare that M & S, by way of Gary Callahan, has set for the Trustee. In reading the letter by Gary Callahan, many assurances were made: (1) that M & S agreed to accept the default judgment, (2) that M & S ivas a small real estate sales company located in Ft. Collins, (3) that M & S was dissolved under the laws of Colorado, and (4) that M & S had no business and no assets, no officers or directors. Mr. Callahan moreover assured counsel for the Trustee that he would cooperate fully. Interestingly, and not un-importantly, Mr. Callahan agreed that the Court may enter findings of law and fact with respect to the default, but that such default shall not be deemed an admission of liability by M & S.3
First, there is very little information before the Court with respect to any authority Mr. Callahan had to act on behalf of M & S, since, in his own words, there was no business, no assets, no officers or directors. Thus, who was calling the shots *452here? Second, although a default judgment was entered — hence, liability determined — if Mr. Callahan had any authority whatsoever, if the default judgment was intended by M & S to not be an admission of liability, then what effect, if any, does the judgment have? Simply put, Mr. Callahan’s letter raises a number of questions — and casts a shadow and a certain taint on this case — which preclude entry of a judgment on the pleadings.
2. Issue and Claim Preclusion Do Not Apply
The doctrines of claim preclusion and issue preclusion are not, under the facts and circumstances of this case, applicable. Claim preclusion requires a judgment on the merits in a previous suit. Yapp v. Excel Corp., 186 F.3d 1222, 1226 (10th Cir.1999)(claim preclusion requires “(1) a judgment on the merits in the earlier action; (2) identity of the parties or their privies in both suits; and (3) identity of the cause of action in both suits”). Here, there is only one law suit and, therefore, no previous action between the parties.
Further, in order for issue preclusion to apply, the following four factors must be met: “(1) the issue previously decided is identical with the one presented in the action in question, (2) the prior action has been fully adjudicated on the merits, (3) the party against whom the doctrine is invoked was a party, or in privity with a party, to the prior adjudication, and (4) the party against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the prior action.” Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1093 (10th Cir.2003). The Trustee argues that the issue previously decided by the default judgment was whether the transfers to M & S are voidable under 11 U.S.C. § 547, not whether Stroud and Van Hull are the “initial transferees” under 11 U.S.C. § 550. This Court agrees.
IV. ORDER
IT IS THEREFORE ORDERED that the Motion is DENIED. The one-day trial of this matter set on the Court’s three-day trailing docket, commencing at 9:00 a.m. on Wednesday, February 11, 2004, is hereby CONFIRMED.
. One question the Court has, discussed at length below, is whether Mr. Callahan had any authority to do anything on behalf of a dissolved corporation.
. Surprisingly, Stroud and Van Hull cite to no authority in support of their election of remedies, claim and issue preclusion arguments.
. It would appear, however, that at the Fed. R.Bankr.P. 7026 Status Conference, conducted by the Law Clerk, that the statement that such "default shall not be deemed and admission of liability” was retracted by counsel. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493658/ | ORDER DENYING CONFIRMATION OF THIRD AMENDED PLAN
A. BRUCE CAMPBELL, Bankruptcy Judge.
This matter is before the Court on the Debtors’ Motion to Confirm Third Amended Plan,1 and the objections thereto filed by the Chapter 13 Trustee and the Internal Revenue Service (“IRS”). Also before the Court and critically related to confirmation of the Debtors’ plan is the response of the IRS to the Debtors’ objection to the proof of claim filed by the IRS. The dispute is over certain “trust fund taxes” which were owed by Debtor Larry Spelts in his capacity as a “responsible person.” The Debtors do not provide for those taxes in their Chapter 13 plan because it is their view that the trust fund taxes were discharged in their prior Chapter 7 case.
*454The parties have submitted: (1) a Joint Stipulation of Facts With Respect to the Debtors’ Objection to Proof of Claim of Internal Revenue Service (“Stipulation of Facts”); (2) cross motions for summary-judgment on the issues presented by the stipulated facts; and (3) statements of remaining factual and legal issues. The Court has reviewed the Stipulation of Facts and exhibits attached thereto, the Second and Third Amended Plans, the record in this case and the briefs of the parties. Having done so, this Court finds that resolution of the matter will not be aided by further argument or hearing.
UNDISPUTED FACTS
The Court has taken the following undisputed facts from the Stipulation of Facts, the exhibits attached thereto and the file in this case, including the Debtors’ Second and Third Amended Plans.
1. On October 26, 1993, the Debtors filed a bankruptcy petition under Chapter 7, Case No. 93-21573 DEC. The Debtors received a discharge on May 31, 1995.
2. Jeffrey Hill (“Trustee”) was named the trustee in that case.
3. In their Statement of Financial Affairs, the Debtors listed a 1992 federal income tax debt in the amount of $1,205 for 1992, a federal employment tax debt of $26,949.25 reported on Form 941 for 1992, and a federal unemployment tax debt of $1,456.14 reported on a Form 940 for 1992 for a total federal tax debt of $29,610.39. All the federal tax debts were scheduled as joint, fixed and liquidated priority tax liabilities on Schedule E of their bankruptcy schedules (Exhibit A to the Stipulation of Facts).
4. The Debtors also listed on their Schedule E a tax debt of $5,564.48 due the Colorado Department of Revenue.
5. On December 7, 1995, the IRS filed a proof of claim in the Chapter 7 case asserting a priority status for income tax liabilities made up of tax and interest to the date of the petition owed by the Debtors for the tax years 1991 and 1992 in the amounts of $256.82 and $1,250.67, respectively, for a total of $1,507.49 (See Exhibit B to the Stipulation of Facts).
6. The IRS also claimed as priority what was termed on the IRS proof of claim a “Civil Pen” in the amount of $22,506.78. This penalty was assessed under the provisions of I.R.C. § 6672 against the Debtors. This portion of the IRS claim was assessed against Larry Lee Spelts as a “responsible person” and is for employer withholding “trust taxes,” assessed for the first quarter of 1993. At the time, the practice of the IRS was to denote any claim it had under section 6672 as a “Civ Pen.” In the past several years, it has changed its practice and now uses the term “IRC 6672” to describe this type of tax.
7. The total priority tax claim of the IRS in that case was $24,014.27.
8. The IRS also claimed an unsecured general claim of $78.51 made up of penalties on the priority income tax periods for 1991 and 1992.
9. The Trustee filed a Proposed Distribution Register dated December 9, 1996, and later amended it by interlineation to serve as a revised and final distribution register. In that Distribution Register, the Trustee classified the claim of the IRS for $22,506.78 as an unsecured claim for penalties and fines (Exhibit C to the Stipulation of Facts).
10. Neither the Trustee nor the Debtors objected to the claim of the IRS for $22,506.78 or moved to reclassify it as an unsecured nonpriority claim for penalties or fines.
*45511. On April 15, 1996, the Trustee filed a Notice of Surplus Funds asserting that there might be a surplus of $6,000 after all timely filed claims and expenses of administration had been paid. The notice extended the time for filing claims until June 14, 1996 (Exhibit D to the Stipulation of Facts).
12. On September 24, 1996, the Trustee filed a Notice Pursuant to Local Rule 202 of Filing of Trustee’s Final Report and Application for Compensation and Reimbursement of Expenses (Final Report) and Notice of Proposed Distribution in which he proposed to pay nothing to the IRS for its claim of $22,506.78 which the Trustee had classified under the category of Fines, Penalties, and Damages. A footnote to the priority claims exhibit to the Trustee’s Final Report and on page 2 of the L.B.R. 202 Notice, declared that the amount represented an IRS claim for civil penalties and was subordinated to general unsecured claimants (Exhibit E to the Stipulation of Facts).
13. The L.B.R. 202 Notice also reported Trustee’s intention to distribute $26,894.11 to timely filed unsecured claims.
14. The Notice also listed the payment of other Chapter 7 expenses in the amount of $4,253.54 which a footnote states was related to the fiduciary tax liability of the Estate for federal and state tax returns.
15. The Trustee also in that same notice, stated his intention to pay $1,622.71 for priority tax claims.
16. An Order entered on October 22, 1996 approving Trustee’s Application for Compensation requested as part of the Final Report (Exhibit F to the Stipulation of Facts).
17. The Trustee paid the IRS on October 22, 1996 a total of $1,552.47 on its claim. The IRS applied that amount to Debtors’ liabilities for 1992 (Exhibit G to the Stipulation of Facts).
18. The Trustee did not pay the IRS for its $22,506.78 I.R.C. § 6672 claim and the Debtors have made no payments on that amount at any time.
19. Since the Debtors filed their Chapter 7 bankruptcy case they have incurred federal income tax liabilities for tax years 1993, 1994, 1995, 1997, 1999, 2000 and 2001 (Exhibit H to the Stipulation of Facts).
20. On February 7, 2003, Debtors filed this Chapter 13 case.
21. The IRS has filed a proof of claim in this Chapter 13 case claiming a total priority claim in the amount of $64,063.33. Of that amount, $41,538.87 is attributable to the I.R.C. § 6672 tax liability and interest on that amount to the Chapter 13 petition date which was not paid in or after the Chapter 7 case. The balance of the claim, $22,524.46, is for taxes and interest for the years listed in paragraph 19 above.
22. Debtors’ Third Amended Plan proposes to pay the IRS a priority claim in the amount of $22,524.46. That amount does not include any of the taxes attributable to the 1993 I.R.C. § 6672 taxes. In addition, Debtors have objected to the proof of claim of the IRS.
ISSUES
The issues presented by these facts are whether the 1993 trust taxes owed by the Debtor, Larry Spelts, in his capacity as a “responsible person” within the meaning of the Internal Revenue Code were discharged in the Debtors’ prior Chapter 7 case and whether the IRS is barred from asserting otherwise in this case.2
*456POSITIONS OF THE PARTIES
It is the Debtors’ position that the I.R.C. § 6672 taxes (“Trust Fund Recovery Penalty” or “TFRP”) claimed by the IRS in its proof of claim were discharged as a nonp-riority “penalty” in their prior Chapter 7 ease. It is on that basis that the Debtors object to the IRS proof of claim and have not provided for those taxes in their Third Amended Plan.
Debtors assert that the IRS is precluded under “Res Judicata from assessing or attempting to collect any income taxes, estate taxes or penalties previously adjudicated and paid by Jeffrey Hill (the Trustee) in the underlying Chapter 7 bankruptcy case” (Debtors’ Objection to Proof Of Claim of Internal Revenue Service Filed June 4, 2003, paragraph 10). In their Motion for Summary Judgment, Debtors further argue that “Debtors’ income tax liability” was discharged in their prior Chapter 7 case pursuant to 11 U.S.C. § 523(a)(1)(B)3 because returns for those taxes were filed “well before the two years before” the Chapter 13 petition date. They also rely on section 523(a)(7)(B) of the Code4 for the proposition that a tax penalty imposed with respect to a tax return that was filed more than three years prior to the petition date is dischargeable.
The IRS through its proof of claim and objection to the Plan asserts that it is entitled to have the 1993 trust fund taxes treated as a priority claim that must, under 11 U.S.C. § 1322, be paid in full by the Debtor’s plan, notwithstanding the events of the Debtors’ prior Chapter 7 case.5 The IRS relies on the language of 11 U.S.C. §§ 523(a)(1)(A) which excepts from a discharge certain priority taxes “of a kind ... specified in section ... 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed.” Section 507(a)(8)(C) refers to “a tax required to be collected or withheld and for which the debtor is liable in whatever capacity.”
ANALYSIS
There is no dispute that the taxes at issue here are “trust fund taxes,” as they are commonly referred to, not paid by Debtor, Larry Spelts, in his capacity as a responsible person. Such taxes fall within the explicit language of section *457507(a)(8)(C) as a “tax required to be collected or withheld and for which the debtor is liable in whatever capacity;” and section 523(a)(1)(A) which excepts such taxes from a discharge under 727, “whether or not a claim for such tax was filed or allowed.” It is also undisputed that the IRS filed a proof of claim in the Chapter 7 case for the trust fund taxes as a priority claim and that the Chapter 7 trustee did not pay them because he subordinated them as a penalty.
Although referred to as a “penalty” by the Internal Revenue Code, the Trust Fund Recovery Penalty is a tax which falls within the ambit of section 507(a)(8)(C). See United States v. Sotelo, 436 U.S. 268, 98 S.Ct. 1795, 56 L.Ed.2d 275 (1978); In the Matter of Taylor, 132 F.3d 256 (5th Cir.1998). It is a tax required to be collected or withheld and for which the debt- or is liable, in this case, as a responsible person.
The Debtors urge the Court to find that the IRS is barred from pursuing its claim for the trust fund taxes because of its failure to contest or respond to the Trustee’s treatment of its claim during their prior Chapter 7. The Tenth Circuit, in DePaolo v. United States (In re DePaolo), 45 F.3d 373, (10th Cir.1995), was confronted with the same argument. There the IRS had stipulated with the debtor as to the amount of its claim to be provided for in the debtor’s Chapter 11 plan. The plan included the agreed upon amount and was confirmed. After confirmation of that plan, the IRS audited the debtor and assessed additional taxes. The debtors moved to reopen their case to obtain declaratory judgment that the IRS was bound by the plan and that res judicata prohibited the IRS from assessing additional taxes. The court in its opinion acknowledged the general applicability of the principles of res judicata' to bankruptcy proceedings, but that the language of section 523(a)(1)(A) precluded its application under these facts:
By expressly providing that the described taxes are not discharged “whether or not a claim for such taxes was filed or allowed,” 11 U.S.C. § 523(a)(1)(A) ..., Congress has determined that the IRS may make a claim for taxes for a particular year in a bankruptcy proceeding, accept the judgment of the bankruptcy court, then audit and make additional claims for that same year, even though such conduct may seem inequitable or impair the debtor’s fresh start.
As we stated in Grynberg (In re Grynberg, 986 F.2d 367, (10th Cir.1993)),
[although allowing the IRS to pursue its claim after the confirmation and consummation of a Chapter 11 plan admittedly conflicts with the “fresh start” policy animating the Code’s discharge provisions, “it is apparent to us that Congress has made the choice between collection of revenue and rehabilitation of the debtor by making it extremely difficult for a debtor to avoid payment of taxes under the Bankruptcy Code.” This is an express congressional policy judgment that we are bound to follow.
DePaolo v. United States (In re DePaolo), 45 F.3d at 376 (citing In re Grynberg, 986 F.2d at 371). This Court too is bound by that congressional policy judgment.
CONCLUSION
The Court concludes that the Debtors’ characterization of the “trust fund taxes” as a penalty or an income tax which was discharged in their Chapter 7, and, consequently, subject to section 523(a)(7) is in-apposite. To so argue and to argue that the IRS is barred by principles of res judicata, ignores the true nature of the *458liability as a tax, the explicit language of the Bankruptcy Code and the weight of legal precedent. Accordingly, it is
ORDERED that the Debtor’s Motion for Summary Judgment is DENIED; and it is
FURTHER ORDERED that Debtors’ Objection to the Claim of the IRS is DENIED; and it is
FURTHER ORDERED that the Motion for Summary Judgment of the IRS is GRANTED; and it is
FURTHER ORDERED that the proof of claim of the IRS is allowed; and it is
FURTHER ORDERED that the Debtors’ Motion to Confirm their Third Amended Plan is DENIED; and it is
FURTHER ORDERED that Debtors are afforded fifteen (15) days from the entry of this Order within which to file an amended plan which provides for the allowed priority claim of the IRS, failing which this case will be dismissed.
. The issues to be resolved were originally presented in the context of the objections of the IRS and (he Chapter 13 Trustee to the Debtors' Second Amended Plan. Both the IRS and the Chapter 13 Trustee objected because the Plan does not properly provide for the priority claim of the IRS. A scheduling conference on those objections was held on July 23, 2003. Since that time Debtors have filed a Third Amended Plan which has drawn the same objections by the IRS and the Chapter 13 Trustee. The Third Amended Plan, like the Second Amended Plan, does not provide for the trust fund taxes claimed by the IRS in its proof of claim. Thus, what is now properly before the Court are the objections to the Third Amended Plan in addition to the Debtors’ objection to the IRS proof of claim.
. The IRS argues an additional issue: whether the interest which has accrued on the "trust fund taxes” since assessment in 1995 to the date of the petition in this case is also *456excepted from discharge. The IRS has supported its argument with a citation to an Eleventh Circuit case, In re Burns, 887 F.2d 1541 (11th Cir.1989), involving very similar facts which held that the interest accruing after a prior bankruptcy filing on a nondis-chargeable tax debt is also nondischargeable. The Debtors do not pose this as an issue and have not responded to the arguments of the IRS, presumably because it is their position that the trust fund taxes were discharged during the Chapter 7 in the first instance.
.Section 523(a)(1)(B) provides that:
A discharge under section 727 ... of this title does not discharge an individual debtor from any debt for a tax ... with respect to which a return, if required... was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition.
. Section 523(a)(7)(B) provides that:
A discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty — (A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or (B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition.
. 11 U.S.C. § 1322(a)(2) states:
The plan shall ... provide for the payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim; ... | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493660/ | LAMOUTTE, Bankruptcy Judge.
Subsequent to this Panel’s decision of December 29, 2003, reversing the bankruptcy court and remanding the case for further proceedings consistent with the mandate of the court of appeals, the appel-lee, Lawrence Groman, filed a motion to amend the panel’s judgment to certify questions for appeal pursuant to 28 U.S.C. § 1292(b). In the decision that was on review before the panel, the bankruptcy court granted Groman’s objection to Wat-man’s discharge under 11 U.S.C. § 727(a)(7), but denied the objection to discharge under § 727(a)(2).
Groman asks the panel to certify three questions to the court of appeals, aimed at clarifying what the court of appeals’ mandate required of the bankruptcy court on remand:
1.Whether the court of appeals’ mandate required the bankruptcy court to specifically identify each transferred asset and quantify the going concern value;
2. Whether the court of appeals’ mandate required the bankruptcy court to make specific findings concerning the property available to the trustee for liquidation; and
3. Whether the court of appeals’ mandate required the bankruptcy court to issue detailed, written findings on each of the indicia of fraudulent intent.
Watman filed an objection to the motion to amend judgment. He argues that a bankruptcy appellate panel does not have authority to certify questions to the court of appeals pursuant to § 1292(b) for the purpose of interlocutory appeal; rather, only a district court may do so. He further argues that even if the Panel could certify the question to the court of appeals, it should not do so in this case.
For the reasons set forth below, the Panel denies Groman’s request to amend its judgment to certify questions to the First Circuit Court of Appeals pursuant to 28 U.S.C. § 1292(b).
Discussion
The issues of whether a decision by a district court or a bankruptcy appellate panel, which reverses and remands back to the lower court, is interlocutory or final, as well as the availability of appellate review of such a decision, have been the topic of much discussion and controversy among the circuit courts of appeals. These issues arise because of the structure of the bankruptcy appellate system, which provides for appeals from the bankruptcy court to the district court or the bankruptcy appellate panel, and then provides for further appeal from those courts to the circuit courts of appeal.
Finality of a Bankruptcy Appellate Panel Decision
Under 28 U.S.C. § 158(d), a circuit court of appeals may only review a final order of *556a district court or a bankruptcy appellate panel. That section provides that “[t]he courts of appeals shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered under subsections (a) and (b) of this section.” Subsection (a) provides that district courts may hear appeals from final judgments and interlocutory orders and decrees (with leave of the court), while subsection (b) provides for the creation of bankruptcy appellate panels, which may hear appeals allowed under subsection (a).
In non-bankruptcy proceedings, 28 U.S.C. § 1291 gives the circuit courts of appeal jurisdiction over all final decisions of the district courts. The policies underlying this requirement include (1) emphasizing the trial judge’s role as the initial decider of law and fact, (2) conservation of judicial resources, (3) determining issues on appeal on a full, rather than partial, record, (4) avoiding the loss of evidence, (5) preserving the court’s and counsel’s familiarity with the case, and (6) preventing parties with substantial resources from harassing an opponent. Mitzel, “When is an Order Final? A Result-Oriented Approach to the Finality Requirement for Bankruptcy Appeals to Federal Circuit Court”, 74 Minn. L.Rev. 1337, 1341 (June, 1990). Although a final order is traditionally defined as one that ends the litigation on the merits and leaves nothing for the court to do but execute the judgment, Congress and the courts have developed pragmatic exceptions to the finality requirements. Id. Statutory exceptions are found in 28 U.S.C. § 1292(a) and Fed.R.Civ.P. 54(b); examples of judicially created exceptions include Forgay v. Conrad, 47 U.S. 201, 6 How. 201, 12 L.Ed. 404 (1848) [The “Forgay doctrine” allows immediate appeal when the substantive issues have been determined and delay would render the appeal of little value.]; Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949) [The collateral order rule, which allows appeal if the ruling conclusively determines a disputed questions, resolves an important issue that is completely severable from the action, and is effectively unreviewable on appeal from the final judgment.]; and Gillespie v. United States Steel Corp., 379 U.S. 148, 152, 85 S.Ct. 308, 13 L.Ed.2d 199 (1964), [Courts should give the general finality requirement of § 1291 a practical, rather than a technical construction.] Id. at 1342.
The Bankruptcy Reform Act of 1978 overhauled the entire appellate process for bankruptcy cases. The very broad grant of jurisdiction found in the Bankruptcy Act was replaced with 28 U.S.C. § 1293(b), which narrowed the jurisdiction of federal courts of appeal to “a final judgment, order, or decree” in bankruptcy. The circuits split on whether to interpret the finality requirement for bankruptcy appeals in the same manner in which they interpret the finality requirement of non-bankruptcy appeals. In 1984, Congress responded to judicial criticism and replaced § 1293 with § 158. Due to the similarity of their language, circuit courts of appeal routinely look to decisions interpreting § 1293(b) as a guide in construing the finality requirement of § 158(d). Mitzel, 74 Minn. L.Rev. at 1346-47. See also, In re Saco Local Development Corp., 711 F.2d 441 (1st Cir.1983), for a detailed discussion of the history of appellate bankruptcy jurisdiction.
When a bankruptcy court issues a final order that the district court or bankruptcy appellate panel reverses and remands for further proceedings, the circuit courts of appeal disagree about whether the § 158(d) finality requirement should be measured by the final order of the bank*557ruptcy court or by the district court or BAP’s reversal and remand.
A minority of jurisdictions hold that if a bankruptcy court’s decision is final, the district court’s reversal of that decision with remand for further proceedings is also final. See Sambo’s Restaurants, Inc. v. Wheeler, 754 F.2d 811 (9th Cir.1985); Bayer v. Nicola (In re Bestmann), 720 F.2d 484 (8th Cir.1983); Official Unsecured Creditors’ Comm. v. Michaels (In re Marin Motor Oil, Inc.), 689 F.2d 445 (3d Cir.1982), cert. denied, 459 U.S. 1206, 103 S.Ct. 1196, 75 L.Ed.2d 440 (1983).
The majority of circuits follow a more flexible approach to determining finality and focus on what remains to be done by the bankruptcy court after remand from the district court. See In re Gould & Eberhardt Gear & Mach. Corp., 852 F.2d 26 (1st Cir.1988); LTV Corp. v. Farragher (In re Chateaugay Corp.), 838 F.2d 59 (2d Cir.1988); ITT Diversified Credit Corp. v. Lift & Equip. Serv., Inc., 816 F.2d 1013 (5th Cir.1987); TCL Investors v. Brookside Sav. & Loan Ass’n, 775 F.2d 1516 (11th Cir.1985); Homa Ltd. v. Stone (In re Commercial Contractors), 771 F.2d 1373 (10th Cir.1985); Suburban Bank v. Riggsby, 745 F.2d 1153 (7th Cir.1984).
In Gould, the First Circuit held that “[w]hen a district court remands a matter to the bankruptcy court for significant further proceedings, there is no final order for the purposes of § 158(d) and therefore the court of appeals lacks jurisdiction.” 852 F.2d at 29. However, “[w]hen a remand leaves only ministerial proceedings, for example, computation of amounts according to established formulae, then the remand may be considered final.” Id. Accord, In re G.S.F. Corp., 938 F.2d 1467, 1473 (1st Cir.1991); M.S.V., Inc. v. Bank of Boston (In re M.S.V., Inc.), 892 F.2d 5 (1st Cir.1989); Tringali v. Hathaway Mach. Co., 796 F.2d 553 (1st Cir.1986); In re American Colonial Broadcasting Corp., 758 F.2d 794, 801 (1st Cir.1985). See also, Advanced Testing Technologies, Inc. v. Desmond (In re Computer Engineering Associates, Inc.), 337 F.3d 38 (1st Cir.2003) (Court of appeals has jurisdiction under § 158(d) to hear appeal from a district court decision reversing and remanding where the district court’s order is “superfluous” and therefore deemed final for purposes of appellate review.)
In another ruling, the First Circuit held that “a district court remand order in an intermediate appeal from a judgment entered in an adversary proceeding is not final and appealable under section 158(d) of the Judicial Code ... unless it resolves all procedural and substantive issues necessary to conclude the entire appeal.” Estancias La Ponderosa Development Corp. v. Harrington (In re Harrington), 992 F.2d 3, 5-6 (1st Cir.1993).
Thus, the First Circuit Courts of Appeals follows the majority view in determining finality under § 158(d), and looks to whether a case is remanded by a district court or bankruptcy appellate panel for significant further proceedings in order to decide whether the district court or panel’s decision is interlocutory. Under this standard, this Panel’s decision is interlocutory, and the court of appeals does not have jurisdiction to review it under § 158(d).
Appellate Review of Interlocutory Decisions Under § 1292(b)
Once it is determined whether a district court or bankruptcy appellate panel decision is final or interlocutory, and a conclusion is reached that it is interlocutory, and therefore unreviewable under § 158(d), the question remains whether the court of appeals may review the decision under § 1292(b).
*558Section 1292(b) provides for appellate review by the court of appeals of interlocutory decisions of the district court, and states:
When a district judge, in making in a civil action an order not otherwise ap-pealable under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order. The Court of Appeals which would have jurisdiction of an appeal of such action may thereupon, in its discretion, permit an appeal to be taken from such order, if application is made to it within ten days after the entry of the order....
In Connecticut National Bank v. Germain, 503 U.S. 249, 112 S.Ct. 1146, 117 L.Ed.2d 891 (1992), the Supreme Court addressed whether a court of appeals has jurisdiction to hear an interlocutory appeal from a district court, acting as an appellate court in a bankruptcy matter. The Court held that § 158(d) should not be read as precluding courts of appeals, by negative implication, from exercising jurisdiction under § 1291 over district courts sitting in bankruptcy, nor should § 158(d) be read as precluding jurisdiction under § 1292. Id. at 253, 112 S.Ct. 1146. The Court stated:
Section 1291 confers jurisdiction over appeals from “final decisions of the district courts” acting in any capacity. Section 158(d), in contrast, confers jurisdiction over appeals from final decisions of the district courts when they act as bankruptcy appellate courts under § 158(a), and also confers jurisdiction over final decisions of the appellate panels in bankruptcy acting under § 158(b). Sections 1291 and 158(d) do overlap, therefore, but each section confers jurisdiction over cases that the other section does not reach.
Id. (emphasis added). The Court goes on to state:
Because giving effect to both §§ 1291 and 158(d) would not render one or the other wholly superfluous, we do not have to read § 158(d) as precluding courts of appeals, by negative implication, from exercising jurisdiction under § 1291 over district courts sitting in bankruptcy. We similarly do not have to read § 158(d) as precluding jurisdiction under § 1292.
Id. And further:
There is no reason to infer from either § 1292 or § 158(d) that Congress means to limit appellate review of interlocutory orders in bankruptcy proceedings. So long as a party to a proceeding or case in bankruptcy meets the conditions imposed by § 1292, a court of appeals may rely on that statute as a basis for jurisdiction.
Id. at 254, 112 S.Ct. 1146. Thus, the Court rejected the appellant’s argument that § 158(d) limits the courts of appeals jurisdiction over the district court under § 1292; however, the Court implies that the distinction between jurisdiction over interlocutory appeals under § 158(d) and § 1292 is their application to the decisions of bankruptcy appellate panels.
The First Circuit cited Germain in Quiros Lopez v. Unanue Casal (In re Unanue Casal), 998 F.2d 28 (1st Cir.1993), wherein it notes:
The courts of appeals may derive jurisdiction to review a district court appellate order in a bankruptcy case from either of two statutory sources: (1) the bankruptcy appeal provisions of 28 U.S.C. § 158(d); or (2) the interlocutory *559appeal provisions in 28 U.S.C. § 1292 applicable to civil provisions generally.
Id. at 31. Further,
Germain rejected the widely held view that 28 U.S.C. § 158(d) affords the only avenue of appeal from a district court appellate order in a bankruptcy case. Compare, e.g., In re GSF Corp., 938 F.2d 1467, 1473 n. 4 (1st Cir.1991).
Id. at 31 n. 2. The Unanue Casal case involved an appeal from a district court, not a bankruptcy appellate panel.
In Vylene Enterprises, Inc. v. Naugles, Inc. (In re Vylene Enterprises, Inc.), 968 F.2d 887 (9th Cir.1992), the court of appeals stated:
Section 1292(b), by its plain language, affords us jurisdiction only over orders made by a district judge. Our decision today recognizes that a party to a bankruptcy court proceeding who foresees the need for an interlocutory appeal must forgo the speedier appellate process afforded by the bankruptcy appellate panel.
Id. at 890 n. 4.
In summary, there is no case law directly addressing whether a court of appeals has jurisdiction to hear an interlocutory appeal from a bankruptcy appellate panel pursuant to 28 U.S.C. § 1292(b); however, the Supreme Court’s decision in Germain, which addresses the courts of appeals jurisdiction over interlocutory appeals from the district courts, implies that the courts of appeals do not have jurisdiction over interlocutory appeals from bankruptcy appellate panels, because such is the distinction between § 158(d) and § 1292 which makes both sections viable.
Standards for Interlocutory Review Under § 1292(b)
As previously mentioned, under § 1292(b), the appellate court may have jurisdiction over an interlocutory appeal where the district court includes in its order a statement that its order (1) “involves a controlling question of law” (2) “as to which there is substantial ground for difference of opinion”, and (3) “an immediate appeal from the order may materially advance the ultimate termination of the litigation”.
In Fleet Data Processing Corp. v. Branch (In re Bank of New England Corporation), 218 B.R. 643 (1st Cir. BAP 1998), the Panel, in deciding whether it had jurisdiction to hear an interlocutory appeal from the bankruptcy court pursuant to § 158(a), took guidance from the criteria for granting an interlocutory appeal pursuant to § 1292(b). Id. at 652 (“Section 158 provides no express criteria to guide our discretion, but most courts utilize the same standards as govern the propriety of district courts’ certification of interlocutory appeals to the circuit courts under § 1292(b).”)
The Panel in Fleet Data first stated that it must “inquire whether the bankruptcy court’s ruling ... presents a question of law that controls the outcome of the underlying case.” Id. In the case presently before the Panel, the Panel’s decision found that the bankruptcy court did not comply with the court of appeals’ mandate; such is not a controlling question of law, but rather an interpretation of the court of appeals’ directive.
As to the second criteria for granting review under § 1292(b), the Panel in Fleet Data stated that “[ejircuit law limits the ‘statutory anodyne’ of certification to ‘rare cases’ where the proposed intermediate appeal presents one or more difficult and pivotal questions of law not settled by controlling authority.” Id. at 653 (citations omitted). The Panel concluded “the case specific issues raised on appeal do not rise to the level of difficulty and significance *560required under § 1292(b), and, therefore, they do not recommend our exercise of discretionary appellate jurisdiction under § 158(a)(3).” Id. Similarly, in the case currently before the Panel, the issues raised, i.e. whether the bankruptcy court complied with the court of appeals’ mandate, are not difficult and pivotal questions of law not settled by controlling authority. Furthermore, the statutory reference to “a controlling question of law as to which there is substantial ground for difference of opinion” seems to refer to differences among district courts, circuit courts, etc., rather than differences between the judges of a bankruptcy appellate panel in a particular case.
Finally, as to the third factor for granting interlocutory review under § 1292(b), the Panel in Fleet Data found that granting review would not “materially advance the ultimate termination of the litigation” because it would not terminate the adversary proceeding nor resolve the trustee’s liability. Id. at 654. In the case presently before the Panel, certifying the question of whether the bankruptcy court complied with the court of appeals mandate to the court of appeals may advance the termination of the litigation if the court of appeals decides that the bankruptcy court did as directed; on the other hand, if the court of appeals agrees with the Panel, the effect will be the same as if the question was not certified for interlocutory review. However, it does not appear that the issues herein are the type intended for interlocutory appellate review under § 1292(b), assuming such review is even available from a decision of a bankruptcy appellate panel to a court of appeals. Accordingly, the appellee’s motion to amend judgment to certify questions for appeal pursuant to 28 U.S.C. § 1292(b) should be denied.
Conclusion
The circuit courts of appeals have jurisdiction to review a final decision of a bankruptcy appellate panel or a district court which is reviewing a final decision of a bankruptcy court pursuant to 28 U.S.C. § 158(d). A decision by a panel or district court which reverses a bankruptcy court’s decision and remands the case for significant further proceedings is not a final decision under § 158(d), and therefore may not be reviewed by the court of appeals. The courts of appeals do not have jurisdiction to entertain an interlocutory appeal pursuant to § 158(d). Although the courts of appeals do have jurisdiction over appeals from interlocutory orders of the district courts in certain situations pursuant to 28 U.S.C. § 1292, that section does not apply in the bankruptcy context to decisions of a bankruptcy appellate panel reviewing a bankruptcy court decision. Even if § 1292(b) did apply herein, this case does not meet the criteria for interlocutory review under that section. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493661/ | DECISION AND ORDER REGARDING RESEARCH AND DEVELOPMENT COSTS AND TAXES
ARTHUR J. GONZALEZ, Bankruptcy Judge.
I. INTRODUCTION
Before the Court is a motion brought in the above-captioned adversary proceeding by Sunbeam Products, Inc. for clarification and/or reconsideration of the Court’s June 3, 2003 memorandum decision, after trial, regarding the ownership and infringement of U.S. Patent No. D348,585 (the “June 3rd Decision”), Sunbeam Products, Inc. v. Wing Shing Products (BVI) Ltd. (In re AI Realty Marketing of New York, Inc.), 293 B.R. 586 (Bankr.S.D.N.Y.2003), concerning the recovery of post-suit profits.1 In an order issued on June 17, 2003, the Court instructed Sunbeam to provide a pro-forma income statement, consistent with the Court’s findings in Section (IV)(D) of the June 3rd Decision, setting forth its operating profits earned from the sale of infringing AD Coffeemakers produced by Simate-lex from February 9, 2001 through the order’s publication date (the “Infringement *624Period”). Sunbeam served and filed an updated pro-forma income statement on July 17, 2003. It subsequently filed this motion on September 19, 2003, asserting that: (i) alleged research and development expenses incurred during the Infringement Period should be deducted in the calculation of Sunbeam’s profits; and (ii) profits should be based on net income after taxes. A hearing was held concerning these issues on October 10, 2003.
II. DISCUSSION
A. Alleged Research and Development Expenses May Not Be Deducted in the Calculation of Sunbeam’s Profit
The Court held in the June 3rd Decision that “[t]he inclusion or exclusion of fixed costs [in calculating profits] is a matter for the Court to determine in its discretion.” In re AI Realty Marketing of New York, 293 B.R. at 618. The Court further held that the decision as to whether fixed expenses should be deducted from total costs should be treated as a question of fact. Id. Those costs properly attributable to the infringing AD Coffeemakers were deducted from Sunbeam’s profits; those costs not clearly attributable to the AD Coffeemakers were not. Id. at 619. Sunbeam bore the burden of demonstrating the nature and amount of alleged costs, as well as their relationship to the infringing products. Id. at 618. Sunbeam also bore the burden of presenting a fair and acceptable formula for allocating fixed overhead. Id. at 619.
Sunbeam now argues that research and development costs allegedly incurred during the Infringement Period should be deducted from its profits. In support, Sunbeam has provided a vague list of six seemingly minor changes that were made to the AD Coffeemakers. Sunbeam contends that the cost of these changes should be allocated as a percentage of sales. It relies upon the Court’s determination that this was a fair and acceptable method with regard to those costs deducted in the June 3rd Decision. However, the Court finds that Sunbeam has not met its current burden of sufficiently demonstrating the nature and amount of the costs associated with the alleged research and development, or of presenting a fair and acceptable formula of allocating fixed overhead with respect to such costs.
Whereas the Court agreed in the June 3rd Decision with Sunbeam’s assertion that it would be extremely difficult to assign line items to particular models or suppliers with regard to those costs that were permitted to be deducted, the present alleged research and development costs are distinguishable in light of the fact that Sunbeam has produced a list of six specific changes that were made to the AD Coffeemakers during the Infringement Period. Since Sunbeam was able to identify particular, seemingly minor changes, it should have attempted to approximate the costs incurred therewith or to better explain its inability to do so. Having failed to provide any detail on the extent or cost of these six seemingly minor changes, or to render a convincing explanation as to why it cannot meet its burden, Sunbeam has failed to sufficiently demonstrate the nature and amount of these costs.
Sunbeam has also failed to meet its burden of presenting a fair and acceptable formula of allocating fixed overhead. It would not be fair and acceptable to use a percentage of sales approach in connection with the allocation of research and development costs for the six changes to the AD Coffeemakers where, as discussed above, Sunbeam should have been able to estimate the costs incurred in effectuating them.
*625Since Sunbeam has not sufficiently demonstrated the nature and amount of the research and development costs relating to the AD Coffeemakers or provided a fair and acceptable method of allocating fixed overhead regarding such costs, the alleged research and development costs associated with the AD Coffeemakers during the Infringement Period may not be deducted for purposes of calculating Sunbeam’s profits.
B. Sunbeam May Not Deduct Unpaid Taxes from Its Profíts
Sunbeam further argues that its profit calculations should be based on net income after taxes. Sunbeam relies on the Second Circuit’s ruling in In Design v. K-Mart Apparel Corp., 13 F.3d 559 (2d Cir.1994), which held that, in appropriate cases, income tax expenses should be included in deductible overhead when determining a defendant’s net profit. Id. at 567. Wing Shing responds that Sunbeam should not be allowed to deduct corporate taxes from its profits since it did not pay any such taxes during the Infringement Period.2 The Court agrees that Sunbeam should not be entitled to deduct an amount based on taxes not actually paid during the Infringement Period.
In Design v. K-Mart Apparel Corp., 13 F.3d at 567 (quoting MacBeth-Evans Glass Co. v. L.E. Smith Glass Co., 23 F.2d 459, 463 (3d Cir.1927)), states, “when a claim is made for infringing profits, ‘this means profits actually made. A book profit of a dollar is not a profit actually made when from the dollar the government takes twenty cents as the price for the right to make any profit at all.’ ” Sunbeam does not contest the assertion that it has paid no corporate taxes since the beginning of the Infringement Period, though it argues that it should receive a deduction based on its loss carryover being lower than it otherwise would have been as a result of the profits attributable to the AD Coffeemakers. This position is inconsistent with the court’s ruling in In Design, which clearly states that a deduction should be allowed for taxes “paid,” but does not suggest that a deduction is permitted for taxes offset against net operating losses.
In fact, In Design specifically rejects “Mypothetical discussions of possible indirect tax ramifications,” focusing instead on taxes actually paid. Id. The loss carryover relied upon by Sunbeam is such a hypothetical; the future impact, if any, of Sunbeam’s net operating losses cannot be ascertained at present. Moreover, courts have disallowed deductions for taxes offset against net operating losses, holding that a defendant may only deduct taxes that it actually paid from its calculation of profits. See Three Boys Music Corp. v. Bolton, 212 F.3d 477, 488 (9th Cir.2000); also Burns v. Imagine Films Entertainment, Inc, No. 92-CV-2438, 2001 WL 34059379, at *9, 2001 U.S. Dist. LEXIS 24653, at *27-28 (W.D.N.Y. August 23, 2001). Sunbeam has not produced contrary authority.3
*626Sunbeam also contends, again without citing applicable authority, that if the lack of taxes paid by Sunbeam during the Infringement Period is relevant, then the lack of profits for the company as a whole should likewise preclude any recovery in connection with the AD Coffeemakers. The Court disagrees. As discussed in the June 3rd Decision, 35 U.S.C. § 289 provides for payment of an infringer’s “total profit” to a patent holder. Total profit is based upon the amount of infringing sales less appropriate costs. See In re AI Realty Marketing of New York, 293 B.R. at 618. Sunbeam’s overall corporate profits do not impact the amount of infringing sales or, by extension, its “total profit.” However, as discussed above, its failure to pay taxes during the Infringement Period does prevent Sunbeam from deducting its unpaid taxes as a related cost.
In light of the fact that Sunbeam did not pay taxes during the Infringement Period, the Court finds that Sunbeam may not deduct unpaid taxes attributable to its profits from the AD Coffeemakers from its total profits.
III. CONCLUSION
For the above reasons, neither the alleged research and development costs nor the unpaid taxes attributable to Sunbeam’s profits from the AD Coffeemakers may be deducted from its total profit. Sunbeam is instructed to file a revised pro-forma income statement consistent with this decision and order within fifteen days of the date hereof. Upon receipt of the income statement, Wing Shing is directed to settle an order on five days notice stating the final amount of damages.
. For purposes of this decision and order, the Court is assuming familiarity with the June 3rd Decision. Unless otherwise indicated, capitalized terms used herein shall be ascribed their meaning in that decision.
. Wing Shing also contends that the Court should apply Nike, Inc. v. Wal-Mart Stores, Inc., 138 F.3d 1437 (Fed.Cir.1998), which held that an infringer should pay an award based on pre-tax profits, rather than In Design. However, the Court need not address this issue because Sunbeam’s argument fails under In Design.
. Although not dispositive, the Court notes that it is likely that ultimately there will be no tax ramifications attributable to the infringing AD Coffeemakers. In the tax year that Sunbeam pays the damages, representing the actual profits derived from the AD Coffeemakers, to Wing Shing, Sunbeam's net operating loss will increase by such amount to the level it would have been had the actual profits (damages) not reduced Sunbeam's net operating loss previously. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493662/ | OPINION
RAYMOND T. LYONS, Bankruptcy Judge.1
Presently before the court is a dispute surrounding the computation of the debt- or’s tax liability for tax years 1986 and 1987. The District Court remanded the matter to the Bankruptcy Court following a decision by the Third Circuit Court of Appeals. In re Pransky, 318 F.3d 536 (3d Cir.2003). The Circuit affirmed the District Court’s holding that refunds for 1984 and 1985 were barred by the statute of limitations, and directed that on remand the Bankruptcy Court should determine the validity of the IRS’s proof of claim. As discussed in further detail below, the court finds that the IRS’s computations of the debtor’s tax liability for tax years 1986 and 1987 are correct, except that an explanation of the computation of the failure to file penalty for 1986 is required.
FACTS2
The debtor, Roger Pransky filed a voluntary Chapter 11 petition on January 15, 1997. The IRS filed a proof of claim on February 27, 1997 asserting that the debt- or owed $131,237.02 in income taxes for the year 1987.3 The debtor initiated an adversary proceeding on April 13, 1998 seeking a determination of his tax liability for tax years 1984 through 1987. The parties filed cross-motions for summary judgment on the issue of whether or not this court had jurisdiction over the debt- or’s tax years at issue. This court found it had jurisdiction, on appeal, however, the *674District Court reversed and found the Bankruptcy Court did not have jurisdiction over the debtor’s refund claims for tax years 1984 and 1985 due to the statute of limitations as set forth in 26 U.S.C. § 6532(a). Internal Revenue Service v. Pransky, 261 B.R. 380 (D.N.J.2001). The Court of Appeals affirmed the District Court’s ruling, and held that Pransky’s refund claims for tax years 1984 and 1985 were barred by the statute of limitations. The case was remanded to the Bankruptcy Court for a determination of the debtor’s tax liability for tax years 1986 and 1987, “without regard to the overpayments Pransky made on his 1984 and 1985 taxes.” In re Pransky, 318 F.3d at 545. Even though his refund claims for 1984 and 1985 are barred, the debtor asserts the IRS owes him a net refund in the amount of $359,295.16. The IRS asserts that Pran-sky owes $131,237.02 for tax year 1987, and that Pransky has a nominal balance of $0.01 due for tax year 1986.4
DISCUSSION
The Bankruptcy Code provides that a proof of claim filed pursuant to 11 U.S.C. § 501 is “deemed allowed, unless a party in interest ... objects.” 11 U.S.C. § 502. An uncontested claim constitutes prima facie evidence of the validity and amount of the claim. Fed. R. Bankr.P 3001(f). The party objecting to the claim bears the initial burden of overcoming the prima facie validity of the claim. In a dispute surrounding a proof of claim filed by a taxing authority, the taxpayer bears the burden of establishing error by the taxing authority, because, “it is well established in the tax law that an assessment is entitled to a legal presumption of correctness.” U.S. v. Fior D’Italia, Inc., 536 U.S. 238, 242, 122 S.Ct. 2117, 153 L.Ed.2d 280 (2002) citing, U.S. v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976), see also, In re Thinking Machines, 203 B.R. 1 (Bankr.D.Mass.1996). In this case, Pransky as both the taxpayer and the party objecting to a claim bears the burden of persuasion.
The difference between the proof of claim filed by the IRS and the refund claimed by the debtor for tax years 1986 and 1987 stem from the following four issues:
1. Did the IRS correctly assess and compute penalties for tax years 1986 and 1987?
2. Is Pransky entitled to netting the overpayment and underpayment interest in accordance with 26 U.S.C. § 6621(d)?
3. Did Pransky make an additional estimated tax payment of $15,000 for tax year 1986? and
4. Is Pransky entitled to an abatement of interest in accordance with 26 U.S.C. § 6404?
I. Did the IRS correctly assess and compute penalties for tax years 1986 and 1987?
A. Penalties for tax year 1986
For tax year 1986, the IRS assessed penalties totaling $95,648.00. The penalties are broken down as follows: a failure to timely file penalty of $77,900, a failure to timely pay tax penalty of $12,531, and a failure to pay estimated tax penalty of $5,217.
B. Penalties for tax year 1987
For tax year 1987, the IRS assessed penalties totaling $34,634. The 1987 penalties are broken down as follows: $14,867 as a late filing penalty, $16,519 as a failure *675to pay tax penalty, and $3,248 as a failure to pay estimated tax penalty.
A significant difference in the overall calculations between the debtor and the IRS is that the debtor did not include penalties for 1986 and 1987, where the IRS has. Pransky alleges several procedural and substantive deficiencies in the IRS’s penalty computations.
C. Procedural Deficiencies
Procedurally, Pransky questions the computation of penalties for tax year 1986; and asserts the penalties for 1986 and 1987 were not previously assessed by the IRS, and accordingly cannot be assessed at this time.
1. 1986 Penalty Computations
For tax year 1986, Pransky’s return was initially due on April 15, 1987. Pransky was granted two extensions to file, thereby extending his filing date to October 15, 1987. The parties agree that Pransky’s tax liability was $396,224 as of April 15, 1987 as shown on his return. As evidenced by the debtor’s 1986 W-2, Pransky had withholding tax of $50,000. On July 13, 1987, Pransky remitted $315,000 towards his 1986 tax liability. As of July 13, 1987, Pransky’s tax liability for 1986 was $31,224.5 Pransky argues that the IRS incorrectly assessed the delinquent penalty for 1986 for five months, from April 15, 1987 through September 15, 1987. Pran-sky asserts the penalty should only be assessed on the remaining balance as of the expiration of the extension date, in accordance with 26 U.S.C. § 6651(b)(1).
In the debtor’s memorandum he recognizes that “this court determined that a failure to timely file penalty should be imposed for 1986.” The IRS argues that since this court previously held that the penalties were properly assessed, and the debtor failed to appeal that aspect of the prior ruling, the debtor is barred from relitigating the issue at this point. As stated by the District Court, “the Bankruptcy Court sustained the imposition of delinquency penalties because the debtor failed to timely submit the remittances in question.” Internal Revenue Service v. Pransky, 261 B.R. 380, 384 (D.N.J.2001). Although this issue was not raised on appeal, the remand requires this court to determine the tax claims for 1986 and 1987. The details of the IRS’s calculations of the failure to file penalties have not been provided. The court directs the IRS to supplement the record by showing how it determined the failure to file penalty for 1986 giving effect to the extensions to file, the $50,000 withholding and the $315,000 payment on July 13,1987.
2. Penalties previously raised/assessed by the IRS
Regarding the penalties imposed by the IRS for both 1986 and 1987, the debtor asserts the IRS previously raised only the failure to file penalty and any other penalties added were never raised and cannot be assessed now. This is factually incorrect. The IRS submitted computations detailing the transactions relating to the government’s calculation of Pransky’s tax obligations. For tax year 1986, the late filing penalty, the estimated tax penalty and the failure to pay tax penalty were all assessed on February 24, 1992.6 For tax *676year 1987, the late filing penalty, the failure to pay tax penalty and the estimated tax penalty were all assessed on September 28, 1992.7 Between February 24,1992 and September 28, 1992, the IRS imposed all of the penalties at issue. The debtor initiated this adversary proceeding in 1998, six years after the penalties were assessed. Therefore, the penalties at issue cannot be new, as they were all previously assessed by the IRS, as evidenced by the submissions.
The court finds the penalties for 1986 and 1987 were correctly assessed by the IRS, except for the failure to file penalty for 1986. The IRS is directed to submit its computation of the failure to file penalty for tax year 1986.
D. Substantive Deficiencies
Substantively, the debtor asserts that penalties cannot be assessed under 26 U.S.C. § 6651 because 1) the debtor reasonably believed he need not file a tax return, and 2) no net tax was due from which a penalty could be computed. Underlying the debtor’s substantive objections to the IRS’s calculations is the premise that he can defensively utilize the overpayments from tax years 1984 and 1985 to negate the penalties assessed by the IRS for the 1986 and 1987 tax years.
26 U.S.C, § 6651(a)8 provides that a taxpayer who fails to timely file a tax return without reasonable cause and due to willful neglect is liable for a penalty equal to a percentage of the amount of tax due. The debtor correctly argues that there are two pre-requisites for assessing the failure to timely file penalty: whether the taxpayer intentionally failed to file the delinquent return, and whether there is a net amount of tax due. Pransky argues that neither pre-requisite was present.
1. Reasonable Cause
Pransky states that he had reasonable cause for failing to file his returns for 1986 and 1987. He explains that the invocation of his Fifth Amendment privilege in the criminal actions against him resulted in his failure to file. This court previously discussed reasonable cause in relation to Pransky’s assertion of the Fifth Amendment and found that Pransky did not establish reasonable cause for failing to file his tax returns. As discussed in this court’s earlier opinion,
[t]he filing of a tax return is mandatory. The Fifth Amendment does not excuse an individual from this obligation.... In the instant case, debtor asserts that [his] failure to file timely tax returns was the result of reasonable cause and not of willful neglect, entitling [him] to a *677refund of the penalties and interest assessed by the IRS. This court disagrees ....
Reasonable cause under § 6651 requires a debtor to demonstrate that he “exercised ordinary business care and prudence” but nevertheless was “unable to file a return within the prescribed time.”
In re Pransky, 245 B.R. 478, 486 (Bankr.D.N.J.1999), citing, U.S. v. Sullivan, 274 U.S. 259, 263, 47 S.Ct. 607, 71 L.Ed. 1037 (1927); U.S. v. Boyle, 469 U.S. 241, 245-46, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985).
Accordingly, because the bankruptcy court already analyzed the reasonable cause provisions of § 6651 in relation to the penalties assessed by the IRS, and the issue was not raised on appeal, this court’s conclusion that the debtor failed to establish reasonable cause remains the law of the case. See, Frank v. Colt Industries, Inc., 910 F.2d 90, 100 (3d Cir.1990).
2. Net balance of tax due for 1986
Next, the debtor asserts that no penalty is due for 1986, because no net tax is due. This argument, too is unpersuasive. Pransky argues that the failure to file penalty for 1986 should be zero because no net tax was due on October 15, 1987. As discussed earlier, Pransky received extensions to file his 1986 return, thereby extending his filing date to October 15, 1987. For tax year 1986, the parties agree that based on Pransky’s tax return, his tax was $396,224. His with-holdings for 1986 totaled $50,000, and on July 13,1987, Pransky remitted a payment of $315,000. Accordingly, by October 15, 1987, the date Pransky’s extensions to file expired, he owed $31,224 in taxes, exclusive of interest and penalties.
The debtor argues that his overpayment from 1984 of $15,539.22 should be deducted from the tax owed for 1986 as of April 15, 1987, and that the overpayment from tax year 1985 totaling $36,294.16 should be deducted from his tax obligations for 1986 as of July 8,1987. Deducting the overpay-ments for 1984 and 1985, Pransky asserts he owed no tax for 1986 on which a penalty could be assessed. Pransky argues he can use the 1984 and 1985 overpayments defensively, and that he is not seeking a credit or a refund from these tax years. The debtor’s position is dependent upon whether, in accordance with the Third Circuit’s opinion, he can use the 1984 and 1985 overpayments defensively.
3. Defensive use of 1981 omd 1985 overpayments
Pransky cites 26 U.S.C. § 6651(b)(1) and two cases in support of his argument that he can use the 1984 and 1985 overpay-ments defensively. Section 6651(b)(1) provides;
Penalties imposed on amount due. For purposes of — subsection (a)(1), the amount of tax required to be shown on the return shall be reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return.
26 U.S.C. § 6651(b)(1).
The debtor asserts that to compute the net penalty due under § 6651(b)(1) his remittances, payments and available credits are to be subtracted from the tax owed. Since the 1984 and 1985 overpayments were included on the 1986 tax return, the debtor asserts they, too should be included in the penalty computation. The debtor argues this is not an offset, credit or refund of the 1984 and 1985 overpayments, rather the debtor seeks to utilize the over-payments merely to reduce the net tax for purposes of penalty calculations.
*678The court disagrees with Pransky’s interpretation of the statute. By the plain language of the statute, the debtor’s tax liability for 1986 may be reduced by “the amount of any credit against the tax which may be claimed on the return.” 26 U.S.C. § 6651(b)(1). That the debtor listed his overpayments for 1984 and 1985 on his tax return for 1986 does not mean that he is entitled to a credit from the 1984 and 1985 overpayments. The District Court held that pursuant to 26 U.S.C. § 6532(a), the Bankruptcy Court could not properly exercise jurisdiction over the debtor’s suit relating to the 1984 and 1985 tax years. Accordingly, the debtor may not subtract the 1984 and 1985 overpayments from his 1986 taxes, since they are not credits to which the debtor is entitled.
Next, Pransky cites Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293 (1932), as supporting the theory that defensive use of time-barred items is allowed under equitable principles. “Although the statute of limitations may have barred the assessment and collection of any additional sum, it does not obliterate the right of the United States to retain payments already received when they do not exceed the amount which might have been properly assessed and demanded.” Id. at 283, 52 S.Ct. 145.
The debtor’s attempt to rely on equities is misplaced. As the District Court stated, “[w]hen statutes of limitations on filing requirements are jurisdictional, ‘non-compliance bars an action regardless of the equities in a given case.’ ” Internal Revenue Service v. Pransky, 261 B.R. 380, 389 (D.N.J.2001) quoting, Becton Dickinson & Co. v. Wolckenhauer, 215 F.3d 340, 344 (3d Cir.2000). Pransky’s right to challenge the IRS’s assessment of his 1984 and 1985 tax obligations is barred by the statute of limitations as provided in 26 U.S.C. § 6532(a). The court is bound by jurisdictional requirements and cannot override them through the use of equitable powers.
Additionally, Pransky cites to Union Pacific R.R. v. U.S., 182 Ct.Cl. 103, 389 F.2d 437 (1968), for the proposition that although the statute of limitations may have expired, a taxpayer is entitled to a redeter-mination of tax liability, because the statute of limitations bars solely the assessment and collection of additional tax. The Union Pacific case, however addressed the statute of limitations in the context of offsetting. In the Pransky case, on appeal, the Third Circuit clearly held that setoff was not available for Pransky. “Because, as we have just held, Pransky did not timely file suit to recover his 1984 and 1985 tax overpayments, the Bankruptcy Court does not have jurisdiction to offset those overpayments against his 1987 tax deficiencies.”9 In re Pransky, 318 F.3d 536 (3d Cir.2003).
Accordingly, Union Pacific is distinguishable, and the conclusion of the Third Circuit clearly provides that Pransky cannot offset his 1987 tax deficiencies by using his overpayments for 1984 and 1985.
The debtor attempts to read the Circuit’s opinion as denying him any credit or refund. He asserts, however, that he can use the overpayments to reduce his tax liability to zero, which would then eliminate a balance from which penalties could be assessed. Permitting Pransky to reduce his tax liability for 1986 and 1987 *679through the use of his 1984 and 1985 over-payments is equivalent to “reducing his tax deficiencies” for those years, which was clearly barred by the Third Circuit.
The Court of Appeals and the District Court were specific in their mandate that the 1986 and 1987 tax liability should be determined without consideration of the 1984 and 1985 overpayments, since the bankruptcy court has no jurisdiction in light of the time constraints imposed by 26 U.S.C. § 6532. Pursuant to the directives of the higher courts, the payments Pran-sky made on his 1984 and 1985 taxes are not available credits, and therefore they cannot be utilized as credits nor to offset or reduce his tax liabilities, even for the sole purpose of reducing or redetermining the interest and penalty computations.
The debtor’s argument that no net tax was due for 1986 from which a penalty could be assessed is meritless. Moreover, the debtor’s rebanee on Lewis, Union Pacific, and 26 U.S.C. § 6651(b)(1) is misplaced in light of the ruling by our Circuit Court of Appeals.
II. Interest Netting
Pransky asserts he is entitled to interest netting on his 1987 tax obbgations, in accordance with 26 U.S.C. § 6621(d), which provides, in relevant part:
Elimination of interest on overlapping periods of tax overpayments and underpayments. To the extent that, for any period, interest is payable under sub-chapter A and allowable under subchap-ter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.
26 U.S.C. § 6621(d).
Section 6621(d) became effective upon its enactment on July 22, 1998. Federal National Mortgage Assoc. v. U.S., 56 Fed.Cl. 228 (Fed.Cl.2003). The statute generally applies to overlapping periods of interest “beginning after July 22, 1998.” Rev. Proc. 99-43, 1999-47 I.R.B. 579, 580, 1999 WL 1019050. An uncodified special rule, however, makes its application retroactive, and provides,
SPECIAL Rule — Subject to any applicable statute of limitation not having expired with regard to either a tax underpayment or a tax overpayment, the amendments made by this section shall apply to interest for periods beginning before the date of the enactment of this Act if the taxpayer—
(A) reasonably identifies and establishes periods of such tax overpayments and underpayments for which the zero rate applies; and
(B) not later than December 31, 1999, requests the Secretary of the Treasury to apply section 6621(d) of the Internal Revenue Code of 1986, as added by subsection (a), to such periods.
Section 3301(c)(2) of P.L. 105-206, as amended by § 4002(d) of P.L. 105-277. In accordance with the special rule, “the net interest rate of zero in 6621(d) also applies to interest for periods beginning before July 22, 1998, provided certain conditions are met.” Rev. Proc. 99-43. “Among these conditions is a requirement that a taxpayer request the application of 6621(d) by December 31, 1999.” Rev. Proc. 99-43. Pransky complied with this condition by requesting application of interest netting by letter dated December 29,1999.
A second condition for retroactive application of § 6621(d) requires the taxpayer to “reasonably identify periods” of tax overpayments and underpayments. Pran-sky asserts that the overlapping period of interest accruing on overpayments and underpayments began on December 11, 1991, the date he filed his 1984 and 1985 tax *680returns. According to the government’s submissions, interest began to accrue on Pransky’s tax liability for 1987 on June 30, 1988. The debtor acknowledges that not all of the interest owed for tax year 1987 overlapped with the overpayments from 1984 and 1985. Interest accrued on Pran-sky’s 1987 tax liability before his overpay-ments for 1984 and 1985 began accruing interest. Accordingly, the interest owed the debtor and the interest owed the IRS only overlapped as of December 11, 1991. Pransky recognizes that interest netting, if available at all, is only available as of December 11, 1991, and asserts that the concurrent period of tax overpayment and tax underpayment interest began on December 11, 1991 and runs until July 7, 2003, the date to which Pransky’s submitted calculations run.
Pransky asserts that while he cannot be refunded for the 1984 and 1985 overpay-ments, those overpayments should be used to compute interest. Pransky overpaid his 1984 and 1985 taxes, and underpaid his 1987 taxes. Since interest ran on both his overpayment and underpayment concurrently, Pransky asserts § 6621(d) relieves him of owing any interest at all. According to the debtor’s interpretation of § 6621(d), for interest netting to apply, the statute of limitations on either the overpayment or the underpayment must be open. Although the statute of limitations is not open on Pransky’s overpayments for 1984 and 1985, the statute of limitations on his underpayment for 1987 is open. Therefore, Pransky contends that he is entitled to a zero net rate of interest for 1987 beginning on December 11, 1991. The debtor cites to Federal National Mortgage Assoc. v. U.S., 56 Fed.Cl. 228 (Fed.Cl.2003) in support of his position.
Federal National Mortgage Assoc. is distinguishable because there the court allowed interest netting of overpayment interest owed to and paid to the taxpayer by the IRS, against underpayment interest owed from and paid by the taxpayer to the IRS. In Federal National Mortgage Assoc., infra., interest on overpayments and underpayments were available, had already accrued, and had been paid by both the IRS and the taxpayer. Whereas, in Pransky’s case, the IRS does not owe the taxpayer interest on the overpayments for 1984 and 1985 because the statute of limitations expired for those years. There exists no interest on an overpayment to net the interest owed on the debtor’s 1986 and 1987 tax liabilities.
As the Third Circuit explained,
The District Court also affirmed the Bankruptcy Court’s holding that [26 U.S.C.] § 6511 did not preclude Pransky from obtaining refunds from the payments he made toward his 1986 and 1987 taxes because he had paid those taxes within three years preceding his requests for refunds. As the IRS points out, however, there was no reason for the District Court to reach this issue because, without the 1984 and 1985 credits, there were no overpayments from 1986 or 1987 to refund.
In re Pransky, 318 F.3d 536, 540 (3d Cir.2003).
It logically follows that if there are no overpayments from 1984 and 1985 to refund, then there can be no interest accruing that would be available for netting.
III. $15,000 estimated payment for tax year 1986
The debtor alleges that an additional $15,000 should be deducted from his tax liability for tax year 1986 for an estimated tax payment made by him but not credited by the IRS. On page 2 of the debtor’s 1986 tax return, line 57 lists “1986 estimated tax payments and amount applied from 1985 return.” The total amount on line 57 is $410,434. The debtor correctly acknowl*681edges that the 1985 return is no longer applicable in accordance with the Third Circuit’s opinion. Therefore, subtracting the amount of the 1985 overpayment of $80,434 and subtracting the estimated tax payment of $315,000, leaves the debtor with an additional estimated tax payment of $15,000.
Although this is reflected on the debtor’s 1986 tax return, the IRS has no evidence of an additional $15,000 estimated tax payment made by Pransky for the 1986 tax year. The taxpayer bears the burden of establishing that he made the payment. Janis, 428 U.S. at 440, 96 S.Ct. 3021. Since the debtor failed to submit a receipt or a cancelled check, he has failed to meet his burden of establishing that he made the payment.
IV. Abatement of Interest
The debtor argues abatement is warranted pursuant to 26 U.S.C. § 6404, which provides, that interest may be abated when it is “attributable in whole or in part to any unreasonable error or delay by an officer or employee of the IRS ... in performing a ministerial or managerial act ...” 26 U.S.C. § 6404. The debtor argues that a significant amount of interest was improperly assessed by the IRS.
The error that Pransky alleges is the failure by the IRS to treat Pransky’s remittances as payments and to preclude Pransky from carrying the amounts forward to the next year. This, however, was not an IRS error subject to abatement. Any error in not carrying overpayments forward must be born by the debtor, due to his failure to seek refunds for tax years 1984 and 1985 within the statutory time frame imposed by 26 U.S.C. § 6532. Pransky bore the burden of challenging the IRS’s denial to carry the 1984 and 1985 payments forward to later years. His failure to do so is not the result of a mistake by the IRS.
CONCLUSION
In accordance with the above discussion, the court concludes that:
1. Except for providing a detailed calculation for the failure to file penalty for 1986, the IRS correctly assessed and computed penalties for the debtor’s 1986 and 1987 tax obligations,
2. The debtor is not entitled to interest netting pursuant to 26 U.S.C. § 6621(d),
3. The debtor failed to establish an additional estimated tax payment of $15,000 for 1986, and
4. An abatement of interest in accordance with 26 U.S.C. § 6404 is not warranted.
The IRS is HEREBY ORDERED to submit to the court and serve on the debt- or a detailed calculation of the failure to file penalty for tax year 1986 within fifteen days of the date herein together with a proposed form of judgment. The debtor shall have five days from the date of service to object to the calculation or the form of order.
. This case was previously assigned to the Honorable William H. Gindin, U.S.B.J., who retired from the bench effective January 17, 2004. Accordingly, the case was reassigned to Raymond T. Lyons, U.S.B.J.
. For a more detailed discussion of the facts, see In re Pransky, 318 F.3d 536 (3d Cir.2003); Internal Revenue Service v. Pransky, 261 B.R. 380 (D.N.J.2001); and In re Pransky, 245 B.R. 478 (Bankr.D.N.J.1999).
.This sum is broken down into a tax balance of $2,183.28, $34,650.15 in penalties, and $94,403.59 in interest for a total proof of claim in the amount of $131,237.02.
. Although taxes, penalties and interest were assessed for 1986 the amount due was reduced by credits from later years applied to 1986 by the IRS.
. $396,224 — {$50,000 withholding tax]— [$315,000 remittance] = $31,224. Although, Pransky asserts that as of July 13, 1987, the only amount that could be subject to penalty is $16,000, his calculations incorrectly account for an additional estimated payment of $15,000 which, as discussed later in this opinion, is not available.
. Exhibit 1 to Declaration of Stewart Sherman, Docket No. 53. Exhibit 1 lists *67610/15/1987 as the date the late filing penalty for tax year 1986 was assessed. As explained in n. 1 of the Declaration of Stewart Sherman, the late filing penalty was assessed on 2/24/1992, and it is dated as of 10/15/1987 because that is when the return was due.
. See Docket No. 53. Exhibit 6 lists 4/15/1988 as the date the late filing penalty for tax year 1987 was assessed. Just as above, however, the penalty was assessed on 9/28/1992, and is dated 4/15/1988 since that is the date the return was due. [See n. 2, Declaration of Stewart Sherman].
. 26 U.S.C. § 6651. Failure to file tax return or to pay tax.
(a) Addition to the tax. In case of failure—
(1) to file any return ..., unless it is shown that such failure is due to reasonable cause and not due to wilful neglect, there shall be added to the amount required to be shown as tax- on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional five percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate; ...
. The Court of Appeals held that since the statute of limitations expired on Pransky's ability to challenge his 1984 and 1985 taxes, his obligations for tax year 1987 could not include consideration of his overpayments for 1984 and 1985. In re Pransky, 318 F.3d 536 (3d Cir.2003). It follows that the determination of penalties for tax year 1986 must also be made without consideration of any over-payments for 1984 and 1985. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493663/ | MEMORANDUM OPINION1
JUDITH K. FITZGERALD, Chief Judge.
The matter before the court is Dollar Bank’s motion for relief from the automat*720ic stay to exercise a right of setoff against a passbook account with respect to a debt owed under a note and mortgage which was not satisfied in full by a foreclosure proceeding.
FACTS
In May of 1994, Debtor and his nondebt- or wife borrowed $480,000.00 from Dollar Bank pursuant to the terms of a note and mortgage. The 1994 loan regarding the real estate was secured by a mortgage and an assignment of leases and rents. None of the documents concerning the mortgage loan purport to convey to Dollar Bank any interest in the passbook account. The account, which was not created until 2001, was opened to secure an irrevocable standby letter of credit required for a Performance Bond for Debtor’s corporation, Tar-buck Security Agency, Inc. (“TSAI”). The letter of credit was satisfied prepetition, but there were funds remaining in the passbook account on September 26, 2001, when the bankruptcy was filed.2 As of January 16, 2003, when the motion was filed, the account had a balance of $21,160.24. Motion for Relief from Stay, Motion No. 03-0400, Dkt. No. 127, at ¶ 13.
Debtor defaulted on the note and mortgage prior to the commencement of a voluntary chapter 11 on September 26, 2001. On January 25, 2002, the case was converted to a chapter 7 proceeding. On June 12, 2002, Dollar Bank was awarded relief from the automatic stay to exercise its rights with respect to the mortgaged premises whereupon it purchased the property pursuant to foreclosure proceedings upon a prepetition confessed judgment. Dollar Bank resold the property 26 days later, realizing net proceeds of $418,457.33. It filed an adversary proceeding at Adversary No. 03-02317 to fix the fair market value of the real estate with respect to a deficiency in the amount of $76,951.37. This court recently issued an opinion and order finding that the complaint was filed out of time under the statute of limitations applicable to the Deficiency Judgment Act. See 42 Pa.Cons.Stat.Ann. § 5522(b)(2); 42 Pa.Cons.Stat.Ann. § 8301. Dollar Bank filed the instant motion to set off against the amount in the passbook account the amount remaining due with respect to the note and mortgage on the real estate. Dollar Bank also filed a proof of claim asserting a secured claim in the amount of $453,373.02, plus interest after March 25, 2002, at a daily rate of $95.92.3
DISCUSSION
Section 553(a) of the Bankruptcy Code states that title 11 “does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of *721such creditor against the debtor that arose before the commencement of the case ....” 11 U.S.C. § 553(a). See also Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995)(“whatever right of setoff otherwise exists is preserved in bankruptcy”). There are four prerequisites to the effectu-ation of a setoff:
(1) a debt exists from the creditor to the debtor and arose prior to the commencement of the bankruptcy case;
(2) the creditor has a claim against the debtor which arose prior to the commencement of the bankruptcy case;
(3) the debt and the claim are mutual obligations; and
(4) each are valid and enforceable.
In re Labrum & Doak, LLP, 237 B.R. 275, 299 (Bankr.E.D.Pa.1999), citing U.S. Through Agr. Stabilization and Conservation Service v. Gerth, 991 F.2d 1428, 1431 (8th Cir.1993); Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1035 (5th Cir.1987). See also 5 Collier on Bankruptcy ¶ 553.01[1] (15th ed. Rev.2003). We address the four elements as follows:
Was there a mutuality of obligation between the bank and the depositor?
For mutuality to exist, the debts must exist between the same parties in the same capacity, i.e., each must owe the other in his own name and not as a fiduciary. 5 Collier on Bankruptcy • at ¶ 553.03[3][e]. The Note was executed by Debtor in his individual capacity and the bank account was also held by him in the same capacity, as explained, infra. See also, e.g., In re Wilde, 85 B.R. 147, 149 (Bankr.D.N.M.1988). The mutuality test is met in this case.
Does Dollar Bank owe Debtor a debt that arose prepetition?
When money is placed on deposit with a bank, the depositor is considered a creditor of the bank for the amount of money that was placed on deposit. See Bank of Marin v. England, 385 U.S. 99, 101, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966)(“[t]he relationship of bank and depositor is that of debtor and creditor, founded upon a contract”). The deposit in Debtor’s name satisfies the first condition of § 553. There is no dispute that the account and therefore the debt arose prior to the commencement of the bankruptcy case, even though the date of deposit has not specifically been set forth in the pleadings. The dispute is whether the account belongs to Debtor or TSAI.
Debtor contends that he personally did not have an account with the bank. He argues that the account was for his corporation, TSAI, to secure the Performance Bond. Debtor states that TSAI did not have the borrowing power needed to attain the required $50,000 letter of credit, so he, as an officer of TSAI, borrowed $30,000 from his parents and $20,000 from his minor children to obtain funding for the bond.4 Although Debtor asserts that he borrowed the money in his capacity as a corporate officer for TSAI, there is no evidence of a loan or that the money in the account was acquired by him in his corporate rather than his individual capacity. None of the exhibits provided by Debtor establish a loan or that any transactions were made in the corporation’s name.5 *722The only documentation regarding the Dollar Bank account was provided by Dollar Bank in its Notice of Filing of Additional Exhibits, Docket No. 184, to which Dollar Bank attached what appears to be the signature card for the passbook savings account. See Notice of Filing of Additional Exhibits to Motion for Relief from the automatic stay to Exercise Right of Setoff Against Deposit Account, Exhibit F, Dkt. No. 134. Debtor signed in his individual capacity only. The corporation’s name does not appear on the document.
Debtor asserts that Dollar Bank was well aware that the funds were for the sole use of his corporation and therefore it cannot reach the account although it is in his individual name.6 However, case law supports the proposition that a corporate officer is acting as an individual unless the signature indicates otherwise. See Watters v. DeMilio, 390 Pa. 155, 134 A.2d 671, 674 (1957) (noting that a corporate officer cannot escape personal liability if “the note was signed simply ‘Gregory DeMilio’ without any indication that the signer was acting as a corporate body or as the agent for such an entity”); Hillbrook Apartments, Inc. v. Nyce Crete Co., 237 Pa.Super. 565, 352 A.2d 148, 152 (1975)(“[c]orporations necessarily act through agents and if one so acting is to escape personal liability for what he intends to be a corporate obligation, the limitation of his responsibility should be made to appear on the face of the instrument. Otherwise, the individual signature imports a personal liability”). Thus, the evidence of record does not support Debtor’s contention. We find that Debtor is the owner of the passbook account in his individual capacity.
Debtor also argues that the money in the account does not belong to him. He alleges that the money belongs to his two minor children and therefore is not subject to a setoff. Dollar Bank, however, produced the account card that shows that Michael D. Tarbuck was the sole name on *723the account.7
Does Dollar Bank have a claim against Debtor that arose prior to the commencement of the bankruptcy case?
It is undisputed that Dollar Bank had a prepetition claim against Debtor, as evidenced by the Note and mortgage and the prepetition confessed judgment. Debtor contends that Dollar Bank does not have a deficiency claim to which the bank account can be applied because Dollar Bank never obtained a determination of the fair market value of the property under the Pennsylvania Deficiency Judgment Act which provides:
Whenever any real property is sold, directly or indirectly, to the judgment creditor in execution proceedings and the price for which such property has been sold is not sufficient to satisfy the amount of the judgment, interest and costs and the judgment creditor seeks to collect the balance due on said judgment, interest and costs, the judgment creditor shall petition the court to fix the fair market value of the real property sold. The petition shall be filed as a supplementary proceeding in the matter in which the judgment was entered.
42 Pa.Cons.Stat.Ann. § 8103(a). Section 5522(b)(2), title 42 Pa.Cons.Stat.Ann., requires a deficiency judgment action to be brought within six months of the sheriffs sale. Dollar Bank never filed such an action in state court and the adversary proceeding it filed in this court to fix the fair market value of the real estate with respect to the deficiency remaining from the sheriffs sale was filed out of time. This court dismissed Dollar Bank’s complaint as a result. See Adversary No. 03-02317, Memorandum Opinion of January 14, 2004, docketed January 15, 2004, Dkt. No. 7. When a creditor does not bring a timely action under the Pennsylvania Deficiency Judgment Act there arises an “irre-buttable presumption that the creditor was paid in full in kind.” McCartney v. Integra Nat’l Bank N., 106 F.3d 506, 509 (3d Cir.1997), quoting Valley Trust Co. of Palmyra, Pa. v. Lapitsky, 339 Pa.Super. 177, 488 A.2d 608, 611 (1985). Thus, for purposes of the Deficiency Judgment Act, Dollar Bank was paid in full.
Dollar Bank, however, has filed a proof of claim in this bankruptcy case asserting a secured claim due as of the date of filing of the bankruptcy in the amount of $453,373.02, plus interest after March 25, 2002, at a daily rate of $95.92.
Dollar Bank contends that it does not have to comply with the Deficiency Judgment Act in order to exercise a right of setoff against the passbook account. We agree. The Pennsylvania Supreme Court addressed a similar issue in Horbal v. Moxham Nat. Bank, 548 Pa. 394, 697 A.2d 577 (1997). There, the issue was whether the judgment creditor bank, which bought the mortgagor’s real property at a sheriffs sale in a foreclosure action, had the right to liquidate a certificate of deposit (“CD”), assigned to the bank as security for the same debt, to cover the deficiency without first bringing an action under the Deficiency Judgment Act to fix the fair market *724value of the property. The trial court held that the bank’s right to the CD arose out of a contract that was separate from the mortgage and that upon default on the mortgage the rights to the CD vested in the bank. Therefore, because it had been assigned to the bank, the CD was not an asset of the mortgagor when the sheriffs sale occurred. The Pennsylvania Superior Court affirmed and the Pennsylvania Supreme Court granted allocatur to determine whether the Deficiency Judgment Act applied to this type of situation, concluding that it did not. The Pennsylvania Supreme Court reasoned that the bank had bought the property at sheriffs sale for a price well under the amount of the debt and that under the terms of the assignment with respect to the CD, the bank’s rights in the CD were created to secure the debtors’ outstanding indebtedness. The terms of the assignment gave the bank the absolute right to enforce payment in its own name upon debtors’ default and, therefore, the CD ceased being a personal asset when the default occurred.
Are the obligations enforceable?
Outside of bankruptcy Debtor would be able to withdraw amounts in the account on demand. However, as a matter of law, the bank can set off an account against other obligations owed by a debtor unless the account is a special purpose account. See generally 5 Collier on Bankruptcy at ¶ 553. See also Matter of Bevill, Bresler & Schulman Asset Management Corp., 896 F.2d 54, 57 (3d Cir.1990)(right of setoff depends on existence of mutual debts and claims except where creditor holds funds as bailee or trustee). Notwithstanding Debtor’s assertions, there is no evidence that the account in question is a special purpose account. “In the usual case, a bank deposit constitutes a ‘debt’ owing from the bank to the debtor that may be offset against some other obligation that the debtor owes to the bank.” Id. at ¶ 553.03[3][c][iv], See also Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 20, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (any right of setoff existing prepetition is not affected by the Bankruptcy Code).
Dollar Bank argues that it could have taken the passbook account pursuant to a right of setoff, and thereafter foreclosed on the property to make up the deficiency. We agree. With certain exceptions stated in § 553(a)(1) through (a)(3) and (b), any right of setoff that existed prepetition is preserved in bankruptcy. In re Haizlett, 261 B.R. 393, 395 (Bankr.W.D.Pa.2000). The only exception that could be applicable to the instant situation is that stated in § 553(a)(1) which provides that a prepetition right of setoff is unaffected in bankruptcy “except to the extent that (1) the claim of such creditor against the debtor is disallowed.” Debtor asserts that because Dollar Bank is not entitled to a deficiency judgment in accordance with our Memorandum Opinion and Order of January 14, 2004, it is not permitted to set off the bank account under § 553. We disagree.
The fact that Dollar Bank was denied a deficiency judgment does not mean as a matter of course that its claim is disallowed. Debtor has not objected to Dollar Bank’s proof of claim and the claim is therefore prima facie valid. See, e.g., In re Sterling Packaging Corp., 265 B.R. 701, 704 (Bankr.W.D.Pa.2001); In re Scheidmantel Olds-Cadillac, Inc., 1994 WL 386855 at *2 (Bankr.W.D.Pa. July 12, 1994)(a claim is presumed to be valid absent sufficient evidence to the contrary). Section 553 is equitable in nature. In re Nase, 297 B.R. 12, 21 (Bankr.W.D.Pa.2003). “The provision is permissive rather than mandatory, and cannot be invoked in *725a case where the general principles of setoff would not justify it.” Matter of Bevill, Bresler & Schulman Asset Management Corp., 896 F.2d 54, 57 (3d Cir.1990). On the record before us there is no basis upon which to deny Dollar Bank the common law right of setoff which § 553 of the Bankruptcy Code preserved to it.
We reviewed the exemptions Debtor claimed in Schedule C. It is not clear whether Debtor could amend Schedule C to claim an exemption in the bank account. Because he is proceeding pro se, we will permit him an opportunity to amend his exemptions, if an amendment may be claimed and if he so chooses, within twenty days of the date of this order. The trustee and Dollar Bank may file objections to any amendment within thirty days thereafter. If Debtor does not timely amend exemptions, relief from stay will become effective without further notice or hearing. If Debtor timely amends exemptions and a timely objection is filed thereto, a hearing will be held.
An appropriate order will be entered.
ORDER GRANTING RELIEF FROM STAY AND STAYING ORDER
AND NOW, this 2nd day of February, 2004, for the reasons expressed in the foregoing Memorandum Opinion, it is ORDERED, ADJUDGED and DECREED that the motion for relief from stay is GRANTED but this Order is STAYED pending the following:
(1) on or before February 23, 2004, Debtor may fíle and serve amended exemptions; if Debtor fails to timely amend exemptions, relief from stay will become effective without further notice, hearing, or order of this Court;
(2) if amended exemptions are claimed, Trustee, Dollar Bank or any party in interest may file objections to amended exemptions on or before March 19, 2004, in which case a hearing will be held on March 26, 2004, at 9:00 a.m., in Courtroom A in the United States Bankruptcy Court for the Western District of Pennsylvania, 54th Floor, U.S. Steel Tower, Pittsburgh, Pennsylvania.
It is FURTHER ORDERED that Dollar Bank shall immediately serve a copy of this Order on Debtor, the Trustee, and all parties in interest and shall file a certificate of service forthwith.
. This Memorandum Opinion constitutes the court's findings of fact and conclusions of law. Debtor contends that we do not have jurisdiction to decide this matter because Dollar Bank has never obtained a deficiency judgment with respect to a sheriff's sale of Debtor’s real estate. At Adversary No. 02-02317 we determined that Dollar Bank is not entitled to a deficiency judgment. However, it has filed a proof of claim in this case to which an objection has never been filed. We therefore have jurisdiction. In addition, we have jurisdiction to decide this matter because it involves property of the bankruptcy *720estate. 11 U.S.C. § 541. See also 28 U.S.C. § 157.
. Debtor received a chapter 7 discharge on August 27, 2002. Section 362(c)(2)(C) provides that the' stay terminates at the time a discharge is granted. However, we issue this Memorandum Opinion inasmuch as the motion was pending when the discharge was entered but briefing was not completed until some time thereafter. Moreover, the underlying entitlement to exercise a setoff must be adjudicated.
. The proof of claim states that the judgment amount as of March 5, 2001, was $472,746.54. Paragraph 4 of the proof of claim form asks for a statement of “Total Amount of Claim at Time Case Filed”. After that phrase Dollar Bank inserted "(3/25/02) $453,373.02 (See Exhibit 'A’ attached hereto)”. Exhibit A lists principal, interest to 3/25/02, prepayment penalty, late fees, satisfaction fee, “other charges”, and attorney fees and costs for a total of "$453,373.02, plus interest after March 25, 2002[,] at the daily rate of $95.92.” See Claim No. 33.
. The children had inherited the funds from a deceased relative and Debtor was the custodian on the accounts which were with a bank other than Dollar Bank.
. The documentation provided by Debtor with his response to the motion, Dkt. No. 132, are:
(1) Approval of Successor Trustee's First and Final Account and Plan of Final Distribution Consent to Distribution; Release of *722Trustee; Waiver of Probate Code 17200; Receipt of Beneficiary with respect to the Sophie Tarbuck Family Trust with respect to Debtor's daughter (Exh. D to Answer);
(2) Same with respect to Debtor's son (Exh. E to Answer);
(3) Copy of front of check in the amount of $9,500 to Michael Tarbuck for [daughter] written on the account of Sophie Tarbuck Family Trust, Martha Ward, Trustee, Check No. 129 dated 12-1-00 (Exh. F to Answer);
(4) Signature cards signed by Debtor as Custodian for daughter with respect to account with Community Bank, NA, under the Pennsylvania Uniform Transfers to Minors Act (Exh. F to Answer);
(5) Deposit statement from the same bank with account identified as "Under PUTMA” and Debtor listed as custodian (Exh. F to Answer);
(6) Copy of front of check in the amount of $9,500 to Michael Tarbuck for [son] written on the account of Sophie Tarbuck Family Trust, Martha Ward, Trustee, Check No. 130 dated 12-1-00 (Exh. G to Answer);
(7) Signature cards signed by Debtor as Custodian for son with respect to account with Community Bank, NA, under the Pennsylvania Uniform Transfers to Minors Act (Exh. G to Answer);
(8) Deposit statement from the same bank with account identified as "Under PUTMA” and Debtor listed as custodian (Exh. G to Answer);
(9) Another statement of account with respect to the daughter under PUTMA, naming Debtor as custodian, Exh. H to Answer;
(10) Same re son, Exh. I to Answer;
(11) Facsimile Transaction Report, Exh. J to Answer.
(12) A letter from a psychologist concerning Debtor.
. In Respondent’s Response to Motion to Exercise Right of Setoff Against Deposit Account, Dkt. No. 132, Exhibit J is captioned "Transaction Report” and appears to relate to a fax transmission. The words "Tarbuck Security” appear on the form but nothing in the exhibit supports Debtor’s contention.
. In his Response to the motion at ¶ 5b Debt- or states that TSAI borrowed the money that had been left to Debtor's minor children by a deceased relative. There is no documentation supporting the theory of a loan to TSAI. Despite the fact that Debtor may have intended to safeguard his children's inheritance and to have TSAI repay the funds for their benefit, as a matter of law the transaction was not structured to accomplish that goal. Furthermore, none of the documentation supplied to the court for review in connection with this motion establishes that TSAI ever received the funds or had an obligation to repay them. The bank account is in Debtor’s name alone and not in his corporate capacity or his capacity as custodian of his children's funds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493664/ | MEMORANDUM OF OPINION AND ORDER
RANDOLPH BAXTER, Chief Judge.
In this adversary proceeding, Ryan Cramer, a co-defendant in the above-referenced adversary, seeks dismissal of the Plaintiffs’ amended complaint against him. Cramer contends that the Plaintiffs, Joseph A. Keichel and Shelley Keichel (“Kei-chels”) commenced a state court action in July of 2003 alleging a similar cause of action. He moved to dismiss the claim against him in the state court action1. The state court granted dismissal on October 8, 2003.2
Cramer seeks dismissal of the amended adversary complaint citing to Ohio Rule of Civil Procedure 41 for the proposition that the state court dismissal operates as res judicata in this proceeding. The issue herein is whether the default judgment entered by the state court operates as an adjudication on the merits in this adversary proceeding. The Court acquires core matter jurisdiction over the instant matter pursuant to 28 U.S.C. §§ 157(a) and (b), 28 U.S.C. § 1334, and General Order Number 84 of this District. Following a duly noticed hearing, the following findings and conclusions are rendered:
*781The above-referenced amended adversary complaint alleges, in pertinent part, the following:
Debtors, Christopher J. and Lori A. Wendt (Debtors) entered into a written contract with the Keichels for the sale and purchase of a residence located in Geauga County, Ohio. Co-defendant, Ryan Cramer (Cramer) was an agent for co-defendants Platinum Funding Corporation and Strategic Mortgage Company. He served as the mortgage broker for the sale transaction. The purchase agreement required an inspection of the residence’s septic system to insure that it was compliant with county health standards.
On or about August 5, 1999, the septic system was inspected. The inspection report provided:
System as installed appears to be functioning. All waste water lines should be tied into septic system currently, only the toilets are connected. System pumped yearly per owner.
Amended Complaint at ¶ 12. Debtors provided Cramer with a copy of the inspection report. Upon the Keichels’ information and belief, Debtors were told to “white out” after the first sentence of the report and to purposefully alter and delete those portions of the report so that it only contained the following comment: “System as installed appears to be functioning.” Id. at ¶ 14.
The amended complaint further alleges that Debtors admitted “whiting out” the report at the request of co-defendants Platinum Funding Corporation and/or Strategic Mortgage Company in certain correspondence with the Keichels’ state court counsel. Id. at ¶ 16. The Debtors allegedly re-faxed the altered report to Platinum Funding and/or Strategic Mortgage. Id. at ¶ 17. Thereafter, Platinum Funding and/or Strategic Mortgage submitted the report to the Keichels and their mortgage lender. Id. at ¶ 18.
Subsequently, the Keichels entered into a mortgage loan agreement and signed a promissory note for the purchase of the Debtors’ residence. After experiencing problems with the septic system and a further inspection which revealed other latent defects, the Keichels filed a third party complaint, alleging fraud, against Platinum Funding, Strategic Mortgage, and Cramer. That case was styled Chase Manhattan Mortgage Corporation v. Keichel, et al. v. Platinum Funding Corporation, et al, Case No. 02F000858.3
* * * * * *
Herein, Cramer supports his motion to dismiss by attaching the following documents for consideration: (1) an undated and unsigned copy of the Keichels’ state court third party complaint against him, (2) the state court’s entry dismissing the third party complaint, (3) the docket from the case styled Chase Manhattan Mortgage Corporation v. Keichel, et al. v. Platinum Funding Corporation, and (4) an agreed judgment entry from the Chase Manhattan case.
A review of the state court third party complaint filed by the Keichels reveals that it is substantially similar to the amended adversary complaint filed in this proceeding. The debtors were not party-defendants on the third party complaint. The state court judgment entry dismissing the third party complaint provides in toto:
The above-captioned matter comes on for consideration upon Third Party Defendant, Ryan Cramer’s Motion to Dismiss. The Court finds said motion is well taken. Therefore, IT IS ORDERED that said motion is sustained.
*782(State Court Judgment Entry entered on October 8, 2003). The agreed judgment entry provides, in pertinent part:
The Court finds on the evidence adduced that there is due the Plaintiff [Chase Manhattan] on the promissory note the sum of $121,435.00, plus interest in order to secure the payment of the promissory note aforesaid.. .Defendants Joseph A. Keichel, Sr. and Shelley M. Keichel executed and delivered to Chase Manhattan Mortgage Corporation their certain mortgage deed.. .conditions in the mortgage deed have been broken and Plaintiff is entitled to have the equity of redemption and dower of the Defendants, Joseph A. Keichel, Sr. aka Joseph A. Keichel and Shelley M. Keichel, in and to said premises shall be foreclosed....
(State Court Agreed Judgment Entry entered December 16, 2003). Based on the aforementioned exhibits, Cramer contends that res judicata applies. Thus, Cramer moves this Court to dismiss him from the instant adversary proceeding.
* * * * * *
Rule 41 of the Ohio Rules of Civil Procedure states, in pertinent part:
A dismissal under division (B) of this rule and any dismissal not provided for in this rule, except as provided in division (B)(4) of this rule, operates as an adjudication upon the merits unless the Court in its order for dismissal, otherwise specifies.
Ohio R. Civ. P. 41. Rule 41(b) of the Federal Rules of Civil Procedure also provides that, unless the Court specifies otherwise, a dismissal operates as an adjudication upon the merits. Fed.R.Civ.P. 41(b). In addressing the standard for applying the doctrine of res judicata under Ohio law, the Ohio Supreme Court has stated that:
It is well-settled in Ohio, under the doctrine of res judicata, that a final judgment or decree rendered upon the merits, without fraud or collusion, by a court of competent jurisdiction is conclusive of rights, questions and facts in issue as to the parties and their privies, and is a complete bar to any subsequent action on the same claim or cause of action between the parties or those in privity with them.
Gilbraith v. Hixson, 32 Ohio St.3d 127, 128, 512 N.E.2d 956 (1987). See also In re Stoddard, 248 B.R. 111, 118 (Bankr.N.D.Ohio 2000). Under the doctrine of res judicata, a final judgment on the merits is an absolute bar to a subsequent action between the same parties or their privies based upon the same claims or causes of action. Kane v. Magna Mixer Co., 71 F.3d 555, 560 (6th Cir.1995). The doctrine precludes re-litigation of claims actually litigated as well as claims that could have been litigated. See Heyliger v. State Univ. and Cmty. Coll. Sys. of Tenn., 126 F.3d 849, 852 (6th Cir.1997).
Res judicata is established with four elements; 1) a final decision was rendered on the merits in the first action by a court of competent jurisdiction; 2) the second action involved the same parties or their privies as the first; 3) the second action raises issues actually litigated or which should have been litigated in the first action; and 4) there is an identity of the causes of action. Bittinger v. Tecumseh Prods. Co., 123 F.3d 877, 880 (6th Cir.1997).
Ohio law allows a court to apply res judicata or collateral estoppel to a default judgment, if all the criteria have been established. See, Broadway Mgmt. v. Godale, 55 Ohio App.2d 49, 378 N.E.2d 1072 (1977). Likewise, federal courts have given default judgments preclusive effect where the elements of res judicata are *783present. See, e.g., McCart v. Jordana (In re McCart), 232 B.R. 469, 476 (10th Cir. BAP 1999).
The Bankruptcy Appellate Panel for the Sixth Circuit (B.A.P.) has opined that default judgments may have preclusive effect in Ohio as to an issue that was the subject of an “express adjudication”. The B.A.P. ruled generally that an “express adjudication” is one that expressly finds something. Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 193 (6th Cir. BAP 2002). This Court has also set forth the following standard to determine whether an issue in a prior judgment — whether the judgment was rendered by default or on the merits — was actually and directly litigated for purposes of res judicata. This Court opined, in part:
First, the plaintiff must actually submit to the state court admissible evidence apart from his pleadings. In other words, a plaintiffs complaint, standing alone, can never provide a sufficient basis for the application of the collateral estoppel [res judicata] doctrine. Second, the state court, from the evidence submitted, must actually make findings of fact and conclusions of law which are sufficiently detailed to support the application of the collateral estoppel [res judicata] doctrine in the subsequent proceeding. In addition, given other potential problems that may arise with applying the collateral estoppel [res ju-dicata] doctrine to default judgments (e.g., due process concerns), this Court will only make such an application if the circumstances of the case would make it equitable to do so.
Longbrake v. Rebarchek (In re Rebarchek), 293 B.R. 400, 407 (Bankr.N.D.Ohio 2002)(citing Hinze v. Robinson (In re Robinson), 242 B.R. 380, 387 (Bankr.N.D.Ohio 1999)). Herein, the state court judgment entry provides:
The above-captioned matter comes on for consideration upon Third Party Defendant, Ryan Cramer’s Motion to Dismiss. The Court finds said motion is well taken. Therefore, IT IS ORDERED that said motion is sustained.
See State Court Judgment Entry entered on October 8, 2003. Based on this judgment entry, the state court did not make findings of fact and conclusions of law relative to the state court third party complaint filed by the Keichels. Furthermore, the Debtors were not party defendants to the state court action. Therefore, res ju-dicata is not applicable. Cramer has not met his burden for dismissal of the cause of action against him in this bankruptcy adversary proceeding.
Accordingly, the motion to dismiss is hereby denied.
IT IS SO ORDERED.
JUDGMENT
A Memorandum Of Opinion And Order having been rendered by the Court in these proceedings,
IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the motion to dismiss, filed by co-defendant Ryan Cramer, is hereby denied. Each party is to bear its respective costs.
IT IS SO ORDERED.
. The motion filed in the Geauga County Common Pleas Court was captioned Motion to Dismiss, or in the Alternative, Motion to Stay Proceedings, Case No. 02 M 000858.
. The motion to dismiss reflects that the Kei-chels were given until a date certain to respond to the motion, but failed to do so. The order of dismissal was entered after the Kei-chels’ failure to respond. The order, however, does not state that it is a default judgment entry. It will be construed as a default judgment entry by this court.
. This case was stayed as a result of the Debtors’ bankruptcy filing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493666/ | *907
ORDER
STACEY W. COTTON, Chief Judge.
Before the court is Debtor Stephen Alan Schupp’s (“Debtor” or “Movant”) motion to avoid the judicial lien of Respondent Teri J. Bearson (“Respondent”), pursuant to 11 U.S.C. § 522(f)(1)(A). Respondent filed a response, contending that Debtor undervalued his residence listed on his bankruptcy schedule and that, if Debtor had properly valued this property, her lien would not impair his exemption. Debtor, Debtor’s counsel, and counsel for Respondent appeared for a hearing on the matter on October 16 and 23, 2003. At the hearing, Respondent also argued that the bankruptcy court, as a court of equity, should determine that her lien is an unavoidable, equitable lien. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(E). Upon consideration of the evidence and arguments, the court’s findings of fact and conclusions are set forth below.
FACTS
Debtor filed his Chapter 7 case on July 24, 2003. Debtor’s Schedule A, “Real Property,” lists his residence as a house and lot on Freemanville Rd., Alpharetta, Georgia, with a market value of $213,000 and a mortgage of $206,000. Schedule C, “Property Claimed As Exempt,” references the same house and lot and reflects a $7,000 exemption pursuant to O.C.G.A. § 44-13-100(a)(l). On October 23, 2003, the amount of the claimed exemption was amended to $20,000, the maximum amount allowed under the statute. O.C.G.A. § 44-13 — 100(a)(1).
Debtor and Respondent had previously been engaged and lived in the house until they ended their engagement, and Respondent moved away. Debtor subsequently married, and he and his wife live in the home and did so at the time this case was filed. Respondent obtained a pre-petition judgment against Debtor in the Magistrate Court of Fulton County in the approximate amount of $12,192 on February 17, 2003, which was recorded on May 8, 2003.1 The judgment is a judicial lien on the home.
The evidence before the court consists of the pleadings and documents filed in Debt- or’s Chapter 7 case; the testimony of the Debtor; the testimony of Laura Thatcher, former owner and current mortgage holder with her husband; the testimony of Debtor’s appraiser, Larry Davis; the testimony of Respondent’s appraiser, Jim Bur-nette; the appraisal reports; the Promissory Note; Deed to Secure Debt; and copies of several of Respondent’s checks and a copy of her charge card statement.
Debtor’s Testimony
Debtor testified that he purchased the house in December 2001 for $210,000 from Mr. and Mrs. Thatcher who provided 100% owner financing. Debtor believed at the time that the property was worth approximately only $190,000, but he was willing to pay the higher amount because he had poor credit and could not buy a house through conventional financing. He stated without dispute that the house itself is not in good condition, has no garage or basement, and the heating and air conditioning are not working properly. (Transcript of Hearing, October 16, 2003 [“October 16th Hearing”], at 13). It has three bedrooms, two of which are very small, and two bathrooms, both in need of repairs. It has a very small kitchen and no landscaping. (October 16th Hearing, at 14). The biggest problem is that the house is settling *908at a rapid rate. The floors are sagging and the deck is about three inches or more lower than it was a year earlier. The heating system ducts were damaged by a flood and need to be replaced. Some of the facial boards are rotted and the house needs to be painted. (October 16th Hearing, at 15). The house has imitation hardwood floors and eight foot ceilings, except for the living-room. (October 16th Hearing, at 35). The house is situated on 2.028 acres. (October 16th Hearing, at 16).
Debtor’s Appraiser, Larry Davis
Mr. Larry Davis stated that he inspected both the interior and exterior of the house. He testified that the house was 1,623 sq. ft.,2 on 2.028 acres, has cedar siding, and a settlement problem. The front porch and deck sag, and the floor bounces up and down because of the settlement. (October 16th Hearing, at 37, 39). The flex duct part of the heating and air system is falling apart and needs to be replaced.
When questioned as to value of Debtor’s property, Mr. Davis stated, without objection, that the Fulton County tax records assessed the value of Debtor’s property at $204,800. (October 16th Hearing, at 40). He further testified that he reviewed three comparable properties, set forth in his appraisal report which indicated a range in fair market value from $177,000 to $182,000. Based upon his analysis, he concluded the fair market value of the subject property to be $180,000. (October 16th Hearing, at 41-43).3
Respondent’s Appraiser, Jim Burnette
Mr. Jim Burnette testified that he made a “drive-by” appraisal of Debtor’s property. He did not inspect the interior of the house and conceded he would not have been able to determine any structural damage. He analyzed four comparable properties set forth in his appraisal report. These comparable sales were $220, 154; $234,860; $246,540; and $255,320. Based upon his analysis he concluded that the fair market value of Debtor’s property is $240,000.
Following the October 16, 2003 hearing, Mr. Burnette did additional research and found a fifth comparable that closed on October 2, 2003, on the subject street, about a quarter mile from Debtor’s property that sold for $249,500. (October 23rd Hearing, at 28). He considers the fifth comparable to be the best comparable. He repeated his opinion that the fair market value of Debtor’s property is $240,000. (October 23rd Hearing, at 39 — 46).
Mr. Burnette did agree that if structural damage was extensive enough an adjustment should be made. (October 23rd Hearing, at 27, 31). In analyzing the com-parables, he incorrectly used 2.92 acres for the subject property, rather than the correct measure of 2.028 acres.4 (October 23rd Hearing, at 33). Based on this acreage error, he acknowledged his first comparable should be adjusted downward by $25,000, from $234,860 to $209,860; his second comparable should be adjusted downward by $10,000, from $255,320 to $245,320; his third comparable should be adjusted downward by $10,000, from $220,154 to $210,154; his fourth eompara-*909ble should be adjusted downward by $25,000, from $246,540 to $221,540. (October 2Srd Hearing, at 33-41).
Mr. Burnette also indicated that a deduction of $3,000 for having a brick exteri- or on comparables three and four would not be out of line, which would reduce their value to $207,154 and $218,540, respectively. (October 23rd Hearing, at 38).
Mr. Burnette has not made any adjustment in the comparables for the structural damage. After making such an adjustment based on Mr. Davis’s figure of $5,000, the fair market value of Respondent’s comparables one through five are $204,860; $240,320; $205,154; $213,540; and $235,007, respectively.5
Laura Thatcher
Mrs. Thatcher testified that she sold the property to Debtor for $210,000, approximately $20,000 higher than what it was worth. Since she and her husband were at considerable risk through owner financing, less a small down payment from Debtor’s pre-purchase lease payments, Mrs. Thatcher considered the increased price to be appropriate. (October 23rd Hearing, at 9). At the time of bankruptcy filing, the outstanding mortgage balance on the residence was $205,579.40. (October 23rd Hearing, at 10). Additionally, Ms. Thatcher stated that she is familiar with land values in this area and that she frequently purchases land in this area and deems $50,000 an acre to be the fair market value of property in this area. (October 23rd Hearing, at 9). In fact, she stated that just three months ago she and her husband had been offered acreage in this area for $50,000 per acre. (October 23rd Hearing, at 10).
Chapter 7 Trustee
After investigating the matter, the Chapter 7 Trustee filed a no distribution report, stating that Debtor’s estate had been fully administered. He made no attempt to sell Debtor’s home for the benefit of the creditors of Debtor’s Chapter 7 estate. Thus, he effectively abandoned any estate claim to this property. 11 U.S.C. § 554(c).
DISCUSSION
(1) 11 U.S.C. § 522(f)(1)(A)
Section 522(f)(1)(A) allows a debtor to avoid a judicial lien to the extent it impairs a debtor’s exemption. Georgia, which opted out of the federal exemption scheme, permits a married debtor to exempt a maximum of $20,000 in property he uses as a residence. O.C.G.A. § 44-13-100(a)(1).
The Eleventh Circuit, affirmed the bankruptcy and district courts’ decisions in Lehman v. VisionSpan, Inc. (In re Lehman), 205 F.3d 1255 (11th Cir.2000), which establishes the proper method for calculating the avoidability of a judicial lien where debtor and his spouse jointly owe a first mortgage on their jointly owned home which is also subject to a second priority judicial lien owed solely by the debtor. First, the mortgage is deducted from the total value of the home to establish the net equity which is divided equally between debtor and his spouse. Then, the mathematical formula provided in 11 U.S.C. § 522(f)(2)(A) is applied to debtor’s one half equity interest. To the extent the judicial lien would not permit the debtor to take his exemption in the property, the *910judicial Ken impairs debtor’s exemption and is avoidable. However, a creditor retains its judicial lien on any unencumbered, non-exempt portion of debtor’s equity in the property.
Debtor argues that once the outstanding mortgage balance and his exemption ($205,579.40 + $20,000 = $225,579.40) are subtracted from the fair market value of his residence, there is no remaining value, whether the chosen fair market value is (1) the $213,000 value stated in his Schedule A, or (2) the Fulton County tax assessor value of $204,800, or (3) Mrs. Thatcher’s value of $190,000, or (4) Mr. Davis’s value of $180,000. Consequently, Respondent’s judicial lien impairs his exemption.
Respondent argues that Debtor’s property is worth $240,000. Consequently, Debtor has sufficient equity in the property that her lien does not impair his exemption. Respondent also contends that even if this court determines that her lien impairs Debtor’s exemption, this court should, as a court of equity, find it to be an unavoidable, equitable lien.
The estimates of fair market value of Debtor’s residence range from $180,000 to $240,000. The total of Debtor’s outstanding mortgage balance and his exemption is $225,579.40. If the fair market value of Debtor’s residence is $225,579.40 or less, Respondent’s lien impairs Debtor’s exemption and is an avoidable judicial lien. Respondent would be entitled to retain her judicial lien to the extent of any amount above $225,579.40.
Debtor testified that his home is not in good condition, has no garage or basement, the heating and air conditioning is not working properly and the house has a bad settling problem. (October 16th Hearing, at 13-15). Debtor’s appraiser’s testimony corroborates Debtor’s testimony that his residence was in need of repairs and suffers from a settlement problem. Mr. Davis stated that he inspected the exterior and interior of Debtor’s home and found
[t]he front porch is sagging. You can see on the back of the deck and the screen porch is sagging and you can tell that in the main part of the house, where the Pergo hardwood floor is that it bounces up and down because of the settlement. And also in the bathroom in the hall, he’s got ceramic tile in there, and you can see it just bouncing. So it’s going to crack.
(October 16th Hearing, at 39-40). He adjusted his calculation by $5,000 for this problem but stated that it could cost much more to correct. A structural engineer would be needed to determine a more exact cost. (October 16th Hearing, at 51). This evidence stands undisputed in this record.
In preparing his appraisal, Mr. Davis identified three comparables. All three comparables closed over six months ago and were more than one mile from Debt- or’s property.6 Comparables one and two, valued at $177,000 and $180,000, respectively, are in Roswell, Georgia. His third comparable valued at $182,000, like Debt- or’s property, is located in Alpharetta, Georgia. Based upon his analysis, he estimated the fair market value of Debtor’s property at $180,000. (October 16th, at 41-43). The court finds this valuation to be so far below the actual sale value of the property that it simply is not credible or persuasive.
Mr. Burnette performed a “drive-by examination.” He acknowledged that he *911made no interior examination. There is no evidence that he actually examined the exterior of the property, except what he could observe in a “drive-by.” He says he just researched the property. Yet, his research resulted in his use of 2.92 acres of land for Debtor’s property when, in fact, the acreage is 2.028 acres.
When his comparables are adjusted for the acreage and settlement issues and difference in exteriors, Mr. Burnette’s com-parables are $204,860; $240,320; $205,154; $213,540; and $235,007, respectively. Three of the five comparables, when adjusted, indicate a value below $225,579.40. Mr. Burnette’s comparables # 2 and # 5 are valued at $240,320 and $235,007, respectively- Both are larger and have basements while Debtor’s property has only a crawl space. These two properties also appear quite different from the subject property because they have basements and two ear garages attached to the houses and appear to have more curb appeal.
Mr. Burnette acknowledged that his limited examination of Debtor’s property failed to disclose the settling problem and other defects of Debtor’s property. The court finds and concludes that his appraisal value of $240,000 simply is not credible. Respondent’s evidence is not persuasive and fails to establish any factors that would account for a $30,000 increase in value of Debtor’s property since the purchase for $210,000.
Mrs. Thatcher’s testimony was very credible and persuasive. She and her husband have been active buyers and sellers of property in this area for a significant period of time. (October 23rd Hearing, at 9-10). She explained her opinion that the fair market value of the property is $190,000, she discussed the previous parcels of property she had bought and sold, what she had paid for them, how she had divided them, and that an acre of land in the area is worth approximately $50,000. (October 23rd Hearing, at 7-10). Mrs. Thatcher’s testimony completely refutes the contention of Respondent that Debt- or’s land alone is worth $250,000. (October 16th Hearing, at 52-55).
The highest and best evidence of the fair market value of property is what a willing buyer would pay a willing seller. Here, Debtor willingly agreed to purchase and the Thatchers agreed to sell this property for $210,000 in December 2001. Based on the residence’s sagging and settlement and other problems established by the evidence and the lack of persuasive credible evidence to establish a substantial increase in land values, the court finds that there has been little or no increase in the value of Debtor’s residence. To the extent that it may have occurred, it is consistent with Debtor’s estimate of value stated in his schedules. For the foregoing reasons, the court finds and concludes that the fair market value of Debtor’s house and 2.028 acres of land is $210,000. Therefore, the judicial lien of Respondent impairs Debt- or’s exemption and is avoidable pursuant to 11 U.S.C. § 522(f)(1)(A) and O.C.G.A. § 44-13-100(a)(l).
(2) Respondent’s Equitable Lien Theory
Respondent contends that the court should determine Respondent’s judicial lien is an unavoidable, equitable lien. The parties were agreeable to stipulating to Respondent’s judgment in the approximate amount of $12,192. It arises from a breach of contract and bad check.
Respondent cited three cases in support of her contention. None of them, however, are applicable. The Eleventh Circuit decision, Weed v. Washington (In re Washington), 242 F.3d 1320 (11th Cir.2001), involves an attorney’s charging lien which by definition is not a judicial lien. In Herman v. Whitacre (In re Herman), 95 B.R. 504 (Bankr.N.D.Ohio 1989), the debtors *912improperly, without consent, used funds of a sister to buy a home. The court found that an equitable lien arose in favor of the sister and could not be avoided. Finally, in In re Davis, 96 B.R. 1021 (Bankr.M.D.Fla.1989), the court found that an equitable “vendor’s lien” arose and could not be avoided by the debtors. That court held that it was an equitable lien, which existed prior to the commencement of the legal proceedings, and it was not a judicial lien.
Respondent introduced copies of four checks drawn on her bank account to pay mortgage payments, a utility payment, and a charge card statement showing payment of taxes. While Debtor did not dispute Respondent’s Exhibits, he testified that he and Respondent pooled their money to pay mortgage payments, utilities and taxes. (October 23rd Hearing, at 48-52). Respondent’s evidence does not explain the source of funds for these payments and does not establish that such payments were made only with her funds. At best, the evidence indicates Respondent may have voluntarily used some of her own funds for some mortgage, utility, and tax payments. Further, there is no evidence that there is a pre-existing equitable lien in Respondent’s favor. The court finds and concludes that Respondent has not met her burden of proof to establish an equitable lien. Accordingly, it is
ORDERED that Respondent’s objections to the valuation of Debtor’s residence and to the avoidance of her judicial lien are overruled, and Debtor’s motion to avoid Respondent’s judicial lien is granted.
The clerk is directed to serve a copy of this order upon counsel for Movant and Respondent.
IT IS SO ORDERED.
. According to Respondent’s response to Debtor’s motion to avoid lien, the judgment arose out of a suit for breach of contract and a bad check.
. Respondent's appraiser uses 1,637 sq. ft., rather than the 1,623 sq. ft. used by Debtor's appraiser without explanation.
. Respondent’s appraiser's major criticism of Debtor's appraisal is that the comparable properties are too far away and two are in the city of Roswell rather than in the city of Alpharetta. (October 23rd Hearing, at 46).
.Mr. Burnette used 2.028 acres in his report of the fifth comparable.
. Debtor’s appraiser’s major criticism of Respondent’s appraisal is that the sales are too old and some of the features are too different, e.g., subject property has 1,623 sq. ft. while comparable # 1 has 2,544 sq. ft. and comparable #3 has 3,098 sq. ft. (October 16th Hearing, at 45-46, 48).
. Mr. Davis measured distance from the subject property in terms of driving distance, unlike Mr. Burnette who measured the distance "as the crow flies.” The evidence does not establish whether there is actually any material difference between the two appraisals if the same measure is used. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493667/ | MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
When they filed their Chapter 13 case, debtors George and Patricia Hanson (“the Hansons”) were under contract to pay $776.94 per month to the U.S. Department of Education (“D.O.E.”) to retire student loans. Because they owed the D.O.E. more than $77,000, a last payment would have been due some 99 months later. The Hansons proposed a Chapter 13 plan which would: 1.) pay $175 per month for 36 months to the Chapter 13 trustee to be distributed to creditors including the D.O.E. for any claimed arrearage due on the student loan contract; and 2.) provide that the Hansons would pay directly to the D.O.E. $437.27 per month on their student *133loans. The D.O.E. consented to this reduced payment “to enhance the feasibility of the plan.”
The trustee objected to confirmation of the plan for two reasons. First, the plan unfairly discriminates against a class of unsecured creditors by paying the D.O.E. more than others. Second, the plan proposes direct payments to the D.O.E. in an amount less than called for by the pre-bankruptcy contract.
1.) Non-disc^iargeable student loans do not enjoy priority status under 11 U.S.C. § 507. They are generally classified with other unsecured claims. However, 11 U.S.C. § 1322(b)(1) authorizes a Chapter 13 debtor, in formulating a plan, to designate classes of unsecured creditors, as provided in 11 U.S.C. § 1122, which states that “[ejxcept as provided in [11 U.S.C. § 1122(b) ], a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.” 11 U.S.C. § 1322(b)(1) further provides that a plan “may ... not discriminate unfairly against any class so designated.” Courts have tried with little success to articulate a test for unfair discrimination against a class of claims. In re Leser, 939 F.2d 669, 672 (8th Cir.1991) (four-factor test); In re Williams, 253 B.R. 220, 225 (Bankr.W.D.Tenn.2000) (four-factor test); In re Thibodeau, 248 B.R. 699, 704-05 (Bankr.D.Mass.2000) (four-factor test); In re Brown, 152 B.R. 232, 237-40 (Bankr.N.D.Ill.1993) (legitimate basis for classification test), reversed under the name McCullough v. Brown, 162 B.R. 506 (N.D.Ill.1993); In re Lawson, 93 B.R. 979, 984 (Bankr.N.D.Ill.1988) (legitimate basis for classification test). Certainly not all discrimination is unfair.
Under 11 U.S.C. § 1322(b)(5), a plan may “provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.” 11 U.S.C. § 1322(b)(5) is typically used by debtors to maintain mortgage payments and other long-term secured debt, while curing any arrearage through the plan. In re Bradley, 109 B.R. 182, 183 (Bankr.E.D.Va.1990); In re Wolff, 22 B.R. 510 (9th Cir. BAP 1982); In re Fontaine, 27 B.R. 614, 615 (9th Cir. BAP 1982). This provision has been interpreted by this court to permit current monthly home first mortgage payments to be paid directly to the creditor without deduction of a trustee fee. Payments on all other claims (including home mortgage arrearag-es) must be made to and through the trustee.
11 U.S.C. § 1322(b)(5) specifically applies to a debtor maintaining payments on unsecured long-term debt. Unsecured long-term debts may include some student loans. “Long-term student loan obligations with payment terms that extend beyond completion of the plan fall squarely within the ambit of section 1322(b)(5).” In re Benner, 156 B.R. 631, 634 (Bankr.D.Minn.1993). While that statement is true, it does not compel the conclusion that the debtor may pay the creditor directly. The trustee’s disbursements can certainly be the source of the “maintenance of payments” required by the statute. Furthermore, falling within the ambit of 11 U.S.C. § 1322(b)(5) does not preclude the application of other statutory provisions.
The treatment of long-term unsecured claims under 11 U.S.C. § 1322(b)(1) and 11 U.S.C. § 1322(b)(5) appears to be in conflict with the uniformity of treatment generally required by 11 U.S.C. § 1322(b)(5) and is different from that prescribed in 11 U.S.C. § 1322(b)(1). If there is indeed a conflict (which we have yet to *134determine because that discrimination may not be unfair), “[t]he existence of a conflict is [a] prerequisite to deciding that a more specific statute prevails over one which is more general.” Squillacote v. U.S., 739 F.2d 1208, 1215 (7th Cir.1984). “Where there are two provisions in a statute, one of which is general and designed to apply to cases generally, and the other is particular and relates only to one case or subject within the scope of the general provision, then the particular provision must prevail; and if both cannot apply, the particular provision will be treated as an exception to the general provision.” Matter of Thornhill Way I, 636 F.2d 1151, 1156 (7th Cir.1980).
11 U.S.C. § 1322(b)(5) is specific and clear in its language. 11 U.S.C. § 1322(b)(1) is more general in that it refers to all classes of unsecured claims, not to claims having specific characteristics. “[W]hen we are forced to choose between specific statutory provisions and a general ... [one], [a court will] err on the side of specific provisions in the belief that they reflect congressional intent more clearly.” Matter of Lifschultz Fast Freight Corp., 63 F.3d 621, 629 (7th Cir.1995). “A specific statute takes precedence over a more general statute.” Matter of Johnson, 787 F.2d 1179, 1181 (7th Cir.1986); see also Central Commercial Co. v. C.I.R., 337 F.2d 387, 389 (7th Cir.1964). “11 U.S.C. § 1322(b)(5) would be rendered largely ineffective with respect to unsecured debt if student loans could not be treated thereunder ...” In re Benner, 156 B.R. 631, 633-634 (Bankr.D.Minn.1993). So, where it applies, 11 U.S.C. § 1322(b)(5) trumps 11 U.S.C. § 1322(b)(1).
To come within the specific coverage of 11 U.S.C. § 1322(b)(5), the claim must be subject to a schedule of payments which extends beyond the last payment under the plan. This is true for the claim of the D.O.E. Therefore, the Hansons’ plan may treat the D.O.E. claim differently from shorter term claims if that different treatment conforms with what is permitted by 11 U.S.C. § 1322(b)(5). What is permitted is curing any default within a reasonable time and “maintenance of payments” while the case is pending. “Maintenance of payments” under 11 U.S.C. § 1322(b)(5) means that the debtor must respect the interest rate and the monthly payment in the original contract during the plan. In re Tavella, 191 B.R. 637, 640-41 (Bankr.E.D.Pa.1996); In re Javarone, 181 B.R. 151, 154 (Bankr.N.D.N.Y.1995); In re Murphy, 175 B.R. 134, 137 (Bankr.D.Mass.1994).
Prior to bankruptcy, the Hansons owed a monthly payment of $776.94 to the D.O.E. That payment was based on the original principal amount of the student loan and the contract interest rate. The Hansons’ Chapter 13 plan, however, proposes a monthly payment in the amount of $437.27 to the D.O.E. “outside of the plan.” “Under 11 U.S.C. § 1322(b)(5), all of the payments of a note or contract remain in full force and effect ... A change in the monthly payments does not constitute the ‘maintenance of payments’ for these purposes.” In re Tavella, 191 B.R. 637, 640-41 (Bankr.E.D.Pa.1996). If the plan changes the interest rate or monthly payment, courts hold that the debtor is not maintaining payments for the purposes of 11 U.S.C. § 1322(b)(5). In re Javarone, 181 B.R. 151 (Bankr.N.D.N.Y.1995). So, while a student loan may be treated under 11 U.S.C. § 1322(b)(5) as a long-term debt, the Hansons’ plan does not meet the terms of that statute. If the requirements of the specific statute (11 U.S.C. § 1322(b)(5)) are not met, then the more general requirements of 11 U.S.C. § 1322(b)(1) must be observed. The Hansons may not dis*135criminate in favor of D.O.E., except in the way condoned by 11 U.S.C. § 1322(b)(5).
2.) Periodic payments to the trustee and disbursement by the trustee is the normal practice in Chapter 13 cases and a departure from this norm is only appropriate when the debtor demonstrates a significant reason for doing so. In re Gregory, 143 B.R. 424 (Bankr.E.D.Tex.1992); In re Barber, 191 B.R. 879, 885 (D.Kan.1996). For example, this court, like many courts, has drawn a distinction between permitting a debtor to make current mortgage payments directly, but not others. See In re Aberegg, 961 F.2d 1307 (7th Cir.1992).
Most reported decisions refuse to confirm plans that propose to pay certain creditors or classes of creditors directly by the debtor, particularly when the proposed direct payment is to an unsecured claimant. In re Reid, 179 B.R. 504 (E.D.Tex.); In re Veasley, 204 B.R. 24 (Bankr.E.D.Ark.1996); In re Bettger, 105 B.R. 607 (Bankr.D.Or.1989); In re Hartdegen, 67 B.R. 230 (Bankr.N.D.Ala.1986); In re Evans, 66 B.R. 506 (Bankr.E.D.Pa.1986); In re Eby, 38 B.R. 318 (Bankr.D.Or.1984); In re Reines, 30 B.R. 555 (Bankr.D.N.J.1983). In re Gaskin, 79 B.R. 388 (Bankr.C.D.Ill.1987); In re Gregg, 179 B.R. 828, 830 (Bankr.E.D.Tex.1995); In re Weeden, 7 B.R. 106 (Bankr.D.R.I.1980); In re Blevins, 1 B.R. 442 (Bankr.S.D.Ohio 1979). No justification has been provided by the Han-sons for paying the D.O.E. “outside” the Chapter 13 plan.
In conclusion, the debtors’ plan cannot be confirmed. It fails to comply with 11 U.S.C. § 1322(b)(5) and fails to demonstrate that its treatment of the D.O.E. claim is not unfair discrimination between classes of unsecured claims. Furthermore, it proposes an impermissible direct payment to D.O.E. For those reasons, the plan cannot be confirmed. It may be so ordered.
ORDER
The court having this day entered its memorandum decision in the above-entitled matter,
IT IS HEREBY ORDERED that the debtors’ Chapter 13 plan not be confirmed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493669/ | MEMORANDUM OF DECISION
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
Before the court is an “Application to Pay Secured Creditor” (“the application”) filed by Neal Ossen, the Chapter 7 trustee (“the trustee”). The application asserts that Anthem Blue Cross & Blue Shield (“Anthem”), the alleged secured creditor, has a “Medicaid lien” in the amount of $2,563.09 on proceeds received by the trustee in settlement of a personal injury claim of Rica Nicolescu (“the debtor”). The trustee seeks an order to pay said amount to Anthem. For reasons that follow, the court denies the application.
II.
The debtor and Eniko Nicolescu on September 11, 2002, filed a joint Chapter 7 petition. Amended schedules filed on November 1, 2002, listed as an asset the debtor’s personal injury claim arising out of an accident in August 2002, and a $700 *28exemption in such claim. The court, on October 30, 2003, entered an order approving a settlement of the claim in the amount of $10,500. The trustee’s counsel for the claim, on June 3, 2003, received a letter from Anthem advising that the debtor received “benefits as a beneficiary of the federal/state Medicaid program;” that Anthem, as the provider of “BlueCare Family Plan Medicaid” coverage for the debtor, had expended $2,563.09 for the debtor’s medical bills; and that Anthem held a “lien” in such amount on “any amounts payable by other payors.”1 The debtors’ estate is insolvent. At the May 25, 2004 noticed hearing on the application, only the trustee appeared, and the court took the matter under advisement.
III.
Conn. Gen.Stat. § 17b-93(a) provides that the state shall have a priority claim over all other unsecured claims on any property,2 real or personal, of any beneficiary of state or state-administered aid programs. Section 17b-94(a), in relevant part, further provides that:
In the case of causes of action of beneficiaries of aid ... the claim of the state shall be a lien against the proceeds therefrom in the amount of the assistance paid ... and shall have priority over all other claims except attorney’s fees for said causes, expenses of suit, costs of hospitalization connected with the cause of action by whomever paid over and above hospital insurance or other such benefits, and, for such period of hospitalization as was not paid for by the state, physicians’ fees for services during any such period as are connected with the cause of action over and above medical insurance or other such benefits; and such claim shall consist of the total assistance repayment for which claim may be made under said programs.
Bankruptcy Code § 545, entitled “Statutory Liens,”3 provides that a trustee “may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien ... (2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser ... whether or not such a purchaser exists.” See In re Faita, 164 B.R. 6 (Bankr.D.Conn.1994) (Statutory lien provided to no-fault automobile insurer on proceeds of settlement of debtor’s prepetition tort claim, where proceeds received post-petition, unperfected and unenforceable against Chapter 7 trustee).
IV.
CONCLUSION
Bankruptcy Code § 545 is derived in large part from former § 67b and § 67c *29of the Bankruptcy Act of 1898, as amended, permitting a trustee to avoid the fixing of statutory liens. “Statutory liens that are disguised state created priorities upset the priority scheme of the federal bankruptcy law and will fall within the group that is subject to avoidance.” 5 Collier on Bankruptcy ¶ 545.01[1] (15th ed. rev.2004).
The Medicaid lien asserted by Anthem clearly falls within the definition of a statutory lien as it arose solely by force of Conn. Gen.Stat. § 17b-94(a). The Medicaid lien is facially avoidable by a trustee pursuant to § 545(2) unless the lien has been perfected and is enforceable against a bona fide purchaser.
An early ruling in this district, In re Leach (State of Connecticut v. Leach), 15 B.R. 1005 (Bankr.D.Conn.1981) (Shiff, J.), concluded that Conn. Gen.Stat. § 17-83f (presently codified as § 17b-94) is silent regarding perfection and, accordingly, the lien provided by that statute is voidable under Bankruptcy Code § 545(2). Although the facts of Leach are not on all fours with the present proceeding,4 the court agrees with the conclusion reached in Leach. Anthem’s Medicaid hen, based on the record made in this proceeding, is not perfected or enforceable against a bona fide purchaser, and the trustee’s application must be, and hereby is, denied.
This ruling does not address whether any of the medical bills paid may qualify as administrative expenses, and, in the absence of an adversary proceeding, does not avoid any lien. It is
SO ORDERED.
. Medicaid is a jointly funded state and federal assistance program designed to pay the medical expenses of individuals whose income and resources are insufficient. Because Congress intended Medicaid to be the "payor of last resort,” the state agency that administers Medicaid must seek reimbursement from any third party responsible for the patient's medical expenses.... As part of its recoupment power, ... the agency administering Medicaid may place a lien on the Medicaid recipient’s personal injury claims against a tortfeasor in order to recover the agency’s medical expenditures. Sullivan v. County of Suffolk, 174 F.3d 282, 285 (2d Cir.1999) (citations omitted).
. Subject to certain restrictions not relevant here.
. 11 U.S.C. § 101(53) defines "statutory lien” as a "lien arising solely by force of a statute on specified circumstances or conditions, or lien of distress for rent, whether or not statutory, but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute."
. Although In re Leach concerned assistance provided under the Aid to Families with Dependent Children Program, the lien thereunder arose pursuant to the same state statutes (since renumbered) as the instant Medicare lien. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493671/ | OPINION AND ORDER DENYING DEBTORS’ MOTION FOR TURNOVER AND DAMAGES
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the debtors’ motion for turnover and damages. FYDA Freightliner Columbus, Inc. (“FYDA”) opposed the motion. At the debtors’ request, the Court conducted an expedited hearing on the motion on May 27, 2003. At the conclusion of the hearing, the Court requested the parties to submit their closing arguments in writing.
Having considered the testimony presented, the various exhibits admitted into evidence, and the closing arguments, the *204Court makes the following findings of fact and conclusions of law:
FINDINGS OF FACT
1. On or about January 31, 2003, FYDA and Charles C. Longmire, one of the debtors herein, entered into an agreement by which FYDA undertook to purchase from the debtor a certain 1996 Pet-erbilt tractor for the sum of $5,214.86. See Exhibit 2. Pursuant to this agreement, FYDA took possession of the 1996 Peter-bilt.
2. At the time FYDA agreed to purchase the 1996 Peterbilt, Cedar Capital, L.L.C. (“Cedar Capital”) owned the tractor under an Iowa certificate of title. Cedar Capital had leased the tractor to the debt- or pursuant to an equipment lease agreement. The debtor believed that under the terms of this lease, Cedar Capital would transfer title to him once he had made all of the payments required. The debtor, however, had not made all of the lease payments at the time he sold the 1996 Peterbilt to FYDA.
3. FYDA issued a check to Cedar Capital on January 31, 2003, for the purchase of the 1996 Peterbilt. See Exhibit B. Cedar Capital also mailed the original Iowa certificate of title for the tractor to FYDA at that time.
4. Also on or about January 31, 2003, FYDA and the debtor entered into a second agreement under which the debtor would buy back the 1996 Peterbilt for the same $5,214.86 plus a $70.00 registration fee. As part of this transaction, the debtor executed a cognovit promissory note in favor of FYDA in the amount of $5,284.86. The debtor promised to make three monthly payments of $1,761.62 to FYDA beginning March 1, 2003.
5. In connection with the debtor’s repurchase of the 1996 Peterbilt, FYDA did not cause a new certificate of title to be issued listing the debtor as owner and itself as lienholder; nor did FYDA immediately apply for an Ohio certificate of title evidencing the transfer of ownership of the 1996 Peterbilt from Cedar Capital to FYDA.
6. Following the execution of the two purchase agreements, FYDA has remained in possession of the 1996 Peterbilt at all times. The debtor did not demand return of the tractor at any time prior to the chapter 13 filing.
7. The debtor did not make the first payment due FYDA on March 1, 2003, nor any payment thereafter. The debtor initially advised FYDA that the March payment would be a couple weeks late. In early April 2003, the debtor’s wife informed FYDA that they were still unable to make the payment, but could pay within the next few weeks.
8. On April 30, 2003, the debtor and his wife filed a joint voluntary petition under chapter 13 of the Bankruptcy Code. They listed the 1996 Peterbilt as an asset of their estate. Their chapter 13 plan proposed to treat FYDA’s claim as unsecured and demanded that FYDA return possession of the tractor.
9. On May 2, 2003, the debtor’s attorney notified FYDA of the chapter 13 filing by facsimile transmission and demanded in writing that FYDA return the 1996 Peter-bilt.
10. Following notice of the chapter 13 filing, FYDA refused to return the 1996 Peterbilt and caused an Ohio certificate of title to be issued on May 2, 2003, listing FYDA as the owner of the tractor.
CONCLUSIONS OF LAW
1. This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the General Order of Reference entered in *205this district. This is a core proceeding which this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(E).
2. The agreement under which the debtor was to purchase the 1996 Peterbilt back from FYDA is an executory contract. See Terrell v. Albaugh (In re Terrell), 892 F.2d 469, 472 (6th Cir.1989). The debtor was obligated to make the monthly payments under the agreement, the last of which was due postpetition; and FYDA had yet to deliver the 1996 Peterbilt to the debtor.
3. The debtor’s failure to make the March and April payments to FYDA constituted a prepetition default under the purchase agreement.
4. Because the chapter 13 plan does not assume the contract and does not provide adequate assurance of a prompt cure of the debtor’s default, FYDA is not obligated to turn over the 1996 Peterbilt to the debtor. See 11 U.S.C. §§ 365(b)(1) and 1322(b)(7).
5. The debtor failed to establish that he possessed an ownership interest in the 1996 Peterbilt at the time of the chapter 13 filing. Rather, any interest of the debtor was limited to his rights under the repurchase agreement with FYDA, which he already had breached.
6. Because the debtor has no ownership interest in the 1996 Peterbilt, FYDA’s actions to obtain an Ohio certificate of title did not violate the automatic stay imposed by 11 U.S.C. § 362(a).
CONCLUSION
For the foregoing reasons, the debtor’s motion for turnover and damages is DENIED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493673/ | JAROSLOVSKY, Bankruptcy Judge,
concurring.
I concur with my brethren that this appeal is equitably moot. I write separately only to express my reservations about their observation that it might be possible to grant relief without reversing or vacating the confirmation order.
While 28 U.S.C. § 2106 does permit an appellate court to modify a judgment or order, I do not believe that power is unfettered. It is one thing to modify the rate of interest on a money judgment and quite another to create a different plan of reorganization in a Chapter 11 case.
In this case, the relief Ederal seeks is nothing less than modification of a confirmed plan. If we were to grant relief, we would be imposing upon all parties a new plan without soliciting their votes. No court would have made the findings mandated by § 1129(a) as to the new plan. We would be ignoring § 1127(b), which limits the power of post-confirmation modification to the plan proponent or reorganized debtor, prohibits modification after substantial consummation, and requires notice and a hearing on the modified plan.
I conclude that the general power granted by 28 U.S.C § 2106 to modify a judgment or order does not trump the specific provisions of Title 11 dealing with Chapter 11 plan modification. I accordingly believe that, in addition to being equitably moot, this appeal is moot because we have not the power to grant the relief sought. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493674/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
(Doc. No. 8)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration in the above-captioned adversary proceeding is a Motion for Summary Judgment, filed by Diane Jensen, the Chapter 7 Trustee (Trustee) of the estate of Nephthalim Haughton (Debtor). It is a contention of the Trustee that there are no genuine issues of material facts, and that she is entitled to a judgment as a matter of law. In the Complaint filed by the Trustee, she seeks to avoid an alleged preferential transfer pursuant to 11 U.S.C. § 547(b). The Trustee alleges that on July 3, 2003, or within ninety (90) days prior to the commencement of this bankruptcy case, which was filed on August 13, 2003, the Debtor paid the sum of $1,667 to Donald Sussman, Esquire (Defendant). It is the Trustee’s contention that as the result of this payment, the Defendant received more then he would have received if the transfers had not been made and such creditor received payment of the debt to the extent provided by the provisions of the Bankruptcy Code under Chapter 7. The Trustee also contends that at the time the payment was made, the Debtor was insolvent.
In due course, the Defendant filed his answer in which he admitted some of the allegations, but also asserted seven affirmative defenses. While none of the affirmative defenses are affirmative defenses in a federal practice, and the defenses do not fall within the definition of that term as defined by F.R.B.P. 7008, and since no motion to strike has been filed, this Court must treat the defenses as a general denial of the Trustee’s right to recover the payment as a preferential transfer.
In due course, the Trustee filed a Motion of Summary Judgment. In support of the Motion, the Trustee filed an Affidavit. In paragraph 2, she stated that the Debtor issued a check in the amount of $1,667 payable to the Defendant, on July 3, 2003, which was within 90 days of filing bankruptcy, as payment for an underpaid contingency fee and court costs connected with the litigation in which the Defendant represented the Debtor. From the allegations set forth in the Affidavit, and from the affirmative defenses filed by the Defendant, it appears without dispute that *300prior to the commencement of the bankruptcy case, the Defendant represented the Debtor pursuant to a personal injury claim of the Debtor.
On April 10, 2001, the Debtor signed an agreement that authorized the Defendant to represent him, and the Debtor agreed to pay for the services from the total proceeds of any recovery. The contract stipulated that the Debtor would pay the Defendant 40% on any amount up to $1 million if the suit settled after the lawsuit has been filed and answered. The Debtor’s claim was settled and the office of the Defendant prepared a final billing that, through an error, computed the contingency fee at 33/6% rather then the 40% called for by the contract. The settlement was consummated and the insurance company paid the settlement in full. Out of the total recovery, the insurance company paid the Defendant 33/6% of the settlement amount, ostensibly in full satisfaction of the attorney’s fees due to the Defendant. After having discovered the error, the Defendant requested the Debtor pay the sum of $1,667, the difference between the contingency fee computed at 40% and the 33 16% actually paid. It is without dispute that the Debtor did comply, and on July 3, 2003, paid the amount requested to the Defendant.
These are the undisputed facts based on which the Trustee claims that she is entitled to a judgment in her favor as a matter of law.
It is well established that it is appropriate to dispose of a suit by summary judgment only if a court is satisfied that there are no genuine issues of material facts, and the moving party is entitled to a judgment as a matter of law. Celotex v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In the present instance, there is no serious dispute that the facts recited are considered to be true and not subject to a bona fide dispute. However, before the Trustee can recover, she must also establish, based on those facts, that she is entitled to a judgment in her favor as a matter of law. There is hardly any question that if the payment at issue were made in compliance with the original contingency fee arrangement, pri- or to the 90 days preceding the bankruptcy case, it would have been immune from any preference attack. This is because the attorney’s charging lien represents a valid charge on the proceeds of the Debtor’s recovery and is therefore immune from any attack that the payment was a preference. This would be the result even if the payment was made within 90 days prior to the commencement of the case.
While federal law controls bankruptcy issues in this case, state law governs the determination of whether a lien has been created in the context of a bankruptcy proceeding. Grant v. Kaufman, P.A., 922 F.2d 742, 744 (11th Cir.1991). Under Florida law, the equitable rights of attorneys to have costs and fees owed for legal services secured by the judgment or recovery in a lawsuit has been recognized for over a century. Sinclair, Louis, Siegel, Heath, Nussbaum & Zavertnik, P.A. v. Baucom, 428 So.2d 1383, 1384 (Fla.1983). The difficulty in the instant case, however, was caused by the fact that the amount sought to be recovered by the Trustee was paid by the Debtor after the settlement was concluded. Thus, the Trustee contends that payment was not part of the amount, which was subject to the attorney’s charging lien. A closer analysis of the surrounding facts leaves no doubt; however, that the sum paid by the Debtor was part of the settlement amount received by the Debtor. The fact that because of a clerical error in the Defendant’s office, the Defendant was not properly paid the full amount from the settle*301ment at the time of the closing of the Debtor’s case is of no consequence.
For this reason, this Court is satisfied that the amount paid by the Debtor within 90 days of the bankruptcy filing was subject to a charging lien which survived any attack that it was a preference. Therefore, the Defendant did not receive a greater amount than he would have received under 11 U.S.C. § 726 of the bankruptcy code.
Ordinarily, this would conclude the matter, but since both sides agree that there are no genuine issues of material facts, the question remains whether this Court may grant summary judgment to a non-moving party when it denies the summary judgment of a moving party. This question is not readily answerable because, technically, Federal Rules of Civil Procedure 56, as adopted by F.R.B.P. 7056, requires at least 10 days notice to consider a motion for summary judgment. Additionally, Federal Rules of Civil Procedure 56 grants a party opposing the motion for summary judgment the right to file a response and an affidavit in opposition of the motion.
Thus, in this case the moving party, whose Motion for Summary Judgment was denied, does not have the benefit of 10 days notice, or the opportunity to serve an opposing affidavit to the non-filed motion of the non-moving party. This issue was considered by the 9th Circuit Court of Appeals in Cool Fuel, Inc. v. Connett, 685 F.2d 309 (9th Cir.1982). In Cool Fuel, the 9th Circuit noted that while oral motions for summary judgment are not authorized, citing Sequoia Union High School District v. United States, 245 F.2d 227 (9th Cir.1957), the court may sua sponte grant summary judgment to the non-moving party. The court held that if one party moves for summary judgment and, at the hearing, there is no genuine issue of material fact, based on all of the files, records, affidavits and documents, essential to prove the movant’s case, and the case cannot be proved if a trial should be held, the court can granted summary judgment. Cool Fuel, supra; Fair Housing Congress, Tabon v. Weber, 993 F.Supp. 1286 (C.D.Cal.1997); Sanborn v. Placer County, 80 Fed.Appx. 566 (9th Cir.2003).
In sum, this Court is satisfied that Trustee is not entitled to summary judgment for the reasons stated above, and conversely, this Court is equally satisfied that it is appropriate to resolve the issue of the avoidable preference in favor of the Defendant.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion For Summary Judgment (Doc. No. 8) be, and the same is hereby, denied. It is further
ORDERED, ADJUDGED AND DECREED that summary judgment be, and the same is hereby, granted sua sponte to the non-moving Defendant.
A separate final judgment shall be entered in accordance with the foregoing.
FINAL JUDGMENT
THIS CAUSE came on for consideration upon the Court’s own Motion for the purpose of entering a Final Judgment in the above-captioned adversary proceeding. The Court has considered the record and finds that this Court has entered an Order on Motion for Summary Judgment. Therefore, it appears appropriate to enter this Final Judgment.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Final Judgment be, and the same is hereby, entered in favor of the Defendant, Donald Sussman, Esq. and against Diane L. Jensen, Trustee in Bank*302ruptcy. The Complaint be, and the same is hereby, dismissed with prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493675/ | MEMORANDUM OF DECISION
LOUIS H. KORNREICH, Bankruptcy Judge.
Presently before the Court is the motion of defendants J.P. Bolduc (“Bolduc”) and JPB Enterprises, Inc. (“JPBE”)(eollectively “Defendants”) to dismiss Counts I and II of the Chapter 7 Trustee’s Third Amended Complaint as barred by the statute of limitations found in § 546(a).1 The only unresolved issue is whether the action *314was commenced within one year of “the appointment or election of the first trustee under section 702 546(a)(1)(B).
Standard for Dismissal
A court weighing a motion to dismiss “must accept as true the factual allegations of the complaint, construe all reasonable inferences therefrom in favor of the plaintiffs, and determine whether the complaint, so read, limns facts sufficient to justify recovery on any cognizable theory of the case.” Beddall v. State Street Bank and Trust Co., 137 F.3d 12, 16 (1st Cir.1998). The parties agree that my consideration of docket entries in the main case and in this adversary proceeding, including the stipulation of facts, will not convert the motion to dismiss into a motion for summary judgment. See Boateng v. InterAmerican Univ., Inc., 210 F.3d 56, 60 (1st Cir.2000); Fudge v. Penthouse Int., Ltd., 840 F.2d 1012, 1015 (1st Cir.1988).
Undisputed facts
The Debtor filed a voluntary petition under Chapter 11 on November 6, 2000. No trustee was appointed under Chapter 11. The case was converted to Chapter 7 by court order dated April 2, 2002. The United States Trustee appointed an interim trustee pursuant to § 701 by certificate of appointment dated April 3, 2002 and filed on May 3, 2002. The § 341 meeting of creditors was held on May 20, 2002. No trustee was elected at that meeting and, consequently, the interim trustee became the Trustee under § 702(d) on that date. This adversary proceeding was commenced precisely one year after the § 341 meeting on May 20, 2003.
Discussion
If the date of the appointment of the first trustee under § 702 is the date of appointment of the interim trustee as pressed by the Defendants, this action would not have been commenced within the one year period prescribed in § 546(a)(1)(B). On the other hand, if the starting date of the crucial period is the date of the § 341 meeting as urged by the Trustee, the action will survive. The question turns upon the meaning of the words “appointment or election under section 702” found in § 546(a)(1)(B).
The pertinent language in § 702 is found in paragraph (d) which provides: “If a trustee is not elected under this section, then the interim trustee shall serve as trustee in the case.” The Defendants correctly point out that the word “appointment” does not appear in § 702(d). From this omission they divine that the reference to § 702 in § 546(a)(1)(B) is limited to the election of a trustee. To give meaning to the word “appointment” in § 546(a)(1)(B) the Defendants read that provision as if it contained a reference to the appointment of an interim trustee under § 701. Since the interim trustee in this instance was appointed more than one year before the commencement of the adversary proceeding, they insist that the case should be dismissed.
There is ample authority for the Defendants’ position. See e.g. Avalanche Maritime, Ltd. v. Parekh (In re Parmetex, Inc.), 199 F.3d 1029 (9th Cir.1999); Burtch v. Georgia-Pacific Corp. (In re Allied Digital Technologies Corp.), 300 B.R. 616, 619 (Bankr.D.Del.2003).
The contrary view adopted by the Trustee in this case is that the word “appointment” has meaning in § 546(a)(1)(B) with respect to Chapter 7 without inventing a reference to § 701. Under this approach, the appointment of the first trustee under § 702 within the context of § 546(a)(1)(B) occurs by operation of law when no trustee has been elected at the § 341 meeting. This understanding of the interplay between § 546 and § 702 would set the date of the § 341 meeting as the beginning of *315the one year limitation period. See In re Art & Co., Inc., 179 B.R. 757, 761 (Bankr.D.Mass.1995)(“In a Chapter 7 case, the appointment of the interim trustee takes place automatically at the first § 341 meeting of creditors in the absence of an election by creditors.”); 5 Collier on Bankruptcy, ¶ 546.02[2][a](15th Ed.2003)(“Since trustee elections under section 702 are rare, the date of the section 341 meeting usually will be the date of appointment of the trustee for purposes of section 546(a)(1)(B).”). Adopting that approach in this instance would allow the Trustee’s action to continue.
The plain meaning of legislation is normally conclusive. See U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). As it relates to this case, the one year statute of limitations contained in § 546(a)(1)(B) commences upon “the appointment or election of the first trustee under section 702.... ” There is no need to look to § 701 for an appointment under § 546, because § 702 has its own appointment provision. Paragraph (d) of § 702 provides: “If a trustee is not elected under this section, then the interim trustee shall serve as the trustee in the case.” (Emphasis added).
The appointment of the interim trustee as trustee under § 702(d) occurs by operation of law and becomes effective when there has been no election at the § 341 meeting. That the interim trustee who becomes the trustee under § 702 had previously been appointed interim trustee under § 701 is of no consequence under § 546(a)(1)(B). The § 701 appointment merely qualifies the interim trustee for subsequent appointment under § 702(d) to be “the first trustee under section 702” within the meaning of § 546(a)(1)(B).
If the effective date of the appointment of the first trustee under § 702 is understood to mean the appointment date of the interim trustee under § 701, then the interim trustee would be the first trustee under § 546(a)(1)(B) in every case, including those rare cases in which a chapter 7 trustee is actually elected.
The full powers given to an interim trustee under § 701(c)(“An interim trustee serving under this section is a trustee in a case under this title.”) do not conflict with the subsequent appointment of the interim trustee as the first trustee under § 546. Surely the interim trustee is a “trustee,” but such status does not alter the specific reference to “first trustee under section 702” in § 546.
This action was commenced exactly one year after the Trustee became the first trustee under § 702. Therefore, this action is timely, and the Defendants’ motion is denied. A separate order will issue.
. The Defendants also moved to dismiss a portion of Count III, but that issue was resolved by agreement of the parties at hearing on the Defendants' motion. Unless otherwise noted, all statutory references herein are to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. § 101, et seq. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493676/ | *406MEMORANDUM OPINION1
MARY F. WALRATH, Bankruptcy Judge.
Before the Court is the Second Motion of Charles M. Golden, as Chapter 11 Trustee, seeking an Order Extending Time to Effect Service of Original Process on Medical Office Properties, Inc., f/k/a Healthcare Financial Partners REIT, Inc., (“MOP”) and Jack Easterday pursuant to Rule 4(m) of the Federal Rules of Civil Procedure (“the Second Motion”).2 For the following reasons, we deny the Second Motion with respect to MOP.3
I.FACTUAL BACKGROUND
On July 10, 2001, Lenox Healthcare, Inc., and its affiliates (“the Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On July 30, 2001, the United States Trustee appointed Charles M. Golden as the chapter 11 trustee (“the Trustee”).
On or about July 8, 2003, the Trustee filed approximately 100 complaints seeking, inter alia, to avoid alleged preferential and fraudulent transfers pursuant to sections 547 and 550 of the Bankruptcy Code.
On October 31, 2003, the Trustee filed his First Motion to Extend Time to Effect Service on MOP. The Court granted the First Motion and entered an order giving the Trustee an additional 90 days (until February 5, 2004) to serve MOP. The Trustee did not perfect service of the complaint on MOP (“the Complaint”) during the first extension. On January 26, 2004, the Trustee filed the Second Motion seeking a further extension of time to serve MOP. On February 19, 2004, MOP objected to the Second Motion and a hearing was held on February 23, 2004.
II. JURISDICTION
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) & 157(b)(2)(A), (E), (F), & (O).
III. DISCUSSION
The Trustee requests an additional extension of time to effect service on MOP. The Trustee contends that a second extension of time is warranted under Rule 4(m) of the Federal Rules of Civil Procedure, as incorporated by Rule 7004 of the Federal Rules of Bankruptcy Procedure.
Rule 4(m) provides the time limit for serving a defendant with notice of a complaint filed against it. Fed R. Civ. P. 4(m). Specifically, this Rule provides that
if service of the summons and complaint is not made upon a defendant within 120 days after the filing of the complaint, the court, upon motion or its own initiative after notice to the plaintiff, shall dismiss the action without prejudice as to that defendant or direct that service be effected within a specified time; provided that if the plaintiff shows good cause for the failure, the court shall extend the time for service for an appropriate period.
Id.
The Third Circuit interpreted Rule 4(m) “to require a court to extend time if good cause is shown and to allow a court discre*407tion to dismiss or extend time absent a showing of good cause.” Petrucelli v. Bohringer and Ratzinger, 46 F.3d 1298, 1305 (3d Cir.1995).
First, the [court] should determine whether good cause exists for an extension of time. If good cause is present, the [court] must extend the time for service and the inquiry is ended. If, however, good cause does not exist, the court may in its discretion decide whether to dismiss the case without prejudice or extend the time for service.
Id.
A. Good Cause
Good cause requires at least a showing of excusable neglect. Braxton v. United States, 817 F.2d 238, 241 (3d Cir.1987) (noting that inadvertence of counsel and half-hearted efforts at service fail to meet the standard.) Courts should permit late filings caused by inadvertence, mistake, carelessness, or intervening circumstances beyond the party’s control. See Pioneer Inv. Servs. Co. v. Brunswick Assocs., L.P., 507 U.S. 380, 387-88, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993); Goldstein v. Illinois Security Agency (In re Just for Feet, Inc.), 299 B.R. 343, 347-48 (Bankr.D.Del.2003). Determining whether excusable neglect exists is an equitable exercise that takes into account all relevant circumstances surrounding the omission. Id. at 348. Where counsel exhibits substantial diligence, professional competence and good faith, but fails to comply with the rule as a result of some minor neglect, the Court is required to find good cause. Consolidated Freightways Corp. v. Larson, 827 F.2d 916, 919-20 (3d Cir.1987).
The Trustee contends good cause is present in this case, because he filed a large number of adversary proceedings. We find this insufficient. In this case, the Trustee filed only 100 complaints. This is not a significant number4 and does not excuse service within the original 120 day period, let alone the additional 90 day extension already granted.
The Trustee also asserts that the poor condition of the Debtors’ books and records and the lack of any employees of the Debtors to assist him prevented him from obtaining a valid and current address for MOP. He further states that his independent efforts to obtain a valid mailing address, during the first extension of time, were unsuccessful. In support of this assertion the Trustee attached his time records and an affidavit from a support staff member detailing her efforts. We conclude that these efforts do not satisfy the good cause standard. Rather than establishing that the Trustee diligently attempted to serve MOP, the time records establish the opposite. They show that the Trustee spent only .5 hours addressing all service issues, only six minutes specifically addressing MOP, and that a staff member spent additional time using Internet search engines.
MOP contends that its address was known (or should have been known) to the Trustee because (1) MOP’s counsel filed a Notice of Appearance in the chapter 11 cases on July 13, 2001, (2) MOP and the Trustee had prior discussions about real estate owned by MOP and leased to the Debtors, (3) the Trustee and MOP filed a consensual motion relating to transactions between MOP and the Debtors and (4) the parties were in contact regarding the nursing homes that are the subject of the Trustee’s litigation. MOP also contends *408that an Internet search for “Medical Office Properties” or “Medical Office Properties, Inc.” would have provided the Trustee with MOP’s address.
We agree with MOP that the Trustee did not establish that he satisfied the requirements of Rule 4(m). The Trustee knew or should have known MOP’s address. The Trustee disagrees with MOP’s assertion that it appeared in the chapter 11 case, noting that the appearance was, in fact, filed by MOP’s predecessor Healthcare Financial Partners REIT, Inc. (“HFPR”). However, the Trustee cannot reasonably contend that he was unaware of the connection between the two entities, because the Complaint filed by the Trustee specifically states that MOP “was formally known as HFPR.” Accordingly, we conclude that the Trustee should have been able to find the address simply by reviewing the filings in this case. Additionally, we conclude that the Trustee did not exercise diligent efforts in attempting to locate MOP’s address. Even an elementary Internet search would have uncovered MOP’s website (www.medoffice.com) which has a hyperlink to its corporate address. Thus, we conclude that the Trustee has failed to establish good cause under Rule 4(m) for an extension of timé to serve MOP.
B. Discretion
Even in the absence of good cause a court may, in its discretion, extend the time for service. Petrucelli, 46 F.3d at 1305. In Petrucelli, the Court relied on the Advisory Committee notes to provide guidance on what factors should influence its discretion. Id. Although not exhaustive, the Committee’s list included whether the applicable statute of limitations would bar the refiled action or whether the defendant evaded service or concealed a defect in attempted service. Id. at 1305-06. The Court emphasized, however, that the running of the statute of limitations does not itself require an extension of time to effect service. Id. at 1306. When there is an absence of good cause, a court may still dismiss the case in its discretion. Id.
The Trustee contends that an extension of time to effect service is proper in this case under the Court’s discretionary authority because the statute of limitations would preclude the Trustee from refiling the Complaint. The Complaint was filed almost a year ago, on the eve of the expiration of the statute of limitations. Since that time, the Trustee made only a de minimus effort to locate MOP’s address and serve the Complaint, ignoring the address and contact information that was readily available in the Court records and its file. We are not inclined to exercise our discretion to grant the Trustee additional time. We will, therefore, deny the Second Motion.
IV. CONCLUSION
For the reasons set forth above, we deny the Second Motion seeking an Order Extending Time to Effect Service of Original Process on MOP and will accordingly dismiss the Complaint for failure to effect service under Rule 12(b)(5) of the Federal Rules of Civil Procedure.
An appropriate order is attached.
ORDER
AND NOW, this 12th day of July 2004, upon consideration of the Second Motion of Charles M. Golden, as Chapter 11 Trustee, seeking an Order Extending Time to Effect Service of Original Process on Medical Office Properties, Inc., f/k/a Healthcare Financial Partners REIT, Inc., and Jack Easterday (“MOP”) pursuant to Rule 4(m) of the Federal Rules of Civil Procedure, and the Objection of MOP, it is hereby
*409ORDERED that the Second Motion is DENIED with respect to MOP, and it is further
ORDERED that the Complaint against MOP is DISMISSED for failure to effect service under Rule 12(b)(5) of the Federal Rules of Civil Procedure, and it is further
ORDERED that the Second Motion is GRANTED with respect to Jack Easter-day.
. This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Federal Rule of Bankruptcy Procedure 7052.
. Concurrently, the Trustee filed three additional Second Motions seeking an extension of time to serve Kaiser Permanente Foundation, FCNPC and ADT Security Services, Inc. Since that time, however, the Trustee has dismissed these complaints. Accordingly, these Motions will not be addressed.
. Jack Easterday did not oppose the relief sought in this Motion.
. In contrast, we have chapter 11 cases with more than 1,000 preference actions. The Court has approximately 13,000 pending preference actions. As a result, we conclude that 100 is not a significant number. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493677/ | OPINION
1
WARREN W. BENTZ, Bankruptcy Judge.
Background and Procedure
On April 12, 2000, Totin Contracting, Inc. (“Totin”) and the West Salem Township Municipal Sewage Authority (the “Authority”) executed a contract for the construction of certain sanitary sewers in Mercer County entitled “Contract #3— South Sanitary Sewers” (the “Contract” or “K-3”). The original contract price was $1,008,455. The Contract is Contract # 3 among 5 separate numbered contracts between the Authority and others for work in contiguous areas. Substantial completion occurred March 13, 2001, and the new sewer system was turned over to the Authority. There remained some surface restoration work to do.
The original notice to commence work was May 15, 2000 and the completion due date was November 20, 2000. Hence, completion was late. The Authority withheld payments otherwise due, and Totin advised that it would stop its surface restoration work, being unable to work without funds. Each party asserted claims, including Totin’s claim for amounts due but unpaid under the Contract, and damages for delays caused by the Authority, and the Authority’s claims for late performance and costs of correcting faulty work.
Totin filed Chapter 11 bankruptcy on May 4, 2001.
About May 1, the parties began negotiations and reached an agreement set forth in a “Memorandum of Understanding” dated May 15, 2001, and approved by this Court the same day. The Memorandum of Understanding provided for various payouts, and for Totin to finish the surface restoration work by June 15, 2001.
Totin requested an extension to June 20, 2001 because of adverse weather and gave notice to the Engineer on June 1 that all work would be done by June 15, 2001. We take it that the work would be finished by June 22. The parties thereafter disputed whether Totin had completed the work.
On February 20, 2002, Totin filed its Complaint, thereafter amended, against the Authority commencing the within adversary proceeding demanding damages in the amount of $238,535.94 plus interest and punitive damages. The Authority filed its Answer alleging numerous counterclaims, totaling $119,377.89, with a net amount due the Authority of $3,472.24 plus additional attorney and engineering fees to be incurred. The Authority stated that it is asserting its claims only as setoffs.
On April 22, 2004, prior to trial, in connection with motions for summary judgment on both sides, this Court entered a MEMORANDUM AND ORDER relative to the May 15, 2001 Memorandum of Understanding; the Memorandum and Order provided in part as follows:
The Memorandum [of Understanding] was a settlement of the rights, claims, obligations and duties under the original Contract. Both parties compromised their respective positions and agreed to accept final performance in accordance with the terms of the Memorandum, in satisfaction of the Contract.
The parties are, by their agreement to the terms of the Memorandum, foreclos*429ed from raising issues or obligations that are resolved by its terms.
The Authority’s claim for liquidated damages was settled and resolved by the Memorandum for the amount of $43,500. It is not entitled to any further credit for additional engineering or legal fees. Totin relinquished any claims for additional monies, if any, that it might have claimed under the Contract for any extra work or for expenses due to delays or increased costs that may have been caused by the Authority’s failure to properly perform its obligations.
Totin’s claim is now limited to (1) the remaining unpaid balance of $14,000 under ¶ 5 of the Memorandum subject to adjustments, plus or minus, for amounts that the Authority was required to expend to complete work, if any, that Totin failed to complete, and (2) for final adjusting quantities, including an upward adjustment for additional paving. The facts necessary to determine the amount of the adjustments are in dispute and must be the subject of an evidentiary hearing.
Notice to proceed had been issued May 15, 2000. On June 8, 2000, the reports show that the material was on the job but there was still a holdup because of negotiations between the Authority and Penndot. Some time later, Penndot agreed to allow open cuts across its roads. The Authority therefore required the contractor to excavate across the roads, install the sewer, backfill with stone, and repave the road. Such work was required in the original bid and Contract, but only to a minor extent, and was greatly expanded by this change. This mostly eliminated the boring work, wherein a pit is dug on each side of the road, and a hole is bored laterally under the road to accommodate a steel pipe through which the sewer is installed.
Resolution of this issue by the Authority absorbed valuable time at the beginning of the job, and Totin may have had a valid claim for delay. Totin gave that up, however, in its attempt on May 15, 2001 to settle the entire job and get it behind him in the Memorandum of Understanding.
This Court’s Order was that Totin thereby gave up any claim he had for delay, and gave up $43,500 to the Authority for liquidated damages. The Authority got $43,500 but gave up claims for past and future liquidated damages. The job was “substantially” done and almost completely finished and the Memorandum of Understanding was intended to be a final settlement.
At trial, the Authority sought to introduce evidence of subsequent additional counsel and engineering fees of some $60,000. This Court sustained an objection to such evidence.
This Court would not, even if the evidence were admitted, have allowed $60,000 in counsel and engineering fees to resist payment of monies clearly owing as to certain paving, and as to setoff rights over the minor resurfacing deficiencies that remained.
The Memorandum of Understanding did several other things: (1) It committed To-tin to finish the work by June 15, 2001.(2) It recognized that in accordance with the Contract, “there will be a Change Order to accomplish final adjusting quantities” as may be determined by Totin and the Authority’s consulting engineer and that included within those quantities is anticipated to be a change related to additional paving in the amount of approximately $34,000. (3) It provided that the Contract was still applicable. (4) It provided for approval of four Change Orders which had been long pending totaling $37,423.70. (5) It provided for payments to Totin of $33,000 presently; $33,000 on June 1 and a *430final payment of $34,000 on June 18, providing the work is finished; and $47,000 direct to Totin’s subcontractors. These amounts were paid, except that $14,000 was withheld from Totin.
The Authority filed a motion for relief from the automatic stay of 11 U.S.C. § 362 asserting that Totin had not finished homeowner lawn and other repairs and that it wanted to terminate the Totin Contract and pursue the Surety. The motion was granted on June 19, 2002 without any determination whether the Authority had legal grounds for such termination. The Authority subsequently terminated the Contract by notice to Totin.
Procedural Issue
The Authority urges that the Complaint as brought by Totin to recover amounts due under the Contract that To-tin did not specifically allege the $54,850 paving claim or the $14,000 claim, that 11 U.S.C. § 108(a) bars claims filed over two years after the bankruptcy case was filed, and that two years have expired. First, we conclude that any claims and counterclaims or offsets necessary to determine amounts due under the Contract are properly before the Court. Second, 11 U.S.C. § 108(a) imposes a two year limitation period only where the state law limitation is less than two years; where the state law limitation period is greater than two years, the longer period governs. The Complaint could, at trial, and even now, be amended if necessary. We deem such amendment unnecessary having been amply disclosed in pretrial statements and being a part of the suit on the Contract. The Complaint will be deemed amended to conform to the evidence.
The Trial Issues
A five day trial of the factual complexities of the Contract and its performance concluded June 8, 2004, and the matter is ripe for decision.
It is appropriate to mention the cast of characters:
Totin Contracting, Inc. (“Totin”), Debtor and Plaintiff
Michael Totin, President of Totin Contracting, Inc.
West Salem Township Municipal Sewer Authority, Defendant (the “Authority”)
Mark Reichard, Chairman of the Authority
Killam Associates, the engineering firm engaged by the Authority for the project
Walter Jenco, the Project Engineer assigned by Killam Associates to the job from May, 2000 to January 29, 2002
Paul Hesse, Project Engineer assigned by Killam Associates after January 29, 2002
John Jordan, Totin’s paving foreman
John Runkle, representative of Sabrina Runkle Services Rendered, Inc. (“Runkle”)
Ken Sherbondy, Township Road Supervisor
Steven G. Adams, Vice President of Paul C. Rizzo Associates, Engineers & Consultants
Irvin Myers, USDA Loan Specialist
The payment and workmanship claims are best treated individually:
1. The paving, 2194 sq. yd. ($54,850 claim)
2. 11 Carnegie Street sewer repair ($2,372.49 setoff claim)
3. 218 Clarksville Road, Smith, new asphalt drive ($3,885 setoff claim)
4. Hempfield Ave. Inlets $3,275; Hempfield Ave. 15" CCP $3,225; Buy Rite catch basin $3,018 (setoff claims)
*4315. Reichard property, rip rap ($1,674.92 setoff claim)
6. Surface Restoration (setoff claims)
1. The Paving, 219J/. square yards ($5^,850 claim)
The contract provided for an “estimated” 1,200 square yards of paving to be paid for at the fixed rate of $25 per square yard. Totin would be paid only for the square yards of paving actually performed. Similarly, Totin would be paid for more than 1,200 square yards if he actually laid more. Thus, the 1,200 square yard figure was designated in the Contract as an “estimate;” but the unit price of $25 per square yard was fixed; so the contractor would get $25 per square yard for each square yard laid.
Similarly, the estimated amount for 8" steel casing borings was 500 lineal feet at a fixed price of $75 per foot, or $37,500. In the Final Compensating Change Order, the 500 lineal feet was reduced to 80 feet, so the contract price was reduced by $31,500 to $6,000.
As soon as the work started, there was a substantial change. The Contract provided that the new sewers should cross certain paved roads by digging pits on both sides of the road, and then boring laterally across the road underground, so that the surface paving would not be disturbed. The Authority, through its engineer, after negotiation with Penndot, ordered that the bored crossings be changed to open cuts, followed by stone backfill, and re-paving. No change order was issued because the fixed unit prices were already in the Contract.
The Authority argues that Totin cannot recover for the paving work done in excess of the original contract because there was no written Change Order.
The May 15, 2001 Memorandum of Understanding, ¶ 7, commits the parties to recognition that there would be a Change Order to accomplish the “final adjusting quantities” in accordance with the original contract. That paragraph also provides “that included within those quantities is anticipated to be a change related to additional paving in the amount of approximately $34,000.” Thus, the Memorandum of Understanding of May 15, 2001 commits the Authority to pay for the paving, subject only to proof of the quantity. It also commits the Authority to the interpretation of the Contract that the unit prices were fixed and the quantities were estimates.
The Authority’s position that the 2,194 square yards of paving cannot be paid without a written Change Order is also belied by the practice under the Contract. The Project Engineer and the Authority previously approved Totin’s Partial Payment Estimate for 2,113.28 square yards of paving in the year 2000, and paid all but the retainage without a Change Order. That seems to make it abundantly clear that no Change Order was required for changes in the quantities of the paving.
Irvin Myers testified that if Change Orders were required every time a quantity is altered, there would be several Change Orders each day — an intolerable scheme. The changes are handled by reporting them on the contractor’s Partial Payment Estimate and then by the Final Compensating Change Order.
There was no Change Order for the deletion of $30,500 of boring work. Pursuant to the Authority’s position, Totin should get that $30,500 even though he never did the work — an absurd conclusion.
The Final Compensating Change Order (Authority, Exhibit D-7) shows that there were 27 different categories of work. Out of that 27, there were 25 that had quantity *432changes which, in turn, changed the price. There were no Change Orders for those items. The four actual Change Orders are itemized separately.
Paul Hesse testified that he prepared Exhibit D-7 and that it is part of his job to prepare the Final Compensating Change Order based upon the quantities actually installed.
After May 15, Totin completed the paving work, but received no payment nor credit for it. In accordance with the Contract and the prior practice of the parties conforming thereto, Totin on July 3, 2001 submitted a Partial Payment Estimate for 2,194 square yards of paving at $25 per square yard, being $54,850. The Contract (¶ 19.1 of the General Conditions) and past practice required the Authority’s Project Engineer to respond in writing within ten days either approving payment or specifying any objections. Walter Jenco, then the Engineer on the job, did not respond, in clear violation of the Contract. He also did not forward the partial Payment Estimate to the Authority.
Totin, having gotten no response, on August 31, 2001, resubmitted the Partial Payment Request to the Engineer. Again, there was no response. Again, in violation of the Contract.
Michael Totin spoke to Walter Jenco in late summer, 2001 advising of the location of the paving. Jenco raised no objections. Jenco did not testify at trial.
In January, 2002, Jenco left Killam Associates and Paul Hesse became the Project Engineer. Hesse telephoned Michael Totin and asked for an explanation showing where the 2,194 square yards of paving was laid. Michael Totin gave an oral explanation of the streets involved. Hesse telephoned Walter Jenco on February 26, 2002, and made the notation on the call record “2194 ok per Walt.”
This is a clear and unequivocal statement by the Project Engineer on the job at the time the paving was laid that Totin should be paid for the 2,194 square yards of paving. Why Hesse resolved to ignore Jenco’s evaluation was not explained and cannot be explained, unless there was a mind-set between him and Reichard to “let the lawyers fight it out.” The problem with that approach is that it is the Engineer, who must give guidance to the lawyers as to the facts.
Hesse telephoned Mark Reichard, Chairman of the Authority Board, about the matter; Reichard instructed “if you can’t justify it, let the lawyers fight it out.” Even then, no notice was given to Totin as to whether or why the paving claim would or would not be paid. Michael Totin believed in the summer of 2001 that Totin would be paid in the normal course. Nonpayment after passage of months enlightened him.
Hesse also telephoned Michael Totin and received an oral explanation of the location of the 2,194 square yards of paving. Hesse on March 20, 2002 sent Totin a request for a written explanation. Michael Totin had his Partial Payment Request ignored for 7 months, and having his oral explanation ignored, did not reply in writing.
Hesse testified that the paving was old and that Penndot had paved over part of it so that inspection could not reveal the extent of Totin’s paving. He also testified that the most he could calculate from his file was 1,500 square yards. Yet, he never sought to credit Totin for this amount, continuing in the assertion of the Authority that nothing was owed Totin for the additional paving.
Hesse also testified that it would not be difficult to walk the site to measure the paving, but that he never did.
*433Michael Totin produced invoices from Dunbar Asphalt Products, Inc. for May-June, 2001 showing purchases totaling 456.4 tons of bituminous paving material for this job. There was no hint that this material was used on any other job. Michael Totin testified that the 456.4 tons of bituminous paving material converts to 2,194 square yards of paving. No one on behalf of the Authority disputed this calculation.
John Jordan, Totin’s paving foreman, testified without contradiction that while he was doing Totin’s paving work in May and June, 2001, including repaving of 1,700 feet of Coal Hill Road, 7 feet wide (as required by the Authority after negotiations with Penndot), there was no inspector on the job — again, contrary to the Contract. Had the Authority had an inspector on the job as required by the Contract, the present dispute would either not exist or have a different character. It is also worth observing that the Authority and its engineer never contended that the paving was not done or that the workmanship was not adequate.
It is also worth observing that Hesse never inspected the paving, and never requested that he meet Michael Totin on the site to review the paving. Totin contended that paving has varying shades of color, that the Engineer should have inspected it while it was being laid, and/or within 10 days after receiving Totin’s Partial Payment Request, and that even 6 months later, an inspection, or a joint inspection, would have resolved the issue. It would appeal’ that by then the Authority and the Engineer had set their course to “let the lawyers fight it out.”
It is therefore concluded that Totin is entitled to be paid or credited for 2,194 square yards of paving at $25 per square yard, or $54,850.
2. 11 Carnegie Street Sewer Repair ($237249 Set off Claim)
The Authority seeks $2,372.49 for this item. Here, there was an old but undisclosed 12" sewer line crossing the path of and above the new sanitary sewer. The old sewer was broken during the new excavation and before its existence was known. Totin replaced jdie broken section with a 10" sdwer pipe of sturdier material under 'the supervision of and without objection from the Authority’s inspéctor. The new sanitary sewer was installed at the correct elevation which was below the old storm sewer and the excavation was back-filled. In December, 2001, the site was observed to be wet, with water bubbling up from below. The Authority concluded that Totin had done the work incorrectly and engaged others to excavate, replace the 10" piece of sewer with 12" or larger sewer, and back-filled. The Engineer testified that the short piece of 10" pipe restricted the flow of the 12" pipe, thus causing the water in the 12" pipe to back up and come out the joints of the 12" pipe and find its way to the surface. However, Totin’s position was that the new sewer had been installed some months earlier, that this problem arose shortly after the adjacent homeowner’s private contractor installed the “lateral” from the house to the new sewer, so that it was more likely that the lateral was improperly connected to the new sewer. The possibility that the problem was caused by improper installation of the lateral was not refuted.
Authority Chairman Mark Reichard’s notes upon his investigation of the matter state “caused by incorrect storm drain connection.” (See Defendant, Exhibit 32, page 7) Reichard has apparently changed his position. Ken Sherbondy also installed some of the lateral sewer drains — perhaps *434this one. Yet, he and Reiehard concluded it was Totin’s fault.
It is also noted that no one knew the old sewer was there, nor did anyone find out where it came from or where it went, or what area it served, or what its load was; consequently, the Engineer was testifying from conjecture when he testified that the 5 or 10 feet of 10" pipe in the 12" line caused the problem.
Further, the Authority’s on-site inspector approved Totin’s original installation.
The Court finds that there is insufficient evidence to show Totin’s liability and that it is more likely that the water discharge in the surface area was caused by improper installation of the lateral and the cure was effected by reconnecting the lateral properly.
8. 218 Clarksville Road Repairs (Smith) ($hl5b:85 Setoff Claim)
The Authority paid Runkle $3,885 to install a new driveway (the invoice is dated 6/7/03) and $269.85 to supply and plant 3 crabapple trees (invoice date of 9/30/02). The new sewer was across the road from the Smith property.
The Adams’ Report of his March 14, 2002 investigation (Plaintiff, Exhibit 25) and his testimony dwells extensively on the Smith property.
The Authority claims that the Smiths claimed that Totin’s work had cracked the plaster in their house, damaged a concrete pad (used for a driveway), damaged a concrete spillway, 3 pine trees, and a crabap-ple tree.
Adams inspected the site. A crabapple tree was in the area and was dead; but it and the house were too far away for any damage to have been caused by Totin. The concrete spillway was ancient; also the cracks and breaks in the concrete were ancient and deteriorated. Adams concluded that Totin’s work caused no damage.
The concrete pad was under 4 to 6 inches of soil. Smith apparently had offered to allow the paving of his driveway in lieu of replacing the pad. Totin declined, asserting that the sewer work did not require him to go near the driveway and he did not go near it.
Of the 3 pine trees, one appeared to be missing, based on prior photographs. However, none of the trees were on the Smith property.
The undated Runkle Bid was apparently opened September 13, 2002 and apparently became part of the Runkle contract shortly thereafter. Totin objected to the introduction of the original Contract which Totin had subpoenaed. The objection was overruled in the interest of completing the record. The Runkle Bid shows $269.85 for “3 crab trees at 218 Clarksville Road.” This item also shows up on Runkle invoice 181 dated September 30, 2002. However, the $3,885 charge for the new driveway shows up on Runkle invoice number 55 dated 6/7/2003 — apparently one of the “oral” extras to the Runkle contract.
The evidence showed that the Authority paid the $269.85 and the $3,885 to Runkle for the Smith work. There was no evidence, however, that the cracks in the plaster walls of the house were not of long standing, or that anyone did damage to Smith’s driveway or the crabapple trees. There was no evidence that Totin was liable. The Authority’s work on the Smith property was gratuitous.
A Hempfield Avenue — Catch Basin $8,275 Hempfield Avenue — 15" CPP $8,325 Buy-Rite Catch Basin — $8,018
These items may be treated together because the evidence is similar.
*435Installation and refurbishing of these catch basins was not a part of Totin’s Contract. Nor were they added as extras. The only relation to the Totin Contract is that they were nearby. Hesse testified as to each of these items that Totin had no obligation for this work.
The owner of the Buy-Rite location wrote to Totin in the Fall of 2001 expressing his thanks for the good work. Yet, the Runkle work in supplying and installing a new catch basin, where none existed before, was invoiced 11/13/02.
This Court finds no basis of a valid claim by these landowners against anyone. The Authority’s performance of this work was gratuitous.
5. The Reichard Property Rip-Rap ($1,674„92)
Frances Deets, one of the landowners, made a private agreement with Totin before any surface restoration work was started. The landowner accepted $528 in lieu of any work by Totin. The landowner could then buy materials, supply his own labor, and come out ahead.
Thus, it was possible for Totin as Contractor to make private contracts with the owners for the surface restoration work.
Mark Reichard, Authority Chairman, is the owner of his residence and adjacent land in the Totin Contract area. In the summer of 2000, when the sewer construction was in full swing, he made a private agreement with Totin. Totin needed a place to deposit the dirt excavated from driveway and roadway cuts. Reichard’s property was the site of an abandoned stone quarry. Reichard wanted the quarry filled and agreed with Michael Totin that Totin should deposit the excavation material in the stone quarry. This was a private agreement between Reichard and Totin for their mutual benefit, and was outside the scope of the Authority’s restoration obligation. Some two years later, Reichard felt he needed additional drainage and orally ordered Runkle (as an Extra to the Authority’s contract with Runkle) to install rip rap on Reich-ard’s property — to be charged to Totin. No inspection, no notice to Totin, no board minutes, and Totin pays the bill! ($369.92 on Runkle invoice # 183 dated 10/7/02, Exhibit D-16 and $1,325 on Run-kle invoice # 55 dated 6/7/03, Exhibit D-17). Reichard must have grown envious seeing his neighbors get the benefit from the Authority’s largesse (with Totin’s money) while he was on the inside yet not enjoying the emoluments of his position. One wonders what the minutes of the Authority Board would have looked like, if they existed, where the Chairman (a very active Chairman) executed the Runkle contract (on prior oral board approval) and then, a month later, asks that there be an “extra” to the contract to improve his own property.
This claim, belatedly made, and not mentioned in the list sent by the Authority to Totin’s surety in December, 2001, has no factual or legal support. The evidence showed that the Authority paid Runkle for the rip-rap, but there was no evidence as to why the rip-rap was needed, other than the general statement that it would improve drainage, nor why it should be the responsibility of Totin.
6. The Surface Restoration
The Authority determined that it should do additional surface restoration work in the fall of 2002. Hesse did a drive-by with prospective bidders. Michael Totin was not invited. The bidders estimated material quantities needed and reported same to Hesse; 500 tons of topsoil and 10,000 square yards of mulch and seed. Hesse *436relied upon those estimated amounts in his bid specification.
Runkle bid $5,772.80 for the 500 tons of topsoil and $10,900 for the 10,000 square yards of mulch and seed.
The bid (Exhibit D-22) and the contract (Exhibit D-23) did not specify where the material was to be placed — only that it would “complete the construction of Restoration of Contract # 3.”
Runkle’s Invoice # 181 of 9/30/02 simply states:
“3. Supply and install/grade topsoil (2" nominal depth)... $ 5,772.80
4. Supply and install seed and mulch... $10,900.00”
Runkle finished the work (except for one deletion) and billed by invoice # 181 dated 9/30/02. Runkle was then instructed orally to do improvement work on an additional 17 properties. The oral instruction was treated as a Change Order. Runkle’s invoice # 183 of 10/7/02 shows an additional 17 properties where work was done, but does not say what was done.
The Totin Contract only obligated Totin to restore the affected properties to their preconstruction condition. Runkle’s written bid, on which his contract was based, provided that Runkle would provide 500 tons of topsoil to “2" nominal depth” and 10,000 square yards of seed and mulch. The Runkle contract ambiguously provided that Runkle would “complete the construction of Restoratior of Contract 3.” Runkle invoiced and was paid for the topsoil and the mulch as Runkle had bid. However, there was no testimony that the labor and material supplied by Runkle was the minimum necessary to satisfy Totin’s obligations under Contract 3. Four or five of the properties were not even within the boundaries of the Totin Contract. The Authority sought to rehabilitate the Run-kle invoice by Runkle’s testimony that those 4 or 5 properties would only have amounted to $1,000.
The Authority argues that the Contract required Totin to provide pre-construction photographs of each property and that To-tin failed to do so. Michael Totin testified that he had photos of all of the properties, but the employee who had possession of part of them left Totin’s employ and left the area with the photos, leaving Totin with only the photos along Route 18.
Adams testified, without rebuttal, that inspection of adjacent undisturbed areas can be a good gauge of the prior condition of the disturbed areas.
No notice was given to Totin by the Authority specifying deficiencies in Totin’s work. The Authority notified the Surety’s attorney by sending him a document entitled “Revised 12/10/01 Open Punch List Items.” Totin was provided a copy by the Surety’s attorney.
Totin argues that by practice and by contract, both sides are entitled to a final on-site joint inspection of any problems, concluding with a “punch list” of items needing attention. Hopefully, the parties agree. But, if they do not agree, the contractor has the owner’s position before him, so that if he fixes those items, he is done.
Here, there was never a final on-site inspection, joint or otherwise; not as to the surface renovation, and not as to the paving. Totin had no way of knowing the items required to finish. Even the list of 12/10/01 doubled thereafter by the oral changes to the Runkle contract in September, 2002, purportedly pursuant to the oral unrecorded agreement of the Authority board.
Mark Reichard was an exceptionally active chairman of the Authority. He is to be commended for his public service and his diligence. In addition to conducting the Authority board meetings, he was active in the field, although construction was *437not his area of expertise, checking the progress of the work on nearly a daily basis and making notes. Some of those notes have been quoted above. His testimony about work by Runkle was particularly persuasive in revealing the Authority’s attitude to the restoration work. He testified that “we didn’t go through a lot of detail on this with an eye to K-3; it was terminated.” Thus, the atmosphere seemed to be that the Bankruptcy Court’s Order removing the automatic stay so as to permit the Authority to terminate the Contract, if it thought it had grounds to do so, was equivalent to removing Totin as a party so that money due Totin could be arbitrarily spent elsewhere.
The same attitude shows up in the testimony of John Runkle, wherein he was instructed on the job “to make the owners happy” — “three or four times by Paul Hesse and every night be Mark Reichard.”
This Court concludes that the oral extras to the Runkle Contract were not the result of defective work, but were concessions to homeowners’ requests after seeing the improvements to other properties, without regard to the obligations of the Totin Contract.
Stephen Adams of Paul C. Rizzo Associates, Inc., Engineers & Consultants, was called as a witness. Adams has spent 20 years in the construction industry and in the past 5 years has investigated 40 to 45 construction projects. His inspection here was at the request of the Surety. He worked from the document entitled “Revised 12/10/01 Open Punch List Items,” which is the same document sent by the Authority to the Surety’s attorney and the same document attached as Exhibit 3 to the Authority’s Answer. Adams inspected the listed properties twice; once on March 14, 2002, and again on July 10, 2002. The second inspection was to confirm vegetation growth. He took photos on each inspection and spoke to each landowner if possible. His reports (Both reports bear Exhibit # P-25) are credible, as was his testimony. Adams testified that the vegetation was returning, that it was well established, that certain depressions were likely caused by the separate contractor who installed the lateral connections, that there was no need for 500 tons of topsoil or 10,000 square yards of seed and mulch, that the condition of the disturbed areas could generally be ascertained from the adjacent undisturbed areas, and that even though roadway salt can have a damaging effect, there was not a problem with vegetation growth, but there was a problem with “ponding” in some areas which two truckloads of topsoil would cure.
This Court concludes that the surface restoration work left undone by Totin was of a value of $1,500.
7. Financial Adjustments
Totin’s pretrial statement and the Authority’s Final Compensating Change Order (Exhibit D-7) agree to a point. The Court recognizes the agreements and disagreements and concludes as follows under the Contract:
Contract price 1,008,455.00
Change Orders 37,423.70
Contract price prior to adjustment 1,045,876.70
Amount paid 931,193.06
Balance 114,683.64
Final Compensating Change Order (Exhibit D-7) 22,767.70
Balance due 91,915.94
Less agreed liquidated damages 43,500.00
48,415.94
Plus 2194 square yards paving 54,850.00
Plus, due from Memo 14,000.00
Total 117,265.94
Allowed setoff herein 1,500.00
Balance due under Contract 3 without the Memorandum of Understanding 115,765.94
However, in the Memorandum of Understanding, Totin gave up amounts due under the Contract, but agreed to be bound by the Final Compensating Change *438Order. Totin knew he would come out ahead in the Final Compensating Change Order because of the paving to be done. He gave up other claim amounts.
Thus, the computation of the amount now due Totin is:
Cash withheld $ 14,000.00
2194 square yards paving 54,860.00
Total $ 68,850.00
Final Compensating Change Order 22,767.70
$ 46,082.30
Less allowed setoff herein 1,500.00
Net due Totin as of August 30, 2001 $ 44,582.30
The difference between the $115,764.94 and the $44,582.30 ($71,182.64) is part of what Totin gave up in the Memorandum of Understanding on May 15, 2001, in order to get this job behind him. He did not anticipate that, after giving up $43,500 in liquidated damages, and $71,182.64 in amounts due under the Contract, that he would have to engage in protracted litigation in order to collect the remaining settlement amount.
The conduct of the Authority toward Totin was arrogant and unjustified. This Court will do what it can to rectify the abuse, subject to the prior agreements of the parties. Based on the representations of counsel early in the bankruptcy case, the Court viewed Michael Totin as an inept contractor. After five days of testimony, our opinion has reversed.
An appropriate Order will be entered.
ORDER
This 7 day of July, 2004, after notice and trial, it is ORDERED that judgment shall be, and hereby is, entered in favor of Totin Contracting, Inc. and against the West Salem Township Municipal Sewage Authority in the amount of $44,582.30 as of August 31, 2001, plus interest at the legal rate from August 31, 2001 until paid.
. This Opinion constitutes the Court’s findings of fact and conclusions of law. Jurisdiction of the Court is not contested and is established under 28 U.S.C. § 1334 and 28 U.S.C. § 157(b)(2). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493678/ | MEMORANDUM OPINION AND ORDER
STEVEN A. FELSENTHAL, Bankruptcy Judge.
Joseph Michael Rice1, the defendant, moves the court for summary judgment declaring that no debt exists to the plaintiff, Jody Bernard Rice, upon which to determine dischargeability, and dismissing this adversary proceeding. The plaintiff opposes the motion. The court conducted a hearing on the motion on April 12, 2004.
The court will refer to the plaintiff as Jody Rice and to the defendant as Michael Rice. The parties are half-brothers. Jody Rice obtained a judgment, filed on April 11, 1991, in California state court against Michael Rice for $15,253,003.97, plus costs. In this adversary proceeding, Jody Rice contends that the judgment must be excluded from Michael Rice’s discharge pursuant to 11 U.S.C. § 523(a)(2)(A) or (a)(4).
In his motion for summary judgment, Michael Rice contends that Jody Rice did *453not properly serve the California complaint on Michael, making the judgment void. Given the passage of time, Michael Rice argues, the California statute of limitations precludes liquidating the claim. As a result, he argues, there is no debt and the adversary proceeding should be dismissed. Alternatively, Michael Rice argues that the court should not apply the doctrine of collateral estoppel to the California judgment.
Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, and other matters presented to the court show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Washington v. Armstrong World Indus., Inc., 839 F.2d 1121, 1122 (5th Cir.1988). On a summary judgment motion, the inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255, 106 S.Ct. 2505. A factual dispute bars summary judgment only when the disputed fact is determinative under governing law. Id. at 250, 106 S.Ct. 2505.
The movant bears the initial burden of articulating the basis for its motion and identifying evidence which shows that there is no genuine issue of material fact. Celotex, 477 U.S. at 322, 106 S.Ct. 2548. The respondent may not rest on the mere allegations or denials in its pleadings but must set forth specific facts showing that there is a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
Jody Rice filed his complaint against Michael Rice in the Superior Court of the State of California, Los Angeles County, on December 19, 1986. At that time, Michael Rice resided in France. Michael Rice challenges the affidavit of Ilka Engelberth-Rice in which she avers that she personally served Michael Rice in France with process of the California lawsuit. However, Michael Rice’s reply to Jody Rice’s summary judgment response effectively acknowledges personal service. Therefore, the court finds that Engelberth-Rice personally served Michael Rice in France on January 30, 1988. That personal service complied with California law. Cal.Civ.Proc.Code §§ 414.10 and 415.10; Olvera v. Olvera, 232 Cal.App.3d 32, 41, 283 Cal.Rptr. 271 (Cal.Ct.App.1991).
But the service did not comply with the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters. The Convention done at The Hague, Nov. 15, 1965, 20 U.S.T. 361 (the Hague Service Convention). Service abroad must comply with the Hague Service Convention. Under the Hague Service Convention, service may be accomplished through the use of a designated central authority. The Hague Service Convention, 20 U.S.T. 361, Art. 2. Jody Rice did not accomplish service through the use of a designated central authority.
Alternatively, if “the State of destination does not object,” service may be made “directly through the judicial officers, officials or other competent persons of the State of destination.” The Hague Service Convention, 20 U.S.T. 361, Art. 10(c). The parties agree that France has not objected to the alternative Hague Service Convention-endorsed service method. There is no genuine issue of material fact that Engel-berth-Rice is not a judicial officer or official of France.
*454Jody Rice contends that an attorney licensed in a state of the United States is considered an “other competent person” in France. Engelberth-Rice is not an attorney. But Jody Rice argues that his attorney could hire Engelberth-Rice as a process server to act on behalf of an American attorney in France. Jody Rice provides no French authority for that proposition. The court therefore concludes that Engel-berth-Rice is not an “other competent person” recognized in France to serve a complaint.
The Hague Service Convention also provides that judicial documents may be sent by “postal channels, directly to persons abroad.” The Hague Service Convention, 20 U.S.T. 361, Art. 10(a). Assuming this provision applies to service of process, Jody Rice did not send the complaint to Michael Rice by “postal channels.”
Even though actually served by Engel-berth-Rice, Michael Rice did not file an appearance in the California litigation and did not answer the complaint. Jody Rice filed a request for entry of default judgment, which he mailed to Michael Rice in France on March 11, 1988. The Hague Service Convention, 20 U.S.T. 361, Art. 10(a). Michael Rice avers that he did not receive that document. He also avers that the address listed in the proof of service as the address that Jody Rice used to mail the request for default judgment to Michael Rice in France is inaccurate. There is a genuine issue of material fact regarding whether Michael Rice received that document in France.
The California court entered a default on March 14, 1988. The California court filed the judgment on April 11, 1991. On January 29, 2001, Jody Rice filed an application for renewal of the judgment. On March 9, 2001, Jody Rice mailed the application to Michael Rice, in care of the Federal Correction Institute in Texarkana, Texas, where Michael Rice was then incarcerated. Michael Rice contends that he did not get the application for renewal of judgment while incarcerated and did not learn of the California judgment until July 2003. Michael Rice filed his bankruptcy petition on September 3, 2003, and Jody Rice filed this adversary proceeding on December 24, 2003. There is no evidence from the Federal Correction Institute as to whether the address Jody Rice used for the Texarkana location was correct or incorrect. There also is no evidence from a prison official that the mailing was actually delivered to Michael Rice. The only evidence that the application for renewal of the judgment was not delivered is from Michael Rice’s declaration. The court finds from the summary judgment evidence that there is a genuine issue of material fact as to whether Michael Rice received the application for renewal of the judgment while incarcerated.
Michael Rice contends that Jody Rice’s failure to comply with the Hague Service Convention voids the service. Michael Rice cites Volkswagenwerk Aktiengesellschaft v. Schlunk, 486 U.S. 694, 108 S.Ct. 2104, 100 L.Ed.2d 722 (1988), and DeJames v. Magnificence Carriers, Inc., 654 F.2d 280 (3d Cir.1981), to support that proposition. This court is not persuaded that the Supreme Court or the Third Circuit held that failure to comply with the Hague Service Convention voids actual service. This case presents facts of actual but defective service under the Hague Service Convention, which may make service voidable.
California law provides that when a defendant has not been served with actual notice in time to defend the action and a default judgment has been entered, the defendant
*455may serve and file a notice of motion to set aside the ... default judgment and for leave to defend the action. The notice of motion shall be served and filed within a reasonable time, but in no event exceeding the earlier of: (i) two years after entry of a default judgment against him or her; or (ii) 180 days after service on him or her of a written notice that the ... default judgment has been entered.
Cal.Civ.Proc.Code § 473.5. A default judgment valid on its face but otherwise void because service was improper is governed by this provision. Thus, the limitations period embodied in § 473.5 applies when the defendant has not been properly served with process. Rogers v. Silverman, 216 Cal.App.3d 1114, 1121, 1123-24, 265 Cal.Rptr. 286 (Cal.Ct.App.1989). Under California law, “the time in which to file a motion to vacate a default judgment valid on its face but void due to improper service commences upon the entry of judgment.” Id. at 1126, 265 Cal.Rptr. 286. The court’s reading of § 473.5 and the case law is that the default judgment is voidable. The California law must mean “voidable.” If it actually means “void,” then there is no issue. The California procedure code allows a default judgment entered after a defectively served complaint to stand, meaning a default judgment is “voidable” and not “void.” A default judgment is voidable because personal jurisdiction defects can be waived. “[Bjecause the personal jurisdiction requirement is a waivable right, there are a ‘variety of legal arrangements’ by which a litigant may give ‘express or implied consent to the personal jurisdiction of the court.’ ” Pennsylvania Life & Health Ins. Guaranty Ass’n v. Superior Court of San Diego County, 22 Cal.App.4th 477, 27 Cal.Rptr.2d 507, 512 (1994) (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 n. 14, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985)).
The court assumes that California would apply the discovery rule to the application of § 473.5. The mailing of the request for default, if received, or the mailing of the application for renewal, if received, could trigger the running of the period under the discovery rule. Because there is a factual dispute for trial regarding the mailings, the extent of the application of § 473.5 cannot be determined until trial.
If, under California law, the limitations period for Michael Rice to challenge the judgment has run, then the judgment would be binding and enforceable;
In California, “[cjollateral attack [on a judgment] is proper to contest lack of personal or subject matter jurisdiction or the granting of relief which the court has no power to grant.” Armstrong v. Armstrong, 15 Cal.3d 942, 126 Cal.Rptr. 805, 809, 544 P.2d 941 (1976). However, “in the absence of unusual circumstances ‘collateral attack will not be allowed where there is fundamental jurisdiction (i.e. of the person and subject matter) even though the judgment is contrary to statute.’ ” Id. at 810, 544 P.2d 941 (quoting Pacific Mut. Life Ins. Co. v. McConnell, 44 Cal.2d 715, 285 P.2d 636, 642 (1955)). The California court had subject matter jurisdiction. The California court obtained personal jurisdiction over Michael Rice under California law, but not pursuant to the Hague Service Convention. Assuming actual service would not be recognized because of the non-compliance with the Hague Service Convention, personal jurisdiction defects still may be waived. If it is found at trial that Michael Rice received the application for renewal of the judgment while in prison, then he did not timely move the California court for relief from the default judgment based on improper sendee of process. The time for him to *456seek that relief would have run. His failure to act would amount to a waiver of the personal jurisdiction contention. Thus, even though the judgment may have been entered contrary to the Hague Service Convention, the California courts would not permit the judgment to be collaterally attacked at this late date. Of course, if the actual service is not void because of the Hague Service Convention, there is no personal jurisdiction issue at all.
Having addressed the issue concerning collateral estoppel by the instant motion, the court notes that the parties have not raised the issue of whether California courts would allow a default judgment to be collaterally attacked. But, as the Armstrong court recognized, California courts do not allow their judgments to be collaterally attacked for failure to state a cause of action, insufficiency of evidence, abuse of discretion or mistake of law. Armstrong, 126 Cal.Rptr. at 809-810, 544 P.2d 941. California has a procedural rule for obtaining relief from a default judgment.
Lastly, Michael Rice argues that without proper service under the Hague Service Convention, the judgment must be void. If the judgment is void, then Jody Rice’s claim has not been established. Michael Rice further argues that the California statute of limitations to establish the claim has run. Without a claim, there can be no debt to except from discharge. Without a debt to except from discharge, the adversary complaint should be dismissed. Jody Rice responds that the judgment is not void. But, even if the judgment were set aside, the statute of limitations in California would not have run because of Michael Rice’s continual absence from California, including the time he lived in France and the time he was incarcerated in federal prison. Jody Rice argues that California would equitably toll its statute of limitations based on this absence.
The court will not decide that issue until it decides the contested facts at trial.
Based on the foregoing,
IT IS ORDERED that the motion of Joseph Michael Rice for summary judgment is DENIED.
. The court notes that on documents submitted by the debtor/defendant's attorney, the debtor/defendant's middle name is spelled "Micheál.” Documents supposedly bearing his signature appear to show that he signs the name as “Micheál.” However, the court's files and other documents show the spelling as “Michael,” which the court will use. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493679/ | OPINION AND ORDER ON APPLICATION FOR TURNOVER AND OBJECTION TO CLAIMS OF EXEMPTION
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the Trustee’s Application for Order Requiring Debtors to File Income Tax Returns and Deliver Refund Checks to Trustee (“Turnover Application”) and on the Trustee’s Objection to the Claims of Exempt Properties (“Exemption Objections”). The Court heard both matters on May 6, 2003.
This Court has 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 which this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(A),(B) and (E).
I. Turnover Application
The Court finds that the Turnover Application is no longer contested. The debtors have provided their tax returns to the Trustee and the dispute now centers on the amount claimed as exempt. Accordingly, the Turnover Application is granted, and the Court need not further consider it.
II. The Exemption Objections
The Trustee objected to three claims of exemption asserted by debtors Linda and Charles Wears. First, the Trustee objected to an amount of $1,200.00 claimed by Charles Wears pursuant to Ohio Rev.Code § 2329.66(A)(5) for certain tools of his trade. The basis for that objection is that $750.00 is the maximum amount available for the cited Ohio tools of the trade exemption.
Next, the Trustee objected to the debtors’ claim for an exemption in the amount of $2,800.00 for a 1997 Ford Taurus. That exemption is asserted pursuant to Ohio Rev.Code § 2329.66(A)(2). The Trustee argues that $1,000.00 is the maximum amount permitted by the cited Ohio motor vehicle exemption.
The Trustee also objected to the debtors’ claim of a $10,000.00 exemption pursuant to Ohio Rev.Code § 2329.66(A)(12)(c) and (d) for payments being received under a structured settlement of a personal injury claim. The Trustee’s objection is that the personal injury was only to Linda Wears and, therefore, only Linda Wears can claim an exemption for that asset in the maximum amount of $5,000.00 permitted by the statute.
In response to those objections and to the Turnover Application, the debtors filed a response and, on March 31, 2003, also *491amended their schedules B and C. Schedule B was amended to describe as an asset, for the first time, their expected federal tax refund in the amount of $3,388.00. The Schedule C Exemption List was amended to reduce the tools of the trade exemption to $1,150.00 and to add Ohio Rev.Code § 2329.66(A)(10)(c) as a source. The 1997 Ford was still claimed as exempt to the extent of $2,385.00, and Ohio Rev. Code sections 2329.66(A)(10)(e) and (A)(17) were added as additional sources. The federal tax refund was claimed as exempt in the amount of $3,388.00 under Ohio Rev.Code § 2329.66(A)(4)(a) and (A)(17). In the written response, the debtors further argue that because the vehicle is marital property, they both are entitled to an exemption for it even though the car is titled only to Linda Wears. With regard to the structured settlement, the debtors argue that the additional $5,000.00 claimed represents either loss of future earnings for Linda Wears or a loss of consortium claim for Charles Wears. The injury involved a multiple ankle fracture suffered by Linda Wars.
At the time of the hearing, the parties represented to the Court that the disputes regarding the tools of the trade and the automobile had been resolved. The tools of the trade exemption is to be allowed in the amount of $1,150.00, representing a claim of $750.00 pursuant to Ohio Rev. Code § 2329.66(A)(5) and $400.00 pursuant to the catchall exemption of § 2329.66(A)(18). The automobile exemption is to be limited to $1,000.00 for Linda Wears as she is the sole owner of the vehicle. The disputes that remain relate to the personal injury settlement and the federal tax refund.
The Trustee has the burden of showing that an exemption is not properly claimed. Fed. R. Bankr.P. 4003(c). In support of the objection to the exemption claim relating to the structured settlement, the Trustee presented only the Settlement Agreement and Release signed by both debtors on July 23,1997.
Each debtor then spoke to an understanding of this settlement agreement. That testimony failed to establish that the settlement specifically envisioned compensation for the loss of future earnings for Linda Wears. Although she missed several months of work because of her injury, she returned to her job and worked there for some period before she suffered a separate workplace injury affecting her shoulder. It was that second injury which has prevented her return to work. It is possible that some portion of the settlement intended to compensate Linda Wears for any loss of future income, but there is no such statement in the settlement, and the testimony gave the Court no basis upon which to quantify any such damages.
Charles Wears’ assertion of entitlement to a claim of exemption for his loss of consortium and the testimony of both debtors on that subject appeared to substantiate that claim, however. Mr. Wears was a party to the settlement and some portion of it is attributable to his claim. Therefore, the Court will overrule the Trustee’s objection and sustain each debtors’ right to claim an exemption in the amount of $5,000.00 for that settlement.
The final claim-that relating to the tax refund-exemplifies the difficulties inherent in the strict interpretation of the exemption objection process set out by the Supreme Court of the United States in Taylor v. Freeland, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). The Wears did not schedule a federal tax refund in their original Schedule B. Nor did they assert any exemption in that refund in their original Schedule C. Nevertheless, after questioning the debtors at their meeting of creditors, the Trustee deter*492mined to file his Turnover Application. In response, the debtors amended Schedules B and C to set forth the refund and claim an exemption for it. The Trustee failed to object to that amendment and, therefore, under Taylor, the debtors became entitled to the exemption.
At the hearing, the debtors’ attorney orally conceded that the debtors seek only the maximum available to them under Ohio Rev.Code § 2329.66(A)(4)(a) and (A)(17). The amount shown and claimed as exempt was $3,388.00 (the total amount of the refund). It appears that both debtors are claiming the exemption, even though only one of them earned wages in 2002. It also appears that part of the (A)(4)(a) exemption has already been used for other assets and that (A)(17) does not relate to a tax refund and is no longer the “catch-all” exemption intended to be claimed. In fact, all of the debtors’ claims of exemption are non-specific as to which debtor owns the asset or which is claiming the exemption. Most are asserted in amounts far in excess of the maximum amounts permitted under the various statutory sections. Under the strict interpretation of the time period for objections under Taylor, 112 S.Ct. 1644, however, the Court has no discretion regarding such claims where the Trustee has failed to object in a timely fashion. Although the Court considers it unprofessional for a debtor’s counsel to prepare exemption claims which are patently not allowable, there may not be a suitable remedy for the impact of such claims on the bankruptcy estate. There was an oral admission that only the maximum available under the statutory cites intended ((A)(4)(a) and (A)(18)) would be pursued. Therefore, the exemption for the federal tax refund will be limited to a total of $1,086.00. That amount comes from a total of $400.00 for each debtor for both (A)(4)(a) and (A)(18) minus $400.00 previously claimed for the tools of the trade, and $114.00 claimed for other cash-type assets ($20.00 cash, $38.00 checking account and $56.00 common stock). The exemption will be allowed in that amount.
Based on the foregoing, the Trustee’s objection to the debtors’ claims of exemptions is sustained as to the tools of the trade (allowed by agreement at $1,150.00); sustained as to the automobile; and overruled as to the structured settlement. The exemption in the federal tax refund is allowed to the extent of $1,086.00.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493680/ | MEMORANDUM DECISION ON PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT
DENNIS MONTALI, Bankruptcy Judge.
On March 11, 2004, this court held a hearing on the motion for partial summary judgment (“MSJ”) filed by the Trustee E. Lynn Schoenmann (“Trustee”). Defendants Kathleen M. de Leon and L. Michael de Leon (“the de Leons”) filed an opposition to the MSJ. For the reasons stated below, the court will deny the MSJ.1
I. Relevant Undisputed Facts
This case concerns a “Tenancy in Common Agreement for 320-322 Collingwood Street” (“TIC Agreement”) between Laurence E. Whiting (“Debtor”) and the de Leons. At the time of the filing of the bankruptcy petition, Debtor had a 32.14% or roughly one-third interest, in property held as a tenant in common with the de Leons.
In 2000, the de Leons purchased the entirety of property located at 320-322 Collingwood Street, San Francisco, CA, 94114 (“Property”). The Property consists of a single parcel of land with two dwellings. Since the time of the de Leons’ purchase the rear dwelling has been exclusively occupied by Debtor. The de Leons have exclusively occupied the front dwelling. There is separate access to each dwelling: the front dwelling has access directly from the sidewalk up the front stairs, and the rear dwelling has access from a separate stairway and walkway on the South side of the Property.
In 2001, the de Leons and Debtor engaged in negotiations for Debtor’s purchase of an interest in the Property. The de Leons and Debtor jointly sought and secured financing in the amount of $750,000. The Property loan was secured by a deed of trust which was signed by the de Leons and by Debtor, and properly recorded. In addition the de Leons and Debtor entered into the separate TIC Agreement. The TIC Agreement provided that Debtor would be responsible for 71.83% or roughly two-thirds of the loan obligation ($538,757), and the de Leons would be responsible for the remaining one-third of the loan obligation ($226,243). The de Leons contend and Trustee does not dispute that Debtor agreed to be responsible for a greater share of the loan obligation in lieu of a down payment on the Property. The TIC Agreement set forth the agreement between the de Leons and Debtor as to the division of the loan obligation, areas of exclusive occupancy by each party and further rights and obligations of each party relating to the Property. Debtor and the De Leons also executed and signed a “Memorandum of Agreement” which referenced the TIC Agreement. The Memorandum of Agreement was to be recorded with the County Recorder’s office. Debtor and the de Leons failed to record the Memorandum of Agreement or the TIC Agreement itself.2
On July 1, 2003, Debtor filed a chapter 7 bankruptcy petition. As of the date of the filing of the bankruptcy petition the TIC Agreement had not been recorded.
*542II. Issue
Whether Trustee can use Section 544(a)(3)3 to defeat the effect of the TIC Agreement.
III. Discussion
A. Summary of Arguments
The de Leons argue that Trustee’s MSJ must be denied because triable issues of fact remain as to whether Trustee can use Section 544(a)(3) to defeat the effect of the TIC Agreement. The de Leons further argue that Trustee cannot establish that a hypothetical buyer would have been without constructive notice of the TIC Agreement and therefore cannot achieve the status of a bona fide purchaser (“BFP”).
Trustee responds that the MSJ should be granted. Trustee contends that there are no triable issues of fact as to whether under Section 544(a)(3) she can use her status as a BFP to defeat the effect of the unrecorded TIC Agreement. Trustee seeks to defeat the effect of the TIC Agreement in order to sell the Property under Section 363(h).4
Section 363(h) applies to property held as tenants in common. 11 U.S.C. § 363(h). A trustee can sell the entire property despite the co-tenancy as long as the additional requirements of subsections one through four are met. If Trustee’s MSJ is granted pursuant to Section 544(a)(3) she can defeat the effect of the TIC Agreement, and therefore avoid liability for two-thirds of the loan obligation. If the TIC Agreement is defeated then the net proceeds from the sale of the Property (after payment of costs of sale and the loan on the Property) would be distributed with the de Leons receiving two-thirds, and Debtor receiving the remaining one-third. As set forth in paragraph 4.2 of the TIC Agreement, Debtor is responsible for two-thirds of the loan obligation. Therefore, if the TIC Agreement is given effect, Trustee would not be entitled to one-third of the net sale proceeds, but instead would be liable to the de Leons for two-thirds of the loan obligation. As indicated at oral argument on the MSJ, Trustee would not likely seek to sell the Debtor’s interest in the Property under Section 363(h) since the bankruptcy estate would not realize any net proceeds from such a sale.
After careful consideration of the papers submitted and oral arguments, the court agrees with the de Leons that triable issues of fact remain as to whether Trustee can use Section 544(a)(3) to defeat the effect of the TIC Agreement.
B. Summary of Law
1. 11 U.S.C. § 5U
*543Section 544(a)(3)5 confers upon a trustee the status of a BFP of real property. The court looks to applicable state law to determine whether the trustee’s BFP status can defeat the rights of another party who claims an interest in the same property. Marc Weisman v. Peters (In re Weisman), 5 F.3d 417, 420 (9th Cir.1993); 5 Collier on Bankruptcy ¶ 544.08, at 544-15 (15th ed. Rev.2003) (“State law governs who may be a bona fide purchaser and the rights of such a purchaser for purposes of section 544(a)(3)”). In other words, for Trustee to achieve the status of a BFP here, Trustee must meet the requirements as set forth in applicable California state law.
2. Applicable California Law
California has established rules governing priority among parties who claim an interest in the same property. 5 Miller and Starr, California Real Estate § 11:1, at 7 (3rd ed. 2000) (“Laws and rules establishing priorities were created to settle disputes between various interests in real property by granting preference to one interest or class of interests over another.”). Therefore, “a person who qualifies as a bona fide purchaser receives his or her interest free and clear of prior unknown interests.” Id. § 11.3 at 15. A person qualifies as a BFP who acted in good faith, paid valuable consideration, was without notice of the other party’s interest in the property, and duly recorded that person’s interest. Gates Rubber Company v. Harry Ulman, 214 Cal.App.3d 356, 364, 262 Cal.Rptr. 630 (Cal.Dist.Ct.App.1989) (citations omitted); See also 4 Witkin, Summary of California Law, Real Property, § 206, at 411 (9th ed.1998). “The status of a BFP is defeated if the prospective purchaser has actual or constructive notice of the other party’s interest in the property.” Id.; see also 5 Miller & Starr, § 11.3, at 15. “The absence of notice is an essential requirement in order that one may be regarded as a bona fide purchaser.” Basch v. Tide Water Associated Oil Company, 121 P.2d 545, 49 Cal.App.2d Supp. 743, 746 (Cal.App.Dep’t Super. Ct.1942).
IV. Application of Laio to the Facts Presented
1. Standard for Summary Judgment.
Federal Rule of Civil Procedure 56(c) (incorporated by Rule 7056), provides that the “judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that party is entitled to judgment as a matter of law.”
“The proponent of a summary judgment motion bears a heavy burden to show that there are no disputed facts warranting disposition of the lawsuit without a trial.” Younie v. Gonya (In re Younie), 211 B.R. 367, 373 (9th Cir. BAP 1997), aff'd, 163 F.3d 609 (9th Cir.1998), (quoting Grzybowski v. Aquaslide ‘N’ Dive Corp. (In re Aquaslide ‘N’ Dive Corp.), 85 B.R. 545 *544(9th Cir. BAP 1987)). If the moving party adequately carries its burden, the party opposing summary judgment must then “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, 91 L.Ed.2d 202 (1986).
All reasonable doubt as to the existence of genuine issue of material fact must be resolved against the moving party. Liberty Lobby, 477 U.S. at 248, 106 S.Ct. 2505. “A ‘material’ fact is one that is relevant to an element of a claim or defense or whose existence might affect the outcome of the suit. The materiality of a fact is thus determined by the substantive law governing the claim or defense.” T.W. Elec. Service v. Pacific Elec. Contractors Ass’n, 809 F.2d 626, 630 (9th Cir.1987).
2. BFP.
In William R. Probasco v. Bill J. Eads (In re Probasco), 839 F.2d 1352, 1356 (9th Cir.1988), the Ninth Circuit determined that under California Civil Code section 19 constructive notice can deny a trustee the status of a hypothetical BFP under Section 544(a)(3). California Civil Code section 19 provides:
Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact.
California Civil Code § 19 (emphasis added). Stated differently, a person is deemed to know facts that he or she could have inquired about. Id. “[The] question is whether a prudent purchaser, in light of the information reasonably available to him ... would have made [an] inquiry.” Weisman, 5 F.3d at 420. If a hypothetical buyer here had a duty to inquire about additional facts, then Trustee is charged with constructive notice and fails as a BFP.
3. Equal Rights of Possession and Tenants in Common.
It is well established that tenants in common are entitled to use and possess the entire property. 5 Miller & Starr, § 12:2 (citations omitted). “Each cotenant is equally entitled to share in the possession of the entire property and neither can exclude the other from any part of it.” 4 Witkin, § 264, at 465-466 (emphasis added). The de Leons’ and Debtor’s exclusive occupancy of sections of the Property is inconsistent with property held as tenants in common because “each tenant owns an equal interest in all of the fee, and each has an equal right to possession of the whole [property].” Swartzbaugh v. Sampson, 11 Cal.App.2d 451, 454, 54 P.2d 73 (Cal.Dist.Ct.App.1936).
There is nothing in any of the documents presented to this Court to indicate that Debtor or the de Leons are able to occupy the entire Property, i.e. both homes. The facts indicate otherwise, namely that Debtor is only entitled to occupy his home, and the de Leons theirs.6 For example, both residences have separate entrances: access to the front dwelling is directly up a set of stairs from the *545sidewalk and access to rear dwelling is by a separate stairway and walkway along the front of the cottage. Even when seeking ingress and egress to and from their respective dwellings, Debtor and the de Leons do not occupy the same space.
4. Exclusive Occupancy is Inconsistent with Title
Debtor’s and the de Leons’ exclusive occupancy of sections of the Property is inconsistent with property held as tenants in common and would require a hypothetical buyer to inquire as to whether there was an agreement and if so what were its terms. This duty of inquiry would result in constructive notice and defeat Trustee’s status as a BFP.
Both the Ninth Circuit and the California Supreme Court have recognized that “[t]here is no duty to inquire ... regarding any unknown claims or interests by a person in possession of real property where the occupant’s possession is consistent with record title.” Weisman, 5 F.3d at 420; Philip Caito v. United California Bank, 20 Cal.3d 694, 702, 144 Cal.Rptr. 751, 576 P.2d 466 (1978). For example, where a tenant’s possession is consistent with the terms of a recorded lease then there is no duty on the part of the purchaser to inquire as whether the tenant possesses other or additional rights. Gates Rubber Company, 214 Cal.App.3d at 365, 262 Cal.Rptr. 630.
A prudent purchaser is required to make an inquiry as to another’s interest in property only when the possession of the property is inconsistent with the record title. Weisman, 5 F.3d at 421 (emphasis added).
Where possession is inconsistent with the record title and thereby creates a duty to inquire, a prospective purchaser is charged with constructive notice of all facts that would be revealed by a reasonably diligent inquiry, regardless of whether the purchaser has ever seen the property.
Weisman, 5 F.3d at 421. The de Leons argue that the exclusive possession of the two dwellings on the Property was inconsistent with property held as tenants in common.
As a hypothetical buyer, Trustee would have a duty to inquire as to the nature of the agreement between the de Leons and Debtor, because the occupancy was inconsistent with property held as tenants in common. In Probasco, 839 F.2d at 1352, the Ninth Circuit determined that the possession of a parcel property was inconsistent with the record title and therefore the debtor-in-possession (“DIP”) had constructive notice of the non-debtor party’s interest in the land. Id. The DIP wanted to use Section 544(a)(3) to defeat Probasco’s interest in a parcel of land. Id. at 1354. The land in dispute consisted of three parcels of land that appeared to be a single piece of property. Id. The entire property was enclosed by a fence, staked and had roads running the entire property, not each individual parcel of land. Id.
Probasco argued that the appearance of the property was such that the entire property looked like a single parcel of land, and therefore his interest in the property was apparent based on the occupancy. The Ninth Circuit agreed with Probasco and stated: “Such an interest in Parcel 1 was inconsistent with the record title indicating that the Eads [DIP} were its sole owners.” Id. at 1356. The Ninth Circuit’s analysis in Probasco, 839 F.2d at 1352, is applicable here. The de Leons’ and Debtor’s exclusive occupancy of each of their respective homes is inconsistent with property held as tenants in common because tenants in common have a right to possess the entire property, not just sec*546tions of the property. Swartzbaugh, 11 Cal.App.2d at 454, 54 P.2d 73. As a result of this inconsistency a hypothetical buyer would have a duty to inquire as to the nature of the agreement between Debtor and the de Leons.
In Gates Rubber, 214 Cal.App.3d at 356, 262 Cal.Rptr. 630, the Court of Appeal affirmed the trial court’s refusal to allow the plaintiff, Gates Rubber Co., to purchase land based on an unrecorded option purchase agreement contained in a recorded lease. Crucial to the court’s analysis was the fact that the plaintiffs continuous operation of a factory on the premises was consistent with the recorded short-form lease. Id. Here, unlike in Gates Rubber, 214 Cal.App.3d at 356, 262 Cal.Rptr. 630, the de Leons’ and Debtor’s exclusive occupancy of separate dwellings was inconsistent with property held as tenants in common.
A hypothetical purchaser would have a duty to inquire as to the nature of the agreement between Debtor and the de Leons based on their exclusive occupancy of sections of the Property. In Basch, 121 P.2d 545, 49 Cal.App.2d Supp. at 743, unbeknownst to the purchaser of a gas station, an agreement existed to reduce the amount of rent in the event traffic was diverted past the property. Id. Prior to the purchase, the purchaser was shown by seller a copy of an unrecorded lease agreement for the current gas station lessee. Id. at 748, 121 P.2d 545. The purchaser did not inquire of the lessor as to whether there were any other agreements with the property lessee. Id. The court held that because the purchaser had a duty to further inquire, the purchaser/new lessor was bound by the reduction in rent.
[T]he tenant’s possession is notice not only of his rights under the lease, but also of any rights which he may have under a subsequent agreement not incorporated in the instrument of the lease, such as a contract for the purchase of land.
Tidewater, 121 P.2d 545, 49 Cal.App.2d Supp. at 750.
Similar to the unrecorded side agreement regarding the rental price, a hypothetical purchaser would have a duty to inquire as to the nature of the agreement between Debtor and the de Leons based on their exclusive occupancy of sections of the Property. Id. Tenants in common have a right to use and possess the entire property. Swartzbaugh, 11 Cal.App.2d at 454, 54 P.2d 73. Here, despite the tenancy in common, there was no right to occupancy of the entire Property which would have required a BFP to inquire as to the nature of the agreement between Debtor and the de Leons. As a result, Trustee is deemed to have constructive notice and cannot defeat the effect of the TIC Agreement and achieve the status of a BFP.
IV. Disposition
Based on Debtor’s and the de Leons’ exclusive occupancy of their respective homes there remains a triable issue of fact as to whether Trustee can use Section 544(a)(3) to defeat the effect of the TIC Agreement. The court DENIES Trustee’s MSJ.
Counsel for the de Leons should submit an order denying the MSJ consistent with this memorandum decision. In doing so, counsel should comply with B.L.R. 9021-1 and B.L.R. 9022-1.
Since the court cannot determine whether Trustee intends to dismiss this adversary proceeding in light of the court’s decision and the apparent lack of any benefit to the estate in a sale under Section 363(h), it will hold a status conference on May 28, 2004, at 1:30 P.M.
. The following discussion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052(a).
. For purposes of discussion, the TIC Agreement and the Memorandum of Agreement will be treated as a single unrecorded agreement referenced as "TIC Agreement”.
. Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330 and the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
. Section 363(h) states:
(h) Notwithstanding subsection (f) of this section, [not relevant here] 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 debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant in entirety, only if-
(1) partition in kind of such property among the estate and such 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 interest 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.
11 U.S.C. § 363(h).
. Section 544(a)(3) states:
(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 of and powers of, or may avoid any transfer in 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 and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
11 U.S.C. § 544(a)(3).
. The TIC Agreement allowed exclusive possession of parts of the Property. Paragraph 3.2 "Assignments of Units and Exclusive Use of Common Areas”. The TIC Agreement expressly provides that Debtor has "exclusive use” of "Unit 320” (his home) and the de Leons will have "exclusive use” of "Units 322” (their home). Id. The TIC Agreement further provides that Debtor has the exclusive use of the adjacent deck common area and the de Leons have exclusive use of the area below the rear exit stair and the entire driveway. Id. This further supports that Debtor and the de Leons did not intend for shared occupancy and use of the Property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493681/ | ORDER DENYING WITHOUT PREJUDICE MOTION FOR CITATION OF CRIMINAL CONTEMPT
TERRENCE L. MICHAEL, Chief Judge.
THIS MATTER comes before the Court pursuant to the Motion for Citation of Criminal Contempt (the “Motion”) filed June 9, 2004, by Ronald J. Saffa (“Saffa”), plaintiff herein. In the Motion, Saffa requests that the Court find Stephen P. Wallace (“Wallace”), defendant herein, in criminal contempt for violating a permanent injunction entered in the above referenced adversary proceeding. The Court finds that Saffa lacks standing to bring the Motion. In addition, significant questions exist regarding the jurisdiction of this Court to hear the Motion and/or conduct the jury proceedings demanded by the Motion. For these reasons, the Motion is denied without prejudice.
Background
The Motion stems from the most recent battle in the internecine war between Saffa and Wallace. The battle has raged on in state and federal courts since at least 1999.1 At the heart of the battle is the estate of Wallace’s mother, which has been alleged to have a value of $30 million. In a nutshell, Wallace is unhappy with the administration of that estate, unhappy with the fact that he is not receiving money from the same, and blames Saffa and anyone else who crosses his path of litigation (including attorneys, political figures, and judicial officers) for his woes.
Wallace filed an original petition for relief under Chapter 11 of the United States Code Bankruptcy Code on September 13, 2001 (the “Bankruptcy Case”). On June 5, 2002, upon motion of the United States Trustee, the Bankruptcy Case was converted to a case under Chapter 7 of the Bankruptcy Code. Patrick J. Malloy III (“Malloy”) is the duly appointed and acting Chapter 7 Trustee in the Bankruptcy Case.
Saffa filed claims in the Bankruptcy Case in the amount of $600,000.00 and *603$334,446.78 (the “Saffa Claims”).2 The former claim relates to damages allegedly caused by Wallace’s malicious prosecution of Saffa. The latter claim relates to attorney’s fees incurred by Saffa in the course of his dealings with Wallace.
Malloy and Saffa entered into negotiations for the compromise of the Saffa Claims which were successful. Under the terms of the settlement, the claim of $334,446.78 was to be subordinated to the claims of other unsecured creditors in the Bankruptcy Case.3 In addition, the $600,000.00 claim was settled by allowing Saffa an unsecured claim against the estate in the amount of $50,000.00, and by Malloy providing Saffa with a full, complete and unconditional release of any alleged claims against Saffa which arose pri- or to the date the Bankruptcy Case was converted to Chapter 7.4 These compromises were approved by the Court by orders entered on November 24 and 26, 2003.5 The parties hoped that the release given to Saffa would put an end to Wallace’s litigious escapades. They were mistaken.
On December 30, 2003, Wallace filed an action against Saffa in Illinois state court (the “Illinois Lawsuit”). The Illinois Lawsuit contained most if not all of the allegations previously made against Saffa and which Saffa believed had been released by Malloy. On February 2, 2004, Saffa filed this adversary proceeding seeking an injunction requiring Wallace to dismiss the Illinois Lawsuit and desist from filing similar actions in the future. Saffa argued that: (1) the claims being asserted in the Illinois Lawsuit were property of Wallace’s bankruptcy estate; (2) the claims had been released by Malloy as part of their compromise; and (3) Wallace, by initiating the Illinois Lawsuit, was exercising control of estate property in violation of the automatic stay. On the same day, Saffa sought a preliminary injunction mandating immediate dismissal of the Illinois Lawsuit.
The Court held an evidentiary hearing on the request for preliminary injunction on February 18, 2004. Wallace, although given notice of the hearing, failed to appear. After making detailed findings of fact and conclusions of law on the record in open court, the Court granted Saffa’s request. Pursuant to the preliminary injunction entered by the Court on February 25, 2004, Wallace was ordered to immediately dismiss the Illinois Lawsuit with prejudice and was enjoined from filing subsequent civil actions against Saffa stating claims that were either settled by Mal-loy or held by Wallace’s bankruptcy estate.6
Wallace failed to answer Saffa’s complaint. On April 11, 2004, the Court entered a default judgment against Wallace. Pursuant to the Court’s ruling, Saffa was awarded fees and costs in bringing the adversary proceeding and the preliminary injunction was made permanent. A judgment memorializing the Court’s mandate was entered on May 11, 2004.7 Wallace eventually dismissed the Illinois Lawsuit without prejudice.
*604The dismissal of the Illinois Lawsuit, rather than signifying an end to matter, was the precursor to a new beginning. On April 30, 2004, Wallace filed a civil action in the United States District Court for the District of Columbia (the “D.C. Lawsuit”). The D.C.' Lawsuit lists approximately 110 individual and corporate defendants, including Saffa, and contains somewhat cryptic allegations that all defendants have committed unspecified acts of treason.8 Saffa alleges that the D.C. Lawsuit is a direct violation of the Court’s order enjoining Wallace from bringing civil actions against Saffa that relate to claims that are property of the estate or that have been settled by Malloy.
Saffa believes that Wallace’s filing of the D.C. Lawsuit and his failure to dismiss the Illinois Lawsuit with prejudice should be severely penalized. Saffa no longer asks the Court to force Wallace to comply with its orders; instead, Saffa requests that Wallace be punished by imprisonment for a term of between 30 and 37 months. Saffa, recognizing that such criminal contempt proceedings likely fall outside the Court’s jurisdiction, requests that the Court make a report and recommendation to the United States District Court for the Northern District of Oklahoma (the “District Court”) for entry of judgment incarcerating Wallace. Under Saffa’s proposal, the actual imposition of a criminal sentence would be performed by the District Court.
Discussion
The Court is not unsympathetic to Saf-fa’s plight. As it noted in Wallace I, Wallace has made repeated allegations of sensationally despicable conduct by Saffa and others, and has never presented a scintilla of evidence to support a single claim. Saf-fa has undertaken herculean efforts to bring Wallace’s perpetual litigation machine to a halt. He has entered into settlements with Malloy, the legal holder of those claims. He has obtained orders enjoining Wallace from bringing further actions based upon those claims. Fees and expenses have been awarded against Wallace. All of these efforts have been to little or no avail. Now, borne out of desperation, frustration, and possibly exasperation, Saffa seeks to invoke the criminal power of the courts, and asks that Wallace be incarcerated for a period of not less than two and one half years. Saffa is no longer attempting to persuade Wallace to comply with orders of this Court; he is asking that Wallace be punished for his transgressions. As the old adage goes, “desperate times call for desperate measures.”
It is elementary that “[cjriminal contempt is a crime in the ordinary sense[.]”9 An individual alleged to have committed criminal contempt is entitled to all the criminal procedural protections guaranteed by the United States Constitution, including the right to be presumed innocent, to be proven guilty beyond a reasonable doubt, to refuse to incriminate oneself, the right to counsel, and, in cases where imprisonment for more than six months is being sought, the right to a jury trial.10 In addition, criminal contempt pro*605ceedings are considered separate from the case in which the order was violated and is between the public and the alleged con-temnor.11
In order to rule upon the Motion, the Court must consider three questions:
1. Does Saffa have standing to seek an order of criminal contempt;
2. Does the Court have the power to enter the order which Saffa seeks; and
3. Is Wallace entitled to a jury trial on the issues raised by the Motion.
If the answers to either of the first two questions is in the negative, the Motion must be denied without prejudice. Similarly, if Saffa has standing, and if this Court has jurisdiction, but if Wallace is entitled to a jury trial, then this Court can proceed only with Wallace’s consent. Given that Wallace has filed suit against this Court and this Judge, the Court will presume that Wallace would not consent to a jury trial here.
Standing
In Young v. United States ex rel. Vuitton et Fils S.A.,12 the United States Supreme Court held that “counsel for a party that is the beneficiary of a court order may not be appointed as prosecutor in a [criminal] contempt action alleging a violation of that order.” The mi-ing recognizes that a prosecutor in a criminal matter must be disinterested and able to pursue the public’s interest, not just the interests of a single individual.13 In addition, the United States Supreme Court has held that the United States Attorney is the proper party to bring criminal contempt proceedings; it is only after the United States Attorney has declined to proceed that a court may appoint a disinterested private attorney as special prosecutor to prosecute the criminal contempt.14
In this case, Saffa’s and Craige’s participation in the adversary proceeding that generated the injunction allegedly violated by Wallace renders them ineligible to pursue the Motion for criminal contempt against Wallace. Furthermore, the United States Attorney is not a party to the Motion, nor is there any allegation that the United States Attorney has been presented with the facts supporting the Motion and declined to pursue an action against Wallace. The Court concludes that Saffa and Craige lack standing to bring the Motion.
Jurisdiction
The unique nature of criminal contempt requires the Court to determine whether it has jurisdiction over the same.15 *606Bankruptcy court jurisdiction is a creature of statute. Under 28 U.S.C.A. § 1334, Congress vested federal district courts with “original and exclusive jurisdiction of all cases under title 11” and “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to eases under title 11.”16 Bankruptcy courts must operate within this framework.
Applying the strictures of § 1334, the Court finds the Motion to be outside the bounds of bankruptcy jurisdiction. The Motion seeks imposition of a criminal punishment; namely, incarceration for a period of not less than two and one-half years. Section 1334 vests bankruptcy courts with jurisdiction over certain “civil proceedings.” 17 The Court concludes that, just as Saffa lacks standing to prosecute a criminal contempt action, this Court lacks jurisdiction to impose the criminal sentence which Saffa seeks.
The Court notes, however, that it is not entirely foreclosed from presiding over contempt proceedings which some might consider criminal in nature. Bankruptcy courts have the implied “power to impose silence, respect, and decorum, in their presence, and submission to their lawful dictates.”18 Included in this implied power is the power to punish for contempt.19
*607
Right to Jury Trial
While the Court leaves for another day the shaping of the contours of its contempt power, the Court concludes that it should not invoke whatever power it possesses to preside over the Motion. Saffa is requesting that Wallace be imprisoned for a term of 30-37 months. Where imprisonment for more than six months is being sought for criminal contempt, the alleged contemnor has the right to a jury trial.20 Absent consent of the parties, bankruptcy courts are not empowered to conduct such trials.21 The Court will not presume that Wallace would consent to a jury trial before this Court. Since Wallace is entitled to a jury trial on the issues raised by the Motion, it would be improper for the Court to hear the matter, including making proposed findings and conclusions for review by the District Court.
For all of the reasons set forth above,
IT IS HEREBY ORDERED that the Motion for Citation of Criminal Contempt filed June 9, 2004, by Ronald J. Saffa, plaintiff herein be, and the same hereby is, denied without prejudice.
. See Case No. 02-0073-M, Stephen Paul Wallace, Debtor, Docket No. 10, Answer to Question 4 of the Statement of Financial Affairs. For a more detailed history of the conflict between Wallace and Saffa, see In re Wallace, 288 B.R. 139 (Bankr.N.D.Okla.2002) (hereafter “Wallace /”).
. See Case No. 02-0073-M, Claim Nos. 20, 22, and 23.
. See Case No. 02-0073-M, Docket No. 557.
. See Case No. 02-0073-M, Docket No. 570. In this pleading, Malloy informed the Court that he had reviewed the claims made by Wallace against Saffa, and believed them to be "frivolous, vexatious and baseless.”
. See Case No. 02-0073-M, Docket Nos. 639 and 648.
. See Docket No. 18.
. See Docket No. 37.
.Included as defendants in the D.C. Lawsuit are Saffa, this judge, numerous other state and federal judges, Malloy, the Mayor of the City of Tulsa, the Tulsa County Attorney, Attorney General John Ashcroft, the United States Court of Appeals for the Tenth Circuit, the American Trial Lawyers Association, and the United States Army Corps of Engineers.
. Bloom v. Illinois, 391 U.S. 194, 201, 88 S.Ct. 1477, 20 L.Ed.2d 522 (1968).
. Matter of Hipp, Inc., 895 F.2d 1503, 1509 (5th Cir.1990); see also Bloom, supra, 391 U.S. at 204-205, 88 S.Ct. 1477.
. Gompers v. Buck’s Stove & Range Co., 221 U.S. 418, 444-45, 31 S.Ct. 492, 55 L.Ed. 797 (1911) ("Proceedings for civil contempt are between the original parties, and are instituted and tried as part of the main case. But, on the other hand, proceedings at law for criminal contempt are between the public and the defendant, and are not a part of the original cause.”); Hipp, supra, 895 F.2d at 1510; see also Bloom, supra, 391 U.S. at 201, 88 S.Ct. 1477 (criminal contempt is "a violation of the law” and "a public wrong”).
. 481 U.S. 787, 809, 107 S.Ct. 2124, 95 L.Ed.2d 740 (1987).
. Id. at 803-05, 107 S.Ct. 2124; accord, Hipp, supra, 895 F.2d at 1506-08; In re Reed, 161 F.3d 1311 (11th Cir.1998).
. Young, supra, 481 U.S. at 801-02, 107 S.Ct. 2124; see also Reed, supra, 161 F.3d at 1314 (discussing Young). It is an open question whether bankruptcy courts have the ability to appoint a special prosecutor. Given that bankruptcy courts lack jurisdiction over criminal matters, it seems unlikely.
. Courts that have considered the issue have come to differing conclusions. Compare In re Ragar, 3 F.3d 1174 (8th Cir.1993) (bankruptcy courts have the ability to hear certain criminal contempt proceedings so long as opportu*606nity exists for de novo review by district court) with Hipp, supra, 895 F.2d at 1509 (bankruptcy courts lack the ability to hear criminal contempt “not committed in (or near) its presence”) and In re Dyer, 322 F.3d 1178, 1193 (9th Cir.2003) (criminal contempt power not created by § 105 of the Bankruptcy Code). In the Tenth Circuit, the issue remains undecided. See Mt. America Credit Union v. Skinner (In re Skinner), 917 F.2d 444 (10th Cir.1990) (holding that bankruptcy courts have jurisdiction to preside over civil contempt proceedings, but expressly declining to rule on criminal contempt) and Graham v. United States (In re Graham), 981 F.2d 1135, 1142 (10th Cir.1992) (stating in dicta that "bankruptcy courts have authority to exercise both civil and criminal contempt powers against recalcitrant government attorneys” (citing Skinner and Fed. R. Bankr. P. 9020)).
. See 28 U.S.C.A. § 1334(a) (West 2004) (emphasis added).
. It should also be noted that bankruptcy jurisdiction is further limited by the public rights doctrine. See Malloy v. Zeeco, Inc. (In re Applied Thermal Systems, Inc.), 294 B.R. 784, 789 (Bankr.N.D.Okla.2003). Under the public rights doctrine, bankruptcy courts may only hear and decide issues that involve public rights emanating from federal bankruptcy power under Article I, Section 8, Clause 4 of the United States Constitution. Id. As the Court has observed, "[pjublic rights in bankruptcy involve only those matters integral to the 'restructuring of debtor-creditor relationships.'" Id. (quoting Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71-72, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)). As should be obvious, a criminal contempt proceeding, being criminal in nature, has no bearing on restructuring the debtor-creditor relationship. Indeed, as the Fifth Circuit has noted, "to the extent that the constitutional boundary of bankruptcy ... jurisdiction is dependant on the public rights doctrine ... that doctrine has never encompassed criminal matters.” Hipp, supra, 895 F.2d at 1510-11 (footnote and citations omitted).
. Chambers v. NASCO, Inc., 501 U.S. 32, 43, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991) (quotations and citations omitted). The Tenth Circuit, like many other circuit courts, has ruled that the inherent power of courts, as enunciated by Chambers, is fully applicable to bankruptcy courts. See Jones v. Santa Fe (In re Courtesy, Inns, Ltd., Inc.), 40 F.3d 1084, 1089 (10th Cir.1994).
. Chambers, supra, 501 U.S. at 44, 111 S.Ct. 2123 ("[I]t is firmly established that the power to punish for contempts is inherent in all courts. This power reaches both conduct before the court and that beyond the court’s confines, for the underlying concern that gave rise to the contempt power was not merely the disruption of court proceedings. Rather, it was disobedience to the orders of the judiciary, regardless of whether such disobedience interfered with the conduct of trial.”) (citations, quotations, and alterations omit*607ted). While Chambers fails to distinguish between criminal and civil contempt, the use of the word "punish” strongly suggests that criminal contempt is within the Court's power. See Cox v. Zale Delaware, Inc., 239 F.3d 910, 917 (7th Cir.2001) (Posner, J.) ("it is punitive purpose that distinguishes criminal from civil contempt”).
. See note 10 supra.
. See 28 U.S.C.A. § 157(e) (West 2004). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493682/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
The matter under consideration in this Chapter 7 case of Peter Tzilvelis (Debtor) is a challenge by Claude Evangelista (Evangelista) of the Debtor’s right to the protection of the general discharge. The claim for relief of Evangelista is based on the allegation set forth in his Complaint that the Debtor transferred property within one year of filing his Petition for Relief with the intent to hinder, delay or defraud a creditor.
In due course, the Debtor filed his Answer to the Complaint setting forth certain admissions but specifically denying that he did transfer the property in question with the intent to hinder, delay or defraud Evangelista. The facts relevant to the issue under consideration, as established at the final evidentiary hearing, are as follows:
Radni Davoodi (Davoodi) and Matt Pa-tisso (Patisso) operated, at the time relevant, a title insurance business as a partnership under the name First-Class Abstract in the State of New York. As part of the business, they reviewed and purchased foreclosure and lis pendens lists from a company called Profile Publishing. Patisso was regularly buying distressed real estate. In addition, Pa-tisso operated Liquid Brick, Inc. as a real estate investment firm and New Millennium Capital, as a mortgage brokerage firm.
From the list, they learned that certain property located in Wantagh Long Island, which was owned by the Debtor, was on the list of property that was vacant. On June 7, 2002, Davoodi sent a certified letter to the Debtor, telling him that they had found out that there was a lis pendens on the property and that they wanted to find out if he was interested in selling the property. (Db.Ex. A). The Debtor responded to this letter by calling Davoodi and told him if they could do anything with the property. Davoodi responded that he would talk to Patisso.
On July 25, 2002, Davoodi sent a cover letter on the stationary of New Millennium to the Debtor and included a Residential Sales Contract for the sale of the property. (PI. Exs. 1 & 2). The Residential Sales Contract was dated June 1, 2002, although it appears that letter was dated July 25, 2002. On June 24, 2002, the Debtor signed a document prepared by the office of Pa-tisso entitled “CONSIDERATION AGREEMENT/BUY-OUT AGREEMENT DOCUMENT,” dated June 24, 2002 (Agreement). (Db.Ex. C). In the Agreement, signed by the Debtor, Patisso agreed to pay the Debtor $20,000.00 for a Deed for the property located at 3716 Jules Lane, Wantagh, New York. The Agreement further provided that the Debtor would receive the amount stated above under the following conditions:
Paragraph 2: Any and all creditors who hold valid liens or claims against the property shall be negotiated by Matt Patisso to an acceptable settlement price.
*625Paragraph 3: No creditor shall have knowledge that Mr. Tzivelis is receiving cash or certified funds as consideration for the DEED, as this would jeopardize the deal and reduce the chances of satisfactory negotiations to occur.
Paragraph 4: Mr. Tzilvelis shall not speak to the creditors holding valid claims on the property with respect to the fact that he is receiving cash or certified funds to transfer his interest in the property.
(Agreement, ¶ s 2, 3, & 4). It is clear and fully supported by the record that these paragraph quoted above were inserted by Patisso. They were inserted for the express purpose of assisting Patisso in his attempt to negotiate with the State of New York and the IRS, both of whom hade perfected tax liens on the property he was to purchase from the Debtor.
On July 31, 2002, the Debtor also signed an ADDENDUM to CONSIDERATION AGREEMENT (Addendum), dated June 22, 2002. (Pl.Ex. 4). This Addendum did not change any of the substantive provisions of the June 22nd Agreement. It did increase the amount paid to the Debtor from $20,000 to $25,000 and it also dealt with the procedure to close the transaction. It is admitted that the transaction closed and the escrow agent disbursed the $25,000.00 when the Debtor delivered the Deed to the property. (Pl.Ex. 7 & 8).
As noted above, the record further reveals that there were already two tax liens encumbering the property, one held by the United States for two federal tax liens, recorded on October 19, 1995, securing an amount of $9,495.83 and another recorded on January 19, 1996, securing an amount of $9,146.51. The other liens were held by the State of New York in the amounts of $266,312.09, $135,799.90, and $3,870.63. It appears that this lien was released by the State of New York on July 23, 2002, upon receipt of $1,000.00 paid at the closing. The release was contingent upon the sale of the property to Patisso.
On July 11, 2002, the IRS advised the Debtor that the tax lien would be released upon payment of $36,260.25, not later than July 30, 2002. Even though there is no documentary evidence that the amount required for the release of the tax lien was in fact paid, it is fair to assume that it was. Be as it may, release of this tax lien is not relevant to the issue under consideration.
It appears that in November of 1998, Evangelista filed a state court lawsuit against VLS Enterprises, Corp.; I Love You Marketing, Ltd. (d/b/a Velis Associates); Peter Velis (a/k/a Peter Tzivelis and Peter Tsivelis); and Jane Velis (a/k/a Jane Tzivelis and Jane Tsivelis), in the Supreme Court of the State of New York, County of New York. It appears that after the defendants were served with the Complaint, they filed their respective answers but that the court granted the plaintiffs motion for entry of default and struck the defendants’ answer. On July 23, 2002, a Default Judgment was entered and awarded Evangelis-ta the sum of $12,791,581.30, plus interest in the amount of $69,389.95, and $1,059.00 for costs, or a total of $12,862,030.25, against some of the defendants, including the Debtor.
The Debtor, even prior to the transactions just described, moved to Florida and on April 21, 2003, filed his Voluntary Petition for Relief under Chapter 7. In his Summary of Schedules, he scheduled the total of unsecured priority debts as $650,000.00 and general unsecured debts as $12,886,799.00.
These are the facts relevant to the single issue presented to this Court’s consideration which is whether the Debtor transferred property of the estate within one year, with intent to hinder, delay or defraud Evangelista, conduct which is condemned by Section 727(a)(2)(A) of the Code.
*626It is well established that the provisions of the discharge were designed to assist a financially distressed debtor to give a fresh start in life unencumbered from the financial vicissitudes of the debt- or’s past. Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970). Thus, these provisions of the Code should be construed in favor of the debtor and strictly against the one who challenges the debt- or’s right to the discharge. In re Muscatell, 113 B.R. 72 (Bankr.M.D.Fla.1990). It should be noted at the outset that while the burden of proof is on the party challenging a debtor’s right to benefits of the general discharge, F.R.B.P. 4005, the standard of proof is no longer the clear and convincing evidence but a mere preponderance is sufficient to prevail on the objections. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)(dicta); In re Keeney, 227 F.3d 679 (6th Cir.2000); In re Scott, 172 F.3d 959 (7th Cir.1999); In re Brown, 108 F.3d 1290 (10th Cir.1997).
In order to establish a viable claim under Section 727(a)(2)(A), the movant has the burden to prove that the transfer occurred within one year preceding the commencement of the case and that debtor had the intent to hinder, delay or defraud creditors. 11 U.S.C. § 727(a)(2)(A). The intent of a debtor, of course, can seldom be established by direct evidence but extrinsic evidence may warrant the finding that a debtor did in fact act with intent when the transfers in question were accomplished. The hallmark of fraudulent intent has been considered by numerous courts and it is generally agreed that they are the following: (1) lack of adequate consideration for the transfer; (2) relationship between the parties; (3) retention of benefit of the property in question by the debtor even though property has ostensibly been transferred, this is the so-called “sham” transfer; (4) the existence of cumulative effect or pattern or series of transactions and the course of conduct incurring debt; and, most importantly (5) pendency or threat of suit by creditors. In re Gollomp, 198 B.R. 433 (S.D.N.Y.1996).
The thrust of the plaintiffs case is based upon the language in the Agreement, as noted above, that directs the Debtor from discussing the fact that he would receive any amount of money to his creditors. However, it is without dispute that Patisso drafted the Agreement and the Addendum and that the express language dealing with the non-communications to creditors of the Debtor was drafted for the benefit of Pa-tisso, not for the benefit of the Debtor. Patisso testified that this provision was inserted so as not to hamper his efforts to negotiate down the liens on the property.
In light of the uncontroverted evidence, this Court is satisfied that based upon the record and the case law dealing with Section 727(a)(2)(A), the record is devoid of any competent evidence to establish that the Debtor had the requisite intent to hinder, delay or defraud Evangelista.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that this Complaint be, and the same is hereby, dismissed with prejudice.
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/8493683/ | OPINION REGARDING PROPERTY OF THE ESTATE
JAMES D. GREGG, Chief Judge.
I. ISSUE
Is a certain Harley-Davidson motorcycle property of the corporate debtor’s bankruptcy estate or property of a non-debtor individual? 1
II. JURISDICTION AND PROCEDURAL BACKGROUND
The court has jurisdiction over the bankruptcy case and this adversary proceeding. 28 U.S.C. § 1334. The adversary proceeding is a core proceeding, 28 U.S.C. § 157(b)(2)(E) and (K) because it pertains to property of the estate and the validity of a lien. This opinion constitutes the court’s findings of fact and conclusions of law. Fed. R. BaNKR. P. 7052.
Specialty Services, Inc., “Debtor,” filed its bankruptcy petition under chapter 7 of the Bankruptcy Code2 on June 21, 2002. James W. Hoerner, “Trustee,” was appointed as the trustee to administer the assets of the Debtor.
On March 21, 2003, the Trustee initiated this adversary proceeding by filing a complaint against Defendant Richard Van Set-ten, ‘Van Setten,” and Defendant Standard Federal Bank, N.A., formerly known as Michigan National Bank, “Bank.” The Trustee asserts that a Harley-Davidson motorcycle, which was won by Van Setten in a contest, is property of the estate. The Trustee also asserts that the motorcycle is not subject to any security interest of the *747Bank or, if it is subject to a security interest, that the security interest is voidable because the Bank is unperfected.
On April 3, 2003, the Bank filed its Answer. It takes the position that it holds a validly perfected security interest regarding the motorcycle. The Bank also filed a counterclaim and a cross-claim asserting that its interest in the motorcycle is superior to any interest that may be held by Van Setten or the Trustee.
On April 21, 2003, Van Setten filed his Answer. He asserts that he owns the motorcycle because he personally won it in a contest. He alleges that the Debtor, its bankruptcy estate, and the Bank have no interest in the motorcycle.
On October 1, 2003, trial of the adversary proceeding took place. Almost all facts were stipulated by the parties. See Amended Stipulated Facts. The Amended Stipulated Facts incorporated eight exhibits, all of which were admitted into evidence.
III. FACTS
The relevant facts are rather simple and straightforward. Van Setten, a journeyman electrician, was the purchasing agent of the Debtor corporation before it filed for bankruptcy. While employed by the Debtor, and acting in his capacity as its purchasing agent, Van Setten became aware of a contest, in the nature of a “sweepstakes” drawing, sponsored by The Wiremold Company, “Wiremold.” The drawing was called “See America in Red, White or Blue.” Wiremold was a supplier of the Debtor.
During the course of his employment, Van Setten received an entry form from Wiremold. Exh. 3. It was easy to participate. “To enter just buy $750 of Wire-mold products and send in your invoices attached to a completed entry form. Just for entering we’ll send you a deluxe 3' x 4' American Flag kit.”3 Exh. 3. Van Set-ten entered the contest, listing his own name, the Debtor’s name, and the Debtor’s business address. He completed the entry form and attached invoices showing the Debtor had purchased $750 of Wiremold producís. (The products were purchased by the Debtor through Graybar Electric, Grand Rapids, Michigan.) Van Setten completed the form while at home rather than doing it “during company hours or while processing company paperwork.” Amended Stipulated Facts at 2. He checked the prize box “Blue Harley-Davidson Motorcycle.” Exh. 3.
Surprise! Van Setten was notified he won the motorcycle. The Debtor also learned about the prize. On April 10, 2002, its attorneys sent a demand letter to Van Setten, citing the Debtor’s employee handbook. The letter stated in part:
As you know, you submitted a contest entry to The Wiremold Company as part of a product purchase made through Graybar Electric. The purchase was made by [the Debtor] and the purchase was a prerequisite to submitting the contest entry. You are therefore not eligible to receive the motorcycle which has been awarded as a prize. The motorcycle and any other prizes obtained through such contest are the property of [the Debtor].
The Wiremold Company has therefore been instructed to deliver the motorcycle to [the Debtor],
Exh. 4.
On April 10, 2002, the Debtor’s attorneys also sent a letter to Wiremold. The *748attorneys told Wiremold “that ... Van Setten is not authorized to receive gifts or awards and that the title to the motorcycle which is tentatively scheduled to be delivered to Mr. Van Setten on April 19th should not be delivered to Mr. Van Setten and should instead be titled and delivered to [the Debtor].” Exh. 5. On April 16, 2002, Van Setten accepted delivery of the motorcycle from a Grand Rapids area Harley-Davidson dealer. The motorcycle was titled in Van Setten’s name with no secured party listed on the title to the motorcycle.
Prior to the contest taking place, on May 3, 2000, Van Setten entered into an Employee Agreement, “Agreement,” with the Debtor. Exh. 6. That Agreement was signed by Van Setten and Frank Van Dam, III, the Debtor’s President. Some provisions in the Agreement are relevant:
1. Employment. Employer employs the Employee and Employee accepts employment upon the terms and conditions contained herein.
9. Modification. No modification of this Agreement is valid unless it is in writing and signed by the President of the Employer.
14. Governing Law. This Agreement is subject to and governed by the laws of the State of Michigan, irrespective of the fact that one party is or may be a resident of another state, and acknowledges and agrees that this Contract has been entered into and executed within the County of Kent, State of Michigan.
22. Term. The Employee’s employment is terminable at the will of either party upon thirty (30) days’ notice to the other party with or without cause; no notice shall be required in the event termination of employment is due to just cause. Just cause shall include but not be limited to ... violation of the Employer’s Handbook ....
Exh. 6.
Attached to the Agreement is an “Exhibit A” which also refers to the Debtor’s “Employee Manual” in two instances. Van Setten knew of the Employee Manual/Handbook when he entered into his May 2000 employment contract.
It is without question that Van Setten received a copy of the Debtor’s “Employee Information Handbook — March 1999,” the “Handbook,” prior to executing the May 2000 Agreement. Exh. 7. He acknowledged receipt of a copy of the Handbook, by signing an “Acknowledgment of Receipt and Understanding,” on April 22, 1999. Exh. 8. In so doing, Van Setten explicitly agreed he would “comply with all policies and procedures to the best of [his] ability” and recognized that the Handbook would not be modified or supplemented without prior written approval of the Debtor’s President. Exh. 8.
The Handbook states in pertinent part:
1.24 An Acknowledgment of Receipt and Understanding is provided at the end of the handbook which requires the signature of the employee receiving the handbook. This signed/witnessed Acknowledgment of Receipt and Understanding will remain in the employee’s handbook. A copy of the Acknowledgment of Receipt and Understanding must be signed by the employee and must be returned to Bookkeeping Department within ten (10) days of commencement of employment. This signed/witnessed copy will become part of the' employee’s personal file.
GIFTS.
*7497.6 Normally a gift to an individual from an outside source is considered the property of the company, unless management makes a prior written exception. It is the policy of the company that no employee shall receive any gift, entertainment, loan or other favor from any outside source (including customers and suppliers) without prior written approval from management. Any employee failing to abide by this policy will be subject to disciplinary action up to and including termination.
Exh. 7, pp. 6 and 32 (emphasis supplied).
At trial, no witnesses testified before the court and no credibility findings are necessary.
IV. DISCUSSION
Property of the estate is created upon commencement of a bankruptcy ease and includes all legal and equitable interests of the debtor in property, “wherever located and by whomever held.” § 541(a)(1) (emphasis supplied). Property rights, including issues regarding entitlement to the motorcycle that is the subject of this adversary proceeding, are determined by state law unless a federal purpose requires a different result. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). The court is called upon to answer a straightforward question of whether the Debtor corporation has rights in the motorcycle pursuant to the Agreement and the Handbook.
In the Agreement, the existence of the Handbook is recognized in at least three locations. Indeed, a violation of a term in the Handbook constitutes “just cause” for termination. Exh. 6, ¶ 22. Also, without question, Van Setten, by his signature on the “Acknowledgement of Receipt and Understanding,” agreed to be bound by all provisions included in the Handbook. Exh. 8.
The Handbook mandates that “gifts” to an “individual” employee from an “outside source” including “suppliers” is property of the “company,” i.e., the Debtor, unless there is “a prior written exception.” Exh. 7, ¶ 7.6. A “gift” includes “something that is voluntarily transferred by one person to another without compensation.” Webster’s Third New International Dictionary at 956 (Merriam-Webster, Inc.1986). The transferor, Wiremold, is an “outside source” and one of the Debtor’s “suppliers.” There is no evidence of any written exception to the ownership rights of the Debtor, as provided for by the Handbook. Indeed, the record before the court demonstrates that the Debtor asserted ownership rights to the motorcycle when it learned about Van Setten’s good fortune. Exhs. 5 and 6. This negates any possible inference that there was an exception to the “Gifts” provision in the Handbook. It is not surprising that the Trustee has continued to assert the Debtor’s rights.
The initial inclination of the undersigned judge was to congratulate Van Setten for his lucky win and recognize that without his effort (in filling out and submitting the necessary form), there would have been no motorcycle to fight about. However, such an initial impression is tempered by the fact that without attachment of proof that the Debtor purchased $750 of Wiremold products, Van Setten would not have had the price of admission to enter the sweepstakes. Most importantly, Van Setten twice agreed to abide by the Handbook: when he signed the Agreement and, when he specifically acknowledged receipt of the Handbook and agreed to abide by its conditions. Exhs. 6, 7 and 8. Under the Handbook’s provisions, Van Setten’s good fortune is transferred, by operation of law, to the Debtor, and then by further opera*750tion of law, to the Debtor’s bankruptcy estate. § 541(a)(1).
In an attempt to overcome his agreements with the Debtor, Van Setten argues that the facts are sufficiently analogous to a Michigan Supreme Court case to be governed by its outcome. See Heurtebise v. Reliable Business Computers, Inc., 452 Mich. 405, 550 N.W.2d 243 (1996). In Heurtebise, the court determined that an employee handbook’s binding arbitration provision did not prohibit an employee from instituting a lawsuit for alleged discrimination in the state court system. Relying on specific language in the handbook that indicated that the employer did not intend to be bound by the handbook’s terms, the Michigan Supreme Court found that the handbook did not constitute a binding contract between the parties. Heurtebise, 452 Mich. at 413-14, 550 N.W.2d at 247. Since the Handbook did not create an enforceable employment contract, the binding arbitration provision in the handbook was similarly unenforceable. Id.
This adversary proceeding involves much different facts. There is a separate Agreement regarding Van Setten’s and the Debtor’s respective rights and obligations. The Handbook is incorporated by reference in the Agreement, and Van Setten’s acknowledgment of the binding provisions in the Handbook predated the execution of the Agreement. Exhs. 6 and 8. The provisions of the Agreement and the Handbook are easily read together in tandem and do not conflict or create any ambiguity regarding the Debtor’s ownership of “gifts” given to an employee such as Van Setten. In this case, there is a separate binding employment agreement which incorporates an employee handbook which is equally binding upon Van Setten. The rationale in Heurtebise that the handbook failed to create a contract does not apply.
This court holds that the Harley-Davidson motorcycle won in the sweepstakes was property of the Debtor under Michigan law. When the Debtor filed for bankruptcy relief, the motorcycle became property of the estate. § 541(a).
V. CONCLUSION
For the reasons discussed above, the Harley-Davidson motorcycle is property of the estate. The motorcycle may be administered by the Trustee. The court reserves the issue of whether the Bank has a perfected security interest in the motorcycle or whether the Bank’s interest, if any, is subordinate to the Trustee’s lien creditor status.
A separate order will be entered.4
. If the motorcycle is property of the estate, a further issue exists whether the Defendant Bank holds a perfected security interest in the motorcycle. The attorneys for the Trustee and the Bank have agreed that the security interest issue may be determined later, only if necessary, inasmuch as there is a tentative settlement of that issue.
. The Bankruptcy Code is set forth in 11 U.S.C. §§ 101-1330. All further references to the Bankruptcy Code will be “§_”
. There was also another method to enter this contest which required a 3" x 5" card rather than the entry form. The alternative method, which did not require a purchase of Wire-mold products, was not used.
. To the extent it may be required, upon motion by a party, the court will augment its order by specifically identifying the motorcycle in question, e.g., by noting the vehicle identification number. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493684/ | ORDER
RANDALL J. NEWSOME, Chief Judge.
This matter is before the Court upon the motion of the State Compensation Insur-anee Fund of California (herein the “Fund”) to dismiss the Chapter 7 Trustee’s underlying complaint to recover an alleged preference. The Fund moves pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction, and Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted, as those Rules are incorporated by Federal Rule of Bankruptcy Procedure 7012. The Motion asserts that the Eleventh Amendment to the U.S. Constitution confers immunity on the Fund from this lawsuit.1
The Fund bears the burden of proving it is entitled to Eleventh Amendment immunity. ITSI TV Productions, Inc., v. Agricultural Associations, 3 F.3d 1289, 1292 (9th Cir.1993). In claiming such immunity here, the Fund merely asserts that it was established under the California Constitution, is a division of the California Department of Industrial Relations, and an agency of the State of California. The Fund fails to address the well-established five-part test for evaluating whether it is an “arm of the State” entitled to Eleventh Amendment immunity, as set forth in Mitchell v. Los Angeles Community College District, 861 F.2d 198 (9th Cir.1988), cert. denied, 490 U.S. 1081, 109 S.Ct. 2102, 104 L.Ed.2d 663 (1989). Under the Mitchell test, the Court must consider 1) whether a money judgment would be satisfied out of state funds; 2) whether the entity performs a central governmental function; 3) whether the entity may sue or be sued; 4) whether the entity has the power to take property in its own name or only in the name of the state; and 5) the corporate status of the entity. In applying these factors, the Court looks to *812the way state law treats the entity. Mitchell, 861 F.2d at 201.
Whether a money judgment would be satisfied out of state funds is the most important factor of the Mitchell test. Savage v. Glendale Union High Sch. Dist., 343 F.3d 1036, 1041 (9th Cir.2003), cert. denied, - U.S. -, 124 S.Ct. 2067, 158 L.Ed.2d 618 (2004). The proper inquiry is whether the state treasury is legally obligated to pay such a judgment, and not whether the Fund has the ability to pay. ITS I TV Productions, 3 F.3d at 1292. Pursuant to the California Insurance Code, although the Fund may establish an account with the State Treasury, that money is not state money, and the State of California “shall not be liable beyond the assets of the [Fund] for any obligations in connection therewith.” See, Cal. Ins.Code § 11800.1 and § 11771. As such, the Fund must necessarily look to the money it collects through insurance premiums to satisfy a money judgment. See also, Gilmore v. State Compensation Insurance Fund, 23 Cal.App.2d 325, 330, 73 P.2d 640 (1937) (Fund must pay expenses incident to defending lawsuits from its surplus reserve fund).
As to the second factor of the Mitchell test, an entity performs a central government function if “the state exercises centralized governmental control over the entity.” Savage, 343 F.3d at 1044. In establishing the Fund, the California Legislature declared its intent that the Fund be self-supporting and a self-operating insurer for the purpose of offering workers’ compensation insurance on the same basis and in competition with other insurers. Cal. Ins.Code § 11775; Gilmore, 23 Cal.App.2d at 329, 73 P.2d 640; P.W. Stephens, Inc. v. State Compensation Insurance Fund, 21 Cal.App.4th 1833, 1835-36, 27 Cal.Rptr.2d 107, 108-09 (1994). In soliciting such business, the Legislature even mandates that Fund advertisements specifically include the disclaimer that the Fund “is not a branch of the State of California.” See, Cal. Ins. Code § 11771.5. Accordingly, the Fund does not perform a centralized government function. Furthermore, as to the third factor of the Mitchell test, Insurance Code § 11783 provides that the Fund “may sue and be sued in all actions arising out of any act or omission in connection with its business or affairs.” See also, Security Officers Service, Inc., v. State Compensation Insurance Fund, 17 Cal.App.4th 887, 892-93, 21 Cal.Rptr.2d 653 (1993) (Fund is subject to suit in tort and contract); State Compensation Insurance Fund v. Superior Court, 24 Cal.4th 930, 944, 103 Cal.Rptr.2d 662, 16 P.3d 85 (2001) (Fund is subject to civil suit for non-insurance law violations).
As to the fourth Mitchell factor, Insurance Code § 11781.5 provides that the Fund “may acquire and own real property” for the purpose of establishing a branch office in Los Angeles in addition to its principal place of business located in San Francisco. Section 11783 of the Insurance Code confers upon the Fund the power to “enter into any contracts or obligations relating” to its business operations, and to “invest and reinvest the moneys belonging to the fund.” (italics added). Additionally, “property belonging to the [Fund] is not considered State property for the purposes of exemption from state taxes, and [it] is generally subject to the payment of taxes on the same basis as any other insurer.” Courtesy Ambulance Service of San Bernardino v. Superior Court, 8 Cal.App.4th 1504, 1511-12, 11 Cal.Rptr.2d 161, 163-64 (1992). Accordingly, the fourth Mitchell factor is affirmatively satisfied here.
The final Mitchell factor considers whether an entity’s independent corporate status would prevent it from being treated *813as an arm of the state. Holz v. Nenana City Public Sch. Dist., 347 F.3d 1176, 1188 (9th Cir.2003). The Fund is a public enterprise fund, a self-operating insurance carrier “of a special and unique character” subject to the same regulation and laws generally applicable to private insurance carriers. P.W. Stephens, 21 Cal.App.4th at 1835-36, 27 Cal.Rptr.2d 107. Although a public entity, the Fund’s “purpose and everyday function is indistinguishable from a private corporation,” and it is treated as a private enterprise. Notrica v. State Compensation Insurance Fund, 70 Cal.App.4th 911, 935, 941, 83 Cal.Rptr.2d 89, 106, 109 (1999). Accordingly, although the Fund may lack corporate status, its treatment as a private enterprise and its independence weigh against considering it an arm of the state.
This Court finds that the Fund is not entitled to immunity under the Eleventh Amendment. Accordingly, the Fund’s Motion to Dismiss is hereby denied.2
IT IS SO ORDERED.
. Challenges to a court's subject matter jurisdiction are treated as brought under Rule 12(b)(1) even if improperly identified by the moving party as brought under Rule 12(b)(6). St. Clair v. City of Chico, 880 F.2d 199, 201 (9th Cir.1989), cert. denied, 493 U.S. 993, 110 S.Ct. 541, 107 L.Ed.2d 539 (1989).
. The Trustee's request to convert this Motion to one for summary judgment is denied. See, Savage v. Glendale Union High Sch. Dist., 343 F.3d at 1040 n. 2 ("Rule 12(b)(1) attacks on jurisdiction can be either facial, confining the inquiry to allegations in the complaint, or factual, permitting the court to look beyond the complaint.”) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493685/ | MEMORANDUM OPINION AND ORDER
STEVEN A. FELSENTHAL, Chief Judge.
The parties request that the court resolve this litigation on summary judgment. Edge Petroleum Operating Co., Inc., the plaintiff, has not been paid for natural gas sold to Aurora Natural Gas, LLC (Aurora), Golden Prairie Supply Services, LLC (Golden Prairie) and/or GPR Holdings, LLC (GPR), the intervenors/debtors, who, in turn, sold the natural gas to Duke Energy Trading and Marketing, LLC (Duke), the defendant, who, in turn, sold the natural gas to third persons. Edge moves for *321summary judgment holding Duke liable for the payment of the gas and for conversion of Edge’s interest in the gas under § 9.343 of the Tex. Bus. & Com.Code. Duke moves for summary judgment declaring that it has no liability to Edge. Golden Prairie, Aurora and GPR move for summary judgment contending, like Duke, that Edge did not have a security interest in the gas and that Edge cannot prove the elements of conversion. GPR, Aurora and Golden Prairie are debtors in bankruptcy cases pending before this court. They contend that Edge must pursue its claim for payment for the gas in their respective bankruptcy cases. The court conducted a hearing on the motions for summary judgment on April 7, 2004.
Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, and other matters presented to the court show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Washington v. Armstrong World Indus., Inc., 839 F.2d 1121, 1122 (5th Cir.1988). On a summary judgment motion, the inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255, 106 S.Ct. 2505. A factual dispute bars summary judgment only when the disputed fact is determinative under governing law. Id. at 250, 106 S.Ct. 2505.
The movant bears the initial burden of articulating the basis for its motion and identifying evidence which shows that there is no genuine issue of material fact. Celotex, 477 U.S. at 322, 106 S.Ct. 2548. The respondent may not rest on the mere allegations or denials in its pleadings but must set forth specific facts showing that there is a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The court applies the same standards to all three motions for summary judgment.
For summary judgment purposes, there is no genuine issue of material fact concerning the following. Edge produces natural gas. In May and June 2001, Edge sold natural gas to Aurora, Golden Prairie or GPR, the debtors, through its marketing agent, Upstream Energy Services Company. Under the parties’ contractual arrangement, the debtors had an obligation to pay for the gas on the 25th day of the month following delivery. The debtors would pay for gas delivered in May by June 25, 2001, and for gas delivered in June by July 25, 2001.
Upon delivery of the gas, the debtors immediately commingled the gas in the pipeline with other gas from other suppliers. The debtors immediately resold the gas purchased from Upstream to Duke.
The debtors assert that Duke did not pay the debtors for the gas. In late May 2001, Duke claimed that it overpaid the debtor for previous deliveries of gas from the debtors to Duke. Duke continued to trade with and purchase gas from the debtors. To recover the alleged overpay-ments, Duke credited portions of the purchases and deliveries of gas from the debtors against the pre-existing receivable. In separate litigation against Duke, GPR, Golden Prairie, and Robert Newhouse, the trustee for Aurora, seek to recover the accounts receivable and to avoid the credits under 11 U.S.C. § 547. GPR Holdings, LLC v. Duke Energy Trading and Marketing, LLC, adversary number 03-3430 (Bankr.N.D.Tex.).
*322Duke immediately sold the gas purchased from the debtors in May and June 2001 to other purchasers. The gas in question has been used and no longer exists. Edge has not been paid for the gas. Edge has not filed a claim against the debtors in their respective bankruptcy cases. Aurora filed its bankruptcy petition on August 13, 2001; ANG Holdings, LLC, filed its bankruptcy petition on August 20, 2001; GPR filed its bankruptcy petition on August 14, 2001; Golden Prairie filed its bankruptcy petition on August 20, 2001.
Motion to Strike
Duke filed a motion to strike summary judgment evidence submitted by Edge with its reply to Duke’s and the debtors’ responses to Edge’s motion for summary judgment. Duke reports that the debtors join in the motion to strike. Edge submitted the additional summary judgment evidence because it understood that Duke, in its summary judgment arguments, raised the issue of whether Edge was an interest owner. The additional summary judgment evidence addresses that issue. Duke states that the evidence had not been produced in discovery. Edge responds that Duke had not previously challenged or even questioned Edge’s status as an interest owner and that the evidence was in Edge’s files available for Duke’s inspection.
The court’s review of the record does not reflect that the debtors or Duke have contested that Edge is an interest owner. Frankly, the court questions why the issue has not been submitted on stipulation. If Duke had a good faith challenge to Edge’s interest owner status, Duke surely would have raised the issue by appropriate motion in the two years the litigation has been pending before it had been transferred to this court. There is no genuine issue of material fact that Edge is an interest owner. The additional summary judgment evidence need not have been filed; yet Duke’s motion to strike misses the issue. If Duke now contests what had been a non-issue, the court will consider Edge’s summary judgment evidence. The court will deny Duke’s motion to strike.
The Statute
Section 9.343 of the Texas Business and Commerce Code provides:
(a) ... a security interest in favor of interest owners, as secured parties, to secure the obligations of the first purchaser of oil and gas production, as debtor, to pay the purchase price. An authenticated record giving the interest owner a right under real property law operates as a security agreement created under this chapter. The act of the first purchaser in signing an agreement to purchase oil or gas production, in issuing a division order, or in making any other voluntary communication to the interest owner or any governmental agency recognizing the interest owner’s right operates as an authentication of a security agreement in accordance with Section 9.203(b) for purposes of this chapter.
(b) The security interest provided by this section is perfected automatically without the filing of a financing statement. ...
(c) The security interest exists in oil and gas production, and also in the identifiable proceeds of that production owned by, received by, or due to the first purchaser:
(1) for an unlimited time if:
(A) the proceeds are oil or gas production, inventory of raw, refined, or manufactured oil or gas production, or rights to or products of any of those, although the sale of those proceeds by a first purchaser to a buyer in the ordinary course of business as provided in Subsection (e) cuts off the security interest in those proceeds;
*323(B) the proceeds are accounts, chattel paper, instruments, documents, or payment intangibles; or
(C) the proceeds are cash proceeds, as defined in Section 9.102; and
(2)for the length of time provided in Section 9.315 for all other proceeds.
(d) This section creates ... a lien that secures the rights of any person who would be entitled to a security interest under Subsection (a) except for lack of any adoption of a security agreement by the first purchaser or a lack of possession or record required by Section 9.203 for the security interest to be enforceable.
Tex. Bus. & Com.Code § 9.343 (2002).
As for secondary purchasers, the statute provides:
(m) A person who buys from a first purchaser can ensure that the person buys free and clear of an interest owner’s security interest or statutory lien under this section:
(1) by buying in the ordinary course of the first purchaser’s business from the first purchaser under Section 9.320(a);
(2) by obtaining the interest owner’s consent to the sale under Section 9.315(a)(1);
(3) by ensuring that the first purchaser has paid the interest owner or, provided that gas production is involved, or the interest owner has so agreed or acquiesced, by ensuring that the first purchaser has paid the interest owner’s operator; or
(4) by ensuring that the person or the first purchaser or some other person has withheld funds sufficient to pay amounts in dispute and has maintained a tender of those funds to whoever shows himself or herself to be the person entitled.
Tex. Bus. & Com.Code § 9.343(m) (2002).
Edge’s Security Interest
Edge contends that under this statute it has an automatically perfected security interest in the gas sold to the debtors and in the identifiable proceeds of that gas due to the debtors by Duke. There is no genuine issue of material fact that Edge produced the gas sold under a contract to the debtors. There is also no genuine issue of material fact that Edge held a recorded real property interest in the mineral estate from which Edge produced the gas. There is no genuine issue of material fact that for all the subject gas sales in this litigation, one of the debtors was the first purchaser as defined by § 9.343(r)(3) of the Texas Business and Commerce Code, which provides, in part, that a first purchaser is:
the first person that purchases oil or gas production from an operator or interest owner after the production is severed, or an operator that receives production proceeds from a third-party purchaser who acts in good faith under a division order or other agreement authenticated by the operator under which the operator collects proceeds of production on behalf of other interest owners.
Tex. Bus. & Comm.Code § 9.343(r)(3).
Duke and the debtors contend that the debtors, as first purchasers of the gas, did not sign an agreement to purchase gas, issue a division order or make any other voluntary communication to the interest owner recognizing the interest owner’s right. Aurora and Upstream entered a standard Gas Industry Standards Board (“GISB”) base contract. The debtors ordered gas deliveries from Upstream on GISB transaction confirmation forms. Neither the base contract nor the confir*324mation forms mention Edge. But they unmistakably contain “an agreement to purchase ... gas production.” Tex. Bus. & Com.Code § 9.343(a).
Recently, the court in the case of In re Enron, 302 B.R. 455, 461-62 (Bankr.S.D.N.Y.2003) held that the base contracts and confirmation forms do not constitute voluntary communications to an interest owner recognizing the interest owner’s right. Edge contends that the Enron court erred in its approach to the Texas protection of gas producers and interest owners. This court does not address that issue.
Section 9.343(a) provides three alternative methods for the first purchaser to trigger the security agreement authentication. The Enron court addressed the third alternative. The second alternative, issuing a division order, does not apply in this case. But there is no genuine issue of material fact that the first alternative exists, namely, a signed agreement to purchase gas production.
The base contract is a signed agreement wherein one of the debtors agrees to purchase gas from Upstream. The base contract and the resulting spot confirmation forms do not mention Edge. The base contract does not state that Upstream is Edge’s marketing agent, nor does it state that an interest owner is involved. The debtors and Duke argue, as a result, that the contract and confirmation forms do not meet the Enron test. The debtors and Duke further argue that under the Enron rationale a signed agreement for the purchase of gas must recognize the interest owner’s rights. Section 9.343(a) does not, however, require that a signed agreement to purchase gas production contain a statement recognizing the interest owner’s rights. Rather, the statute requires a signed agreement to purchase gas production or any other voluntary communication to the interest owner recognizing the interest owner’s right.
Edge, Duke and the debtors were, and Edge and Duke, at least, remain, players in the Texas natural gas business. None of the parties have presented summary judgment evidence suggesting that the base contract with confirmation forms does not implicitly communicate an acknowledgment of the purchase of gas with an interest owner involved in the chain of production and delivery. None of the parties actually argue that there is a fact issue here warranting submission to a jury. Section 9.343 contemplates that players in the Texas natural gas business will understand the relationships in contracts to purchase gas. “People in the business of dealing with operators and ‘first purchasers’ are substantially aware that royalty owners and the like always exist and have a claim to the production.... Their identities can be discovered through the realty records in most cases.” Tex. Bus. & Com. Code § 9.343 official cmt. at ¶ 5 (2002).
The court has no basis to assume that entities such as Edge or Duke would operate in the Texas gas market if the base contract and subsequent confirmation forms did not meet the statutory requirements to protect the interest owners.
The court therefore finds that Edge obtained a perfected security interest in the gas sold through its agent Upstream to the debtors in May and June 2001.
The security interest attaches to the proceeds of the debtors’ sale of the gas to Duke. Section 9.343(c) provides that the security interest exists in the gas production and in the identifiable proceeds of that production owned by, received by, or due to the first purchaser. The debtors sold the gas purchased from Upstream, as Edge’s agent, to Duke. The security interest attached to the proceeds due from *325Duke to the debtors for that gas. As the State Bar Committee Official Comment recognizes, “[n]o unfair surprise will result if [the royalty owners’] claim also extends to proceeds.” Tex. Bus. & Com.Code § 9.343 official cmt. at ¶ 5.
Duke Payment
Duke contends that it paid for the gas. There are however genuine issues of material fact concerning Duke’s contention that it has paid the debtors for the gas. Duke asserts that the debtors had over billed Duke for prior gas purchases. Duke nevertheless continued to purchase gas from the debtors. Duke credited portions of the gas shipments from the debtors to preexisting receivables. Duke took gas without paying for it as an extra-contractual remedy to reduce the alleged overpay-ments. Newhouse, the trustee for Aurora, GPR and Golden Prairie have filed an adversary proceeding to collect the receivable from Duke or to avoid the offset transfers. See GPR Holdings, LLC v. Duke Energy Trading and Marketing, LLC, adversary number 03-3430 (Bankr.N.D.Tex.).
If Duke prevails in the adversary proceeding, then Duke will have paid for the gas, and Edge’s security interest will have attached to the payments received by the debtors. Duke would not owe the debtors for the gas purchased by the debtors from Edge and sold to Duke. Edge’s lien extends to identifiable proceeds of the gas production owned by, received by or due to the first purchaser, the debtors. As Duke would not owe the debtors for the gas, having paid for it, Edge’s security interest or statutory lien would not extend to proceeds held by Duke. Edge’s security interest and statutory lien would extend to the proceeds received by the debtors for the sale of the gas produced by Edge. Edge’s remedy would be to pursue its secured claims in the bankruptcy cases.
As discussed below, even if it does not have a security interest or statutory lien on proceeds obtained by Duke for the sale of the gas, Edge contends that it has a separate claim of conversion against Duke. Edge argues that it may pursue its conversion claim whether or not it files a claim in the bankruptcy estate. A direct action by Edge against Duke, if successful, would likely result in a claim by Duke against the estates. But that claim would be counterbalanced by the elimination of a secured claim by Edge, as Duke will have paid for the gas. There would be no net change to the bankruptcy estates. Thus, assuming Duke has paid the debtors for the gas, Edge could pursue direct actions against Duke, to the extent that such actions exist under applicable non-bankruptcy law.
On the other hand, if the debtors prevail in that adversary proceeding, then the credit by Duke will be voided, Duke will owe the debtors for the gas purchased by the debtors from Edge and sold to Duke, and the debtors will obtain a judgment against Duke for the outstanding amount due for the purchase of the gas. Under that circumstance, Edge would hold a security interest in the proceeds due to the debtors.
The debtors would hold a judgment against Duke. The judgment would be property of the respective bankruptcy estates. 11 U.S.C. § 541. Edge would hold a security interest in the proceeds due under the judgment.
The filing of the bankruptcy petitions by the debtors operated as a stay applicable to all entities of certain activities, including exercising control over property of the bankruptcy estate, enforcing a lien against property of the bankruptcy estate and collecting or recovering a pre-bankruptcy petition claim. 11 U.S.C. § 362(a)(3), (4), (5) and (6); All *326Trac Transp., Inc. v. Transp. Alliance Bank (In re All Trac Transp., Inc.), 306 B.R. 859, 872 (Bankr.N.D.Tex.2004). Edge could not, therefore, pursue its security interest directly against Duke without obtaining relief from the automatic stay pursuant to 11 U.S.C. § 362(d). The court has not granted relief to Edge to pursue its security interest in property of the bankruptcy estates.
A direct action by Edge to collect from Duke would interfere with the debtors efforts to collect property of the estate, as Edge and the debtors would, in essence, be pursuing Duke for the same collection. Edge cannot interfere with the debtors’ pursuit of property of the bankruptcy estates, absent leave of the bankruptcy court. Under the Supremacy Clause of the U.S. Constitution, U.S. Const. Art. VI, cl. 2, the automatic stay of the Bankruptcy Code prevails over Edge’s non-bankruptcy claims against Duke. See In re First Texas Petroleum, Inc., 52 B.R. 322, 325 (Bankr.N.D.Tex.1985). Accordingly, in the event that the debtors prevail in the adversary proceeding against Duke, this adversary proceeding must be dismissed. Edge’s remedy would be to pursue its security interest in the bankruptcy cases or obtain relief from the stay.
Accordingly, on this summary judgment record, Edge had a perfected security interest in the gas sold through Upstream to the debtors and sold by the debtors to Duke. If Duke paid for the gas, then Edge holds a perfected security interest in the proceeds owned by or received by the debtors from Duke. Edge must pursue its security interest in the proceeds by the bankruptcy claims process. To the extent that Edge has a separate claim against Duke under applicable non-bankruptcy law, Edge could pursue that claim. If Duke has not paid for the gas, then Edge holds a perfected security interest in the proceeds due from Duke to the debtors. Edge’s ability to pursue collection however would be stayed by § 362 of the Bankruptcy Code.
Duke Purchase Free and Clear
Assuming that Duke has not paid for the gas and Edge obtains relief from the automatic stay, the court considers the reach of Edge’s security interest and statutory lien to the sale of the gas by Duke to third persons. Addressing the statutory reach of the security interest, the State Bar Committee Official Comment observes, “[t]his section gives interest owners rights to oil production in the hands of a ‘first purchaser’ and his transferees.” Tex. Bus. & Com.Code § 9.343 official cmt. at ¶ 1. The first purchaser may terminate the security interest or statutory lien by paying, or by making and keeping open a tender of, the amount the first purchaser believes to be due the interest owner. Tex. Bus. & Com.Code § 9.343(1). The debtors have not paid Edge for the gas. The debtors did not provide for any of the alternative statutory methods to terminate Edge’s security interest or statutory lien. Section 9.343(1). Consequently, the first purchaser did not terminate the security interest or statutory lien.
The person who buys from the first purchaser may buy the gas free and clear of the interest owner’s security interest or statutory lien if the person meets one of the conditions enumerated in § 9.343(m), quoted above. The court must determine whether Duke cut off the security interest or the statutory lien in the gas or its proceeds by one of the statutory methods.
Edge contends that Duke failed to take any of the statutory measures to assure that it bought gas from the debtors free and clear of Edge’s security interest or statutory lien. Duke counters that it had no need to take any of these measures because it paid the debtors for the gas. *327With the debtors paid, Duke argues that did not hold proceeds of the gas production “due to the first purchaser” under § 9.343(c). Consequently, it contends that it had no reason to take any of the steps provided in § 9.343(m).
Edge’s security interest and statutory lien attached to the gas and the proceeds from the sale of the gas. If Duke paid the debtors for the gas, then Duke would not hold proceeds of gas production “due to the first purchaser.” If Duke did not pay for the gas, then Duke would hold proceeds of gas production “due to the first purchaser.” In addition, Duke bought the gas. The gas was subject to Edge’s security interest. With the issue of the payment for the gas subject to a genuine dispute and with the gas sold subject to the security interest and statutory lien, the court considers whether Duke bought the gas or held the proceeds free and clear of the security interest and statutory lien pursuant to § 9.343(m).
There is no genuine issue of material fact that Duke did not obtain Edge’s express consent for the sale. Tex. Bus. & Com.Code § 9.343(m)(2). Edge impliedly consented to the debtor’s resale of the gas on the market. The parties do not contend that implied consent meets the consent requirement to allow the transfer of the gas free and clear of Edge’s security interest and statutory lien. The court notes that the implied consent issue is material to Edge’s conversion claim, addressed below.
Duke did not ensure that the debtors paid Edge or Edge’s operator. Id. at § 9.343(m)(3). Duke did not withhold or assure that another withheld funds sufficient to pay for the gas. Id. at § 9.343(m)(4).
There is a genuine issue of material fact of whether Duke bought the gas in the ordinary course of the debtors’ business. Id. at § 9.343(m)(l). There is summary judgment evidence that the debtors and Duke regularly and customarily bought and sold gas. There is further summary judgment evidence that Duke negotiated a pre-payment system with the debtors to obtain discounted prices for gas. Duke took extra-contractual measures to pay for gas after it concluded that it overpaid the debtors for gas. Those extra-contractual measures are the subject of litigation. On this record, the court cannot find that an extra-contractual setoff would be outside the ordinary course of business in this industry. Consequently, the issue of the purchase by Duke in the ordinary course of the debtors’ business must be resolved by a trial. Until the § 9.343(m)(l) issue is resolved at trial, the court cannot conclude whether or not Duke purchased the gas in the ordinary course of business and, if payment is due to the debtors, holds proceeds subject to Edge’s security interest and statutory lien. If Duke bought the gas from the debtors in the ordinary course of the debtors’ business, then Duke would have purchased the gas free and clear of Edge’s security interest and statutory lien. If Duke did not purchase the gas from the debtors in the ordinary course of the debtors’ business, then Duke would not have purchased the gas free and clear of Edge’s security interest and statutory lien.
Conversion
Assuming that Duke did not purchase the gas in the ordinary course of the debtors’ business, the gas when purchased by Duke would have been subject to Edge’s security interest and statutory lien. Assuming further that the debtors prevail in the collection adversary proceeding against Duke, the proceeds of the gas when sold by Duke would have been subject to Edge’s security interest and statu*328tory lien. If Duke prevails in the collection adversary proceeding, Edge would not have a security interest or statutory lien on proceeds held by Duke from the sale of the gas by Duke to third persons, but the security interest and statutory lien in the gas itself would have existed. Edge contends that by selling the gas without paying the proceeds to Edge, Duke converted Edge’s interest in property.
Under Texas law, conversion is established by proving that: (1) the plaintiff owned, had legal possession of, or was entitled to possession of the property; (2) defendant assumed and exercised dominion and control over the property in an unlawful and unauthorized manner; and (3) defendant refused plaintiffs demand for the return of the property. Russell v. Am. Real Estate Corp., 89 S.W.3d 204, 210 (Tex.App.—Corpus Christi, 2002, no pet.). Stated somewhat differently, conversion is “the wrongful exercise of dominion and control over another’s property in denial of or inconsistent with the property owner’s rights.” Edlund v. Bounds, 842 S.W.2d 719, 727 (Tex.App.—Dallas, 1992, writ denied). When the defendant initially acquires possession of personalty by lawful means, conversion generally occurs upon refusal of a demand for return of the property. Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 651 (5th Cir.1991). “ ‘When an indebtedness can be discharged by payment of money generally, an action in conversion is inappropriate.’ ” Edlund, 842 S.W.2d at 727 (quoting Eckman v. Centennial Sav. Bank, 757 S.W.2d 392, 398 (Tex.App.— Dallas 1988, writ denied)). Thus, in a debtor-creditor relationship, the remedy is a money judgment for the debt, not conversion. Eckman, 757 S.W.2d at 398. The measure of damages for conversion is the value of the property at the time and place of conversion. Edlund, 842 S.W.2d at 727.
Edge agreed to sell gas to the debtors through Upstream. There is no genuine issue of material fact that Edge knew that the debtors would resell the gas. While Duke did not obtain Edge’s express consent for the debtors’ sale of the gas to Duke to cut off the security interest under § 9.343(m)(2), there is nevertheless no genuine issue of material fact that Edge consented to the resale of the gas by the debtors. When Duke purchased the gas from the debtors, Duke therefore obtained dominion and control over the gas in a lawful and authorized manner, albeit subject to Edge’s security interest and statutory lien.
Duke purchased gas in May before the debtors’ payment was due to Edge. Likewise, Duke purchased gas in June before the debtors’ payment for the gas was due to Edge. Thus, at the time of the Duke purchases, payment by the debtors was not due to Edge. Before payment was due on June 25, 2001, Edge had no right to possession of its security interest in the gas or its proceeds; that is, until the debtors defaulted on their obligation to pay Edge, Edge could not enforce its security interest in the gas or its proceeds. By the time the debtors defaulted to Edge, Duke had sold the gas. Duke sold the gas in a lawful and authorized manner. Duke obtained the proceeds of the sale of the gas in a lawful and authorized manner.
Possession of legally obtained property would not be considered converted unless the use of the property departs so far from the conditions under which it was received as to amount to an assertion inconsistent with that of the owner. Pierson v. GFH Fin. Servs. Corp., 829 S.W.2d 311, 314 (Tex.App.—Austin 1992, no writ). There is no summary judgment evidence to suggest that Duke sold the gas, obtained possession of the proceeds or used the proceeds from the sale of the gas *329inconsistently with gas market transactions in Texas. Edge does not request return of the gas. Edge seeks payment for the sale of the gas. There is no summary judgment evidence that Edge cannot maintain a collection action to enforce its security interest or statutory lien if it reaches Duke.
Furthermore, conversion involves taking of property without the owner’s consent. If the owner impliedly consented to the disposition of the property, the owner may not maintain a claim for conversion. Pan Eastern Exploration Co. v. Hufo Oils, 855 F.2d 1106, 1125 (5th Cir.1988). As the court found above, there is no genuine issue of material fact that Edge impliedly consented to the resale of the gas in the market place. Edge argues that Duke must plead consent as an affirmative defense. The court focuses on market expectations, however. As discussed above, the establishment of the security interest and statutory lien of § 9.343 had been designed to fit consistently with prevailing practices in the gas industry. At times in this litigation both Edge and Duke have left the court with the impression that neither is being particularly forthright in their approach to this dispute.
Duke sold the gas to third persons. The third persons paid Duke for the gas. As found above, Duke thereby obtained possession of the proceeds of the gas. If Duke did not pay the debtors for the gas, then Edge’s security interest would have attached to the proceeds obtained by Duke and due, in turn, to the debtors. Edge’s security interest secured the debtors’ indebtedness to Edge. Edge could enforce its security interest. The debtors contend that Edge has not presented summary judgment evidence that it made a demand for the return of the property on Duke. Edge argues it need not make an express demand to Duke for payment. But where Edge expected the gas to be sold in the market and where Duke acted lawfully in obtaining and reselling the gas, Edge must make a demand for payment of its security interest or statutory lien as a prerequisite for an action of conversion of its collateral. Otherwise, Duke would have no reason to believe that it had possession of Edge’s collateral. Duke did not need to return the gas. Duke would pay the debtors for the gas purchased from the debtors.
But, even if a formal demand would not be needed when a statutory lien is involved, as discussed below, Edge’s security interest extends only to identifiable proceeds of the gas production — that is, the amount due to Edge for the gas sold to the debtors. That indebtedness can be discharged by payment of money. Furthermore, Edge is only entitled to the payment of that indebtedness. The measure of damages for conversion is the value of the property at the time and place of the conversion. But Edge is not entitled to the value of the property at the time of conversion. Edge is only entitled to the amount due for the gas when sold by Edge to the debtors. Because the indebtedness could be satisfied by the payment of money and Edge is not entitled to the damages for conversion, conversion is inappropriate.
Edge contends that it may pursue collection by conversion. Texas law does recognize that “in an appropriate case” a secured creditor may maintain an action for conversion if collateral has been sold without the secured creditor’s consent. See Amarillo Nat. Bank v. Komatsu Zenoah America, Inc., 991 F.2d 273, 275 (5th Cir.1993). But that case law begs the question. Edge does not seek return of the gas. Edge does not seek to repossess collateral. Edge seeks payment for the gas sold to the debtors. As discussed above, the collection of a debt by enforcing *330security interest in collateral does not translate into “an appropriate case” for conversion.
If Duke paid the debtors, Edge’s security interest would not reach the proceeds of the sale of the gas by Duke to third persons, for the reasons stated above. Nevertheless, the gas itself would still be subject to the security interest or statutory lien. Edge contends that when Duke sold the gas but did not deliver the proceeds to Edge, Duke converted Edge’s interest in the gas itself. Alternatively, Edge contends that when Duke credited its debt to the debtors after Duke sold the gas, the act of setoff amounted to the conversion of Edge’s security interest in the gas. In essence, the court understands Edge’s argument as follows. Duke sold gas subject to Edge’s security interest and statutory lien. Duke received the proceeds from the sale. Duke did not owe the proceeds to the debtors because Duke had paid the debtors by offset and credit. Nevertheless, Duke transformed Edge’s security interest in the gas into dollars. The gas is gone. While the sale was lawful and authorized, the proceeds should have been preserved or paid to Edge. Otherwise, Edge loses its collateral. Edge concludes that amounts to conversion.
While circular, Edge’s reasoning-returns to the same point. Edge seeks a money judgment based on its security interest and statutory lien for the payment of the gas Edge sold through Upstream to the debtors. Edge’s theory for a claim of conversion of proceeds of the sale of the gas amounts to a claim for conversion of money.
“An action for the conversion of money will lie if the money can be identified as a specific chattel.” Edlund, 842 S.W.2d at 727. “An action for the conversion of money may be brought where money is (1) delivered for safekeeping; (2) intended to be kept segregated; (3) substantially in the form in which it is received or an intact fund; and (4) not the subject of a title claim by the keeper.” Id. There is no summary judgment evidence that, because of Edge’s security interest or statutory lien in the gas sold by the debtors to Duke and, in turn, sold by Duke to third persons, Edge intended that the proceeds of the sale by Duke be held for safe keeping in a segregated account and intact. Furthermore, Duke obtained title to the proceeds, whatever Edge’s security interest may have been. See also Estate of Townes v. Townes, 867 S.W.2d 414, 419-20 (Tex.App.—Houston [14th Dist.] 1993, writ denied).
This is not a situation where the proceeds of the sale of the gas had to be held in trust for the interest owners. See Suddarth v. Poor, 546 S.W.2d 138 (Tex.Civ.App. — Tyler 1977, writ ref'd n.r.e.). Nor is this a situation where Duke had notice of Edge’s security interest or statutory lien. Texas case law recognizes that a person who accepts and benefits from proceeds subject to a statutory lien, with actual notice of the lien, may be subject to a claim for conversion of the proceeds by the lienholder. Home Indem. Co. v. Pate, 814 S.W.2d 497, 498-99 (Tex.App.—Houston [1st Dist.] 1991, writ denied). Thus, where an attorney in a workers’ compensation case knows that he has received settlement proceeds subject to the compensation insurance carrier’s first priority in the funds, but disburses the funds anyway, the attorney may be subject to a claim of conversion of the proceeds. Prewitt and Sampson v. City of Dallas, 713 S.W.2d 720, 722 (Tex.App.—Dallas 1986, writ ref'd n.r.e.). Edge has not presented summary judgment evidence that Duke had actual notice of Edge’s security interest or statutory lien. Furthermore, Edge has not presented summary judgment evidence *331that Duke had actual notice that the debtors had not paid Upstream for the gas. While the court presumes that Duke has knowledge of § 9.348, that does not translate into actual notice that the debtors did not pay Edge or that Duke purchased gas bought by the debtors from Edge. On this summary judgment record, Duke only knows that it bought gas carried in a pipeline from the debtors. Edge may not maintain a claim for conversion of money.
Edge argues that without a claim for conversion, it loses its statutory protection, thereby defeating the statute’s policy. Edge further argues that imposing an obligation on Duke does not work a hardship on Duke. Edge asserts that a purchaser of gas from a “first purchaser” under § 9.343 may protect itself from an interest owner’s security interest or statutory lien by meeting one of the elements of § 9.343(m). If the subsequent purchaser fails to obtain those protections, then it acts at its peril in selling gas without preserving the proceeds for the interest owner. If double liability results, namely, to the first purchaser for the purchase of the gas and to the interest owner if the first purchaser fails to pay the interest owner, the double liability results only because of a failure to attain the protection of § 9.343(m). But, Edge argues, the interest owner’s protections must prevail under the statute.
The court has analyzed the conversion claim on this summary judgment record because Edge, Duke and the debtors/inter-venors all ask the court to attempt to resolve the adversary proceeding on their competing summary judgment motions. In analyzing the conversion claim the court has therefore assumed that Duke did not purchase the gas free and clear of Edge’s interest under § 9.343(m). There is a genuine issue for trial of whether Duke purchased the gas from the debtors in the ordinary course of the debtors’ business. Nevertheless, the court’s analysis of the Texas law on conversion does not result in undermining the public policy of § 9.343. The court has merely held that Edge’s claim of conversion cannot be maintained. In part, that is because Edge has not established that Duke did not act lawfully, obtaining property consistent with rparket practices and/or with Edge’s implied consent. Further, that is because Edge has not established that it cannot obtain a money judgment based on its collateral in a debtor/creditor context. Further, that is also because Edge itself did not establish a contractual basis with Duke or actual notice to Duke for a claim of conversion of money.
The court does address one other issue. Both Duke and the debtors contend that Edge may only assert a security interest in “identifiable” proceeds under § 9.343(c). Apparently, the debtors and Duke would impose a requirement that specific dollars be traced from the sale of the gas. That reading would nullify the security interest granted in the proceeds from the gas production. A statute should not be read to defeat its purpose. See In re G.R.M., F.A.M., and N.D.M., 45 S.W.3d 764, 770 (Tex.App. — Fort Worth 2001, no pet.) (“In construing a statute, our primary aim is to give effect to the legislature’s intent.... Our construction of the provisions must be consistent with their underlying purpose and the policies they promote.”). The Legislature intended that the statute recognize prevailing practices in the gas industry. Thus, for example, the Legislature concluded that it seemed an undue burden to change historic ways of doing business to require gas pipeline companies and gathering systems to insist on paying individual interest owners directly. The statute therefore allows payments to someone else in a chain to ultimately discharge the interest owner’s se*332curity interest or statutory lien. Tex. Bus. & Com.Code § 9.343 official cmt. at ¶ 9. Under this payment scheme, tracing of actual dollars would be unnecessary and counterproductive, undermining the very nature of permitting payments through a chain to ultimately reach the interest owners.
Section 9.343(c) recognizes the security interest in “gas production” and “in the identifiable proceeds of that production.” In reading this provision, the court must give significance to every word. The word “identifiable” must be read in the context of the sentence. The court must consider the particular statutory language, the design of the statute as a whole and its object and policy. The court must avoid a reading that would create internal inconsistencies or contradictions. But where the statutory scheme is coherent and consistent, the court generally need not inquire beyond the statute’s language. Celadon Trucking Svcs., Inc. v. Titan Textile Co., Inc., 130 S.W.3d 301, 305 (Tex.App.— Houston [14th Dist.] 2004, pet. filed).
“Identifiable” commonly means “subject to identification; capable of being identified.” “Identify” means “to link in an inseparable fashion” or “to join with some interest.” Webster’s Third New Int’l Dictionary 1123 (1993). Black’s Law Dictionary defines “identify” as “[t]o look upon as being associated with” or “[t]o specify ... as the object of a contract.” Black’s Law Dictionary 748 (7th ed.1999). Applying these common meanings, “identified” proceeds “of that production” means proceeds linked to or joined with the gas production subject to the security interest; the proceeds associated with the gas production subject to the security interest. The statute thus extends the security interest to the proceeds that can be identified as associated with or linked to the gas production.
The statute does not require that, to be identifiable, the actual dollars obtained from the sale of the gas be traced. That reading would be inconsistent with the design of the statute as a whole and its object and policy. Rather, it requires that the security interest be limited to only the proceeds linked with or associated with the actual gas production subject to the security interest.
Thus, presumably, the debtors sold the gas to Duke for an amount greater than the debtors would have paid Edge. Edge’s security interest only extends to the proceeds due from Duke to the debtors identified with the gas sold by Edge to the debtors. That limits the security interest to the amount due by the debtors to Edge, which accomplishes the purpose of the statute, namely, to assure payment of interest owners while not disrupting the market for the sale of gas in Texas.
Edge therefore has no requirement to trace the dollars from Duke’s sale of the gas to have a security interest in identifiable proceeds of the gas production.
Duke and the debtors may also argue that the gas itself must be traced. All parties know that the gas is delivered into a pipeline and commingled with other gas in the pipeline. It is disingenuous for Duke, a player in that market, to even suggest that the gas must be traced. See Tex. Bus. & Com.Code § 9.336. If Edge could maintain a claim of conversion, it is based on the loss of collateral, not on the sale of volumes of gas from the pipeline.
Summary
Edge had a security interest and statutory lien in the gas and in the proceeds of the gas owed by, received by or due to the debtors. If Duke paid the debtors for the gas, Edge may pursue its secured claim against the debtors. Edge would not have a security interest in the proceeds of the *333gas sold by Duke to third persons. If Duke has not paid the debtors for the gas, Edge would have a lien on the gas and the proceeds obtained by Duke, unless Duke bought the gas free and clear of Edge’s lien pursuant to § 9.343(m). Edge may not, however, maintain a claim against Duke, if Duke has not paid the debtors for the gas, without obtaining relief from the automatic stay. There is a genuine issue of material fact of whether Duke purchased the gas in the ordinary course of the debtors’ business. Whether or not Duke paid the debtors for the gas and whether or not Duke bought the gas in the ordinary course of the debtors’ business, Edge may not maintain a claim of conversion against Duke.
Based on the foregoing,
IT IS ORDERED that the motion of Duke Energy Trading and Marketing, L.L.C., to strike plaintiffs supplemental appendix is DENIED.
IT IS FURTHER ORDERED that the motion for summary judgment filed by Edge Petroleum Operating Co., Inc., is DENIED.
IT IS FURTHER ORDERED that the motion for summary judgment filed by Duke Energy Trading and Marketing, L.L.C., is GRANTED.
IT IS FURTHER ORDERED that the motion for summary judgment filed by GPR Holdings, L.L.C., Golden Prairie Supply Services, L.L.C., and Aurora Natural Gas, L.L.C., is GRANTED.
IT IS FURTHER ORDERED that this adversary proceeding is DISMISSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493686/ | ORDER OVERRULING TRUSTEE’S OBJECTION TO CLAIM IN PART AND WITHDRAWING TRUSTEE’S OBJECTION TO CLAIM IN PART
AUDREY R. EVANS, Bankruptcy Judge.
Now before the Court is an Objection to Claim filed by the Chapter 13 Trustee (the *291“Trustee”) on January 5, 2004 (docket entry # 38). The Trustee objects to a claim filed by Union Planters Bank (“Union Planters”) in which Union Planters asserts security interests in the following vehicles: a 1986 International tractor truck, a 1984 GMC gravel truck, a 1991 GMC tractor truck and a 51 ‘low boy. Union Planters subsequently submitted evidence of its security interest in the 1991 GMC tractor truck and 51 ‘low boy, and the Trustee has agreed to withdraw its objection with respect to that collateral.
During the trial held on July 7, 2004, the Court heard testimony from Bob Hankins, Vice-President of Union Planters, and received documentary exhibits. Kimberly Woodyard appeared on behalf of the Trustee, and Robert Gibson appeared on behalf of Union Planters. The parties requested the opportunity to file post-trial briefs and were allowed to do so. Upon consideration of the trial testimony, documentary evidence and post-trial briefs, the Court orally ruled on August 4, 2004, making the following findings of fact and conclusions of law in accordance with Rule 7052 (made applicable to contested matters by Rule 9014(c)). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (B), and the Court has jurisdiction to enter a final judgment in this case.
The Trustee objects to Union Planters’ proof of claim because Union Planters did not attach to its proof of claim certificates of title showing Union Planters as lien-holder. It is undisputed that at the time of Debtor’s bankruptcy filing, Union Planters could not locate the certificates of title to the vehicles in question. However, Union Planters submitted evidence that in the year 2000, titles were issued on the vehicles in question showing Union Planters as lienholder. Following Debtor’s bankruptcy filing, Union Planters obtained replacement titles listing it as lienholder. . According to an affidavit by Roger Duren, a manager in the DFA’s Office of Motor Vehicles, replacement titles are only issued to the vehicle’s owner or a lienholder that is listed in the DFA’s database. Duren affirmed that on both vehicles in question, Union Planters was listed as lienholder in the DFA’s database.
The legal issue before me is whether Union Planters complied with Arkansas’ titling statute such that its security interest in the vehicles is perfected. I find that it did. Arkansas Code Annotated § 27-14-801 provides, in part:
No ... lien ... upon a vehicle, of a type subject to registration, is valid as against the creditors of an owner acquiring a lien by levy or attachment or subsequent purchasers or encumbrances, with or without notice, until the requirements of this subchapter have been complied with.
(Emphasis added.) To perfect a security interest in a vehicle, the statute requires that a creditor file its security agreement (1) with the application for registration (under Ark.Code Ann. § 27-14-802), or (2) at the time it records its lien on the vehicle’s statement of origin or an existing certificate of title (under Ark. Code Ann. § 27-14-806). Both methods constitute constructive notice of the lien against the vehicle. (With respect to new certificates of title, see Ark.Code Ann. § 27-14-805, and with respect to existing certificates of title or statements of origin, see Ark. Code Ann. § 27-14-806.)
Once the creditor has complied with these requirements and had its security agreement filed with the DFA and its lien noted on the title or statement of origin, its security interest is perfected. There is no requirement under the statute to maintain a copy of the title. Additionally, the statute does not provide that a security interest becomes unperfected if *292the title cannot be located. Consequently, because Union Planters followed the statute’s requirements and had its liens noted on the vehicles’ certificates of title prior to the Debtor’s filing bankruptcy, Union Planters has a perfected security interest in the Debtor’s 1986 International tractor truck and 1984 GMC gravel truck.
For these reasons, it is hereby
ORDERED that the Trustee’s Objection to Claim is OVERRULED in part (with respect to Union Planter’s security interest in Debtor’s 1986 International tractor truck and 1984 GMC gravel truck) and WITHDRAWN in part (with respect to Union Planter’s security interest in Debt- or’s 1991 GMC tractor truck and 51 ‘low boy).
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493688/ | MEMORANDUM OF DECISION ON MOTION IN LIMINE
ALBERT S. DABROWSKI, Chief Judge.
I. INTRODUCTION
By Motion dated May 13, 2004, certain creditors of these individual Chapter 11 debtors initiated a contested matter seeking, inter alia, to have a trustee appointed to replace the Debtors as estate fiduciary (hereafter, the “Trustee Matter”). However, the present Motion in Limine (hereafter, the “Preclusion Motion”) does not raise the merits of the Trustee Matter, but instead seeks a ruling in limine that by virtue of a decision of the Connecticut Superior Court in pre-petition litigation between the parties certain issues are collaterally estopped from re-litigation in the Trustee Matter.
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 matter on reference from the District Court pursuant to 28 *360U.S.C. §§ 157(a), (b)(1). This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(A), inter alia.
III. BACKGROUND
It is not necessary for purposes of this in limine ruling to recount fully the extensive factual background of the relationship between the parties. It is sufficient merely to note that certain disputes between the parties were adjudicated by the Connecticut Superior Court (Schuman, J.) following trial (hereafter, the “Superior Court Litigation”). Judgment in the Superior Court Litigation entered in accordance with a certain Memorandum of Decision dated August 26, 2003 (hereafter, the “Superior Court Decision”). Among other findings and conclusions, the Superi- or Court Decision concludes that the Debtors misappropriated funds from Raafat R. Tadros and Giuseppe Tripodi, M.D., P.C. (hereafter, the “Professional Corporation”), and that such misappropriation constituted (i) a breach of fiduciary duty, and (ii) statutory theft under C.G.S. § 52-564.1 It is these determinations which the mov-ants seek to have established by collateral estoppel in the Trustee Matter.2 The Superior Court Decision is presently pending on appeal in Connecticut state court.
IV. DISCUSSION
In opposing the Preclusion Motion the Debtors make two principal arguments. First, they claim the fact that the Superior Court Decision is presently on appeal negates the finality which they allege is required for the application of collateral es-toppel. Second, the Debtors claim that the standards of proof applied by the Superior Court to the subject issues were lower than that required to be applied by this Court in adjudicating the Trustee Matter. Specifically, the Debtors assert that a preponderance of evidence standard was applied to the issues in the Superior Court Decision, but that the Trustee Matter must be determined on the basis of clear and convincing evidence.
As an initial matter, the Court notes that neither party has properly articulated the collateral estoppel standards which should guide this Court in resolving the pending matter. Under the Full Faith and Credit Doctrine, as codified by 28 U.S.C. § 1738, a federal court is required to give a state court judgment the same preclusive effect as would a sister court of the judgment state. Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980). Thus, in the instant matter the Court must look to Connecticut law to determine whether the Connecticut state courts would estop the Debtors from contesting the subject determinations of the Superior Court Decision.
Under Connecticut law, “[cjollateral estoppel, or issue preclusion, prohibits the re-litigation of an issue when that issue was actually litigated and necessarily determined in a prior action .... For an issue to be subject to collateral estoppel, it must have been fully and fairly litigated in the first action. It also must have been actually decided and the decision must have been necessary to the judgment .... Furthermore, [t]o invoke collateral estop-*361pel the issues sought to be litigated in the new proceeding must be identical to those considered in the prior proceeding .... ” Carnemolla v. Walsh, 75 Conn.App. 319, 325, 815 A.2d 1251, 1256-7 (Conn.App.2003), cert. denied, 263 Conn. 913, 821 A.2d 768 (2003) (internal quotation marks and citations omitted).
A. Finality.
As an initial observation this Court notes that the foregoing articulation of the Connecticut doctrine of collateral estoppel does not include the word “final”. The absence of such term is reflective of the fact that under Connecticut law any issue actually litigated and necessarily determined by a Connecticut Superior Court is eligible for the application of collateral estoppel, even if that court’s determination is still subject to reversal on appeal. E.g., LaBow v. Rubin, 2004 WL 615713 at *6 (Conn.Super.2004) (“[t]he Supreme Court has held the judgment of a trial court to be final, despite a pending appeal, when the issue was ... the applicability of the rules of res judicata. The same principle applies to the issue of collateral estoppel.”); see, e.g., Carnemolla, supra, 75 Conn.App. at 327-28, 815 A.2d 1251 (“[because collateral estoppel is a much narrower aspect of res judicata, and a pending appeal does not preclude the application of res judicata, we conclude that the plaintiffs pending appeal in the [first] action did not preclude the defensive application of collateral estoppel in the [present] action.”). Accordingly, the Superior Court Decision is sufficiently “final” to provide the basis for issues to be collaterally estopped in the Trustee Matter.
B. Congruence of Issues
The Debtors correctly observe that for collateral estoppel to be utilized there must exist a congruence between the subject determination in the prior proceeding and the issue sought to be estopped in the present matter. Specifically, they claim that this Court cannot import the Superior Court’s determinations of statutory theft and breach of fiduciary duty because those issues were determined in the Superior Court Litigation by a standard of proof lower than that by which this Court must determine the Trustee Matter.
1. Standard of proof for Trustee Matter.
The Debtors argue that “clear and convincing evidence” is the appropriate standard of proof in the Trustee Matter. Indeed, the numerical weight of authority appears to point in that direction. E.g., In re Cajun Electric Power Cooperative, Inc., 69 F.3d 746, 749 (5th Cir.1995); In re Sharon Steel Corporation, 871 F.2d 1217, 1226 (3rd Cir.1989). Yet, this Court is not directly bound by any such authority, and good faith arguments can be advanced for application of the lower “preponderance of the evidence” standard. See Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991) (“... we presume that ... [the preponderance] ... standard is applicable in civil actions between private litigants unless ‘particularly important individual interests or rights are at stake.’ ”). However, for purposes of determining the instant Preclusion Motion, the Court will assume, without deciding, that the “clear and convincing” standard is the appropriate measure of proof in the Trustee Matter.
2. Standard of proof utilized in the Superior Court Decision.
a. Statutory theft.
Despite the absence of the words, “clear and convincing” in the Superior Court Decision, this Court has no doubt that Judge Schuman utilized a “clear and *362convincing” standard in determining that the Debtors committed statutory theft. Judge Schuman made that determination, inter alia,- by “applying the appropriate burden and standard of proof’. Superior Court Decision at pp. 4, 7. He identified the nature of the “appropriate” standard of proof by reference to case law, namely Suarez-Negrete v. Trotta, 47 Conn.App. 517, 520, 705 A.2d 215 (1998) (“The trial court properly recognized that the plaintiff was required to satisfy the higher standard of proof by clear and convincing evidence to be entitled to an award of treble damages pursuant to § 52-564.”). Accordingly, this Court holds that the findings and conclusions of Judge Schuman with respect to statutory theft were determined pursuant to a “clear and convincing” standard of proof, and shall be collaterally estopped from re-litigation in the Trustee Matter.
b. Breach of fiduciary duty.
As with his determination of statutory theft, Judge Schuman identifies the standard of proof applied to his determination of breach of fiduciary duty by reference to case law, namely Ostrowski v. Avery, 243 Conn. 355, 362, 703 A.2d 117 (1997). The passage of Ostrowski cited by Judge Schuman sets out a shifting burden , of proof applicable to breach of fiduciary duty cases, to wit:
... a plaintiff bears the burden of establishing ... a fiduciary relationship between the corporation and the alleged wrongdoers .... Once a plaintiff establishes these predicates to liability, the burden then shifts to the fiduciaries to establish, by clear and convincing evidence, the fairness of their dealings with the corporation.
243 Conn, at 362, 703 A.2d 117.3
While Ostrowski does not explicitly state the standard of proof required of a plaintiff as to its initial burden, it is clear, by implication, that such standard is the default civil standard of a “preponderance of the evidence”. This Court must logically assume that the Connecticut Supreme Court would not specify the higher “clear and convincing” standard only for the defendant’s burden if in fact that standard applied to both the plaintiff and defendant. Thus it appears that the issue of breach of fiduciary duty, if determined independently of theft, could be established by a plaintiff in the Superior Court on a lesser standard of proof than that required of a movant in a trustee appointment matter in the Bankruptcy Court. Under such circumstances this Court would not collaterally estop the re-litigation of the issue of breach of fiduciary duty based upon the findings and conclusions on that topic made by Judge Schu-man in the Superior Court Decision.
However, the ultimate analysis of the breach of fiduciary duty issue is more complex than a mere assessment of the congruence of standards of proof. The complexity stems from the interrelationship between Judge Schuman’s determinations of theft and breach of fiduciary duty. Specifically, although Judge Schuman concludes that “misappropriation of large amounts of money from the corporation ... obviously constitutes a breach of... fiduciary duty”, he concludes further that “because the evidence establishes conclusively that the misappropriation was part of an ongoing plan and attempted cover*363up, rather than a matter of poor bookkeeping or other inadvertent error, the proof satisfies the standards for ... theft under General Statutes 52-264.” Thus, given the nature of Judge Schuman’s analysis of the record before him, one must conclude that the nature of the relationship of breach of fiduciary duty to theft was essentially that of a “lesser included offense”. Viewed in that fashion one must conclude that the standard of proof .for Judge Schuman’s determination of breach of fiduciary was necessarily “clear and convincing” since he applied that standard to the same record in determining the overlapping elements of statutory theft.
Nonetheless, the “lesser included” nature of the breach of fiduciary duty determination also points to its irrelevancy to the Trustee Matter. In other words, to the extent that this Court draws from the Superior Court Decision certain negative inferences concerning the Debtors’ character and propensity toward illicit behavior, the most severe of those inferences will be drawn from the findings/conclusions regarding theft.4 Thus, any inferences drawn from the additional conclusion of a breach of fiduciary duty will add nothing to the Movants’ case before this Court in the Trustee Matter.
Accordingly, for the foregoing reasons this Court must decline to collaterally es-top the re-litigation of the issue of breach of fiduciary duty stemming from the facts contested before Judge Schuman in the Superior Court Litigation. However, the parties are hereby advised that the Court is not predisposed to receive any evidence rendered irrelevant or unnecessarily cumulative by the Court’s importation of Judge Schuman’s determination that the Debtors are guilty of theft.
V. CONCLUSION
For the foregoing reasons this Court will bar re-litigation, in the context of the pending Trustee Matter, of Judge Schu-man’s determination of statutory theft, together with its subsidiary findings and conclusions, as contained at Section I of the Superior Court Decision. In all further respects the Preclusion Motion shall be denied.
ORDER ON MOTION IN LIMINE
The above-captioned contested matter having come on for hearing, and the Court having considered the arguments of the parties on the Movants’ Motion in Limine (hereafter, the “Preclusion Motion”), and having this day entered its Memorandum of Decision on Motion in Limine, in accordance with which it is hereby
ORDERED that the Debtors are precluded from re-litigating, in the context of the pending Trustee Matter, Connecticut Judge Schuman’s determination of statutory theft, together with its subsidiary findings and conclusions, as contained at Section I of Judge Schuman’s Memorandum of Decision dated August 26, 2003. In all further respects the Preclusion Motion is hereby DENIED.
. C.G.S. § 52-564 provides, in pertinent part, that "[a]ny person who steals any property of another ... shall pay to the owner treble damages.”
. The Preclusion Motion does not precisely state what aspects of the Superior Court Decision are sought to be established via collateral estoppel. At its most specific, the Preclusion Motion, states that the issues sought to be precluded "include, but are not limited to, findings that the Debtors committed, inter alia, statutory theft and breach of fiduciary duty to a professional corporation.”
. Since the Superior Court Litigation did not involve self-dealing, it is unusual that Judge Schuman cites to Ostrowski’s discussion of the burden in a self-dealing case, rather than lo its general statement of the burden/standard applicable in corporate fiduciary litigation generally. Cf. 243 Conn. at 361, 703 A.2d 117.
. Although raised in the parties arguments on the Preclusion Motion, it is unnecessary for the Court to rule at this time on the question of the relevance of pre-petition conduct to the Trustee Matter. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493690/ | ORDER
RICHARD TAYLOR, Bankruptcy Judge.
On August 16, 2004, the Court held a hearing regarding a letter report submit*445ted to the Court by the Assistant United States Trustee [Trustee], Charles W. Tucker. The report was submitted at the request of the Court and as a result of a hearing held on May 13, 2004. The events leading up to the report are outlined below.
On May 13, 2004, the Court held a show cause hearing in the Jerry W. Roland and Janice Roland bankruptcy proceeding, case number 5:02-bk-75973. The purpose of the hearing was to consider the “Trustee’s Final Application for Approval of Attorney’s Fees and Expenses and Accountant’s Fees and Expenses and Notice to Creditors Thereof,” filed on January 5, 2004, by John T. Lee, chapter 7 panel trustee [Terry Lee]. Terry Lee was directed to show cause why he should not be removed as trustee pursuant to 11 U.S.C. § 324, for cause, including, but not limited to, the following:
1. a failure to distinguish between trustee’s duties and the attorney for the trustee’s duties;
2. a pattern of charging for mileage and meals as an attorney for a Fay-etteville trustee to attend Fayette-ville hearings;
3. a pattern of filing and obtaining multiple payments for the same expenses;
4. the use of a “pro rata” designation on billing entries when the time and expenses are clearly not prorated between the various cases and statements;
5. billing attorney time for traveling to hearings;
6. the appearance of inflated hours, exacerbated by duplicate billings to separate files; and
7. the appearance of billing both time and expenses for hearings that had either been removed from the docket or concluded by a previously entered order.
Terry Lee appeared in person with his attorneys, Charles T. Coleman and James J. Glover of Wright, Lindsey & Jennings LLP. Charles W. Tucker, Assistant United States Trustee, and Jim Hollis, attorney for the Trustee, also appeared on behalf of the United States Trustee.
At the conclusion of the hearing, the Court approved the remedial actions recommended by and agreed to by the United States Trustee and Terry Lee (United States Trustee’s Investigation Report dated March 25, 2004, introduced into the record as Court Exhibit 1). Additionally, the Court suggested that the United States Trustee conduct an investigation of the entire Charger, Inc. file, case number 5:99-bk-81646 [Charger]. The Court’s request was occasioned by entries in some of Terry Lee’s fee applications that warranted further investigation. Specific applications were introduced into the record at the May 13, 2004, hearing as Court Exhibits 15,17,18, 20, 24, 25 and 26.
Based on the issues raised at the May 13 hearing, the scope of the Charger investigation could have included, but not been limited to, a review of the entirety of each of Terry Lee’s applications for the following entries: (1) multiple charges for the same mileage and meals; (2) the use of a “pro rata” designation on billing entries where the time and expenses were not prorated between the various cases, including multiple Charger adversary proceedings and hearings; (3) inflated hours, exacerbated by duplicate billings within Charger statements; and (4) attorney charges for reviewing claims registers and filing simple objections to claims.
On July 8, 2004, Charles Tucker submitted a letter report of the Charger investigation to the Court. After reviewing the report, the Court ordered Charles Tucker *446to appear and fully inform the Court regarding the report and the proposed recommendations contained in the report. A hearing was held on August 16, 2004.
The Trustee’s report and the proffered exhibit [Trustee’s Exhibit 1] reflect that the Trustee restricted his investigation merely to. the seven specific billing entry dates highlighted by the Court and contained in the above referenced exhibits. It is apparent that the Trustee’s office did not conduct a full or complete audit or examination of the Charger files. Accordingly, the Court hereby approves the recommendations contained in the report, but only to the extent that the report relates to the seven dates referenced in the Trustee’s Exhibit 1.
The Trustee’s submission of the letter report, in response to the Court’s suggestion of an audit of the entire Charger file, raises concerns by the Court as to the procedures and standards used by the Trustee’s office in reviewing compensation applications submitted by panel trustees who hire themselves as counsel. These proceedings demonstrate that the United States Trustee’s examination lacks critical analysis and scrutiny. For example, obvious duplicate and even triplicate billings for items such as miles and meals were never discovered by the Trustee’s office. Other entries that should have raised red flags appear to have been ignored. When questioned, the Trustee was not able to respond unequivocally that an appropriate inquiry had been made concerning a forty hour billing day contained in a Charger fee application. Reasonable reasons may exist for such a day, but exacting inquiry seems to be lacking.
The law is clear. In particular, the bankruptcy code provides that,
[i]f the court has authorized a trustee to serve as an attorney or accountant for the estate under section 327(d) of this title, the court may allow compensation for the trustee’s services as such attorney or accountant only to the extent that the trustee performed services as attorney or accountant for the estate and not for performance of any of the trustee’s duties that are generally performed by a trustee without the assistance of an attorney or accountant for the estate.
11 U.S.C. § 328(b)(emphasis added). This requires cogent, consistent, and uniformly applied standards, with commensurate scrutiny, when reviewing bills to ensure reasonable charges for work appropriately performed. The Bankruptcy Court for the Western District of Arkansas has specifically provided that a panel trustee may not be awarded attorneys fees for reviewing the schedules or claims register, or for drafting simple objections to claims. In re NWFX, Inc., 267 B.R. 118, 228-29 (Bankr.W.D.Ark.2001). Despite this very clear mandate, the United States Trustee’s office continues to put its stamp of approval on applications requesting compensation for such services. Trustees acting as attorneys are entitled to compensation, but the charges must be proper under the code and reasonable in relation to the services performed. This case demonstrates that the United States Trustee’s vigilance is an absolute necessity.
As stated above, the United States Trustee’s letter report is approved, but only as it relates to the seven days reviewed by the Trustee and referenced in the letter report and Trustee’s Exhibit 1.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493691/ | MEMORANDUM OF DECISION
HENRY J. BOROFF, Bankruptcy Judge.
Before the Court is an “Objection to Exemption” (the “Objection”) wherein the Chapter 7 trustee objects to the above-captioned debtor’s claim of a homestead exemption under Massachusetts General Laws ch. 188 (“M.G.L.”). At issue is whether a deed of real property from a debtor and his former co-owner to the debtor as sole owner, without an express reservation of a previously recorded declaration of homestead on the property, terminates the estate of homestead pursuant to M.G.L. ch. 188, § 7.
I. FACTS AND POSITIONS OF THE PARTIES
The material facts are not in dispute. In 2000, Brian Hildebrandt (the “Debtor”) and Ann Renaud (“Renaud”), unmarried, purchased real property located at 4 Klaus Anderson Road, Southwick, Massachusetts (the “Residence”) as tenants in common. Later that year, the Debtor and Renaud recorded a Declaration of Homestead (the “Homestead”) for the Residence pursuant to M.G.L. ch. 188.1 There is no contention *537that the Homestead was acquired improperly or was otherwise invalid at the time it was recorded in 2000. Subsequently, in 2003, the Debtor and Renaud terminated the tenancy in common by jointly deeding the Residence to the Debtor as sole owner. The Debtor recorded the new deed on April 1, 2003 (the “2003 Deed”) but did not specifically reserve the Homestead.
On July 28, 2003, the Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code (the “Code”). On Schedule “C” of his petition, the Debtor listed the value of the Residence as $206,000 and claimed a $300,000 exemption in the Residence under M.G.L. ch. 188.2 The Trustee responded with the instant Objection arguing that the conveyance of the property from the tenancy in common to the Debtor solely under the 2003 Deed terminated the Homestead pursuant to M.G.L. ch. 188, § 7.3
The Debtor maintains that, despite his failure to expressly reserve it under the 2003 Deed, the Homestead remains in full force and effect. He contends that the 2003 Deed did not “convey” the Residence as that term should be understood under M.G.L. ch. 188, § 7. In support of this contention, the Debtor argues that the 2003 Deed did not convey an interest in the Residence away from the Debtor, but rather, unified title in the Debtor. In fact, the Debtor alleges that, since the 2003 Deed did not convey an interest to a third person but only to the Debtor as grantee, the Homestead was actually supplemented by that transaction in that the equity interest he gained in the Residence from Re-naud under the 2003 Deed is eligible for protection under the Homestead. The Debtor urges the Court to hew to the spirit of case law holding that chapter 188 should be “liberally construed in favor of Debtors.” Dwyer v. Cempellin, 424 Mass. 26, 29, 673 N.E.2d 863, 866 (1996) (citations omitted).
The Trustee views the effect of the 2003 Deed differently. He argues that § 7 unambiguously establishes that a conveyance by deed terminates an existing homestead absent a reservation of the homestead in the deed. Accordingly, the Trustee argues that the 2003 Deed transferring title to the *538Residence from Renaud and the Debtor as tenants in common to the Debtor as sole owner was a conveyance sufficient to terminate the Homestead under M.G.L. ch. 188, § 7.
The Trustee contends that Dwyer v. Cempellin is here inapplicable because the language of § 7 is not ambiguous. He notes that the Massachusetts Legislature presumably had the opportunity to exclude “self-transferees” (i.e., Renaud and the Debtor as tenants in common transferring sole ownership to the Debtor under the 2003 Deed) from the ambit of § 7, but they chose not to do so despite multiple amendments to chapter 188. The Trustee concludes, therefore, that there is no basis in the statute or its legislative history for the Court to overlook the plain meaning of § 7 and adopt the Debtor’s position.
III. DISCUSSION
Section 522(i) of the Code states that a debtor “shall file a list of property that the debtor claims as exempt,” and, absent a timely objection from a party in interest, “the property claimed as exempt on such list is exempt.” 11 U.S.C. § 522© (2004). Bankruptcy Rule 4003(c) assigns to the objecting party the burden of proving that such exemptions are not properly claimed. Fed. R. Bankr.P. 4003(c) (2004).
Here, the Debtor claimed an exemption in the Residence'4 under M.G.L. ch. 188. The Trustee timely filed his objection thereto arguing that the Homestead was terminated prior to the Chapter 7 filing and is no longer validly claimed. Thus, the Court is asked to determine whether an estate of homestead survives a conveyance by deed from tenants in common to one of those tenants as sole owner, absent a reservation of homestead pursuant to M.G.L. ch. 188, § 7.
It appearing that this question of state law is one of first impression in the District of Massachusetts, the Court is mindful at the outset of the In re Miller court’s instruction that a bankruptcy court
ruling on an issue of state law must rule as it believes the highest court of the state would rule. When the highest court has not addressed the issue, the Bankruptcy Court should not regard lower court rulings on the issue as dis-positive. Rather, it should attempt to predict what the highest court would do and to that end should accord proper regard to decisions of other courts of the state.
113 B.R. 98, 101 (Bankr.D.Mass.1990); see also Caron v. Farmington Nat’l Bank (In re Caron), 82 F.3d 7, 9 (1st Cir.1996) (holding that a federal court must decide an issue of first impression regarding the interpretation of a state law according to its anticipation of how the highest state court would hold).
More broadly, the Supreme Court has repeatedly cautioned that when interpreting a statute, courts must look “to the particular statutory language at issue, as well as the language and design of the statute as a whole.” See Sullivan v. Everhart, 494 U.S. 83, 89, 110 S.Ct. 960, 108 L.Ed.2d 72 (1990) (quoting K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291, 108 S.Ct. 1811, 100 L.Ed.2d 313 (1988)). Essentially, the court “must presume that a legislature says in a statute what it means and means in a statute what it says there.” Connecticut Nat’l Bank v. Germain, 503 U.S. 249, 254, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992) (citations omitted). The courts of the Commonwealth of Massachusetts have likewise specifically endorsed the view that “where the statutory language is clear, the courts must impart to the lan*539guage its plain and ordinary meaning.” Com. v. One 1987 Mercury Cougar Automobile, 413 Mass. 534, 537, 600 N.E.2d 571, 573 (1992); see Nationwide Mut. Ins. Co. v. Commissioner of Ins., 397 Mass. 416, 420, 491 N.E.2d 1061 (1986).
Applying these judicial mandates to the case at bar, the Court turns to the language of the controlling statute and is compelled to observe that the language of M.G.L. ch. 188, § 7 is clear and unambiguous:
An estate of homestead created under section two may be terminated during the lifetime of the owner by either of the following methods:® a deed conveying the property in which an estate of homestead exists, signed by the owner and owner’s spouse, if any, which does not specifically reserve said estate of homestead ....
M.G.L. ch. 188, § 7 (2003) (emphasis supplied). A review of Massachusetts case law and statutory history provides no basis for this Court to conclude that there exists any ambiguity in the language of § 7. The Court may not, therefore, impart to the wording “a deed conveying the property” any meaning beyond that plainly associated with such terminology. To do otherwise would be to alter the construction of the statute and, thereby, legislative intent. Shamban v. Masidlover, 429 Mass. 50, 51-52, 705 N.E.2d 1136, 1138-39 (1999) (holding that despite the liberal construction afforded debtors under the homestead statute the courts cannot extend homestead protections in contradiction of plain and unambiguous statutory language).
A conveyance is defined as: “[t]o transfer or deliver (something such as a right or property) to another, esp. by deed or other writing; esp., to perform an act that is intended to create one or more property interests, regardless of whether the act is actually effective to create those interests.” Black’s Law Dictionary 357 (8th ed.2004). Further, a conveyance is defined as “including every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or encumbrance.” In re Messia, 184 B.R. 176 (Bankr.D.Mass.1995). Nothing in the language of § 7 permits this Court to conclude that the term “conveyance” is used ambiguously.
Despite the Debtor’s insistence that the 2003 Deed was a “self-transfer” and not a conveyance under § 7, thereby excepting the Homestead from termination, this Court finds no basis for such an argument given the plain meaning of the statute. The 2003 Deed conveyed title in the Residence from Renaud and the Debtor as tenants in common to the Debtor as sole owner. Since no reservation of the Homestead was made as M.G.L. ch. 188, § 7 requires, the 2003 Deed terminated the Homestead. Accordingly, a homestead exemption is not available to the Debtor.
IV. CONCLUSION
Based on the foregoing, this Court sustains the Trustee’s objection. An order will issue in conformance with this Memorandum of Decision.
ORDER
For the reasons set forth in a Memorandum of Decision of even date, the objection of the Chapter 7 Trustee to the above-captioned debtor’s claim of a homestead exemption under Massachusetts General Laws ch. 188 in real estate located at 4 Klaus Anderson Road, Southwick, Massachusetts is SUSTAINED.
. M.G.L. ch. 188, § 1 states in pertinent part:
An estate of homestead to the extent of $300,000 in the land and buildings may be acquired pursuant to this chapter by an owner or owners of a home ... who occupy *537or intend to occupy said home as principal residence.
For the purposes of this chapter, an owner of a home shall include a sole owner, joint tenant, tenant by the entirety or tenant in common ....
M.G.L. ch. 188, § 1 (2000). While § 1 sets forth who may make a declaration of homestead and the extent of the exemption thereunder, M.G.L. ch. 188, § 2 establishes the manner in which a homestead exemption is actually acquired under chapter 188. Section 2 states that property “designed to be held as such shall be set forth in the deed of conveyance by which the property is acquired; or, after the title has been acquired, such design may be declared by a writing duly signed, sealed and acknowledged and recorded in the registry of deeds ....” M.G.L. ch. 188, § 2 (2000).
. A debtor is permitted to exempt a limited amount of property from the bankruptcy estate pursuant to 11 U.S.C. § 522(b). In Massachusetts, a debtor may choose between the exemptions listed under § 522(d) and those available under state law. Pursuant to 11 U.S.C. § 522(b)(2)(A), the Debtor selected the exemptions available under Massachusetts law.
. M.G.L. ch. 188, § 7 states in pertinent part:
An estate of homestead created under section two may be terminated during the lifetime of the owner by either of the following methods:(l) a deed conveying the property in which an estate of homestead exists, signed by the owner and owner's spouse, if any, which does not specifically reserve said estate of homestead ....
M.G.L. ch. 188, § 7 (2003). The parties hinge their arguments regarding the validity of the Debtor's right to the Homestead exemption on competing views of § 7.
. See supra note 2. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493692/ | MICHAEL J. KAPLAN, Bankruptcy Judge.
This case squarely presents an issue that the Second Circuit in In re Pond, 252 F.3d 122 (2nd Cir.2001), declined to address when it explicitly (but without guidance) rejected the advice given by one Panel of the 11th Circuit in In re Dickerson, 222 F.3d 924 (11th Cir.2000).
In the Dickerson case, the Panel stated that if it were not constrained by the 11th Circuit’s “prior panel” rule (of horizontal stare decisis), it would reject the notion that a wholly unsecured mortgage may be avoided despite Nobelman. The Panel said “... [Providing ‘antimodification’ protection to mortgagees where the value of the mortgage property exceeds the senior mortgagee’s claim by at least one cent ... but denying that same protection to junior mortgagees who lack that penny of equity, places too much weight upon the valuation process. As we have noted ‘[vjaluation outside the actual market place is inherently inexact ...’ Given the unavoidable imprecision and uncertainty of the valuation process, we think that choosing to draw a bright line at this point is akin to attempting to draw a bright line in the fog. ” [Emphasis mine.]
The Second Circuit in Pond explicitly noted that dictum in Dickerson when it chose to align this Circuit with the prior ruling by the Eleventh Circuit, and with other authorities.
Here now is a case in which the Debtor’s appraiser competently appraised the home at $113,000, and the Second Mortgagee’s appraiser just-as-competently appraised the home at $125,000. The First Mortgage lien is $114,118. The Second Mortgage payoff is approximately $22,200.
The Debtor's Plan will pay 5% to unsecured creditors. Consequently, the Second Mortgagee will receive $22,000 plus a “present value additive” if the Court finds the home to be worth at least $1,118.01 more than the Debtor’s $113,000 appraisal, but will receive only $1100 otherwise — a difference of more than $20,900.
For all but one other purpose under the Bankruptcy Code, a decision of the Court clearly would never be found to be an abuse of discretion no matter where it set the value along the $113,000 — $125,000 continuum. The amount in controversy would be $12,000; an amount that is less than 10% of the fair market value. In effect there would be a 10% “margin of error.” (The other purpose for which a valuation might not permit a “margin of error” is 11 U.S.C. § llll(b)(l)(B)(i).)
Here, however, the amount in controversy is more than $20,900 and is decided by whether the Court fixes the value at somewhere between $113,000 and $114,118, on the one hand, or at some value above that, on the other hand.
The $1,118 “window of opportunity” for the Debtor here is less than 1% of her appraised value. The Court is given almost no “margin of error.”
As is often the case when appraisers disagree over the value of a single family home, the dispute is with regard to the “comparables.” The Debtor here bought her ranch-style home for $51,900 in 1985. She paid about $25,000 in 1990 to add a *553second story containing three small bedrooms and a bath. The second story rises only over the center portion of the first floor. The three added bedrooms plus bath were in an added space of 27' by 23'. After providing for a landing, the four bedrooms averaged about 9' by 12'. These might be considered big rooms in Manhattan, but not in Western New York.
It was no longer a ranch-style home. It is agreed that there are no direct compara-bles — no ranches with a limited two-story addition have been sold recently in any similar neighborhood. The Debtor’s appraiser considered and rejected the notion of using two-story colonials as “comps” because the three bedrooms that were added upstairs made a total of six bedrooms and this was by no means comparable to a “six bedroom colonial.” Rather, this was a ranch with “an addition of [what he called] one bedroom and ‘ two dens’.” So he used split-level homes for two of his three comps.
The Mortgagee’s appraiser considered and rejected “splits” as comps. Splits have below-ground-level square footage and/or steps both up and down from the front entrance. In his view, center-entry colonials are the most comparable.
Both positions are, in this writer’s substantial experience in these matters, defensible.
This fact has profound meaning. It means that either the Debtor’s appraisal is the “best evidence” of value or the Lender’s appraisal is the “best evidence” of value. The Court cannot simply split the difference as it might in so many other contexts. To do so would be to say “The Debtor loses,” on an arbitrary basis.
And so the question for the Court is whether the Debtor has carried her burden of proof. The burden is hers because In re Pond simply holds that a Chapter 13 plan may modify a wholly unsecured claim under a Plan. A debtor always has the burden of convincing the Court of the various requisites to confirmation of a Chapter 13 Plan: feasibility, good faith, compliance with the applicable provisions of the Code, etc.
What is the measure of proof of value to overcome Nobelman, under Pond? Is it fair preponderance,” “clear and convincing,” or some other standard?
At the close of the evidentiary hearing on June 29, 2004, the Court ordered briefs on this issue. It is now agreed between the parties that1 “fair preponderance” is the applicable standard. (See Southard v. Curley, 134 N.Y. 148, 31 N.E. 330 (1892); Werzberger v. Union Hill Constr. Corp., 30 N.Y.2d 932, 287 N.E.2d 380, 335 N.Y.S.2d 686 (1972).) Based on that standard, the Debtor’s Motion will be sustained. In my view it is more probable than not that the Debtor’s Appraiser’s “comparables” are the better measure of value, and that the use of center-entry colonials as the “comps” in the Lender’s appraisal yields an incorrect value.
It is well-known locally that a ranch-style home is more expensive to build per square foot of living space than other styles. For example, a 1600 square foot ranch has a roof that covers 1600 square feet. But a 1600 square foot colonial has a roof that covers only 800 square feet. The same is true as to the foundation and its excavation, backfill, grading and landscaping. Plumbing and heating runs are longer in a ranch than in a home in which bathrooms are directly above a kitchen or above another bathroom, and where bedrooms often are directly above other heated space.
*554These same factors often make ranches more expensive to maintain, to heat, and to improve. Consequently, the re-sale market for ranches is very dependent on the location. Is it a neighborhood favored by seniors, who often desire a single-floor layout? Is it a working-class neighborhood in which higher maintenance costs might depress the value of a ranch? And so forth.
The fact that even the Lender’s appraiser chose not to use ranches as comps suggests either than ranches are not well-valued in the neighborhood in question, or that the “addition” here reduced, rather than enhanced, the resale value of the home. Where a ranch would not be favored, a ranch with the added costs of an irregular roofline and its added flashing (where leaks can originate), a higher roof segment on which gutter maintenance is not so simple as on a ranch, etc., may be even less favored. It is a house with the disadvantages of ranches, and few of the benefits of two-story homes.
If the ranch attributes would have been highly-valued in the neighborhood, on the other hand, this particular addition apparently more than negated that value, or else the lender’s appraiser would have used ranches as comps. Perhaps this addition’s stairs or structural supports, or utility runs, etc., interfered with the traffic-flow of the ranch-style first floor.
In any event, because neither appraisal used ranches (or capes, raised ranches, garrisons, or other styles) as comps, the question for the Court is whether splits or colonials were more likely to produce the correct value.
It is the view of this writer that splits are more likely to produce the true value of the dwelling at issue.
Here in Western New York, the most saleable suburban home has for years been the four-bedroom, two and a half bath colonial. That does not make it the most valuable; merely the home with the largest market. And there are a great deal of such homes.
By choosing center-entry colonials only as comps (and having rejected the use of ranches) the Debtor’s appraiser has opined that this house tends toward the most desirable of Western New York properties. Splits, on the other hand, have good and bad. They have the multilevel roofline (harder and more expensive to maintain), but few steps to climb. Some splits have below-grade living space (the slab floor is cold, and the view is of the backside of the foundation plantings), but the upper-level bath is often just a short vertical expansion of the kitchen plumbing (or of a first floor bathroom plumbing). Other splits put the garage under the bedrooms (making the bedrooms harder to heat), but fit on a smaller lot, and so put more value into the structure than into the land. There are many other trade-offs.
In sum, I agree with the Debtor’s appraiser’s choice of splits as comps, rather than the choice of center-entry colonials. And since the parties agree that “fair preponderance” is the standard, the Debtor has carried her burden.
Debtor’s counsel may submit the usual proposed Order under Pond, for recordation in the Court Clerk’s Office. The second mortgage will be void if the Debtor completes her Plan.
SO ORDERED.
. Because of the agreement, the Court expresses no opinion on the question. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493693/ | MEMORANDUM AND ORDER OF COURT
M. BRUCE MCCULLOUGH, Bankruptcy Judge.
AND NOW, this 24th day of August, 2004, upon consideration of (a) the adversary complaint filed by Robert J. Lowther, Jr. (hereafter “Lowther”), wherein Lowther (i) objects to the Chapter 7 discharge of Donald Insley, the instant Debtor (hereafter “the Debtor”), pursuant to 11 U.S.C. § 727(a)(2) — (5) & (7) (Count 1), (ii) seeks to have his pre-petition claims against the Debtor declared nondischargeable pursuant to 11 U.S.C. § 523(a)(4) (Count 2), and (iii) objects to the Debtor’s claim for an exemption of the Debtor’s personal residence (Count 3), (b) the Debtor’s motion to dismiss Lowther’s complaint in its entirety pursuant to Fed.R.Bankr.P. 7012(b) and Fed.R.Civ.P. 12(b)(6), which dismissal motion the Debtor bases upon, inter alia, Lowther’s alleged lack of standing to pursue the three causes of action that are set forth in his complaint, and (c) all of the exhibits attached to the aforesaid complaint and dismissal motion, as well as those that were handed up as exhibits at the hearing regarding such dismissal motion;
and after notice and a hearing on the Debtor’s motion to dismiss held on August 16, 2004,
it is hereby ORDERED, ADJUDGED, AND DECREED that:
1. The Debtor’s motion to dismiss shall henceforth be treated as one for SUMMARY JUDGMENT and disposed of as provided in Fed.R.Civ.P. 56 (made applicable herein via Fed. R.Bankr.P. 7056) because (a) such dismissal motion was brought under Fed.R.Civ.P. 12(b)(6), (b) matters outside of Lowther’s complaint were presented to, and were accepted and considered by, the Court in ruling upon such dismissal motion, namely the numerous aforementioned exhibits, and (c) such a motion to dismiss, when coupled with the introduction of evidence outside of a pleading, must be dealt with as if it is one for summary judgment, see Fed. R.Civ.P. 12(b), 28 U.S.C.A. (West 1992) (last sentence thereof). For the sake of convenience, the Court shall nevertheless continue throughout the instant memorandum and order to refer to the Debtor’s dismissal motion as such notwithstanding that it must be treated as one for summary judgment.
2. Lowther possesses standing to pursue each of the three causes of action presented in his complaint, that is his objection to the Debtor’s discharge, his nondischargeability cause of action under § 523(a)(4), and his objection to an exemption of the Debtor. Accordingly, the Debtor’s motion to dismiss cannot be granted with respect to any of the three causes of action brought by Lowther on the ground that Lowther lacks such standing. The Debtor contends that Lowther lacks such standing on the ground that, as of the bar date and the dates upon which Lowther sought to extend, and was granted an extension of, such bar date for bringing the three causes of action in question (hereafter col*670lectively referred to as “the Bar Date”), which three dates are respectively March 8, 2004,1 February 5, 2004, and March 16, 2004, he (a) did not then possess an allowed claim against the Debtor, and (b) consequently was not then a creditor of the Debtor. In arguing as the Debtor does, the Debtor relies upon cases that stand for the proposition that a creditor cannot object to discharge under § 727 or object to an exemption of a debtor if such creditor’s claim has been disallowed. The Court rejects the Debtor’s position and rules that Lowther possesses relevant standing because the Court finds, in turn, that Lowther possessed, as of, the Bar Date, several contingent claims for contribution against the Debtor, which contingent contribution claims (a) pertinently had not been disallowed as of the Bar Date, and (b) pertinently also cannot be disallowed in the future, indeed are henceforth allowed and, pursuant to 11 U.S.C. § 502(e)(2), are now allowed as of — i.e., relate back to— the date upon which the instant bankruptcy case was commenced, given that such contribution claims have, since the Bar Date, become fixed by virtue of Lowther’s payment of partnership debts for which both he and the Debtor were personally liable. In ruling as the Court does, the Court pertinently distinguishes between the instant matter and the cases upon which the Debtor relies, that is those that ascertained a lack of standing on behalf of the plaintiffs that brought actions against the debtors therein, by pointing out that, in contrast to the plaintiffs in such latter cases, Lowther possessed a claim against the Debtor that had not been, and now will never be, disallowed as of the Bar Date. As a corollary, the Court finds to be irrelevant to the issue of standing the fact that, as of the Bar Date and absent the relation back mechanism afforded by § 502(e)(2), Lowther’s contingent contribution claims had not yet become fixed and consequently allowed; instead, what is relevant is that such claims had never been disallowed prior to the Bar Date. Finally, because the Debtor concedes that Lowther was personally liable on, and thus possessed a contingent contribution claim against the Debtor for, certain of the partnership debts that Lowther ultimately paid subsequent to the Bar Date, namely those partnership debts that Lowther satisfied on August 6, 2004, and August 12, 2004, it matters not whether Lowther was also personally liable on, and thus also possessed a contingent contribution claim against the Debtor for, that partnership debt that Lowther satisfied on March 16, 2004. However, and as an aside, the Court concludes that Lowther was personally liable on that partnership debt that Lowther satisfied on March 16, 2004 (hereafter “the Satisfied Debt”), which conclusion the Court arrives at by virtue of the fact that Lowther was a partner in the partnership that incurred the Satisfied Debt (hereafter “Insmer Real Estate”) when *671the Satisfied Debt was incurred by Insmer Real Estate — the latter finding is compelled because Lowther became a partner in In-smer Real Estate on February 4, 1998, see Lowther Hearing Ex. 7, which date precedes the guarantee by Insmer Real Estate on May 18, 1999, of, inter alia, the Satisfied Debt, see Lowther Hearing Ex. 8 & Insley Hearing Ex. 8 (General Guaranty and Suretyship Agreement, dat. May 18, 1999, at ¶ II— i.e., guarantee of “all present and future obligations ... of Borrower to Bank”).
8. The releases contained in the two Settlement Agreements between, among others, the Debtor and Lowther, that is those agreements dated May 16, 2001, and September 20, 2001, do not prevent Lowther from possessing, as of the Bar Date, the contingent claims for contribution against the Debtor that are referred to by the Court in the preceding paragraph of the instant memorandum and order. The Court so rules on the basis of particular language contained in the Settlement Agreements that preserves such claims for contribution in favor of Lowther, see May 16, 2001 Settlement Agmt. ¶ 22(b)(i) (last sentence thereof) & September 20, 2001 Settlement Agmt. ¶ 8(d) — Settlement Agmts. are attached as Ex’s. G-l & G-2 to the Debtor’s Mot. to Dismiss. Consequently, such settlement agreements do not operate to divest Lowther of standing to bring his three causes of action set forth in his complaint.
4. The Debtor’s motion to dismiss, in particular, Lowther’s ob-nection to the Debtor’s discharge is generally DENIED WITHOUT PREJUDICE. The Court so rules because (a) Lowther possesses standing to so object, and (b) genuine disputed factual issues abound with respect to much of the substance of Lowther’s discharge objection. However, the Court GRANTS such dismissal motion with respect to, and thus overrules at this time, that portion of Lowther’s discharge objection that is predicated upon an alleged fraudulent transfer of funds to the Debtor from Allegheny Metalworking Corporation (hereafter “Allegheny”), which entity is an insider of the Debtor that itself also filed for bankruptcy on November 25, 2002. The Court rules as it does because (a) Lowther contends that such transfer from Allegheny to the Debtor supports a denial of the Debtor’s discharge pursuant to § 727(a)(7) via § 727(a)(2)(A), that is the Debtor’s discharge should be denied pursuant to § 727(a)(7) since he allegedly violated § 727(a)(2)(A) on behalf of Allegheny, (b) only transfers of property that occur within one year of a bankruptcy petition filing may serve to support a denial of discharge under § 727(a)(2)(A), see 11 U.S.C.A. § 727(a)(2)(A) (West 1993), and (c) Lowther concedes, indeed alleges in his complaint, that any funds that Allegheny may have transferred to the Debtor were so transferred by at least June 26, 2001, which date is more than one year prior to Allegheny’s November 25, 2002 petition filing.2
*6725. The Debtor’s motion to dismiss, in particular, Lowther’s nondischargeability cause of action under § 523(a)(4) and, in particular, under that prong of § 523(a)(4) for fraud or defalcation while acting in a fiduciary capacity, is GRANTED. The Court so rules because (a) the actionable fiduciary capacity under which Lowther alleges the Debtor acted when committing fraud or defalcation was as a partner of Lowther, (b) “unless there exists some additional fact [such as, for instance, the existence of an express trust], section 523(a)(4), as it relates to a debtor acting in a fiduciary capacity, does not generally apply to frauds of ... partners,” 4 Collier on Bankruptcy, ¶ 523.10[l][c] at 523-73 (Bender 2004) (citing, inter alia, In re Spec-tor, 133 B.R. 733 (Bankr.E.D.Pa.1991)), (c) there does not exist, indeed there was not even pled, in the instant matter an express trust or, for that matter, any other such additional fact so as to make actionable under § 523(a)(4) the partnership capacity of the Debtor, and (d) the Debtor, with respect to Lowther, thus did not act in a “fiduciary capacity” within the meaning of such phrase for purposes of § 523(a)(4) by mere virtue of the Debtor’s status as a partner of Lowther.
6. The Debtor’s motion to dismiss, in particular, Lowther’s objection to the Debtor’s claim for an exemption of the Debtor’s personal residence is GRANTED. The Court so rules because that the Debtor, as Lowther alleges, may have received a fraudulent conveyance of funds from Allegheny that then provided the Debtor with the financial wherewithal to purchase some portion of his personal residence does not, by itself, constitute a valid objection to the Debtor’s exemption of such personal residence. However, and of course, if the bankruptcy trustee for the Allegheny bankruptcy estate chooses to pursue, and is then successful in pursuing, an avoidance action against the Debtor for such funds in question under 11 U.S.C. § 544(b)(1), then the Debtor’s exemption of the portion of his personal residence that may have been purchased with such funds would ultimately not stand by virtue of the imposition of a constructive trust.
IN SUMMARY, (a) the Debtor’s motion to dismiss shall be treated as one for SUMMARY JUDGMENT, (b) such motion, with respect to Lowther’s objection to discharge (Count 1), is GRANTED in part and DENIED in part, and (c) such motion is GRANTED with respect to Lowther’s § 523(a)(4) nondischargeability cause of action (Count 2) and his objection to an exemption of the Debtor (Count 3).
. The bar date for objecting to exemptions, which differs from the bar dates for objecting to discharge and bringing a § 523(a)(4) non-dischargeability action, was February 6, 2004, in the instant bankruptcy case.
. The Court notes that § 727(a)(7) also contains a one-year lookback period itself, which *672one-year lookback period, of course, also could not be satisfied by the alleged transfer of funds from Allegheny to the Debtor on or prior to June 26, 2001. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493695/ | MEMORANDUM DECISION GRANTING IN PART CHAPTER 11 TRUSTEE’S MOTION FOR SUMMARY JUDGMENT ON FIRST COUNT OF COMPLAINT AND DENYING MATRIX CAPITAL BANK’S MOTION FOR SUMMARY JUDGMENT
ELIZABETH S. STONG, Bankruptcy Judge.
This adversary proceeding was commenced by the filing of a complaint (the “Complaint”) by Alan M. Jacobs as Chapter 11 Trustee (the “Trustee”) of the estates of AppOnline.com, Inc., Island Mortgage Network, Inc., and Action Abstract, Inc. (“AppOnline,” “Island Mortgage,” and “Action Abstract” or the “Debtors”) to avoid and recover prepetition transfers totaling $6,166,396 (the “June Repayments,” as defined below) made by the Debtors to Matrix Capital Bank (“Matrix”), on grounds that the June Repayments are preferential or fraudulent transfers.
*267The Trustee moves for summary judgment on the First Count, which seeks to recover the June Repayments as avoidable preferential transfers.1 Matrix moves for summary judgment on its counterclaim for a declaration that the June Repayments are not property of the Debtors’ estates and dismissing the Trustee’s preference and fraudulent conveyance claims or, alternatively, a declaration that the June Repayments are protected from avoidance under the ordinary course of business exception set forth in 11 U.S.C. § 547(c)(2).
The matter came before the Court on May 13, 2004, at which counsel for the Trustee and Matrix appeared and were heard. After consideration of the submissions, the arguments of counsel, and the record before the Court, for the reasons set forth below, the Trustee’s Motion for Summary Judgment is granted in part, and Matrix’s Motion for Summary Judgment is denied.
JURISDICTION
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(F). The following constitutes the Court’s findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure, as made applicable herein by Bankruptcy Rule 7052.
FACTUAL BACKGROUND
A. Procedural History
On July 19, 2000 (the “Petition Date”), AppOnline and Island Mortgage filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code che “Bankruptcy Code”). On July 20, 2000, certain of Island Mortgage’s creditors (the “Petitioning Creditors”) moved for an order appointing a trustee for these Chapter 11 cases under 11 U.S.C. §§ 1104(a)(1) and (2). By order dated July 28, 2000, the United States Trustee appointed the Trustee as Chapter 11 trustee of AppOnline and Island Mortgage. On July 28, 2000, the Petitioning Creditors filed an involuntary Chapter 11 petition in the name of Action Abstract, and on August 22, 2000, the Court entered an order for relief under Chapter 11 in respect of Action Abstract. By order dated September 19, 2000, the United States Trustee appointed the Trustee as Chapter 11 trustee of Action Abstract.
On July 3, 2001, the Trustee moved for an order substantively consolidating the estates of the Debtors for all purposes, nunc pro tunc to July 19, 2000, on grounds that prior to the Petition Date, the Debtors’ businesses were operated as a single consolidated entity and théir assets were hopelessly commingled. On September 7, 2001, the Court entered an order substantively consolidating the Debtors’ estates.
B. The Debtors ’ Business
Prior to the Petition Date, AppOnline was a holding company that, through its subsidiaries, operated a mortgage banking business. Island Mortgage, a wholly-owned subsidiary of AppOnline, was a licensed mortgage banker which originated and sold residential mortgage loans. Declaration of Regina Jones dated February 23, 2004 (“Jones Deck”), ¶ 2. Island Mortgage obtained consumer applications for residential mortgage loans through its *268website and a network of retail branches. Jones Decl. ¶ 3. The majority of these mortgage loans were funded by several warehouse banks with which Island Mortgage maintained financing agreements. Id.
Island Mortgage arranged for funding of a mortgage loan from a warehouse bank by sending the warehouse bank a package of mortgage-related documents a day or two before the scheduled closing. Jones Decl. ¶ 4. If the mortgage loan met the requirements of the warehouse bank, the bank transferred ninety-five to one hundred percent of the principal amount of the mortgage loan to the Debtors. Id. If the warehouse bank delivered less than the full amount, the difference, referred to as the “haircut,” was advanced by the Debtors. Declaration of Cindy Eisele dated February 21, 2004 (“Eisele Deck”), ¶5. After receiving these funds, the Debtors forwarded documents executed by Island Mortgage and a check in the amount of the mortgage loan to the closing agent. Jones Deck ¶ 6.
If the mortgage loan closed, then the closing agent transmitted the original promissory note executed by the borrower to the warehouse bank to hold as collateral. Id. Island Mortgage also obtained a commitment from a permanent investor to purchase the mortgage from it. Jones Deck ¶ 7. After the mortgage loan closed, if the permanent investor decided to purchase the mortgage, it paid the purchase price to the warehouse bank. Id. The warehouse bank then deducted the principal balance of the loan it made to Island Mortgage, together with interest, fees and charges, and deposited the balance in an account in the name of Island Mortgage. Id.
If the mortgage loan did not close, the Debtors returned the funds advanced by the warehouse bank, together with interest, fees, and charges on the advance. Jones Deck ¶ 8. The number of days that the funds remained at the Debtors varied, depending on, among other things, the requirements of the warehouse bank that made the advance and the thoroughness with which the warehouse bank monitored those requirements. Id.
Action Abstract was a settlement agent and title abstract company for mortgage transactions originated by Island Mortgage. Declaration of Cindy Eisele in Connection with Trustee’s Motion for an Order Pursuant to Section 105 of the Bankruptcy Code Authorizing Substantive Consolidation of the Debtors’ Estates dated June 13, 2001 (“Eisele 2001 Deck”), ¶ 14. Action Abstract received funds from warehouse banks and arranged for those funds to be delivered at the closing. It was owned by a director of AppOnline. Eisele 2001 Deck ¶¶ 14,15.
Action Abstract’s bank accounts, including its operating account and the principal settlement account used to receive funds from warehouse lenders, were maintained at State Bank of Long Island (“State Bank”) and were part of Island Mortgage’s group account arrangement. Eisele 2001 Deck ¶ 15. Island Mortgage personnel had access to and authority over these accounts and routinely transferred funds from Action Abstract accounts to accounts of other Debtors without regard to corporate or legal formalities, based upon the cash needs of the particular Debtor. Ei-sele 2001 Deck ¶¶ 13,15.
Beginning in mid-1999, Island Mortgage directed its warehouse banks to deliver funds to an Action Abstract account at State Bank (the “Settlement Account”). Jones Deck ¶ 5. On a regular basis, Island Mortgage employees transferred funds delivered to the Settlement Account by warehouse banks to disbursement accounts to fund mortgage closings. Eisele 2001 Deck *269¶ 16. Island Mortgage employees also used Settlement Account funds to pay off earlier warehouse advances and to pay operating expenses and cover shortfalls in the Debtors’ other accounts. Id.
Almost from the outset of their operations, the Debtors were not able to fund the “haircut” or pay their operating and other expenses. Eisele 2001 Decl. ¶¶ 16, 17; Supplemental Declaration of Cindy Eisele dated April 1, 2004 (“Eisele Supp. Decl.”), ¶ 3. From 1996 or earlier and continuing through June 30, 2000, when the New York State Banking Department suspended the Debtors’ mortgage banking operations, the Debtors financed their operations through a pattern of multiple borrowings from warehouse banks. Eisele Decl. ¶ 7. The Trustee characterizes the Debtors’ borrowings as a variant of a traditional “Ponzi” scheme. Trustee’s S.J. Br. at 7.
The Debtors adopted a practice of regularly representing to their warehouse banks that specific mortgage loans were ready to close when, in fact, many of those loans were not ready to close. Eisele Decl. ¶ 6. Based on the Debtors’ representations, the warehouse banks advanced funds to the Debtors to fund these mortgage loans. The Debtors used the funds for many purposes, including to fund the closing of other mortgage loans, to repay amounts advanced in connection with other mortgage loans, and to pay the operating expenses of the Debtors and related companies. Id. When the time came to repay the advance by the warehouse bank, the Debtors represented to another warehouse lender that a separate loan was ready to close and used the resulting advance to repay the first warehouse advance. Id. By the time the Debtors’ mortgage banking operations were closed down by regulators in June 2000, more than $60 million in warehouse advances was missing. Declaration of Alan M. Jacobs dated February 23, 2004 (“Jacobs Decl.”), ¶ 8.
C. The Debtors’ Relationship with Matrix
Matrix, a federally chartered bank centered in Las Cruces, New Mexico, buys and sells residential mortgages. Affidavit of Patrick Howard, dated February 12, 2004 (“Howard Aff.”) ¶¶ 3-4. On January 12, 2000, Island Mortgage contracted with Matrix to provide warehouse funding2 for the Debtors’ mortgage banking business. Jones Decl. ¶ 9. The parties executed a Mortgage Purchase/Repurchase Agreement (the “Agreement”) which established a $25 million purchase/repurchase line under which Matrix agreed to purchase mortgage loans from Island Mortgage, *270within five days of closing, up to a total outstanding amount of $25 million, subject to Island Mortgage’s obligation to repurchase the mortgage within the following forty-five days. Jones Decl. Exh. A (Agreement).
The Agreement did not address what happened if the underlying mortgage did not close. Id. Over the six months that Matrix did business with Island Mortgage, the underlying mortgage did not close in approximately two-thirds of the transactions in which Matrix advanced funds to Island Mortgage. Jones Decl. ¶ 9; Declaration of Francine Azzariti dated February 23, 2004 (“Azzariti Decl.”), ¶ 2. The Agreement provided for Matrix to receive a “premium” equal to the then-prevailing prime rate of interest plus one percent on the total amount advanced for the period that it was outstanding. Jones Decl. ¶ 9, Exh. A (Agreement) ¶ 5.01. Matrix collected these amounts by debiting a bank account held in the name of Island Mortgage at Matrix (the “Concentration Account”). Id. Matrix collected over $375,000 in premiums and $19,450 in fees on transactions in which the underlying mortgage did not close. Azzariti Decl. ¶ 2.
D. The Alleged Preferential Transfers
Between May 26 and June 8, 2000, Island Mortgage represented to Matrix that fifty-three loans were ready to close. Jones Decl. ¶ 11, Exh. B (payment/repayment data). Based upon these representations and documentation submitted by Island Mortgage, Matrix wired a total of $6,166,396 to the Debtors to fund the mortgages (the “June Advances”). Id. More specifically, between May 26 and June 1, 2000, Matrix wired $1,765,025 to the Debtors; on or about June 2, 2000, Matrix wired $1,157,067 to the Debtors; on or about June 6, 2000, Matrix wired $1,778,105 to the Debtors; on or about June 7, 2000, Matrix wired $985,221 to the Debtors; and on or about June 8, 2000, Matrix wired $480,978 to the Debtors. Id. Following Island Mortgage’s instructions, these amounts were directed to the Settlement Account. Jones Decl. ¶ 11.
None of the fifty-three mortgage loans associated with the June Advances closed. Jones Decl. ¶¶ 12-17. The June Advances were used by the Debtors to fund other mortgage loans, to repay advances made by other warehouse lenders relating to different mortgage loans, and to pay the Debtors’ operating expenses. Eisele Decl. ¶ 6.
On June 6, 2000, Matrix terminated the Agreement, effective June 16, 2000. Between June 8 and June 23, 2000, the Debtors wired a total of $6,166,396 to Matrix to repay the amounts that Matrix advanced to fund the fifty-three mortgages that did not close. Specifically, on June 8, 2000, the Debtors wired $1,561,595 to Matrix (the “June 8 Repayment”); on June 14, 2000, the Debtors wired $481,466 to Matrix (the “June 14 Repayment”); on June 15, 2000, the Debtors wired $1,046,277 to Matrix (the “June 15 Repayment”); on June 16, 2000, the Debtors wired $490,914 to Matrix (the “June 16 Repayment”); on June 20, 2000, the Debtors wired $402,518 to Matrix (the “June 20 Repayment”); and on June 23, 2000, the Debtors wired $2,183,616 to Matrix (the “June 23 Repayment” and collectively, the “June Repayments”). Jones Decl. ¶¶ 12-13, Exh. B (payment/repayment data).
DISCUSSION
A. The Standard for Summary Judgment
The Trustee and Matrix each seek summary judgment on some or all of their claims. Federal Rule of Civil Procedure 56, made applicable to this adver*271sary proceeding by Bankruptcy Rule 7056, provides that summary judgment is appropriate when “ ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits ... show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.’ ” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c)); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). “A fact is material only if it affects the result of the proceeding and a fact is in dispute only when the opposing party submits evidence such that a trial would be required to resolve the differences.” Hassett v. Altai Inc. (In re CIS Corp.), 214 B.R. 108, 118 (Bankr.S.D.N.Y.1997).
The moving party has the burden of demonstrating the absence of any genuine issue of material fact, and all of the inferences to be drawn from the underlying facts must be viewed by the Court in the light most favorable to the party opposing the motion. See Anderson, 477 U.S. at 249, 106 S.Ct. 2505. To defeat a motion for summary judgment, the nonmoving party “must do more than simply show that there is some metaphysical doubt as to the material facts.” Matsushita, 475 U.S. at 586, 106 S.Ct. 1348. Rather, it must present “significant probative evidence” that a genuine issue of fact exists. Anderson, 477 U.S. at 249, 106 S.Ct. 2505. “Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party,” there is no genuine issue of fact for trial and summary judgment is appropriate. Matsushita, 475 U.S. at 587, 106 S.Ct. 1348. See Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2000), cert. denied, — U.S. —, 124 S.Ct. 53, 157 L.Ed.2d 24 (2003).
B. The Summary Judgment Motions on the First Count of the Complaint
One of the fundamental principles of bankruptcy law is the equality of distribution of the debtor’s property to creditors who are similarly situated. As the Supreme Court observed:
Equality of distribution among creditors is a central policy of the Bankruptcy Code. According to that policy, creditors of equal priority should receive pro rata shares of the debtor’s property. Section 547(b) furthers this policy by permitting a trustee in bankruptcy to avoid certain preferential payments made before the debtor files for bankruptcy. This mechanism prevents the debtor from favoring one creditor over others by transferring property shortly before filing for bankruptcy.
Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) (citations omitted). The intent of the parties to a transfer is not determinative. Rather, “[b]e-cause a ‘preference is an infraction of the rule of equal distribution among all creditors,’ ... neither the intent nor motive of the parties is relevant in consideration of an alleged preference under § 547(b).” Corporate Food Mgmt., Inc. v. Suffolk Cmty. Coll. (In re Corporate Food Mgmt., Inc.), 223 B.R. 635, 641 (Bankr.E.D.N.Y.1998) (quoting Cullen Center Bank & Trust v. Hensley (In re Criswell), 102 F.3d 1411, 1414 (5th Cir.1997)).
The Trustee claims that as a matter of law and undisputed fact, the June Repayments satisfy each of the elements of a preferential transfer. These elements are set forth in Section 547(b) of the Bankruptcy Code as follows:
*272[T]he trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. §§ 647(b)(l)-(5).
“The Trustee bears the burden of proving each of these elements by a preponderance of the evidence.” Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 34 (2d Cir.1996) (citations omitted). If the Trustee “puts forth sufficient proof to establish a prima facie preference, the burden shifts and the creditor is given the opportunity to establish by a preponderance of the evidence that one of the enumerated exceptions in 11 U.S.C. § 547(c) applies.” Child World, Inc. v. Service Merck. Co. (In re Child World, Inc.), 173 B.R. 473, 476 (Bankr.S.D.N.Y.1994) (citations omitted). The Court considers each of these elements in turn.
Were the June Repayments transfers of interests of the Debtors in property?
The Court first considers whether the June Repayments were each a “transfer of an interest of the debtor in property.” 11 U.S.C. § 547(b). See Begier, 496 U.S. at 58, 110 S.Ct. 2258 (avoidance power is limited to transfers of “property of the debtor”). As one court explained, “[a] preference action is designed to recover property that would have been available for distribution to the creditor body but for the transfer. Conversely, property that would not have been property of the estate cannot be recovered.” Regency Holdings (Cayman), Inc. v. Microcap Fund, Inc. (In re Regency Holdings (Cayman), Inc.), 216 B.R. 371, 375 (Bankr.S.D.N.Y.1998) (citation omitted).
The Bankruptcy Code defines “transfer” as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, ....” 11 U.S.C. § 101(54). But the Bankruptcy Code does not define the phrase “interest of the debtor in property.” As the Fifth Circuit observed:
Other courts that have addressed this dilemma, including the United States Supreme Court, have concluded that “the term ‘interest of the debtor in property’ under § 547(b) is ... equivalent to the term ‘property of the estate’ under § 541 and therefore encompasses ‘all legal or equitable interests of the debtor in property as of the commencement of the case.’ ”
In re Corporate Food Mgmt., Inc., 223 B.R. at 642 (quoting Cullen Center Bank & Trust v. Hensley (In re Criswell), 102 F.3d 1411, 1415 (5th Cir.1997)). See Begier, 496 U.S. at 58-59, 110 S.Ct. 2258 (“For guidance, then, we must turn to § 541, which delineates the scope of ‘property of the estate’ and serves as the post-petition analog to § 547(b)’s ‘property of the debtor’ ”).
“Property of the estate” is described in Section 541 of the Bankruptcy Code as follows:
*273(a) The commencement of a case ... creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) ... [A]ll legal and equitable interests of the debtor in property as of the commencement of the case.
(d) Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest ... becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.
11 U.S.C. §§ 541(a)(1), (d).
The Trustee argues that the June Repayments were “transfers of an interest of the debtor in property” because the June Repayments were made from the Settlement Account, which was held in the name of Action Abstract, to Matrix. Jones Decl. ¶¶ 5, 12-17. Thus, the Trustee asserts, the June Repayments “clearly represent a transfer of an interest of Action Abstract in property.” Trustee’s S.J. Br. at 16, citing Jones Decl. ¶ 11. The Trustee also asserts that the June Repayments were transfers of property interests of the Debtors other than Action Abstract because the Debtors’ estates have been substantively consolidated. Id. The Trustee further asserts that the preference claim stands on its own even if asserted solely by the estate of Action Abstract. Reply Memorandum of Law in Further Support of Trustee’s Motion for Summary Judgment on First Count of Complaint dated April 16, 2004 (“Trustee’s Reply Br.”), at 7-8.
Matrix seeks summary judgment on its counterclaim for a declaration that the June Repayments were made from trust funds belonging to Matrix and rightly returned to it when the underlying mortgages that those funds intended to purchase did not close. Matrix claims that the funds it advanced to Action Abstract were held for its benefit in escrow, a constructive trust, or a resulting trust. Reply Memorandum in Further Support of Matrix Capital Bank’s Motion for Summary Judgment dated April 15, 2004 (“Matrix Reply Br.”), at 11-14.
Matrix claims that during the course of the parties’ relationship, it purchased and resold several thousand loans through “wet” funding.3 Howard Aff. ¶ 26. Matrix argues that it delivered funds to Action Abstract as closing agent, intending that the funds be held in escrow and delivered to Island Mortgage only if the underlying mortgage loan closed and Matrix received a note and mortgage in exchange. Memorandum of Defendant Matrix Capital Bank in Opposition to the Trustee’s Motion for Summary Judgment dated April 2, 2004 (“Matrix Opp. Br.”), at 2. Matrix asserts that in each case it advanced funds with the contractual understanding that the funds were earmarked for a single and exclusive purpose: the purchase of the approved loan. Howard Aff. ¶¶ 28-29; Matrix Notice of Motion for Summary Judgment dated February 12, 2004 (“Matrix S.J. Notice”) Exh. 11 (HUD-1 reports). Matrix argues that since this pur*274pose was known to both Action Abstract and Island Mortgage, they received those funds in trust, and had neither legal nor equitable authority to treat the funds as their own. Matrix Opp. Br. at 2-3.
Matrix’s argument that the funds that it advanced to Action Abstract were held in an escrow or express trust does not carry the day, for several reasons. Under New York law,4 to establish an escrow arrangement “there must be a written agreement under which the grant- or deposits property with and relinquishes control to an escrowee with the subsequent delivery of the property by the escrowee to the grantee conditioned upon the happening of some event.” Doran v. Trolling (In re Treiling), 21 B.R. 940, 943 (Bankr.E.D.N.Y.1982). See also George A. Fuller Co. v. Alexander & Reed, Esqs., 760 F.Supp. 381, 386 (S.D.N.Y.1991). Put another way, an escrow arrangement requires “a valid contract and absent such a contract the mere delivery of the instrument or property to an escrowee does not constitute a transaction in escrow.” National Union Fire Ins. Co. Pittsburgh, Pa. v. Proskauer Rose Goetz & Mendelsohn, 165 Misc.2d 539, 545, 634 N.Y.S.2d 609, 614 (Sup.Ct. N.Y. County 1994), aff'd, 227 A.D.2d 106, 642 N.Y.S.2d 505 (1st Dep’t 1996). A proponent “must also show the alleged escrow agent agreed to accept that responsibility.” Friedman v. Stern, 1992 WL 58878, *2 (S.D.N.Y.1992).
Similarly, “[a]n express trust is ‘a fiduciary relationship with respect to property, subjecting the person by whom the title to property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it.’ ” LFD Operating, Inc. v. Ames Dep’t Stores, Inc. (In re Ames Dep’t Stores, Inc.), 274 B.R. 600, 623 (Bankr.S.D.N.Y.2002) (quoting Restatement (Second) of TRüsts § 2 (1959)), aff'd, 2004 WL 1948754 (S.D.N.Y.2004). Under New York law, an express trust requires (i) a designated beneficiary; (ii) a designated trustee who is not the beneficiary; (iii) a fund or other property sufficiently designated or identified to enable title thereto to pass to the trustee; and (iv) the actual delivery or legal assignment of the fund or other property to the trustee with the intention of passing legal title to him or her as trustee. In re Ames Dep’t Stores, Inc., 274 B.R. at 623.
Here, the record does not show that the parties entered into a written agreement providing that funds wired by Matrix to the Settlement Account would be held in escrow or trust by Action Abstract. The only documentation of the parties’ arrangements is the Agreement, which does not provide for an escrow arrangement or other express trust. Jones Decl. Exh. A (Agreement) ¶ 4.01. Rather, the Agreement requires only that Matrix advance money “to [Island Mortgage] in accordance with [Island Mortgage’s] wiring instructions ....” Id.
In response, Matrix offers the affidavit of its Executive Vice President and Chief Operating Officer, Patrick Howard, who states that “Matrix sent these funds with *275the understanding that they would be held in escrow until the closing of the mortgage loan, when they would be conveyed to the closing agent and disbursed as appropriate.” Howard Aff. ¶ 28. Matrix also offers expert testimony to the effect that “standard industry practice” requires that such funds be deposited in escrow. Martinez Aff. ¶¶ 8, 80.
As New York law makes clear, neither the “understanding” of Matrix’s executives nor “standard industry practice” is sufficient to overcome the requirement that a binding escrow agreement be in writing, or that an entity agreed to assume the responsibilities of an escrow agent, or that any of the elements of an express trust were met: Rather, the record shows the following.
• Matrix did not agree, orally or in writing, that funds advanced by Matrix would be held in escrow by Action Abstract. Supplemental Declaration of Alan M. Jacobs dated April 2, 2004 (“Jacobs Supp. Deck”), Exh. D (testimony of Patrick Howard) at 84:22-85:6; Exh. H (testimony of Christine Harris) at 70:14-25; Exh. F (testimony of Yolanda Byford) at 52:20-23.
• When it advanced funds to Action Abstract, Matrix did not give written or oral instructions as to how the funds were to be handled, or direct that they were to be held in escrow or trust. Jacobs Supp. Deck Exh. H (testimony of Christine Harris) at 70:7-13, 71:5-11; Exh. I (testimony of Christine Harris) at 89:2-90:8; Exh. E (testimony of Patrick Howard) at 129:2-130:4; 174:3-175:6.
• Action Abstract did not represent to Matrix that the Settlement Account was an escrow account. Jacobs Supp. Deck Exh. D (testimony of Patrick Howard) at 91:2-7.
• Island Mortgage did not represent to Matrix that Action Abstract was an independent third party closing agent with an escrow account to receive the funds. Jacobs Supp. Deck Exh. E (testimony of Patrick Howard) at 185:9-186:6; Exh. I (testimony of Christine Harris) at 90:19-91:19; Exh. G (testimony of Yolanda Byford) at 108:25-109:21.
• The Settlement Account was denominated a “settlement account,” not an escrow or trust account. Jacobs Deck Exh. J (Action Abstract Settlement Account bank statement).
• The Settlement Account was not used as an escrow or trust account. Eisele 2001 Deck ¶¶ 13-16; Eisele Deck ¶¶ 2-5; Jacobs Supp. Deck Exh. D (testimony of Patrick Howard) at 106:2-6; 104:14^105:25.
• Matrix assumed that funds would be deposited by Action Abstract in a real estate escrow account. Jacobs Supp. Deck Exh. E (testimony of Patrick Howard) at 129:24-133:17; Exh. I (testimony of Christine Harris) at 100:22-101:10.
Accordingly, the record does not support Matrix’s claim that an escrow agreement or other express trust arrangement existed between Matrix and any of the Debtors, including Island Mortgage and Action Abstract. To the contrary, the record shows that no such agreement was in place. See Ellis v. Provident Life & Accident Ins., 3 F.Supp.2d 399, 409 (S.D.N.Y.1998) (contract may not be implied in fact where facts are inconsistent with its existence), aff'd, 172 F.3d 37 (2d Cir.1999).
Matrix’s argument that the funds that it advanced to Action Abstract were held in a resulting trust or constructive trust is similarly not persuasive. Under New York law, a resulting trust arises “ ‘(1) where an express trust fails in whole *276or in part; (2) where an express trust is fully performed without exhausting the trust estate; (3) where property is purchased and the purchase price is paid by one person and at his direction the vendor conveys the property to another person.’ ” Saulia v. Saulia, 31 A.D.2d 640, 640, 295 N.Y.S.2d 980, 982 (2d Dep’t 1968) (quoting 4 Soott on Trusts § 404.1 (2d ed.) (1956)). A resulting trust “can be established only by clear, unequivocal and convincing evidence, especially when parol evidence is relied upon.” Schmitz v. Schmitz, 234 A.D. 73, 77, 254 N.Y.S. 109, 114 (1st Dep’t 1931). As described above, the record does not show that an escrow or express trust existed, or failed, between Matrix and Action Abstract or any of the Debtors.
The record also does not show that a constructive trust was established. The elements of a constructive trust under New York law are: “(1) a confidential or fiduciary relationship; (2) a promise, express or implied; (3) a transfer made in reliance on that promise; and (4) unjust enrichment.” Koreag, Controle et Revision S.A. v. Refco F/X Assoc., Inc. (In re Koreag), 961 F.2d 341, 352 (2d Cir.1992), cert. denied, 506 U.S. 865, 113 S.Ct. 188, 121 L.Ed.2d 132 (1992). Matrix has not shown that “a confidential or fiduciary relationship” existed between Matrix and the Debtors. Rather, the Agreement and the parties’ course of dealings shows that Matrix and the Debtors were engaged in a commercial relationship to fund mortgage loan transactions. As noted by the Second Circuit, “[pjurely commercial transactions do not give rise to a fiduciary relationship.” In re Koreag, 961 F.2d at 353.
Even if the record established that the June Advances were held in an escrow or trust account, Matrix would face another hurdle that it cannot overcome. The record shows that funds advanced by Matrix to the Settlement Account were commingled with funds from the Debtors and other warehouse banks. Jacobs Supp. Deck ¶¶ 2-3; Jacobs Decl. Exh. F (Complaint, Household Commercial Financial Services, Inc. v. Action Abstract, Inc.) at ¶ 61. It is well-settled that a claimant to trust property held by a debtor must be able to trace its funds in order to lay claim to property of the debtor. Where funds cannot be traced, priority over unsecured creditors cannot be sustained:
As the Second Circuit explained in a different context: “[P]roperty converted, embezzled, or otherwise taken by the bankrupt, or obtained by him by fraud, can be claimed from the bankrupt estate only so long as it can be definitely traced, with the consequence that an attempted repayment by the bankrupt prior to bankruptcy is a preference, except when made from the very property taken .... The rule applies even to property which the bankrupt had held in trust.”
Cassirer v. Herskowitz (In re Schick), 234 B.R. 337, 343 (Bankr.S.D.N.Y.1999) (citations omitted) (quoting Morris Plan Indus. Bank v. Schorn, 135 F.2d 538, 539 (2d Cir.1943)). See also Banning v. Bozek (In re Bullion Reserve of North America), 836 F.2d 1214, 1218 (9th Cir.1988) (“even if an express trust were created, [the defendant] would still have a duty under federal bankruptcy law to trace his funds to the [payment] he received”), cert. denied, 486 U.S. 1056, 108 S.Ct. 2824, 100 L.Ed.2d 925 (1988); First Fed. of Mich. v. Barrow, 878 F.2d 912, 915 (6th Cir.1989) (“any party seeking to impress a trust upon funds for purposes of exemption from a bankrupt estate must identify the trust fund in its original or substituted form”); Daly v. Radulesco (In re Carrozzella & Richardson), 247 B.R. 595, 600 (2d Cir. BAP 2000) (“[o]nce the defendants established [an express] beneficiary-trustee relationship with *277the Debtor, it was incumbent upon them to prove that the transfers constituted a specific trust res.”).
Put another way, if funds are commingled, then even the existence of an escrow or other express trust will not protect the beneficiary in a preference action, because the very fact of commingling shows that the debtor had the ability to control the disposition of the funds at issue. As the court in In re Schick further observed:
Ordinarily, a bankruptcy trustee must demonstrate that the debtor had legal title to a bank account and control over its use, including paying his own creditors .... In the case of commingled accounts, the bankruptcy trustee’s burden of proof is affected by the beneficiary’s burden to trace. The funds in a commingled account maintained in the debtor’s name may be used to pay his unsecured creditors unless a beneficiary can trace his or her superior right in the funds. Thus, the law implies the element of “control” in the absence of tracing. Accordingly, the bankruptcy trustee carries her burden of proving that the account was property of the debtor by showing that the debtor had legal title to the account, and the account consists of commingled trust and personal funds.
In re Schick, 234 B.R. at 343.
The record shows that the Debtors had legal title to the Settlement Account, which was held in the name of Action Abstract and controlled by Island Mortgage. Matrix does not identify a trust res to support the existence of an asserted trust, whether express, resulting, or constructive, and does not trace the June Repayments directly to any such res. Accordingly, Matrix’s escrow and trust theories do not overcome the Trustee’s claim that the June Repayments were “transfers of an interest of the [Debtors] in property.”
Finally, Matrix argues that to the extent that the Debtors exercised “control” over the funds in the Settlement Account, they did so fraudulently. Matrix S.J. Br. at 18-20. Matrix argues that the Debtors’ estate should not be augmented by property obtained by the Debtors’ fraud. Id. Thus, Matrix argues, the June Advances did not become property of the Debtors’ estate, and the June Repayments cannot be recovered through the Trustee’s preference claim. Id. But as discussed above, Matrix’s burden to establish the existence of an escrow or trust, and to trace the June Repayments back to the June Advances, is not diminished because it contends that the Debtors committed fraud. In re Schick, 234 B.R. at 343. See p. 276, supra.
In sum, the Court concludes that the Trustee has established that the June Advances were property of the Debtors’ estates, and therefore, that the June Repayments made from the commingled Settlement Account were transfers of interests of the Debtors in property. The Court also concludes that Matrix has not established that the June Advances were made pursuant to an escrow or an express, resulting, or constructive trust. The Court further concludes that Matrix has not shown that it can trace the June Repayments to the June Advances. As a result, the Court concludes that the June Repayments were transfers of interests of the Debtors in property under Section 547(b) of the Bankruptcy Code.
Is Matrix a creditor that was owed an antecedent debt by the Debtors?
The Court next considers whether Matrix is a “creditor” that was owed an “antecedent debt” by the Debtors before the June Repayments were made. 11 U.S.C. §§ 547(b)(1), (b)(2). The term *278“antecedent debt” is not defined in the Bankruptcy Code. But the term “debt” is defined as “liability on a claim.” 11 U.S.C. § 101(12). The Supreme Court observed that “[t]his definition reveals Congress’ intent that the meanings of ‘debt’ and ‘claim’ be coextensive.” Pennsylvania Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552, 558, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990). A “claim” is defined in the Bankruptcy Code as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” 11 U.S.C. § 101(5)(A). It is well-settled that “the term ‘claim’ is sufficiently broad to encompass any possible right to payment.” Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 302 (2d Cir.1997). Thus, “[w]hen a creditor has a claim against the debtor, the debtor owes a debt to the creditor.” In re Bullion Reserve of North America, 836 F.2d at 1219.
The Trustee argues that Matrix’s delivery of the June Advances created a “claim” by Matrix against the Debtors for return of those funds or delivery of a promissory note executed in connection with the underlying mortgages. Trustee’s S.J. Br. at 14. The Trustee asserts that because the underlying mortgages corresponding to the June Advances did not close, “Matrix undoubtedly had a ‘right to payment’ of the amounts advanced, whether under the terms of the [Agreement] or under general principles of law.” Id.
The Trustee also argues that Matrix has asserted multimillion dollar claims based on fraud, breach of contract, and other theories, to recover funds that it advanced to Island Mortgage and Action Abstract to fund mortgages that did not close. See Jacobs Decl. Exh. F (Complaint, Household Commercial Financial Services, Inc. v. Action Abstract, Inc.); Exh. G (list of adversary proceedings brought by the Trustee). Therefore, the Trustee argues, since Matrix would have had “claims” against Island Mortgage and Action Abstract to recover the June Advances if the June Repayments had not been made, Island Mortgage and Action Abstract owed Matrix a “debt” under the Bankruptcy Code. Trustee’s S.J. Br. at 14. Because Matrix holds “claims” against Island Mortgage and Action Abstract, it is a “creditor” of Island Mortgage and Action Abstract. See 11 U.S.C. § 101(10)(A) (“creditor means — (A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor”).
The Trustee further argues that Matrix is a “creditor” and the June Advances created an “antecedent debt” because the June Advances may be viewed as unsecured loans from Matrix to Island Mortgage. Trustee’s S.J. Br. at 14-15. The Trustee claims that Matrix delivered the June Advances to Island Mortgage and Action Abstract with the understanding that the funds would be repaid with interest if the underlying mortgage loans did not close. Id. When the funds were not repaid within the time period Matrix required, Matrix demanded and received prompt repayment, with interest based upon the length of time that the advance was outstanding. Jones Decl. ¶ 9. The Trustee asserts that these facts demonstrate that the June Advances were unsecured loans. Trustee’s S.J. Br. at 15. See In re Grand Union Co., 219 F. 353, 356 (2d Cir.1914) (“[a] loan of money is a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrow[ed]”), cert. denied, 238 U.S. 626, 35 S.Ct. 664, 59 L.Ed. 1495 (1915); BlacK’s Law Dictionary 646 (6th ed.1991) (a loan is “[djelivery by one party *279to and receipt by another party of sum of money upon agreement, express or implied, to repay it with or without interest”).
Matrix argues that it is not a “creditor” of the Debtors that was owed an “antecedent debt,” for three reasons. First, Matrix argues that it is not a “creditor” for preference purposes because it was a “purchaser” of mortgages rather than a “lender” to the Debtors. Matrix S.J. Br. at 5-7, 9-10. Second, Matrix argues that it is not a “creditor” because the June Advances were to be held in escrow or trust by Action Abstract on its behalf. Matrix S.J. Br. at 15-18. Finally, Matrix argues that Island Mortgage’s payment of fees for the period that Matrix’s funds were held by Action Abstract does not establish that the funds advanced by Matrix were “loans.” Matrix Opp. Br. at 10-11.
The Court first considers Matrix’s argument that it is not a “creditor” because it is a “purchaser” rather than a “lender.” Matrix urges that under the Agreement, “it purchased and resold several thousand such loans, all through ‘wet’ funding.” Matrix S.J. Br. at 6, citing Howard Aff. ¶ 26. Matrix asserts that in each case, it received and reviewed loan documentation prior to approving the purchase. Id., citing Howard Aff. ¶ 27. Matrix further asserts that following approval of the loan, Matrix wired funds to Action Abstract to purchase the loan with the “contractual understanding that the funds were earmarked for a single and exclusive purpose: the purchase of the approved loan.” Matrix S.J. Br. at 6.
But Matrix’s arguments do not take account of the broad definitions set forth in Section 101 of the Bankruptcy Code. As other courts have found, whether Matrix is a “purchaser” or a “lender” does not determine whether Matrix is a “creditor” of the Debtors that was owed an “antecedent debt” for preference purposes. For example, in In re Bullion Reserve of North America, the debtor represented itself to be in the business of purchasing bullion for the public through a member account program. In re Bullion Reserve of North America, 836 F.2d at 1216. Rather than purchasing the bullion, the debtor commingled the funds that it received from program participants and used them to pay various expenses, including its costs of general operation. Id. One of the participants closed his account and received over $200,000 of bullion from the debtor forty-two days before the debtor filed for Chapter 11 relief. Id. The trustee sought to recover the bullion as a preferential transfer. Id.
The participant argued that he was an “investor” rather than a “creditor” and that the transfer was not on account of an “antecedent debt” because the debtor did not owe him anything before making the bullion transfer. 836 F.2d at 1218. The Ninth Circuit rejected these arguments on grounds that under the Bankruptcy Code’s definitions of “creditor” and “claim”:
[the participant] became a creditor when he transferred funds to [the debtor] for the purchase of bullion. At that moment, [the participant] accrued a right to demand bullion from [the debtor]. This right, although unmatured, constituted a “claim” under the Bankruptcy Code.
836 F.2d at 1218. The court also observed that the term “ ‘debt’ is defined as a ‘liability on a claim,’ ” and that “the terms ‘debt’ and ‘claim’ are coextensive.” 836 F.2d at 1219. The court concluded:
When a creditor has a claim against the debtor, the debtor owes a debt to the creditor.... [The participant] accrued a claim against [the debtor] when he paid for the bullion. Likewise, [the debtor] incurred a debt to [the participant] as of this time. Therefore, the subsequent *280transfer of bullion was on account of an antecedent debt.
Id.
A similar analysis was made by the Fifth Circuit in Cohen v. Barge (In re Cohen), 875 F.2d 508 (5th Cir.1989). There, the court held that an investor who was defrauded by the debtor was a creditor for preference purposes. The court held:
Regardless whether [the investor’s] transactions with [the debtor] create claims in the nature of contract ... or in fraud, they are nevertheless claims as defined by the Bankruptcy Code.... [the debtor’s] repayment of funds to [the investor] up to the $2.3 million that [the investor] invested with [the debtor] were for or on account of an antecedent debt.
875 F.2d at 509.
The Court next considers Matrix’s argument that it is not a creditor because the June Advances were to be held in escrow or trust by Action Abstract on its behalf. As discussed above, Matrix has not established that the June Advances were made pursuant to an escrow or an express, resulting, or constructive trust. See pp. 275-77, supra. And even if the June Advances were held in escrow, the Bankruptcy Code’s broad definitions and the authorities interpreting them show that Matrix would have held contingent “claims” for the return of the funds. See 11 U.S.C. § 101(5) (a “claim” is any “right to payment” including a contingent right to payment). As a result of this “claim,” the Debtors owed Matrix an “antecedent debt.” See 11 U.S.C. § 101(12) (“debt” is “liability on a claim”).
Finally, the Court considers Matrix’s argument that the payment of fees for the period that Matrix’s funds were held by Action Abstract does not establish that the funds advanced were “loans.” But whether Matrix is characterized as a “purchaser” or a “lender,” it held a “claim” against Island Mortgage and Action Abstract for return of the funds advanced, and Island Mortgage and Action Abstract owed Matrix a corresponding antecedent “debt.” See McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir.2000) (“[a] debt need not ... arise from a loan.”). As an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor,” Matrix is a creditor of Island Mortgage and Action Abstract. See 11 U.S.C. § 101(10)(A).
In sum, the Court concludes that the Trustee has established that by making the June Advances, Matrix became a “creditor” of the Debtors with a “claim” for the return of those funds or delivery of a promissory note executed in connection with the underlying mortgages. The Court also concludes that the June Advances gave rise to a “claim” as defined by the Bankruptcy Code. As a result, the Court concludes that Matrix is a “creditor” who was owed an “antecedent debt” by the Debtors under Sections 547(b)(1) and (b)(2) of the Bankruptcy Code.
Were the June Repayments made less than ninety days before the Petition Date, and made while the Debtors were insolvent?
The Court next considers whether the June Repayments were made “while the debtor was insolvent” and “made ... on or within 90 days before the date of the filing of the petition.” 11 U.S.C. §§ 547(b)(3), (b)(4)(A). As to the first of these requirements, the record shows that the June Repayments occurred in June 2000, less than ninety days before the July 19, 2000, Petition Date of AppOnLine and Island Mortgage, and the July 28, 2000, Petition Date of Action Abstract. As to the second of these requirements, Section 547(f) provides that “the debtor is pre*281sumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.” 11 U.S.C. § 547(f). Matrix has not presented evidence to contest, or otherwise disputed, the statutory presumption as to the Debtors’ insolvency at the time that the June Repayments were made. Under these circumstances, “[w]here the transferee offers no evidence regarding solvency, the trustee may rely upon the statutory presumption.” Sapir v. Keener Lumber Co. (In re Ajayem Lumber Corp.), 143 B.R. 347, 351 (Bankr.S.D.N.Y.1992).
In sum, the Court concludes that the Trustee has established that the June Repayments were made “within 90 days before the date of the filing of the petition” and “while the [Debtors] were insolvent” in accordance with Sections 547(b)(3) and (b)(4)(A) of the Bankruptcy Code.
Did the June Repayments enable Matrix to receive more than it would have received in a Chapter 7 liquidation had the June Repayments not been made?
The Court next considers whether the June Repayments caused Matrix to receive more than it would have received in a Chapter 7 liquidation if the June Repayments had not been made. 11 U.S.C. § 547(b)(5). As the Supreme Court found:
Whether a creditor has received a preference is to be determined, not by what the situation would have been if the debtor’s assets had been liquidated and distributed among his creditors at the time the alleged preferential payment was made, but by the actual effect of the payment as determined when bankruptcy results.
Palmer Clay Prods. Co. v. Brown, 297 U.S. 227, 229, 56 S.Ct. 450, 80 L.Ed. 655 (1936).
In Elliott v. Frontier Props. (In re Lewis W. Shurtleff, Inc.), 778 F.2d 1416 (9th Cir.1986), the Ninth Circuit, applying the Palmer Clay test, explained:
This analysis requires that in determining the amount that the transfer “enables [the] creditor to receive,” 11 U.S.C. § 547(b)(5) (1982), such creditor must be charged with the value of what was transferred plus any additional amount that he would be entitled to receive from a Chapter 7 liquidation. The net result is that, as long as the distribution in bankruptcy is less than one-hundred percent, any payment “on account” to an unsecured creditor during the preference period will enable that creditor to receive more than he would have received in liquidation had the payment not been made.
778 F.2d at 1421 (emphasis in original).
Here, Matrix does not dispute that the June Repayments constituted payment in full of the June Advances. Nor does Matrix dispute that, as the Trustee states, “there is no prospect whatsoever that unsecured creditors will be paid in full.” Trustee’s S.J. Br. at 18, citing Jacobs Decl. ¶¶ 10-11. Indeed, the Trustee asserts that “unsecured creditors may well be paid only pennies on the dollar.” Id. As a result, the Court concludes that the Trustee has established that the June Repayments enabled Matrix to receive more than it would have received from the Debtors in a Chapter 7 liquidation, in accordance with Section 547(b)(5) of the Bankruptcy Code.
The Ordinary Course of Business Defense
Matrix argues that if the June Repayments are deemed preferences under Section 547(b), they are nevertheless insulated from avoidance by the ordinary course of business exception set forth in Section 547(c)(2). Matrix S.J. Br. at 20-22. This Section provides that an otherwise avoidable preferential transfer may not be avoided if the transfer was:
*282(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debt- or and the transferee; (B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and (C) made according to ordinary business terms.
11 U.S.C. §§ 547(c)(2)(A)~(C).
The ordinary course of business exception serves an important purpose in protecting parties who enter into routine business transactions in the weeks and months before a company seeks bankruptcy protection. In the absence of this protection, troubled companies might well find themselves unable to conduct the most routine business operations as the prospect of bankruptcy loomed. As the Eighth Circuit observed:
The purpose of the ordinary course of business exception is reflected in its legislative history: “The purpose of this exception is to leave undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor’s slide into bankruptcy.”
Jones v. United Savings and Loan Ass’n (In re U.S.A. Inns of Eureka Springs, Ark., Inc.), 9 F.3d 680, 683 n. 4 (8th Cir.1993) (quoting S. Rep. No. 95-989, at 88 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5874; H.R. Rep. No. 95-595, at 373 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6328).
Preference law, while undoubtedly frustrating to the affected creditor, is essential to the orderly operation of the bankruptcy system. It advances the “prime bankruptcy policy of equal distribution among similarly situated creditors” and “discourages creditors from racing to the courthouse to dismember the debtor during its slide into bankruptcy.” In re Bullion Reserve of North America, 836 F.2d at 1217. In recognition of these important purposes, courts recognize that exceptions to Section 547(c) “should be narrowly construed.” Hassett v. Goetzmann (In re CIS Corp.), 195 B.R. 251, 257 (Bankr.S.D.N.Y.1996).
A creditor seeking to establish the ordinary course of business defense must prove each of the elements set forth in Section 547(c)(2) by a preponderance of the evidence. See 11 U.S.C. § 547(g). “Failure under any one of the three elements dooms the entire exception.” Seaver v. Allstate Sales & Leasing Corp. (In re Sibilrud), 308 B.R. 388, 393 (Bankr.D.Minn.2004).
The Trustee argues that as a threshold matter, the ordinary course of business defense is not available to Matrix because “debts incurred and payments made in furtherance of fraudulent schemes, including Ponzi Schemes, are not shielded by [Section 547(c)(2) ].” Amended Trustee’s Memorandum of Law in Opposition to Matrix Capital Bank’s Motion for Summary Judgment dated April 5, 2004 (“Trustee’s Opp. Br.”), at 34. Some courts have held that “Ponzi schemes simply are not legitimate business enterprises which Congress intended to protect with section 547(c)(2).” Graulty v. Brooks (In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc.), 819 F.2d 214, 217 (9th Cir.1987); see 5 CollieR ON Bankruptcy, ¶ 547.04[2][b][ii] (15th ed. rev.2003). Other courts disagree. See, e.g., Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 874 (D.Utah 1987); 5 COLLIER ON BANKRUPTCY, ¶ 547.04[2][b][ÍÜ] (15th ed. rev.2003). This Court prefers the “middle ground” approach taken by the Tenth Circuit in Jobin v. McKay (In re M & L Business Mach. Co.), 84 F.3d 1330 *283(10th Cir.1996), cert. denied, 519 U.S. 1040, 117 S.Ct. 608, 136 L.Ed.2d 534 (1996), as follows:
Although several courts have concluded that transfers by a debtor engaged in a Ponzi scheme do not, as a matter of law, involve ordinary business terms, we have chosen a middle ground.... [T]he § 547(c)(2) defense is inapplicable to payments to investors in a Ponzi scheme. However, ... payments to non-investment creditors could be made according to ordinary business terms and in the ordinary course of business such that these [creditors] are entitled to the § 547(c)(2) defense.
84 F.3d at 1340.
Matrix claims that the Trustee “has not established that [the Debtors] were in fact operating a Ponzi scheme,” and asserts that “Island did operate a legitimate mortgage origination business to a degree. By the Trustee’s count, Island closed at least 700 mortgage purchase and sale transactions with Matrix alone during a 5\ month period in 2000.” Matrix Reply Br. at 14. In any event, Matrix contends it was not an “investor in the scheme, but rather, Island [Mortgage] was a participant in Matrix’s mortgage warehouse program.” Id.
Here, regardless of whether the Debtors’ business operations may accurately be characterized as a “Ponzi scheme,” the record shows that Island Mortgage closed at least 700 mortgage purchase and sale transactions with Matrix during a five and one-half month period in 2000. These legitimate business activities lead the Court to conclude that Matrix may pursue the ordinary course of business defense. Accordingly, the Court will turn to the elements of that defense under Section 547(c)(2).
First, the Court considers whether the June Repayments were “in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee” as required by Section 547(c)(2)(A). As one court observed, this “contemplate^] a subjective test: Was the debt and the transfer ordinary as between the debtor and the creditor? To be subjectively ordinary implies some eonsistency'with other business transactions between the parties.” Huffman v. New Jersey Steel Corp. (In re Valley Steel Corp.), 182 B.R. 728, 734-35 (Bankr.W.D.Va.1995) (citation omitted).
Here, the record shows that Matrix and the Debtors conducted numerous transactions under the Agreement, and that the June Advances were made pursuant to the Agreement. Howard Aff. ¶ 26. The record also shows that the parties contemplated the return of funds advanced for specific mortgage loan transaction when that mortgage loan did not close. Howard Aff. ¶ 25. As discussed above, Matrix held a “claim” against the Debtors for return of the June Advances or delivery of a promissory note executed in connection with the underlying mortgages, and the Debtors owed Matrix a corresponding “debt.” See pp. 277-80, supra. Accordingly, the Court concludes that the June Repayments were “in payment of a debt incurred by the debtor in the ordinary course of business ... of the debtor and the transferee” under Section 547(c)(2)(A).
Next, the Court considers whether the June Repayments were “made in the ordinary course of business or financial affairs of the debtor and the transferee” as required by Section 547(c)(2)(B). “This is a subjective element that requires an examination of whether a transfer was ordinary between the parties to the transfers.” In re Carrozzella & Richardson, 247 *284B.R. at 603. This examination, in turn, calls for the consideration of several factors. As one court found:
In determining whether a payment is made in the ordinary course of business, the facts and circumstances surrounding the payments must be considered. Factors which militate against a finding of ordinary course of business include untimeliness of the payment, change in method of payment by cashiers check rather than corporate check, and payment made pursuant to unusual economic pressure and unusual debt collection or payment practices
Tolz v. Signal Capital Corp. (In re Mastercraft Graphics, Inc.), 157 B.R. 914, 919 (Bankr.S.D.Fla.1993) (citations omitted).
Causation must also be considered by the Court. As the Eleventh Circuit observed, “whenever the bankruptcy court receives evidence of unusual collection efforts it must consider whether the debtor’s payment was in fact in response to these efforts.” Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563, 1566 (11th Cir.1986). The burden is on the creditor to show “the absence of any unusual collection efforts or protectionist demands directed at the debtor, and the absence of any other significant or material change in the way it treated the debtor during the preference period, along with the absence of any material change in the means, manner and amounts of payments made by the debtor.” Marlow v. Federal Compress & Warehouse Co. (In re Julien Co.), 157 B.R. 834, 838 (Bankr.W.D.Tenn.1993).
The Trustee argues that the June Repayments were not “ordinary” between the parties because they were made “extremely” late in contrast to repayments made before the preference period. “Lateness is particularly relevant in determining whether payments should be protected by the ordinary course of business exception.” In re Craig Oil Co., 785 F.2d at 1567. But “there is no per se rule that late payments can never be ordinary; late payments can properly fall within the ordinary course of business exception where the prior course of conduct between the parties demonstrates that those types of payments were ordinarily made.” Gold Force Int’l Ltd. v. Official Comm. of Unsec. Creditors of Cyberrebate.com, Inc., 2004 WL 287144, *4 (E.D.N.Y.2004).
In particular, the Trustee asserts that the June Repayments were made 300 percent later than the average of such payments made before the preference period. Put another way, the Trustee asserts that repayments before the preference period were made in an average of 6.04 business days, or one day later than the prescribed five day period; while the June Repayments were made in an average of 9.09 business days, or three additional days later. Trustee’s Opp. Br. at 41.
In response, Matrix asserts that “the return of funds was so much a part of normal business during the parties’ relationship that Matrix required [the Debtors] to make such payments within five days of a failed closing.” Matrix S.J. Br. at 21. Matrix states that “[a]pproximately forty-five (45%) percent of the funds returned in the June 8 Payment, the June 14 Payment, the June 15 Payment, the June 16 Payment, and the June 20 Payment were returned within 6 or fewer days of their initial wiring by Matrix to Action.” Howard Aff. ¶ 42. This, Matrix argues, shows that the June Repayments were “ordinary” between the parties.
The Court finds that the June Repayments were made in an average of nine business days after the associated debt was incurred. The Court further finds that before the preference period, repay*285ments were made in an average of six business days. The Court concludes the difference between these periods — three business days — is not sufficient to take the June Repayments outside of the ordinary course of business established between the parties. See Brothers Gourmet Coffees, Inc. v. Armenia Coffee Corp. (In re Brothers Gourmet Coffees, Inc.), 271 B.R. 456, 461 (Bankr.D.Del.2002) (preference period payments made one day later than pre-preference period payments deemed not material); In re Valley Steel Corp., 182 B.R. at 737 (preference period payments made thirteen days later than pre-preference period payments deemed to be within acceptable range).
The Trustee also argues that the June Repayments, which were made from June 8 to June 23, 2000, were not “ordinary” between the parties because they were made after Matrix terminated the Agreement on June 6, 2000. The Trustee argues that “the termination of the parties’ business relationship is clearly an extraordinary event that ... renders payments made thereafter out of the ordinary course.” Trustee’s Opp. Br. at 37. The Trustee relies on Xtra Inc. v. Seawinds Ltd. (In re Seawinds Ltd.), 91 B.R. 88 (N.D.Cal.1988), aff'd, 888 F.2d 640 (9th Cir.1989), where the court found that seven payments made after a notice of termination were “outside the ‘ordinary course of business or financial affairs of the debtor and the transferee,’ ” and further observed that “avoidance of all of the payments is in accordance with both bankruptcy policy and common sense.” In re Seawinds Ltd., 91 B.R. at 92 (quoting 11 U.S.C. § 547(c)(2)(B)).
But there is at least one significant difference between the situation presented in In re Seawinds Ltd. and the facts present here. In In re Seawinds Ltd., the creditor terminated its leases with the debtor effective immediately and demanded payment from the debtor on past due invoices. When the payments were made, the contract was no longer in effect. Under those circumstances, the court found:
A creditor who takes the steps of terminating its contracts with a struggling debtor, demanding immediate payment and return of equipment, and then raising rates on any remaining equipment is using economic pressure to obtain payment as soon as possible. Within the 90 day preference period, such payments are made to the detriment of other creditors. This discrimination between creditors is the essence of a preference, and is prohibited by the Bankruptcy Code.
In re Seawinds Ltd., 91 B.R. at 92.
Here, by contrast, the record shows that Matrix terminated the Agreement on June 6, 2000, and provided ten days to transition out of the Agreement. Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 166:6-167:18. The record also shows that Matrix continued to fund the purchase of mortgages through June 9, 2000. Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 167:15-24. The Court concludes that Matrix’s termination of the Agreement before the June Repayments were made is not sufficient to take the June Repayments outside of the ordinary course of business established between the parties.
The Trustee further argues that the June Repayments were not “ordinary” between the parties because they were made in response to “an extensive, concerted campaign to maximize pressure on the Debtors.” Trustee’s Opp. Br. at 38. “Payments made in response to unusual debt collection practices by the creditor are outside the scope of the ordinary course of business exception.” Schwinn Plan Comm. v. AFS Cycle & Co. (In re Schwinn Bicycle Co.), 205 B.R. 557, 572 *286(Bankr.N.D.Ill.1997). See In re Mastercraft Graphics, Inc., 157 B.R. at 919 (payments “made pursuant to unusual economic pressure and unusual debt collection or payment practices” are not “ordinary” between the parties). As noted by the Eleventh Circuit, “[Section] 547(c)(2) should protect those payments which do not result from ‘unusual’ debt collection or payment practices. To the extent an otherwise ‘normal’ payment occurs in response to such practices, it is without the scope of § 547(c)(2).” In re Craig Oil Co., 785 F.2d at 1566.
Here, the record shows that Matrix made substantial and unusual efforts to induce the Debtors to repay the June Advances, beginning with a series of communications between Matrix and the Debtors and State Bank on and after June 13, 2000. The record shows:
• Between June 13 or 14 and June 22, 2000, Mr. Howard, Matrix’s Executive Vice President and Chief Operating Officer, made daily telephone calls to Edward Capuano, President of Island Mortgage, to inquire about collateral exceptions and obtain updates on which mortgages had closed. Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 171:2-173:15.
• On June 14, 2000, Mr. Howard sent a letter by fax and overnight courier to Robert Knickman, President of Action Abstract, demanding that numerous amounts, including the June Advances, be wired back to Matrix within twenty-four hours. Jacobs Supp. Decl. Exh. L (June 14, 2000 letter from Patrick Howard to Robert Knickman); Exh. D (testimony of Patrick Howard) at 174:13-175:24. Mr. Howard had not done this before. Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 177:15-21.
• On June 14, 2000, Yolanda Byford, the operations supervisor and underwriter for Matrix’s warehouse lending department, sent an e-mail message to Mr. Howard reporting that, in addition to calling Island Mortgage, she had called “Jason” at Action Abstract “every fifteen minutes” that day to request repayment of amounts advanced to the Debtors and that Jason had not returned her calls. Jacobs Supp. Decl. Exh. M (June 14, 2000, e-mail from Yolanda Byford to Patrick Howard); Exh. F (testimony of Yolanda Byford) at 187:25-188:13, 189:22-190:22. Mr. Howard acknowledged that “[p]rior to early June 2000, it would have been out of the ordinary for Ms. Byford to make such contacts with Action Abstract.” Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 179:16-180:12.
• On June 14, 2000, Ms. Byford sent a fax to Action Abstract demanding repayment of funds advanced by Matrix and threatening legal action if the repayment was not forthcoming. Jacobs Supp. Decl. Exh. N (June 14, 2000, facsimile from Yolanda Byford to Action Abstract).
• On June 14, 2000, Ms. Byford directed that a “hold” be put on the Concentration Account held at Matrix, barring Island Mortgage from making any withdrawals from that account. Jacobs Supp. Decl. Exh. O (June 14, 2000, e-mail from Yolanda Byford to Maria Mauricio); Exh. F (testimony of Yolanda Byford) at 191:16-192:12. Matrix had not done this before. Jacobs Supp. Decl. Exh. F (testimony of Yolanda Byford) at 192:13-21. Ms. Byford directed that this action be taken to “tie up any assets we had of [Island Mortgage’s] ... because we had so much collateral outstanding.” *287Jacobs Supp. Decl. Exh. F (testimony of Yolanda Byford) at 194:14-22.
• On June 14 and 15, 2000, Matrix contacted State Bank to request the return of amounts advanced to Action Abstract. Jacobs Supp. Decl. Exh. F (testimony of Yolanda Byford) at 194:23-196:5. Matrix had not taken such action before in its dealings with the Debtors. Jacobs Supp. Decl. Exh. F (testimony of Yolanda Byford) at 196:10-22. State Bank responded that it could not deliver funds to Matrix without authorization from Action Abstract. Jacobs Supp. Decl. Exh. P (June 16, 2000, wire advice from State Bank to Matrix). Ms. Byford was not surprised by this result and testified that “It was just in line with everything else that they had done. We weren’t getting our funds back and we were trying any way we could to get them back and this just struck me as another way they were avoiding doing that.” Jacobs Supp. Decl. Exh. G (testimony of Yolanda Byford) at 303:17-21.
The record further shows that beginning on June 19, 2000, Matrix increased its collection efforts and began to contact regulators and law enforcement authorities, as follows:
• On June 19, 2000, Ms. Byford wrote to the Attorney General of the State of New York to report that the Debtors had failed to deliver original notes or return funds advanced by Matrix and to request the Attorney General’s assistance in collecting the amounts due. Jacobs Supp. Decl. Exh. Q (June 19, 2000, letter from Yolanda Byford to Eliot Spitzer, Attorney General of the State of New York); Exh. F (testimony of Yolanda Byford) at 197:3-198:3. Ms. Byford testified that this letter was sent “[bjecause Island Mortgage was not cooperating, so we wanted to go to a higher authority.” Jacobs Supp. Decl. Exh. F (testimony of Yolanda Byford) at 198:13-19.
• On June 20, 2000, Ms. Byford sent similar letters to the New York State Banking Department and the New York State Insurance Department. Jacobs Supp. Decl. Exh. R (June 20, 2000, letters from Yolanda Byford to New York State Banking Department and New York State Insurance Department); Exh. S (undated memorandum from Yolanda Byford to Patrick Howard); Exh. F (testimony of Yolanda Byford) at 202:19-203:11, 205:17-206:7, 206:17-207:18. Ms. Byford testified that she sent these letters “[f]or assistance in retrieving our collateral or the $5.3 million.” Jacobs Supp. Decl. Exh. F (testimony of Yolanda Byford) at 203:8-11.
• On June 20, 2000, Ms. Byford spoke with representatives of the New York State Banking Department and was informed that they would send investigators to Island Mortgage within the next few days. Jacobs Supp. Decl. Exh. F (testimony of Yolanda Byford) at 203:21-205:2.
The record further shows that beginning on June 22, 2000, senior executives from Matrix augmented its collection efforts by traveling from New Mexico to New York to meet with the Debtors and regulators and demand repayment, as follows:
• On June 22, 2000, Mr. Howard flew from Matrix’s New Mexico offices to New York to recover the monies advanced by Matrix or original notes relating to closed mortgages. Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 187:11-188:24. Mr. Howard was accompanied by Bruce Allen, an employee of Matrix who had no experience with the Island Mort*288gage account but was, according to Mr. Howard, a “big guy.” Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 189:25.
• On June 23, 2000, Messrs. Howard and Allen arrived at Island Mortgage’s offices in Melville, New York. Jacobs. Supp. Decl. Exh. D (testimony of Patrick Howard) at 190:9-20. Mr. Howard and Mr. Allen then met for two hours with regulators from the New York State Banking Department, who had commenced an investigation at Island Mortgage’s offices. Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 193:9-20. Mr. Capuano joined the meeting and, in the presence of a regulator from the New York State Banking Department, reviewed a list prepared by Mr. Howard of the outstanding advances. Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 193:21-194:4. Mr. Capua-no indicated which mortgage loans on the list had closed and which had not. Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 194:5-8. He stated that as to the mortgage loans that had not closed, he had directed Action Abstract to wire transfer the funds back to Matrix that day and provided wire confirmation numbers to Mr. Howard. Jacobs Supp. Decl. Exh. D (testimony of Patrick Howard) at 194:9-18.
In response, Matrix argues that “the Trustee would have this Court punish Matrix for being diligent and conscientious in doing its best to enforce the terms of its agreement with debtors” and observes that the manner in which it monitored its collateral and enforced the Agreement was the same earlier in 2000. Matrix Reply Br. at 16. But the principle of equality of distribution could not be maintained if creditors who received payments in response to extraordinary or unusual collection efforts during the preference period were allowed to retain those payments. See Begier, 496 U.S. at 58, 110 S.Ct. 2258.
The record reflects that as early as June 13 or 14, 2000, Matrix commenced a series of unusual collection efforts including telephonic and written inquiries and demands directed to the Debtors that were described by Matrix’s senior executives as “out of the ordinary”; contacts with others including State Bank, regulators, and law enforcement authorities; and ultimately, meetings with the Debtors and the New York State Banking Department; all with the purpose of obtaining repayment of the funds that Matrix advanced to the Debtors. The record further reflects that Matrix’s efforts were successful, as they caused the Debtors to make a series of repayments to Matrix from June 14, 2000, immediately after these efforts began, to June 23, 2000, when the last of the June Repayments was made. See pp. 286-88, supra.
Accordingly, the Court concludes that the repayments made by the Debtors to Matrix on June 14, June 15, June 16, June 20, and June 23, 2000, were made in response to unusual collection efforts undertaken by Matrix from June 13 or 14, 2000, to June 23, 2000, and therefore, that these repayments were not “made in the ordinary course of business or financial affairs” of the Debtors and Matrix as required by Section 547(c)(2)(B). The Court further concludes that the repayment made by the Debtors to Matrix on June 8, 2000, in the amount of $1,561,595, was not made in response to unusual collection efforts by Matrix, and that it otherwise was “made in the ordinary course of business of financial affairs” of the Debtors and Matrix.
Next, the Court considers whether the June 8 Repayment was “made *289according to ordinary business terms” as required by Section 547(c)(2)(C). As the Second Circuit held, “11 U.S.C. § 547(c)(2)(C) requires a creditor to demonstrate that the terms of the payment for which it seeks the protection of the ordinary course of business exception fall within the bounds of ordinary practice of others similarly situated.” In re Roblin Indus., Inc., 78 F.3d at 41. This “does not require a creditor to establish the existence of some uniform set of business terms within the industry in order to satisfy its burden. It requires evidence of a prevailing practice among similarly situated members of the industry facing the same or similar problems.” In re U.S.A. Inns of Eureka Springs, Ark., Inc., 9 F.3d at 685. As noted by the Eighth Circuit:
“ ‘[Ojrdinary business terms’ refers to the range of terms that encompasses the practices in which firms similar in some general way to the creditor in question engage, and ... only dealings so idiosyncratic as to fall outside that broad range should be deemed extraordinary and therefore outside the scope of subsection [547(c)(2)(C)].”
Id. (quoting In re Tolona Pizza Prod. Corp., 3 F.3d 1029, 1033 (7th Cir.1993)).
The record reflects that the June 8 Repayment consisted of repayment to Matrix for advances made in respect of thirteen mortgage loans that did not close. Jones Decl. ¶ 12. The amounts of the unclosed mortgage loans that led to the June 8 Repayment ranged from $43,346 to $331,500. Id. The record further shows that the Debtors made the June 8 Repayment within five to eight business days after Matrix funded the corresponding thirteen unclosed mortgage loans, and as to twelve of the thirteen, within five or six business days. Jones Decl. ¶ 11, Exh. B (payment/repayment data).
The record also shows that the Debtors’ mortgage banking operations were generally conducted as follows:
If the underlying mortgage did not close, the Debtors would return the money advanced by the warehouse bank, together with interest, fees and charges on the advance. The number of days the money remained at the Debtors would vary depending on, among other things, the requirements of the warehouse bank that had made the advance and the thoroughness with which the warehouse bank policed those requirements.
Jones Decl. ¶ 8. The record shows that the Agreement provided that “[Island Mortgage] shall deliver the loans to [Matrix] in purchasable form within 5 (five) days from [Island Mortgage’s] disbursement of loan proceeds to borrower,” but did not address the situation where the underlying mortgage loan did not close. Jones Decl. Exh. A (Agreement) ¶ 3.01(a). Thus, the record shows that it was the practice of the Debtors to return funds advanced by one of its warehouse banks in the event that the underlying mortgage did not close, and that the Agreement did not vary that practice as to Matrix.
Moreover, the record reflects that mortgage banking warehouse lending agreements generally provide for a transaction to be completed within a specified time limit. Martinez Aff. ¶ 19; WAS Report at 9. The record further shows that the relationship between Matrix and the Debtors was consistent with industry standards in that Matrix’s selection of a repurchase facility as the form of its warehouse program was consistent with industry standards of care, and further, that the Agreement contained the key elements that would be considered normal and customary by a prudent warehouse lending provider. Martinez Aff. ¶ 27; WAS Report at 16-18.
*290In sum, the Court finds that the record reflects that the practice of the Debtors to return funds advanced by one of its warehouse banks in the event that the underlying mortgage did not close in response to requests by that warehouse bank was “a prevailing practice among similarly situated members of the industry facing the same or similar problems.” In re U.S.A. Inns of Eureka Springs, Ark, Inc., 9 F.3d at 685. Accordingly, the Court finds that Matrix has satisfied the objective requirement under Section 547(c)(2)(C), and that the June 8 Repayment made by the Debt- or to Matrix was made “according to ordinary business terms.”
C. Matrix’s Summary Judgment Motion on the Second Count of the Complaint
In the Second Count of the Complaint, the Trustee seeks to recover the June Repayments as avoidable fraudulent conveyances because the Debtors made the June Repayments at a time when they were insolvent or had unreasonably small capital, and Matrix did not receive the June Repayments in good faith, and therefore failed to provide fair consideration within the meaning of Section 272 of New York’s Debtor and Creditor Law.
Matrix seeks summary judgment dismissing the Second Count of the Complaint on grounds that the June Repayments were held in trust by the Debtors, and therefore, were not transfers by the Debtors. Alternatively, Matrix seeks summary judgment on grounds that there was fair consideration for the transfers because they extinguished an antecedent debt owed by Island Mortgage and Action Abstract to Matrix. Matrix S.J. Br. at 22-23.
Matrix first argues that the June Repayments “did not constitute a conveyance of the debtors’ property in the first place. Rather, they represented the return of Matrix property, held by the debtors in escrow and in trust.” Matrix S.J. Br. at 22. As discussed above, the Court finds that Matrix has not established that the June Advances were made pursuant to an escrow or an express, resulting, or constructive trust. See pp. 273-76, supra. The Court further finds that Matrix has not shown that it can trace the June Repayments to the June Advances. See pp. 276-77, supra. As a result, the Court concludes that the June Repayments were transfers of the Debtors’ property and, accordingly, Matrix is not entitled to summary judgment dismissing the Second Count of the Complaint on grounds that the June Repayments were the return of Matrix’s property.
Alternatively, Matrix argues that the June Repayments were “made ‘for fair consideration’ to satisfy an ‘antecedent debt’.” Matrix S.J. Br. at 22. Section 272 of New York’s Debtor and Creditor Law provides:
Fair consideration is given for property, or obligation,
(a) When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, or
(b) When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property, or obligation obtained.
N.Y. Debt. & Cred. Law § 272 (McKinney 2001) (emphasis added).
Interpreting Section 272, another judge of this Court found:
The Second Circuit has analyzed the elements of “fair consideration” under DCL § 272 as follows: (1) the recipient of the debtor’s property “must either (a) convey property in exchange or (b) dis*291charge an antecedent debt in exchange; and (2) such exchange must be a ‘fair equivalent’ of the property received; and (3) such exchange must be ‘in good faith’.”
Sharp Int’l Corp. v. State Street Bank and Trust Co. (In re Sharp Int’l Corp.), 281 B.R. 506, 518 (Bankr.E.D.N.Y.2002) (quoting HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1058-59 (2d Cir.1995) (emphasis in original)), aff'd, 302 B.R. 760 (E.D.N.Y.2003). And as the Second Circuit observed, New York law provides that “where ... a transferee has given equivalent value in exchange for the debtor’s property, the statutory requirement of ‘good faith’ is satisfied if the transferee acted without either actual or constructive knowledge of any fraudulent scheme.” HBE Leasing Corp. v. Frank, 48 F.3d 623, 636 (2d Cir.1995).
Here, the record reflects the following:
• In May 2000, Matrix learned that the Debtors had “double-banked” a loan, that is, caused a loan and supporting documentation to be offered for sale simultaneously to Matrix and another warehouse bank. Howard Aff. ¶ 36.
• In May 2000, Ms. Byford believed that she had caught the Debtors altering loan documents to induce Matrix to fund ineligible loans. Jacobs. Supp. Decl. Exh. G (testimony of Yolanda Byford) at 206:24-213:25. As Mr. Howard stated, “in mid-May 2000, Matrix came to believe that Island may have permitted the alteration of loan documents in one transaction to close upon an unsuitable loan. As a result of this discovery, Matrix temporarily suspended the [Agreement].” Howard Aff. ¶ 35.
• By letter dated June 19, 2000, Matrix contacted the Attorney General of the State of New York to assist it in collecting from the Debtors. Jacobs Decl. Exh. Q (June 19, 2000, letter from Yolanda Byford to Eliot Spitzer, Attorney General of the State of New York).
• By no later than June 22, 2000, Matrix contacted the Federal Bureau of Investigation and informed other creditors of its involvement. Jacobs Supp. Decl. Exh. S (undated memorandum from Yolanda Byford to Patrick Howard); Exh. T (June 23, 2000, memorandum from Christine Harris to Patrick Howard). On June 23, 2000, the same date on which the Debtors received the final repayment, the Federal Bureau of Investigation informed Christine Harris, Matrix’s Assistant Vice President of Mortgage Lending, that they believed that Island Mortgage was a pyramid scheme. Jacobs Supp. Decl. Exh. T (June 23, 2000, memorandum from Christine Harris to Patrick Howard); Exh. H (testimony of Christine Harris) at 236:11-15.
The Court finds that the record establishes the existence of a genuine issue of material fact with respect to Matrix’s good faith in receiving the June Repayments. Accordingly, Matrix’s request for summary judgment dismissing the Second Count of the Complaint is denied.
CONCLUSION
For the reasons stated herein, the Trustee’s Motion for Summary Judgment on the First Count of the Complaint is granted to the extent that the Court finds and concludes that the June 14 Repayment, the June 15 Repayment, the June 16 Repayment, the June 20 Repayment, and the June 23 Repayment are avoidable preferential transfers and are not excepted from the Trustee’s avoidance power under the “ordinary course of business” exception of 11 U.S.C. § 547(c)(2). The Trustee’s Mo*292tion for Summary Judgment on the First Count of the Complaint is denied to the extent that the Court finds and concludes that the June 8 Repayment is excepted from the Trustee’s avoidance power under the “ordinary course of business” exception of 11 U.S.C. § 547(c)(2). Matrix’s Motion for Summary Judgment on the Second Count of the Complaint is denied.
The parties are directed to settle an order in conformity with this Memorandum Decision.
. The Trustee’s Motion seeks summary judgment only on the preference cause of action. The Trustee states that “an order granting summary judgment on the preference cause of action will render moot the fraudulent conveyance cause of action.” See Memorandum of Law in Support of Trustee's Motion for Summary Judgment on First Count of Complaint dated February 23, 2004 ("Trustee’s S.J. Br.”), at 2 n. 1.
. Matrix offers the expert affidavit of Elsa Martinez, Senior Partner of Warehousing Advisory Services, Inc., and the expert report of Warehousing Advisory Services, Inc., in support of its motion for summary judgment. They describe warehousing lending as the “short-term borrowing of funds by a mortgage banker using permanent mortgage loans as collateral.” Affidavit of Elsa Martinez in Support of the Motion for Summary Judgment of Defendant Matrix Capital Bank dated February 11, 2004 ("Martinez Aff.”), ¶ 10; Report of Warehousing Advisory Services, Inc. to Matrix Capital Bank dated October 15, 2003 ("WAS Report”), at 5-7. Warehouse lending may occur through a wholesale credit agreement or a mortgage purchase/repurchase agreement between a warehouse banker and a mortgage broker. In general, the warehouse banker agrees to purchase mortgage loans meeting established product parameters for a short, fixed interval. Before the purchase, the warehouse banker reviews the underlying mortgage documentation and underwrites the loan. After the purchase, the warehouse banker holds the mortgage until the broker repackages the loan for sale to investors in the secondary mortgage market. Then, the broker repurchases the loan from the warehouse banker and sells it to other investors. Id.
. Ms. Martinez states that "dry” warehouse funding occurs when a mortgage loan is purchased after the loan has closed, and "wet” warehouse funding occurs when a mortgage loan is purchased at or immediately after the closing using funds that have been previously deposited by a warehouse bank with a closing agent for that purpose. Martinez Aff. ¶ 13; see Memorandum in Support of Matrix Capital Bank Motion for Summary Judgment dated April 2, 2004 ("Matrix SJ. Br.”) at 4.
. New York law governs this question because the funds were held at State Bank which is located in New York. As the Second Circuit held, "the law of the situs of the property, and therefore the trust, governs” the formation of a trust. Sanyo Elec., Inc. v. Howard's Appliance Corp. (In re Howard’s Appliance Corp.), 874 F.2d 88, 94 (2d Cir.1989). See Hassett v. Far West Fed. Sav. and Loan Ass'n (In re O.P.M. Leasing Servs., Inc.), 40 B.R. 380, 399 (Bankr.S.D.N.Y.1984) ("New York's choice of law rule pertaining specifically to the validity and construction of a nontestamentaiy trust of personal property has long been to apply the law of the situs of the trust without undertaking an interest analysis”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493696/ | MEMORANDUM
WILLIAM E. ANDERSON, Bankruptcy Judge.
This matter comes before the court on a motion to dismiss filed by the defendant Federal Insurance Company (“Federal”). The motion will be treated as a motion for summary judgment. The motion will be granted. Judgment shall be entered in favor of Federal Insurance Company.
Facts
The facts are not in dispute. Defendant John M. Faulkner (“Faulkner”) served as President and Chief Executive Officer of the R.J. Reynolds — Patrick County Memorial Hospital, Inc., (“the Debtor”) from December of 1997 through June of 1999. Alan Smith (“Smith”) served as Chief Financial Officer of the Debtor from January 21,1998, through June 16,1999.
On or about November 27, 2000, the Debtor and Federal executed an Executive Protection Policy (“the Policy”). Under the Policy, Federal agreed to indemnify directors and officers of the Debtor for all losses for which those directors and officers were not indemnified by the debtor for which those directors and officers became legally obligated as the result of the commission of a “wrongful act”, as that term is defined in the Policy. The Policy also contained certain exceptions to coverage, including an insured-versus-insured (“IVI”) exception, which is discussed below.
On November 17, 1999, the Debtor filed a chapter 11 petition with the Clerk of this court. On March 9, 2001, the court confirmed the Debtor’s plan of reorganization (“the Plan”). The Plan provided for the creation a trust, the R.J. Reynolds — Patrick County Memorial Hospital, Inc., Organization Trust (“the Trust”). The Plan designated Roy M. Terry, Jr., (“the Trustee”) as the trustee of the Trust. The Plan also provided that the Debtor would, on or before the effective date of the Plan, transfer to the Trust all claims against directors and officers.
On November 19, 2001, the Trustee commenced an adversary proceeding1 against Faulkner and Smith by filing a complaint in this court seeking a recovery for damages allegedly resulting from various actions taken by Faulkner and Smith in their capacities as officers of the Debtor.
On or about November 29, 2001, the Trustee notified Federal that it had made claims against Faulkner and Smith which might give rise to a claim against Federal under the Policy. On December 19, 2001, Federal denied coverage for this matter on the grounds that the claims asserted by the trustee were excluded by virtue of the IVI clause in the Policy.
On January 29, 2003, the Trustee filed the instant complaint seeking a declaration that Federal must indemnify its insureds, Faulkner and Smith, for any damages that may have been caused by their alleged wrongful acts.
Discussion
This court has jurisdiction over this matter. 28 U.S.C. § 1334(a) & 157(b)(2)(A). This motion is brought under Fed.R.Civ.P. 12(b)(6), as incorporated by Fed. R.Bankr.P. 7012(b). Rule 12(b)(6) provides that a complaint may be dismissed if *677it fails to state a claim upon which relief may be granted. Because Federal presented matters outside the pleadings, the motion must be treated as one for summary judgment and disposed of as provided in Fed.R.Civ.P. 56. Fed.R.Civ.P. 12(c) as made applicable in this proceeding by Fed. R. Bankr.P. 7012. Gadsby v. Grasmick, 109 F.3d 940, 949 (4th Cir.1997).
A motion for summary judgment shall be granted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c). The court may not try issues of fact on a Rule 56 motion but may only determine whether there are issues to be tried. Wright, Miller & Kane, Federal Practice and Procedure: Civil 3d, § 2712, p. 205-6 (1998) (Citations omitted.). Summary judgment is improper if the existence of material fact issues is uncertain. Id. at 201. In the case at bar, neither party has disputed a factual allegation made by the other. Accordingly, the motion will be treated as a motion for summary judgment.
The Trust seeks a judgment declaring that Federal is obligated to indemnify Faulkner and Smith for any loss incurred as the result of claims brought by the Trust against them. The Policy provides in relevant part:
[Federal] shall pay on behalf of [Faulkner or Smith] all loss for which [Faulkner or Smith] is not indemnified by [the Debtor] and [for] which [Faulkner or Smith] becomes legally obligated to pay on account of any claim first made against [either of them], individually or otherwise during the policy period ... [Federal] shall pay on behalf of [the Debtor] all [covered] loss for which [the Debtor] grants indemnification to [Faulkner or Smith].2
In other words, Federal agreed to indemnify Faulkner and Smith against any loss arising from certain causes of action filed against them. Federal also agreed to indemnify the Debtor if the Debtor indemnified Faulkner and Smith for losses arising from those same certain causes of action filed against them. There are exceptions to this coverage.
The Policy excludes claims which are “brought or maintained by or on behalf of any Insured”. This exception includes any claims that are brought or maintained by or on behalf of the Debtor. There is an exception to this exception. The exception does not apply to:
a Claim that is derivative action brought or maintained on behalf of [the Debtor] by one or more persons who are not Insured persons, and who bring or maintain the Claim without the solicitation, assistance or participation of [the Debt- or] ...
This exception to the exception contains its own exception. It excludes coverage for derivative actions brought with the “solicitation, assistance, or participation” of the Debtor.
*678The term of coverage and its exceptions may be paraphrased thus: Federal will indemnify loss resulting from any claim brought for certain wrongful acts committed by Faulkner or Smith unless (1) the claim is brought by, maintained by, or brought on behalf of, the Debtor or (2) the claim is a derivative action brought or maintained on behalf of the Debtor by someone other than the Debtor with the solicitation, assistance or participation of the Debtor.
Before we continue, it is necessary to distinguish between the two sets of claims that the Trustee asserts exist. First, the Trustee asserts claims against Faulkner and Smith for the commission of wrongful acts (“the Underlying Claims”). Second, the Trustee asserts that Faulkner and Smith have a claim against Federal for indemnification of any damages for loss arising from the prosecution of the underlying claims (“the Insurance Claims”). It is the source of the Trustee’s standing to assert Underlying Claims that determines whether there is coverage under the Policy.
So, in what capacity, that is, on what basis of standing, does the Trustee bring the Underlying Claim against Faulkner and Smith? There are two possibilities. First, the Trustee could bring them on the basis of the provision in the plan that transferred to the Trust any claims held by the Debtor against directors and officers. Second, the Trustee could bring the Underlying Claims as a representative of creditors.
The Trustee first has standing to bring the Underlying Action by virtue of the assignment of claims under the Plan. A confirmed plan restructures the contractual relationships between the debtor and other parties; a confirmed plan is a eon-tract. An order confirming a chapter 11 plan is a judgment that gives the plan the status of a valid contract. “The rights and duties of creditors and the debtor are determined by the confirmed chapter 11 plan...” In re Grinstead, 75 B.R. 2, 3 (Bankr.D.Minn.1985). “Since confirmation binds both debtors and creditors to the terms of a confirmed plan, it effectively replaces debtors’ pre-petition obligations to creditors, which were discharged, with the obligations to those creditors set forth in the confirmed plan.” In re Depew, 115 B.R. 965, 966 (Bankr.N.D.Ind.1989).
The provision in the Plan that transferred any claims against Faulkner and Smith from the Debtor to the Trust, and the Trustee, constituted a voluntary assignment of claims by contract. An assignee steps into the shoes of the assignor and takes the assignment subject to all prior equities between previous parties, and his situation is no better of the assign- or. 2A Michie’s Jurisprudence of Virginia and West Virginia, “Assignments” § 29, p. 284 (1993, rev.) and citations therein, including Hartford Accident & Indemnity Co. v. Board of Edue. of District of Beaver Pond, 15 F.2d 317, 319 (4th Cir.1926) (“[T]he right of plaintiff[-assignee] to recover on the claims sued on is no greater than that of the laborers and materialmen whose claims were assigned ...”).
But the fact that the Trustee steps into the shoes of the Debtor with regard to the Underlying Claims does not necessarily trigger the IVI exception. Rather, the determining factor is that the Trustee steps into the shoes of the Debtor by virtue of a voluntary affirmative act of the Debtor, not by the involuntary appointment of a chapter 11 trustee.3
*679This court has found only one case in which a court considered whether an entity appointed pursuant to a confirmed chapter 11 plan that was drafted and filed by the debtor was subject to the exclusion in an IVI clause. See Pintlar Corporation, et al. v. Fidelity and Casualty Company of New York, et al., 205 B.R. 945 (Bankr.D.Idaho 1997). In Pintlar, the debtor-in-possession filed a complaint against former directors and officers of the debtor. The insurer, Fidelity and Casualty Company of New York, denied coverage under a D & 0 policy on the basis of an IVI clause that contained language almost identical to that in the case at bar. The debtor then assigned the claims under a trust agreement to the president of the debtor and other unnamed individuals. Provision was made in the trust agreement for the designation of the other trustees, designated “litigation trustees”, in the prospective plan of reorganization. The plan was confirmed and other individuals were named as the trustees in place of the president of the debtor.
Fidelity argued that the litigation trustees were the alter ego of the debtor for purposes of the exclusion and that the transfer of the causes of action was nothing more than a transfer to avoid the exclusion. The court agreed and concluded that:
If the causes of action belong to the same entity as [the debtor], the “insureds” under the policy, the exclusions are applicable. Further, the exclusions cannot be avoided by the process of assigning the claims to another entity merely for the purpose of avoiding the exclusion.
Pintlar, at 947.4 In the case at bar, the Debtor’s voluntary creation of the Trust and assignment of the Underlying claims against Faulkner and Smith does not permit either the Debtor or the Trustee to circumvent the exclusion provided by the IVI clause.
It is important to distinguish Pintlar and the case at bar from cases cited by the parties to this dispute. The Trustee cites In re Molten Metal Technology, Inc., 271 B.R. 711 (Bankr.D.Mass.2002) for the proposition that an IVI clause in a D & 0 Policy is applicable when a chapter 11 trustee brings a cause of action against directors or officers.
The critical distinction between Molten Metal and the case at bar is that the Trustee in this case obtained standing by virtue of the Debtor’s voluntary assignment, through the Plan, of claims against the directors and officers and not by the appointment of a chapter 11 trustee, an act that is almost always effected in contravention of the wishes of a debtor. As noted in Pintlar, a debtor cannot avoid the limitations imposed by an IVI clause in a D & 0 policy to which it was a party by assigning any claims that it may have against the directors and officers of the corporation.
This reasoning is bolstered by an examination of the difference between a pre-bankruptcy debtor, a debtor-in possession, and a chapter 11 trustee. A pre-petition debtor is the same entity as a debtor-in-possession, but a debtor-in-possession is not the same entity as a chapter 11 trustee.
*680The Bildisco decision (N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984)) defines a Chapter 11 debtor in possession as the same entity as the pre-Chapter 11 debt- or.
A debtor in possession, however, is afforded different rights and obligations under title 11 of the United States Code. Further rights and duties may be afforded a post confirmation Chapter 11 debtor by the provisions of a confirmed Chapter 11 plan. Those duties are, in these cases, to liquidate the assets of the corporations for the benefit of the creditors, as opposed to pursuing causes of action on behalf of the confirmed plan to reorganize a Chapter 11 debtor [Footnote omitted]. A Trustee appointed in a Chapter 11 case is not the same entity as a pre-Chapter 11 debtor, yet a Chapter 11 debtor fulfills the same functions as a Chapter 11 Trustee [Footnote omitted].
Pintlar at 947. Because a chapter 11 debtor-in-possession is a different entity than a chapter 11 trustee that is appointed by the court, claims by a debtor-in-possession, or its assignee, against a director or officer might possibly be precluded by an IVI clause while the same action against the same director or officer brought by a chapter 11 trustee in the same case might not be excluded by an IVI clause.
The Trustee also cites In re County Seat Stores, 280 B.R. 319 (Bankr.S.D.N.Y.2002) in support of the proposition that a chapter 11 trustee is not the same entity as the debtor for purposes of an IVI exclusion. The case is distinguishable because the plaintiff in that case was a chapter 11 trustee. And, as the court in County Seat Stores noted, a chapter 11 trustee is more than a mere assignee. The court stated:
It is the trustee’s position as an officer of the court and statutory entity, and not a mere assignee or successor — in— interest, that requires a holding that he is not the same entity as County Seat, and as a truly adverse party does not (or should not) invoke fears of collusion.
County Seat Stores, 280 B.R. at 327. The Trustee in this case is a mere assignee. His rights arise by virtue of provisions in the plan, not directly by operation of statute. The concerns about collusion remain and the conclusion in Pintlar is applicable.
Two other cases cited by the Trustee also concern the rights of a trustee appointed by statute. See NARATH v. Executive Risk Indemnity, Inc., 2002 WL 924231, 2002 U.S. Dist. LEXIS 8162 (D.Mass.2002) (Chapter 11 trustee appointed.) In re Buckeye Countrymark, Inc., 251 B.R. 835 (Bankr.S.D.Ohio 2000) (Chapter 7 trustee appointed.). Another case cited by the Trustee, Alstrin v. St. Paul Mercury Insurance Co., 179 F.Supp.2d 376 (D.Del.2002), concerns very different facts from this case, that is, whether an “estate representative” who brought a derivative action against directors and officers in concert through a pre-petition class action suit should be denied coverage under an IVI clause. The important distinction in Alst-rin is that in that case the action was brought pre-petition without the participation of the debtor.
The policy concerns that give rise to the inclusion of an IVI clause in a D & O Policy also illuminate the difference between this case and Molten Metal and other cases cited by the Trustee. A primary reason that insurers require that IVI clauses be included in D & O policies is to avoid the possibility of collusion between the corporation and the directors and officers. In Molten Metal the Court reasoned that it need not place any reliance on the purpose of the exclusion because chapter 11 trustees have no incentive to collude with directors and officers. Molten Metal *681at 728. In a case in which the debtor voluntarily transfers the causes of action to a third party, there is the distinct possibility of collusion between the debtor and the directors and officers.5 Furthermore, the debtor may have an incentive to assign its claims against the directors and officers, without colluding with them, in order to obtain a larger concession from the creditors. This is especially true when the plan is a plan of reorganization and the debtor contemplates continuing its operations.6
Federal cites Hyde v. Fidelity & Deposit Company of Maryland, 23 F.Supp.2d 630 (D.Md.1998) for the proposition that coverage is excluded under the IVI clause. In Hyde, a case that was decided under Virginia law, the Resolution Trust Corporation (“RTC”) investigated the directors of a bank regarding a loan made to one borrower in excess of the loans-to-one borrower limit. The matter was settled. The bank paid the settlement amount, but refused to pay the directors’ legal fees. The directors sought indemnification for the legal fees from the insurance. The court concluded that the IVI exclusion excepted coverage of the claims brought by the RTC. The Court reasoned that the RTC may have been acting for the benefit of creditors and shareholders, but it was doing so by acting on behalf of the bank.
In Hyde, as in Molten Metal the plaintiff (RTC) obtained standing to bring the causes of action as the result of an involuntary transfer of the causes of action against the debtor, not as the result of a voluntary assignment by the debtor. Neither Hyde nor Molten Metal inform the analysis in this case, because the facts in each case differ substantively from the case at bar.
The second method by which the Trust may assert standing to prosecute the Underlying Claims is as an agent for the creditors. Any such action brought by the Trust on behalf of the creditors must, by definition, be a derivative action.
It is clearly the law, at least in most jurisdictions, and certainly in Virginia, that no direct action lies to a creditor of a corporation against its directors, who are its agents (except in special instances of which this case is not one), for improper performance or failure in performance of their duties. This is a right belonging to the corporation only, or its legal successors to the right. The creditors must sue, not for any direct right of action in them, but in the right of the corporation, after the corporation, or its proper representatives, have refused to act.
Anderson v. Bundy, 161 Va. 1, 171 S.E. 501 (1933) (Emphasis added.).
To sue “in the right of a corporation” is to sue “on behalf of a corporation”. The Policy provides for an exception to the IVI exception. It provides that a creditor may bring an action against the directors and *682officers of a corporation on behalf of the corporation without being subject to the provisions of the IVI clause. But there is an exception to the IVI clause for derivative actions brought on behalf of the corporation. The IVI clause does not apply to “a Claim that is derivative action brought or maintained on behalf of [the Debtor] by one or more persons who are not Insured persons, and who bring or maintain the Claim without the solicitation, assistance or participation of [the Debtor] ...”
The next question, then, is whether the Trustee in this case may be said to have brought the action against Faulkner and Smith without the “solicitation, assistance or participation” of the Debtor. The answer is no. The Debtor drafted the Plan. The Debtor provided through the Plan for the creation of the Trust and for the appointment of the Trustee. By creating a legal entity to sue on behalf of the creditors, the Debtor solicited the action against Faulkner and Smith. By voluntarily assigning the claims to the Trust, the Debtor assisted in the prosecution of the claims against Faulkner and Smith. It follows that the Trustee now brings the action against Faulkner and Smith only with the solicitation, assistance, or participation of the Debtor.
Conclusion
The Trust’s standing to bring an action against Faulkner and Smith is based either on the assignment of the claims against Faulkner and Smith under the Plan or its representation of the unsecured creditors of the Debtor in a derivative action against the corporate Debtor. The Policy excludes any action filed by a party acting in either of these capacities. Partial summary judgment shall be entered in favor of the defendant Federal Insurance, Inc.
An appropriate judgment shall issue.
Upon entry of this Memorandum the Clerk shall forward copies to Roy M. Terry, Esq., Jonathan A. Constine, Esq., and the United States trustee.
PARTIAL JUDGMENT
For the reasons stated in the accompanying memorandum,
It is ORDERED ADJUDGED and DECREED that judgment shall be entered in favor defendant Federal Insurance Company and against the plaintiff, Roy M. Terry, Trustee of the R.J. Reynolds-Patrick County Memorial Hospital, Inc., Trust. Federal Insurance Company has no obligation under the Executive Protection Policy Number 8125-92-26D to indemnify defendants John M. Faulkner and Alan Smith based on the causes of action pleaded in the complaint, filed in Adv. No. 03-00004A.
No Judgment is entered at this time with respect to defendants other than Federal Insurance Company.
Upon entry of this Memorandum the Clerk shall forward copies to Roy M. Terry, Esq., Jonathan A. Constine, Esq., and the United States trustee.
. The proceeding was designated as Adv. Proc. No. 01-000196A.
. Without the parentheses, the portion of the Policy quoted above reads:
[¶ 1.] The Company shall pay on behalf of the Insured Persons all loss for which the Insured Person is not indemnified by the Insured Organization and which Insured person becomes legally obligated to pay on account of any claim first made against him, individually or otherwise during the policy period or if exercised, during the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted by such Insured Person before or during the Policy Period. [¶ 2.] The Company shall pay on behalf of the Insured Organization all Loss for which the Insured Organization grants indemnification to each Insured Person ...
. The court does not reach in this case the issue of whether a chapter 11 trustee appoint*679ed pursuant to an order of the court is subject to the exclusion in an IVI clause.
. The court in Pintlar did rule that the litigation trustees could proceed with the prosecution of the claims against the directors and officers as representatives of the creditors in a derivative action. There was no discussion concerning whether an exclusion applied to the litigation trustees in that capacity.
. All discussion of incentives for collusion in this memorandum are presented in the context of hypothetical scenarios. This court does not mean to imply that the debtor in this case has engaged in any collusive activity. This discussion is included only to distinguish the policy concerns that arise in this case from those concerns that are specifically rejected by the Court in Molten Metal.
. The Court in Molten Metal also based its reasoning in part on the fact that the IVI clause excluded actions "brought by” the debtor not those "brought by or on behalf of” the debtor. The Court concluded that when the term "brought by” is used in an IVI clause, the emphasis "is on who is bringing the claim, not who it initially belonged to”. This argument is not applicable to the case at bar, because the IVI clause in the Policy includes the language "brought by or on behalf of”. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493697/ | MEMORANDUM OPINION AND ORDER
STEVEN A. FELSENTHAL, Chief Judge.
In these consolidated adversary proceedings, Duke Energy Trading and Marketing, L.L.C. (Duke), moves for partial summary judgment dismissing claims brought by Robert Newhouse, the Chapter 7 trustee for the bankruptcy estate of Aurora Natural Gas, L.L.C., except the claim to avoid a transfer under 11 U.S.C. § 548(a)(1)(A). Newhouse opposes the motion. The court conducted a hearing on the motion on September 10, 2004.
Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, and other matters presented to the court show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Washington v. Armstrong World Indus., Inc., 839 F.2d 1121, 1122 (5th Cir.1988). On a summary judgment motion the inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255, 106 S.Ct. 2505. A factual dispute bars summary judgment only when the disputed fact is determinative under governing law. Id. at 250, 106 S.Ct. 2505.
The movant bears the initial burden of articulating the basis for its motion and identifying evidence which shows that there is no genuine issue of material fact. Celotex, All U.S. at 323, 106 S.Ct. 2548. The respondent may not rest on the mere allegations or denials in its pleadings but *479must set forth specific facts showing that there is a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
When the court concludes that summary judgment is inappropriate, it may merely enter an order denying the motion. Material fact disputes and competing factual inferences need not be discussed in an order denying a motion, as those factual disputes will necessarily be addressed at trial.
As relevant to this motion, in his second amended complaint, Newhouse seeks to avoid transfers of $19,121,139 to Duke under 11 U.S.C. §§ 547, 548(a)(1)(B), 544(b) and 550. Newhouse alternatively seeks a money judgment for breach of contract with attorney’s fees. Newhouse challenges setoffs made by Duke as contrary to 11 U.S.C. § 553(b), objects to Duke’s claim in the Aurora bankruptcy case, and, if the claim is allowed, seeks to subordinate the claim. Duke contends, in its motion for partial summary judgment, that 11 U.S.C. §§ 362(b)(6) and 546(e) shield Duke from liability to the bankruptcy estate.
Under § 546(e), the trustee may not avoid a transfer that is a “settlement payment” made by or to a “forward contract merchant” that is made before the commencement of the case, except under § 548(a)(1)(A). Section 362(b)(6) excludes from the automatic stay a setoff by a forward contract merchant of any mutual debt and claim under or in connection with a forward contract that constitutes a settlement payment arising out of a forward contract. A “forward contract merchant” means a person whose business consists in whole or in part of entering into forward contracts as or with merchants in a commodity or similar interest. 11 U.S.C. § 101(26). A “forward contract” means a contract (other than a commodity contract) for the purchase, sale or transfer of a commodity or similar interest which is presently or in the future becomes the subject of dealing in the forward contract trade, with a maturity more than two days after the date the contract is entered. 11 U.S.C. § 101(25). A “settlement payment” is broadly defined to include any payment commonly used in the forward contract trade. 11 U.S.C. § 101(51A).
Duke contends that it purchased gas from Aurora under forward contracts, that Duke operated as a forward contract merchant, and that Duke recovered overpay-ments for delivered gas by effecting settlement payments. The summary judgment evidence establishes that there are genuine issues of material fact concerning each of those contentions, requiring a trial.
Duke purchased natural gas from Aurora and resold the gas to third parties. Duke and Aurora operated pursuant to a series of agreements, including a gas sales and purchase contract, a net out agreement and a June 22, 2001, letter. Duke overpaid Aurora for certain deliveries of gas. The summary judgment evidence suggests that Duke overpaid by making erroneous payments.
Duke entered contracts with affiliates of Aurora, after engaging in transactions with Aurora. There is summary judgment evidence that Duke entered the new contracts in its computer system without deleting the old contracts with Aurora. Newhouse produced summary judgment evidence that Duke manually sent Aurora payments, but also automatically paid for purchased gas. In effect, inferences may be drawn from the summary judgment evidence that Duke twice paid for certain gas delivered, once pursuant to contracts and once outside the contracts. Duke thereafter sought to remedy its error by offsetting the manual payment against fu*480ture gas purchases. This summary judgment evidence, construed in the light most favorable to Newhouse, supports an inference that Duke made the manual payments erroneously and possibly negligently, but not pursuant to any contract.
Accordingly, considering the summary judgment evidence in the light most favorable to Newhouse, there are genuine issues of material fact of whether Duke effectuated the setoffs to correct the payment pursuant to any contract, let alone a forward contract. There is an additional genuine issue of material fact that, assuming a forward contract existed, Duke was acting as a forward contract merchant when it made the overpayment and then took the corrective, and possibly, extra-contractual setoffs. In re Mirant, 310 B.R. 548, 569 (Bankr.N.D.Tex.2004)(explaining that the Fifth Circuit in In re Olympic Natural Gas Co., 294 F.3d 737 (5th Cir.2002), mandates that such a determination must be made). Even if Duke had been acting as a forward contract merchant, not every transaction by a forward contract merchant is eligible for the protections of §§ 362(b)(6) and 546(e). Mirant, 310 B.R. at 569 n. 33. If the setoffs were taken to correct an erroneous payment not made pursuant to an existing contract, there is an additional genuine issue of material fact of whether the setoffs would qualify as settlement payments even if the parties had entered a forward contract with Duke acting as a forward contract merchant.
Duke contends that the Aurora gas sales contract, or the net out agreement, or the June 22, 2001, letter, constitute forward contracts. Depending on the fact-finding made at trial, the court may not have a need to determine this issue. But, assuming Duke prevails at trial on the issues concerning whether the overpayment and the resulting setoffs may be covered by one of these documents, Newhouse asserts that there are disputed facts regarding whether any constitute a forward contract. For example, Duke contends that the Aurora gas sales contract parallels the forward contract found by the Fifth Circuit in Olympic Natural Gas. The Olympic Natural Gas decision does not quote the contract, but finds that it provided that the parties would monthly enter into a series of individual transactions, after agreeing on the price, quantity, timing, and delivery point of natural gas. The Aurora gas sales contract provides that an agreement for the sale and purchase of gas for a particular period of delivery would be addressed by a confirmation letter. On this summary judgment record, there is a genuine issue of material fact of whether the Aurora gas sales contract itself amounts to a forward contract, even assuming that the manual payment followed by the setoffs can be construed as pertaining to the gas sales agreement.
While Duke has presented summary judgment evidence that it was not a producer, distributor or end-user of natural gas, that does not translate into a fact that Duke was a forward contract merchant in the transaction at issue with Aurora. The court cannot find on this summary judgment record that Duke has established that it was a forward contract merchant in its transactions with Aurora.
Assuming Duke establishes at trial the existence of a forward contract and that it had been acting as a forward contract merchant in its transactions with Aurora, the setoffs must still be settlement payments. The summary judgment record does not support a finding that setoffs to correct prior erroneous payments are payments commonly used in the securities trade. To the contrary, there is a genuine issue of material fact of whether the transfers were atypical and, thus, outside the *481definition of settlement payments. Furthermore, Newhouse contends that the setoffs amount to transfers not included in the definition of a “payment.” The court defers that issue until trial.
Duke maintains that §§ 546(e) and 362(b)(6) had been enacted to protect the commodities and securities markets from the ripple effect of avoidance actions and stay litigation by a bankruptcy trustee. The court cannot conclude on this summary judgment record that the Bankruptcy Code sections cover correcting erroneous payments by setoffs. The court cannot conclude that Congress intended to shield energy companies from bankruptcy trustee avoidance actions of erroneous transfers to somehow protect the commodities and securities markets. Indeed, there is a genuine issue of material fact of whether Duke employed extra-contractual remedies to setoff amounts due for natural gas deliveries to correct for the prior erroneous payment. Furthermore, the Code sections cannot be read to subsume and nullify the trustee’s avoidance powers. Mirant, 310 B.R. at 568.
Because of the genuine issues of material fact, the court defers consideration of the issues relating to the trustee’s claim regarding the automatic stay.
Based on the foregoing,
IT IS ORDERED that the motion for partial summary judgment is DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493699/ | MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
The debtors filed a Chapter 13 petition on July 10, 2003, and a Complaint To Determine Validity Of Lien on July 30, 2003. On stipulated facts, the parties submitted the case to the court for resolution on cross motions for summary judgment.
Prior to November 15, 2002, Wells Fargo Bank held a properly-recorded first mortgage on the debtors’ home in the amount of $54,900.00. Household Mortgage held a properly-recorded second mortgage on the home in the amount of $25,001.00.
On November 15, 2002, the debtors refinanced the first and second mortgages by a new note and mortgage given to Field-stone Mortgage Company (“Fieldstone”). The Wells Fargo and Household Mortgage mortgages were satisfied in full. Field-stone loan proceeds were also used to pay property taxes due. K & M Title Company closed the loan as settlement agent for Fieldstone. Due to K & M’s negligence, the mortgage was not recorded. The debtors made mortgage payments until July 2003 when they filed their Chapter 13 Petition. The debtors listed Fieldstone’s claim as unsecured for $81,690.38. The home had a value as of July 10, 2003 of $60,000, and a liquidation value of $54,000.00.
The debtors want to use the trustee’s § 544(a)(3) power to avoid Fieldstone’s lien thereby rendering Fieldstone’s claim unsecured, non-priority, and dischargeable. They may not do so.
Fieldstone argues that it is entitled to equitable subrogation, to wit: that it is entitled to take the place of the erstwhile secured creditors, Wells Fargo and Household Mortgage, by virtue of having paid the debts owed to them. Fieldstone goes on to claim that its mortgage should be deemed recorded as of the date the Wells Fargo and Household Mortgage mortgages were recorded by virtue of having paid those mortgages for the debtors’ benefit. Fieldstone is not entitled to subrogation.
Subrogation in this context is a matter of state law. In Wisconsin,
Subrogation is an equitable doctrine invoked to avoid unjust enrichment, and may properly be applied whenever a person other than a mere volunteer pays a debt which in equity and good conscience should be satisfied by another. As a rule, however: ... the right of a party to subrogation, by reason of advances made to a debtor, depends upon (1) his being secondarily liable; or (2) the necessity for acting to protect his own interests; or (3) an agreement that he is to have security.
Rock River Lumber Corp. v. Universal Mortg. Corp. of Wisconsin, 82 Wis.2d 235, 262 N.W.2d 114, 116-17 (1978) (citation *515omitted). Fieldstone was not secondarily liable on the debtors’ prior mortgages. Fieldstone had no need to lend the debtors money or pay off the prior mortgages to protect its own interest.
Under what is generally termed ‘conventional subrogation,’ a lender will be granted subrogation where money is advanced in reliance upon a justifiable expectation that the lender will have security equivalent to that which his advances have discharged, provided that no innocent third parties will suffer. Equity will treat such a transaction as tantamount to an assignment of the original security.
Id. at 117.
“An agreement that he is to have security” refers to an agreement between the parties to the transaction — the mortgagor and the mortgagee — in this case the debtors and Fieldstone. Id. at 117. Although Fieldstone entered into an agreement with the debtors that it was to have security, and received that security in the form of a mortgage which it neglected to record, it had no agreement that the debt- or would provide additional security to Fieldstone. There is no need for equity to treat Fieldstone’s mortgage as “tantamount to an assignment of the original” mortgages because Fieldstone received its agreed security. That Fieldstone failed to record its mortgage is not grounds for invoking equity. The debtors are not the party at fault here, and they will not be unjustly enriched if subrogation is denied.
The mortgage was not recorded by Field-stone’s agent. Furthermore,
Even where a definite agreement for subrogation is shown... subrogation will be denied where it would lead to an uncontemplated and inequitable result. ... [Conventional subrogation will be available only where a definite agreement of the parties is shown and where a balancing of the equities favors application of the doctrine.
Id.
There is no definite agreement for sub-rogation, and the balancing of equities does not support equitable subrogation.
Fieldstone had an opportunity to perfect its mortgage and assert its priority. By its own negligence it failed to perfect. However, the mortgage lien is still valid as between the debtors and Fieldstone. The importance of recording a mortgage concerns notice to future lenders who seek security in the same real estate; it has no effect on the secured status of Fieldstone’s loan to the debtors. It is only unperfected as against a subsequent bona fide purchaser.1 Thus, the debtors would need to avoid the lien in order to render Fieldstone’s claim unsecured.
The debtors want to invoke the trustee’s § 544(a)(3) power to avoid the mortgage and deem Fieldstone’s claim unsecured. But the debtors are not trustees nor have they been given the powers of a trustee under § 544. This court held in In re Driscoll, 57 B.R. 322, 324 (Bankr. *516W.D.Wis.1986) (reversed on other grounds, see n.6):
[Sjection 1303 grants a chapter 13 debt- or the powers of a trustee only under specified subsections of 11 U.S.C. § 363 and does not purport to grant the debtor any of the trustee’s avoiding powers found in chapter 5 of the Code.
Section 1303 states:
Subject to any limitations on a trustee under this chapter, the debtor shall have, exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 3630), of this title.
Because § 544 is not among the enumerated powers given to Chapter 13 debtors, the debtors may not avoid a lien under that section.
Some courts have reached a different conclusion.2 But those decisions do not control this court, and their reasoning is not compelling. The decision in Driscoll followed In re Carter, 2 B.R. 321 (Bankr.D.Colo.1980).
The issue of the Chapter 13 debtor invoking a trustee’s powers has been recently revisited in In re Ryker, 315 B.R. 664 (Bankr.D.N.J.2004), which, referring to the holding in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000), which limited the exercise of powers available to the trustee under § 506(c), stated:
The Supreme Court was also not persuaded by the contention that § 506(c) could be read to include other parties since the language of § 506(c) does not explicitly exclude other parties. The Court pointed out that had Congress intended to include other parties within the ambit of § 506(c) it simply could have said so.
Ryker, 315 B.R. at 669.
The Ryker court found the analogy of § 506(c) to § 1303 to be apt, stating:
Importantly, the issue before the Court in Hartford Underwriters is similar to the issue addressed here: whether statutory language which identifies only the trustee as the party who may act, should be read to include other parties. Applying Hartford Underwriters, it is apparent that not only the statutory language, but also the structure of the Code reveals that a Chapter 13 debtor does not have standing to independently assert the trustee avoidance powers.
Id.
The Ryker court’s analysis of this issue is in total accord with this court’s decision in Driscoll, 57 B.R. 322, 325. There is a specific and limited grant of authority to the debtor in § 1303. That authority found did not include the use of § 548 in Ryker, § 545 in Driscoll or § 544 in Carter, and does not include the use of § 544 in the present case.
The debtors cannot avoid Fieldstone’s mortgage. Fieldstone must be treated as *517a creditor with a secured claim. Defendant’s are entitled to summary judgment.
ORDER
The Court having this day entered its memorandum decision in the above-entitled matter,
IT IS HEREBY ORDERED that judgment may be entered for Defendants.
. Wis. Stat. § 706.08(a) states in relevant part:
[E]very conveyance that is not recorded as provided by law shall be void as against any subsequent purchaser, in good faith and for valuable consideration, of the same real estate or any portion of the same real estate whose conveyance is recorded first.
The lien exists on the property regardless of the mortgage not being recorded. Wis. Stat. § 708.01 states:
A mortgage on real property creates a lien on the property mortgaged; except for the lien and subject to s. 708.11, the mortgagor retains the interest that the mortgagor had at the time of the mortgage until that interest is divested by some later act.
. For cases holding that debtors do have a trustee’s avoiding powers see In re Boyette, 33 B.R. 10, 11 (Bankr.D.Tex.1983) ("I reject the holding of In re Carter... I hold that the Debtors are vested with the avoiding powers of a bona fide purchaser for value under § 544(a)(3)...”); Matter of Ottaviano, 68 B.R. 238, 240 (Bankr.D.Conn.1986) ("I disagree, and accept the majority view that a chapter 13 debtor has standing to bring actions under the Bankruptcy Code's avoidance powers.”); Thacker v. United Companies Lending Corp., 256 B.R. 724, 728 (W.D.Ky.2000) ("The Thackers are determined to have standing to assert the § 544(a) strong-arm avoidance powers granted to trustees.”); U.S. v. Dewes, 315 B.R. 834, 836 (N.D.Ind.2004) ("While the IRS and the Bank argue that a better reasoned approach is one in which a Chapter 13 debtor does not have standing to bring such an action, the Bankruptcy Court disagreed.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493815/ | MEMORANDUM-OPINION
JOAN L. COOPER, Bankruptcy Judge.
This matter is before the Court on the Motion of Secured Creditor Regional Acceptance Corporation (“Regional Acceptance”) to Amend Confirmation Order. The Court considered the Motion of Regional Acceptance and the Objection to Motion of Regional Acceptance Corporation to Amend Confirmation Order of Debtors, Ronnie R. Ray and Angela G. Ray (“Debtors”). For the following reasons, the Court GRANTS the motion of Regional Acceptance.
FACTS AND LEGAL ANALYSIS
Regional Acceptance is the secured lien-holder on Debtors’ 2004 Ford Mustang. Regional Acceptance filed a Proof of Claim on October 3, 2005 asserting a secured claim in the amount of $15,720.34.
The confirmation Order entered on October 13, 2005 values the 2004 Ford Mustang at $10,000 with interest to be paid at 10%. The appraisal performed by the Court appointed appraiser set the value of the 2004 Ford Mustang at $14,175. Regional Acceptance claims that it did not object to the Debtors’ Plan because it believed the Court appointed appraiser’s value would be used.
The Court finds that all creditors have a reasonable expectation that the Court appointed appraiser’s assessment of the value of items will be used in the confirmation process. In this jurisdiction, the confirmation hearing is held on the same date as the § 341 meeting. If creditors cannot rely on the Court appointed appraiser’s value to be used in the Plan, every creditor would be required to attend the § 341 meeting and the confirmation hearing. Otherwise, a creditor’s nonattendance at the § 341 meeting could result in confirmation by ambush with significant impairment of their claims. This cannot be permitted.
In the case at bar, the appraisal was of record ten days prior to the § 341 meeting. Regional Acceptance did not object to the Plan because the appraisal was of record. Had Regional Acceptance attended the hearing, the Court appointed appraiser’s value would have been used in the Plan and the Order of Confirmation.
Regional Acceptance’s Motion to Amend the Order of Confirmation was filed by November 14, 2005. The Court finds there is no undue delay in Regional Acceptance’s action to protect its claim. Accordingly, the Motion to Amend Order of Confirmation is GRANTED.
CONCLUSION
For all of the above reasons, the motion of secured creditor Regional Acceptance Corporation to Amend Confirmation Order is GRANTED. An Order incorporating the findings herein accompanies this Memorandum-Opinion.
ORDER
Pursuant to the Memorandum-Opinion entered this date and incorporated herein by reference,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Motion of secured creditor Regional Acceptance Corporation to Amend Confirmation Order, be and hereby is, GRANTED. The Order of Confirmation is amended to re-*599fleet the value of Regional Acceptance’s claim as $14,175. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493816/ | MEMORANDUM
DAVID T. STOSBERG, Bankruptcy Judge.
This adversary proceeding comes before the Court on the defendant’s Motion to Dismiss or in the Alternative to Compel Discovery and for Sanctions. The trustee did not file a response to the motion. Upon consideration of the motion, and the record in this case, the Court holds that this adversary proceeding should be dismissed.
I. STATEMENT OF JURISDICTION
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, and it is a core proceeding under 28 U.S.C. § 157(b)(2)(E). Venue of this adversary proceeding in this Court is proper under 28 U.S.C. § 1409(a), as this proceeding arises in and relates to the debtor’s Chapter 7 case pending in this District.
II. FACTS
1. On August 13, 2002, the debtor filed a voluntary Chapter 11 petition in , the United States Bankruptcy Court for the Western District of Kentucky.
2. On November 4, 2002, the case converted to a Chapter 7 proceeding and the Court ordered the appointment of a trustee. Gordon A. Rowe, Jr., the plaintiff, was appointed as the Chapter 7 trustee.
3. On August 10, 2004, the trustee initiated this adversary against Jan Lo-man, the defendant, alleging that the defendant received several preferential transfers totaling $11,184.04. Following discovery and a hearing on a motion to compel filed by the defendant, the trustee reduced the amount to $8,481.86, a total derived from five separate transfers made to the defendant from May 17, 2002 to July 8, 2002. According to the trustee, these transfers satisfied the elements of a preferential transfer under 11 U.S.C. § 547.
4. The defendant answered on September 17, 2004, admitting receipt of the payments in question and asserting the ordinary course of business preferential defense as set forth in 11 U.S.C. § 547(c)(2).
5. After several discovery extensions caused by the trustee’s actions or inactions, the defendant moved for summary judgment on September 20, 2005. The trustee opposed the summary judgment motion indicating that the defendant received, along with the alleged preferential transfers, several payments which the trustee characterized as duplicate payments, ie., expenses erroneously paid twice to the defendant by the debtor. These duplicate payments totaled $1,152.13.
6. On November 21, 2005, this Court entered its Memorandum and Judgment granting the defendant’s motion for summary judgment with respect to all the transfers except the alleged duplicate payments. A separate order was entered setting a discovery deadline of February 20, 2006, and a trial date of March 20, 2006.
7. On February 1, 2006, the defendant filed the motion currently before the Court. In that motion, defendant argues that this adversary should be dismissed due to the trustee’s failure to cooperate with discovery requests. Defendant set forth the *603dates that discovery was propounded to the trustee, and indicated that the trustee failed to reply within the time allowed by the Federal Rules of Bankruptcy Procedure. Furthermore, the defendant reminded the Court of the trustee’s past behavior with respect to discovery abuses. In the alternative to dismissal, the defendant asks the Court to impose sanctions against the trustee and to again order the trustee to comply with discovery requests. The trustee did not respond to this motion.
III. LEGAL DISCUSSION
There are several reasons why the Court has decided to grant the defendant’s motion to dismiss. First and foremost, is the trustee’s failure to properly handle this case. Unfortunately, this case is not an isolated incident and simply follows a pattern of poor handling of the adversaries related to this main bankruptcy case. This action started in August 2004, and after eighteen months, the defendant is still not being provided responses to basis discovery requests. It is apparent to the Court that this adversary proceeding simply does not have a high priority to the trustee, as evidenced by the motion to compel previously filed by the defendant in March, 2005. Furthermore, the discovery deadline is set to expire within a short period of time, and trial is set to be heard a short time after that, and the trustee still refuses to cooperate with simple discovery requests. Such dilatory tactics by the trustee unfairly prejudices the defendant.
The Court could order the trustee to comply with the defendant’s discovery requests and award the defendant sanctions, including attorney fees, as clearly would be warranted under Fed. R. Bank. P. 7037. However, considering the small amount in controversy here, the Court believes the better course of action is to simply dismiss the action. Clearly, a continuation of this litigation to recover such a small sum is not in the best interest of the estate. Indeed, the Court was somewhat surprised the trustee did not dismiss this action after the Court partially granted the defendant’s motion for summary judgment. Certainly, the Court appreciates the trustee’s zeal in trying to recover every dollar for the estate, but this zeal must be balanced with practicality. It is simply not practical to incur thousands of dollars in legal fees to recover $1,152.13. Such a quest does not serve the estate and indeed burdens the estate to an unacceptable level. The Court shall enter an Order this same date in accordance with the holding of this Memorandum.
ORDER
Pursuant to the Court’s Memorandum entered this same date and incorporated herein by reference,
IT IS ORDERED this adversary proceeding is DISMISSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493817/ | *694MEMORANDUM OPINION AND ORDER DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
JANICE MILLER KARLIN, Bankruptcy Judge.
This matter is before the Court on Defendant United States’ Motion for Summary Judgment.1 Plaintiff, Earl C. Mills (Mills), has filed a response to the motion. The United States, acting through the Internal Revenue Service (IRS), did not file a reply, and the time for doing so has now expired. The Court has reviewed the briefs submitted by the parties and is now prepared to rule. This matter constitutes a core proceeding,2 and the Court has jurisdiction to decide it. The Court denies the motion for summary judgment, and the matter is now set for trial.
I. FINDINGS OF FACT
Mills initiated this adversary proceeding seeking a determination that his federal income tax obligations for the years 1987 through 1998, now totaling $1,727,813,3 are dischargeable in this Chapter 7 bankruptcy. The Bankruptcy Code permits a debt- or to discharge income taxes in Chapter 7 for a period that is at least three years before the bankruptcy filing, if the applicable returns were filed at least two years before the bankruptcy case, the returns are not fraudulent, and the debtor has not willfully attempted, in any manner, to evade or defeat the otherwise dischargea-ble taxes. IRS contends that Mills did willfully attempt to evade or defeat his taxes for those years, and, therefore, the taxes are nondischargeable pursuant to 11 U.S.C. § 523(a)(1)(C).4
The basic facts underlying this case are not really in dispute. Mills is a neurosurgeon who obtained his medical degree in 1969 and has been actively employed as a neurosurgeon since at least 1976. During the twelve year period at issue in this case, his adjusted gross income ranged from a low of $84,392 in 1997 to a high of $434,003 in 1990, with an average annual income of $255,243.5 His AGI over this period of time totaled $3,062,914, with a tax due on returns in the same period totaling $557,762.13, or only 18.2% of his AGI. In 1998, Mills closed his private practice and took a salaried position at Howard University, where he worked until the end of 1999 for an annual salary of $300,000.
During this same period, Mills was married to another physician who had annual income also available to support their family of four (consisting of Drs. Mills and their two children, who were born in approximately 1983 and 1986) in amounts in the $120,000 to $150,000 range. Mills also was in the Amway business, and records reflect his receipt, during some period, of another $3,000 per month attributable to that business venture. This translated into monthly gross income to support their family of anywhere from $44,000 to $54,000 *695per month during at least portions of the time period in question.6
In August 2000, Mills took a position at the Wichita Clinic in Wichita, Kansas for an annual salary of $350,000-$393,000. At the time of the filing of this bankruptcy in 2003, Mills’ Schedule I reflected monthly gross income of $37,171.60, which would equal approximately $446,000 per annum. Mills also earns substantial additional income by doing medical consulting, in addition to the Wichita Clinic salary; he projected $45,000 in consulting income for 2003. Accordingly, at the time he filed this bankruptcy petition, it appears his 2003 income may have been in the one-half million dollar range. It is also relevant to note this is Dr. Mills’ second bankruptcy, the other one having been filed in Maryland in approximately 1990.7
Mills ultimately filed a tax return for each year in question, although eight of the twelve returns were filed late.8 During most of that time period, Mills was apparently self employed, and thus required to pay estimated tax payments on a quarterly basis. Mills did not pay those estimated taxes9 as they became due throughout the tax year, nor did he pay the balance due on the returns when the returns were ultimately filed.
For the years 1987 to 1998, Mills incurred income tax liabilities in the sum of $557,762.13, excluding interest and penalties. IRS contends that Mills had more than adequate income available to him to pay these taxes as they became due, and before interest and penalties accrued, but that he made the choice, instead, to live an extravagant lifestyle. IRS relies, in part, on Mills’ decision to purchase, and then continue to own, certain pieces of expensive real estate (including owning three separate houses simultaneously during a significant part of the relevant time frame — at least 1989 to 1995) to support its position. Specifically, IRS contends that the following transactions are evidence of Mills’ decision to continue a lavish lifestyle, instead of choosing to have a very comfortable lifestyle while also paying his tax obligations:
1. In 1978, Mills purchased a house in Rockville, Maryland for approximately $216,000. Mills lived there for approximately four years and required a mortgage payment of approximately $1,800 per month. Mills then rented the property to his *696wife’s parents for monthly rent of approximately $300 (and he thus paid the remaining $1,500 monthly mortgage payment) until the property was foreclosed in 1995. The estimated fair market value of the property in 1993 was $700,000. There is no evidence in the record why these individuals required support, or if support was necessary, why they required such a high-dollar residence, or why they could not have resided with the Mills.
2. In 1980, Mills purchased a house in Potomac, Maryland for $545,000.10
3. In 1983, Mills purchased a townhouse in Bethesda, Maryland requiring a monthly mortgage payment of approximately $2,325. Mills allowed his wife’s sister to live in this property for $500 a month in rent (while he paid the remaining $1,825 of the required payment) until the property was foreclosed in 1995. The estimated fair market value of the property in 1993 was $350,000. Again, there is no evidence why Mills was obligated to support this person, or if necessary to provide her support, why she required such a high-dollar residence, or why she could not have resided with the Mills.
4. Also in 1983, Mills purchased a second home, in Potomac Falls, Maryland, for approximately $600,000, which is where Mills and his immediate family lived. In 1987, Mills sold this house for $1.4 million.
5. In February 1989, Mills purchased another home in Potomac, Maryland for $2.8 million.11 He used the $800,000 “profit” from the sale of the Potomac Falls home as a down payment on this 8,000 square foot, eight bedroom, ten bathroom house.12 The mortgage on the home required a monthly payment of approximately $25,000.13 The estimated fair market value of the home in 1993, six years after he had acquired it, was $3.1 million. The loan on the house was also foreclosed in 1995 when he stopped making the required payments.
6. From 1995 until 2000, Mills rented property in Potomac, Maryland for $5,500 to $6,000 per month.14 This home had the approximate same square footage as the $3.1 million home (8,000 sq. ft.).15
7. Upon moving to Wichita, Kansas in 2000, Mills first rented a 4,000 *697square-foot house for $5,000 per month.
8. In May 2003, Mills purchased a 6,000 square-foot, five-bedroom house in Wichita, Kansas for $370,000, which required a monthly mortgage payment of $5,627.14, not including real estate taxes and insurance.16 This home has an elevator and a swimming pool, although there is nothing in the record indicating that anyone living in this home has any disabilities.
IRS also cites several other purchases, transactions and living expenses to support its position that Mills chose to enhance, or at least maintain, his lifestyle instead of paying his income taxes, including:
1. Mills throughout the years in question paid living expenses of his wife’s parents (and at least the housing expenses of a sister-in-law for some portion of time).
2. In 1988, Mill purchased approximately $17,075 worth of antiques for his home.17
3. Mills purchased a new Mercedes Benz automobile in 1982 and another in 1984, as well as a 1987 model year van and a 1987 model year Jeep in December 1986.
4. Mills purchased artwork in the 1980s for approximately $50,000, and apparently has never liquidated that art in an attempt to pay ongoing, or past due, taxes.18
5. Mills’ children attended private schools for a time when the family lived on the East Coast.
6. Mills belonged to a country club in Wichita, Kansas and he paid for his wife’s personal trainer at a cost of $480/month for some period of time in 2003.
7. Mills and his wife took a trip to Hawaii in 2004 at a cost of over $4,000.
8. Mills hired an interior decorator for approximately $350.
9. In 2001, when his tax liability well exceeded a million dollars, Mills donated over $23,000 to his church.
Mills has responded to many of these allegations, claiming IRS has “scant facts” to support its assertions. He argues that many of the identified purchases and ex*698penses took place prior to 1987, when these tax obligations arose, and thus could not be evidence of a willful failure to pay during the years in question. Mills also states that he tried, to dispose of at least one of the properties in the Washington, D.C. area, but that a downturn in the real estate market made disposing of the properties impractical. Further, Mills points out that his children stopped attending private schools when his family moved to Kansas, that his donations to his church are motivated by religious beliefs and not an attempt to evade his taxes, and that his membership in the country club no longer exists.19 He contends he joined the country club merely to build business contacts upon moving to Kansas. Finally, Mills claims that many of the expenses, such as a payment of $850 to an interior decorator, are so de minimus that they do not support IRS’s position.
Additional facts will be discussed below, when necessary.
II. STANDARD FOR SUMMARY JUDGMENT
Summary judgment is appropriate if the moving party demonstrates that there is “no genuine issue as to any material fact” and that it is “entitled to a judgment as a matter of law.”20 In applying this standard, the Court views the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party.21 An issue is “genuine” if “there is sufficient evidence on each side so that a rational trier of fact could resolve the issue either way.”22 A fact is “material” if, under the applicable substantive law, it is “essential to the proper disposition of the claim.”23
The moving party bears the initial burden of demonstrating an absence of a genuine issue of material fact and entitlement to judgment as a matter of law.24 In attempting to meet that standard, a mov-ant who does not bear the ultimate burden of persuasion at trial need not negate the other party’s claim; rather, the movant need simply point out to the court a lack of evidence for the other party on an essential element of that party’s claim.25
If the movant carries this initial burden, the nonmovant who would bear the burden of persuasion at trial may not simply rest upon his pleadings; the burden shifts to the nonmovant to go beyond the pleadings and “set forth specific facts” that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant.26 To accomplish this, sufficient evidence pertinent to the material issue “must be identified by refer*699ence to an affidavit, a deposition transcript, or a specific exhibit incorporated therein.”27 Finally, the Court notes that summary judgment is not a “disfavored procedural shortcut;” rather, it is an important procedure “designed to secure the just, speedy and inexpensive determination of every action.”28
III. ANALYSIS
A debtor under Chapter 7 of the Bankruptcy Code is generally granted a discharge from all debts that arose before the filing of the bankruptcy petition. Exceptions to discharge are to be strictly construed in favor of debtors.29 The objecting creditor, here the IRS, bears the burden of proving by a preponderance of the evidence that the debtor’s taxes are nondischargeable.30
Certain debts are excepted from discharge under 11 U.S.C. § 523, including any debt “for a tax or custom ... with respect to which the debtor ... willfully attempted in any manner to evade or defeat such tax ....”31 Evidence of nonpayment alone does not, however, support a finding that a tax debt is nondischargeable.32 To defeat the discharge of the tax debt, the creditor must prove that the debtor willfully attempted to evade or defeat the tax, and that proof must contain both a “conduct” element, that the debtor has attempted in any manner to evade or defeat tax, and a “mental state” element, that he has acted willfully.33 The conduct required is that the debtor attempted in any manner to evade or defeat a tax, which can include either affirmative conduct or acts of culpable omission. The willfulness required under §' 523(a)(1)(C) is met if the actions are done voluntarily, consciously, or knowingly and intentionally.34
Interwoven into the Court’s analysis is the underlying policy that § 523(a)(1)(C) should be applied in such a fashion as to best promote its purpose of limiting discharge to the honest but unfortunate debtor.35 Thus, the late filing of returns, or the failure to pay taxes as they became due, due to mistake, inadvertence or an honest misunderstanding would not, without more, constitute a willful attempt to evade or defeat a tax. Conversely, conduct found to be sufficient for a finding of willful tax evasion under § 523(a)(1)(C) could include the combination of unexcused late-filed returns and significant understatement of income.36 As the Court understands the evidence, there is no dispute that Mills had a duty to file returns and pay taxes, and that he knew he had such a duty.
*700It is important to note that in order for a debt to be non-dischargeable under § 523(a)(1)(C), the debtor does not have to have acted with a bad purpose or an evil motive.37 A tax can be found non-dischargeable under § 523(a)(1)(C) if the debtor has elected to pay creditors other than his tax creditors and to purchase discretionary items rather than address his tax obligation. When a debtor has made the conscious choice to pay other debts and purchase luxury items or an expensive home, instead of paying an admitted tax liability, he can be said to have acted willfully under § 523(a)(1)(C).38 As stated in United States v. Angel,39 the Court must distinguish
“... between the debtor with the present ability to pay who so refuses and the unfortunate debtor without a present ability to repay. Debtors with an inability to pay their taxes with no more culpability will have their tax debts discharged. However, debtors who have cash in hand and, instead of responding to their tax obligations, choose to pay other creditors or purchase luxury items and expensive homes will have their tax debts excepted from discharge.”40
The Court finds that the following four, admittedly overlapping, factors should be considered when deciding whether Mills is an unfortunate debtor who simply was unable to pay his taxes, as they became due, or a debtor who had adequate funds, but instead chose to pay others. The Court will analyze these under a “totality of the circumstances” standard, which is required because direct proof of an intention to evade or defeat taxes may be difficult to establish.
First, the Court should consider under what circumstances the tax obligations arose. For example, over what period of time did the taxes arise? Was it a onetime occurrence, or a pattern of accumulation of tax obligations? Was there some unexpected, and unavoidable, reduction in income or increase in expenses that caused a debtor to suddenly become unable to meet all his financial obligations, such as job loss or illness, or an employee’s embezzlement of funds?
Second, once the tax obligation first arose, did the debtor take steps to ensure that his ongoing expenses were reasonable and necessary in light of his available income (after payment of taxes attributable to that income)? For example, did the existing level of the debtor’s lifestyle predate the unpaid tax obligations, or did the lifestyle become more extravagant (or continue to be extravagant) while the tax obligations were accruing? If his lifestyle did not become more extravagant, did debtor take reasonable steps to decrease expenses so as to be able to meet ongoing liabilities? In this case, IRS contends that Mills should have simply sold one or all of the homes he owned in the Washington D.C. area to save on the large monthly mortgage payments (and the taxes, insurance, and upkeep associated therewith). IRS *701also contends that Mills should have sold the properties occupied by his wife’s relatives to save on the large mortgage payments required to retain those additional homes.41
Mills has responded that he attempted to sell at least the $3.1 million home at some point after he acquired it, but that the real estate market had fallen and he was unable to sell it.42 If Mills did in fact take reasonable steps to sell the properties to eliminate the large mortgage payments, but was unable to do sell the property due to no fault of his own, or could only sell the property at a loss (such that it would not net income for payment of tax liabilities or if such sale would result in negative tax consequences not offset by mortgage savings), then that fact would be relevant to the issue of whether he willfully failed to pay the taxes that came due after he was unable to sell the property.
Third, the Court should look at the particular debtor’s awareness of his tax situation and whether he is financially savvy enough to understand the consequences of his spending choices. In other words, was the debtor acting in good faith surrounding the tax obligations? For example, a highly educated debtor, such as Mills, might well be held to a higher standard than a less educated debtor. In addition, a higher income debtor, who could well afford professional tax counseling provided by a lawyer or accountant,43 might be held to a higher standard than a lower income debtor.
On that same subject, whether a debtor is making reasonable efforts to comply with all aspects of the Internal Revenue Code could well be relevant for the Court to determine the willfulness of a debtor’s election not to pay his outstanding tax obligations as they become due. Was the debtor routinely timely filing tax returns, or was he making it difficult for the tax collectors by purposely requiring the collector to chase outstanding returns? Was the debtor, when he filed his tax returns, declaring all income earned, or was he requiring IRS to audit the return because of unexplained income purportedly received?44 Was the debtor electing to pay some kinds of taxes, while choosing not to pay others, such as payment of “trust fund” type taxes that would not be dischargeable45 in a personal bankruptcy *702versus income taxes that, after a certain period of time, might be? Was debtor taking deliberate steps to avoid accumulating assets that could be seized to satisfy his liabilities, such as by renting instead of purchasing assets?46 Finally, what was the debtor’s history with the IRS prior to the time he started not paying taxes? Had he always previously timely filed and paid, or had there been repeated collection problems, which might show that a particular debtor had a unique understanding of the consequences of not paying taxes?
Finally, the Court should consider any other factors that might show intent, including the reasonableness of expenses paid in lieu of taxes. For example, it may not be reasonable for one debtor to send his child to private school while it could be perfectly reasonable for another to do so if he had a child with special needs, or if the public schools demonstrably failed to provide an adequate education.47 Or, it might not be reasonable for a family of two to purchase a large, four wheel drive sport utility vehicle to drive around a large city, while it might be perfectly reasonable for a family of six who lives in a rural community to do so. Furthermore, homes typically cost more in the Washington, D.C. area than they do in Kansas, for example, and thus whether a given mortgage payment is reasonable may depend on the area where a debtor resides, and at what cost safe and comfortable housing is reasonably available. Although the Court well suspects Mills could have found safe, comfortable and affordable housing for considerably less than $25,000 per month, there was no evidence in the record of this fact.
In applying these factors to this case, the Court finds that although it is a close decision, summary judgment is not appropriate because of the required standard of review for summary judgment motions. Mills argues that there is no evidence he purposely sought to expand or increase his standard of living following the start of his tax problems in 1987; instead, he argues that by that time he already had a high lifestyle and that he was unable to extricate himself from the expenses that came with that lifestyle despite his well-intentioned efforts to do so.
Part of the reason the Court finds that granting summary judgment at this stage is inappropriate is because Mills correctly notes that many of the purchases and expenses IRS relies upon to show willfulness occurred prior to, or around the same time as, when Mills’ tax obligations began to accrue. The only expenditures IRS points to, which occurred after his tax problems began in 1987, essentially include those for the purchase of $17,000 in antiques, the *703purchase of the home in Wichita, the temporary use of a storage facility upon moving to Wichita, the country club membership for some time, and the purchase of several used, albeit expensive, automobiles upon the family’s arrival in Wichita.48 Mills has testified, by affidavit, as to each of these expenses, and if all inferences are made in the light most favorable to him, summary judgment is not appropriate. Mills has also presented evidence that he ultimately took steps to reduce his standard of living. Mills notes that the real estate market had fallen -in the Washington, D.C. area, perhaps in part as a result of tax changes surrounding the deduction of mortgage interest, making the sale of multi-million dollar homes more difficult. He contends he in fact tried to sell the most expensive piece of property, but was unable to do so before it was eventually foreclosed. There is no evidence in the record to refute this contention.
Mills also took steps such as purchasing a much less expensive home when he moved to Wichita (which cost only 13% as much as the $2.8 million house in the D.C. area), sending his children to public school once they moved to Kansas, and buying used vehicles to replace two Mercedes Benz automobiles. On that same subject, he argues that although he admittedly purchased two new Mercedes Benz automobiles in 1982 and 1984, several years before the tax problems at issue arose in 1987, that he and his wife then drove those automobiles until they moved to Wichita in 2000, at which time they could no longer be -repaired.
The Court finds, for purposes of this summary judgment motion, that Mills did make some effort to marginally reduce his monthly expenses. IRS is free at trial to present evidence concerning the reasonableness of Mills’ efforts, in light of his family income, and whether Mills could and should have done more to reduce his living expenses.49 The uncontroverted evidence in this case does show that Mills incurred the tax obligations over a very long period of time, by simply, year after year, failing to pay his taxes as they became due. This is clearly not a case where Mills experienced an unexpected drop in earnings or incurred some unexpected expenses and needed a reasonable period of time to accept that he needed to adjust his standard of living so that he could afford to meet his tax obligations. The taxes in quest on in this motion span a period of twelve years in which Mills completely failed to pay his taxes. Although this factor certainly weighs in favor of the IRS, it is not sufficient, taken by itself, to allow the Court to rule,- as a matter of law, that Mills willfully failed to meet his tax obligations.
Finally, there are numerous other questions that surround the evidence submitted by IRS that preclude summary judgment. *704For example, IRS relies upon the fact that Mills belonged to a country club in Wichita, Kansas as evidence of his lavish lifestyle. The amount spent at the country club is not itemized. Mills has responded that the country club membership was intended to assist his efforts in networking and building his medical practice following his move to Kansas (and not to evade taxes), and that he has since canceled that membership. IRS also notes that he paid for a personal trainer for his wife, to which Mills responds the trainer was only hired for a short period of time and was necessary for certain health reasons, which are undisclosed.50 Again, for purposes of summary judgment, the Court must accepts Mills’s explanation for these expenses and finds that, standing alone, they do partly negate IRS’ contention that Mills willfully failed to pay his taxes.
Without going into each and every argument made by the parties, the Court finds that Mills has raised sufficient questions of fact to preclude summary judgment. The central issue here is whether Mills acted willfully in failing to pay his taxes. Given Mills’ explanation for why he failed to sell the properties in Washington, D.C. when it became patently obvious he could not afford them while simultaneously paying his tax obligation, and his somewhat reduced lifestyle once he moved to Wichita, the Court cannot find that there is sufficient evidence to rule, as a matter of law, that Mills willfully failed to meet his tax obligations. The evidence presented in this motion may well turn out to be sufficient to establish willfulness at trial, but it is not sufficient for summary judgment.51
IV. CONCLUSION
The Court finds that summary judgment cannot be granted with the evidence before it. IRS has outlined numerous purchases, transactions and expenses that do appear to be lavish, and the Court is struck by the amount of income Mills and his wife earned during the time when he was regularly not paying his taxes. That said, however, Mills has provided enough of an explanation for his lifestyle and living expenses that, when all reasonable inferences are viewed in the light most favorable to him, raise a factual question as to whether he willfully failed to pay his income taxes.
“[A]t the summary judgment stage the judge’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.”52 Accordingly, this issue must be decided as a factual matter following a full opportunity for both sides to present evidence to the Court as a trier of fact. Mills suggests his non-payment over twelve years was as a result of a “downward spiral” and that “despite his best efforts” he was unable to meet all his obligations. It will be this Court’s job, after hearing all the evidence and assessing the credibility and demeanor of the witnesses, to determine why Mills, who appears to have had the wherewithal to pay his taxes, did not do so.
*705IT IS, THEREFORE, BY THIS COURT ORDERED that the Motion for Summary Judgment filed by the United States (Doc. 54) is denied. This matter is set for trial on the Court’s stacked eviden-tiary trial docket to commence January 5-6, 2006.
. Doc.54.
. 28 U.S.C. § 157(b)(2)Cl).
. In addition to these potentially dischargea-ble taxes, IRS has filed a Proof of Claim showing Mills owes over $38,000 as a civil penalty for what is likely trust funds taxes due for the first quarter of 1998, and another approximately $57,000 in income tax liabilities that were last due within three years before the date of the filing of the petition and are excepted from discharge under 11 U.S.C. §§ 523(a)(1)(A) and 507(a)(8)(A)(I). This Adversary Proceeding does not question the non-dischargeability of those taxes.
. All statutory references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330 (2004), unless otherwise specified.
. During the time frame at issue, Mills was married, but elected to file singly.
. Mills also does consulting that he estimated, on schedules filed in this case, would result in $45,000 additional income for 2003. The record is unclear whether Dr. Mills earned consulting income in the 1987-1998 period.
. It appears that Mills' Chapter 11 case was pending over four years, but that it was dismissed in 1995.
. Mills filed his 1987 and 1988 tax returns on July 26, 1991; his 1989 tax return on August 26, 1991; his 1990 tax return on November 8, 1991; his 1991 tax return on October 7, 1992; his 1992 tax return on November 19, 1993; his 1994 tax return on April 15, 1995; his 1995, 1996 and 1997 tax returns on April 15, 1998; and his 1998 tax return on April 15, 1999.
.The evidence before the Court does not reflect how much of the required estimated taxes were paid in any given tax year, if any, but it is clear that all the required estimates could not have been paid, or he would not have amassed a $1.7 million tax liability. IRS contends Mills made no voluntary payment on his federal tax liabilities after 1995. The Court is unsure whether that fact is contested, or not, because of Mills' habit, in his response, of grouping numbered factual paragraphs together, and glossing over specific facts in favor of generalizations. It appears this fact is tacitly admitted, however, because Mills only refers to one payment made in 1993.
. The record does not establish what became of this property.
. The real estate contact for this property was signed in October 1987, pursuant to IRS Exhibit 27, with a down payment of $256,000 (Exhibit 28), but the sale was apparently not closed until February 1989 as a result of construction problems.
. It is interesting to note that by February 1989, when the sale on this $2.8 million house finally closed, Mills had not paid his 1987 taxes ($26,423) or his 1988 taxes ($26,-891). Rather than using less than 7% of the $800,000 profit (or about 20% of the $256,000 escrow payment) to satisfies the 1987 and 1988 tax liabilities, he apparently decided to use the entire $800,000 as a down payment on what Ms. Mills describes as her “dream home.”
. The record indicates that the mortgage on this home actually required payment of $24, 560/month rather than $30,000. Mills, for a time, doubled up on mortgage payments when he got behind, so there was some period when his mortgage payments on all three homes likely exceeded $30,000.
. Mr. Mills and Mrs. Mills' depositions give conflicting amounts.
. See Mrs. Mills’ deposition at p. 39.
. Mills' schedule I shows his homeowner’s insurance equals $900 additional a month, and $200 is required for home maintenance. Real estate, vehicle taxes and '’priority taxes” are combined on the schedule and equal $600 per month. The Court thus cannot determine how much of the $600 is for real property taxes, but assumes it is at least $300/month, for approximately $1,400 on top of the $5,627 mortgage payment. It appears only two people may live in this home on a regular basis, as tuition to two colleges appear in the record. It also appears Mills may have made a $40,000 down payment on the purchase of his Wichita home in 2000, although the record is not entirely clear. See Mills’ answer to Interrogatory No. 2 The Court also could not find in the record whether this is a 15 or 30 year mortgage, or something in between.
. The receipt produced appears to suggest the August 1988 purchase of antiques totaled $13,707. Another receipt shows another $10,000 spent at Antique Art Gallery in 1983. Again, the undisputed evidence is that Mills' 1988 tax liability reported on his return was $26,891.00. Theoretically, if Mills had chosen to pay even $13,707 towards his 1988 tax liability, instead of towards antiques, his tax liability for 1988 would have been substantially less for that year.
.In Mills’ previous bankruptcy, Case No. 90-42725, filed in the District of Maryland, he indicated he owned personal property of "an aggregate value of $130,000.” Government Exhibit 20. In this bankruptcy, he values his one-half interest in art at $15,000. In Mills’ deposition, he contends at some unstated date, he had had the art appraised at $40,000. Mills Deposition at pages 50-51.
. The record seems to suggest he joined the club when he first moved to Wichita in 2000, and that he was still a member until at least November 2004, the date when his wife testified in her deposition that they were currently members. See Mrs. Mills’ deposition at page 94.
. Fed.R.Civ.P. 56(c). Fed.R.Civ.P. 56(c) is made applicable to adversary proceedings pursuant to Fed. R. Bankr P. 7056.
. Lifewise Master Funding v. Telebank, 374 F.3d 917, 927 (10th Cir.2004); Loper v. Loper (In re Loper), 329 B.R. 704, 706 (10th Cir. BAP 2005).
. Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir.2003) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
. Id. (citing Anderson, 477 U.S. at 248, 106 S.Ct. 2505).
. Id. (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).
. Id. (citing Celotex, 477 U.S. at 325, 106 S.Ct. 2548).
. Id. (citing Fed.R.Civ.P. 56(e)).
. Diaz v. Paul J. Kennedy Law Firm, 289 F.3d 671, 675 (10th Cir.2002).
. Celotex, 477 U.S. at 327, 106 S.Ct. 2548 (quoting Fed.R.Civ.P. 1).
. Dalton v. Internal Revenue Service, 77 F.3d 1297, 1302 (10th Cir.1996).
. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Bd.2d 755 (1991).
. 11 U.S.C. § 523(a)(1)(C).
. Dalton v. Internal Revenue Service, 77 F.3d at 1301 and Griffith v. United States .(In re Griffith), 206 F.3d 1389, 1396 (11th Cir.2000).
. Landi v. United States (In re Landi), 316 B.R. 363, 366 (M.D.Fla.2004).
. Dalton v. Internal Revenue Service, 77 F.3d 1297 at 1302.
. In re Sommers, 209 B.R. .471, 479 (Bankr. N.D.II1.1997) (citations omitted); Dalton v. I.R.S., 77 F.3d at 1300-01 (quoting legislative history noting the purpose of this section is to provide relief for the financially unfortunate, and not to create a tax evasion device).
. Berzon v. United States (In re Berzon), 145 B.R. 247, 250 (Bankr.N.D.I11.1992).
. See In re Wright, 191 B.R. 291, 293 (S.D.N.Y.1995).
. See, e.g., In re Toti, 24 F.3d 806, 809 (6th Cir.1994) (finding debtor had the wherewithal to file his return and pay his taxes, but he did not fulfill his obligations to do so) and In re Landi, 316 B.R. at 370 (finding willfulness demonstrated when debtors (one of whom was vascular surgeon) failed to pay estimated taxes or to pay any income taxes with their tax returns, notwithstanding their ability to maintain a lavish lifestyle, including using their substantial income and proceeds from sale of real estate to build 10,000-square-foot six bedroom/ten bathroom dream home and to support their respective parents).
. 1994 WL 69516 (Bankr.W.D.Okla.1994)
. Id. at A.
. See, e.g., In re Griffith, 206 F.3d at 1396 (finding the transfer of assets to family members for insufficient consideration an indicia of willfulness).
. Mills suggests one reason he could not sell the $3.1 million home was because the tax laws changed after he purchased the home, restricting mortgage deductions to the first $1 million value. If true, that does not appear to provide an explanation for his failure to sell the other two homes properties resided in by relatives, which were each valued at less than $1 million.
. In re Fretz, 244 F.3d 1323 (11th Cir.2001) (finding debtor, an emergency room physician, willfully evaded collection of taxes when he had adequate income to hire accountant to assist him with tax matters, but still failed to timely file returns). The record shows that Mills had both lawyers and accountants, both back East and in Wichita.
. For example, there is some general assertion that Mills under-reported his income for the 1998 tax year, resulting in an audit and an increase in his ultimate tax liability for that year. See, e.g., In re Jacobs, 324 B.R. 376, 382 (Bankr.M.D.Fla.2005) (stating the understatement of income for more than one tax year is one badge of fraud). The present record on this matter is vague. Mills admits he under-reported income, but alleges it was an innocent mistake.
. Compare the dischargeability of taxes under 11 U.S.C § 523(a)(1)(A), which references a § 507(a)(8)(C)(a) tax required to be collected or withheld and for which debtor is liable in whatever capacity, versus a § 523(a)(8)(A)(I) tax on income last due after *702■the three year period before filing bankruptcy. Deposition transcripts provided by the parties suggest that Mills may have paid certain business taxes, while allowing his personal income taxes to accumulate, but again, the record is unclear. Mills deposition at page 89.
. See Haesloop v. U.S., 2000 WL 1607316, *6 (Bankr.E.D.N.Y.2000) (finding that although debtor earned approximately $275,000 per year, his bankruptcy case was administered as a "no asset” case because debtor deliberately structured his lifestyle and assets so as to preclude any meaningful attempt by IRS to collect on the tax debt other than through pursuit of his future income).
. Mills also made a large contribution to his church at a time when he likely owed over $1 million to the IRS, which may or may not, after trial, be deemed reasonable. See In re Lynch, 299 B.R. 62, 75 (Bankr.S.D.N.Y.2003) (finding that although a debtor (like any other American) is free to practice his religion as he sees fit, one cannot evade payment of tax obligations by making gratuitous transfers to religious and other charitable organizations before paying taxes, even if done with sincere motivation).
. Again, there is a factual issue about when the $2.8 million home was purchased. Mills’ response says it was purchased "in or around 1987, before his tax liabilities arose.” (Emphasis in original) The other evidence in the record suggests the home was not actually purchased until 1989, by which time Mills owed at least $53,000 in federal taxes for 1987 and 1988.
. IRS, for example, has done little analysis of the amounts Mills was paying for discretionary items upon his arrival in Wichita in 2000, when his income was high and the cost of living likely lower than it had been in Washington. How much did the family spend on meals out, on cleaning or yard services, on life insurance, on discretionary items for the children, on clothing and dry cleaning, on computers or cell phones, on car payments or insurance for those cars, on tuition for college-aged children, etc. Similarly, there is little explanation, outside of the size of the house payments, whether the rest of the Mills’ expenditures prior to 2000 were reasonable.
. Mills' wife stated in her deposition that her trainer was for "fitness” purposes, instead of health purposes, leaving a factual issue whether the trainer was medically necessary. See her deposition at page 94.
. In re Loper, 329 B.R. at 704 (reversing the bankruptcy court's decision to grant summary judgment on the basis that non-movant had presented some evidence of intent, and the court was required to construe that evidence, at the summary judgment stage, in the light most favorable to non-movant).
.Anderson v. Liberty Lobby, 477 U.S. at 249, 106 S.Ct. 2505. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493819/ | MEMORANDUM OPINION AND ORDER DENYING IN PART MOTION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSES AND SETTING FURTHER HEARING
ROBERT A. MARK, Chief Judge.
The Court conducted a hearing on January 3, 2006 at 2:00 p.m. on the “Amended Motion for Entry of Order Determining Entitlement to Allowance of Claim for Administrative Expenses Pursuant to § 503(b) of the Bankruptcy Code by Interested Party, Miami River Development, LLC” (the “Motion”) (CP# 833). The majority of the claims raised in the Motion are for payments allegedly made by MRD to improve certain real property owned by MRD, but later recovered by the Chapter 11 Trustee (the “Trustee”) in a fraudulent conveyance adversary proceeding filed in this Chapter 11 case, specifically, Adv. No. 03-1439 (the “Adversary”). The Trustee argues that these payments cannot be allowed as administrative expenses under 11 U.S.C. § 503(b) since MRD was denied relief under § 550(e) in the Adversary on the same or similar claims.
The Court has considered the Motion, the “Memorandum of Law in Support of Amended Motion for Entry of Order Determining Entitlement to Allowance of Claim for Administrative Expenses Pursuant to § 503(b) of the Bankruptcy Code by Interested Party, Miami River Development, LLC” (CP#832), the “Omnibus Response of Chapter 11 Trustee to (a) Memorandum of Law in Support of Amended Motion for Entry of Order Determining Entitlement to Allowance of Claim for Administrative Expenses Pursuant to § 503(b) of the Bankruptcy Code by Interested Party, Miami River Development, LLC; (b) Interested Party, Miami River Development, LLC’s Motion for Leave to Amend; and (c) Amended Motion for Entry of Order Determining Enti*713tlement to Allowance of Claim for Administrative Expenses Pursuant to § 508(b) of the Bankruptcy Code by Interested Party, Miami River Development, LLC’ (CP# 879). The Court has also considered the record in the Adversary, considered the argument of counsel, and reviewed the applicable law. For the reasons set forth below, all of the claims described in the Motion, except for the marine equipment rent claim, fail as a matter of law based upon findings of fact and rulings of law in the Adversary denying relief to MRD under § 550(e).
Procedural and Factual Background
A. In October 1999, Consolidated Yacht Corporation (the “Debtor”) accepted an assignment of a lease on certain real property located at 2051 NW 11th Street, Miami, Florida (the “Real Property”).
B. In May 2000, the Debtor executed a purchase option contained in the lease to purchase the Real Property.
C. The Debtor fraudulently transferred the right to purchase the Real Property to MRD (the “Fraudulent Transfer”).
D. MRD purchased the Real Property on May 3, 2001.
E. MRD funded the purchase of the Real Property with a bank loan from Peninsula Bank (the “Mortgage”).
F. The Mortgage included an additional fine of credit intended to fund certain MRD business activities (the “Line of Credit”).
G. Some months later, MRD allegedly purchased certain marine equipment with the Line of Credit.
H. Thereafter, MRD began to collect rent from the Debtor and other tenants on the Real Property.
I. On September 10, 2002, the Debtor filed the instant chapter 11 case.
J. On May 28, 2003, Alan L. Goldberg was appointed chapter 11 trustee.
K. The Trustee filed an adversary proceeding against MRD (the “Adversary”)1 that sought to recover the fraudulent transfer of the Real Property. See Counts I and II of “Plaintiffs Second Amended Complaint” (the “Complaint” and MRD ADV CP# 101).
L. The Adversary also sought to recover rents that MRD collected during its fraudulent ownership of the Real Property. See Count V of the Complaint.
M. MRD counterclaimed for rent it claimed was owed to MRD. See Counterclaim in “Answer, Affirmative Defenses to Second Amended Complaint and Counterclaim” (the “Counterclaim” and MRD ADV CP# 114).
N. The Trustee then moved to dismiss the Counterclaim (the “Motion to Dismiss” and MRD ADV CP# 129).
O. After a trial on the merits, this Court entered an Amended Judgment (MRD ADV CP# 412) and Amended Findings of Fact and Conclusions of Law (“Amended Findings”) and (MRD ADV CP# 411), in favor of the Trustee, which among other things:
1. Ruled that MRD received the Real Property through a fraudulent transfer;
2. Directed MRD to transfer the Real Property to the Debtor; and
3. Ordered that MRD was not entitled to a lien on the Real Property or the
*714Amended Judgment for any purpose under 11 U.S.C. § 550(e) because MRD was not a good faith transferee.
P. The foregoing findings were affirmed on appeal.
Q. The Trustee has sold the Real Property for $12,900,000. The amounts remaining from the sale constitute the vast majority of the proceeds in the estate.
Discussion
In the Motion, Miami River Development, LLC (“MRD”) seeks allowance as an administrative expense of six (6) categories of expenses under 11 U.S.C. § 508(b). Those categories include the following:
(1) The alleged payment by MRD of environmental remediation expenses;
(2) The alleged payment by MRD of insurance premiums;
(3) The alleged payment by MRD for capital improvements;
(4) The alleged payment by MRD of a second mortgage on the Real Property;
(5) The alleged payment by MRD of a first mortgage on the Real Property; and
(6) Unpaid post-petition rent for use of certain marine related equipment by the Debtor.
Categories (1) through (5) are expenses related to alleged improvement to, or preservation of, estate property. Categories (2) and (5) were specifically raised and rejected by this Court in the Adversary in the context of a claim under 11 U.S.C. § 550(e). Categories (1), (3), and (4) were not raised, but should have been raised, in the Adversary as claims under 11 U.S.C. § 550(e).
Section 550 provides that an estate may recover the full value of an avoided transfer because § 550 is designed and intended to return the bankruptcy estate to the financial position that it would have been in had the fraudulent transfer never occurred. Morris v. Kansas Drywall Supply Company, Inc., (In re Classic Drywall, Inc.), 127 B.R. 874, 876 (D.Kan.1991). One component of that analysis is § 550(e), which permits the recipient of the fraudulent transfer to recover monies it expended to preserve the transferred property, if, and only if, the transferee accepted the transfer in good faith. Section 550(e) makes sense from an equitable perspective because § 550 is intended to return the debtor to the position it would have been had the transfer not occurred—not to return it to a better position.
Section 550(e) is the exclusive means by which a transferee in a fraudulent conveyance case can assert claims for preservation of an estate or estate property. See Feltman v. Warmus (In re American Way Service Corp.), 229 B.R. 496 (Bankr.S.D.Fla.1999). In Warmus, the court looked to § 550 to determine the extent of a trustee’s rights to recover fraudulently transferred property and the transferee’s rights to assert claims for preserving or improving the fraudulently transferred property. In footnote 114, the court discussed the right of a transferee to recover the value of its improvements. The court concluded that the right exists only under § 550(e) and then only to the extent that the transferee accepted the transfer in good faith. Id. at 531 n. 114. The court then determined that the transferee in that case did not accept the transfers at issue in good faith. As in Warmus, this Court has already found that MRD did not accept the transfer of the Real Property in good faith thereby eliminating MRD’s right to assert claims under § 550(e).
*715MRD asserts that despite the adverse ruling of this Court in the Adversary .denying it relief under § 550(e), it should still be able to seek administrative expenses treatment under § 503(b) on the same claims raised by MRD in the Adversary. MRD’s position is inconsistent with a plain reading of the statute and public policy. Section 550(e) provides the mechanism by which a recipient of a fraudulent transfer can assert claims for benefitting and preserving a bankruptcy estate, which claims must be predicated upon the good faith nature of the underlying transfer. It makes no sense to allow a transferee to seek the same recovery under § 503(b). To do so would circumvent the good faith transferee requirement of § 550(e), which is designed to prevent a bad faith transferee from profiting from his fraud. This purpose would obviously not be served it a bad faith transferee could assert claims under § 503(b) even though such claims were asserted and denied under § 550(e).
The facts in this case prove the point. If MRD had proved it was a good faith transferee, its claims would have been a lien on the Real Property under § 550(e) and paid from the proceeds when the Real Property was sold. Having lost in the Adversary, allowing administrative expense treatment for these same or similar claims would provide this bad faith transferee the identical recovery it is not entitled to, namely, payment from the proceeds of the Real Property sale. These statutory provisions cannot be read to allow this obviously inequitable and unintended result.
Finally, it is a fundamental tenet of statutory interpretation that when two statutes address the same issue, it is the more specific statute that controls. See, e.g., Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384-385, 112 S.Ct. 2031, 119 L.Ed.2d 157 (1992)(stating “it is a commonplace of statutory construction that the specific governs the general”). That is the case here where Section 550(e) specifically addresses the ability of a recipient of a fraudulent transfer to seek reimbursement for improvements it made to fraudulently transferred property and establishes a good faith requirement for such reimbursement. As a more general statutory provision, § 503(b) is trumped by § 550(e) for situations like this one where § 550(e) specifically applies. In sum, since § 550(e) is the exclusive means by which the recipient of a fraudulent transfer may recover for improvements to, or the preservation of, fraudulently transferred property, and because MRD had the opportunity to litigate its rights under § 550(e), and did so in the Adversary, MRD’s claims in the Motion under categories (1) through (5) must be denied.
Category (6) is an expense related to rent of equipment that is allegedly owned by MRD, and that allegedly benefitted the estate. This claim appears to be inconsistent with prior testimony by MRD’s principal stating that no rent was charged for use of the equipment. Nevertheless, the Court is reserving ruling on the category (6) claims and setting a further hearing on this issue.
Based on the foregoing findings and the reasons set forth on the record, it is
ORDERED as follows:
1. The Motion is denied in part. The expenses described in categories (1) through (5) are not entitled to administrative priority under 11 U.S.C. § 503.
2. The Court reserves ruling on MRD’s entitlement to allowance as an administrative expense of the marine equipment rent described in category (6) above. The Court will conduct a prehearing conference on March 8, 2006 at 2:00 p.m., at the U.S. Bankruptcy Court, 51 S.W. First Avenue, *716Courtroom 1406, Miami, Florida 33130, on this remaining rent claim. No later than March 1, 2006, MRD shall file and serve a Supplement to its Motion specifically setting forth the amount of rent it claims is due for each piece or category of equipment and the factual basis for the amount of rent claimed.
3. For purposes of facilitating an initial distribution to creditors, and without finding that MRD will be entitled to any of the rent described in category (6), the Court finds that MRD’s marine equipment rent claim, if allowed, will be no greater than $400,000, which amount the Trustee shall reserve until the claim is determined.
. The adversary is styled Goldberg v. Miami River Development, LLC, Case No. 03-1439-BKC-RAM-A. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493820/ | DECISION GRANTING MOTION TO DISMISS CLAIMS FILED BY JAN-NETTE HUGHES, LANCE SCHUBERT, JMARCEL ENTERPRISES, J. MARCEL DE MEXICO AND J. MARCEL ENTERPRISES OF YUMA PURSUANT TO RULE 12(b)(6) OF THE FEDERAL RULES OF CIVIL PROCEDURE
BURTON R. LIFLAND, Bankruptcy Judge.
Before the Court is a motion to dismiss pursuant to the Federal Rules of Civil Procedure, (the “Rules”) Rule 12(b)(6), objecting to proofs of claim filed by Jannette Hughes (“Hughes”) (Claim No. 3368), Lance Schubert (“Schubert”) (Claim No. 3369), J. Marcel Enterprises (“J. Marcel”) (Claim No. 3367), J. Marcel De Mexico (Claim No. 3370) and J. Marcel Enterprises of Yuma, Inc. (Claim No. 3366) (collectively, “Marcel” or the “Marcel Parties”). Background
Marcel performed manufacturing services for Eddie Bauer, Inc. (“Eddie Bauer”) dating back to 1985 in Seattle, Washington, pursuant to various manufacturing agreements. On March 17, 2003, Spiegel, Inc. (“Spiegel”) and certain of its direct and indirect subsidiaries, including Eddie Bauer, Inc. (collectively, “Debtors”), filed a voluntary petition in this Court for relief under the United States Bankruptcy Code. On October 1, 2003, the Marcel Parties filed the five proofs of claim totaling $2 million.
Attached to each proof of claim is a copy of a state court complaint (the “Com*823plaint”) that was filed in the Superior Court of Washington on March 3, 2004. The Complaint asserts causes of action against Eddie Bauer for breach of contract, breach of implied contract and breach of the implied covenant of good faith and fair dealing based on the allegation that Eddie Bauer notified them in June 2000 that they were terminating all contract work with Marcel. The crux of the Marcel Parties’ claims is that sometime in 1992, the Debtor allegedly induced Marcel to build a manufacturing facility in Mexico. Marcel alleges that Eddie Bauer represented that if Marcel built the manufacturing facility in Mexico, “Eddie Bauer would keep their facility busy all year, every year.” Declaration of Lance Schubert at ¶ 17. Further, Marcel alleges that Eddie Bauer assured them “that [Marcel] had nothing to worry about since Eddie Bauer would provide them with constant work and so long ás the provisions of the North American Free Trade Act remained in place and would protect their business in the event of any change in that status.” State Court Complaint at ¶¶ 3.5-3.7. None of these alleged agreements were in writing and there are no documents evidencing these alleged commitments. Instead, the Marcel Parties allege that the representations constitute an enforceable oral agreement. Based upon these oral “assurances” the Marcel Parties contend that Schubert and Hughes formed J. Marcel de Mexico and J. Marcel Enterprises of Yuma, Inc., through which the respective entities constructed manufacturing facilities in San Luis, Mexico and Yuma, Arizona (the “Manufacturing Facilities”). After the Manufacturing Facilities were opened, the Debtors regularly placed orders with Marcel for work to be completed in those plants. Since Marcel began manufacturing products for Eddie Bauer in 1985, orders were placed with Marcel through various manufacturing agreements which contained the type and number of products ordered, the price and the delivery specifications. In June 2000, Eddie Bauer notified Marcel that it would not be placing any more 'orders with Marcel. No further manufacturing agreements were entered into after that point.
On September 15, 2004, the Creditor’s Trust (the “Trust”), as successor to the Debtors, filed the Fourteenth Omnibus Objection to Proofs of Claim (the “Objection”) requesting that the Court expunge and disallow certain claims, including the claims filed by the Marcel Parties, on the grounds that there is no basis for liability and that the claims are duplicative of each other. On February 15, 2005, the Marcel Parties filed their response to the Objection, asserting that the Trust made no showing to overcome the prima facie validity of the Claims. On November 15, 2005, the Trust filed a supplement to the Objection along with a motion to dismiss pursuant to Rule 12(b)(6) (the “Motion”). On January 2, 2006, the Marcel Parties filed a response to the Motion, contending, among other things, that the Motion was procedurally improper and that manufacturing agreements in effect at the time of the alleged breach (the “Manufacturing Agreements”) attached to the Motion should not be considered by the Court in deciding the Motion.
Discussion
Rule 12(b)(6), which is made applicable to this proceeding by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), enables a defendant to move to dismiss a complaint on the ground that it fails to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(6); Fed. R. Bankr.P. 7012(b). A motion to dismiss must be denied unless it “appears beyond doubt that the plaintiff can prove no set of facts in support of its claim which would entitle it to relief.” *824Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). All well-pled factual allegations must be read by the court as true and construed in a light most favorable to the plaintiff. Id.
Documents whose terms and effect are relied upon by the plaintiff in drafting the complaint may be considered on a motion to dismiss, even if the documents are not submitted as exhibits by the plaintiff. See Gryl ex rel. Shire Pharmaceuticals Group PLC v. Shire Pharmaceuticals Group PLC, 298 F.3d 136, 140 (2d Cir.2002) (“We are also free to consider documents that are incorporated into the complaint by reference or attached to the complaint as exhibits, or whose terms and effect are relied upon by the plaintiff in drafting the complaint”); Chambers v. Time Warner, Inc., 282 F.3d 147, 152-54 (2d Cir.2002). Here, the Complaints were attached to the Marcel Parties’ proofs of claim and the Complaints refer to the Manufacturing Agreements, which the Trust attached to its Motion, and are the basis for their claims, and thus the Court may properly consider the Complaints and the Manufacturing Agreements.
In addition, when the right to file a motion to dismiss is preserved by filings preceding the motion to dismiss, courts have held that subsequent motions to dismiss are proper. See Allianz Ins. Co. v. Otero, 2003 WL 262335, *3 (S.D.N.Y. Jan.30, 2003); Zebrowski v. Denckla, 630 F.Supp. 1307, 1309 n. 1 (E.D.N.Y.1986). See also In re WorldCom, Inc., 322 B.R. 530 (Bankr.S.D.N.Y.2005). In the current ease, the Trust preserved its right to otherwise move for relief in the Fourteenth Omnibus Objection to Claims. See Fourteenth Omnibus Objection, at ¶ 11.
Moreover, an objection to a claim is a “contested matter” governed by Bankruptcy Rule 9014, which allows the bankruptcy court “at any stage in a particular contested matter to direct that one or more of the rules applicable to adversary proceedings apply.” See Iannochino v. Rodolakis (In re Iannochino), 242 F.3d 36, 42 (1st Cir. 2001) citing Fed. R. Bankr.P. 9014, 7001; Internal Revenue Service v. Taylor (In re Taylor), 132 F.3d 256, 260 (5th Cir.1998) (“An objection to a proof of claim serves to initiate a contested matter and thereby serves the purpose of putting the parties on notice that litigation is required to resolve the objection and to make a final determination on the allowance or disal-lowance of the claim.”); cf. In re Stavriotis 977 F.2d 1202, 1204 (7th Cir.1992) (“Bankruptcy Rule 9014 permits a court, at its discretion, to extend Rule 7015 to contested matters as well as adversary proceedings.”)
At bottom, regardless of the procedure, the pleadings before the Court go to the merits of the claims, which all parties want the Court to address. Accordingly, the procedural objections are overruled.
THE MERITS Oral Contract
The Trust objects to claims filed by the Marcel Parties because they are allegedly based on oral assurances, and there are no written documents supporting the assertion that an agreement exists. The Trust contends that the business relationship between the parties was governed by the Manufacturing Agreements, which are wholly integrated and preclude the consideration of oral agreements. Marcel contends that aside from the Manufacturing Agreements, the oral assurances amount to an implied contract that are not within the Statute of Frauds and may be enforced. Alternatively, should the Court find that the Manufacturing Agreements are sufficiently related to the subject matter, Marcel asserts that parol evidence should be considered and will establish *825that the parties agreed Marcel would operate manufacturing plants in Mexico and Arizona for the benefit of Eddie Bauer. Additionally, and in response to the Motion, the Marcel Parties add a new theory of recovery, promissory estoppel.
Under Washington law,1 if “performance [of a contract] is possible within one year, however unlikely that may be, the agreement is not within the statute of frauds” and it is “legally immaterial that the actual period of performance exceeded one year.” See Malnar v. Carlson, 128 Wash.2d 521, 534, 910 P.2d 455 (1996). Washington law recognizes implied contracts. “The party asserting the existence of the contract must prove that the terms of the contract are stated, agreed upon, and that the parties intended the terms to be a binding agreement .... ” Keystone Land & Dev. Co. v. Xerox Corp., 353 F.3d 1070, 1073 (9th Cir.2003). The party asserting an implied contract must prove the essential facts of the contract including “the existence of a mutual intention .... The essential elements of a contract are the subject matter of the contract, the parties, the promise, the terms and conditions, and (in some but not all jurisdictions) the price or consideration.” Bogle and Gates, P.L.L.C. v. Holly Mountain Resources, 108 Wash.App. 557, 32 P.3d 1002, 1004 (2001) (quotations omitted).
Arguably, the Statute of Frauds imbedded in the Uniform Commercial Code (the “UCC”) would be applicable here. UCC Article 2 applies to transactions in goods. U.S. Engine, Inc. v. Roberts, 118 Wash. App. 1052, 2003 WL 22230139 (Div. 1 2003). The manufacturing agreements relate to articles of clothing, which are goods, so this contract may fall under Article 2. According to the Restatement of Contracts, “[t]he fact , that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation, of intention is not intended to be understood as an offer or as an acceptance.”. Restatement of. Contracts, § 33. Because the terms alleged to constitute an oral contract in this instance are so vague, however, it is unclear if Article 2 would apply.
The Trust urges the Court to find that because the agents of the Debtor allegedly assured the Marcel Parties that Eddie Bauer would keep Marcel busy every year and year-round this oral agreement couldn’t possibly be performed in under one year and therefore is within the Statute of Frauds. Claimants argue that this agreement could have been performed in less than one year and therefore this contract is not within the Statute of Frauds. Because, the alleged terms of this oral agreement are so vague, it is unclear how a determination in this regard could be made.
Moreover, even if all the allegations in the proof of claim were true, the Marcel Parties have not established any essential terms of an oral contract. Their claim rests on oral assurances and does not constitute an enforceable contract, therefore, the Court declines to find that any implied, oral agreement was entered into. The parties did enter into numerous manufacturing agreements for work to be completed at the Mexico and Arizona plants. These written contracts included the required terms of a contract — the quantity and price of the items to be manufactured. *826The Marcel Parties did not assert that these contracts were breached.2
Marcel suggests that the Manufacturing Agreements do not illustrate the true relationship between the two parties and that the integration clause in the Manufacturing Agreements do not preclude the introduction of parol evidence as a supplement to the purchase orders. The Manufacturing Agreements, however, relate to orders for the Mexico and Yuma, Arizona plants, and therefore any terms relating to manufacturing at those plants would have to be included in the Manufacturing Agreements because they are completely integrated.
The Manufacturing Agreements state: “This contract ... contains all representations and agreements of the parties hereto. Any modification or alteration of this agreement shall be in writing signed by both parties.” Washington courts have held that parole agreements should be given effect rather than permit boilerplate terms of a contract when it appears the integration clause is contrary to the parties’ intentions. See Black v. Evergreen Land Developers, 75 Wash.2d 241, 249, 450 P.2d 470 (Wash.1969); see also Banner Bank v. Metrophone Telecommunications Inc., 2004 WL 2429559, 2004 WashApp. LEXIS 2448 (Wash.Ct.App.2004). Since no definite terms of any alleged oral agreement have been alleged here, I find that the integration clause in the Manufacturing Agreements are not contrary to the actual agreement of the parties. “If parties to an integrated written contract have a secret handshake agreement to contrary terms, it is the written agreement the courts will enforce.” Lopez v. Reynoso, 129 Wash.App. 165, 177, 118 P.3d 398 (2005).
In Hearst Communications, Incorporated v. Seattle Times Company, the Supreme Court of Washington stated, “we have explained that surrounding circumstances and other extrinsic evidence are to be used ‘to determine the meaning of specific words and terms used’ and not to ‘show an intention independent of the instrument’ or do ‘vary, contradict or modify the written word.’ ” 154 Wash.2d 493, 503, 115 P.3d 262 (2005), citing Hollis v. Garwall, 137 Wash.2d 683, 974 P.2d 836 (1999). In this case, since the manufacturing agreements were completely integrated, any terms allegedly agreed to relating to the same subject matter of the manufacturing agreements that were not included in the agreements may not be considered.
I find that the purchase orders executed by the parties were completely integrated and therefore parol evidence may not be considered to prove any terms contradictory to the terms of the written, executed contracts.
Promissory Estoppel
Under Washington law, to obtain recovery based on promissory estop-pel a party must establish that a promise was made upon which the promisor reasonably expected the promisee to rely in changing its position, and the promisee did, in fact, change its position justifiably relying upon the promise, in such a manner that injustice can be avoided only by *827enforcement of the promise. See King v. Riveland, 125 Wash.2d 500, 886 P.2d 160 (1994). Washington courts have found that for promissory estoppel to apply, the terms of the promise made must be clearly established. Irvin Water District No. 6 v. Jackson Partnership, 109 Wash.App. 113, 34 P.3d 840, 846 (2001). As stated above, without establishing terms and conditions of the alleged oral agreement between the parties, this Court cannot ascertain what the exact agreement was and therefore finds Marcel may not recover on the basis of promissory estoppel.
Considering the facts plead by the Marcel Parties in their favor, this Court declines to find that recovery would be proper under any of the above-mentioned basis. The Motion of the Trust, dismissing the proofs of claim numbered 3386, 3369, 3367, 3370 and 3366 is granted.
THE TRUST IS DIRECTED TO SUBMIT AN ORDER CONSISTENT WITH THE ABOVE FINDINGS.
. The manufacturing agreements are governed by Washington state law. See Exhibit 1 to the Lee Aff. It appears that Washington state law would apply even in the absence of the manufacturing agreements because both principal plaintiffs (Schubert and Hughes) and the Debtor are Washington citizens. See In re Gaston & Snow, 243 F.3d 599 (2d Cir. 2001).
. At the hearing before the Court on January 19, 2006, the Marcel Parties requested that the Court permit an amendment to their proof of claim to include damages for two outstanding manufacturing agreements that were allegedly breached when Marcel was informed that there would be no further orders placed for manufacture at the Mexican Facility. Marcel asserts that this work stoppage caused the Mexican facility to shut-down and Marcel was forced to complete the manufacturing under the two outstanding agreements at facilities in the United States, at a higher cost to Marcel. The alleged breach of the two agreements bear no relation to the theories advanced in the contested claims and the Court denied this request to amend. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493821/ | MCDONALD, Bankruptcy Judge.
Johnny Harris (“Debtor”) appeals the bankruptcy court’s1 order granting the motion of the Boyd G. Montgomery Trust (the “Trust”) to terminate the automatic stay. We affirm for the reasons set forth below.
*923I.
Debtor leased non-residential real property from the Trust. The Trust terminated the lease effective May 81, 2005. Debt- or, however, failed to vacate the premises.
Debtor filed his petition for relief under Chapter 13 of the Code on June 23, 2005. Debtor was still in possession of the premises on the petition date. The Trust filed a motion on August 4, 2005 for relief from the stay so that it could enforce its state law right to remove Debtor from the premises. The bankruptcy court set the Trust’s motion for relief from the stay for hearing on September 1, 2005.
The United States Trustee then filed a motion to dismiss Debtor’s case. The Chapter 13 trustee and a creditor also filed objections to the confirmation of Debtor’s proposed Chapter 13 plan (collectively the “Plan Objections”). The Court set these three matters for hearing on August 15, 2005. Debtor and his attorney appeared at the August 15, 2005 hearing.
The bankruptcy court announced at the August 15, 2005 hearing that three motions were on the docket for that day: the United States Trustee’s motion to dismiss and the two Plan Objections. None of those matters involved the Trust. Debt- or’s attorney (the “Attorney”) then announced that he had just been retained and requested a continuance until September on these matter. The bankruptcy court granted the Attorney’s request to continue the motion to dismiss and the Plan Objections until September. The bankruptcy court then asked the Attorney if he would prefer the first or the fifteenth, and the attorney responded he would be unavailable on the first. The bankruptcy court, therefore, continued the motion to dismiss and the Plan Objections to September 15.
Neither the bankruptcy court nor the Attorney mentioned continuing the Trust’s motion to terminate the stay from the September. 1, 2005 hearing date. Also, although the Attorney appeared at the August 15 hearing, he did not enter his appearance on behalf of Debtor until September 13, 2005.
The bankruptcy court held the hearing on the Trust’s motion to terminate the stay on September 1, 2005. The bankruptcy court noted on the record at the hearing that Debtor had notice of the hearing but was not present. The Trust’s attorney also noted on the record that Debtor knew of the motion because his client and Debt- or had spoken about the matter. The bankruptcy judge then observed that she had reviewed the record and would grant the Trust’s motion. The court then entered a written order granting the Trust’s motion on September 8, 2005. This appeal followed.
II.
This Court will review the bankruptcy court’s factual findings for clear error and conclusions of law de novo. Bankr.R. 8013; In re Marlar, 432 F.3d 813, 814 (8th Cir.2005). Because the bankruptcy court made a finding on the record that Debtor received adequate notice of the hearing, the Court will review that finding under the clearly erroneous standard. See Rosinski v. Boyd (In re Rosinski), 759 F.2d 539, 541 (6th Cir.1985). Thus, we will affirm the bankruptcy court’s determination that Debtor received adequate notice of the hearing unless, after reviewing the record, we are left with a definite and firm conviction that the bankruptcy court erred. In re Broken Bow Ranch, Inc., 33 F.3d 1005, 1010 (8th Cir.1994).
III.
Debtor advances two points on appeal. Debtor first argues that he did *924not receive adequate notice of the hearing on the Trust’s motion to terminate the stay. A debtor is entitled to notice and an opportunity to be heard on a motion to terminate the automatic stay. 11 U.S.C. § 362(d)(2); Banrk. R. 9014(a). The notice must be reasonable given the circumstances of the particular case. 11 U.S.C. § 102(1)(A). This analysis, consistent with the due process clause of the Fifth Amendment, must focus upon whether the notice is reasonably calculated to apprise the parties of the pendency of the action and an opportunity to be heard. In re Hairopoulos, 118 F.3d 1240, 1244-45 (8th Cir.1997). This analysis is objective and must center upon whether the notice would have apprised a reasonable person of the pen-dency of the action. See Gretchen’s of Minneapolis v. Highland House, Inc. (In re Interco), 186 F.3d 1032, 1034 (8th Cir.1999). Here, a review of the record unequivocally establishes that Debtor received reasonable notice of the hearing.
First, the bankruptcy court’s certificate of service notifying the parties that it had set the hearing on September 1, 2005 includes Debtor. Also, at the hearing itself, the Trust’s counsel indicated to the bankruptcy court that his client had discussed the motion to terminate the stay with Debtor. This record certainly indicates that Debtor had notice of the September 1 hearing date.
Debtor additionally argues that the bankruptcy court failed to provide him with sufficient notice because the court continued the three motions set for hearing on August 15 to September 15. Debt- or maintains that he and his attorney believed that the bankruptcy court continued all pending motions, including the Trust’s motion to terminate the stay, when it continued the three other motions to September 15. A review of the record, however, does not leave us with a firm and definite conviction that a reasonable person would have concluded that the bankruptcy court continued the hearing on the Trust’s motion to September 15.
The bankruptcy court’s certificate of service with respect to the August 15, 2005 hearing docket listed the three matters that it would hear that day: (1) the United States Trustee’s motion to dismiss; (2) the Chapter 13 Trustee’s objection to Debtor’s proposed Chapter 13 Plan; and (3) creditor Stagecoach Self Storage’s objection to Debtor’s proposed Chapter 13 Plan. Additionally, at the August 15 hearing itself, the bankruptcy court specifically identified these three motions as the matters it would hear that day. Neither the bankruptcy court nor Debtor’s attorney even mentioned the Trust’s motion to terminate the stay at the August 15 hearing. Thus, despite Debtor’s subjective belief to the contrary, an objective review of the record supports the bankruptcy court’s finding that Debtor had reasonable notice of the hearing on the Trust’s motion as required by 11 U.S.C. § 102(1)(A).
Debtor also asserts that the bankruptcy court deprived him of his Fifth Amendment procedural due process rights by conducting the hearing in his absence. As discussed above, the bankruptcy court did provide reasonable notice to the Debt- or of the hearing on the Trust’s motion in a manner consistent with 11 U.S.C. § 102(1)(A). And due process only requires that a party receive notice in a manner consistent with the requirements of the Bankruptcy Code. Brooks v. Am. Gen. Finance, Inc., 323 F.3d 675, 677-78 (8th Cir.2003) (citing In re Banks, 299 F.3d 296, 302 (4th Cir.2002)). Thus, the bankruptcy court did not deprive Debtor of his procedural due process rights by conducting the hearing in his absence.
Debtor’s second point on appeal is that the Trust violated the automatic stay. *925Debtor bases this argument on the Trust’s counsel’s statement to the bankruptcy court at the hearing that “[m]y client has talked with Mr. Harris about the proceeding that he’s (the trustee) filed against him and Mr. Harris is upset about it”. Debtor maintains that this statement constitutes an admission that the Trust violated the automatic stay.
Even assuming arguendo that the Trust’s attorney’s statement somehow constitutes an admission that the Trust violated the automatic stay, Debtor never presented this argument to the bankruptcy court. This Court will not review issues that the appellant failed to raise below unless it is strictly a legal issue and manifest injustice would result otherwise. Stalnaker v. DLC, Ltd. (In re DLC, Ltd.), 376 F.3d 819, 824 (8th Cir.2004). Here, Debtor’s argument that the Trust violated the automatic stay is not strictly a legal issue and our refusal to review it does not result in manifest injustice. We, therefore, will not review this issue.
IV.
In conclusion, we are not left with a definite and firm conviction after reviewing the record that the bankruptcy court failed to provide Debtor with reasonable notice of the hearing on the Trust’s motion to terminate the stay. Thus, the bankruptcy court’s finding that Debtor had reasonable notice of the hearing on the Trust’s motion is not clearly erroneous. Debtor also failed to present his argument that the Trust violated the automatic stay to the bankruptcy court. Thus, we will not review that claim for the first time on appeal. Accordingly, the judgment of the bankruptcy court is affirmed.
. The Honorable Audrey R. Evans, United States Bankruptcy Judge for the Eastern District of Arkansas | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493822/ | ORDER SUSTAINING IN PART, AND OVERRULING IN PART, MOTION TO ENFORCE AUTOMATIC STAY AND DENYING DEBTOR’S REQUEST FOR RECOVERY OF DAMAGES ARISING FROM GARVEY’S STAY VIOLATION
ARTHUR B. FEDERMAN, Bankruptcy Judge.
Debtor Kuecker Equipment Company filed a Motion to Enforce the Automatic Stay seeking an Order, inter alia, declaring that a certain lawsuit filed in state court by Tom Garvey against the Debtor’s principals and an affiliated company violates the automatic stay in this case. For the reasons that follow, the Motion is SUSTAINED in part and OVERRULED in part. Subsequent to the hearing on the Motion to Enforce Automatic Stay, Debtor filed a separate Request for Recovery of *55Damages Arising from Garvey’s Stay Violation. That Request is DENIED.
Factual Background
Prior to the filing of this bankruptcy case, Garvey filed a lawsuit in the Circuit Court of Cass County, Missouri, against the Debtor and an affiliated company, Key Management Systems, Inc. (the “Prepetition Litigation”).1 The Prepetition Litigation involved claims for breach of an employment contract dated September 17, 1999, between Garvey and the Debtor and Key Management. The case was tried to a jury, which returned a verdict in favor of Garvey for non-payment of commissions and failing to tender shares of the Debtor’s stock to Garvey pursuant to the employment contract. On August 25, 2005, the Cass County Circuit Court entered a Judgment, based on the jury’s verdict, in the total amount of $2,331,336.28. The Debtor appealed the Judgment and Garvey filed a cross-appeal. That matter is currently pending in the Missouri Court of Appeals.2
Not long after the verdict, Debtor filed its voluntary Chapter 11 bankruptcy petition on October 14, 2005. Thereafter, Garvey filed a second lawsuit, this time in the Circuit Court for St. Louis County, Missouri, against Stanley J. Kuecker (“Stan”), Alice L. Kuecker (“Alice”), James K. Kuecker (“James”), Chris Kuecker (Chris), Stanley N. Kuecker a/k/a/ Nick Kuecker (“Nick”), and Bilt Industries, Inc. (the “Postpetition Litigation”).3 Stan is the sole owner and president of the Debtor. Alice, James, and Nick are officers of the Debtor, and Chris is the wife of James. Bilt Industries, Inc. is an affiliate of the Debtor.
The original Petition in the Postpetition Litigation asserted five counts against the various defendants in that action. To summarize the facts alleged by Garvey in support of his Postpetition Litigation,4 Garvey states that he was hired by the Debtor and Key Management Systems pursuant to a written contract which provided that he was to receive certain commissions for his work with certain listed clients that Garvey had brought in to the companies, based on a percentage of gross revenue less direct costs associated with the particular customer. He was also to be paid a commission based on continuing net sales from jobs received from those clients, even after he ceased to be employed by the Debtor or Key Management Systems. Finally, the contract provided that, in the event that purchase orders from Garvey’s clients reached $16,000,000, the Debtor and Key Management Systems were required to tender 33% of their shares of stock to Garvey.
The Debtor and Key Management Systems fired Garvey in October 2003 and failed to pay him for his commissions earned both while he was employed and after he was fired. They also failed to tender the stock to him after purchase orders from Garvey’s clients exceeded *56$16,000,000. As noted above, a jury found that Garvey was entitled to a net judgment of $2,555,635.48 for the unpaid commissions and stock.
In the Postpetition Lawsuit, Garvey asserts that the individual defendants took various actions in an effort to, at least in part, prevent Garvey from recovering his commissions and stock. Among other things, Garvey asserts that Stan would regularly sell the Debtor’s inventory for cash and keep the cash for his personal benefit. Stan would not report these cash transactions on his personal tax returns and would manipulate the inventory on the Debtor’s financial statements and books. Garvey alleges Stan filed false federal, state, and unemployment tax returns, as well as false social security, Medicare, and workers’ compensation returns for the Debtor and Key Management. Stan also had the Debtor and Key Management pay himself hundreds of thousands of dollars per year in dividends and distributions, and pay significant salaries to himself, James, Nick, Alice, and Chris, all in order to strip the companies of assets. Stan also prepared and filed false insurance claims for losses to the Debtor’s property allegedly damaged in fires or cave-ins at the Debtor’s warehouse facility. Garvey also alleges Stan instructed employees to do work that personally benefited himself and his sons, James and Nick, and that this work was billed to customers of the Debtor. Further, Garvey asserts Stan formed Bilt Industries in October 2004 and transferred assets, customers, money, and business from the Debtor and Key Management Systems to Bilt Industries without reasonable compensation. As to Garvey’s customers’ accounts, Stan and the other individual defendants prepared false quarterly commission reports, overstating expenses and instructing employees to falsely bill time to Garvey’s jobs, in an effort to reduce Garvey’s commissions.
In Counts I and II of the original Petition filed in the Postpetition Litigation, Garvey asserted that the Debtor and Key Management Systems committed the numerous improper, tortious, or fraudulent acts described above, which were instigated by Stan, Alice, Nick, James, and Chris, by virtue of their domination and control of the Debtor. Garvey asserted that these acts were done, at least in part, to cheat Garvey out of the commissions and stock distributions he was entitled to. Count I sought to pierce the corporate veil as to Stan, and Count II sought to pierce the corporate veil as to Stan, Alice, Nick, James, and Chris, and to make them personally liable for the damages Garvey incurred in his dealings with the Debtor and Key Management Systems.
Count III of the original Petition alleged that the Debtor engaged in various fraudulent transfers from the Debtor company and Key Management Systems to the individual defendants and the newly-formed affiliate, Bilt Industries, at the direction of each of the individual defendants and Bilt Industries. Garvey asserted that these transfers were done with the intent to hinder, delay, or defraud Garvey and prevent him from recovering the money owed to him. He requested, among other things, that the transfers be avoided to the extent necessary to satisfy Garvey’s claims and that the court appoint a receiver to take custody of the various defendants’ assets.
Count IV alleged that the Debtor provided fraudulent reports to Garvey relating to the commissions earned under the employment agreement, all at the hands of the individual defendants. This count alleged that Stan, Alice, and Chris prepared the reports and instructed employees to falsely bill expenses to Garvey’s accounts. He requested a judgment for actual and *57punitive damages against the individual defendants for fraud.
Count V alleged that the Debtor fraudulently and deceitfully failed to send commission reports to Garvey after he was fired, and concealed the continuing commissions owed by the Debtor to Garvey, all at the hands of the individual defendants. He sought a judgment for actual and punitive damages based on fraud.
On December 22, 2005, the Debtor filed the instant Motion to Enforce Automatic Stay, asserting that Garvey’s filing and pursuing the Postpetition Litigation violated the automatic stay in the Debtor’s bankruptcy case, even though the Debtor was not named as a defendant in that action. The Motion asked the Court to rule that the filing of the Petition violated 11 U.S.C. § 362, that the claims asserted in the Petition were estate property, that Garvey has no standing to prosecute the claims asserted in the Petition, that the filing of the Petition was void ab initio, and further sought an order “entering relief in favor of the Debtor to remedy the stay violation.”5
On January 9, 2006, Garvey filed a request for leave to amend his Petition in the St. Louis County Court, along with a First Amended Petition. The St. Louis County Court granted Garvey’s request and permitted the First Amended Petition to be filed. The First Amended Petition dropped the original Counts I—III for piercing the corporate veil and fraudulent transfers, re-designated the previous Counts IV and V (alleging fraud by the individual defendants) as Counts I and II, and added a new count, Count III, for tortious interference with business expectancy.
Thus, in Count I of the First Amended Petition, entitled “Fraud,” Garvey asserts that Stan, Alice, and Chris, with the knowledge and approval of James and Nick, falsely applied charges and billed time to Garvey’s jobs in order to falsely increase the expenses to Garvey’s jobs and reduce his commissions. They each represented to Garvey that the commission reports they gave him were accurate, even though they knew they were false. He asserts that the individual defendants made the representations with the intent that Garvey rely on them, that Garvey did rely on them, and that his reliance was justifiable. He also asserts that the individual defendants took these actions so that the money to be distributed to themselves would be increased. He seeks actual and punitive damages, jointly and severally, from each of the individual defendants.
In Count II, entitled “Fraud and Deceit,” Garvey asserts, in essence, that the individual defendants decided they would completely hide the ongoing commissions due to Garvey for the second quarter of 2005 and thereafter, and that they stopped sending his commission reports to him altogether. He asserts that their efforts to hide his commissions were done with the specific intent to harm him and to personally profit by taking the money that was owed to Garvey for themselves. He seeks actual and punitive damages, jointly and severally, from each of the individual defendants.
In Count III, entitled “Tortious Interference with Business Expectancy,” Garvey alleges that he had a contractual relationship with the Debtor and Key Management and that the individual defendants and Bilt Industries, separately and in agreement with each other, intentionally interfered with the contract and caused the Debtor and Key Management *58to breach the contract. He again asserts the individual defendants caused the Debtor and Key Management to fail to pay the commissions and stock owed to him. He asserts that the defendants, individually and in concert, tortiously interfered with the contract and Garvey’s expectancies in order to profit themselves and injure Garvey.
The Automatic Stay
The issue here is whether the causes of action contained in the original Petition and the First Amended Petition in the Postpetition Litigation, asserted against the principals and affiliate of the Debtor, violate the automatic stay imposed by the Debtor’s bankruptcy case. The Debtor asserts that each of the Counts, in both the original Petition and the First Amended Petition, violate the stay because they are claims belonging to the Debtor and because the Debtor must necessarily be found liable before the individual defendants can be. Garvey, in effect, conceded that the original Counts I through III violated the stay, which is why he filed the First Amended Petition to drop them, but maintains that the counts alleged in the First Amended Petition are direct causes of action against the individual defendants and therefore do not violate the Debtor’s automatic stay.
Section 362 of the Bankruptcy Code provides, in relevant part, that the filing of a bankruptcy petition operates as a stay, applicable to all entities, of—
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; [and]
* * * * * *
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.6
The Debtor asserts that all of the causes of action asserted in the Postpetition Litigation are premised on the Debtor’s alleged tortious conduct. Thus, to maintain any action against the individual defendants, Garvey must proceed under a piercing the corporate veil or alter ego theory. According to the Debtor, such actions belong to the estate, and not to Garvey as an individual creditor of the Debtor. As to the original Counts I—III relating to alleged fraudulent conveyances and the individual defendants’ other alleged improper actions in falsifying records and stripping the Debtor of assets and the like, I agree.
“Only a trustee has standing to assert pre-petition claims that are property of the debtor’s estate under 11 U.S.C. § 541(a)(1).”7 State law determines whether the cause of action belongs to a debtor’s estate,8 and no one disputes that Missouri law applies here. “It is well settled under Missouri law that a corporation is the only party that may recover for its direct injuries.”9 “[T]he focus of whether the cause of action belongs to the corporation should center on the relationship between the alleged injury and the corporation.” 10 If the corporation suffers the *59direct injury that results from a principal’s malfeasance, then only the corpora-has standing to assert claims arising of the malfeasance.11
[I]t is clear that causes of action belonging to the debtor at the commencement of the case are included within the definition of property of the estate. E.g., 4 Collier on Bankruptcy ¶ 541.10[1], at 541-62 (15th ed.1986). Any of these actions that are unresolved at the time of the filing then pass to the trustee as representative of the estate, who has the responsibility under Section 704(1) of asserting them whenever necessary for collection or reservation of the estate. Id. ¶ 704.02, at 704-6 to 7. For example, these sections give the trustee authority to bring an action for damages on behalf of a debtor corporation against corporate principals for alleged misconduct, mismanagement, or breach of fiduciary duty, because these claims could have been asserted by the debtor corporation, or by its stockholders in a derivative action.12
The causes of action asserted in Counts I and II of the original Petition allege that the individual defendants sold the Debtor’s inventory for cash and kept the cash for their personal benefit; manipulated the inventory on the Debtor’s financial statements and books; filed false federal, state, and unemployment tax returns, as well as false social security, Medicare, and workers’ compensation returns for the Debtor and Key Management; paid themselves hundreds of thousands of dollars per year in dividends, distributions, and salaries in order to strip the companies of assets; instructed employees to do work that personally benefitted themselves and billed these costs to customers of the Debtor; and formed Bilt Industries in October 2004 and transferred assets, customers, money, and business from the Debtor and Key Management Systems to Bilt Industries without reasonable compensation. If these allegations are true, then the Debtor was directly harmed by these actions and it could pursue causes of action against the individual defendants.13 Similarly, Count III of the original Petition, alleging that the individual defendants transferred money and assets to themselves and Bilt Industries, are actions that directly harmed the Debtor and, therefore, it is an action clearly belonging to the Debtor and not to Garvey as an individual creditor of the Debtor. Accordingly, even though Garvey may have been injured by these actions as well, these causes of action belong to the Debtor.14
*60In sum, if the allegations relating to the original Counts I through III are true, they belong to the Debtor and any recovery for damages caused by them should benefit all of the Debtor’s creditors, and not just Garvey.15 Accordingly, I find that the filing of the Petition asserting the original Counts I through III violated the automatic stay in the Debtor’s bankruptcy case.
As to the current Counts I through III, Garvey asserts that those causes of action are particular to him and therefore do not violate the automatic stay in the Debtor’s bankruptcy case. The Debtor asserts that officers and directors may not be held independently liable without piercing the corporate veil or finding liability on the part of the Debtor and, therefore, any action brought by a third party against them violates the automatic stay.
In Missouri, merely holding a corporate office does not subject one to personal liability for the misdeeds of the corporation.16 However, corporate officers may be held individually liable for tortious corporate conduct if they have actual or constructive knowledge of, and participated in, an actionable wrong.17 This is true even when the officers are acting in their corporate capacity.18 In an action for inducing a breach of contract, a corporate officer is protected from individual liability, “provided no improper means are used, the defendant acts in good faith to protect the corporation!,] and does not act for his own benefit.”19 Further, “[a]n individual is not protected from liability simply because the acts constituting the tort were done in the scope and course, and pertained to, the duties of his employment.”20 In other words, a manager who controls the operations of the corporation, and directs the wrong, may be held individually liable.21
In his First Amended Petition, Garvey has dropped all of the allegations and causes of action asserting sabotage or damage to the Debtor itself. The Counts remaining in the First Amended Petition relate only to the actions taken by the individual defendants in connection with the contract with Garvey, namely, that they falsified the records relating to his commissions and caused the breach of the contract with him. As outlined above, in Missouri, he need not pierce the corporate veil in order to seek personal liability against the individual defendants under certain circumstances.
Accordingly, because Missouri law provides a mechanism whereby Garvey can seek personal liability against the individual defendants as principals of the Debtor *61without piercing the corporate veil, and he is no longer pursuing a cause of action belonging to the Debtor, I find that Counts I through III of the First Amended Petition do not violate the automatic stay in the Debtor’s bankruptcy case. Whether Garvey has sufficiently pled a cause of action against the individual defendants in his First Amended Petition, and whether he can prove them, are issues for the Circuit Court of St. Louis County to determine.
Damages for Violation of the Automatic Stay
Although I find that the First Amended Petition does not violate the automatic stay, as discussed above, the original Counts I through III for piercing the corporate veil and fraudulent transfers did violate the stay. The Debtor seeks damages from Garvey and his counsel for the attorneys fees incurred by Debtor as a result of this violation of the automatic stay. A bankruptcy court may award damages to the injured party for a willful violation of the automatic stay pursuant to the court’s civil contempt power embedded in § 105 of the Bankruptcy Code.22 However, the Debtor failed to present any evidence of damages at the hearing on the Motion; instead, at the hearing, counsel for the Debtor requested that he be allowed to offer such evidence at another hearing, saying that he would not know the precise amount of fees incurred until he knew how long he actually spent at the hearing. Subsequent to the hearing, Debtor filed a separate Request for Recovery of Damages Arising from Garvey Stay Violations23 seeking attorneys fees and costs of $22,558.50. In his Response to such Request, Garvey contends that Debt- or is not entitled to damages but that, in any event, the award sought is not reasonable. Parties routinely present evidence regarding attorneys fees at the hearing on the underlying motion, often estimating the amount of time to be spent at the hearing or requesting to supplement the evidence to include the time spent at the hearing. Here, the original Motion sought an order “[ejntering relief in favor of Debtor to remedy the stay violation.” A hearing was set on such Motion, so Debtor should have been prepared to prove up his damages at such hearing, if an award of damages was sought to remedy the stay violation. The Debtor, however, presented no evidence at all. Accordingly, the Debt- or’s request for damages is DENIED.24
For the foregoing reasons, the Motion to Enforce Automatic Stay is SUSTAINED in part and OVERRULED in part. Debt- or’s Request for Recovery of Damages Arising from Garvey’s Stay Violation is DENIED.
IT IS SO ORDERED.
. Garvey v. Kuecker Equipment Co., Inc., et al., Case No. CV104-504CC.
. By Order entered December 14, 2005, this Court granted relief from that automatic stay for the limited purpose of allowing both the Debtor and Garvey to proceed with their appeals from the Cass County Judgment.
. Garvey v. Kuecker, et al., Case No. 05CC-5874.
.The facts that follow, relating to the prepetition dealings between Garvey and the various defendants in the state court litigation, are a summary of the facts as alleged by Garvey in the Petition filed in the Postpetition Litigation, many of which are disputed by the Debt- or and other parties. They are provided here only to outline the dispute between the parties and do not constitute my findings of fact.
. Doc. No. 47, at 15.
. 11 U.S.C. § 362(a)(1) and (3).
. In re Bridge Information Sys., Inc., 325 B.R. 824, 831 (Bankr.E.D.Mo.2005).
. Id. (citations omitted).
. Id. at 831.
.Id.
. Id. at 832.
. Mixon v. Anderson (In re Ozark Rest. Equip. Co.), 816 F.2d 1222, 1225 (8th Cir.1987) (emphasis in original).
. As noted above, these counts were pled as veil piercing claims. As the Bankruptcy Court in Bridge Information Systems noted, the Eighth Circuit in Ozark Restaurant Equipment held generally that only third-party creditors may bring a veil piercing cause of action under Arkansas law, but Ozark does not stand for the broad proposition that only a creditor may bring a veil piercing claim in all circumstances. Bridge Information Sys., 325 B.R. at 833. “Rather, the proper analysis must focus upon whether the veil piercing claim belonged to the corporation on the petition date under applicable state law so that it became property of the corporation’s estate under 11 U.S.C. § 541(a).” Id. (citing Kalb, Voorhis & Co. v. Am. Fin. Corp., 8 F.3d 130, 134 (2nd Cir.1993)). The Ozark Restaurant case was based on Arkansas law, which is not applicable here.
.While the filing of the original Petition did violate the automatic stay, as found here, that does not mean that the serious allegations in such Petition are not true. Indeed, if Garvey were to prove such allegations in this Court, there could well be a basis for appointment of a Chapter 11 trustee, 11 U.S.C. § 1104, or denial of confirmation of a Chapter 11 plan *60proposed by the Debtor, 11 U.S.C. § 1129(a)(3) and (11).
. Accord S.I. Acquisition, Inc., 817 F.2d 1142, 1153-54 (5th Cir.1987) (holding that allowing an individual creditor's action to proceed against the debtor’s principals under a piercing the corporate veil theory would undercut the general bankruptcy policy of ensuring that all similarly-situated creditors are treated fairly); see also In re Colonial Realty Co., 980 F.2d 125, 131-32 (2nd Cir.1992).
. Constance v. B.B.C. Dev. Co., 25 S.W.3d 571, 590 (Mo.Ct.App.2000); Grothe v. Helterbrand, 946 S.W.2d 301, 304 (Mo.Ct.App.1997).
. Id.; Lynch v. Blanke Baer & Bowey Krimko, Inc., 901 S.W.2d 147, 153 (Mo.Ct.App.1995).
. Id. See also Osterberger v. Hites Constr. Co., 599 S.W.2d 221, 229 (Mo.Ct.App.1980).
. Lynch v. Blanke Baer & Bowey Krimko, 901 S.W.2d at 153.
. State ex rel. the Doe Run Resources Corp. v. Neill, 128 S.W.3d 502, 505 (Mo.2004) (en banc) (internal quotemarks omitted).
.Id. at 507.
. In re A & J Auto Sales, Inc., 223 B.R. 839, 844 (D.N.H.1998); In re Payless Cashways, Inc., 254 B.R. 746, 751 (Bankr.W.D.Mo.2000).
. Doc. No. 65.
. Accord In re Payless Cashways, 254 B.R. at 751 (denying the debtor’s request for attorneys' fees as a sanction for violation of the discharge injunction because the debtor failed to provide direct proof of the amount of attorney’s fees it incurred as a result of the violation of the discharge injunction); In re A & J Auto Sales, 223 B.R. at 845 (affirming the bankruptcy court’s denial of damages because the violation of the stay was in good faith and the debtor failed to present evidence of actual damages). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493823/ | MEMORANDUM OPINION
ARTHUR B. FBDERMAN, Bankruptcy Judge.
Debtor filed this adversary proceeding seeking to discharge student loan obligations. This Court has jurisdiction pursuant to 28 U.S.C. 1334(b), and may hear and determine the issues in this case pursuant to 28 U.S.C. 157(a), 157(b)(1), and 157(b)(2)(I). This is a core proceeding. I find that the Debtor has not met his burden of proving that requiring repayment of his student loan obligation to the United States Department of Education would impose an undue hardship on him, so such obligation is nondischargeable.
Preliminarily, the Complaint was filed against three defendants. Trial was held on January 25, 2006, in Springfield, Missouri. At trial, Plaintiffs counsel announced that the action was being dismissed as to defendant Van Ru Credit Corporation. Counsel also announced that a stipulated judgment would be filed as to defendant University of Missouri-Kansas City. Pursuant to such stipulation, the obligation of $2469 to UMKC is to be paid at the rate of $50 per month until paid in full, without the debtor being required to pay interest, attorneys fees, penalties, or other *64charges. The precise terms of that agreement are contained in the Stipulation of Settlement and Dismissal, which was filed on February 3, 2006.
The Debtor proceeded to trial as to the remaining defendant, the United States Department of Education (the Department). There is no dispute that, as of May 19, 2005, the Debtor owed the Department $117,850.71, or that interest, penalties, and other charges have accrued since that date. There is also no dispute that the total amount the Debtor borrowed for his education was $65,046.87. Although he did not remember doing so, the Department’s records show that the Debtor made one voluntary payment, in the amount of $147.00, on July 17,1997.
The Debtor graduated from Southwest Missouri State University in 1991, with a B.S. in Psychology/Philosophy. He received a Juris Doctor degree from UMKC Law School in 1994. Upon graduation, he received a partial merit scholarship for the L.L.M. program in taxation at Washington University, from which he graduated in 1995. After graduation, he spent a short time doing tax work with a law firm in Illinois. When that job ended, he found it difficult to find another one, so he opened his own firm in November 1995. During the period from 1999-2001, in addition to his law practice, he sold manufacturing software along with his then-spouse. Upon his divorce in 2001, he testified that he received nothing from that business, but that he continued his solo law practice.
On July 28, 2003, the Debtor began work as an Assistant Public Defender in Springfield. Initially, his job classification was PD Level I. On July 1, 2004, he was promoted to Level II, with a current salary of $37,128, and take home pay of $2377.06 per month. According to Chris Hatley, his supervisor, the Debtor has held his current position long enough to be eligible for promotion to Level III, which now pays $41,676, but that such promotion typically takes 3-4 months after local approval. At Level III, Debtor’s take home pay would be $2515 per month. A Level IV Public Defender now earns $52,452, with take home pay of $3107 per month. Again according to the supervisor, new Public Defenders typically go from Level I to Level IV in a period of 1-4 years. The Debtor will have worked for the Public Defender’s office for four years on July 28, 2007. In addition to his salary, Debtor is reimbursed for mileage to attend court outside of Springfield. He averages approximately $100 per month in such reimbursements. He testified that he enjoys public service work because it provides the opportunity to “give a little back.” He also testified that the existence of this student loan obligation has made it difficult to get another job, because prospective employers often conduct credit checks. He did not state how recently he has sought other employment. In any event, he is eligible to retire from the Public Defender’s Office at the age of 57/h, which he said would be 18-19 years from the time of trial. There was no evidence of any medical condition or disability which would prevent his working beyond that age.
The Debtor filed his bankruptcy petition on December 24, 2004. Schedules filed on that date show total unsecured debt, with and without priority, of $164,204.68. Of the unsecured debt, the Schedules list a total of $144,503.64 representing student loan debt to the Department and to UMKC. At trial, the Debtor’s counsel stated that the main purpose of the bankruptcy filing was to deal with student loan debt.
Debtor’s schedules show total monthly expenses of $2291. As pointed out at trial, however, such total includes rent of $685 *65per month, when the actual figure is $625, thereby reducing scheduled expenses to $2231. Listed expenses include cable/internet charges of $95 and food expense of $300 per month. In addition, due to a poor driving record, Debtor pays $240 per month for car insurance. The listed expenses include those attributable to Debt- or’s work-related travel, for which he is reimbursed. With net income of $2,345, Debtor has $114 per month after expenses.
The Department’s Income Contingent' Repayment Plan (ICRP) is a formula-based approach to tailoring the repayment burden to the borrower’s ability to pay.1 Under the ICRP, the annual payments are based on the income of the borrower and, if married, his or her spouse, for a period of 25 years. Certain types of income, including social security insurance payments, are not included for purposes of this calculation. Any amount not paid by the end of the 25th year is cancelled. The ICRP’s flexibility was designed to make repayment affordable, particularly for borrowers who take “lower-paying community service jobs.”2 There is no dispute that, if Debtor chose the ICRP option, he would have current payments of $457.17 per month. Assuming he continued to be single without dependents, his payment at Level III income would be $534.90, and it would be $714.70 at Level IV. At Level IV, Debtor would have available income of $3107, less his current expenses of $2231, or $876. By making that payment for a period of 25 years, he would be entitled to a discharge under the provisions of the ICRP.
A second option available to Debtor would be a voluntary repayment agreement made in response to a notice of a non-judicial wage garnishment by the Department. According to the Department’s publication, Options for Financially-Challenged Borrowers in Default, for a borrower who has received a garnishment notice, and responds by seeking to repay a student loan voluntarily, and is not claiming a hardship (discussed below), the Department is generally willing to accept without documentation of expenses—an installment payment arrangement under which the borrower pays 15% of disposable pay.3 This “15% of disposable pay” calculation appears to be based on the standards for the amount the Department would be able to obtain under a non-judicial wage garnishment permitted under 31 U.S.C. § 3720D and 34 C.F.R. Part 34. In other words, borrowers can avoid garnishment of their wages if they propose to voluntarily pay the Department at least what it would receive under a non-judicial garnishment.
According to 31 U.S.C. § 3720D, the Department may garnish an individual’s wages if the individual is not currently making required payments in accordance with any agreement with the Department, but such garnishment “may not exceed 15 percent of disposable pay.”4 The term *66“disposable pay” is defined as “that part of the compensation of any individual from an employer remaining after the deduction of any amounts required by any other law to be withheld.”5
The Debtor’s Schedule I shows current gross monthly income of $3094. He shows a deduction for payroll taxes and social security of $654. His disposable income for these purposes, therefore, is $2440. Fifteen percent of that amount is $366. Thus, the Department would accept, without evidence of his expenses or a showing of financial hardship, a proposal from the Debtor to voluntarily make payments in the amount of $366 at his current income level.
A third option is available to borrowers who want to repay voluntarily and can show financial hardship. In these cases, the Department is willing to accept-upon documentation of income and expenses— an installment payment amount based on available income after necessary household expenses, measured against certain standards.6 Again, this option appears to be premised on the fact that the Department will permit a borrower to voluntarily repay the amount that the Department would be able to garnish from the borrower’s wages, if the borrower shows financial hardship.7 Borrowers asserting financial hardship must show that withholding the amount of wages proposed in the notice would leave them unable to meet the basic living expenses of themselves and their dependents.8 In applying this standard, the Department compares the amounts that the borrower proves are being incurred for basic living expenses against the amounts spent for basic living expenses by families of the same size and similar income to the borrower’s.9 The Department regards the Internal Revenue Service standards as the applicable standard here.10 If the borrower claims an amount that exceeds the IRS standard for a basic living expense, the borrower must prove that the amount claimed is reasonable and necessary.11
At the hearing in this case, the Debtor submitted evidence as to the IRS standards relevant for his income and family size.12 Those standards provide, for a family of one with gross income of $2500 to $3333, monthly housing expenses in Greene County, Missouri, of $818, household expenses of $577 per month,13 and transportation expenses of $475 for vehicle ownership plus $251 for operating expenses. These standard expenses total $2121.
*67The Debtor’s actual expenses are $820 for housing, $570 for household expenses, $346 for a car payment, and $491 for operating expenses for his vehicle.14 The Debtor’s actual expenses for housing and household expenses, therefore, are about the same as the IRS standards. As to transportation, the Plaintiffs operating expenses exceed the IRS standards by about $250; however, he also testified that he is reimbursed approximately $100 for travel expenses through his employer, which reimbursement is not reflected here.
The Debtor testified that his current net income, after taxes and insurance deductions, is $2377,15 plus approximately $100 per month in travel expense reimbursement, for a total of $2477. After deducting the IRS standard expenses of $2121, the Debtor has $356 left over which, under the Department’s guidelines, would be available for payment on his student loans. If the Department accepted Debtor’s explanations for increased travel expenses as reasonable and necessary, the Debtor’s available income after expenses is $250. Hence, under this third option, the Department would appear to accept a voluntary payment between $250 and $356, depending on whether the Department accepted the Debtor’s actual expenses as reasonable and necessary. The Department would review the Debtor’s situation periodically, typically at six-month intervals.16
Finally, borrowers may “rehabilitate” their defaulted student loans by making twelve consecutive timely monthly payments and then having the holder of the defaulted loan sell the loan to a lender.17 The Department reinstates the loan guaranty upon the sale to the lender and the borrower regains all the benefits of the original loan, such as the rights to deferment and cancellation, that were lost when the loan defaulted.18 The loan may then be repaid under a new repayment schedule.19 The amount of the payments for the twelve-month rehabilitation period must be “reasonable and affordable” based on the borrower’s “total financial circumstances” assessed by the Department.20 Counsel for the Department stated at trial that the Department has offered for the Debtor to make payments of $125 per month for the twelve-month rehabilitation period, based on the Debtor’s “total financial circumstances.” The payment amount after the twelve-month rehabilitation period will be analyzed after the loan is rehabilitated. However, the Debtor would then be eligible for forbearances and deferments at that time.
Instead of any of these options, the Debtor proposed that he be allowed to restructure the Department’s obligation by reducing it to the original principal balance of $65,046, with such balance to be paid at the rate of $150 per month for two years, to be 'followed by payments of $340.78 per month for an additional 20 years. Such proposal would allow the Debtor to essentially retire from the Public Defender’s office soon after he is first eligible to do so, and well before the age of 65, without *68taking the burden of this student loan obligation into his retirement.
Under § 523(a)(8), certain student loans are nondischargeable unless repayment of the loan would impose an undue hardship on the debtor or his dependents. The burden of establishing undue hardship, by a preponderance of the evidence, is on the debtor.21 Unfortunately, the Code contains no definition of the phrase “undue hardship” and interpretation of the concept has been left to the courts. In this Circuit, the applicable standard is the “totality of the circumstances” test.22 In applying this approach, the courts are to consider: (1) the debtor’s past, current and reasonably reliable future financial resources; (2) the reasonable necessary living expenses of the debtor and the debtor’s dependents; and (3) and the other relevant facts and circumstances unique to the particular case.23 The principal inquiry is to determine whether “the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt— while still allowing for a minimal standard of living”; if so, the indebtedness should not be discharged.24 The “totality of the circumstances” is obviously a very broad test, giving courts considerable flexibility. As a result, courts in the Eighth Circuit have looked to a number of facts and circumstances to assisting them in making this determination including: (1) total present and future incapacity to pay debts for reasons not within the control of the debtor; (2) whether the debtor has made a good faith effort to negotiate a deferment or forbearance of payment; (3) whether the hardship will be long-term; (4) whether the debtor has made payments on the student loan; (5) whether there is permanent or long-term disability of the debtor; (6) the ability of the debtor to obtain gainful employment in the area of the study; (7) whether the debtor has made a good faith effort to maximize income and minimize expenses; (8) whether the dominant purpose of the bankruptcy petition was to discharge the student loan; and (9) the ratio of student loan debt to total indebtedness.25
Counsel for the Debtor argues that this Court has the authority to restructure the student loan by reducing the amount due, and creating a new payment schedule. The Bankruptcy Appellate Panel for the Eighth Circuit has, in dicta, rejected the notion that a bankruptcy court has the authority to restructure a student loan, stating that “Congress could have provided that student loans will be dischargeable ‘to the extent’ excepting such debt would impose an undue hardship upon a debtor and his dependents,” but it did not. This is especially true, according to the BAP, in light of the fact that “Congress used that phrase elsewhere in the Bankruptcy Code, including the three other subdivisions of the dischargeability section, 11 U.S.C. § 523(a)(2), 523(a)(5), and 523(a)(7)”.26 In *69Debtor’s favor, the Sixth Circuit has long held that bankruptcy courts do have the authority to restructure student loans.27 While not a student loan case, the Ninth Circuit appears to be prepared to follow the same course.28 Nevertheless, I conclude that, while the quoted statement of the Eighth Circuit Appellate Panel in An-dresen was not necessary to the panel’s holding, the conclusion is a sound one.
That conclusion is supported by the decision of the Eleventh Circuit in In re Cox.29 There, the debtor argued that since the Bankruptcy Code is intended to give debtors a fresh start, courts should be authorized to partially discharge student loans to the extent necessary to provide such fresh start. The debtor in that case also contended that Section 105(a) of the Bankruptcy Code30 enables courts to fashion an equitable remedy, which might include a partial discharge. In rejecting both arguments, the Eleventh Circuit stated as follows:
It is a well-settled rule of statutory interpretation that where there is no clear intention otherwise, a specific statute will be not controlled or nullified by a general one, regardless of the priority of enactment. Because the specific language of Section 523(a)(8) does not allow for relief for a debtor who has failed to show “undue hardship,” the statute cannot be overruled by the general principles of equity contained in Section 105(a). To allow the Bankruptcy Court, through principles of equity, to grant any more or less than what the clear language of Section 523(a) mandates would be “tantamount to judicial legislation and is something that should be left to Congress, not the courts.” ’31
I agree. Accordingly, I conclude that in a dischargeability action pursuant to § 523(a)(8), the Court does not have the authority to restructure or reduce the loan obligation, but only to determine whether a finding of nondischargeability as to the entire obligation would impose an undue hardship on the debtor or the debtor’s dependents.
In any event, I find that, even if this Court were authorized to restructure or reduce a student loan obligation, there is no basis for doing so here, since the Debtor has not met his burden of proving that a finding of nondischargeability would impose an undue hardship on him. The Debtor’s student loan funds were spent training him to be an attorney, and he has worked in that field continuously since 1994. He started out intending to be a tax attorney; that didn’t work out, but he has nevertheless continued to work as an attorney, and to benefit from his education. Since taking his current position, he has progressed in the Public Defender’s Office, and there is nothing in the record to indicate that he will not continue to do so. Upon promotion to Public Defender Level TV, he will have sufficient income to meet the monthly payment due under the Income Contingent Repayment Plan. Upon making payments under that plan for 25 years, he would be relieved of further obligations. In any event, the Debtor need not limit his income to that he would receive as a public defender. Based on the trial experience he is accumulating, he could well be qualified at some point to *70leave the Public Defender’s office and earn a higher income elsewhere. The Debtor testified that he has sought other positions through the years. Although it was unclear how recently he has sought other positions, as time goes by he is becoming more and more qualified for higher-paying employment as a trial attorney.
Further, he testified, without support, that the existence of this debt makes it more difficult for him to obtain other employment, because prospective employers often run credit checks.32 While prospective employers may be wary of prospective employees whose wages are subject to garnishment, as the Debtor’s are, that would not be the case if he were making payments on the loan under an approved program. And, with his bankruptcy discharge, any check of Debtor’s credit should show that he has no unsecured debt other than his student loans.
The Debtor testified that he enjoys his current position because it allows him to give something back to society. While that is a commendable sentiment, he also gives back by repaying his student loans. The ICRP and other government programs are intended to enable him to do both, so if he chooses to work at a lower-paying job, that should not be a basis for discharging this obligation. Furthermore, the Debtor’s current situation was created by events within his reasonable control. Debtor testified that, soon after being awarded an L.L.M. degree in taxation, he received a bill for his first monthly student loan payment, and that he “panicked”. Despite the fact that he has been a practicing attorney for almost 12 years, he has made just one voluntary payment of $147. He now offers to pay the principal balance, without the interest and other charges that accumulated during the years that he, for all practical purposes, ignored his student loan obligations. His proposal would enable him to be rid of this obligation at the age of approximately 60 years old, even though there is no evidence that he will be unable to continue working past that age. While it would certainly be more comfortable for him to be able to pay the amount he proposes, on the schedule he proposes, that is not sufficient to demonstrate undue hardship under § 523(a)(8).
In sum, I find that the Debtor has not met his burden of proving that excepting his debt to the Department of Education would impose an undue hardship on him. An Order consistent with this Memorandum Opinion will be entered this date.
. See Plaintiff's Exhibit N, U.S. Department of Education Federal Student Aid Borrower Services—Collections Group, Options for Financially-Challenged Borrowers in Default (October 2004), at 4 (citing 20 U.S.C. § 1087e(d)(l)(D)).
. H.R.Rep. No. 103-111, at 121 (1993), reprinted in 1993 U.S.C.C.A.N. 378.
. See Plaintiff's Exhibit N, Options for Financially-Challenged Borrowers in Default, at 23. This option appears to come from the requirement in the Debt Collection Improvement Act, 31 U.S.C. § 3720D(b)(4), which requires an agency covered by the statute, such as the Department, to provide an opportunity to a borrower who is subject to a garnishment to enter into a written agreement, under terms agreeable to the head of the agency, to establish a schedule for repayment of the debt. See also 34 C.F.R. § 34.6(b).
.31 U.S.C. § 3720D(a) and (b)(1).
. 31 U.S.C. § 3720D(g).
. Plaintiff's Exhibit N, Options for Financially-Challenged Borrowers in Default, at 23.
. Upon receiving notice of the Department’s intent to issue a non-judicial wage garnishment as described above, a borrower may object to the amount of the garnishment, and attempt to demonstrate that such garnishment would cause financial hardship to the borrower and his dependents. 34 C.F.R. § 34.7(a).
. In the actual garnishment context, the borrower bears the burden of proving financial hardship by a preponderance of the credible evidence. 34 C.F.R. § 34.14(c)(1).
. Id. at § 34.24(e)(1).
. Id. at § 34.24(e)(2).
. Id. at § 34.24(e)(4).
. See Plaintiffs Exhibits K-l, K-2, and K-3.
. In Plaintiffs Exhibit M-l, the Plaintiff stated that the standard household expenses at his current income level was $494, which is the IRS standard amount for individuals with gross income of $1667 to $2449. However, because the Debtor's current gross income is $3,094, the correct figure for household expenses should be $577. See Plaintiffs Exhibit K-3.
. See Plaintiff's Exhibit M-4.
. See also Plaintiff's Exhibit M-l.
. Exhibit N, Options for Financially-Challenged Borrowers in Default, at 23.
. Exhibit N, Options for Financially-Challenged Borrowers in Default, at 19 (citing 20 U.S.C. § 1078—6(a); 34 C.F.R. § 682.405).
. Id.
. Id.
. Id.
. In re Reynolds, 425 F.3d 526, 529 (8th Cir.2005); Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702, 704 (8th Cir.1981).
. Reynolds, 425 F.3d at 532; Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554 (8th Cir.2003); Andrews, 661 F.2d at 704.
. Long, 322 F.3d at 554; Ford v. Student Loan Guarantee Foundation of Arkansas, 269 B.R. 673, 676 (8th Cir. BAP 2001).
. Long, 322 F.3d at 554.
. See generally, In re Fahrer, 308 B.R. 27 (Bankr.W.D.Mo.2004).
. In re Andresen, 232 B.R. 127 (8th Cir. BAP 1999) (quoting Hawkins v. Buena Vista College (In re Hawkins), 187 B.R. 294, 300-301 (Bankr.N.D.Iowa 1995)).
. In re Hornsby, 144 F.3d 433 (6th Cir.1998).
. In re Myrvang, 232 F.3d 1116 (9th Cir. 2000).
. In re Cox, 338 F.3d 1238 (11th Cir.2003).
. 11 U.S.C. § 105(a).
. In re Cox, 338 F.3d at 1243 (citations omitted).
. Cf., In re Reynolds, 425 F.3d 526 (student loan held to impose undue hardship where existence of student loan exacerbated debtor’s mental illness). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493824/ | ORDER AVOIDING LIEN
HOWARD R. TALLMAN, Bankruptcy Judge.
This case comes before the Court on Plaintiffs Complaint seeking avoidance of Defendant’s lien in Debtor’s 2004 Chevrolet Silverado pickup truck, VIN# GCHK29G64E379345 [the “Vehicle”]. The Complaint alleges that the Defendant’s lien on the Vehicle is avoidable as a preferential transfer under 11 U.S.C. § 547.
I.PROCEDURAL BACKGROUND
This matter went to trial on August 31, 2005, on stipulated facts, and the Court heard the arguments of counsel. The Court has reviewed its file in the bankruptcy case; the pleadings in this adversary case; and the stipulated facts. It has considered the arguments advanced by counsel and is ready to rule.
On October 26, 2005, this Court issued its Order Regarding Trustee’s Complaint to Recover Preferential Transfer in the case of Hepner v. AmeriCredit Financial Services, Inc., (In re Baker), 338 B.R. 470, 2005 WL 3827385 (Bankr.D.Colo.2005) [“Baker”]. That case involved an issue that is common to this case as well as several others that are currently pending in this division and other divisions of this Bankruptcy Court.
In Baker, this Court determined that, under the structure of Colorado’s Certificate of Title Act, motor vehicle lien perfection does not occur until the county clerk electronically files the lien in the state’s Central Registry. It may take several days for any particular county clerk to act on a lien application and perfect the creditor’s lien. As a consequence, an automobile lien in this state may be vulnerable to avoidance by a bankruptcy trustee even though the creditor acted promptly to perfect its interest.
Because Baker is on appeal to the District Court, this Court held a status conference on December 5, 2005, with the parties involved in many of the cases that present issues similar to Baker. The Court was interested in getting input from the parties as to whether these cases should be ruled on in the ordinary course or whether the parties would be better served by holding cases in abeyance while the District Court considers the Baker appeal. The parties in this case requested that it not be held in abeyance and asked the Court to rule on the case in the ordinary course.
II. STIPULATED FACTS
The parties have stipulated to the following facts:
1. Christie Marie Glandon [the “Debt- or”] filed a Chapter 7 voluntary petition on December 30, 2004 [the “Petition Date”].
2. The Debtor resides in Adams County-
3. Plaintiff is the duly' appointed trustee of the Debtor’s Chapter 7 estate.
4. Defendant is a California corporation authorized to conduct business in Colorado.
5. The Debtor purchased the Vehicle on August 21, 2004.
6. The Debtor purchased the Vehicle from Century I Chevrolet, Inc. [“Century”].
7. At the time of the Debtor’s purchase of the Vehicle, the Vehicle was subject to a manufacturer’s certificate of origin and had not yet been titled.
8. Defendant financed the Debtor’s purchase of the Vehicle under the terms of a Credit Sale Contract, Se*106curity Agreement, Financing Statement and Disclosures.
9. The Debtor incurred the debt secured by the Vehicle on August 21, 2004.
10. The Debtor took possession of the Vehicle on August 21, 2004.
11. Defendant’s creation of a security interest in the Vehicle under the Credit Sale Contract, Security Agreement, Financing Statement and Disclosures constituted a transfer within the meaning of 11 U.S.C. §§ 101(54) and 547 which, pursuant to 11 U.S.C. § 547(e), occurred when it was perfected.
12. The transfer of the lien was made to or for the benefit of Defendant, in its capacity as a creditor of the Debtor.
13. The Debtor had a duty to cooperate with Defendant to provide the credit documentation requested by Defendant. The Debtor provided the last of the requested documents on September 14, 2005.
14. The Adams County Clerk received the application for title of the Vehicle and the other lien paperwork from Century, acting as Defendant’s agent, on September 29, 2004.
15. As shown on the Certifícate of Title, the lien was filed with the Central Registry of the Colorado Department of Revenue on October 8, 2004.
16. The 90-day preference period for the Debtor’s bankruptcy case began October 1, 2004.
17. The transfer was made while the Debtor was insolvent.
18. The transfer was made for or on account of an antecedent debt owed by the Debtor before the transfer was made.
19. If perfection occurred within the ninety (90) days prior to the petition date, the transfer enabled Defendant to receive more than it would receive in this Chapter 7 case had the transfer not been made and had Defendant received payment of its debt to the extent provided by the provisions of Title 11.
20. Defendant was the initial transferee of the transfer.
21. As of August 11, 2005, Defendant has received nine monthly payments which were due on account of the lien which Plaintiff seeks to avoid.
Ill DISCUSSION
Section 547(b) provides:
Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
*107(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).
A. Application of Baker
The stipulated facts establish all of the elements of the Plaintiffs cause of action under § 547(b) except that the transfer took place within 90 days of the filing of the bankruptcy petition. It is stipulated that the transfer took place at the time Defendant’s lien became perfected and that the 90 day preference period begins on October 1, 2004. If the Court finds that the lien was perfected after that date, then the transfer is avoidable as a preference under § 547(b).
In accordance with the Court’s discussion in the Baker case, cited above, the Court finds that Defendant’s lien on the Vehicle was perfected on October 8, 2004. That is the date that the Adams County Clerk caused Defendant’s lien to be filed in the Central Registry.
B. Equitable Lien
In addition to the operation of the Colorado Certificate of Title Act, which the Court discussed in Baker, the Court has also considered the Defendant’s argument that it’s lien should be deemed perfected earlier than October 8, 2004, because it is entitled to an equitable lien on the Vehicle. Defendant argues that the Debtor delayed completing all of the paperwork for her loan application for over three weeks and that the Adams County Clerk delayed taking action for ten days after all of the proper paperwork was delivered to it. Defendant cites to Commerce Bank v. Chambers (In re Littlejohn), 519 F.2d 356, 359 (10th Cir.1975) and Rushton v. Dean Evans Chrysler-Plymouth (In re Solar Energy Sales and Services), 4 B.R. 364, 369 (Bankr.D.Utah 1980), for support.
In the case of Hepner v. Daimler Chrysler Serv. (In re Ramey), 338 B.R. 878, 2006 WL 531273 (Bankr.D.Colo.2006), this Court examined a similar equitable lien claim made by the creditor in that case. In this case, the Court will again analyze the equitable lien issue in some detail. After further consideration of its opinion in Ramey, the Court wants to clarify its view that the structure of the Colorado Certificate of Title Act virtually forecloses the possibility that a factual circumstance might arise that could justify the imposition of an equitable lien in favor of a Colorado automobile creditor.
“An equitable lien is ‘the right, not recognized at law, to have a fund or specific property or its proceeds applied to the payment of a debt.’ ” Rounds v. Sullivan (In re Sullivan), 82 B.R. 133, 135 (Bankr.D.Colo.1988) (quoting In re Hart, 50 B.R. 956 (Bankr.D.Nev.1985)). “Equitable liens arise only where there is evidence that the parties intended to charge a particular property or fund as security for an obligation.” Barocas v. Bohemia Import Co., Inc., 33 Colo.App. 263, 518 P.2d 850, 852 (1974) (citing American Investors Life Insurance Co. v. Green Shield Plan, Inc., 145 Colo. 188, 358 P.2d 473 (1961); School District No. 3 v. Central Savings Bank & Trust Co., 113 Colo. 487, 159 P.2d 361 (1945); Valley State Bank v. Dean, 97 Colo. 151, 47 P.2d 924 (1935); Clatworthy v. Ferguson, 72 Colo. 259, 210 P. 693 (1922)). “A principal issue in determining the existence of an equitable lien ... is whether the creditor has done all it reasonably can do to perfect its lien, but nevertheless is thwarted by the uncoopera-tiveness of the debtor.” Solar Energy Sales, 4 B.R. at 370; see, also, O.P.M. Leasing, 23 B.R. at 119 (“The doctrine is further limited to situations where a se*108cured creditor is prevented from perfecting its interest by an uncooperative debt- or.”)-
As an initial matter, the Court doubts its authority to recognize an equitable lien in a motor vehicle covered by Colorado’s Certificate of Title Act. The Colorado legislature has made it clear that the only route to perfection of an automobile lien in this state is by following the procedures mandated by the Act. The statute reads in pertinent part:
Except as provided in this section, the provisions of the “Uniform Commercial Code”, title 4, C.R.S., relating to the filing, recording, releasing, renewal, and extension of chattel mortgages, as the term is defined in section 42-6-102(6), shall not apply to motor vehicles. Any mortgage or refinancing of a mortgage intended by the parties to the mortgage or refinancing to encumber or create a lien on a motor vehicle, or to be effective as a valid lien against the rights of third persons, purchasers for value without notice, mortgagees, or creditors of the owner, shall be filed for public record.
Colo.Rev.Stat. § 42-6-120(1).
But, even if recognition of an equitable lien is not foreclosed by the language of the Certificate of Title Act, it is not supported by the case law. Under Colorado law, the debtor’s actions must have prevented the creditor from perfecting its lien in order for an equitable lien to arise. But, under the Colorado Certificate of Title Act, the debtor cannot prevent a creditor from filing its lien with the county clerk’s office. Two Tenth Circuit opinions on the subject are instructive.
Commerce Bank v. Chambers (In re Littlejohn), 519 F.2d 356 (10th Cir.1975), was decided under a Kansas statute that required the lienholder to deliver the lien paperwork to the vehicle purchaser. It was then the duty of the purchaser to perfect the lien by making application for a new vehicle title. In that case, the bank did deliver the old title with its lien noted on the title to the Littlejohns at the time of the purchase. They never did apply for a new title and filed a bankruptcy petition some six months after the purchase. The bankruptcy referee and the district court found that the bank’s lien was unperfected on the petition date. On appeal, the Tenth Circuit created an equitable exception to a strict construction of the Kansas statute. It reasoned that, because the creditor’s lien was noted on the old title, absent fraud, it would give adequate notice to any potential purchaser and the creditor should not be penalized for the Littlejohns’ failure to comply with their obligation.
But, in the case of Lentz v. Bank of Independence (In re Kerr), 598 F.2d 1206 (10th Cir.1979), under a set of facts substantially similar to the Littlejohn case, the Tenth Circuit explicitly abandoned the rule it announced in Littlejohn as it applied to the Kansas motor vehicle title statutes. The reason was not that it found any infirmity in the reasoning that it had applied in Littlejohn, but that Kansas had changed its law. In Kerr, the new version of the Kansas statute that the court considered gave Kansas automobile creditors an alternative method to perfect their liens. Under the new law, the creditor could perfect its lien by submitting a lien notification directly to the state. Because the creditor in Kerr had not taken advantage of that alternative, it had not done all that it could to perfect its lien by simply noting its lien on the old title and giving it to the purchaser to file with the state. Under those circumstances, the equitable exception crafted in Littlejohn had no application.
Littlejohn’s equitable exception stood only as long as the Kansas statute was *109structured in such a way that the creditor was compelled to depend upon the debtor to file the title with the state. But once the Kansas legislature gave creditors an alternative, so that an uncooperative debtor could no longer thwart the creditor’s timely perfection, then the Tenth Circuit no longer recognized that equitable exception in relation to the Kansas statute.
Here, the Colorado statute does not depend upon the cooperation of the debtor for the creditor’s lien perfection. Under the Colorado Certificate of Title Act, the creditor submits the lien paperwork directly to the county clerk’s office. Thus, the circumstances that gave rise to Littlejohn cannot occur in relation to perfection under the Colorado statute. That point is underlined in the Solar Energy Sales case cited by the Defendant. That court made the point that the critical factor leading courts to recognize an equitable lien is uncooperativeness of the debtor that prevents a creditor from timely perfecting its lien. 4 B.R. at 370.
In this case, the Debtor took possession of the Vehicle before the Defendant had gotten all of the documentation that it requested from her. Century, acting as the Defendant’s agent, was in total control of when the Debtor received possession of the Vehicle. It apparently made the business decision to turn over possession of the Vehicle before it had complete documentation from the Debtor. It is not the function of equity to rescue parties from the consequences of their own unilateral decisions. See, e.g., Heifetz Metal Crafts, Inc. v. Peter Kiewit Sons’ Co., 264 F.2d 435, 439 (8th Cir.1959) (“the conscience of equity cannot ordinarily be invoked to obtain relief for unilateral mistake occasioned by the plaintiffs own failure to have exercised ordinary diligence in relation to some contractual feature.”). The equitable relief crafted in Littlejohn rescued the lender from the debtors’ malfeasance in a situation where the statute required the lender to depend on the debt- or to take the final step to perfect the lien. Defendant in this case was only vulnerable to the delay in receiving documents from the Debtor because its agent put the Defendant in that position by handing over possession of the Vehicle before having the documents in hand.1
Nor does the Court believe the ten day delay between delivery of the lien paperwork to the Adams County Clerk and entry of the lien in the Central Registry is relevant to the issue of an equitable lien. That delay was the result of the design and operation of Colorado’s Certificate of Title Act, not the fault of the Debtor. For the Court to recognize an equitable lien in this case would require the Court to use its equitable jurisdiction to justify rewriting the Colorado Certificate of Title Act. To attempt to do so would clearly exceed this Court’s role of interpreting and applying statutes as written.
In another bankruptcy case decided in this district, Judge Brown addressed the question of an equitable lien asserted in the case of Lewis v. Hare (In re Richards), 275 B.R. 586 (Bankr.D.Colo.2002). In that case, Judge Brown found that an automobile creditor’s claim of an equitable lien was an unperfected interest that was avoidable by a bankruptcy trustee using his strong-arm powers under § 544. Id. at 591-92 (“[UJnder Colorado law, the Trustee, as a hypothetical lien creditor, prevails over the equitable (unperfected) lien claim *110of the Creditor.”)-2
IV. CONCLUSION
As the Court discussed in Baker, a motor vehicle lien in Colorado is not perfected at the time that a lender delivers its lien paperwork to a county clerk’s office. It is only perfected after the clerk’s office has performed its obligation to examine the lien paperwork and has finally entered the lien into the state’s electronic Central Registry.
Perfection of a security interest in a motor vehicle cannot be accomplished by means of an “equitable lien.” The circumstances that persuaded the Tenth Circuit to recognize an equitable lien under the Kansas motor vehicle statutes in Littlejohn are notably absent in the Colorado Certificate of Title Act. Specifically, under that early version of the Kansas statute, a creditor’s hen could only be perfected when the debtor filed for a new title. The Colorado statute does not place the creditor in the position of depending upon the debtor to perfect its hen.
The Defendant’s hen was perfected on October 8, 2004, the date that the Adams County Clerk filed the hen in the state’s Central Registry. That placed the date of the transfer some eight (8) days into the ninety (90) day preference period. The parties stipulated to the remaining facts that establish the Plaintiffs right to avoid the Defendant’s hen under § 547. Therefore, it is
ORDERED that the Court will enter JUDGMENT in favor of Plaintiff and against Defendant, pursuant to 11 U.S.C. §§ 547(b) and 550(a)(1), avoiding the transfer of a lien to Defendant against a 2004 Chevrolet Silverado pickup truck, VIN# GCHK29G64E379345, owned by the Debtor. The avoided hen is hereby preserved for the benefit of the bankruptcy estate pursuant to 11 U.S.C. § 551. It is further
ORDERED that Plaintiff is entitled to money judgment against Defendant in an amount equal to all payments which have, to the date of judgment, been made by or on behalf of the Debtor to the Defendant plus costs. Defendant is directed to advise Plaintiff, within ten (10) days, of the amount of those payments; and Plaintiff is directed to provide the Court with a form of judgment.
. The Court also notes in passing that it took Century 15 days, from September 14th to September 29th, to file its lien paperwork with the Adams County Clerk after it received documentation from the Debtor.
. The topic of equitable liens raises two distinct questions. The first is whether there is an equitable interest that is enforceable as between the parties to the transaction; the second question is whether the interest is a perfected interest that is enforceable against third parties. The Tenth Circuit omitted any discussion of that distinction in its Littlejohn and Kerr opinions. Those opinions use the term to refer to an interest that is enforceable against third parties. This Court has done the same for the purpose of comparing the facts of this case to those Tenth Circuit precedents. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493825/ | MEMORANDUM OPINION
ROBERT F. HERSHNER, Chief Judge.
Joy R. Webster, Trustee, filed on December 23, 2004, a Complaint To Avoid Fraudulent Transfer And For Return Of Property Or Its Value. Betty L. Cape, *143Defendant, filed a response on January 5, 2005. J. Coleman Tidwell, Trustee, (“Mr. Tidwell”), filed on January 7, 2005, a response to Plaintiffs complaint and asserted a cross-claim against Defendant.1 Defendant filed on May 20, 2005, a response to the cross-claim. Mr. Tidwell filed on August 17, 2005, an amended response to Plaintiffs complaint and an amended cross-claim. Defendant filed on September 6, 2005, a response to the amended cross-claim. This adversary proceeding came on for trial on September 21, 2005. The Court, having considered the evidence presented and the arguments of counsel, now publishes this memorandum opinion.
FINDINGS OF FACT
James Robert Lary, Debtor, is Defendant’s brother. Debtor is known as “Jim-bo” and as James Robert Lary, III. Defendant is known as “Betsy.” Betty S. Lary, (“Mrs. Lary”), was the mother of Debtor and Defendant.
Mrs. Lary died on February 12, 2003. Her Last Will and Testament was probated in solemn form. On March 31, 2003, the probate court appointed Debtor to be the executor of Mrs. Lary’s estate. Debt- or administered the estate without the assistance of counsel. The primary assets of the estate were a residence (the “Newberg residence”)2 and a retirement account in the amount of $80,504.55.
Section 11(1) of Mrs. Lary’s Will provided:
II. BEQUESTS:
I direct that after payment of all my just debts, my property be bequeathed in the following manner:
1. To whome [sic] that it may concern, at the time of my death, if my son, James Robert Lary III, aka Jimbo, is living at 1220 Newberg Ave and since this is his home now, he can live there as long as he wants. Then if he should move it can be sold and divided two ways between both my son James Robert Lary III, aka Jimbo and Betty Louise Cape, aka Betsy. I love you with all my heart. God bless each of you! Mother, (emphasis original)
The Will made bequests of specific personal property to several members of Mrs. Lary’s family. Section II(4)(I) of the Will provided that Debtor and Defendant “shall divide whats left.”
The Newberg Residence
Debtor was living in the Newberg residence when Mrs. Lary died. Debtor continued to live in the Newberg residence. Debtor and Defendant testified that they believed that, under the terms of the Will, Debtor was the sole owner of the Newberg residence. In June 2003, Debtor married and moved to Gray, Georgia. The New-berg residence was vacant until January 2004.
Defendant filed a petition under Chapter 7 of the Bankruptcy Code on June 24, 2003.3 Mr. Tidwell was the duly appointed Chapter 7 trustee of Defendant’s bankruptcy estate. Defendant did not list the Newberg residence in her bankruptcy schedules. Defendant testified that she did not believe that she owned any interest in the Newberg residence. Defendant received a discharge in bankruptcy and her case was closed on September 30, 2003. Defendant’s bankruptcy case was reopened *144on March 26, 2004. Mr. Tidwell was reappointed to be the Chapter 7 trustee.
During 2003, Defendant rented a residence on Wimpy Road, Macon, Georgia. Defendant wanted to move. In December 2003, Defendant applied for a loan to purchase a mobile home. Defendant’s loan application was not approved.
Debtor learned that Defendant’s loan application had not been approved. Debt- or asked Defendant if she wanted the Newberg residence. Debtor and Defendant testified that the judge of the probate court told them how title to the Newberg residence should be transferred from Mrs. Lary’s estate to Defendant. Debtor testified that an attorney prepared the deeds after reviewing Mrs. Lary’s Will. Debtor executed an executor’s deed dated December 28, 2003, conveying the Newberg residence to himself and to Defendant. Debt- or also executed a quit claim deed dated December 28, 2003, conveying his interest in the Newberg residence to Defendant. Debtor received no consideration from Defendant. The executor’s deed and the quit claim deed were filed for record on January 13, 2004.4
Defendant moved into the Newberg residence in January 2004. She continues to live there.
Debtor testified that he had no opinion as to the value of the Newberg residence. There was no mortgage on the Newberg residence when Mrs. Lary died. Debtor filed on November 2, 2003, an Inventory with the probate court listing the value of the Newberg residence as $60,000. (Exhibit Tidwell -1, Book 39, Page 217). The 2005 ad valorem tax statement showed the “100% value” of the Newberg residence to be $62,000.00. (Exhibit P—46). The Court is persuaded that the value of the residence in January 2004 was $60,000.
The Retirement Account
Mrs. Lary owned a retirement account at the time of her death. Southern Farm Bureau Life Insurance Company issued a check dated April 21, 2003, for $80,504.55. The check was payable to “James R Lary III, Executor For The Estate of Betty S Lary.” (Exhibit P—5). Debtor deposited the check into his personal checking account on April 29, 2003. (Exhibit P—6). On April 30, 2003, Debtor issued a check on his personal checking account for $35,013.46, payable to “cash”. The check stated that it was “For Betsy’s Inheritance.” Debtor endorsed the back of the check. (Exhibit P—7). Debtor testified that he cashed the check and kept the proceeds at his residence. Debtor and Defendant testified that Defendant did not receive any of the proceeds and that Defendant knew nothing about the retirement account.
Debtor and his wife separated in June 2004. Debtor testified that he was able to pay his obligations as they became due until his wife moved from the marital residence. Debtor testified that no creditor was threatening to sue him. Debtor testified that, prior to the separation, his annual income was about $32,000. Debtor testified that, prior to the separation, the combined annual income of he and his wife was $57,729. Debtor and his wife later divorced. Debtor continues to live in the former marital residence in Gray, Georgia.
In July 2004, Debtor filed a list of Expenditures of the estate totaling $55,840.27. (Exhibits Tidwell-1, Book 40, *145Pages 84—87; P-42). Debtor testified that the remainder of Mrs. Lary’s estate, $52,437.27, had been put into Debtor’s checking account. Debtor testified that the $52,437.27 was no longer in his checking account as of March 2, 2004.
The probate court entered an order on July 27, 2004, discharging Debtor as the executor of Mrs. Lary’s estate. Debtor represented that he had fully administered Mrs. Lary’s estate. (Exhibit Tidwell-1, Book 40, Page 101).
Debtor filed a petition under Chapter 7 of the Bankruptcy Code on September 13, 2004. Plaintiff is the duly appointed Chapter 7 trustee of Debtor’s bankruptcy estate. Debtor did not list the transfer of his interest in the Newberg residence in his bankruptcy schedules.
The primary factual issue in dispute is whether Debtor was insolvent or became insolvent, when he transferred his interest in the Newberg residence to Defendant on January 13, 2004.5 The Court is persuaded from the evidence presented at trial that Debtor’s assets and liabilities on January 13, 2004, were as follows:
ASSETS
Exhibit No.
Item
Value Prior to Transfer
Value Immediately After Transfer
Cash $ 10,000.006 $10,000.00
P-17 Account $ 626.81 $ 626.81
P-30 Savings Account $ 1,002.44 $ 1,002.44
2003 Ford
Residence in GA
Household Goods $ 2,000.00 $ 2,000.00
P-46 Newberg Residence $ 30,000.00 7 $ 0
TOTAL TO DEFENDANT $125,401.25 $95,401.25
LIABILITIES
Exhibit No.
P-32
P-34
P-35
P-36
P-37
P-38
P-39
P-40
P-41
Obligations
2003 Ford Expedition
Mortgage on Residence in Gray, GA
Capital One MasterCard
Providian Visa Gold
Child Orthodontics8
Attorney Bill
Household Bank MasterCard
Household Bank MasterCard Gold
Citi Card
TOTAL
Amount
$ 29,123.37
$ 68,773.01
$ 1,965.44
$ 972.27
$ 2,587.50
$ 3,173.93
$ 286.11
$ 287.34
$ 813.35
$107,982.32
*146CONCLUSION OF LAW
Plaintiff filed this adversary proceeding to avoid as a fraudulent transfer Debtor’s transfer of his interest in the Newberg residence. Plaintiff contends that Debt- or’s bankruptcy estate is entitled to a one-half undivided interest in the Newberg residence. Mr. Tidwell contends that Defendant’s bankruptcy estate is entitled to the other one-half undivided interest in the Newberg residence.
Defendant’s Interest in the Newberg Residence
Mrs. Lary died on February 12, 2003. Her Will provided in part that if Debtor moved from the Newberg residence “it can be sold and divided two ways.” Debtor moved from the Newberg residence in June 2003. Debtor executed an executor’s deed dated December 28, 2003, conveying the Newberg residence to himself and to Defendant.
“In the testamentary disposition of realty, ‘upon the death of the owner of realty ..., the devisees have an inchoate title in the realty which is perfected when the executor assents to the devises. Code § 113-801. [Cits.]’ This interest of a devi-see is an assignable property right. It can be the subject of a voluntary conveyance.” Williams v. Williams, 236 Ga. 133, 223 S.E.2d 109, 110 (1976).
Under Georgia law, an executor holds title to all property of a deceased’s estate for the payment of debts and for other purposes of administration. Title to property does not pass to the heirs or beneficiaries until the executor assents to the distribution of the property. O.C.G.A. § 53-8-15(a) (1997).
Upon the executor’s assent, the de-visee’s title to the realty relates back to the date of the deceased death. Bradley v. Bradley, 225 Ga.App. 530, 484 S.E.2d 280, 283 (1997) cert. denied.
Defendant filed for bankruptcy relief on June 24, 2003. Defendant’s bankruptcy estate included “all legal and equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C.A. § 541(a)(1) (West 2004). Defendant’s inchoate title to the residence was property of her bankruptcy estate. Upon the executor’s assent, Defendant’s title related back to February 12, 2003, the date of Mrs. Lary’s death. The Court is persuaded that Defendant must surrender to Mr. Tidwell the one-half interest in the Newberg residence that Defendant acquired through Mrs. Lary’s Will. 11 U.S.C.A. § 521(4) (West 2004) (debtor must surrender to trustee all property of the estate).
Fraudulent Transfer of Debtor’s Interest
Plaintiff is the Chapter 7 trustee of Debtor’s bankruptcy estate. Debtor executed and filed for record a quit claim deed transferring his one-half interest in the Newberg residence to Defendant. Plaintiff seeks to avoid this transfer as a fraudulent transfer. The transfer, if avoided, would be recovered from the transferee, Defendant. 11 U.S.C.A. § 550(a)(1) (West 2004). Plaintiff relies upon section 548(a)(1)(B) of the Bankruptcy Code which provides in part:
§ 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-*147(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
11 U.S.C.A. § 548(a)(l)(B)(i), (ii)(I) (West 2004)
Plaintiff has the burden of proving all facts necessary to prove that a fraudulent transfer occurred. Harris v. Huff (In re Huff), 160 B.R. 256, 260 (Bankr.M.D.Ga., 1993). Defendant concedes that the transfer was made within one year before Debtor filed for Chapter 7 relief. Defendant concedes that Debtor received less than a reasonably equivalent value.
Plaintiff and Defendant dispute whether Debtor was insolvent9 at the time of the transfer or became insolvent as a result of the transfer.
“The Bankruptcy Code definition of insolvency is essentially a balance sheet test in which the sum of the debts is greater than the sum of the assets, at a fair valuation, exclusive of property transferred with actual fraudulent intent, and property that may be exempted from the bankruptcy estate.” 5 Collier on Bankruptcy, ¶ 548.05[l][a] (15th ed. rev.2005).
Debtor and his wife separated about six months after Debtor transferred his interest in the Newberg residence to Defendant. Debtor testified that he was able to pay his obligations as they became due until his wife moved from the marital residence.
“The test for ‘insolvency’ under [the Bankruptcy Code] is not the inability to meet current obligations but is the state of having liabilities exceed assets.” Farmers Bank of Clinton, Missouri v. Julian, 383 F.2d 314, 326 (8th Cir.), cert. denied 389 U.S. 1021, 88 S.Ct. 593, 19 L.Ed.2d 662 (1967). See Durso Supermarkets, Inc. v. D’Urso (In re Durso Supermarkets, Inc.), 193 B.R. 682, 701 (Bankr.S.D.N.Y.1996).
Turning to the case at bar, on the date of the transfer, Debtor’s assets totaled $125,401.25. Immediately after the transfer, his assets totaled $95,401.25. Debtor’s liabilities totaled $107,982.32. The Court is persuaded that Debtor became insolvent as a result of the transfer. The Court is persuaded that Plaintiff can avoid the transfer under section 548(a)(1)(B) of the Bankruptcy Code. The Court is persuaded that Plaintiff can recover from Defendant a one-half undivided interest in the Newberg residence.
An order in accordance with this memorandum opinion shall be entered this date.
. Although Plaintiff’s complaint also names Mr. Tidwell as a defendant, the real defendant is Betty L. Cape.
. The Newberg residence is located at 1220 Newberg Avenue, Macon, Georgia.
.In re Cape, Ch. 7, Case No. 03-52795 (Bank. M.D.Ga., June 24, 2003).
. Mrs. Lary’s Will provided that the Newberg residence could be sold and the proceeds divided between Debtor and Defendant. Debt- or and Defendant elected to take the Newberg residence itself rather than the proceeds realized from its sale. Swann v. Garrett, 71 Ga. 566, 1883 WL 2741 (1883). See also Bradley v. Bradley, 225 Ga.App. 530, 484 S.E.2d 280, 283 (1997).
. The quit claim deed transferring Debtor’s interest was filed for record on January 13, 2004. See 11 U.S.C.A. § 548(d)(1) (West 2004) (transfer is made when transfer is so perfected that bona fide purchaser cannot acquire an interest superior to interest of transferee).
. Debtor testified that he had some $10,000 to $20,000 in cash at his residence.
. The value of the Newberg residence was $60,000. Debtor and Defendant each owned a one-half undivided interest after Debtor moved from the Newberg residence.
. Debtor testified that his former wife is paying this obligation. Debtor's signature, however, appears as the sole responsible party on the agreement for the orthodontic services.
. Section 101(32)(A) of the Bankruptcy Code defines insolvency as follows:
(32) "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.A. § 101(32)(A) (West 2004). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493827/ | DECISION AND ORDER
ADLAI S. HARDIN, JR., Bankruptcy Judge.
Before me is an Order to Show Cause, issued sua sponte by this Court, why an adversary proceeding initiated by debtor-plaintiff George Sassower should not be dismissed. After hearing Sassower in opposition to the Order to Show Cause, I conclude that the proceeding must be dismissed on the merits because the complaint is patently frivolous and fails to state a claim against any defendant, and because the proceeding violates an injunction issued by the District Court for the Southern District of New York (Hon. Peter K. Leisure). The Order dismissing this proceeding, at the foot of this Decision, will supplement Judge Leisure’s injunction to make it clear to Sassower that further such litigation is barred.
*214
Jurisdiction
The Court has jurisdiction over this proceeding under 28 U.S.C. §§ 1334(a) and 157(a) and the standing order of referral to bankruptcy judges dated July 10, 1984 signed by Acting Chief Judge Robert J. Ward.
Background
For a quarter of a century George Sas-sower, a disbarred attorney, has inundated state and federal courts across the nation with an extraordinary number of frivolous filings. Although earlier injunctions bar Sassower from seeking relief in this Court, his persistence in filing utterly baseless claims and motion practice against various public officials remains undeterred. What follows is a comprehensive history of Sas-sower’s litigious past in the hope that future litigants and courts will be spared needless time, energy and expense. For a review of Sassower’s far-flung litigation abuses in the years 1980 through 1993, I defer to District Judge Leisure’s comprehensive recitation in Sassower v. Abrams, 833 F.Supp. 253, 256-60 (S.D.N.Y.1993).
The long and tortured history of vexatious litigation arises out of Sassower’s representation of Hyman Raffe, a shareholder of Puccini. Puccini, a New York corporation, was dissolved and placed in receivership in 1980 by the New York State Supreme Court. Raffe appealed the court’s order and it was unanimously affirmed by the Appellate Division, First Department.
In the early 1980s, Sassower and Raffe filed numerous motions in New York state courts attempting to relitigate the dissolution and receivership of Puccini. The state courts repeatedly denied these motions and, on at least two occasions, imposed extraordinary costs and attorney’s fees. Nevertheless, Raffe and Sassower continued to commence more lawsuits adding, as defendants, the judges and officials who ruled against them. The New York courts found that their various claims were precluded under principles of res judicata, as well as doctrines of qualified and absolute immunity protecting public officials and judicial officers, and such orders were affirmed by the Appellate Division, First Department. See, e.g., Raffe v. Feltman, Karesh & Major, 113 A.D.2d 1038, 493 N.Y.S.2d 70 (1st Dept.), appeal dismissed, 66 N.Y.2d 914, 498 N.Y.S.2d 1026, 489 N.E.2d 772 (1985).
On January 20, 1984, Sassower and Raffe brought an action in the Eastern District of New York naming the same list of Puccini defendants and adding, as defendants, several state court judges and New York State Attorney General Robert Abrams. See Raffe v. Citibank, N.A., No. 84 Civ. 305 (E.D.N.Y.). On August 1, 1984, the Honorable Eugene H. Nickerson, United States District Judge, Eastern District of New York, dismissed the complaint on the grounds that (1) the claims against the private party defendants were barred by the doctrines of res judicata and collateral estoppel, and (2) the claims against the state court judges and Robert Abrams were barred by the Eleventh Amendment and the doctrine of absolute immunity. In addition, Judge Nickerson found that Sassower had conducted the litigation in a vexatious manner and granted defendants’ motion for sanctions. On January 23, 1985, the Second Circuit affirmed Judge Nickerson’s decision without opinion. See Raffe v. Citibank, N.A., No. 84 Civ. 305 (E.D.N.Y. August 1, 1984), aff'd mem., 779 F.2d 37 (2d Cir.1985).
Less than one month after the dismissal of the Eastern District action, Sas-sower and Raffe filed an action in the *215Southern District of New York which named, as defendants, many of the individuals who were the subject of the lawsuit in the Eastern District. The case was assigned to Judge Conner. See Raffe v. John Doe, 619 F.Supp. 891 (S.D.N.Y.1985). Shortly after filing this action, Raffe and Sassower filed new actions in the New York state courts and the defendants in those actions moved the Supreme Court Special Term for a permanent injunction enjoining Raffe and Sassower from filing new lawsuits in the state courts. The New York Supreme Court subsequently granted the motion and entered an order permanently enjoining Sassower from filing any complaint or proceeding relating to Puccini dissolution in state court. See In re Barr, Index No. 01816/80 (N.Y.Sup.Ct., N.Y.Co. January 23, 1985) (Exhibit 24); see also In re Barr, Index No. 01816/80 (N.Y.Sup.Ct., N.Y.Co. March 11, 1986) (Exhibit 25); In re Barr, Index No. 01816/80 (N.Y.Sup.Ct., N.Y.Co. March 1987) (Exhibit 26); In re Barr, Index No. 01816/80 (N.Y.Sup.Ct., N.Y.Co. September 2, 1988) (Exhibit 27).
Sassower and a new actor in the litigation, Sam Polur, Esq., disregarded that order and filed at least ten actions in New York Supreme Court related to the Puccini dissolution and, thus, Sassower was the subject of several criminal contempt convictions. See Raffe v. Riccobono, No. 9522/85, slip op. at 6-7 (Sup.Ct. N.Y.Co. July 1, 1985) (criminal contempt conviction), aff'd, 113 A.D.2d 1038, 493 N.Y.S.2d 70 (1st Dep’t), appeal dismissed, 66 N.Y.2d 915, 498 N.Y.S.2d 1027, 489 N.E.2d 773 (1985) cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987); Raffe v. Feltman, Karesh & Major, 113 A.D.2d 1038, 493 N.Y.S.2d 70 (1st Dep’t), appeal dismissed, 66 N.Y.2d 914, 498 N.Y.S.2d 1026, 489 N.E.2d 772 (1985). In In re Barr, supra, Sassower was convicted of criminal contempt and sentenced to 30-days imprisonment. See In re Barr, 121 A.D.2d 324, 324, 503 N.Y.S.2d 392, 392 (1st Dep’t), appeal dismissed, 68 N.Y.2d 807, 506 N.Y.S.2d 1037, 498 N.E.2d 437 (1986).
During this same time frame, Sassower, Raffe, and Polur filed three additional actions in this Court which asserted the same claims contained in Raffe v. John Doe and named most of the same defendants. The cases were assigned to Judge Conner as related actions. See Puccini Clothes, Ltd. v. Murphy, No. 85 Civ. 3712(WCC) (S.D.N.Y. filed May 16, 1985); Raffe v. Riccobono, No. 85 Civ. 3927(WCC) (S.D.N.Y. filed May 23, 1985); Raffe v. Relkin, No. 85 Civ. 4158(WCC) (S.D.N.Y. filed June 3, 1985).
On October 11, 1985, Judge Conner dismissed all four actions as being barred by the principles of res judicata and collateral estoppel. The Court stated:
I have reviewed the complaint in this case and have compared it to the complaint filed in Raffe v. Citibank, N.A. On the basis of that review, I think it plain that the instant action is barred by the principles of res judicata and collateral estoppel set out above. The complaint in this action does no more than rehash the allegations put before Judge Nickerson. It is clear that Raffe and Sassower have merely attempted to revive issues that Judge Nickerson expressly held were without merit or barred by prior decisions in the state courts.
Raffe v. Doe, 619 F.Supp. at 896. The Court also awarded attorney’s fees on the following grounds:
[I]t is overwhelmingly clear that this suit is entirely without merit and that it has no basis in law or fact. More*216over, in view of Judge Nickerson’s recent decision, to say nothing of the five-year history of duplicative state court proceedings, it is inconceivable that Raffe and Sassower had any legitimate purpose in instituting this action. Their only apparent aim was to harass the defendants in some desperate hope that they will eventually tire of defending lawsuits and surrender Puccini and its assets. This is nothing more than blackmail by litigation, and the Court will not tolerate it.
Id. at 897. Finally, Judge Conner issued an order permanently enjoining Sassower from bringing any further actions in federal court in connection with the Puccini dissolution or receivership. Id. at 898. The Second Circuit dismissed Sassower’s subsequent appeal. See Nos. 85-7963, 7965, 7967, 7969 (2d Cir. March 18,1986).
In 1987, in flagrant violation of the Court’s injunction, Sassower filed another lawsuit in this District naming the same defendants, as well as adding Judge Conner and the judge who presided over Sassower’s bankruptcy proceeding, the Honorable Howard Schwartz-berg, as defendants. See United States for the Benefit of George Sassower v. Sapir, No. 87 Civ. 7135, 1987 WL 26596 (S.D.N.Y.1987). The case was originally assigned to the Honorable Charles S. Haight, United States District Judge, Southern District of New York, but after Judge Haight also was named as a defendant in the lawsuit, Judge Brieant took the case on reassignment.
On December 10, 1987, Judge Brieant dismissed the action on the grounds that Sassower’s claims were frivolous and that Sassower had intentionally violated the 1985 injunction issued by Judge Conner. Judge Brieant also noted as follows:
[The] inclusion of the assigned judge as an additional defendant has the effect, and probably the purpose of disrupting the orderly judicial deci-sional process of this district court insofar as concerns the motion to dismiss. Plaintiff, who used to be a lawyer, must be deemed to recognize that the Amended Complaint violates the 1985 injunction, and also that Judge Haight, and for that matter Judge Conner also, are immune from this sort of litigation.
United States for the Benefit of George Sassower v. Sapir, 87 Civ. 7135(CSH), slip op. at 2 (S.D.N.Y. December 10, 1987) (Exhibit 23). Thus, Judge Brieant prohibited Sassower from filing any actions in the United States District Court for the Southern District of New York without prior leave of court. Id. at 3. (“Sapir order”). This order applies to “any actions” and, thus, expanded the injunction issued by Judge Conner in Raffe v. Doe which applied to the “Puccini related” submissions.
This pattern of frivolous and vexatious litigation resulted in Sassower’s disbarment from practice in New York courts. See In re Sassower, 700 F.Supp. 100, 104 (E.D.N.Y.1988), aff'd, 875 F.2d 856 (2d Cir.1989); Matter of Sassower, 125 A.D.2d 52, 53-54, 512 N.Y.S.2d 203 (2d Dep’t), appeal dismissed, 70 N.Y.2d 691, 518 N.Y.S.2d 964, 512 N.E.2d 547 (1987); see also In re Disbarment of Sassower, 481 U.S. 1045, 107 S.Ct. 2174, 95 L.Ed.2d 831 (1987). Moreover, in 1989, the Second Circuit dismissed the sixth appeal filed by Sassower in a one-year period and warned Sassower that, if Sas-sower’s abuse of the judicial process continued, he would be barred from the Second Circuit. See Sassower v. San-sverie, 885 F.2d 9, 11 (2d Cir.1989).
*217After abusing the federal and state court systems in New York for almost a decade, Sassower began to institute these lawsuits outside the State of New York adding the names of the New York federal judges to the list of defendants. These lawsuits, which sought to revive the Puccini lawsuit as well as challenge the subsequent litigation defeats and sanctions, were brought in district courts in California, Maryland, Minnesota, New Jersey, Ohio and Washington, D.C. [FN2] Each district court imposed sanctions and/or injunctive relief which sought to prevent Sassower from continuing his vexatious lawsuits. Sassower also brought appeals in the courts of appeal for the Third, Fourth, Sixth, Eighth, and Ninth Circuits. [FN3]
FN2. Sassower’s complaints also included allegations regarding his bankruptcy proceedings, the “plundering” of the Estate of Eugene Paul Kelly, and the incarceration of Dennis F. Vilella. However, these claims, along with all of Sassower’s other claims, have been fully litigated and dismissed on the merits. See Sassower v. Signorelli, 99 A.D.2d 358, 472 N.Y.S.2d 702 (2d Dep’t 1984); Sassower v. Finnerty, 96 A.D.2d 585, 465 N.Y.S.2d 543 (2d Dep’t 1983), appeal dismissed, 61 N.Y.2d 756, 472 N.Y.S.2d 923, 460 N.E.2d 1358 (1984); Cohen and Vilella v. Litman, No. 89 Civ. 7049 (S.D.N.Y.1989); In re Barr, Index No. 01816/80 (N.Y.Sup.Ct., N.Y.Co. September 2, 1988) (Exhibit 33).
FN3. A chart outlining Sassower’s history of litigation is attached as Exhibit 1 to the federal defendants’ Appendix to the Motion to Dismiss.
The lawsuit filed in New Jersey, before the Honorable Nicholas H. Politan, resulted in a conviction of criminal contempt against Sassower for failure to obey court orders. See Sassower v. Feltman, 88 Civ. 1562(NHP) (D.N.J. October 6, 1989). Sassower, in response to the contempt conviction, instituted a second action in the New Jersey district court which named Judge Politan as a defendant. The Third Circuit determined that Sassower had filed, inter alia, “numerous repetitive pleadings, motions, briefs and other submissions containing frivolous legal arguments, flagrant misstatements of fact, and scurrilous allegations in these appeals and petitions for writs of mandamus/prohibition.” See Sassower v. Abrams, No. 91-8063, 37 F.3d 1506, slip op., at 1 (3d Cir.1992) (Exhibit 15). Thus, the Third Circuit enjoined Sassower from filing any appeal, petition, motion, or pleading in the Third Circuit relating to the Puccini defendants, as well as numerous federal judges, in connection with the previously adjudicated matters. Id. at 4-5.
Sassower then filed two complaints in the federal district court in Minnesota. See Sassower v. Carlson, Civ. 4-90-511 (D.Minn. August 20, 1990); Sassower v. Dosal, 744 F.Supp. 908 (D.Minn.1990). In these two actions, Sassower, inter alia, identified a group of “racketeering defendants” including members of the Southern and Eastern Districts of New York, members of the Second and Third Circuits, a Magistrate Judge, a Bankruptcy Judge, a Chief Clerk, a United States Attorney, several Assistant United States Attorneys, the New York Attorney General, the District Attorney of Nassau County, several state judicial personnel, and counsel. The district court in Dosal determined that the claims were “wholly frivolous and malicious” and, thus, the complaint was dismissed for lack of subject matter jurisdiction. Id. at 909. Both Minnesota *218actions were dismissed with prejudice. The Eighth Circuit affirmed the dismissals and issued an injunction enjoining Sassower from filing any civil action in the United States District Court for Minnesota without first obtaining leave of that court. See Sassower v. Carlson, 930 F.2d 583 (8th Cir.1991).
Sassower then refiled his complaint in November 1991 in the Southern District of Ohio. See Sassower v. Mead Data Central, Civ. 3-91^36 (S.D.Ohio) (Complaint) (Exhibit 17). In that case, Sas-sower alleged “criminal racketeering activity” by Judge Oakes, Judge Pratt, Judge Brieant, Judge Conner, Judge Nickerson, Judge Goettel, and others. See Complaint, at ¶ 9(e)(3). In addition to alleging corruption on the part of past judges who issued injunctions and other sanctions due to his vexatious litigation, Sassower sought to have the Puccini-related orders declared invalid. Complaint, at ¶ 37a. Sassower also sought to enjoin Mead Data Central, Inc. (ie., LEXIS), a computer data base company which publishes judicial opinions, from publishing or distributing certain decisions rendered against him. In February 1992, the Ohio case was dismissed. See Sassower v. Mead Data Central, Inc., Civ. 3-91-436 (S.D.Ohio February 18, 1992). However, shortly thereafter, Sassower refiled the complaint naming the Magistrate Judge who had been assigned to the first Ohio complaint as a defendant. On May 13, 1992, the district court dismissed the second complaint and issued an injunction which
was similar in scope to the Eight Circuit’s injunction and, thus, barred him from filing any further actions in the Southern District of Ohio. See Sassower v. Thompson, Hiñe and Flory, 92 Civ. 27 (S.D.Ohio May 13, 1992) (Exhibit 19). Sassower appealed the dismissal of both complaints and the injunction issued by the district court. The Sixth Circuit denied the appeal and enjoined him from filing or prosecuting any civil actions in the Eighth Circuit or any court in that Circuit. See Sassower v. Mead Data Central, No. 92-3537, 1993 WL 57469 (6th Cir. March 4, 1993) (Exhibit 21); Sassower v. Thompson, Hiñe and Flory, No. 92-3553, 1993 WL 57466 (6th Cir. March 4,1993) (Exhibit 22).
The Court notes the Fourth and Ninth Circuits, as well as the District Court for the District of Columbia, also have issued injunctions barring suits by Sas-sower. See Sassower v. Whiteford, Taylor & Preston, No. 90-1142, slip op., 1991 WL 136589 (4th Cir. July 2, 1991) (Exhibit 16); Sassower v. General Ins. Co. 962 F.2d 15 (9th Cir.1992); Sassower v. Barr, Nos. 91-3233, 91-3302, 1992 WL 133163 (D.D.C. January 9, 1992) (Exhibit 14).
Having made the foregoing findings of fact, Judge Leisure issued an injunction barring Sassower “from filing any civil action in the United States District Court for the Southern District of New York without first obtaining prior leave from the Court.”1 Judge Leisure’s injunction, which continues in effect, applies to actions removed from state courts to the Southern *219District of New York and actions filed in or removed to federal district courts other than the Southern District of New York,
Since 1993, Sassower’s exploitation of the legal system has abated somewhat, perhaps in response to outstanding injunctions recognized and adhered to by courts in no less than six circuits. Among the handful of courts to issue published rulings on Sassower following the publication of *220Judge Leisure’s injunction is the Supreme Court of the United States. In October of 1993, the Supreme Court issued an opinion enjoining Sassower from filing petitions for certiorari in non criminal matters in forma pauperis. In re George Sassower, 510 U.S. 4, 114 S.Ct. 2, 126 L.Ed.2d 6 (1993) (“The order ... will allow this Court to devote its limited resources to the claims of petitioners who have not abused our process.”).
In September 1993 Sassower was ordered to show cause by the Judicial Council of the Second Circuit why he should not be enjoined from filing any further judicial misconduct complaints without first obtaining leave to file. See In re George Sassower, 20 F.3d 42 (2d Cir.1994). The show cause order “was issued in connection with the dismissal of two judicial misconduct complaints filed by George Sassower ... [and] was prompted by Sassower’s pattern of filing frivolous and vexatious judicial misconduct complaints.” Id. at 43. After reviewing Sassower’s abuses, the Judicial Council enjoined Sassower from filing “any subsequent judicial misconduct complaints in this Court or any document related to such judicial misconduct complaints without first obtaining from the Chief Judge leave to file ...” id. at 45 (the “Judicial Council injunction”).
Sassower, undaunted and undeterred by sanctions imposed by courts in the Second Circuit, brought his campaign of harassment to the United States Court of Appeals for the Seventh Circuit in 1994. After remarking that the Northern District of Illinois, where Sassower initiated the suit, lacked even a tenuous connection to the transactions and defendants involved (“[t]he only possible explanation for the choice of venue is that this circuit has yet to bar Sassower from filing additional suits”), the Seventh Circuit held that Judge Leisure’s injunction barred Sassower from pursuing his claim in any federal court. The court went on to impose additional burdens that significantly impair Sassower’s access to the Seventh Circuit for adjudication of any claim, on the basis that his filings are to be treated as presumptively frivolous. Sassower v. American Bar Ass’n, 33 F.3d 733, 735-36 (7th Cir.1994).
Sassower marched on to the courts in the Eleventh Circuit where he was met with swift dismissals. The Eleventh Circuit Court of Appeals found that Sassower’s filings were barred by Judge Leisure’s injunction, but that further restrictions were warranted to prevent the squandering of judicial resources. “It is ORDERED that Sassower not be permitted to file further civil appeals in this court unless he first either pays this court’s filing fee, or obtains a certificate from the district court stating that each appeal Appellant wishes to bring is not frivolous and does not contravene the terms of the injunction entered by District Judge Leisure .... ” Sassower v. Fidelity & Deposit Co. of Maryland, 49 F.3d 1482, 1483 (11th Cir.1995).
The Eastern District of Pennsylvania dismissed Sassower’s most recent documented attempt (aside from the proceeding before this Court) to bend a judicial ear to his accusations of corruption and collusion. In addition to acknowledging the validity and applicability of Judge Leisure’s injunction, the Eastern District of Pennsylvania ordered that Sassower “is enjoined from filing any civil action in the United States District Court for the Eastern District of Pennsylvania which relates to or arises from the Puccini litigation or claims against state or federal judges, officers or employees for actions taken in the course of their official duties exercised in connection with petitioner’s previous litigation, without prior authorization of this *221court.” Sassower v. Stiles, 1997 WL 89111 (E.D.Pa. February 28, 1997).
We arrive now at Sassower’s conduct before this Court, originating with an evidently false and bad faith petition for relief under the Bankruptcy Code. Sassower filed for relief under Chapter 13 of the Code on June 1, 2005.2 His petition, schedules and proposed plan represent that he has net assets of just over $100 million (including a non-existent judgment for $100 million), almost no creditors and no income other than social security and family assistance. Sassower commenced the above-captioned adversary proceeding in the Chapter 13 case, and it is this proceeding that is now before the Court.
The Instant Order to Show Cause
On September 23, 2005 Sassower filed the adversary proceeding alleging in the complaint that various federal and state judges and officials “cooked” federal books and “fixed” various courts. Named as defendants in the adversary proceeding are Kenneth W. Starr, John G. Roberts, Jr., Drew S. Days, III, Wilfred Feinberg, Charles L. Brieant, William H. Rehnquist, Frank H. Easterbrook, Francis T. Murphy, Eliot Spitzer, Jonathan Lippman, the New York Times and Citibank, N.A. Because the complaint is virtually unintelligible and therefore defies summary description, it has been set forth in full text as an Appendix at the foot of this Decision and Order. Suffice it to say that the complaint does not allege any facts demonstrating or even suggesting that any of the defendants engaged in any conduct which had any' economic or other impact on Sassower or which could possibly give rise to any legal or equitable claim in favor of Sassower against any defendant. Nevertheless, in the “Wherefore” clause Sassower “demands money damage judgment, compensatory and punitive, against the defendants, jointly and severally, in the sum of one billion dollars, together with costs and disbursements of this action.”
Confronted with Sassower’s unfounded and outlandish conclusory accusations, and considering Sassower’s apparent violation of Judge Leisure’s injunction and the Judicial Council injunction, this Court, acting sua sponte, issued an Order to Show Cause dated October 7, 2005 why Sassower’s complaint should not be summarily dismissed.3 A hearing was held on November 1, 2005, at which time Sassower was unable to substantiate or legitimate any of the purported claims alleged in the complaint. On December 22, 2005, Sas-sower filed a motion to: (1) declare “null and void” this Court’s sua sponte Order to Show Cause; (2) disqualify Bankruptcy Judge Adlai S. Hardin, Jr. by reason of having issued the above sua sponte Order; (3) render partial summary judgment in favor of plaintiff against Citibank, N.A. in the sum of $27,912.42; (4) render partial summary judgment in favor of plaintiff against all the defendants, jointly and severally, in the sum of $120,000 together with interest; (5) render partial summary judgment in money damages against the New York Times; (6) award partial summary judgment against all the defendants for money damages; (7) for a 18 U.S.C. § 3057 Bankruptcy Investigation; and (8) any other, further, and/or different relief *222as may be just and proper. The motion was heard at length by the Court on January 3, 2006, and is hereby denied in its entirety. If the motion served any useful purpose, it was to demonstrate beyond doubt that this adversary proceeding, and indeed the main bankruptcy case itself, has been initiated for the sole purpose of rehashing yet again Sassower’s alleged rights with respect to the Puccini dissolution which were resolved against him in multiple state court decisions and appeals decades ago.
Because there is no viable claim alleged or even intimated in the complaint, in Sas-sower’s written and oral response to the Order to Show Cause, or in his recent motion addressed to the Order to Show Cause, the complaint must be dismissed for failure to state a claim.
It is also evident that Sassower’s complaint violates the spirit if not the letter of both the Judicial Council injunction and Judge Leisure’s injunction. It is true that the Judicial Council injunction relates to “judicial misconduct complaints in this Court,” referring to the Court of Appeals. But there can be no doubt from the opinion of the Judicial Council that the intention of the Judicial Council injunction was to put an end to Sassower’s “pattern of filing frivolous and vexatious judicial misconduct complaints,” and there also can be no doubt that Sassower’s complaint in this adversary proceeding is precisely the sort of “frivolous and vexatious judicial misconduct complaints” which the Judicial Council injunction was designed to curb.
Judge Leisure’s injunction bars Sassower from filing any civil action “in the United States District Court for the Southern District of New York” without prior leave of court. The jurisdiction of the district court comprehends and is the source of that of the bankruptcy court. Section 152(a)(1) of Title 28 states that bankruptcy judges “shall serve as judicial officers of the United States District Court established under Article III of the Constitution.” The jurisdiction of the bankruptcy court is derived from that of the district court. Under 28 U.S.C. § 1334(a) and (b), the district courts have original and exclusive jurisdiction of all cases under Title 11 and original but not exclusive jurisdiction of all civil proceedings arising under Title 11 or arising in or related to cases under Title 11. Section 157 of Title 28 provides that the district court may refer cases and proceedings arising under or in Title 11 cases to bankruptcy judges for the district. Because Federal jurisdiction over Sassower’s bankruptcy case and this adversary proceeding is vested in the District Court under 28 U.S.C. § 1334, and merely referred under 28 U.S.C. § 157(a) to a bankruptcy judge who “serve[s] as a judicial officer[ ] of the ... District Court,” Judge Leisure’s injunction must be deemed applicable to an action commenced in the Bankruptcy Court. And it is perfectly clear that Judge Leisure’s injunction was intended to bar frivolous and vexatious litigation by Sassower in all Federal courts.
Unfortunately, this frivolous complaint, with its baseless and outlandish conclusory accusations against the late Chief Justice of the Supreme Court of the United States, his successor Chief Justice of the Supreme Court and a host of distinguished federal and state judges and public servants, is not the latest in Sassower’s attempts to relitigate his Puccini claims and harass the state and federal judges who have ruled against him. On December 28, 2005 Sassower filed a complaint in a new adversary proceeding naming as defendants Samuel A. Alito, Nicholas H. Politan, Robert Abrams, Anthony J. Sciri-ca, Charles L. Brieant, Citibank, N.A., Kreindler & Relkin, P.C., William C. Conner, Francis T. Murphy, Wilfred Feinberg, *223Feltman, Karesh, Major & Farbman, New York Times, New York Law Journal and Alberto R. Gonzales. This new complaint, to the extent that it is intelligible, alleges more of the same type of conclusory allegations of “fixing,” “bribes” and “corruption” against judges, other public servants and two newspapers as he has in countless prior lawsuits. It is now evident to this Court, as it was to Judge Leisure, the Judicial Council and numerous federal and state courts, that there is no way to curb Sassower’s egregious abuse of the judicial process other than an injunction backed by the prospect of contempt proceedings and possible incarceration for violation.
Accordingly, this Court’s order dismissing this adversary proceeding will include an injunction barring Sassower from commencing any further litigation in this or any other federal court in the Second Circuit without prior approval of the* Chief Judge of the Court in which the action is proposed to be commenced. Any violation by Sassower may result in a civil or criminal contempt proceeding. This injunction, which stands on its own, supplements but does not supercede Judge Leisure’s 1993 injunction and other injunctions issued by other courts. The purpose of this injunction is to make clear to Sassower that he is barred from filing any adversary proceeding in any bankruptcy court without prior court approval.
ORDER
Upon the foregoing Decision, is it hereby
ORDERED as follows:
1. The complaint in this adversary proceeding is dismissed with prejudice.
2. George Sassower is hereby enjoined and barred from filing any civil action in this Court or in any Federal Court within or without the Second Circuit without first
obtaining prior leave from the Chief Judge of the court in which the action is proposed to be commenced. In seeking leave to file, Sassower must certify subject to the penalties of perjury that the claim or claims he wishes to present are new claims never before raised and disposed of on the merits by any court. The action may not relate to or arise from (1) the Estate of Paul Kelly litigation, (2) Dennis F. Vilella, (3) the Puccini litigation, (4) claims objecting to sanctions for which ordinary review has been exhausted, or (5) claims against any state or federal judge, officer or employee for actions taken in the course of their official duties exercised in connection with Sassower’s previous litigation. He must also certify facts showing that the claim or claims are not frivolous, malicious or taken in bad faith. The motion for leave must be captioned “Application Pursuant to Court Orders Seeking Leave to File” and Sassower must cite and annex a copy of this Decision and Order and Judge Leisure’s Opinion and Order in Sassower v. Abrams, 833 F.Supp. 253 (S.D.N.Y.1993). Failure to comply strictly with these requirements will be sufficient grounds for summarily denying leave to file the proposed complaint. Until an order granting leave from the Chief Judge of the court in question is obtained, any complaint, motion, discovery demand or other document served by Sassower is a nullity and no party need file a response thereto.
3.The injunction contained in paragraph 2 of this Order shall not bar Sassower’s right to appeal from this Decision and Order.
APPENDIX
In re George Sassower, Chapter 13 Debt- or.
George Sassower, a Chapter 13 Debtor, Plaintiff,
v.
*224Samuel A. Alito; Nicholas H. Politan; Robert Abrams; Anthony J. Scirica; Charles L. Brieant; Citibank, N.A.; Kreindler & Relkin, P.C.; William C. Conner; Francis T. Murphy; Wilfred Fein-berg; Feltman, Karesh, Major & Farb-man; New York Times; New York Law Journal and Alberto R. Gonzales, Defendants.
No. 05-BK-23120
Trial By Jury Demanded
Plaintiff, a Chapter 13 debtor, as and for his complaint, in this adversarial proceeding, respectfully sets forth and alleges:
1. The defendants, insofar as they are or were judges or officials of the United States or State of New York, are being sued in their “personal” capacities for “personal” misconduct.
2. There is nothing in this complaint which seeks to obtain any money damages, compensatory or punitive, against the United States or State of New York, or seeks to impose the cost of any defense representation on the United States or State of New York.
A. Any federal defense expenditures for any defense representation would have criminal consequences (31 U.S.C. § 1350).
B. Any N.Y. State representation or representation at N.Y. State cost expense, would be in violation of Amendment XI of the Constitution of the United States (Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 [1890]).
AS AND FOR A FIRST CAUSE OF ACTION
3. Plaintiff is a born American citizen, a battle-starred veteran of World War II, is entitled to all the rights, privileges and immunities provided in the Constitution and Laws of the United States, including “access to the federal courts” in order to, inter alia, liquidate his extensive assets, contractual and otherwise.
4A. On February 29, 1988, Geo. Sas-sower v. Abrams (88CM012 [NHP]) was filed in the U.S. District Court for the District of New Jersey, which was followed on April 4, 1988 by the filing in the same court of Geo. Sassower v. Feltman, (88Civ1562[NHP]).
B. There was never any question that “jurisdiction” and “venue” were appropriate.
5. The defendants in Geo. Sassower v. Abrams/Feltman (supra), insofar as they were federal or New York State judges or officials were being sued in their “personal” capacities, for activities which, in most instances, were adverse to legitimate sovereign interests, such as “diverting” federal and state monies to private coffers, as a “source” of “bribes”, which diversion of monies, included those of plaintiff.
6A. The defendants, Samuel A. Alito, Nicholas H. Politan and Anthony J. Sciri-ca, as well as the federal defendants in Geo. Sassower v. Abrams/Feltman (supra), and the defendants in this action, such as Wilfred Feinberg, Charles L. Brieant and William C. Conner all knew and know that in a money damage tort action, a United States attorney, such as Alito, can only defend the United States, never any “person”, and never anyone, even the United States, unless a 28 U.S.C. § 2675 “notice of claim” has been filed.
There is the irrelevant exception for revenue and custom officials, who may be sued in their own names under special circumstances and be defended by a federal attorney (28 U.S.C. § 547[3]).
B. Nevertheless, with actual knowledge that the expenditures he was making were unauthorized by Congress, triggering a “subject matter jurisdictional” infir*225mity, rendering all merit dispositions made to be null and void, U.S. Attorney Alito appeared for some of the defendants in Geo. Sassower v. Abrams/Feltman (supra) in their own names and where no 28 U.S.C. § 2675 “notice of claim” existed.
C. To conceal from the Article I Congress the unauthorized federal expenditures made which, according to a named federal official were “staggering” (New Jersey Law Journal, July 13, 1989), U.S. Attorney Alito “cooked” his federal books, as Exhibit “A”, confirms.
Exhibit “A” is a response from the United States Department of Justice [“USDJ”] to a Freedom of Information Act [“FOIA”] request and states that it has no record of such litigation.
7A. The defendants in the aforementioned action and in this action, Robert Abrams and Francis T. Murphy knew they could not be defended by a New York State attorney or at N.Y. State cost and expense as violative of Amendment XI/ Hans, triggering a “subject matter jurisdictional” infirmity and rendered all merit dispositions made to be null and void.
B. However, after being advised by Chief Judge Brieant of New York that Judge Politan of New Jersey had been “fixed” and would not address the “subject matter jurisdictional” and other lethal infirmities, albeit mandatory, New York State Attorney General [“NYSAG”] Abrams appeared for himself and others sued in their personal capacities at unconstitutional New York State cost and expense.
8A. Since the proceedings in the District Court of New Jersey were inundated with lethal “subject matter jurisdictional” infirmities, obviously Alito, Politan and Abrams knew beforehand that the Third Circuit Court of Appeals [“CCA3”] had been “fixed” and would not make a United States v. Corrick (298 U.S. 435, 440, 56 S.Ct. 829, 80 L.Ed. 1263 [1936]) disposition, albeit mandatory.
B. While Chief U.S. District Court Judge Brieant' was the prime “fixer” on behalf of Citibank, N.A. at the New Jersey District Court level, it was Chief U.S. Circuit Court Judge Wilfred Feinberg for the Second Circuit who was the “fixer” at CCA3.
9. By reason of the aforementioned unauthorized sovereign representations, the plaintiff was deprived of merit dispositions, which caused him substantial damages, for which he requests substantial monetary and punitive damages.
AS AND FOR A SECOND CAUSE OF ACTION
10A. The defendant, Alberto R. Gonzales, the Attorney General of the United States, knows that U.S. Attorney Alito had expended substantial federal monies, not authorized by Congress and, by statute, was obligated to “immediately report to the President and Congress all relevant facts and a statement of actions taken.” (31 U.S.C. § 1351) but has wilfully failed give obedience to such mandate, causing plaintiff damages.
B. The defendant, Gonzales, also knows that all monies payable “to the federal court”, which included monies paid on plaintiffs behalf, were diverted to the coffers of Citibank and Kreindler & Relkin, P.C. [“K & R”] and the involvement of Feinberg and Alito in such criminal adventure, and his obligation to recapture such monies in favor of the United States, but has failed to act.
AS AND FOR A THIRD CAUSE OF ACTION
11A. Puccini Clothes, Ltd., was involuntarily dissolved at the instance of the *226defendants, Citibank-K & R when, in this one instance, its illegal and unethical “estate chasing” practices went awry and it immediately began to engineer the larceny of its judicial trust assets, dissipating its judicial trust assets in order to “bribe” and “corrupt”.
B. Eventually, all of Puccini’s judicial trust assets were made the subject of larceny engineered by Citibank-K & R, almost all in order to “bribe” and “corrupt”, leaving nothing for its nationwide legitimate creditors.
C. The larceny of approximately $800,000 of Puccini’s assets can be attributed to the actions and activities of Alito-Politan, at substantial and unauthorized federal cost and expense.
12A. The initial “hard evidence” surfaced forty-two (42) months after Puccini was involuntarily dissolved when Citibank-K & R attempted to make “bribe” payments of approximately $160,000 from Puccini’s judicial trust assets to the defendant, Feltman, Karesh, Major & Farb-man, Esqs. [“FKM & F”] and $10,000 to Rashba & Pokart [“R & P”], and in the few months that followed the “hard evidence” reached avalanche proportions.
B. At the time the Citibank-K & R engineered larceny surfaced, there remained in cash, approximately $800,000 in the Puccini judicial trust, resulting in an agreement reached with, inter alia, the defendants, Frances T. Murphy, Charles L. Brieant and Robert Abrams that for the transfer to those on their behalf of Puccini’s remaining cash assets as “bribes”, the Citibank conspirators would be given “Total and Complete Civil, Criminal and Disciplinary Immunity”.
C. The “Citibank Bribes for Immunity Agreement” was given effect by Politan by, inter alia, issuing an Order of the Court which read:
“ORDERED, that the plaintiff George Sassower or anyone acting on his behalf or acting in concert or cooperation with Sassower may not file any new case, proceeding, motion or other litigation document in this Court or in the State Courts of New Jersey without specific written order of this Court...”
D. When permission was requested to file a Notice of Appeal from an injunction order, Politan denied the request.
E. After being “fixed”, a substantially similar injunction was issued by CCA3 by Order dated February 12, 1992, in which the defendant Scirica was a panel member (Geo. Sassower v. Abrams/Feltman, 37 F.3d 1506-Exhibit “B”).
13. The initial “hard print” publication of the “Citibank Bribe for Total Immunity Agreement” appears in Raffe v. Doe (619 F.Supp. 891 [SDNY-1985]), a decision wherein U.S. District Court Judge William C. Conner was openly flaunting that he was a “fixed” and “corrupt” federal jurist.
14. At no time or place has Judge Conner or any Article III federal jurist been willing to swear under oath or affirm under penalty of perjury that Raffe v. Doe (supra) has any legal validity.
15. Raffe v. Doe (supra) is inundated with infirmities, and “on its face” has an Amendment XI/Hans “subject matter jurisdictional” infirmity, which rendered all merit dispositions to be null and void.
16. Despite the absence of “subject matter jurisdiction”, Judge Conner provided the Citibank conspirators with “immunity” by enjoining any action or proceedings against the Citibank conspirators by either Hyman Raffe, the most major stockholder-creditor in Puccini or the plaintiff.
*22717. In addition to the lack of “subject matter jurisdiction”, which rendered all dispositions made to be null and void, Judge Conner did not have “personal” jurisdiction over plaintiff, who was not a party in Raffe v. Doe (supra) and who, after being threatened with incarceration for six (6) years, by the Citibank entourage, Raffe discharged plaintiff, as his attorney, months before the decision in Raffe v. Doe (supra) was rendered.
18A. The injunctions issued by Judge Conner in Raffe v. Doe (supra) was intended to: (a) preserve the remaining cash assets in Puccini of approximately $800,000 as “bribes” and (2) provide the Citibank conspirators with “immunity”.
However, Raffe and plaintiff had contractually based, constitutionally protected, money judgments against Puccini Clothes, Ltd., Eugene Dann and Robert Sorrentino which could not be impaired by any state or federal judge, official or employee (Article I § 10[1], Amendment V & XIV of the Constitution of the United States).
19. Although the Conner and similar injunctions by N.Y. Referee Donald Diamond and N.Y. State Supreme Court Justice Ira Gammerman proved sufficient to preserve the approximately $800,000 cash in the Puccini judicial trust account, the Citibank conspirators and their stable of corrupt judges and officials could not, because of the judgment held by plaintiff, consummate the transmission of such monies as “bribes”, inflicting injuries on plaintiff in their attempt.
AS AND FOR A FOURTH CAUSE OF ACTION
20. The Citibank conspirators, along with their stable of corrupt judges and officials, despite a “reign of judicial terror”, unable to consummate the transmission of the approximate $800,000 in cash in the Puccini judicial trust account, began to “divert” monies payable “to the federal court” to the coffers of Citibank and/or K & R, to serve, after “laundering”, as an additional “source” of “bribes”.
21. Eventually, aided and abetted by Alito and Politan they “diverted” all these federal monies to Citibank-K & R and the federal court and/or government received none of these federal monies.
22. In view of the cooperation of U.S. Alito in this “diversion” of federal monies to the coffers of Citibank-K & R and his refusal to support motions to recapture these federal monies in favor of the United States, the obligation of Gonzales was to recapture such federal monies, which included monies paid on behalf of plaintiff.
AS AND FOR A FIFTH CAUSE OF ACTION
23. Anticipating the elevation of Brieant to be Chief Judge of the Southern District of New York [“SDNY”] on October 1, 1986, he, Murphy, Abrams and others contrived and concocted a base criminal scheme to consummate the transmission of the approximate $800,000 in the Puccini judicial trust while providing the Citibank-K & R conspirators with “immunity”.
24. Pursuant to this criminal scheme, the Citibank conspirators, published in the New York Times and New York Law Journal [“NYLJ”], at Puccini’s cost and expense, fraudulent “legal notices” which stated that Lee Feltman, Esq., the court-appointed receiver for Puccini would present to his “final account” for approval by N.Y. Referee Diamond, on October 30, 1986, who would then terminate the Puccini litigation by a judgment, and a discharge of Feltman and his surety, Fidelity & Deposit Company of Maryland [“F & D”].
*22825. The Feltman “final accounting” for Puccini was “phantom” and “non-existent”, and even if it existed, and it did not, Referee Diamond, an at-will employee with insignificant legal powers (NY CPLR § 4317[b]) did not have the authority to “approve” any “accounting” by a court-appointed receiver, terminate a judicial trust proceeding, discharge a court-appointee or his surety or execute any of the other legal papers set forth in the fraudulent “legal notices”.
26. The NY Times and NYLJ were made aware, confirmed and knew before October 30,1986 that the “accounting” was “phantom”, and that Referee Diamond did not have the authority to execute the required legal documents, but failed and refused to repudiate or correct these fraudulent “legal notice”.
27. Consequently, on the eve of the consummation of this published fraud, plaintiff filed a petition in bankruptcy, which vested plaintiffs assets in the United States District Court (28 U.S.C. § 1334[e]) which also triggered an automatic 11 U.S.C. § 362.
28. As a result of such filing, a cornucopia amount of evidence of judicial corruption surfaced resulting in retaliatory measures against plaintiff and causing him substantial damages, monetary and otherwise.
AS AND FOR A SIXTH CAUSE OF ACTION
29. The obligation of the trustee in bankruptcy, Jeffrey L. Sapir, Esq., was to liquidate plaintiffs assets, free of any all pre-petition restrictions.
30. However, the liquidation of plaintiffs assets by Sapir, would encroach upon the approximate $800,000 remaining in the Puccini judicial trust.
31. Thus, Brieant began to “fix” U.S. Bankruptcy Judge Howard Schwartzberg and Sapir, so that, inter alia, to preserve Puccini’s remaining assets as “bribes”.
32. Judge Schwartzberg attempted to resist the “fixing” activities of Brieant as best as he reasonably could be expected, until December 11,1987.
33. On December 11, 1987, “without jurisdiction”, “without notice” “without due process” and sua sponte Brieant issued an Order that plaintiff could not make any motions in the bankruptcy proceeding “without permission”.
34. When plaintiff requested permission to file a motion, Brieant without looking at the papers or inquiring as to the nature of the motion, denied permission and threatened plaintiff with incarceration, if he ever made any request for a Puccini “accounting”.
35. Because of Brieant’s “fixing” activities and Sapir unable to function in view of same, the bankruptcy proceeding was terminated, with leave to file in New Jersey, all to plaintiffs damage.
AS AND FOR A SEVENTH CAUSE OF ACTION
36. Plaintiff filed his petition in bankruptcy in the District of New Jersey, which was followed by adversary proceedings, including one to satisfy plaintiffs contractually based, constitutionally protected, money judgment against Puccini Clothes, Ltd., Eugene Dann and Robert Sorrentino. Consequently Brieant “fixed” the bankruptcy court, and then the District Court, to ignore the automatic “stay” provisions in 11 U.S.C. § 362 in order to preserve Puccini’s remaining cash assets as “bribes”.
37A. Brieant and the Citibank conspirators, then inundated those courts with Rajfe v. Doe (supra) and other null and *229void decisions, such as those issued by Feinberg and the Murphy court, as purportedly valid, when they knew they were null and void.
B. The fraudulent “legal notices” published in the N.Y. Times and NYLJ, as well as other publications by NYLJ were thrust upon the New Jersey federal court, all causing plaintiff damage.
AS AND FOR A EIGHTH CAUSE OF ACTION
39. Brieant, Politan, Alito, Abrams and the Citibank conspirators, concocted a criminal scheme, at the cost and expense of the United States, to transfer the remaining $800,000 cash in the Puccini judicial trust account as “bribes”.
40A. Politan, as the complainant, falsely claiming plaintiff had violated his injunction, which he did not, or permit the filing of a Notice of Appeal (28 U.S.C. § 1292) and then falsely claiming plaintiff did not “appear”, although he did, in the civil actions issued a totally defective warrant.
b. The law was clear and is clear, as stated in Latrobe Steel v. United Steelworkers (545 F.2d 1336, 1343 [3rd Cir.1976]):
“Criminal contempt .. .proceedings are separate from the actions which spawned them. If a criminal contempt action develops from a civil proceeding, it bears a separate caption apart from the civil suit.” [emphasis supplied].
c. After plaintiff refused to surrender to a completely invalid warrant, he had Assistant U.S. Attorney Susan Cassell backdate a complaint and they spent monumental sums of federal monies, which including an unauthorized and unlawful wire tap.
d. Politan, with the cooperation of Alito held plaintiff incarcerated for two (2) months, without bail, charged with a single count of non-summary criminal contempt.
e. During this two (2) month period Politan, Alito, Abrams, Brieant were able to consummate the transmission of the approximate $800,000 in Puccini’s assets to serve as a “source” of “bribes”
f. As the complainant, he was disqualified to serve as the jurist in the contempt proceeding (Young v. United States ex rel. Vuitton (481 U.S. 787, 107 S.Ct. 2124, 95 L.Ed.2d 740 [1987])), although he also acted as the jurist.
g. More than fifteen (15) years later, at monumental federal cost, the proceedings are still not finalized, since Politan-Alito having caused the successful of the $800,000 in “bribes” have no further interest in this criminal proceeding.
41. The Politan Order as it exists today, reflecting the “Citibank Bribes for Immunity Agreement” reads:
“ORDERED that the plaintiff, George Sassower or anyone acting on his behalf or acting in concert or cooperation with Sassower may not file any new case, proceeding, motion or any other litigation document in this Court or in any other state and federal court in New' Jersey ... [and] in the event that George Sassower or anyone acting on his behalf, shall in violation of the within Order, file without having first obtained the prior written consent of this Court, any pleading, new case, proceeding, motion or other litigation document ... then George Sassower may immediately be held in contempt of this Court and shall be subject to arrest and appropriate sanctions without further notice.” [emphasis supplied].
WHEREFORE, plaintiff demands from the defendants, damages in the sum of one *230hundred million dollars, compensatory and punitive damages.
. The full text of Judge Leisure’s injunction reads as follows:
The Court hereby issues the following permanent injunction as to George Sassower:
(1) ACTIONS FILED IN THE SOUTHERN DISTRICT OF NEW YORK— George Sassower is hereby enjoined from filing any civil action in the United States District Court for the Southern District of New York without first obtaining prior leave from the Court. In seeking leave to file, Sassower must certify that the claim or claims he wishes to present are new claims never before raised and disposed of on the merits by any court. The action may not relate to or arise from (1) the Estate of Paul Kelly litigation, (2) Dennis F. *219Vilella, (3) the Puccini litigation, (4) claims objecting to sanctions for which ordinary review has been exhausted, or (5) claims against any state or federal judge, officer or employee for actions taken in the course of their official duties exercised in connection with Mr. Sassower's previous litigation. He must also certify that the claim or claims are not frivolous, malicious, or taken in bad faith. The motion for leave must be captioned “Application Pursuant to Court Order Seeking Leave to File” and Sassower must cite or affix a copy of this Opinion and Order to that motion. Failure to comply strictly with these requirements will be sufficient grounds for summarily denying leave to file. Until leave from the Court is obtained, any document or motion served by Sassower is a nullity and no party need file a response thereto.
The Clerk of the Court is hereby ordered not to accept for filing any paper or proceeding or motion or new case of any kind presented by George Sassower, or naming him as a party plaintiff or petitioner, without the leave in writing first obtained from a judge or magistrate of this Court.
(2)ACTIONS REMOVED FROM STATE COURT TO THE SOUTHERN DISTRICT OF NEW YORK—If any civil action in which Sassower is a plaintiff is removed to the United States District Court for the Southern District of New York from state court, pursuant to 28 U.S.C. §§ 1441, 1442, 1442a, 1443, or 1444, Sassower is required to obtain leave from the Court to continue the action. Sassower must file, within 30 days from the date of removal, an "Application for Leave of Court to Continue Action.” Such Application must comply with all of the requirements enumerated in Paragraph One of this injunction. Failure to comply strictly with these requirements will be sufficient grounds for summarily denying leave to continue the action. Until leave from the Court is obtained, any document or motion served by Sassower is a nullity and no party need file a response thereto. Until leave to continue the action is obtained, the action is stayed and the Clerk of the Court should not accept for filing any paper or motion in the removed action, other than the Notice of Removal and the Application for Leave to Continue Action.
(3) ACTIONS FILED IN, OR REMOVED TO, FEDERAL DISTRICT COURTS OTHER THAN THE SOUTHERN DISTRICT OF NEW YORK—Sassower is enjoined from filing any civil action in any federal district court which relates to or arises from (1) the Estate of Paul Kelly litigation, (2) Dennis F. Vilella, (3) the Puccini litigation, (4) claims objecting to sanctions for which ordinary review has been exhausted, or (5) claims against any state or federal judge, officer or employee for actions taken in the course of their official duties exercised in connection with Sassower’s previous litigation. Sassower is required to annex a copy of this Opinion and Order to any pleading filed in a civil action in any federal court. Failure to comply with the terms of this injunction may be considered by such federal court to be a sufficient defense to sustain a motion to dismiss such a lawsuit and may result in summary dismissal. This injunction also applies to an action in which Sas-sower is a plaintiff that is removed to federal court from state court pursuant to 28 U.S.C. §§ 1441, 1442, 1442a, 1443, or 1444. If the removed action falls within the scope of the subject matter of this injunction, it will be subject to summary dismissal.
(4) This injunction does not, in any way, abrogate any past or future injunctions directed at George Sassower, but rather supplements such injunctions.
Sassower v. Abrams, 833 F.Supp. 253, 273-74 (S.D.N.Y.1993).
. The Trustee has moved to dismiss Sassower's Chapter 13 case.
. In a letter to this Court dated October 28, 2005, after his receipt of the Court's Order to Show Cause, Sassower wrote that "U.S. Bankruptcy Judge Adlai S. Hardin, Jr. is a dangerously corrupt federal jurist, who is engaged, on several levels, in egregious criminal activities, who must be removed from his judicial office, criminally prosecuted and sentenced to serve a term of incarceration.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493828/ | MEMORANDUM ORDER
JORDAN, District Judge.
I. INTRODUCTION
Presently before me is an appeal of the Official Committee of Unsecured Creditors *231(the “Committee”) from the Judgment and Amended Judgment1 of the Bankruptcy Court issued, respectively, on November 17, 2004 and November 23, 2004 (Docket Item [“D.I.”] 11 at Tab 12, 13), allowing Presstek, Inc., and Silver Acquisitions Corp. (collectively, “Presstek”) to purchase inventory from A.B. Dick Company (“A.B. Dick”). For the reasons that follow, the Order of the Bankruptcy Court is affirmed.
II. STANDARD OF REVIEW
This court has jurisdiction over appeals from the Bankruptcy Court, pursuant to 28 U.S.C. § 158(a). On appeal, a clearly erroneous standard applies to the Bankruptcy Court’s findings of fact, and a plenary review standard applies to its legal conclusions. See Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir.1999). When reviewing mixed questions of law and fact, this court will accept the Bankruptcy Court’s findings of “historical or narrative facts unless clearly erroneous, but [will] exercise plenary review of the trial court’s choice and interpretation of legal precepts and its application of those precepts to the historical facts.” Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 642 (3d Cir.1991) (internal citations omitted).
III. DISCUSSION
This case involves an Asset Purchase Agreement (the “APA”), pursuant to which Presstek bought substantially all of the assets of A.B. Dick Company (“A.B.Dick”), Paragon Corporate Holdings, Inc., Multigraphics, LLC, and Interactive Media Group, Inc. (collectively, “Debtors”). The Bankruptcy Court found that those assets included “inventories and rights to partially prepaid orders of inventory supplied by [Mitsubishi Imaging (MPM), Inc.]” (“Mitsubishi”). (D.I. 11, Tab 11 at A-0727.) The Committee asserts that the Debtors’ estates, and thus the creditors, were entitled to receive a refund of the money that Debtors had pre-paid on orders to Mitsubishi. (D.I. 12 at 16.) The Committee argues that, because Presstek did not assume the contract between Mitsubishi and A.B. Dick, Presstek was not entitled to any prepayments A.B. Dick made on that contract. (Id. at 16-24.)
While the Committee strenuously disagrees with the ruling of the Bankruptcy Court, that Court’s November 17, 2004 decision2 (id. at A-0725-30) is not clearly erroneous in its factual findings, nor does it reflect any error of law.
The only legal authority cited by the Committee in support of its position, other than citations to general principles of contract law and judicial estoppel, is In re CellNet Data Systems, Inc., 327 F.3d 242 (3d Cir.2003). In CellNet, when the debtor sold its intellectual property to a buyer, the buyer “specifically exclude[d] all stocks, assets, liabilities and agreements pertaining to [the debtor’s] venture with [a licensee].” Id. at 245. Pursuant to 11 U.S.C. § 365(n), the licensee elected to retain its rights under the license, and continued to use the intellectual property *232and pay royalties. Id. at 246. Despite having specifically excluded the contract with the licensee from the assets it purchased, the buyer claimed that, because it had purchased the intellectual property that was licensed, it was entitled to the royalties accompanying that license. Id. at 245. The debtor also claimed that it was entitled to such royalties. Id. at 245-46. . The Third Circuit affirmed the findings of the bankruptcy and district courts that, because the buyer had expressly excluded the license agreement from the assets it had purchased, it had severed the right to receive royalties from the intellectual property it had purchased, and thus that the debtor was entitled to the royalties. Id. at 252.
The instant case is distinguishable from the facts of CellNet. While in CellNet the buyer had excluded “all stocks, assets, liabilities and agreements” pertaining to the licensee, here Presstek simply elected not to assume the contract with Mitsubishi. (D.I. 11, Tab 4 at A-0488 (Bankruptcy Court finding that, in approving the APA, “neither [of the agreements with Mitsubishi] ... shall be deemed assumed or assumed and assigned to [Presstek] pursuant to this Order. The ... Debtors reserve their rights to seek assumption and assignment in the future.”).) Excluding all assets, liabilities, stocks and agreements pertaining to a relationship with a licensee, as the buyer did in CellNet, is distinctly different from declining to accept an ongoing business relationship but demanding the delivery of prepaid inventory, as Presstek did here.
Moreover, the APA clearly provides that Presstek acquired the Debtors’ “right title and interest in and to all of [Debtors’] property and assets, real, personal or mixed, tangible and intangible, or every kind and description, wherever located ... [including]: (c) all Inventories of [Debtors] and their Subsidiaries; ... (I) all rights of [Debtors] relating to deposits and prepaid expenses, claims for refunds and rights to offset in respect thereof which are not excluded under Section 2.2(g)[.]”3 (D.I. 19, Ex. A at A-0029.) Thus, the Bankruptcy Court did not commit error when it found that, even though Presstek did not assume the contract with Mitsubishi, it had purchased Debtors inventory, including the right to the products as to which Debtors had made prepayments to Mitsubishi.
IY. CONCLUSION
Accordingly, it is hereby ORDERED that the November 17, 2004 Order of the Bankruptcy Court, as amended November 23, 2004, is AFFIRMED.
. The initial Judgment from November 17, 2004 contained a mistake in the caption that stated that the Judgement was from the Bankruptcy Court in the District of Nevada. (D.I. 11, Tab 12 at A-0736.) That mistake was corrected in the Amended Judgment on November 23. (Id., Tab 13 at A-0736-37.) That is the only difference between the two judgments.
. The Bankruptcy Court issued an oral Memorandum of Decision on the Record at the close of the November 17, 2004 hearing. (D.I. 11, Tab 11 at A-0725-30.) It then issued a Judgment and an Amended Judgment reflecting that decision. (Id. at Tab 12, 13.)
. Section 2.2(g) of the APA states that "the Excluded Real Property Interests and all Governmental Authorizations relating exclusively to the operation of such Real Property” are excluded from the APA, and will remain the property of Debtors after the sale. (D.I. 19, Ex. A at A-0030.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493829/ | MEMORANDUM OPINION
m. bruce McCullough, Bankruptcy Judge.
Aetna, Inc. (hereafter “Aetna”), the instant defendant, brings its Motion for Re*275lief from a Default Judgment to obtain relief from a $235,941.52 default judgment entered against it in the instant adversary proceeding on December 11, 2003 (hereafter “the Default Judgment”). Aetna did not file such motion until November 9, 2005, or nearly two years after the entry of the Default Judgment. Can the Court now grant the relief sought by Aetna? For the reasons set forth below, the Court is constrained to deny Aetna’s motion for relief from the Default Judgment.
DISCUSSION
Relief from a default judgment can only be obtained “in accordance with Rule 60(b)”—i.e., Fed.R.Civ.P. 60(b). See Fed. R.Civ.P. 55(c), 28 U.S.C.A. (West 1992); Fed.R.Bankr.P. 7055, 11 U.S.C.A. (West 2005) (making Rule 55 applicable to adversary proceedings). Aetna appears to argue that it is entitled to relief from the Default Judgment via (a) Rule 60(b)(1) on the basis of its own “mistake, inadvertence, ... or excusable neglect,” (b) Rule 60(b)(3) on the basis of fraud by the instant debtor precedent to the Unsecured Creditors Committee’s bringing of the complaint that commenced the instant adversary proceeding, (c) Rule 60(b)(4) on the basis that the Default Judgment is null and void, and (d) Rule 60(b)(6) on the basis that other reasons justify relief from operation of the Default Judgment.
Unfortunately for Aetna, Rule 60(b) itself makes clear that relief from a default judgment may be obtained via Rule 60(b)(1)—(3) only if one moves for such relief within the first year after such default judgment was entered. See Fed. R.Civ.P. 60(b), 28 U.S.C.A. (West 1992).1 Because Aetna brings its motion for relief well outside of such one-year period relative to the entry of the Default Judgment, Aetna is foreclosed from receiving any relief via Rule 60(b)(1)'—(3). Recognizing as much, Aetna doggedly contends that such one-year limitation contained in Rule 60(b) is inapplicable to its motion for relief. Aetna takes such position by (a) arguing, in turn, that its motion is one to reopen a case under the Code, and (b) pointing the Court to Fed.R.Bankr.P. 9024(1), which rule, in addition to making Rule 60 applicable to adversary proceedings, excepts from Rule 60(b)’s one-year limitation “a motion to reopen a case under the Code,” Fed. R.Bankr.P. 9024, 11 U.S.C.A. (West 2005).2
Unfortunately for Aetna, its motion for relief from the Default Judgment is not a motion to reopen a case under the Code. The Court so concludes for several reasons. First, “a motion to reopen a case *276under the Code” within the meaning of Bankruptcy Rule 9024(1) refers to a motion to reopen a bankruptcy case, not a motion to reopen an adversary proceeding. See 10 Collier on Bankruptcy, ¶ 9024.04 at 9024-5 (Bender 2005); see also Fed.R.Bankr.P. 9024 advisory committee note (“Motions to reopen cases are governed by Rule 5010”); Fed.R.Bankr.P. 5010 advisory committee note (referencing 11 U.S.C. § 350(b) when discussing reopening of cases); H.R.Rep. No. 95-595, at 338 (1977) & S.Rep. No. 95-989, at 49 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5963, 6294, 5787, 5835 (expressly stating that 11 U.S.C. § 350 deals with the closing and reopening of a bankruptcy case); In re Southern Industrial Banking Corp., 189 B.R. 697, 702 (E.D.Tenn.1992) (“ ‘case’ is a term of art in bankruptcy practice” and “is to be distinguished from the adversary proceeding”); In re KZK Livestock, Inc., 221 B.R. 471, 476 n. 3 (Bankr.C.D.Ill.1998) (same); In re James, 300 B.R. 890, 896-97 (Bankr.W.D.Tex.2003) (same). Because Aetna concededly seeks not to reopen the instant bankruptcy case—there would be no need to since such case has never been closed—its present motion for relief cannot be characterized as “a motion to reopen a case under the Code” within the meaning of Bankruptcy Rule 9024(1). Second, and more importantly, even if “a motion to reopen a case under the Code” can be taken under Bankruptcy Rule 9024(1) to also mean a motion to reopen an adversary proceeding, such language most certainly cannot be strained to also mean a motion, as is presently brought by Aetna, to obtain relief from a default judgment entered within such adversary proceeding. See In re Woodcock, 315 B.R. 487, 494 (Bankr.W.D.Mo.2004).
Therefore, Aetna is foreclosed from receiving any relief via Rule 60(b)(1)—(3).3
As for Aetna’s request for relief via Rule 60(b)(6), the Court notes that the Third Circuit “ha[s] long held in this circuit that ‘[r]ule 60(b)(6) is available only in cases evidencing extraordinary circumstances.’ ” Lasky v. Continental Products Corp., 804 F.2d 250, 256 (3rd Cir.1986) (citing Stradley v. Cortez, 518 F.2d 488, 493 (3rd Cir.1975)); see also, e.g., Marshall v. Bd. of Education, Bergenfield, New Jersey, 575 F.2d 417, 425-426 (3rd Cir.1978) (quoting from Vecchione v. Wohlgemuth, 558 F.2d 150, 159 (3rd Cir.1977), to the effect that Rule 60(b)(6) “ ‘provides for extraordinary relief and may only be invoked upon a showing of exceptional circumstances’ ”). Unfortunately for Aetna, the Court cannot find to be extraordinary the circumstances that surround either the entry of the Default Judgment or the belated filing by Aetna of its instant motion for relief therefrom. The Court so rules, in large part, because (a) Aetna concededly was properly served with a summons, a copy of the adversary complaint, and a copy of this Court’s Pre-Trial Order that scheduled a pre-trial conference for December 11, 2003, yet Aetna failed to either file an answer or appear at such hearing, and (b) Aetna actually became aware of the entry of the Default Judgment within six days of its entry, yet Aetna waited for *277nearly two years thereafter before it filed the instant motion.4
Finally, the Court rejects outright Aetna’s strained contention that the Default Judgment is null and void. As the Court understands it, Aetna argues that the Unsecured Creditors Committee’s commencement of the instant adversary proceeding to avoid as preferential a pre-petition transfer by the instant debtor to Aetna was somehow impermissible, outside the scope of the Committee’s statutory authority, and thus ultra vires, so that any judgment rendered against Aetna thereon would necessarily be null and void. Aetna contends that the Committee’s attempt to avoid as preferential the transfer in question to Aetna was impermissible because, argues Aetna in turn, (a) such transfer satisfied a pre-petition claim that Aetna would have otherwise had against the instant debtor, (b) such pre-petition claim, had it not been paid by virtue of such transfer, would have constituted a priority claim under § 507(a)(4), and (c) it is impermissible, as a matter of law, to seek to avoid as preferential an otherwise preferential transfer that satisfied what would have constituted, absent such transfer, a priority claim. The Committee’s pursuit of a preference claim against Aetna was not impermissible as a matter of law, and Aetna’s foregoing position thus fails, however, because, until Aetna raised as an affirmative defense its priority claim theory and this Court ruled favorably thereon, that the Committee’s preference claim would have been unsuccessful is entirely speculative—put differently, the Committee’s preference claim against Aetna was, on its face, entirely plausible, free from frivolity, and therefore neither impermissible, outside the scope of the Committee’s statutory authority, nor ultra vires. Consequently, the Default Judgment is not null and void, which means that it may not be set aside pursuant to Rule 60(b)(4).
CONCLUSION
For all of the foregoing reasons, the Court shall deny with prejudice Aetna’s motion for relief from the Default Judgment.
An appropriate order will be entered.
ORDER OF COURT
AND NOW, this 3rd day of March, 2006, for the reasons set forth in the accompanying Memorandum Opinion of the same date, it is hereby ORDERED, ADJUDGED, AND DECREED that Aetna’s motion for relief from the Default Judgment is DENIED WITH PREJUDICE.
. The Court is prohibited from enlarging such one-year time period. See Fed.R.Bankr.P. 9006(b)(2), 11 U.S.C.A. (West 2005).
. Aetna, in support of its present motion, also cites to Third Circuit case authority for the proposition that, at least within the Third Circuit, a party may obtain relief from a default judgment based upon an application of a three-part test wherein the following are considered: (1) "whether vacating the default judgment will visit prejudice on the plaintiff, [(2)] whether the defendant has a meritorious defense, and [(3)] whether the default was the result of the defendant’s culpable conduct.” Harad v. Aetna Casualty and Surety Co., 839 F.2d 979, 982 (3rd Cir.1988) (citing United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 195 (3rd Cir.1984)). However, the Court does not understand Aetna to argue that satisfaction of such three-part test (a) represents a means for obtaining relief from a default judgment alternative to Rule 60(b), or (b) would allow Aetna to avoid the impact of the one-year limitation that applies to Rule 60(b)(1)—(3). To the extent that Aetna does so argue, it does so to no avail. See, e.g., In re USN Communications, Inc., 288 B.R. 391, 394-96 (Bankr.D.Del.2003) (applying not only the Third Circuit’s 3-part test for setting aside a default judgment but also Rule 60(b) and the one-year limitation that pertains to Rule 60(b)(1)—(3)).
. The Court also rejects outright the suggestion by Aetna that it would be inequitable for the Unsecured Creditors Committee to be able to take advantage of the one-year limitation in Rule 60(b)(1)—(3) vis-a-vis Aetna's present motion while the Committee, at the same time, refrained from collecting on the Default Judgment until nearly two years had passed subsequent to its entry. The Court so rules because Rule 60(b) imposes such time limitation on Aetna regarding its Rule 60(b)(1) & (3) positions, whereas pertinent Pennsylvania law grants to the Committee a period of no less than twenty (20) years to pursue collection upon the Default Judgment, see 42 Pa. C.S.A. § 5529(a) (Purdon’s 2006).
. Given the foregoing, the Court finds that, were it necessary, the Court would be constrained to rule that Aetna's obvious neglect was not even "excusable” within the meaning of Rule 60(b)(1). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493830/ | ORDER AFFIRMING BANKRUPTCY COURT
WINGATE, Chief Judge.
Before this court is the appeal from the United States Bankruptcy Court brought by the Mississippi State Tax Com*285mission in the above styled and numbered cause. This court has jurisdiction over bankruptcy appeals pursuant to Title 28 U.S.C. § 158(a), which provides that, “[t]he district courts of the United States shall have jurisdiction to hear appeals ... from final judgments, orders and decrees; .... and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title.” In a bankruptcy appeal, the applicable standard of review by a district court is the same as when the Court of Appeals reviews a district court proceeding. In re Killebrew, 888 F.2d 1516, 1519 (5th Cir.1989). Findings of fact by the bankruptcy courts are to be reviewed under the clearly erroneous standard. Id.; see also Bankruptcy Rule 8013.1 Conclusions of law are reviewed de novo. In re National Gypsum Company, 208 F.3d 498, 504 (5th Cir.), cert. denied, 531 U.S. 871, 121 S.Ct. 172, 148 L.Ed.2d 117 (2000); In re Bass, 171 F.3d 1016, 1021 (5th Cir.1999). This court has fully reviewed the findings of fact and conclusions of law of the Bankruptcy Court, as well as the briefs of the parties on appeal. This court is persuaded that the determination of the Bankruptcy Court must be affirmed.
BACKGROUND
Pursue Energy Corporation (“Pursue”), the debtor pursuant to a petition in bankruptcy filed under Chapter 11 of the Bankruptcy Code, Title 11 U.S.C. §§ 1101-1174, is a producer of oil and gas subject to severance taxes in Rankin County, Mississippi. Pursue entered into a long term contract in 1980 to sell gas to Southern Natural Gas Pipeline Company (Southern National). In June of 1992, Pursue and Southern National executed an amendment to their gas purchase contract which resulted in a $79 million dollar payment to Pursue and its partners in 1993. A final payment to Pursue was made by Southern National in 1996 of $8.4 million dollars. The parties agree that Pursue did not report either of these payments in its gas severance tax returns filed with the Mississippi State Tax Commission.
In 1996, the Mississippi Tax Commission’s undertook an investigation into payments made to various oil and gas producing companies in Mississippi. These payments had been made by oil and gas purchasers such as Southern National who were locked into long-term contracts with the oil and gas producers such as Pursue for purchase prices well above the market price of the commodity. The payments were settlements intended to modify or rescind unfavorable contracts.
The Tax Commission’s investigation in 1996 requested that Pursue and others produce documents and information relating to a series of settlements beginning in 1993 and concerning payments greater than $100 million. Pursue resisted the production of the information and filed a lawsuit, along with The Louisiana Land and Exploration Company and Inexco Oil Company, in the Rankin County Chancery Court. These state court plaintiffs sought to put an end to the Tax Commission’s investigation and its request for the documents in question. Pursue particularly argued that Mississippi’s Attorney General *286and State Tax Commission acted without legal authority. The Chancery Court of Rankin County ruled against Pursue, requiring it to produce the documents in question. This decision was upheld by the Mississippi Supreme Court.
Shortly after the Mississippi Supreme Court’s decision in Pursue v. Mississippi State Tax Commission, 816 So.2d 385 (Miss.2002), the Tax Commission issued three tax assessments against Pursue for $8,674,200.00 based on the $79,000,000.00 payment; $2,397014.00 based on deductions Pursue had claimed; and a $354,674.00 use tax assessment. Once these assessments were made, Pursue filed its petition for bankruptcy relief under Chapter 11 on September 20, 2002, without contesting the assessments in accordance with the administrative procedures provided under Mississippi law. The Tax Commission says it was compelled to file a proof of claim in the amount of $11,077,727.22 in order to protect its position, and to file an objection and motion to abstain or to grant relief from automatic stay so that the Mississippi administrative proceedings could begin. The Bankruptcy Court denied the motions to abstain in accordance with its analysis of the factors set forth in In re Searcy v. Knostman, 155 B.R. 699, 710 (S.D.Miss.1993). The Bankruptcy Court also denied the Tax Commission relief from the automatic stay, citing the twelve factors for lifting a stay set forth in In re Curtis, 40 B.R. 795 (Bankr.D.Utah 1984).
Now, the Mississippi State Tax Commission asks this court to overturn the Bankruptcy Court’s ruling, contending that the State of Mississippi is being denied its most fundamental right to levy and collect taxes. The parties do not dispute the facts above recited. So, for its analysis of this matter, this court shall review de novo the Bankruptcy Court’s conclusions of law.
APPLICABLE LAW
A. The Bankruptcy Court’s Authority
Title 11 U.S.C. § 505(a)(1) addresses the Bankruptcy Court’s jurisdiction to determine certain tax liabilities, stating that, “[e]xcept as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.” Title 11 U.S.C. § 505(a)(2) provides that the Bankruptcy Court may not determine, “the amount or legality of a tax, fine, penalty, or addition to tax if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under this title.... ” In the instant case only an assessment of Pursue’s probable tax liability had been made when Pursue filed its petition for bankruptcy relief. No adjudication had been made which would have precluded the Bankruptcy Court from considering the tax issues pursuant to Title 11 U.S.C. § 505(a)(1).
B. The “Core” Proceediny Determination
The Bankruptcy Court determined that the dispute between Pursue and the Tax Commission was a “core” proceeding pursuant to (A), (B), and (O) of Title 28 U.S.C. § 157(b)(2). Title 28 U.S.C. § 157(b)(2) provides that 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 *287confirming 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 discharge-ability 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.
Because the dispute involved tax liability, liquidation of the assets of the estate, administration of the estate, and allowance or disallowance of claims against the estate, the Bankruptcy Court concluded that the dispute involved matters which the Bankruptcy Court could hear and determine pursuant to Title 28 U.S.C. § 157(b)(1).2 Inasmuch as Pursue’s tax liability was the issue, the Bankruptcy Court concluded that the determination of tax liability constituted a core proceeding under Title 28 U.S.C. § 157(b)(2)(B), particularly the estimation of claims or interests for the purposes of confirming a plan under Chapter 11 of the Bankruptcy Code. See In re Hunt, 95 B.R. 442, 444 (Bankr.N.D.Tex.1989) (determination of tax liability constitutes a core proceeding). See also Title 11 U.S.C. § 505(a)(l)(above, permitting the Bankruptcy Court to determine the amount or legality of any tax); In re Southmark Corp., 163 F.3d 925, 930 (5th Cir.1999) (a proceeding is core under § 157 if it involves a substantive right provided by Title 11 or a matter that, by its nature, could arise only in the context of a bankruptcy case).
This court agrees. This case qualifies as a core proceeding under the three criteria of 157(b)(2) cited by the Bankruptcy Court. First, the dispute over Pursue’s tax liability directly affects the administration of the bankruptcy estate. The Tax Commission is potentially a very large creditor in position to wrest over $11,000,000.00 from the bankruptcy estate if its assessments were to be upheld by state court proceedings. Therefore, this court finds no error in the “core” proceeding determination and the Bankruptcy Court’s decision to undertake the determination of the tax issues in question.
C. The Matter of Abstention
Where the controversy before the Bankruptcy Court lies “at the core of *288the federal bankruptcy power,” Northern Pipeline Construction Company v. Marathon Pipe Line Company, 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the bankruptcy law permits but does not require abstention.3 See Title 28 U.S.C. § 1334(c)(1)4, providing that the court has the discretion to abstain from deciding either core or non-core proceedings. A federal district court or bankruptcy court may find that remand to a state court of competent jurisdiction is appropriate in a case removed on bankruptcy grounds whether it is “core” or “non-core” if there is any equitable ground for doing so. See Chickaway v. Bank One Dayton, N.A., 261 B.R. 646, 650 (S.D.Miss.2001), citing In re Southmark Corp., 163 F.3d at 929. The factors for a district court or a bankruptcy court to consider with regard to permissive abstention are set forth in Searcy v. Knostman, 155 B.R. 699, 710 (S.D.Miss.1993):
(1) the effect or lack thereof on the efficient administration of the estate if the Court recommends [remand or] abstention;
(2) extent to which state law issues predominate over bankruptcy issues;
(3) difficult or unsettled nature of applicable law;
(4) presence of related proceeding commenced in state court or other nonbank-ruptcy proceeding;
(5) jurisdictional basis, if any, other than § 1334;
(6) degree of relatedness or remoteness of proceeding to main bankruptcy case;
(7) the substance rather than the form of an asserted core proceeding;
(8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
(9) the burden of the bankruptcy court’s docket;
(10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties;
(11) the existence of a right to a jury trial;
(12) the presence in the proceeding of nondebtor parties;
(13) comity; and
(14) the possibility of prejudice to other parties in the action.
In the instant case the Bankruptcy Court first considered the administrative process under Mississippi law provided under Mississippi Code Annotated §§ 27-65-455 and 27-65-476. The Bankruptcy *289Court noted that a taxpayer aggrieved by an assessment of sales taxes faces a potential four-step process: (1) review before the Tax Board; (2) then to the full Tax Commission; (3) then to the Chancery Court; and, finally, to the Mississippi Supreme Court. The Bankruptcy Court observed that no actual hearing on Pursue’s severance tax liability had been conducted at the time Pursue filed for relief in bankruptcy, and that, at least at the time of the Bankruptcy Court was considering this matter, the tax issue actually could have been adjudicated faster and more efficiently in the Bankruptcy Court.
This court agrees with this analysis. Furthermore, notwithstanding the Tax Commission’s suggestion that accommodations could be made, the Bankruptcy Court concluded that the Mississippi statutory provision which required full payment of the tax in question before appeal to the full Tax Commission would be unfair to the unsecured creditors in the bankruptcy proceeding since an amount in the neighborhood of $11,000,000.00 could be taken from the estate in a proceeding in which the unsecured creditors could not participate. This court also agrees with this observation.
Next, the Bankruptcy Court considered the Searcy factors, having already found that remand to state court would not result in more efficient administration of the bankruptcy estate, and that no related proceeding had been commenced in state court or in some other non-bankruptcy proceeding (factors 1 and 4). Pursuant to factors 2, 3, 5 and 8 that the state law issues did not predominate over bankruptcy issues; that there were no difficult or unsettled issues of state law to be resolved; that the Bankruptcy Court’s jurisdiction was not based only on § 1334; and that severing any state law claims from *290core bankruptcy matters to allow judgments to be entered in state court was not feasible given that no state court proceeding was underway.
Under factors 6 and 7 the bankruptcy Court found the tax issue to be closely related to the main bankruptcy case, not so remote as had been suggested by the Tax Commission. Under Factor 9 the Court could find no less burdensome a docket in state court than in the Bankruptcy Court.
Addressing factor 10, the Bankruptcy Court responded to the Tax Commission’s suggestion that Pursue simply was forum shopping with regard to a straightforward state tax issue which should have been adjudicated in state court. The bankruptcy Court referred to the lawsuit against Pursue brought by its royalty holders in the Chancery Court of Simpson County, Mississippi. Since Pursue faced a potentially large judgment being returned against it in that litigation, the Bankruptcy Court concluded that this was not merely an attempt by Pursue to forum shop the tax issue.
Factor 11 concerns the loss of any right to trial by jury. The Bankruptcy Court found that this factor had no application to the instant case. The presence of non-debtor parties, the unsecured creditors, weighed in favor of denying abstention under factor 12. Finally, under factor 13 concerning comity, the Bankruptcy Court concluded that the Chancery Court of Mississippi was no better suited to address the tax issues than was the Bankruptcy Court in terms of special expertise. So, the motion of the Tax Commission for the Bankruptcy Court to abstain was denied. This court concurs.
D. The Matter of Lifting the Automatic Stay
Finally, the Bankruptcy Court denied the Tax Commission’s request to lift the automatic stay and to permit state court proceedings to go forward. The automatic stay of Title 11 U.S.C. § 3627 prohibits parties moving to lift stay from proceeding against a debtor in other proceedings without first obtaining relief from the automatic stay. The filing of a petition under Chapter 11 of the Code operates pursuant to § 362(a) as an automatic stay of: (1) the commencement or continuation including the issuance or employment of process, of a judicial, administrative or other action or *291proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; [and] ... (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title. Section 362 is deemed “one of the fundamental debtor protections provided by the bankruptcy laws.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 340 (1977), reprinted in USCCAN 5963, 6296; S.Rep. No. 989, 95th Cong., 2d Sess. 54, reprinted in 1978 USCCAN 5787, 5840. In Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47 (2d Cir.1976), cert. denied, 429 U.S. 1093, 97 S.Ct. 1107, 51 L.Ed.2d 540 (1977), the United States Court of Appeals for the Second Circuit stated that the stay is designed to prevent a chaotic and uncontrolled scramble for the debtor’s assets in a variety of uncoordinated proceedings in different courts. The stay insures that the debtor’s affairs will be centralized, initially in a single forum in order to prevent conflicting judgments from different courts and in order to harmonize all of the creditors’ interests with one another. Id., at 55.
Under Title 11 U.S.C. § 362(d)(1), the Bankruptcy Court could have granted the Tax Commission relief from the automatic stay “for cause” if it had found just cause to do so. In re Fowler, 259 B.R. 856, 858 (Bkrtcy. E.D.Tex.2001). The Bankruptcy Code does not specify what constitutes “cause” to grant relief from the stay other than “lack of adequate protection,” so, one may look to the legislative history to 362(d) for some guidance:
Subsection (d) requires the court, on request of a party in interest, to grant relief from the stay, such as by terminating, annulling, modifying, or conditioning the stay, for cause. The lack of adequate protection of an interest in property of the party requesting relief from the stay is one cause for relief, but is not the only cause.... [A] a desire to permit an action to proceed to completion in another tribunal may provide another cause. Other causes might include the lack of any connection with or interference with the pending bankruptcy case. For example, a divorce or child custody proceeding involving the debtor may bear no relation to the Bankruptcy case. In that case, it should not be stayed. A probate proceeding in which the debtor is the executor or administrator of another’s estate usually will not be related to the bankruptcy case, and should not be stayed. Generally, proceedings in which the debtor is a fiduciary, or involving postpetition activities of the debtor, need not be stayed because they bear no relationship to the purpose of the automatic stay, which is debtor protection from his creditors. The facts of each request will determine whether relief is appropriate under the circumstances. H.R.Rep. No. 95-595, 95th Cong., 1st Sess., 343^14 (1977).
When relief from the automatic stay is sought, the party seeking the relief has an initial burden to demonstrate cause for relief. See In re RCM Global Long Term Capital Appreciation Fund. Ltd., 200 B.R. 514, 526 (Bankr.S.D.N.Y.1996); and In re Stranahan Gear Company, Inc., 67 B.R. 834, 836-37 (Bankr.E.D.Pa.1986), both cases cited in In re Fowler, 259 B.R. at 858. Ultimately, the granting of relief from the automatic stay is left to the discretion of the bankruptcy court and is decided on a case by case basis. In re Fowler, 259 B.R. at 858.
In the instant case the Bankruptcy Court relied on In re Curtis, 40 B.R. at *292799-800, a case cited in In re Fowler, 259 B.R. at 858. Curtis listed twelve factors a court should weigh in deciding whether to lift the automatic stay:
(1) whether relief would result in a partial or complete resolution of the issues;
(2) lack of any connection with or interference with the bankruptcy case;
(3) whether the other proceeding involves the debtor as a fiduciary;
(4) whether a specialized tribunal with the necessary expertise has been established to hear the cause of action;
(5) whether the debtor’s insurer has assumed full responsibility for defending it;
(6) whether the action primarily involves third parties;
(7) whether litigation in another forum would prejudice the interests of other creditors;
(8) whether the judgment claim arising from the other action is subject to equitable subordination;
(9) whether movant’s success in the other proceeding would result in a judicial lien avoidable by the debtor;
(10) the interests of judicial economy and the expeditious and economical resolution of litigation;
(11) whether the parties are ready for trial in the other proceeding; and
(12) impact of the stay on the parties and balance of harms.
Id., at 799-800. The Bankruptcy Court found that the tax issues could be decided fully in either federal or state court, concluding that the first factor weighed against lifting the stay. Under factor 12, the bankruptcy Court concluded that allowing the state courts to determine the tax issues would compromise unnecessarily the assets of the bankruptcy estate. Finding that it already had addressed factors 2, 4, 7, 10 and 11 in its consideration of abstention, and finding that factors such as 3, 5, 6, 8 and 9 did not apply to this case, the Bankruptcy Court concluded that the automatic stay should not be lifted to permit the Mississippi States Tax Commission to proceed. This court agrees.
CONCLUSION
Therefore, in light of the foregoing authority and analysis, this court finds the conclusions of law determined by the Bankruptcy Court to be well taken and they are hereby affirmed.
. Bankruptcy Rule 8013 provides that, “[o]n an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge’s judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.”
. Title 28 U.S.C. § 157(b)(1) provides that, “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.”
. Under Title 28 U.S.C. § 1334(c)(2), only in "non-core” proceedings are the federal courts required to abstain from hearing a state law claim for which there is no independent basis for federal jurisdiction other than § 1334(b) "if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.” In re Gober, 100 F.3d 1195, 1206 (5th Cir. 1996).
. Title 28 U.S.C. § 1334(c)(1) provides that, "[njothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.”
.Mississippi Code Ann. § 27-65-45 provides as follows: If any taxpayer feels aggrieved by an assessment for taxes made upon him for any year by the commissioner, he may apply to the board of review, such board to be composed of qualified employees of the commission appointed by the chairman, said application to be made by petition in writing, within ten (10) days after notice is mailed to him, for a hearing and a correction of the amount of the tax assessed upon him by the commissioner. At said hearing, the board of review shall try the issues presented, according to the law, the facts and within guidelines set by the commissioner, and shall notify the taxpayer of its determination, and if the board *289of review orders the payment of the tax, the taxpayer shall pay the tax, damages and interest, if any, within ten (10) days after the order is issued provided there is no application for appeal to the State Tax Commission.
If any taxpayer feels aggrieved by the decision of the board of review, he may apply to the State Tax Commission by petition, in writing, within ten (10) days after notice is mailed to him, for a hearing and a correction of the amount of the tax assessed upon him by the commissioner, in which petition he shall set forth the reasons such hearing should be granted and the amount in which such tax should be reduced. The State Tax Commission shall promptly consider the petition, grant the hearing, and notify the petitioner of the time and place fixed for the hearing. After the hearing, the State Tax Commission may make such order in the matter as may appear to it just and lawful and shall furnish a copy of the order to the petitioner. If the State Tax Commission orders the payment of the tax, the taxpayer shall pay the tax, damages and interest, if any, within ten (10) days after the order is issued. Interest shall accrue on the delinquent tax at the rate of one percent (1%) per month or part of a month from and after the expiration of ten-day period if not paid by that time.
. Mississippi Code Ann. § 27-65-47 provides that, "[a]ny person improperly charged with any tax imposed by this chapter, and required to pay the same, may recover the amount paid together with interest, in any proper action or suit against the commissioner for the amount paid into the state treasury, or to a representative of any municipality or county which has received any part of the tax sought to be recovered; and the chancery court of Hinds County, or of the county of the taxpayer’s residence or place of business, shall have original jurisdiction of any action to recover any tax improperly collected by the commissioner and paid into any fund in the state treasury or to any municipality, county, or other taxing authority which benefits by said tax.
The chancery court, or the supreme court of Mississippi on appeal to it, may, if it be of the opinion from all the evidence that the assessment is incorrect or in part invalid, determine the amount of tax due and shall decide all questions both as to legality and the amount of the tax and enter judgment therefor.”
. Title 11 U.S.C. § 362(a) states that, "[e]x-cept as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493831/ | MEMORANDUM-OPINION
JOAN L. COOPER, Bankruptcy Judge.
This matter came before the Court on the Motion of Debtors Ewert J. Wilson and Linda Wilson (“Debtors”) for an Order Granting Homestead Exemption and the Objection thereto of Creditor Anthony Wilson (‘Wilson”). An evidentiary hearing was held on the matter on November 16, 2005, and post-trial briefs were submitted by the Debtors and Wilson. For the following reasons, the Court DENIES Debtors’ Motion for an Order Granting Homestead Exemption.
FACTS AND PROCEDURAL HISTORY
On July 28, 2003, Debtors filed a Voluntary Petition seeking relief under Chapter 13 of the United States Bankruptcy Code. Debtors listed their residence as 109 Burkesville Road, Albany, Kentucky, on the Petition. No homestead exemption was claimed on Schedule C to the Petition.
On August 20, 2008, Debtors moved to convert the case from a Chapter 13 proceeding to one under Chapter 11 of the United States Bankruptcy Code. On September 15, 2003, the Court entered an Order converting the case to a Chapter 11 proceeding. The Debtors’ Chapter 11 Petition listed their residence as 109 Burkes-ville Road. No homestead exemption was claimed on Schedule C to the Chapter 11 Petition.
On April 23, 2004, the case was converted to a Chapter 7 case. The Chapter 7 Petition listed the Debtors’ residence as 109 Burkesville Road, Albany, Kentucky. No homestead exemption was claimed on Schedule C to the Petition.
On July 28, 2005, the Chapter 7 Trustee, Jerry Burns, filed a Motion to Sell NonExempt Assets, Including Real Estate, Oil and Gas Leases, Patents and Heavy *317Equipment. In the Motion, the Trustee indicated he had been offered the sum of $15,000 by Wilson, the son of Debtor Ewert J. Wilson, for the non-exempt equity in all of the assets of the bankruptcy estate. The Motion was noticed by the Court for objections, but no objections were filed to the Trustee’s Motion. On August 22, 2005, the Court entered an Order granting the Trustee’s Motion to Sell Non-Exempt Assets Including Real Estate, Oil and Gas Leases, Patents and Heavy Equipment.
On September 7, 2005, the Debtors filed their Motion for Order Granting Homestead Exemption requesting that the Court grant the Debtors a homestead exemption in the real estate known as “the farm” more fully described at DB 125, Page 63, DB 125, Page 56, DB 125, Page 59 and DB 125, Page 52 filed at the Clinton County Courthouse.
On October 4, 2005, Wilson filed an Objection to Motion for Order Granting Homestead Exemption. The basis of that Objection was that the property listed was not the residence of the Debtors.
On November 16, 2005, the Court held an evidentiary hearing on the Debtors’ Motion for an Order Granting Homestead Exemption. At that hearing, Wilson established that the Deeds referenced in the Debtors’ Motion were purportedly conveyed to the Debtors post-petition by various corporate entities in which Debtor Ewert Wilson had an interest. None of these transfers had prior Court approval. Furthermore, the Debtors had no interest in the referenced properties on the date of the filing of their Petition.
At the hearing, the evidence established that Debtor Ewert Wilson is currently residing in a nursing home in Burkesville, Kentucky. Over the years, he has owned two houses, one which is considered “the farm” and another at Spring Creek Air-park. The Spring Creek Airpark property was referred to as the “party house”. The building on “the farm” has been used as offices for the Debtors’ various oil companies. When the Debtors entertained, they did so at the party house, not the farm. Neither of the Debtors permanently and continuously lived at the farm property either before or after the date of their initial Petition.
LEGAL ANALYSIS
Debtors seek by way of this Motion, as articulated by their counsel at the evidentiary hearing, actual possession of the property referenced in the Motion for Order Granting Homestead Exemption. The Court is mystified by this request, which for any number of reasons, cannot be granted.
At the time that Debtors filed their initial Petition seeking relief under Chapter 13 of the United States Bankruptcy Code, the Homestead Exemption was contained in KRS 427.060. That statute allowed an exemption not to exceed $5,000 in value in real or personal property “that such debt- or uses as a permanent residence in this state .... ” There was no evidence presented at the evidentiary hearing to establish that the parcels of property referenced in the Debtors’ Motion served as the permanent residence of the Debtors.
Furthermore, each of the Debtors’ Petitions listed their residence as property located on Burkesville Road, not the property Debtors seek to exempt. Debtors cannot simply designate a parcel of property that they one day hope to make their residence as the property to be exempt.
Secondly, the homestead exemption was not properly raised by the Debtors. Under Kentucky law applicable at the time this proceeding was filed, the right of a debtor to a homestead exemp*318tion vested on acquisition of property and could be claimed at any time thereafter by a debtor who qualified for the exemption. In re Lynch, 187 B.R. 536, 539 (Bankr.E.D.Ky.1995). The problem here is that the property Debtors seek to exempt does not qualify for the exemption. Additionally, on Schedule C to each of the Voluntary Petitions filed by the Debtors, Debtors simply stated, “employment of exemptions under 11 U.S.C. § 522(d) to be determined in the bankruptcy plan.” Debtors never moved to amend Schedule C to assert the exemption. This is simply not sufficient to put creditors on notice of specific exemptions to be raised in the case.
Third, the property at issue is not even owned by the Debtors’ estate. Debtors’ counsel apparently believes Debtors would be entitled to possession of the property by claiming the homestead exemption. Even if the homestead exemption were properly claimed in the subject property, which it is not, Debtors would still not be entitled to possession of the property. All of the Debtors non-exempt assets were sold and approved by this Court without any objection by the Debtors. Debtors therefore, do not even have standing to claim an exemption in the subject property.
Finally, Debtors attempted to have the property conveyed to them post-petition without Court approval by various entities in which Debtor Ewert Wilson owned an interest. Since these transactions were post-petition and not approved by the Court, they are without effect. Accordingly, Debtors do not have standing to assert any sort of an exemption in the subject property.
CONCLUSION
For all of the above reasons, Debtors’ Motion for an Order Granting Homestead Exemption must be DENIED. An Order accompanies this Memorandum-Opinion.
ORDER
Pursuant to the Memorandum-Opinion entered this date and incorporated herein by reference,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Motion of Debtors Ewert and Linda Wilson for an Order Granting Homestead Exemption, be and hereby is, DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493832/ | ORDER GRANTING MOTION FOR ORDER DIRECTING TRUSTEE TO RELEASE ALL CLAIMS TO REVOLVING LOAN FUND ACCOUNT AND TO DELIVER POSSESSION THEREOF TO THE STATE OF COLORADO
HOWARD R. TALLMAN, Bankruptcy Judge.
This case comes before the Court on Colorado’s Motion for Order Directing Trustee to Release all Claims to Revolving Loan Fund Account and to Deliver Possession Thereof to the State of Colorado (docket # 46) [the “Motion”]; High Desert State Bank’s Response to Motion for Order Directing Trustee to Release all Claims to Revolving Loan Fund Account and Deliver Possession Thereof to the State of Colorado (docket # 52); and Pao-nia Land and Cattle LLC’s Objection to Motion for Order Directing Trustee to Release all Claims and [sic] Revolving Loan Fund Account and to Deliver Possession Thereof to State of Colorado (docket # 54).
The matter was tried to the Court on May 27, 2005, and on July 11, 2005. At the close of the evidence, the Court requested that the parties submit their closing arguments in writing. The State of Colorado [the “State”] filed its closing argument on July 25, 2005; Paonia Land and Cattle, LLC, [“Paonia”] and High Desert State Bank [“High Desert”] submitted their joint closing argument on August 5, 2005; and the State submitted its final closing argument on August 15, 2005. The Court has considered the pleadings filed in the matter, the substantial volume of evidence submitted at trial, and the closing arguments of the parties, and is ready to rule.
I. FACTS
West Central Housing Development Organization [“WCHDO”] was a non-profit organization which served a six county region from its headquarters located in Delta, Colorado. It provided down payment loans and low interest residential rehabilitation loans directly to individuals. It also made loans for the development of low income housing projects. WCHDO filed its petition under chapter 7 on June 25, 2004. The bankruptcy filing followed WCHDO’s discovery that its executive director had allegedly embezzled funds from the organization.
The Motion seeks the release of any claim the Trustee may assert to certain funds and promissory notes in the Trus*485tee’s possession and to turn those assets over to the State. The assets at issue consist of bank account balances of $460,360.40; and note balances of $1,474,-558.071 [the “Revolving Loan Assets”]. The Revolving Loan Assets are derived from block grant monies given to the State by the federal government for the purpose of supporting housing rehabilitation and home ownership. In turn, the State distributes those funds to local governments, which contract with housing organizations like WCHDO to administer the programs. The Revolving Loan Assets also includes some matching funds raised by WCHDO.
In support of its Motion, the State argues that those Revolving Loan Assets, in the possession and control of WCHDO, were held in trust solely for the purposes set out in the grant documents and by statute. Accordingly, the State argues that WCHDO had no equitable interest in the Revolving Loan Assets and they never became property of the bankruptcy estate under § 541.2
High Desert and Paonia [collectively, the “Respondents”] resist the Motion. They argue that the State does not have standing to assert an interest in the Revolving Loan Assets because the State is not the beneficiary for whom those assets are held. The Respondents further argue that any interest that the State may have in the Revolving Loan Assets constitutes an interest in real property that the Trustee may avoid with “strong arm” powers under § 544(a)(3). Finally, the Respondents argue that the State has failed to meet its burden to demonstrate its interest and entitlement to the Revolving Loan Assets.
II. DISCUSSION
A. Standing
The State has standing to pursue this action. The ultimate beneficiaries of the grant monies that are at issue in this case are those citizens of Colorado who are eligible to receive loans from WCHDO under these programs. The State need not claim an ownership interest in the Revolving Loan Assets in order to have standing to pursue this turnover action. The doctrine of parens patriae allows the State to take action to protect the rights of all or a portion of its citizens. It is enough that it has a quasi-sovereign interest in protecting the rights of that group of citizens in the six county area served by WCHDO who may qualify for housing assistance. In addition, the State has a broader interest in insuring that money it has received, and which has been earmarked to provide housing assistance to its citizens, remains available for that purpose. The State’s role as protector of the rights of those of its citizens who are in need of the housing assistance provided by the programs that WCHDO administered makes it a real party in interest and the proper party to pursue this action. See Alfred L. Snapp & Son, Inc. v. Puerto Rico, ex rel., Barez, 458 U.S. 592, 603, 102 S.Ct. 3260, 3266-67, 73 L.Ed.2d 995 (1982).
B. Title 11 U.S.C. § 5U.(a)(S) is Inapplicable
Respondents argue that the Trustee may use his strong-arm powers under § 544(a)(3) to avoid the State’s interest in *486the Revolving Loan Assets because that interest is an interest in real property that has not been properly perfected. Section 544(a)(3) provides that
The trustee shall have, as of the commencement of the case, ... 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—a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
11 U.S.C. § 544(a)(3) (emphasis added).
The Revolving Loan Assets consist of cash as well as notes and deeds of trust securing those notes. On its face, the Respondents’ argument fails as to the cash. The State’s interest in the cash component of the Revolving Loan Assets is certainly not real property.
But the Revolving Loan Assets do include promissory notes that are secured by deeds of trust in pieces of real property. With respect to this component of the Revolving Loan Assets, the Respondents’ argument also fails because the State’s interest in those notes and deeds of trust is a personal property interest rather than a real property interest.
“The extent of the trustee’s rights as a bona fide purchaser of real property ... is measured by the substantive law of the state governing the property in question.” Anderson v. Conine (In re Robertson), 203 F.3d 855, 864 (5th Cir.2000). By statute, Colorado has adopted the lien theory of mortgages. Colo. Rev. Stat. § 38-35-117. Under a lien theory, the granting of a mortgage in real property does not convey an interest in that real property, but merely constitutes a lien on the property. Id; Columbus Investments v. Lewis, 48 P.3d 1222, 1225 (Colo.2002) (en banc) (“A mortgage is not a conveyance of a real property interest ....”); Crown Life Ins. Co. v. Haag Ltd. P’ship, 929 P.2d 42, 45 (Colo.Ct.App.1996) (“[T]he question presented is whether a promissory note secured by an incumbrance [encumbrance] on realty creates an interest in that realty. We conclude that it does not.”). Because § 544(a)(3) is applicable only to interests in real property, and because the State’s interest in the Revolving Loan Assets is purely a personal property interest, the Trustee cannot use his strong-arm powers under § 544(a)(3) to avoid the State’s interest in any part of the Revolving Loan Assets.
C. The Revolving Loan Assets are Not Property of the WCHDO Bankruptcy Estate
The Court agrees with the State that the pivotal issue in this matter is whether or not WCHDO held the beneficial interest, as well as legal title, to the Revolving Loan Assets at the time the bankruptcy petition was filed. The Court’s review of the several grant contracts and intergovernmental agency agreements admitted into evidence reveals that all of those agreements recite that they are subject to state and federal regulations governing the granting and use of the subject funds. The restrictions contained in those regulations establish WCHDO’s role as holding only bare legal title to the Revolving Loan Assets in order to manage those assets for the benefit of individuals who were intended to receive assistance through the programs that WCHDO administered. WCHDO did not hold a beneficial interest in the Revolving Loan Funds. Consequently, under § 544(d), the Revolving Loan Assets only *487became bankruptcy estate property to the extent of the Debtor’s bare legal title. No equitable interest in the Revolving Loan Assets ever became an asset of the bankruptcy estate. See U.S. v. Whiting Pools, Inc., 462 U.S. 198, 205 n. 10, 103 S.Ct. 2309, 2314 n. 10, 76 L.Ed.2d 515 (1983) (“We do not now decide the outer boundaries of the bankruptcy estate. We note only that Congress plainly excluded property of others held by the debtor in trust at the time of the filing of the petition.”).
1) Funds Acquired Through the CDBG Program
WCHDO received funds through the Community Development Block Grant [“CDBG”] program established by the Housing and Community Development Act of 1974 and administered by the U.S. Department of Housing and Urban Development [“HUD”]. The Court has reviewed the CDBG grant contracts entered into evidence. Those contracts are executed between the State and Delta County. Delta County is the “contractor” as that term is used in the contract documents. Delta County and WCHDO entered into intergovernmental agreements [Exhibits A-13 and A-14] stating that Delta County would contract with WCHDO to carry out its responsibilities under the CDBG grants. Thus, WCHDO is a “subcontractor” or “subrecipient” of the funds granted to Delta County under the grant agreements. The CDBG grant agreements contain provisions stating generally that contractors and subcontractors will comply with applicable state and federal statutes and regulations. For example, Exhibit A-7, one of the CDBG grant contracts, contains the following language at ¶ 23:
At all times during the performance of this Contract, the Contractor and any subcontractors shall strictly adhere to all applicable Federal and State laws, orders, and all applicable standards, regulations, interpretations or guidelines issued pursuant thereto.
The four pages of the grant contract, which follow that language, list some of the applicable federal laws. Similar language appears in the other CDBG program contracts admitted into evidence. Thus WCHDO is bound by its express contract with Delta County to carry out Delta County’s responsibilities under the CDBG grant contracts. Those contracts specify that WCHDO, as a subcontractor of Delta County, is bound by all applicable federal and state statutes and regulations.
One such applicable regulation is 24 CFR § 84.37. That regulation is applicable to federal grant programs funded by HUD. 24 CRF § 84.1. It covers subrecipi-ents of grant funds, such as WCHDO, as well as the direct recipients. 24 CFR § 84.5. The regulation explicitly provides that “[r]eal property, equipment, intangible property and debt instruments that are acquired or improved with Federal funds shall be held in trust by the recipient as trustee for the beneficiaries of the project or program under which the property was acquired or improved.” Therefore, it creates an explicit trust relationship between grant recipients, such as WCHDO, and the beneficiaries of the CDBG grant programs.
2) Funds Acquired Through the HOME Program
In addition to funds derived from CDBG programs, the Revolving Loan Assets also include funds derived from a program under the 1990 National Affordable Housing Act. That program was administered by WCHDO and is known as the HOME program. Delta County is the “Contractor” under the grant contracts associated with the HOME program. The grant contracts admitted into evidence, which were en*488tered into under the HOME program, contain reference to the contractor’s duty to adhere to all federal and state laws and regulations. As an example of the language appearing in the HOME program contracts, Exhibit A-3 at ¶24 reads as follows:
At all times during the performance of this contract, the Contractor and any subcontractors shall strictly adhere to all applicable federal and State laws, orders, and all applicable standards, interpretations or guidelines issued pursuant thereto.
The specific regulations referenced and incorporated into grant agreements relating to the 1990 National Affordable Housing Act [“HOME”] grants differed somewhat, depending upon when they were entered into.
Earlier grant agreements make reference to and incorporate 24 CFR § 92.2. That regulation, in turn, refers to 24 CFR § 84.21, which requires grant recipients to assure that grant funds are used solely for the purposes authorized in the grant agreement. 24 CFR § 84.21(b)(3). While the term “trust” is not used in 24 CFR § 84.21, the restrictions on a grant recipient’s use of the grant funds establish that the grant recipient occupies the role of a trustee of the grant money it receives.
Regulation number 24 CFR § 84.37 was promulgated in 19943 and is incorporated into the later grant agreements. An excerpt from that regulation is quoted above in relation to the CDBG grants. It creates the same explicit trust relationship between grant recipients and the beneficiaries of the HOME grant programs as it does in relation to the CDBG grant programs.
The State did not offer into evidence the same type of intergovernmental agreements in relation to the HOME grant contracts as it did in relation to the CDBG grants. However, Theresa Durran, a program manager for the State, testified that WCHDO occupied the status of a subgran-tee or subcontractor with respect to funds received through the HOME grant. As the contractor under the grant contracts, Delta County was contractually bound to insure that WCHDO, as a subcontractor, complied with all applicable state and federal regulations.
The documents entered into evidence demonstrate a direct contractual relationship between the State and Delta County. The Court does not have before it any subcontracts entered into between Delta County and WCHDO relating to the HOME grants. Even though the grant contracts purport to bind subcontractors, WCHDO is not a signatory to those agreements, and the Court cannot find that WCHDO is bound by those agreements. Nonetheless, WCHDO’s obligation to comply with the federal statutes and regulations relating to the HOME grants is not dependent upon a contractual relationship.
S) WCHDO was Bound by Federal Statutes and Regulations Even in the Absence of Contract Provisions
The evidence presented at hearing established that WCHDO was a recipient of funds from both the CDBG and HOME grant programs.
As noted above, one of the many federal regulations applicable to funds disbursed under the CDBG grant program reads: “[r]eal property, equipment, intangible property and debt instruments that are *489acquired or improved with Federal funds shall be held in trust by the recipient as trustee for the beneficiaries of the project or program under which the property was acquired or improved.” 24 CFR § 84.37. It is undisputed that the federal funds portion of the Revolving Loan Assets moved from HUD to the State to Delta County and ultimately to WCHDO. Regulation 24 CFR § 84.37 is applicable to WCHDO as a subrecipient of the federal grant funds. 24 CFR § 84.5. It establishes trust responsibilities with respect to those federal funds and the assets derived from those funds. The applicability of 24 CFR § 84.37 to WCHDO is based solely on WCHDO’s status as a subrecipient of federal grant funds. While WCHDO’s status may be a result of its contractual relationship with the Delta County, it is WCHDO’s receipt of those funds that triggers the provisions of 24 CFR § 84.37, not the provisions appearing in WCHDO’s contract with Delta County.
The same analysis applies to Revolving Loan Assets derived from HOME grants made after 1994 when 24 CFR § 84.37 was promulgated. Regulation 24 CFR § 84.21 also applies to WCHDO as a subrecipient of HUD funds under the HOME grant program. That federal regulation was applicable prior to 1994. It requires that WCHDO maintain “[e]ffective control over and accountability for all funds, property and other assets.... [and] adequately safeguard all such assets and assure they are used solely for authorized purposes.” 24 CFR § 84.21(b)(3). Just as with the CDBG funds discussed above, it is WCHDO’s status as a recipient of HUD funds that makes these regulations applicable to it, quite independently of any provision contained in any contract to which WCHDO is a party.
These federal regulations provide that a recipient of CDBG and HOME grant funds holds those funds in trust. The regulations have the force and effect of federal law, Chrysler Corp. v. Brown, 441 U.S. 281, 295-96, 99 S.Ct. 1705, 1714, 60 L.Ed.2d 208 (1979), and their provisions are binding on WCHDO as a recipient of those federal grant funds. Even in the absence of a contractual obligation to hold the federal grant funds in trust, WCHDO was bound by federal regulations to act in the role of a trustee of the federal grant funds. It held no beneficial interest in any of the Revolving Loan Assets derived from CDBG and HOME grant funds.
Jf) Commingling of Trust Funds
There was some evidence at hearing that matching funds from government agencies and funds from other contributors were deposited into the same accounts as the funds from the federal HOME and CDBG grant funds. The hearing testimony was that those funds were used for the payment of administrative expenses.
The Respondents argue, in essence, that by presenting evidence that funds from other sources were mixed with the trust funds, the Court cannot turn the Revolving Loan Assets over to the State because the Court cannot determine the precise amount of the Revolving Loan Assets that was derived from the federal grants. The Court agrees that the State’s evidence is insufficient for the Court to perform a precise tracing of funds and determine a breakdown of the Revolving Loan Assets that identifies those assets derived solely from federal grant money and those whose origin may include funds from state matching funds or from private donors.
But, the issue in this case focuses on WCHDO’s beneficial interest in the Revolving Loan Assets. With respect to those Revolving Loan Assets that may have been derived from money contributed from other governmental agencies and *490from private contributors, the issue then becomes whether WCHDO could claim a beneficial interest in those assets. In other words, did it have discretion over the use of those funds that it did not have with respect to the federal funds that passed through the State to WCHDO in the form of HOME and CDBG grants? The Court thinks not.
Each grant contract contains a budget. Each of those budgets contain a breakdown of the total cost of each project. For example, in CDBG contract # 02-041G (Exhibit 12), the revised budget shows that $265,600 will be spent for down payment assistance; $13,000 for home buyer education; and $56,200 for project administration. In turn, the budget breaks down how much of each of those categories will come from grant money and how much is funded from other sources. In contract # 02-041G, the down payment assistance is funded with $250,000 of grant money and $15,600 of other funds; the $13,000 for home buyer education is completely funded by other funds; and the administrative expenses are funded with $29,400 from the grant and $26,800 from other funds. Thus, the grant contracts not only governed WCHDO’s use of the grant funds, they also governed WCHDO’s use of funds derived from other sources by including those funds in the overall project budget.
The Court has recognized above that an express trust has been created by contract provisions and federal regulations with respect to the bulk of the Revolving Loan Assets. Those funds are very clearly excluded from the bankruptcy estate. But for funds to be excluded from the estate by operation of § 541(d) they need not be subject to an express trust. See, e.g., Davis v. Cox, 356 F.3d 76 (1st Cir.2004); City of Farrell v. Sharon Steel Corp., 41 F.3d 92, 98-99 (3rd Cir.1994).
An example included in the legislative history to § 541 is instructive. It cites the example of insurance proceeds paid to an individual on account of medical treatment that the individual had received and for which the insurance proceeds were specifically intended to provide payment; it concludes that such payments are excluded from the bankruptcy estate because they are held in constructive trust for the person to whom the bill is owed. Springfield v. Ostrander (In re LAN Tamers, Inc.), 329 F.3d 204, 210 (1st Cir.2003) (citing S.Rep. No. 95-989 (1978), at 82, reprinted in 1978 U.S.C.C.A.N. 5787, 5868; H.R.Rep. No. 95-595 (1978), at 368, reprinted in 1978 U.S.C.C.A.N. 5963, 6324.). Thus, it is plain that Congress intended that in any situation where the debtor was intended to be a mere conduit of the property in its possession and was never intended to have the beneficial interest, § 541(d) excludes that property from the estate. Moreover, although the above cited legislative history refers to “constructive trust” the circumstances recited in the example do not involve elements of fraud or abuse of a confidential relationship that are typically present where a constructive trust is found. Here, funds have been raised from “other sources” for specific projects and are included in the project budget for payment of particular types of expenses. The Court finds that those funds were not intended to be subject to WCHDO’s unfettered discretion. They were intended by the donors, the State and WCHDO to be used to carry out WCHDO’s obligations under the various grant contracts. Under the circumstances, the Court finds that WCHDO’s interest in the funds from “other sources” was nothing more than bare legal title, not a beneficial interest.
5) Case Law
The Court believes that the case law that addresses situations where claimants *491are asserting that the debtor holds funds in constructive trust due to the debtor’s wrongdoing is very different from the cases that address circumstances, such as the present case, where a debtor is in possession of assets that are intended to be used to carry out a government program.
In the former cases, “[t]o warrant imposition of a constructive trust over the property of a debtor, a claimant must (1) show fraud or mistake in the debtor’s acquisition of the property; and (2) be able to trace the wrongfully held property.” Hill v. Kinzler (In re Foster), 275 F.3d 924, 926-27 (10th Cir.2001). Those cases typically require the use of the lowest intermediate balance rule to trace funds into the trust. Id. That tracing technique assumes that the first funds to come out of the common account are funds that are the legitimate property of the wrongdoer and that only after he has dissipated all of his legitimate funds does he begin to dissipate the funds subject to the constructive trust. Therefore, the lowest intermediate balance represents the amount of funds, which are subject to the constructive trust, that were not dissipated by the wrongdoer. Id.
But the cases that deal with the issue of whether funds in the possession of an agency engaged in carrying out state and federal programs become part of a bankruptcy estate differ in significant respects. First of all, these are not analogous to the constructive trust cases because the funds are not acquired through the debtors’ fraud or other wrongdoing. More importantly, those case do not require that a formal trust be established. These are cases where the interests involved go beyond the interests of private party litigants. These cases involve the interest of the larger community of citizens whose tax dollars are used to carry public programs as well as the interests of those who are intended to benefit from that expenditure of public funds. The analysis consistently applied to this type of case reflects the balance between the public and private interests involved.
In the First Circuit case of Springfield v. Ostrander (In re LAN Tamers, Inc.) 329 F.3d 204 (1st Cir.2003), the debtor was a contractor engaged in the business of installing wiring to support high speed internet access in public schools. The E-Rate Program, established by the Telecommunications Act of 1996, generated funding for that purpose. The federal agency that carried out that program paid service providers like Lan Tamers, Inc. to install the necessary wiring. In some cases, in order to speed up the process, schools would make payment to the contractor at the time services were rendered. In those cases, the federal money paid to the contractors would then be passed back to the schools. The funds at issue in Lan Tamers were federal funds in Lan Tamers’ possession' at the time that it filed its bankruptcy petition. The funds had been paid to it and were intended to be passed through to the public school system that had already paid for the services that Lan Tamers had provided.
In that case, the First Circuit identified three factors that are common in the analysis of such cases: 1) “the role the debtor was intended to play;” 2) “the degree and intensity of regulatory control over the property in question;” and 3) “the extent to which recognizing a greater ownership interest—and thereby diverting the property in question to the creditors—would thwart the overall purpose of the regulatory scheme.” Id. at 211-12; (citing In re Joliet-Will County Comty. Action Agency, 847 F.2d 430 (7th Cir.1988); Official Comm. of Unsecured Creditors v. Columbia Gas Systems, Inc., 997 F.2d 1039 (3rd Cir.1993)).
*492In the present case, WCHDO is a nonprofit agency that was created for the express purpose of administering housing programs for the benefit of the citizens of certain Colorado counties. All of the money in WCHDO’s possession is intended either to be used to fund loans to homeowners or to pay WCHDO’s expenses to administer the housing programs under its purview. WCHDO’s non-profit structure; the contracts that it is subject to; and the regulations that govern its activities all lead to the conclusion that WCHDO’s role with respect to these funds involves no equitable interest beyond payment of its administrative expenses. Its role is to operate housing programs established by federal law and subject to federal regulations and state oversight. WCHDO is bound to administer the Revolving Loan Assets in the interest of program beneficiaries.
WCHDO is subject to extensive regulation in its operation of grant programs. Each grant contract entered into evidence included a budget that included both the funds received from the grant plus funds raised from other sources. WCHDO was required to use those funds, regardless of their source, in the manner provided for in the contract budget and in accordance with federal regulations. WCHDO was subject to audits to insure that funds were used in accordance with the grant contract budgets and with the regulations. The Respondents elicited testimony to the effect that WCHDO exercised discretion as to who it would make loans to under the HOME and CDBG programs. Such discretion does not equate to a beneficial interest. The evidence made it clear that WCHDO’s discretion was exercised within the strictures of the grant contracts and the regulations that governed those programs.
The final Lan Tamers factor focuses on how the diversion of program funds into the hands of creditors would affect the overall purposes of the regulatory scheme. The greater the negative impact that the diversion of funds would have on the programs that a debtor administers, the greater the presumption that the debtor was never intended to have an equitable or ownership interest in the funds. Testimony demonstrated that the purpose of operating the HOME and CDBG programs as loan programs was to generate income that would make them more self-supporting.4 That means that the Revolving Loan Assets were not only intended to fund loans to current program beneficiaries, but that the assets were intended to generate principal and interest payments that would be available to fund similar loans in the future. The Court finds that purpose would be utterly defeated by diversion of the Revolving Loan Assets to WCHDO’s creditors. By contrast, restoring those funds to the State would allow them to continue to be available for their intended purpose.
An analysis of the three Lan Tamers factors convinces the Court that WCHDO was never intended to have any equitable interest in the Revolving Loan Assets. As a non-profit organization, which was formed for the express purpose of administering housing programs, it was never intended to be an owner of the Revolving Loan Assets. From its inception, it was intended as a mere custodian of those assets to be administered for the benefit of program beneficiaries and the citizens of Colorado.
*493The Lan Tamers court based its analysis at least in part on the Seventh Circuit case of In re Joliet-Will County Cmty. Action Agency, 847 F.2d 430 (7th Cir. 1988). The debtor in that case was a nonprofit organization which was created to operate a number of community service programs. The trustee had moved to sell certain assets of the debtor to pay administrative expenses. The federal and state agencies which granted the funds to that debtor claimed an ownership interest in those funds. According to Judge Posner,
The answer depends on the terms under which the grants were made. Did they constitute JolieLWill a trustee, custodian, or other intermediary, who lacks beneficial title and is merely an agent for the disbursal of funds belonging to another? If so, the funds (and the personal property bought with them) were not assets of the bankrupt estate. Or were the grants more like payment under a contract for promised performance not actually performed? The promisee would have a contractual claim for the return of the money he had paid, but he would not have a property right in the money.
Id. at 432 (citations omitted).
Judge Posner found that the terms of the grants imposed controls on the use of the grant money such that the debtor had limited discretion and was bound to spend the grant money in accordance with the budget contained in the grant. Under the circumstances, the debtor functioned as an “agent to carry out specified tasks rather than a borrower, or an entrepreneur using invested funds.” Id. Under those circumstances, that court found that the debtor did not have an equitable interest in the grant money and property at issue and that they did not become property of the bankruptcy estate.
This case has striking similarities to the Jolietr-Will case. Both agencies were nonprofit agencies created for the express purpose of carrying out programs to be funded by government grants. In both cases, detailed regulations give the debtors little discretion with respect, to how the grant funds are to be spent. In both cases the manner in which the grants are to be used was set out in the budget accompanying the grant contracts. Here, as in Jol-ietr-Will, there is no evidence that the Debtor was ever intended to have an equitable interest in the Revolving Loan Assets.
D. Outstanding Costs of Administration
The Court will raise one final issue that has not been discussed by the parties. The grant contracts allowed WHCDO to be reimbursed for its expenses incurred in the administration of the Revolving Loan Assets. Testimony at hearing indicated that the Trustee has engaged the services of an individual to collect and account for payments that are owed to WCHDO on various note obligations that are part of the Revolving Loan Assets. The Court will allow the Trustee to hold back 10% of the cash portion of the Revolving Loan Assets if he believes that he has any claim for reimbursement of expenses out of the Revolving Loan Assets. If the Trustee does retain a portion of the Revolving Loan Assets for the purpose of making such a claim, his application for reimbursement must be filed with the Court no later than fifteen (15) days from the date of this Order.
III. CONCLUSION
As discussed above, the State is the proper party to act on behalf of program beneficiaries for whom the Revolving Loan Assets were held by WCHDO. The State is, therefore, the proper party to receive *494the Revolving Loan Assets so that they may be returned to the purpose for which they are intended.
The Court finds that WCHDO lacked any equitable interest in the Revolving Loan Assets. Provisions of the governing statutes created an express trust at least with respect to the portion of the Revolving Loan Assets that was derived from federal grant funds. Beyond that, the Court has analyzed the overall regulatory scheme; the amount of discretion that WCHDO had with respect to its use of the Revolving Loan Assets; the fact that WCHDO was created as a non-profit organization for the specific purpose of carrying out certain housing programs; and the negative impact on those housing programs that would result from including the Revolving Loan Assets in WCHDO’s bankruptcy estate. The Court finds no indicia that WCHDO ever possessed any ownership or equitable interest in the Revolving Loan Assets. Accordingly, it is
ORDERED that the State of Colorado’s Motion for Order Directing Trustee to Release all Claims to Revolving Loan Fund Account and to Deliver Possession Thereof to the State of Colorado is hereby GRANTED; it is further
ORDERED that, if the Trustee has no claim to any administrative costs to be paid from the Revolving Loan Assets, he is directed to turn over possession of those assets to the state of Colorado immediately. If the Trustee believes that he does have such claim, he is hereby authorized to withhold 10% of the cash included in the Revolving Loan Assets currently on hand and is directed to file his motion asserting the claim in this Court no later than fifteen (15) days from the date of this Order. He is further directed to turn over the remaining cash and non-cash assets immediately. If the Trustee does assert a claim to reimbursement of expenses from the Revolving Loan Assets, he is directed to continue in possession of the funds withheld under this Order until this Court has made its determination on his claim.
. These amounts reflect cash and note receivable balances as of August 31, 2005, per the Report to the Court Re Financial Matters (docket #111) filed by the Trustee on September 15, 2005. These figures will change as loan payments are received by the estate.
. Unless otherwise noted, statutory references are to the Bankruptcy Code, 11 U.S.C. § 101 et seq.
. Published in the Federal Register at 59 Fed. Reg. 47,010-01 (Sept. 13, 1994) (effective October 13, 1994).
. "Self supporting” would probably be an overly optimistic term since the testimony also established that the cost of administering WCHDO's housing programs was somewhat greater than the income generated. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493834/ | DETERMINATION OF OBJECTION TO RULE 2004 EXAMINATION ON SELF-INCRIMATION GROUNDS
BURTON R. LIFLAND, Bankruptcy Judge.
Before the Court is a Proposed Order (the “Proposed Order”) filed by Robert L. Geltzer, the Chapter 7 Trustee (“Trustee”) of The Cassandra Group (“Cassandra” or the “Debtor”), directing and compelling Dana Giacchetto (“Giacchetto”) to produce documents and to appear at the Bankruptcy Court in the Southern District of New York for further examination by the Trustee pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure. Giac-chetto has filed an objection to the Proposed Order.
Background
On July 1, 2000 (the “Petition Date”), the Debtor filed a voluntary petition in this Court for relief under Chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”). Thereinafter, the Trustee was appointed, duly qualified, and is now acting as such Trustee.
Prior to the Petition Date, the primary business of the Debtor was to render investment advisory services to various clients. Giacchetto was the principal, sole shareholder and chief officer of the Debtor from the time he caused the Debtor to be incorporated in 1991, until approximately April of 2000.
In April of 2000, the office of the United States Attorney for the Southern District of New York commenced a criminal proceeding against Giacchetto (the “Criminal Proceeding”) charging him with having committed various fraudulent acts against clients of Cassandra, including misappropriation of client funds and improper use of funds for his own personal benefit.
On August 2, 2000, Giacchetto pled guilty to fraud in the Criminal Proceeding under Section 206 of the Federal Investment Advisor’s Act, 15 U.S.C. § 80b-6, et seq. He was sentenced to 57 months federal incarceration on January 17, 2001, including an additional three years supervised release and restitution in the amount of $9,870,612.21. In his plea allocution, Giacchetto’s counsel stated that it was their intention to “work as closely as we can both with the SEC and the bankruptcy trustee to try and determine the actual amount of loss, and do everything we can to make whole those people whose money has been misappropriated.”
On or about April 3, 2000, the Securities and Exchange Commission (the “SEC”) commenced a separate civil enforcement proceeding against Giacchetto and Cassandra (the “SEC Proceeding”). At a later date, Giacchetto consented to a judgment that was entered in the SEC Proceeding, which held him individually liable for dis*603gorgement of $14,376,332.64 (the “Giac-chetto Consent Judgment”). The Giacchet-to Consent Judgment also stated that the plaintiff, as well as the Trustee, would be entitled to execute on this judgment.
Prior to Giacchetto serving out his sentence, this Court issued two previous orders authorizing examination of Giacchetto pursuant to Federal Rule of Bankruptcy Procedure 2004. The first such order was entered November 22, 2000, at which time, Giacchetto made himself available only to invoke the Fifth Amendment privilege against self-incrimination as a basis for refusing to answer any substantive questions regarding the Debtor and its clients. The Trustee then sought further examination of Giacchetto pursuant to a second order entered February 5, 2001 (the “Second Order”). While the Trustee made no efforts to enforce the Second Order, Giac-chetto’s counsel informed the Trustee that Giacchetto would again invoke the Fifth Amendment.
On or about February 3, 2006, the Trustee filed the Proposed Order upon information and belief that Giacchetto may have access to significant sources of revenue. The Trustee cites numerous articles regarding interviews with Giacchetto, which allude to the following: a) Giacchet-to may be forming a large food company called “Taste;” b) Giacchetto may be in the process of confirming a deal to publish his autobiography; and c) Giacchetto may have had recent work in a musical group known as “Waterworld.” The Trustee believes that information provided by Giac-chetto will have an impact on the administration of the Debtor’s estate.
On or about February 6, 2006, Giacchet-to filed an objection to the Proposed Order and indicated that he a plans to invoke his Fifth Amendment privilege. Giacchetto claims that the questions and/or examinations in the Proposed Order are “genuinely threatening” as they may involve Cassandra or his prior conduct, and he believes the Trustee will use the questions and examinations to erode his Fifth Amendment privileges.
The Trustee maintains, however, that the scope of the examination as set forth in the Proposed Order does not concern Giac-chetto’s past misconduct, but rather his present assets and present and prospective revenue sources.
Discussion
In general, “[t]he proper assertion of the Fifth Amendment privilege has three prerequisites: I) ‘compelled’ disclosure, 2) that is ‘testimonial’ and 3) ‘incriminatory.’ ” In re ICS Cybernetics, Inc., 107 B.R. 821, 827 (Bankr.N.D.N.Y.1989) (citing Two Grand Jury Contemnors v. U.S. (In re Grand Jury Subpoena), 826 F.2d 1166, 1168 (2d Cir.1987), cert denied 487 U.S. 1218, 108 S.Ct. 2870, 101 L.Ed.2d 905 (1988)). The privilege exists to protect a witness from providing oral or written testimony that would “ ‘furnish a link in the chain of evidence needed to prosecute the claimant for a federal crime.’ ” United States v. Zappola, 646 F.2d 48, 52-53 (2d Cir.1981) (citation omitted).
For disclosure to be considered “incriminatory” for Fifth Amendment purposes, there must exist “ ‘reasonable cause to apprehend danger from a direct answer,’ ” as a “witness’ say-so does not of itself establish the hazard of incrimination.” In re ICS Cybernetics, Inc., 107 B.R. at 828-29 (quoting In re Hulon, 92 B.R. 670, 675 (Bankr.N.D.Tex.1988)).
Reasonable cause is present where “a nexus exists between the risk of prosecution and the information requested.” In re ICS Cybernetics, Inc., 107 B.R. at 828. “The claimant of the privilege must be ‘confronted by substantial and real, and not merely trifling or imaginary, *604hazards of incrimination.’ ” United States v. Zappola, 646 F.2d at 53 (quoting United States v. Apfelbaum, 445 U.S. 115, 128, 100 S.Ct. 948, 956, 63 L.Ed.2d 250 (1980)); see also United States v. Bowe, 698 F.2d 560, 566 (2d Cir.1983); In re ICS Cybernetics, Inc., 107 B.R. at 828 (“An individual is entitled to invoke the privilege only where the question is ‘genuinely threatening.’ ”) (citation omitted).
As such, blanket assertions of the Fifth Amendment privilege are prohibited and a court must seek to “undertake a particularized inquiry to determine whether the assertion was founded on a reasonable fear of prosecution as to each of the posed questions.” United States v. Bowe, 698 F.2d at 566 (2d Cir.1983); see also United States v. Zappola, 646 F.2d at 53; In re ICS Cybernetics, Inc., 107 B.R. at 829 (the determination of whether a Fifth Amendment privilege has been properly asserted rests “upon the trial court, guided by its own perception of the case’s facts, to conduct a particularized inquiry into the scope and legitimacy of the claim with regard to each question asked”).
As a general rule, in situations involving testimony related to prior criminal convictions, “where there can be no further incrimination, there is no basis for the assertion of the privilege.” Mitchell v. U.S., 526 U.S. 314, 326, 119 S.Ct. 1307, 143 L.Ed.2d 424 (1999). There can be no further incrimination when sentence has been fixed and the judgment of conviction has become final. Mitchell v. U.S., 526 U.S. at 326, 119 S.Ct. 1307 (“If no adverse consequences can be visited upon the convicted person by reason of further testimony, then there is no further incrimination to be feared.”); see also McCall v. Pataki, 232 F.3d 321 (2d Cir.2000) (“Because [defendant] had already been convicted and sentenced with respect to the crime of which he was asked to speak, he had no right to refuse to answer on the ground of self-incrimination.”).
Giacchetto has not articulated any reason whatsoever why the Trustee’s examination of his assets, income, and sources of potential revenue could subject him to criminal liability. Indeed, Giacchet-to voluntarily signed the Giacchetto Consent Judgment on March 21, 2001, after he pled guilty to fraud in the Criminal Proceeding. His objections respecting the ability to make payments in connection with that judgment have nothing to do with the Criminal Proceeding or any of the misconduct that gave rise to it.
Conclusion
Since Giacchetto has already been sentenced and served most, if not all, of his sentence, no further risk of incrimination exists relating to any of the matters within the scope of the 2004 examination. As no risk of incrimination exists, Giacchetto cannot properly assert a Fifth Amendment privilege to avoid answering the questions posed respecting the subject matter in the Proposed Order. Thus, for the reasons cited above, Giacchetto’s objection to the Proposed Order is overruled, the Trustee’s Application to conduct a 2004 examination, the scope of which is defined in the Proposed Order, is granted, and a separate order was entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493837/ | *701
MEMORANDUM OPINION AND ORDER
DOUGLAS O. TICE, JR., Chief Judge.
This matter came before the court on the Motion for Summary Judgment filed by defendant American General Financial Services of America, Inc. and the Objection to the Motion filed by plaintiff Roy M. Terry, Jr., the trustee in debtors’ chapter 7 case. Arguments were heard on the motion at hearing held January 11, 2006, and the court took the motion under advisement. Upon consideration of the pleadings filed in this matter and the oral argument of the parties at hearing, the court finds there are no genuine issues of material fact in dispute and that defendant is entitled to judgment as a matter of law.
Facts.
On October 21, 2004, debtors obtained a loan from American General in the amount of $4,813.89, and in exchange gave defendant a promissory note secured by their vehicle. Four days after making the loan, on October 25, 2004, in an effort to perfect its security interest, American General mailed to the Virginia Department of Motor Vehicles an application to have its lien noted on the certificate of title for the vehicle.1 The Application for Supplemental Lien or Transfer of Lien was signed by Larry D. Gray on October 21, 2004, and was accompanied by the proper fee in the form of a check for $6.00, dated October 25, 2004, made payable to the DMV for “RECORD LIEN/GRAY JR.” This application was received by the Virginia DMV on October 27, 2004, and date stamped upon receipt in the lower right-hand corner. Some time afterwards, the Virginia DMV processed the application and stamped it PAID when the applicant’s check was processed.2 On November 29, 2004, the Virginia DMV issued a certificate of title for the vehicle identifying American General as the sole lien holder. On December 7, 2004, American General received the title from the Virginia DMV. Debtors subsequently filed their chapter 7 case on December 9, 2004. A transcript of the vehicle dated December 9, 2004, lists the lien with American General, noting the “Filing Date” of November 29, 2004.
Conclusions of Law.
Section 547(b) of the Bankruptcy Code permits a trustee to set aside defined pre-petition transfers of a debtor, generally referred to as preferences. See Lubman v. C.A. Guard Masonry Contractor, Inc. (In re Gem Constr. Corp. of Va.), 262 B.R. 638, 644 (Bankr.E.D.Va.2000). Property brought back into the estate under this provision is shared by unsecured creditors. Id. The trustee is permitted to “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—
*702(A) on or within 90 days before the date of the filing of the petition.
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.”
11 U.S.C. § 547(b).
However, even if all the elements of § 547(b) are met, the preferential transfer will not be avoided if it falls within an exception under § 547(c). American General argues that the preference claim fails as a matter of law because the transfer at issue satisfies the contemporaneous exchange exception of § 547(c)(1) and may not be avoided. This exception provides that a trustee cannot avoid a transfer consisting of an exchange for new value given to debtor when (i) the debtor and creditor intended the transfer to be a contemporaneous exchange for new value; and (ii) the exchange for new value, in fact, occurred contemporaneously. The trustee responds that summary judgment is inappropriate because an issue of fact exists as to whether the exchange was in fact contemporaneous.
In order to satisfy the requirement that the exchange occurred contemporaneously in fact, a security interest must be perfected within ten days of its creation. See § 547(e)(2)(A); In re Arnett, 731 F.2d 358, 364 (6th Cir.1984). In the present case, this determination turns on whether, as a matter of law, perfection occurs on the date the application was received by the DMV with the correct fee, as argued by creditor, or the date the title was issued, as argued by trustee. This court has addressed the issue of when a security interest in a vehicle is perfected, holding that the interest is perfected on the day the title application is filed with the Virginia DMV. In re Abruzzese, 252 B.R. 341, 344-45 (Bankr.E.D.Va.1999). Abruzzese noted that Virginia’s perfection statute, Va.Code § 46.2-638, although ambiguous as to the time of perfection, does not rely on the date of issuance of a certificate of title for perfection purposes. Consistent with prior case law, the court finds here that American General perfected its security interest on the filing date, October 27, 2004, six days following its creation. As this meets the ten day perfection requirement for an actual contemporaneous exchange, no genuine issue of material fact exists as to whether the transfer satisfies the exception of § 547(c)(1), and summary judgment is appropriate.
Accordingly,
IT IS ORDERED that defendant’s motion for summary judgment is GRANTED; and
IT IS FURTHER ORDERED that plaintiffs complaint to avoid preferential transfer is dismissed.
. Virginia Code § 46.2-638 requires a security interest to be reflected on the face of the certificate of title for a security interest in a motor vehicle to be perfected.
. The precise date applicant’s check was processed is unknown, as the "PAID” stamp is partially obscured on the copy of the application provided to the court. As this opinion makes clear, however, the date the application was processed, as well as the date title was issued, is irrelevant for determining the date of creditor’s perfection. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493839/ | ORDER AVOIDING LIEN
HOWARD R. TALLMAN, Bankruptcy Judge.
This case comes before the Court on Plaintiffs Amended Complaint. This mat*880ter was tried to the Court on September 26, 2005. The Court has reviewed its file in the bankruptcy case; the pleadings in this adversary case; and the evidence submitted at trial. It has considered the arguments advanced by counsel and is ready to rule.
On October 26, 2005, this Court issued its Order Regarding Trustee’s Complaint to Recover Preferential Transfer in the case of Hepner v. AmeriCredit Financial Services, Inc., (In re Baker), 338 B.R. 470 (Bankr.D.Colo.2005) [“Baker” ]. That case involved an issue that is common to this case as well as several others that are currently pending in this division and other divisions of this Bankruptcy Court.
In Baker, this Court determined that, under the structure of Colorado’s Certificate of Title Act, motor vehicle lien perfection does not occur until the county clerk electronically files the lien in the state’s Central Registry. It may take several days for any particular county clerk to act on a lien application and perfect the creditor’s lien. As a consequence, an automobile lien in this state may be vulnerable to avoidance by a bankruptcy trustee even though the creditor acted promptly to perfect its interest.
Because Baker is on appeal to the District Court, this Court held a status conference on December 5, 2005, with the parties involved in many of the cases that present issues similar to Baker. The Court was interested in getting input from the parties as to whether these cases should be ruled on in the ordinary course or whether the parties would be better served by holding cases in abeyance while the District Court considers the Baker appeal. The parties in this case requested that it not be held in abeyance and asked the Court to rule on the case in the ordinary course.
The evidence in this matter revealed that James L. Ramey purchased and took possession of a new 2004 Dodge Durango pickup truck (VIN# 1D4HB48N64F201637) [the “Vehicle”] on December 11, 2004. He purchased the Vehicle from Champion Chrysler Jeep Dodge and the purchase was financed by Daimler Chrysler Services North America, LLC, the Defendant in this case. Twelve days after he purchased the Vehicle, on December 23, 2004, Mr. Ramey filed a joint bankruptcy petition, Case No. 04-37603 HRT, with his wife. On December 27, 2005, sixteen days after the purchase date and subsequent to the filing of the Rameys’ bankruptcy petition, Defendant delivered the Vehicle title and lien documents to the Weld County Clerk and Recorder’s Office. On January 6, 2005, twenty-six days after the purchase date, the clerk’s office electronically filed the Defendant’s lien in the state’s Central Registry. The state of Colorado issued a Certificate of Title on February 8, 2005. The title shows that the Defendant is the first lienholder. The title also includes entries of “Date Filed 01/06/2005” and “Date Accepted 01/06/05.”
In this action, the Plaintiff seeks to avoid Defendant’s lien under § 544(a). In the parties’ Joint Pretrial Statement, the parties stipulate that the initial issue before the Court in this case is
Whether Defendant’s lien against the Vehicle was perfected on December 27, 2004, when Defendant’s lien and title paperwork were delivered to the county, or on January 6, 2005, when Defendant’s security interest was filed within the central registry.
In addition, the parties state that
If the Court finds that the lien was perfected on January 6, 2005, Defendant *881has no defense to avoidance of the transfer.
In accordance with the Court’s discussion in the Baker case, cited above, the Court finds that Defendant’s lien on the Vehicle was perfected on January 6, 2005. That is the date that the Weld County Clerk and Recorder’s Office caused Defendant’s lien to be filed in the Central Registry.
In addition to the operation of the Colorado Certificate of Title Act, which the Court discussed in In re Baker, the Court has also considered the Defendant’s argument that it is entitled to an equitable lien on the Vehicle. Defendant asserts that equity should intervene to backdate perfection of its security interest in the Vehicle to the date it delivered its lien paperwork to the Weld County Clerk and Recorder’s Office. Defendant argues that, at that point, it had done all it could do to perfect its interest and any delay that occurred took place in the recorder’s office. Defendant cites to Commerce Bank v. Chambers (In re Littlejohn), 519 F.2d 356, 359 (10th Cir.1975); Lentz v. Bank of Independence (In re Kerr), 598 F.2d 1206 (10th Cir.1979); Associates Commercial Corp. v. Green (In re Humphries), 1 B.R. 82 (Bankr.D.Utah 1979).
Littlejohn was decided under a Kansas statute that required the lienholder to deliver the lien paperwork to the vehicle purchaser. It was then the duty of the purchaser to perfect the lien by making application for a new vehicle title. In that case, the bank did deliver the old title with its lien noted on the title to the Littlejohns at the time of the purchase. They never did apply for a new title and filed a bankruptcy petition some six (6) months after the purchase. The bankruptcy referee and the district court found that the bank’s lien was unperfected on the petition date.
In Littlejohn, the Tenth Circuit created an equitable exception to a strict construction of the Kansas statute. It reasoned that, because the creditor’s lien was noted on the old title, absent fraud, it would give adequate notice to any potential purchaser and the creditor should not be penalized for the Littlejohns’ failure to comply with their obligation.
In the case of Lentz v. Bank of Independence (In re Kerr), 598 F.2d 1206 (10th Cir.1979), under a set of facts substantially similar to the Littlejohn case, the Tenth Circuit explicitly abandoned the rule it announced in Littlejohn as it applied to the Kansas motor vehicle title statutes. The reason was not that it found any infirmity in the reasoning that it had applied in Littlejohn, but that Kansas had changed its law. In Kerr, the new version of the Kansas statute that the court considered gave Kansas automobile creditors an alternative method to perfect their liens. Under the new law, the creditor could perfect its lien by submitting a lien notification directly to the state. Because the creditor in Kerr had not taken advantage of that alternative, it had not done all that it could to perfect its lien by simply noting its lien on the old title and giving it to the purchaser to file with the state. Under those circumstances, the equitable exception crafted in Littlejohn had no application. Littlejohn was still good law, but the changes to the Kansas statute simply made it inapplicable in the Kerr case.
Under the circumstances here, however, Defendant’s equitable lien argument is misplaced. “An equitable lien is ‘the right, not recognized at law, to have a fund or specific property or its proceeds *882applied to the payment of a debt.’ ” Rounds v. Sullivan, 82 B.R. 133, 135 (Bankr.D.Colo.1988) (quoting In re Hart, 50 B.R. 956 (Bankr.D.Nev.1985)). “An equitable lien will arise where ‘(a)n intention to create such a charge clearly appear(s) from the language and the attendant circumstances.’ ” Hassett v. Revlon, Inc. (In re O.P.M. Leasing Serv., Inc.), 23 B.R. 104, 119 (Bankr.S.D.N.Y.1982) (quoting Chemo v. Dutch American Mercantile Corp., 353 F.2d 147, 153 (2nd Cir.1965)). “The doctrine is further limited to situations where a secured creditor is prevented from perfecting its interest by an uncooperative debtor.” Id.
It was the fact that the Littlejohn creditor was dependent upon the debtor to complete the necessary steps for perfection that distinguished that ease from Kerr because the revisions to the Kansas statute removed the creditor’s reliance on the debtor. It also distinguishes Littlejohn from the circumstances in this case. Defendant here was in no way reliant upon the Debtor for perfection of its lien. Any delay experienced by the Defendant here was the result of the design and operation of Colorado’s Certificate of Title Act.
In Littlejohn, equity intervened to compensate for the fact that the creditor was harmed when the debtors failed to honor their duty to perfect the creditor’s lien. In this case, no party failed to perform its duty. The Weld County Clerk and Recorder’s Office performed its duty precisely as contemplated by the statute. If the Court were to take Defendant’s invitation to craft some sort of equitable relief here, it would be rewriting a state statute rather than using its equitable powers to compensate for a debtor’s malfeasance as the Litt-lejohn court did. only route to perfection of an automobile lien in this state is by following the procedures mandated by the Certificate of Title Act. Colo.Rev.Stat. § 42-6-120(1); see, also, Lewis v. Hare (In re Richards), 275 B.R. 586, 591-92 (Bankr.D.Colo.2002) (“[U]nder Colorado law, the Trustee, as a hypothetical lien creditor, prevails over the equitable (unperfected) lien claim of the Creditor.”).
Because the Court finds that the perfection of Defendant’s lien was not effective until January 6, 2005, the parties agree that the Court need not address the issue of whether perfection of Defendant’s lien relates back to the prepetition period. Therefore, it is
ORDERED that the lien of Daimler Chrysler Services North America, LLC, on James Ramey’s 2004 Dodge Durango pickup truck (VTN# 1D4HB48N64F201637) is hereby avoided under § 544(a) and is preserved for the benefit of the estate under § 551; it is further
ORDERED that Plaintiff is entitled to money judgment against Defendant in an amount equal to all payments which have, to the date of judgment, been made by Mr. Ramey to the Defendant plus costs. Defendant is directed to advise the Court, within ten (10) days, of the amount of those payments.
Furthermore, the Colorado legislature has made it abundantly clear that the | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493843/ | MEMORANDUM-OPINION
JOAN L. COOPER, Bankruptcy Judge.
This matter is before the Court on the Motion to Remand to State Court of Nelson Clemmens (“Clemmens”) and the Objection to Defendant’s Motion to Remand of Plaintiff/Debtor ThermoView Industries, Inc. (“Debtor”). A hearing on the matter was held on January 11, 2006 and Plaintiff was permitted additional time to file a written response to the Motion to Remand after which the matter was submitted. For the following reasons, the Court GRANTS Clemmens’ Motion to Remand to State Court. An Order incorporating the findings herein accompanies this Memorandum-Opinion.
FACTS
Clemmens personally guaranteed $500,000 of a $15 million loan to Debtor from PNC Bank. That loan was later as*419signed to GE Capital. Debtor defaulted and PNC enforced its right to collect on Clemmens’ guaranty.
On November 19, 2001, Clemmens filed suit against Debtor in Jefferson Circuit Court seeking reimbursement and/or indemnity from Debtor. On May 9, 2003, the Circuit Court entered Summary Judgment in Clemmens’ favor. Debtor appealed the Circuit Court ruling to the Kentucky Court of Appeals. On or about October 8, 2004, the Court of Appeals reversed the Circuit Court and remanded the matter to Circuit Court for further proceedings.
Clemmens filed a Motion for Discretionary Review with the Supreme Court on January 5, 2004. The Petition for Discretionary Review was denied on April 13, 2005.
Pinal Judgment was entered by the Circuit Court on July 11, 2005. Debtor filed a Notice of Appeal with the Court of Appeals on July 18, 2005.
On September 26, 2005, Debtor filed its Petition seeking relief under Chapter 11 of the United States Bankruptcy Code. Pursuant to 11 U.S.C. § 362, the Kentucky Court of Appeals’ action was stayed.
On December 19, 2005, Debtor filed its Notice of Removal with this Court on the pending Court of Appeals’ action styled, ThermoView Industries, Inc. v. Nelson E. Clemmens, No. 05-CA-001499-MR and No. 2005-CA-001556-MR.
On January 6, 2006, Clemmens filed his Motion to Remand the Matter to State Court. Debtor’s Objection to the Motion to Remand was filed on January 23, 2006.
LEGAL ANALYSIS
Clemmens requests this Court to remand this adversary proceeding to state court pursuant to 28 U.S.C. § 1334(c)(1). The statute states, in pertinent part,
... nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State court or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
Under the permissive abstention doctrine, federal courts have broad discretion to abstain from hearing state law claims whenever appropriate in the interest of justice, or in the interest of comity with state courts or respect for state law. Matter of Gober, 100 F.3d 1195, 1206 (5th Cir.1996). In determining whether permissive abstention is appropriate, courts generally consider the twelve factors set forth in In re Best Reception Systems, Inc., 220 B.R. 932, 953 (Bankr.E.D.Tenn.1998). A consideration of these factors compels this Court to abstain from hearing this case and remand it back to state court.
The first factor considered is whether remand will affect the efficient administration of the estate. For all practical purposes, the administration of this bankruptcy estate is nearly complete. Furthermore, the procedural history of this action in state court is long and involved. The Circuit Court has handled the case twice and it is before the Kentucky Court of Appeals for the second time. As stated in Republic Reader’s Serv., Inc., 81 B.R. 422, 426 (Bankr.S.D.Tex.1987),
Where a cause of action for monetary damages based primarily on state law can be litigated in state court without substantial delay and disruption to the orderly administration of the estate, the best forum for resolution of that action is state court, irrespective of whether the legal issues present unsettled questions of state law.
Remand would not result in delay and disruption of the orderly administration of *420Debtor’s estate. Considering the long procedural history of this case in state court, it is clear that the state court is better able to efficiently handle the issues currently pending on appeal.
Next, the issue involved is not a federal question, nor is there any basis for diversity jurisdiction. Thus, there is no independent basis for federal jurisdiction absent the chapter 11 case.
It is also clear that state law issues predominate over bankruptcy issues in this case. Although this Court is equipped to determine the state law issues, given the current posture of the case in state court, the state court could more expeditiously handle the issues pending on appeal.
The Court finds that the state law issues and procedural history of the case in state court weigh heavily in favor of permissive abstention. Other factors in the Best Reception Systems test also weigh in favor of abstention, such as the presence of non-debtor parties and the likelihood that the removal involves forum shopping by one of the parties. These factors, however, do not predominate over the state law issues and the extensive procedural history in state court. All of the factors discussed above lead this Court to exercise its discretion to abstain from hearing this proceeding under the authority of 28 U.S.C.A. § 1334(c)(1) and to remand the matter back to state Court.
CONCLUSION
For all of the above reasons, the Court will abstain from hearing this proceeding and remand it for further proceedings in the state court. An Order granting Clem-mens’ Motion to Remand to State Court accompanies this Memorandum-Opinion.
ORDER
Pursuant to the Memorandum-Opinion entered this date and incorporated herein by reference,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Motion to Remand to State Court of Nelson Clemmens, be and hereby is, GRANTED pursuant to 28 U.S.C.A. § 1334(c)(1). This matter is remanded back to state court and this Court abstains from adjudicating the merits of any further issues herein.
This is a final and appealable Order and there is no just reason for delay. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493844/ | MEMORANDUM OF OPINION AND ORDER
RANDOLPH BAXTER, Chief Judge.
Before the Court is the defendant Echo Rock Ventures, LLC’s (“Echo Rock”) motion to dismiss or, alternatively, to stay action pending arbitration and grant related relief. Upon an examination of the parties’ respective briefs and supporting documentation and conducting a hearing on the matter, the following findings of fact and conclusions of law are heréby rendered:
On September 10, 2002, attorneys from the Los Angeles, California office of Arter & Hadden, LLP (the “Debtor”) agreed to perform legal services for Echo Rock, a California based company, regarding a worker’s compensation claim. The Debtor later billed Echo Rock an amount that was allegedly greatly in excess of the amount originally quoted. Echo Rock disputed the billing amount with the Debtor, and later the Debtor’s collection agency, and has not paid the disputed fees at this time.
An involuntary Chapter 7 petition was filed against the Debtor on October 6, 2003. On November 16, 2005, the Trustee commenced the above styled adversary *448proceeding, seeking to recover for the unpaid amounts billed to Echo Rock, which constitute property of the Debtor’s estate. * *
Although there is no express arbitration agreement between the parties, Echo Rock argues that California’s Mandatory Fee Arbitration Act (the “MFAA”) applies to this case. The MFAA was proposed by the Board of Governors of the State Bar of California to create a mechanism for arbitrating disputes over legal fees and costs. Aguilar v. Lerner, 32 Cal.4th 974, 983, 12 Cal.Rptr.3d 287, 88 P.3d 24 (Cal.2004). “[T]he obligation to arbitrate under the MFAA is based on a statutory directive and not the parties’ agreement. Thus, a client may invoke the MFAA and proceed to arbitration despite the absence of any prior agreement to do so.... [W]hereas a client cannot be forced under the MFAA to arbitrate a dispute concerning legal fees, at the client’s election an unwilling attorney can be forced to do so.” Id. at 984, 12 Cal.Rptr.3d 287, 88 P.3d 24. An award rendered pursuant to an arbitration under the MFAA is nonbinding, unless otherwise agreed by the parties in writing. Id. The Board of Governors of the State Bar of California has been granted the authority to rule, establish, maintain, and administer a system and procedure for the Mandatory Fee Arbitration system, with the assistance of local bar associations. West’s Ann. Cal. Bus. & Prof.Code §§ 6200(a), (d).
The Trustee argues that the Debtor is excluded by § 6200(b)(1) of the MFAA, which states that:
(b) This article shall not apply to any of the following:
(1) Disputes where a member of the State Bar of California is also admitted to practice in another jurisdiction or where an attorney is only admitted to practice in another jurisdiction, and he or she maintains no office in the State of California, and no material portion of the services were rendered in the State of California.
West’s Ann. Cal. Bus. & Prof.Code § 6200(b). The Trustee interprets this section to exclude two groups of attorneys: 1) attorneys admitted to practice in California who are also admitted to practice in another jurisdiction, and 2) attorneys who are only admitted to practice in jurisdictions other than California, who maintain no office in California, and who performed no material portion of the services in question in California. The Trustee argues that since the Debtor employed individual attorneys licensed in various states, including California, they are not attorneys solely licensed in California, and are therefore excluded by the MFAA.
Echo Rock, however, offers a different interpretation of § 6200(b)(1), arguing that the two groups of attorneys addressed in the statute are: 1) attorneys admitted to practice in California who are also admitted to practice in another jurisdiction, and 2) attorneys who are only admitted to practice in jurisdictions other than California. Echo Rock argues that attorneys in both of these groups are excluded from the MFAA if they maintain no office in California, and render no material portion of the disputed services. Because the Debtor maintained offices in California, and the services were allegedly rendered in California, § 6200(b)(1) would not apply to the present dispute.
Therefore, the Court must determine whether the MFAA applies to attorneys who are admitted to practice in California and who are also licensed to practice in another jurisdiction, who maintain an office in California, and who render services in California that become the subject of dispute. No case law has been prof*449fered or discovered which interprets § 6200(b)(1) in this regard.
A review of § 6200(b)(1), giving each word its ordinary and usual meaning, reveals that the statutory language can reasonably be interpreted to support both parties’ positions. B.g., Coburn v. Sievert, 133 Cal.App.4th 1483, 1495, 35 Cal.Rptr.3d 596 (Cal.App.2005) (“The initial examination of the words and grammar of the statute may lead to the conclusion that the statutory language is ambiguous on its face. Ambiguous means ‘susceptible to more than one reasonable interpretation.’ ”).
Where statutory language is ambiguous, California courts have looked to other sources, “such as context, the object in view, the evils to be remedied, the history of the times and of legislation upon the same subject, public policy and contemporaneous construction.” B.g., MacIsaac v. Waste Management Collection and Recycling, Inc., 134 Cal.App.4th 1076, 1084, 36 Cal.Rptr.3d 650 (Cal.App.2005) (citations omitted); Bivens v. Gallery Corp., 134 Cal.App.4th 847, 859-60, 36 Cal.Rptr.3d 541 (Cal.App.2005) (citations omitted) (“However, ‘[i]f the language is ambiguous, we may look to the history and background of the statute to ascertain legislative intent.’ Such extrinsic evidence of the Legislature’s intent, includes the ostensible ‘public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a part.’ ”). The legislative history reveals no discussion on the specific issue raised in this matter.
“The MFAA was enacted in 1978 following an earlier finding by the Board of Governors of the California State Bar that fee disputes constituted the most serious problem between attorneys and their clients. ‘The policy behind the mandatory fee arbitration statutes [was] ... to alleviate the disparity in bargaining power in attorney fee matters which favors the attorney by providing an effective, inexpensive remedy to a client which does not necessitate the hiring of a second attorney.” Law Offices of Dixon R. Howell v. Valley, 129 Cal.App.4th 1076, 1086-87, 29 Cal.Rptr.3d 499 (Cal.App.2005) (citations omitted). Through the MFAA, the California legislature has expressed a “strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.” Aguilar, 32 Cal.4th at 983, 12 Cal.Rptr.3d 287, 88 P.3d 24.
After considering the purpose and operation of the MFAA, the Court finds that Echo Rock’s interpretation of § 6200(b)(1) is the more reasoned view. The exception in § 6200(b)(1) prevents attorneys from being forced to adhere to the MFAA when the disputed fee arose out of services that were performed outside of California. For example, an attorney licensed in Ohio, who practices in Ohio, and who performed legal services in Ohio, would not be subject to the MFAA, merely because he or she has also been previously admitted to practice in California. Under the Trustee’s interpretation, however, an attorney licensed in California, who maintains offices in California, and provides legal services in California, could permanently avoid the scope of the MFAA by gaining admission to practice in another state. It is obvious that such an attorney would otherwise be subject to the regulation of the State Bar of California. The MFAA provides a uniform process for the resolution of attorney-client fee disputes for legal services in California, and should not interpreted in a manner that would make the availability of such a process contingent on the out-of-state licensing of the attorney.
Echo Rock’s interpretation is also consistent with the statement of the Orange *450County Bar Association, which states on its website, “An attorney/client fee dispute can be arbitrated [through the Mandatory Fee Arbitration Program] if the attorney has an office in Orange County, or the majority of services were rendered in Orange County.” OCBA-Fee Arbitration, http://www.ocbar.org/feearbitration .htm (last visited January 25, 2006); see also Naegele v. Albers, 355 F.Supp.2d 129, 141 (D.D.C.2005) (staying litigation in favor of arbitration under the California MFAA) (“Because the plaintiff is an attorney licensed to practice law in California and the events that gave rise to this fee dispute and the instant litigation also arose in California, the court stays the litigation of the attorney-client fee dispute pending the completion of arbitration in California.”).
Lastly, the Trustee’s arguments, as they related to him individually, are irrelevant. The Trustee is seeking to enforce the Debtor’s rights, and therefore it is the applicability of the MFAA to the Debtor, and not to the Trustee, that is relevant. See Javitch v. First Union Securities, Inc., 315 F.3d 619, 624 (6th Cir.2003); Matter of Esco Mfg., Co., 33 F.3d 509, 514 (5th Cir.1994) (citing Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1154-62 (3rd Cir.1989)) (The Trustee “stands in the shoes of the debtor for purposes of the arbitration clause and that the Trustee-plaintiff is bound by the clause to the same extent as would be the debtor.”); In re Cooker Restaurant Corp., 292 B.R. 308, 312 (S.D.Ohio 2003); McClarty for Fortney v. Gudenau, 176 B.R. 788, 790 (E.D.Mich.1995) (citing 4 Collier on Bankruptcy ¶ 541.10[1] (Lawrence P. King ed. 1994)) (“In all cases where the trustee seeks to assert or enforce the debtor’s right of action against another, he stands in the debtor’s shoes regarding defenses to the action.”).
Accordingly, the MFAA applies to the Debtor, who was licensed in California (among other states), performed legal services to Echo Rock in California, and maintained an office in California.
* ❖ *
Initially, Echo Rock seeks a motion to dismiss, on the basis that the Debtor did not provide notice of Echo Rock’s right to arbitrate pursuant to the MFAA. Pursuant to the MFAA,
(a) ... an attorney shall forward a written notice to the client prior to or at the time of service of summons or claim in an action against the client ... The written notice shall be in the form that the board of governors prescribes, and shall include a statement of the client’s right to arbitration under this article. Failure to give this notice shall be a ground for the dismissal of the action or other proceeding....
... the client’s failure to request arbitration within 30 days after receipt of notice from the attorney shall be deemed a waiver of the client’s right to arbitration under the provisions of this article.
West’s Ann. Cal. Bus. & Prof.Code § 6201(a). Echo Rock argues that since the Debtor did not give notice that Echo Rock could seek arbitration under the MFAA prior to filing the pending adversary action, the Court should dismiss the Trustee’s claim according to the terms of § 6201(a).
Contrary to the arguments of Echo Rock, even if the Debtor failed to provide the requisite notice, § 6201(a) merely provides that such failure is a “grounds for dismissal,” and does not mandate dismissal. Law Offices of Dixon R. Howell, 129 Cal.App.4th at 1090, 29 Cal.Rptr.3d 499. (“Accordingly, we conclude that dismissal under the MFAA is discretionary and the court misperceived that it *451was required to dismiss the case due to Law Firm’s noncompliance with section 6201(a)’s notice requirements.”). In this case, such relief is unwarranted, especially given the threshold questions regarding the applicability of the MFAA to the Debt- or. Echo Rock does not allege that the Debtor acted in bad faith, nor has it alleged that it has suffered any prejudice on the basis of the Debtor’s failure to provide notice. Echo Rock has provided no other grounds upon which the Trustee’s case should be dismissed.
Therefore, Echo Rock has not shown the Trustee’s complaint should be dismissed under the terms of the MFAA.
* * * *
Alternatively, Echo Rock seeks stay relief in order to pursue arbitration in California. Echo Rock, as the party seeking relief from the automatic stay, has the burden of showing that such relief is warranted. See, e.g., In re Shultz, 325 B.R. 197, 201 (Bankr.N.D.Ohio 2005) (“The party seeking to establish the existence of ‘cause’ for relief from the stay bears the initial burden of proof.”). Having determined that Echo Rock may seek arbitration pursuant to the MFAA, the Court must next determine whether it has discretion to deny enforcement of the MFAA. An important factor in this determination is whether the complaint of the Trustee presents a core or noncore matter. See, e.g., In re Oakwood Homes Corp., 2005 WL 670310, *3 (Bankr.D.Del.2005) (“While it is clear that bankruptcy courts do not possess discretion with respect to enforcement of an arbitration clause in a non-core adversary proceeding, it does appear manifest that such discretion exists with respect to core adversary proceedings.”); In re Mirant Corp., 316 B.R. 234, 237-38 (Bankr.N.D.Tex.2004) (quoting Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re Natl Gypsum Co.), 118 F.3d 1056 (5th Cir.1997)) (“[W]e believe that nonenforcement of an otherwise applicable arbitration provision turns on the underlying nature of the proceeding, i.e., whether the proceeding derives exclusively from the provisions of the Bankruptcy Code and, if so, whether arbitration of the proceeding would conflict with the purposes of the Code.”).
Although the Trustee asserts that this matter involves a proceeding to turn over property of the estate, the Trustee’s complaint is entitled “Complaint for Breach of Contract, on Account,” and does not seek to enforce any section of the Bankruptcy Code. It is undisputed that the amount that the Debtors are owed by Echo Rock is subject to a bona fide dispute that arose prepetition, and is therefore not a turnover action. In re Groggel, 333 B.R. 261, 268 (Bankr.W.D.Pa.2005) (“The Court disagrees with such position by the Trustee, however, because (a) the Trustee’s claims against Horsley constitute nothing more than garden variety contract claims, that is claims wherein the right to property-i.e., money-is in dispute, and (b) ‘actions seeking a turnover of assets whose title is in dispute can only constitute, at the most, noncore rather than core proceedings given that such actions are not true turnover actions within the meaning of [11 U.S.C.] § 542(a) and 28 U.S.C. § 157(b)(2)(E).’ ”); In re United Sec. & Communications, Inc., 93 B.R. 945, 958 (Bankr.S.D.Ohio 1988) (quoting Acolyte Elec. Corp. v. City of New York, 69 B.R. 155, 175 (Bankr.E.D.N.Y.1986)) (“When a bona fide dispute exists as to liability involving state law, then the proceeding cannot be core under § 157(b)(2)(E). In this adversary proceeding there is a legitimate dispute as to whether [the debtor] is entitled to recover the funds claimed due under the contract. Since a resolution of this action, involves a state law determination of the defendant’s *452liability under the contract, it is a step away from a true § 542 turnover proceeding and, therefore, does not constitute a core proceeding under § 157(b)(2)(E).”); Matter of Commercial Heat Treating of Dayton, Inc., 80 B.R. 880, 890 (Bankr.S.D.Ohio 1987) (“To the extent that a BONAFIDE dispute exists with regard to the existence of an identifiable fund or res, a proceeding to recover that res is not a turnover within the meaning of BAFJA unless and until the existence, magnitude and identity of the res are first established.”).
The Trustee’s complaint is a breach of contract action to recover payment for legal services performed by the Debtor. Letters between the Debtor and Echo Rock evidence that the agreement, the performance of legal services, and Echo Rock’s dispute of the fee billing all arose prepetition. Therefore, this dispute involves a noncore, related matter. In re Durango Georgia Paper Co., 309 B.R. 394, 399 (Bankr.S.D.Ga.2004) (citing Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)) (“It seems well settled that an adversary complaint to recover a prepetition account receivable where the defendant did not file a proof of claim is not a core proceeding.”); In re Coho Energy, Inc., 309 B.R. 217, 222 (Bankr.N.D.Tex.2004) (“This is an action seeking damages for pre-petition breaches of pre-petition contracts and for pre-petition tor-tious conduct, and it is a non-core proceeding which neither arises in nor under title 11.”); In re DVI, Inc., 305 B.R. 414, 416 (Bankr.D.Del.2004) (“[A] proceeding to collect accounts receivable in which the underlying transaction occurred pre-petition is only ‘related to a case under title 11’ and is therefore, non-core.”); In re Hughes-Bechtol, Inc., 132 B.R. 339, 345 (Bankr. S.D.Ohio 1991) (quoting Matter of Commercial Heat Treating of Dayton, Inc., 80 B.R. at 890) (“a proceeding to collect a prepetition account receivable that is subject to a BONAFIDE dispute is a non-core proceeding.”); In re United Sec. & Communications, Inc., 93 B.R. at 957 (“The clear majority, and better-reasoned, view is that state law, contract-type actions, such as the lawsuit before the Court here, which literally fall within the broad catchall language of 28 U.S.C. § 157(b)(2)(A) and (O), are noncore, ‘related’ proceedings.”).
Since it involves a noncore matter, this Court does not have discretion to deny enforcement of arbitration under the MFAA, unless such enforcement is in direct conflict with the Bankruptcy Code or other federal statute. See In re Cooker Restaurant Corp., 292 B.R. at 312 (“Nonetheless, this Court finds, consistent with all of the courts of appeals which have addressed the issue that, in non-core proceedings, the policies expressed in favor of arbitration in the Arbitration Act are not overridden, either expressly or implicitly, by provisions of the Bankruptcy Code.... This Court finds that in non-core proceedings in which the parties do not dispute the making of an agreement to arbitrate, a bankruptcy court is without jurisdiction to deny a motion to stay the proceedings and compel arbitration.”); In re Hupp Industries, Inc., 157 B.R. 360, 362 (Bankr.N.D.Ohio 1993) (“At bar, submission of the aforesaid noncore matters to arbitration presents no conflict with the Bankruptcy Code or any other federal statute.”).
The Trustee’s arguments that arbitration in this case is implied by state law under the MFAA, and not a written agreement as required by the Federal Arbitration Act (“FAA”), are misguided. Whether enforced through the FAA, or implied by California law, Echo Rock had the power to seek arbitration against the *453Debtor. California enjoys the “broad power to regulate ‘the practice of professions within their boundaries,’ and ‘[t]he interest of the States in regulating lawyers is especially great since lawyers are essential to the primary governmental function of administering justice, and have historically been “officers of the courts.” ’ ” In re Primus, 436 U.S. 412, 422, 98 S.Ct. 1893, 56 L.Ed.2d 417 (1978). The Trustee argues that arbitration would force him to travel to California, bearing significant expense for an insignificant amount of money (about $8000 of fees are in dispute). Additionally, even if applied, arbitration under the MFAA would not necessarily be binding on the Trustee. Although the Trustee has given valid, persuasive reasons why arbitration would be costly to the Debtor’s estate, such inconvenience does not override “California’s substantial interest in providing clients with prophylactic tools to deal with attorney-client fee disputes.” Naegele v. Albers, 355 F.Supp.2d at 141. The California legislature’s decision to give Echo Rock, the client, the ability to force arbitration on an unwilling attorney should not be denied by this Court where there is no conflict with the Bankruptcy Code or federal law. In re Anthony, 334 B.R. 780, 787 (Bankr.N.D.Miss.2005) (citing In re Gandy, 299 F.3d 489 (5th Cir.2002)) (“As such, pursuant to the Gandy decision, this court does not have the discretion to refuse to compel arbitration since the arbitration agreements are enforceable according to their terms under state law.”); In re Caraballo Rivera, 328 B.R. 12, 16 (Bankr.D.P.R.2005) (“The provisions of the Bankruptcy Code preempts only those State laws that are in conflict with federal law.”); In re Tate, 253 B.R. 653, 670 (Bankr. W.D.N.C.2000) (“Federal bankruptcy preempts state law, but only to the extent that there is an actual conflict between the two.”).
Finally, the Trustee argues that the Court may nonetheless allow proceedings to continue in this Court if “the matter is not appropriate for arbitration under the provisions of this article.” West’s Ann. Cal. Bus. & Prof.Code § 6201(c). This provision, however, is not applicable to in this instance. “This sentence implies an authority and discretion in the trial court to determine an action, or a portion of an action, is not appropriate for arbitration ____This matter involves an attorney-fee dispute, which is precisely the purpose of the MFAA. The attorney fee arbitration procedure is expressly applicable to disputes concerning fees charged for professional services rendered. The claim by respondent for fees owed is clearly amenable to arbitration within the meaning of this section.” Loeb & Loeb v. Beverly Glen Music, Inc., 166 Cal.App.3d 1110, 1116, 212 Cal.Rptr. 830 (Cal.App.1985).
Therefore, Echo Rock has shown that stay relief should be granted in order to pursue arbitration against the Debtor pursuant to the MFAA.
* # * # * ❖
Accordingly, Echo Rock’s motion to dismiss is not well-premised, and is hereby denied. Echo Rock’s motion to stay action pending arbitration, however, is well-premised and is hereby granted. Each party is to bear its respective costs.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493846/ | MEMORANDUM OPINION
DENNIS R. DOW, Bankruptcy Judge.
This matter comes before the Court on the motion of Trent D. Ginter (“Debtor”) to avoid a non-possessory, non-purchase money security interest. Alliant Bank-Boonville (“Alliant”) argues that Debtor cannot now avoid its security interest because he previously stipulated to relief from the stay and should now be estopped from avoiding Alliant’s security interest in the personal property at issue. The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 157(a) and (b). This is a core proceeding which the Court may hear and determine pursuant to 28 U.S.C. § 157(b)(2)(B) & (K). The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure made applicable to this proceeding by Rule 7052 of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below, the Debtor’s motion to avoid non-possessory, non-purchase money security interest is overruled.
I. FACTUAL BACKGROUND
On February 22, 2005, Debtor entered into a promissory note and security agreement with Alliant which granted Alliant a security interest in certain equipment which included three-2002 DR Kern Tanning beds and assorted mechanical tools then owned or thereafter acquired by Debtor1. On October 16, 2005, Debtor filed a bankruptcy petition under Chapter 7. Debtor’s Schedules indicate the mechan*495ic’s tools had a value of $800. Affiant contends that the tools have a value of $12,5002 which is in excess of the $3,000 amount allowed for tools of the trade under Mo.Rev.Stat. § 513.430(4) and also in excess of the $800 value claimed as exempt by Debtor in Schedule C of his bankruptcy petition. On December 13, 2005, Debtor entered into a Stipulated Motion for Relief From Automatic Stay (“Stipulation”) with Affiant. In the Stipulation, Debtor stipulated to the Court entering an order granting Affiant relief from the stay for the purpose of allowing Affiant to enforce its rights under the security agreement in accordance with applicable state law. On December 14, 2005, the Court entered an Order approving the Stipulation. The day after the Court entered the Order approving the Stipulation, Debtor filed a Motion to Avoid Non-Possessory, Non-Purchase Money Security Interest pursuant to 11 U.S.C. § 522(f)3 requesting that the Court avoid Affiant's lien on the mechanic’s tools because it impaired an exemption to which Debtor would be entitled under § 522(b) since they are his tools of the trade.
II. DISCUSSION AND LEGAL ANALYSIS
A. Estoppel
“[W]here 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.” Davis v. Wakelee, 156 U.S. 680, 689, 15 S.Ct. 555, 39 L.Ed. 578 (1895). This rule, known as judicial estoppel, “generally prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.” Pegram v. Herdrich, 530 U.S. 211, 227, n. 8, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000); see 18 Moore’s Federal Practice § 134.30, p. 134-62 (3d ed. 2000) (“The doctrine of judicial estoppel prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding”); 18 C. Wright, A. Miller, & E. Cooper, Federal Practice and Procedure § 4477, p. 782 (1981) (hereinafter Wright) (“absent any good explanation, a party should not be allowed to gain an advantage by litigation on one theory, and then seek an inconsistent advantage by pursuing an incompatible theory”). Courts have uniformly recognized that its purpose is “to protect the integrity of the judicial process,” Edwards v. Aetna Life Ins. Co., 690 F.2d 595, 598 (6th Cir.1982), by “prohibiting parties from deliberately changing positions according to the exigencies of the moment.” United States v. McCaskey, 9 F.3d 368, 378 (5th Cir.1993); see In re Cassidy, 892 F.2d 637, 641 (7th Cir.1990) (“Judicial estoppel is a doctrine intended to prevent the perversion of the judicial process.”); Allen v. Zurich Ins. Co., 667 F.2d 1162, 1166 (4th Cir.1982) (judicial estoppel “protect [s] the essential integrity of the judicial process”); Scarano v. Central R. Co., 203 F.2d 510, 513 (3rd Cir.1953) (judicial estoppel prevents parties from “playing ‘fast and loose with the courts’ ” (quoting Stretch v. Watson, 6 *496N.J.Super. 456, 69 A.2d 596, 603 (Super Ct. Ch.Div.1949))).
Judicial estoppel “is an equitable doctrine invoked by a court at its discretion,” Russell v. Rolfs, 893 F.2d 1033, 1037 (9th Cir.1990) (internal quotation marks and citation omitted). Courts have observed that “[t]he circumstances under which judicial estoppel may appropriately be invoked are probably not reducible to any general formulation of principle,” Allen, 667 F.2d, at 1166; accord, Lowery v. Stovall, 92 F.3d 219, 223 (4th Cir.1996); Patriot Cinemas, Inc. v. General Cinema Corp., 834 F.2d 208, 212 (1st Cir.1987). Nevertheless, several factors typically inform the decision whether to apply the doctrine in a particular case. First, a party’s later position must be “clearly inconsistent” with its earlier position. United States v. Hook, 195 F.3d 299, 306 (7th Cir.1999); In re Coastal Plains, Inc., 179 F.3d 197, 206 (5th Cir.1999); Hossaini v. Western Mo. Medical Center, 140 F.3d 1140, 1143 (8th Cir.1998); Maharaj v. Bankamerica Corp., 128 F.3d 94, 98 (2nd Cir.1997). Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party’s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create “the perception that either the first or the second court was misled,” Edwards, 690 F.2d, at 599. Absent success in a prior proceeding, a party’s later inconsistent position introduces no “risk of inconsistent court determinations,” United States v. C.I.T. Constr. Inc., 944 F.2d 253, 259 (5th Cir.1991), and thus poses little threat to judicial integrity. See Hook, 195 F.3d, at 306; Maharaj, 128 F.3d, at 98. A third consideration is whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not es-topped. See Davis, 156 U.S. at 689, 15 S.Ct. 555; Scarano, 203 F.2d, at 513 (judicial estoppel forbids use of “intentional self-contradiction ... as a means of obtaining unfair advantage”); see also 18 Wright § 4477, p. 782. Judicial estoppel is “a common law doctrine by which a party who has assumed one position in his pleadings may be estopped from assuming an inconsistent position.... ” Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 600 (5th Cir.2005)(citing In re Coastal Plains, 179 F.3d at 205). Because the doctrine is intended to protect the judicial system, rather than the litigants, detrimental reliance by the opponent of the party against whom the doctrine is asserted is not necessary. Id.
In this case, Debtor willingly entered into the stipulation for relief from the stay and agreed that Alliant had a security interest in the tools and that it could enforce its rights in accordance with applicable state law. Debtor cannot now seek to avoid the very lien he previously agreed that Alliant may enforce. An order avoiding the lien and rendering Alliant unsecured would clearly be inconsistent with the prior order authorizing Alliant to exercise its lien rights. Further, Debtor’s Statement of Intention indicated that he intended to surrender the tools to Alliant. By entering into the Stipulation, Debtor effectuated the Statement of Intention and satisfied his duty under § 521. Lastly, Alliant relied on Debtor’s consent to the stipulation for relief from stay and its ability to pursue its state remedies in the mechanic’s tools. If Debtor is now permitted to avoid the lien, Alliant will have wasted the time, effort and expense incurred in that effort. Accordingly, Debtor is estopped from avoiding Alliant’s lien that was stipulated to in the Stipulation.
B. Res Judicata
In addition, avoidance of the lien is barred by the doctrine of res judica-*497ta. The essential elements of res judicata are as follows: 1) an identity of parties or privies in the two suits; 2) an identity of the causes of action in both the prior and subsequent suits; and 3) a final judgment on the merits was entered in the prior action. See In re Glenn, 160 B.R. 837, 838 (Bankr.S.D.Cal.1993). Under the doctrine of res judicata, a judgment on the merits in a prior suit bars a second suit involving the same parties or their privies based on the same cause of action. See In re Walz, 44 B.R. 973, 975 (Bankr.W.D.Wis.1984) (citing Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 327 n. 5, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979)). Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding. Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979); see also, Ladd v. Ries (In re Ladd), 319 B.R. 599, 602 (8th Cir. BAP 2005) (res judicata applies to bankruptcy motions; bankruptcy motion is equivalent to civil lawsuit). Further, an order approving a settlement should be given res judicata effect as to those issues that were decided. Glenn, 160 B.R. at 838 (citing McClain v. Apodaca, 793 F.2d 1031, 1033 (9th Cir.1986)).
Applying these principles to this case, the Court holds that Debtor’s motion to avoid the lien is barred by res judicata. The parties are the same as those that entered into the Stipulation and the cause of action is the same in that both the Stipulation and Debtor’s motion seek a determination of Alhant’s right to enforce its lien on the mechanic’s tools. Further, the Court’s order approving the Stipulation and granting relief from the stay was a final order. The Court determined that Alliant had a security interest in the mechanic’s tools and could enforce its rights in accordance with state law. Debtor could have stated his intention to exempt the mechanic’s tools and avoid the lien in the relief from stay proceeding. Thus, Debtor’s motion is barred by res judicata. See Glenn, 160 B.R. at 838 (holding settlement between trustee and debtors operated as res judicata to bar debtors from bringing motion to avoid lien); see also, Walz 44 B.R. at 975 (finding debtor barred by res judicata from seeking to avoid lien after failing to raise exemption issue in relief from stay proceeding).
Based on the foregoing reasons, Debt- or’s motion to avoid non-possessory, non-purchase money security interest is DENIED.
A separate Order will be entered in accordance with Bankruptcy Rule 9021.
. Defendant’s Exs. 1 & 2.
. See Def.’s Ex. 1.
. Section 522(f) provides: Notwithstanding any waiver of exemptions, 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-... (B) implements, professional books, or tools of the trade of the debtor.... | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493847/ | MEMORANDUM OF PARTIAL DECISION AND ORDER RE: MOTION FOR ALLOWANCE OF CLAIM AND DISTRIBUTION OF PROCEEDS TO TOWN OF NEWTOWN
LORRAINE MURPHY WEIL, Bankruptcy Judge.
The matters before the court are that certain Motion for Allowance of Claim and Distribution of Proceeds to Town of New-town (Doc. I.D. No. 217, the “Motion”)1 and the Debtor’s Objection to Motion for Allowance of Claim and Distribution of Proceeds to Town of Newtown (Doc. I.D. No. 257, the “Objection”). The court has jurisdiction over this matter as a core proceeding pursuant to 28 U.S.C. §§ 1134 and 157(b), and that certain Order dated September 21, 1984 of the District Court (Daly, C.J.).2
I. BACKGROUND
This case was commenced by the above-referenced debtor’s (the “Debtor”) filing of a petition under chapter 11 of the Bankruptcy Code on February 2, 2004. (Doc. 1.D. No. 2.) The case was converted to a case under chapter 7 of the Bankruptcy Code by order dated October 12, 2004. (Doc. I.D. No. 93.) Michael J. Daly (the “Trustee”) is the duly-appointed chapter 7 trustee serving in this case.
By order dated April 14, 2005, the court authorized the Trustee to sell the Debtor’s real property (the “Property”) free and clear of liens for $8,900,000.00 in cash consideration (the “Sale Proceeds”). (Case Doc. I.D. No. 183.) That sale has closed and the Trustee holds the Sale Proceeds *534subject to valid liens. New Haven Mortgage Refinance, LLC (the “Mortgagee”) filed a motion for allowance and payment of its secured claim from the Sale Proceeds. (Doc. I.D. No. 190.) Similarly, the town of Newtown (the “Town”) filed the Motion seeking allowance and payment from the Sale Proceeds of its secured claim with respect to an alleged “sewer lien” (the “Lien”) on the Property. (Doc. I.D. No. 217.) All objections to the Mortgagee’s motion having been either resolved or withdrawn, the court entered two orders authorizing the Trustee to pay the Mortgagee’s secured claim: an order authorizing the Trustee to pay principal and interest (Doc. I.D. No. 224); and a second order authorizing the Trustee to pay the Mortgagee’s disbursements and further interest (Doc. I.D. No. 260, the “Disbursement Order.”)3
As noted above, the Debtor filed the Objection with respect to the Motion. The Trustee does not object to the Motion.4 By order dated November 10, 2005, the current owner of the Property (the “Inter-venor”) was permitted to intervene in these proceedings. (Doc. I.D. No. 261.) At the Hearing, Frederick W. Hurley, the Public Works Director for the Town, testified for the Town. The Debtor produced no witnesses but both the Debtor and the Town introduced documentary evidence into the record.5 Some oral argument was heard at the conclusion of the Hearing and post-trial briefing (including briefing by the Intervenor) has been completed. The matter is ripe for decision.
II. THE MOTION AND THE OBJECTION
The Motions seeks allowance and payment in the amount of $466,507.05 of the Town’s alleged secured claim in respect of the Lien.6 The Objection makes the following principal arguments:
*5351. The Lien is purported to be a sewer benefit lien within the purview of Section 7-249 of the Connecticut General Statutes. However, the Debtor argues, the record demonstrates that the claim of the Town (if any) relates to Section 7-255 “connection fees” and not a Section 7-249 “benefit assessment.” Accordingly, the Debtor argues, the Lien is invalid.
2. Certain procedural (statutory) requisites for a valid sewer benefit lien allegedly were not satisfied with respect to the Lien.
3. Pursuant to the Agreement (as that term is defined below), the “connection fee” for any particular Unit (as that term is defined below) will not become due until a certificate of occupancy (a “CO”) is issued in respect of such Unit. The Debtor argues that, since no CO’s have been issued in respect of the Units (and the Debtor now does not even own the Property), there is no “claim” in respect of the “connection fee” within the purview of Bankruptcy Code § 101(5).
III. FACTS'7
Prior to September 28, 1999, title to the Property appears to have been vested in an affiliate (the “Affiliate”) of the Debtor. (Town’s Exhibit C at 2.)8 Part of the Affiliate’s plan of development for the Property was the construction and sale of 38 “independent living units.”9 In order to facilitate that plan, on the application of the Affiliate the Town constructed an extension of its sewer systems to reach the Property. (Town’s Exhibit C at 1.) The Town borrowed some or all of the cost thereof. (Debtor’s Exhibit 2.) The Debtor acquired title to the Property on or about September 28, 1999. (Town’s Exhibit C at 2.) The proposed sewer extension was completed and the Property was connected to it in 2000. (Transcript at 23.) That sewer extension was constructed just for the Property. (Transcript at 24.)
In order further to facilitate the relevant development plan for the Property, on or about March 8, 2001 the Town, the Debtor (and the Affiliate) entered into that certain Sanitary Sewer Connection Fee Agreement (a copy of which is in the record as Town’s Exhibit C, the “Agreement”). The Agreement provides in relevant part as follows:
3. The connection fee [the “Fee”] for the aforesaid 38 independent living units shall be $10,347.00 per unit, or a total of $393,186.00, which may be paid by Homesteads II [ie., the Debtor] to the Town, with interest and in installments *536as hereinafter set forth, on condition that Homesteads II provides the Town, at all times while such connection fee remains outstanding, with security therefor which, in the sole and absolute opinion of the Town Finance Director and the Town Attorney, is sufficient in amount and/or value and is satisfactory in form and substance. So long as such security is provided, Homesteads II shall be permitted to pay the connection fee, with interest at the rate of 5.35% per annum, in 17 equal consecutive annual installments of principal and interest in the amount of $37,792.80 each, to be billed in July of each year, commencing July, 2001, and payable on or before July 31st in each year, for a total payment of principal and interest in the amount of $608,477.74.10
If, however, at any time while connection fee remains outstanding, the Town Finance Director and the Town Attorney, in their sole and absolute judgment, shall deem that the Town is not provided with adequate security, as herein-above required, then the connection fee of $10,374.00 for each unit shall be payable by Homesteads II to the Town, in full, without interest, upon the issuance of the certificate of occupancy for each such unit.11
3. [sic] For all units for which installments are provided, a “Certificate of Notice of Installment Payment of Connection Fee” shall be filed in the New-town Town Clerk’s Office. Said Notice shall be enforceable in accordance with the provisions of Section 7-258 of the Connecticut General Statutes ....
(Town’s Exhibit C at 3-4.) The general form of the Agreement was the Town’s form used for other owners in the area. (Transcript at 35-36.)
Attached to the Agreement was a copy of a “Sewer Benefit Analysis of The Homesteads at Newtown Mount Pleasant Road and Pocono Road, Newtown, CT” addressed to the “Newtown WPCA” from Kerin Commercial Real Estate and dated January 23, 2001. (See Town’s Exhibit C (attachment, the “Appraisal”).) The Appraisal states in relevant part as follows:
... It is understood that the function of this appraisal is to support the sewer benefit to the subject property for internal purposes.
In estimating the amount of the sewer benefit, the standard “Before and After” technique has been utilized; i.e., the sewer benefit estimate is based on the difference between the market value of the property immediately before and after the installation of the sewer line serving the property. The difference between the before and after values is the benefit to the property resulting from the availability of the municipal sewer line.
As a result of my inspections, investigations and analysis, it is my opinion that the benefit to the subject property attributable to the sewers is as follows:
Phase III (38 Independent Living Units) $10,347/Unit *
* The unit rate for Phase III is set in accord with the rate charged for the independent living units in the most recent phase of Walnut Tree Village.
(Appraisal at 1-2.)
On March 30, 2001, the Town caused a “Legal Notice” to be published in the Newtown Bee which notice provided in relevant part as follows:
*537At a meeting held on March 22, 2001, the Newtown Water Pollution Control Authority set connection fees as follows: Connection fees for ... “The Homesteads Community”, ... $393,186.00 for 38 independent living units, payable at 5.35% over 17 years.
This action was taken after a duly noticed Public Hearing held on March 12, 2001 and said charges were filed with the Office of the Town Clerk on March 27, 2001. Any appeals from such charges must be taken within twenty-one days after such filing.
(Town’s Exhibit B, the “Legal Notice.”) No appeal to the referenced action was taken by any party. The Debtor never posted security with the Town (Transcript at 33) and apparently never made any payment toward the Fee.
On November 21, 2001, the Town filed in the Newtown land records a document entitled “Town of Newtown — Sewer Lien Certificate Continuing Sewer Lien for not More than 15 Years.” (Town’s Exhibit A.) That certificate (the “Lien Certificate”) provided in relevant part as follows:
The lien continued by this certificate is to secure payment of a sewer assessment, the principal of which is due to said Town of Newtown, together with legal interest, fees and charges thereon, in the name of the individual(s) listed below.
(Town’s Exhibit A.)12 The Lien Certificate listed the Debtor as the “Owner of Record” and stated the “Principal Amount Due” as $393,186.00. (Id.)
IV. DISCUSSION
A. Applicable Law
1. Relevant Statutes
The parties agree that the “sewer lien” referred to in the Lien Certificate to be valid must be a lien in respect of an “assessment of benefits” governed by Sections 7-249, 7-252, 7-253 and 7-254 of the Connecticut General Statutes.
Section 7-249 provides in relevant part as follows:
At any time after a municipality, by its water pollution control authority, has acquired or constructed, a sewerage system or portion thereof, the water pollution control authority may levy benefit assessments upon the lands and buildings in the municipality which, in its judgment, are especially benefited [sic] thereby, whether they abut on such sewerage system or not, and upon the owners of such land and buildings, according to such rule as the water pollution control authority adopts, subject to the right of appeal as hereinafter provided.... No lien securing payment shall be filed until the property is assessed
Conn. Gen.Stat. Ann. § 7-249 (West 2006).
Section 7-252 provides in relevant part as follows:
Assessments shall be due and payable at such time as is fixed by the water pollution control authority, provided no assessment shall become due until the work or particular portion thereof for which such assessment was levied has been completed, except that when the work or particular portion thereof for which such assessment was levied is being performed by the water pollution control authority pursuant to an order of the Department of Environmental Protection, the entire assessment may be made due and payable, provided the portion of the total work bonded by the *538water pollution control authority, which directly benefits the particular property has been completed. The water pollution control authority shall give notice of the date when assessments are due and payable by publication at least twice within a period of fifteen days in a newspaper having a general circulation in the municipality and shall mail a copy of such notice to the owners of the property assessed at their last known addresses. Such notice shall list the streets and describe the area within which are located any properties against which such assessments are due. No assessment shall be due and payable earlier than thirty days after the first publication of such notice.
Conn. GemStat. § 7-252 (West 2006).
Section 7-253 provides in relevant part as follows:
The water pollution control authority may provide for the payment of any assessment in substantially equal annual installments, not exceeding thirty, and may provide for interest charges applicable to such deferred payments.... The water pollution control authority shall cause the town clerk of the town in which the property so assessed, in such equal installments, is located, to record on the land records a certificate, signed by the tax collector or treasurer of the municipality, of such facts in form substantially as follows:
CERTIFICATE OF NOTICE OF INSTALLMENT PAYMENT OF ASSESSMENT OF BENEFITS
Such certificate shall operate as notice of the existence of a plan for payment of such assessment by installments and the town clerk shall cancel or remove the same within seven calendar days after the last installment due has been satisfied, or the total assessment together with all interest, fees and charges has been paid in full.
Conn. GemStat. Ann. § 7-253 (West 2006).
Section 7-254 provides in relevant part as follows:
(a) Any assessment of benefits or any installment thereof, not paid within thirty days after the due date, shall be delinquent and shall be subject to interest from such due date at the interest rate and in the manner provided by the general statutes for delinquent property taxes. Each addition of interest shall be collectible as a part of such assessment.
(b) Whenever any installment of an assessment becomes delinquent, the interest on such delinquent installment shall be as provided in subsection (a) or five dollars, whichever is greater. Any unpaid assessment and any interest due thereon shall constitute a lien upon the real estate against which the assessment was levied from the date of such levy. Each such lien may be continued, recorded and released in the manner provided by the general statutes for continuing, recording and releasing property tax liens ... 13
Conn. Gen.Stat. Ann. § 7-254 (West 2006).
2. Burden of Allegation and Proof
These proceedings are materially similar to an action by the Town to foreclose the Lien. In such actions, the burden of proof is as follows:
When the [assessment] lien has been continued by certificate, the production in court of the certificate of lien, or a certified copy thereof, shall be prima facie evidence that all requirements of *539law for the assessment and collection of the ... assessment secured by it, and for the making and filing of the certificate, have been duly and properly complied with. Any claimed informality, irregularity or invalidity in the assessment ... or in the lien filed, shall be [a] matter of affirmative defense to be alleged and proved by the defendant.
Conn. Practice Book 1998 § 10-70(b) (emphasis added). When as here, the Bankruptcy Code does not establish the burden of allegation and proof, the applicable state law burden will be applied in bankruptcy. Raleigh v. III. Dept. of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). See also In re Campano, 293 B.R. 281, 285 (D.N.H.2003) A certified copy of the Lien Certificate is in the record as Town’s Exhibit A. Therefore, in accordance with the above-cited state law, the burden of allegation, the burden of production and the risk of nonpersuasion are all on the Debtor.
B. Application of Law to Facts
1. Sewer Connection Fee or Assessment of Beneñts
The Debtor argues that the Lien is not a valid statutory sewer lien because the Fee was a “connection fee” pursuant to Section 7-255 and not a statutory “assessment of benefits” under Section 7-249. The Debtor has failed to persuade the court on that point.
To carry its point, the Debtor chiefly relies upon ambiguities in the Town’s proof: specifically, the use of the term “connection fee” in the Agreement and in the Legal Notice; and the fact that, at page 4 of the Agreement, it refers to a “Certificate of Notice of Installment Payment of Connection Fee” and Section 7-258 of the Connecticut General Statutes.14 However, for the reasons which follow the court is not persuaded that the Fee was anything but a Section 7-249 “assessment of benefits” to the Property.
First, the Appraisal was annexed to the Agreement and the Appraisal was an “opinion ... [of] the benefit to the ... [PJroperty attributable to the sewers .... ” (Appraisal at 2.) The calculation of the Fee was in accordance with the Appraisal. (See Paragraph A.) Second, at page 4 of the Agreement, it refers to a “ ‘Certificate of Notice of Installment Payment of Connection Fee’ ... enforceable in accordance with the provisions of Section 7-258 .... ” The only statutory reference to a “Notice of Installment Payment” is Section 7-253’s provision for a “Certificate of Notice of Installment Payment of Assessment of Benefits.”15 The foregoing render the term “connection fee” at worst ambiguous in the context of the Agreement. At the Hearing, Mr. Hurley testified that, for those landowners (such as the Debtor) who came into the system after the original abatement project, the term “connection fee” was used by the Town in place of and as the equivalent of the term “assessment of benefits.”16 The court credits Mr. Hur*540ley’s testimony that “for ... [the Town], the process has always been a sewer benefit to the individual coming into the systems [after the initial abatement project].” (Transcript at 90.) In contrast, the Debt- or produced no proof with respect to its understanding of the Agreement (or the Legal Notice) on the relevant point.17 For all the reasons stated above, the court is not persuaded that the Fee was anything but a Section 7-249 “assessment of benefits” to the Property.
2. Procedural Requisites
The Debtor alleges that the Lien is invalid because certain procedural (statutory) requisites for a valid sewer lien have not been satisfied.18 That position has no meaningful support in the record and cannot prevail. Cf. Town of Wallingford v. Glen Valley Associates, Inc., 190 Conn. 158, 163, 459 A.2d 525 (1983) (“The record includes a certified copy of the sewer lien; however, ... [the record] is devoid of any evidence showing that Glen Valley failed to receive notice of the proposed sewer assessment. Since Glen Valley did not sustain its burden of proof, the sewer lien is presumed to be valid.”).
3. “Claim”
The Debtor argues that Paragraph B of the Agreement (which makes the Fee payable only on a per-Unit basis upon the issuance of each CO) controls here. Accordingly, the Debtor argues, since no CO’s have been issued and the Debtor now does not even own the Property the Fee does not constitute a “claim” in bankruptcy.19 The court disagrees with the Debt- or’s initial premise that Paragraph B applies here.
The court construes the relevant portions of the Agreement as follows. Paragraph A conditionally provided the Debtor with the right to pay the Fee in install*541ments. Paragraph B made the Fee payable on a per Unit basis as CO’s were issued for the Units in the event that the right to pay in installments was terminated by the Town. Paragraph A would become effective only when the Debtor had “provide[d] the Town ... with security ... which, in the sole and absolute opinion of the Town Finance Director and the Town Attorney ... [was] sufficient in amount and/or value and ... [was] satisfactory in form and substance.”20 Paragraph B permitted the Town to terminate an existing right of the Debtor to pay in installments if the “Town Finance Director and the Town Attorney, in their sole and absolute judgment ... deem that the Town is not provided with adequate security.” Paragraph B presupposes that Paragraph A was triggered by the Debtor’s posting of “sufficient” security. If Paragraph A were not triggered, Paragraph B would never become effective. If Paragraph A were never triggered and Paragraph B thus never became relevant, the Fee was owing and (assuming compliance with Section 7-252) due prepetition as a lump sum.
The evidence in the record is uncontro-verted that the Debtor had not posted the requisite security as of the filing of the Lien Certificate on November 21, 2001. (See Transcript at 33-34.) Moreover, the Debtor has not alleged that the Town filed a Section 7-253 “Certificate of Notice of Installment Payment of Assessment of Benefits” and it is a fair inference from the record that no such certificate was filed. The fact that the March 30, 2001 Legal Notice refers to an installment payment arrangement (which still was a possibility at that time) does not persuade the court that the Debtor’s right to pay the Fee in installments ever matured.21 Accordingly, the court finds that the Fee was owing as a lump sum prepetition.
The record is silent as to whether the Town complied with the Section 7-252 procedure for declaring the Fee “due.” However, even if it the Town has not complied with the Section 7-252 procedure, the Fee was still owing prepetition if not yet due. That is because, by statute, a sewer benefit assessment is deemed owing from the date of levy. See Conn. Gen.Stat. Ann. § 7-254 (“Any unpaid assessment ... shall constitute a lien upon the real estate against which the assessment was levied from the date of such levy.”) (emphasis added).22 That is the classic definition of a Bankruptcy Code § 101(5) “claim” that is “unmatured.” Cf. First Connecticut Small Business Investment Co. v. Bank of Boston Connecticut (In re First Connecticut Small Business Investment Co.), 118 B.R. 179, 184 (Bankr.D.Conn.1990) (Shiff, J.) (“[E]ven assuming the debt was not mature prior to the petition, the filing of a petition accelerates the principal amounts due on all claims against the debtor.”). Thus, the Fee still would constitute a “claim” even if not “due” and/or “payable” prepetition.23
*542Y. CONCLUSION
For the reasons discussed above, the court concludes that the Objection is not well founded at least to the extent of the principal amount of the Fee and is overruled to that extent. The Trustee is authorized to pay $393,186.00 to the Town from the Sale Proceeds and the Motion is granted to that extent. The Hearing will be continued to consider the propriety of payment of interest on the Fee. A scheduling notice will issue.24
It is SO ORDERED.
. References to the docket of this case are in the following form: "Doc. I.D. No. _ References to the transcript of the November 10, 2005 hearing (the "Hearing”) in this case appear in the following form: "Transcript at
. That order referred to the "Bankruptcy Judges for this District” inter alia "all proceedings ... arising in ... a case under Title 11, U.S.C.....”
. The Debtor did not file written objections with respect to the Mortgagee’s Motion. However, at the Hearing the Debtor orally moved for this court to reconsider its oral ruling (rendered earlier that day) that the Disbursement Order should enter on the grounds that the Mortgagee's payment (in part) of the Lien was not a valid disbursement because the Lien allegedly was invalid. (Transcript at 78-79.) That motion was denied on the record because, pursuant to the applicable loan documents, the Mortgagee’s good faith payment in respect of the Lien became part of the mortgage debt even if the Lien itself was invalid. (Transcript at 80-81.) No appeal was taken and the Disbursement Order has become final.
. The court previously ruled that the Debtor (and/or its principal) had standing to object to the Motion. However, at the Hearing the Town requested the court to reconsider that ruling (arguing that there was no reasonable likelihood of a surplus to the Debtor in this case), and the court indicated that it would be willing to do so on an appropriate record. (Transcript at 7-9.) Because the foregoing may have come as a surprise to the Debtor and because the parties were prepared to proceed on the merits, the parties agreed at the Hearing that they would proceed on the merits, reserving the issue of standing to another day (if necessary). (Transcript at 10-11.)
.The Intervenor did not introduce any evidence into the record. References herein to the referenced documentary evidence appear in the following form (as the case may be): "Town's Exhibit _’’ or "Debtor's Exhibit
.The Town calculates its secured claim as follows (the "Calculation”):
The Town’s debt is calculated as follows:
Principal and Interest for years 2001 through 2005 $188,964.00
($37,792.80 x 5 years = $188,964) ...
*535Principal for years 2006 through 2017 $277,543.05
($393,186 / 17 years = $23,128.588 x 12 years = $277,543.05)
TOTAL OUTSTANDING ASSESSMENT $466,507.05
(Motion at 2, n. 1.)
. The facts listed in this part III and elsewhere in this memorandum are found based on the record of the Hearing and of this entire case.
. Exhibit C appears to be incomplete (i.e., one or more of the "whereas” pages are missing). Page references herein are to Exhibit C as it appears in the record.
.Each such unit is hereafter referred to individually as a "Unit,” and such units are hereafter referred collectively as the "Units.”
. The foregoing paragraph is referred to hereafter as "Paragraph A.”
. The foregoing paragraph is referred to hereafter as "Paragraph B.”
. Exhibit A is a certified copy of the Lien Certificate.
. See Conn. Gen.Stat. §§ 12-173 et seq.
. Section 7-258 is entitled: "Delinquent charges for connection [to sewers] or use [of sewers]. Lien.” Conn. Gen.Stat. Ann. § 7-258 (West 2006).
. Moreover, Section 7-255 which provides for “charges for connection with and for the use of a sewerage system” provides for "optional methods of payment of sewer use charges” only for two limited classes of persons. See Conn. Gen.Stat. § 7-255(c). Otherwise, such fee is paid quarterly. (Transcript at 25.)
.
In the Town itself we used the word sewer benefit for the original pollution abatement project that was done in conjunction with the State of Connecticut. That was approximately 800 properties were [sic] hooked up. They were mandatory hook-ups. Sew*540er benefit assessment was [sic] placed on the properties, everything was liened. Subsequent to that project ... we have used the term connection and connection fee for everybody who came later, although we followed precisely the same process of notice and hearing .... So, for us, the process has always been a sewer benefit to the individual coming into the system. But chronologically we started using the term connection and connection fee after the initial pollution abatement project.
(Transcript at 89-90.)
.The court is aware that the general rule is that ambiguities in a contract are to be construed against the drafter. See Texaco, Inc. v. Rogow, 150 Conn. 401, 408, 190 A.2d 48 (1963) (general rule of construction against the drafter). However, the Town does not seek to enforce the Agreement in this case. Rather, the Town has introduced the Agreement into the record strictly as evidence to rebut the Debtor’s claim that the Fee is not a benefit assessment. (See Transcript at 57, Ins. 10-16.) Moreover, even if the "general rule" would otherwise apply here, that rule is subject to the rule that "if the terms of an instrument are fairly susceptible of two or more interpretations, the one which is the more equitable, reasonable and rational is to be preferred.” See Texaco, Inc. v. Rogow, supra. Although the Agreement is not a model of good contract draftsmanship, for the reasons set forth in part IV.B.l, above, the court concludes that the Town’s suggested interpretation of the ambiguous contractual term "connection fee” is "more equitable, reasonable and rational” than the Debtor’s and should be preferred.
. Only procedural deficiencies specifically alleged by the Debtor have been considered. Cf. part IV.A.2, supra ("Burden of Allegation and Proof”).
. Bankruptcy Code § 101(5) provides in relevant part:
The term "claim” means—
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured ....
11 U.S.C.A. § 101(5) (West 2006).
. A reasonable construction of Paragraph A is that the outside date for posting such security was no later than July, 2001.
. Even if the burden of proof were on the Town on this issue, the result would be the same. The court views the Calculation’s use of the installment payment formula to calculate accrued interest either as inartful or as an example of "pleading in the alternative."
. The term "unpaid assessment” is to be contrasted with the term "delinquent” assessment which appears elsewhere in Section 7-254, and with the term "due and payable” which appears in Section 7-252.
. The Debtor’s appeal to the equities also fails. It is a fair inference that the Sale Proceeds reflect the “sewer benefit” to the Property at least to some extent. (Cf. Appraisal.) Accordingly, the estate got the benefit of the increase in value to the Property *542from the sewers when the Property was sold, and it is not inequitable to allow the Town to recoup the same through the Lien. However, although (as explained above) the issue of whether payment of the Fee was "delinquent” prepetition is irrelevant to the determination of whether the Fee is a "claim,” that issue may be relevant to the calculation of interest on the principal amount of the Fee. Cf. Conn. Gen.Stat. § 7-252.
. The Debtor's remaining arguments have been considered by the court and found not to be supported by the evidence or to be otherwise unpersuasive. Because of the conclusion reached herein by the court, it is unnecessary for the court to consider further the issue of the Debtor’s standing at this time. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493848/ | ORDER
JOHN E. WAITES, Bankruptcy Judge.
THIS MATTER comes before the Court upon the 11 U.S.C. § 506(a) motion to value filed by Craig Lewis Bishop (the “Debtor”) regarding security consisting of 33.71 acres, more particularly described herein, and objections to the motion filed by Farm Service Agency (“FSA”) and Ag-South Farm Credit (“AgSouth”). Following consideration of the pleadings, the evidence presented, the arguments of counsel, and the stipulations filed by the parties, the Court makes the following Findings of Fact and Conclusions of Law pursuant to Federal Rule of Civil Procedure 52, which is applicable to bankruptcy proceedings under Federal Rule of Bankruptcy Proce*596dure 7052.1
FINDINGS OF FACT
1.Debtor filed a petition for relief under Chapter 12 of the United States Bankruptcy Code on December 3, 2004. Debtor is the record owner of the following real estate (hereinafter referred to as the “Property”):
All that certain piece, parcel or tract of land measuring and containing Thirty-three and seventy-one One-hundredths (33.71) acres, more or less, situate lying and being in the Bend of Four Holes section, School District 4, County of Dorchester, State of South Carolina, and being bounded now or formerly as follows to wit: On the North by lands of Robert N. Bell; on the East by lands of Richard Bishop; on the South by lands of Richard Bishop and lands of Herbert Bishop; and on the West by lands of Hamet M. Bishop.
The above described property is more fully delineated on a plat entitled “Plat showing property of Craig L. Bishop located Bend of Four Holes Dorchester County, South Carolina DATE: September 9, 1997” by Richard J. Rhode, S.C.R.L.S. number 11366, which plat is recorded in the Office of the R.M.C. for Dorchester County in plat cabinet J slide 30. ALSO a non-exclusive right of way and ingress-egress easement leading from a county road known as the Cantley Rd. to the property above described, as shown and delineated on said plat.
The above described property is the identical property conveyed to Craig Lewis Bishop by deed recorded in Deed Book 326 at page 4, and by deed recorded in Record Book 1292 page 309 in the Office of the R.M.C. for Dorchester County.
2. AgSouth is the successor in interest to Edisto Farm Credit. On October 1, 1997, Edisto Farm Credit recorded a mortgage on the Property in Book 1832 at page 325 in the Office of the Register of Deeds for Dorchester County, South Carolina. It is undisputed that the amount of the AgSouth Farm Credit debt as of December 3, 2004 was $176,689.30.
3. The United States Department of Agriculture, acting through the FSA, recorded a mortgage on the real estate on May 2, 2002, in the Office of the Register of Deeds for Dorchester County, South Carolina in Book 3074 at Page 321. It is undisputed that the amount of the FSA debt as of December 3, 2004 was $113,527.52. The interest or lien of the FSA mortgage is junior and subsequent in priority to the AgSouth mortgage.
4. Improvements on the real estate consist of two poultry houses, a metal shed with a concrete floor, a second metal shed with a dirt floor, eight grain bins, and a frame hog barn. A double wide mobile home, owned by Debtor, is located on the Property. Neither FSA nor AgSouth claim a lien on the mobile home.
5. Previously, Debtor operated a breeder poultry operation on the property. Gold Kist, Inc. (“Gold Kist”) provided Debtor flocks for growing in its hatching egg program.
6. A poultry integrator is an entity that processes poultry for commercial sale. Gold Kist is the only poultry integrator in Debtor’s geographic area. By letter dated October 21, 2003, Gold Kist notified Debt- or that it would not furnish any new flocks *597to him. Debtor’s poultry houses have been vacant since May 29, 2004.
7. The field operations manager for Gold Kist testified that Gold Kist was unwilling to place flocks with Debtor for any purpose. However, if the Property were sold to another party and the Property converted to a broiler operation, Gold Kist would place flocks with the new owner.
8. Both AgSouth and Debtor presented testimony on the value of the Property.2 Each presented two diverging appraisals. Debtor’s proposed value was based upon his appraiser’s determination that the Property should be valued as rural residential. He placed a value of $2,300.00 per acre, for a total value of $77,533.00 for the Property. Debtor’s appraiser did not place any value on the existing structural improvements, inasmuch as, in his opinion, the improvements were more of a detriment to the value of the Property.
9. Debtor intends to maintain ownership of the Property, and to use the Property as his residence. He does not intend to resume poultry operations.
10. AgSouth’s proposed value was based upon converting the Property to a broiler facility, contending that use to be the Property’s highest and best use. Ag-South presented a value of $77,500.00 for the Property, and a value of $147,500.00 on the improvements. The appraisal noted, but does not appear to deduct from the value, the costs to convert the Property to a broiler facility, including alterations to the chicken houses and upgrading of equipment. AgSouth’s appraiser testified that costs to convert the houses could exceed $100,000.00, and the appraisal indicated that the value was contingent upon two (2) breeder houses being converted to broiler houses and a contract to be received from Gold Kist in order to continue operations.
11. Debtor proposes to fund his Chapter 12 Plan in part by farming approximately fifty (50) acres of corn and fifty (50) acres of soybeans per year. Sixteen (16) tillable acres are located on the Property.3
12. The parties agree that the Property, excluding improvements, has a value of $77,500.00.
13. The parties presented only the two appraisals to the Court: one for the Property to be valued as rural residential (Debtor’s) and one for the Property to be valued as a broiler facility following conversion (AgSouth/FSA). Both appraisals’ final values are based on a sales comparison approach for each of their proposed uses.4 AgSouth did not present a value based upon Debtor’s proposed use of the Property, and no other values other than those provided in the appraisals were presented to the Court.
CONCLUSIONS OF LAW
The issue to be determined is what value, if any, should be given to the improvements on the Property based upon the differing uses proposed by the parties. Both appraisers agree that the value of the Property alone is approximately $77,500.00, and that the equipment in the chicken houses on the Property add no value. Debtor argues that the value to be placed upon the chicken houses and related improvements, and thus the Property as a whole, should be based upon Debtor’s *598proposed disposition or use of the Property, as stated in 11 U.S.C. § 506. AgSouth contends that the highest and best use of the Property is to be converted into a broiler farm, and that reliance upon Debt- or’s proposed use fails to reflect the Property’s true replacement value cited by the United States Supreme Court in Associates Commercial Corporation v. Rash.5 520 U.S. 953, 963, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997) (“replacement-value standard accurately gauges the debtor’s ‘use’ of the property.”). AgSouth’s appraiser values the improvements on the Property at $147,500.00.
The determination of the value of an allowed secured claim is governed by 11 U.S.C. § 5066 of the Bankruptcy Code. Section 506 provides as follows:
Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
11 U.S.C. § 506.7 In 1997, the United States Supreme Court in Rash addressed the method for valuing collateral pursuant to § 506. 520 U.S. 953, 117 S.Ct. 1879. The Court rejected the use of a foreclosure value standard8 in favor of replacement value, and defined replacement value as “the price a willing buyer in the debtor’s trade, business, or situation would pay to obtain like property from a willing seller.” 520 U.S. at 960, 117 S.Ct. 1879. The Court determined that the second sentence of § 506(a) addresses how value is determined, and that the “ ‘proposed disposition or use’ of the collateral is of paramount importance to the valuation question.” Id. at 962, 117 S.Ct. 1879.
An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a'secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, ... and is an unsecured claim to the extent that the value of such creditor’s interest ... is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property ....”
Although the statute plainly states, and the Court in Rash emphasized, that value is to be determined in light of the proposed disposition or use of such property, courts have not been uniform in the interpretation of the “proposed disposition or use” clause of § 506. There are two primary cases that have directly addressed the meaning of this clause — with opposite results. United States v. Donato (In re Donato), 253 B.R. 151 (M.D.Pa.2000), and In re Bell, 304 B.R. 878 (Bankr.N.D.Ind.2003).
In Donato, the issue before the court was the valuation of debtors’ real property to determine the extent of the government’s secured claim. The debtors presented expert testimony valuing the property in the manner in which the debtors intended to utilize their property, which in that case was to maintain the property together as one parcel. The government’s position was that the property should be valued at its highest and best use regardless of the debtors’ proposed use, and valued the property as if it were to be subdivided. Donato, 253 B.R. at 153-54. In examining the language of § 506 and the *599Supreme Court’s analysis of § 506 in Rash, the court concluded that automatically applying the “ ‘highest and best’ use value to the real estate, without examining its proposed or intended use, is not proper.” Id. at 155.
In the context of a Chapter 12 case, an Illinois bankruptcy court similarly concluded. In re Watkins, 240 B.R. 735 (Bankr.C.D.Ill.1999). In Watkins, the court was presented with a competing appraisal by the mortgage holder that assumed a division of debtors’ property that was not contemplated by the debtors. Instead, the debtors’ current and prospective use was that of a family farm. The court determined that “[pjroperty retained for the debtor’s use must be based upon replacement value (the cost of purchasing like property for the same use),” and concluded that valuation based upon debtors’ intended use was the correct basis. Id. at 741.
The court in Bell reached a different result. 304 B.R. 878. The debtors in that case valued their property as it was presently being operated, as a farm, and argued that any valuation should be based on such proposed used. The creditor objected to such valuation. The court disagreed with the debtors, interpreting § 506 and the Supreme Court’s reference in Rash to “proposed disposition or use” as referring to a debtor’s two options for dealing with secured claims in that situation — surrender the collateral, or retain it and pay the creditor the collateral’s present value. Id. at 881. In the end, the court in Bell did not reach a conclusion as to the appropriate value because the court found that neither appraisal represented the actual replacement value, but nonetheless refused to base the valuation upon debtors’ intended use.9 See also In re Arden Properties, Inc., 248 B.R. 164 (Bankr.D.Ariz.2000) (property with potential clean-up liability was to be valued in its present state and not based upon debtor’s unique situation in which the debtor’s negotiated settlement with the EPA would result in relief from the clean-up liability postconfirmation).
This Court has previously addressed whether to consider an appraisal that is inconsistent with the debtor’s proposed use in In re Pavilion Prop. Ltd., C/A No. 97-3186-B (Sept. 14, 1998). In Pavilion, the debtor’s plan contemplated retrofitting the property at issue, apartment complexes, to repair defects in the buildings. The appraisal relied upon by the debtor valued the property assuming the apartments would not be repaired. The Court noted that Rash “holds that § 506(a) required that value reflect the proposed use of the Property by the Debtor under its Plan,” and found that the debtor’s appraisal that failed to consider the proposed use carried little, if any, probative weight. See also In re Pack Enter., C/A No. 03-05020-W (Bankr.D.S.C. Sept. 12, 2003) (excluding appraisal on a motion in limine that did not value poultry farm in accordance with debtors’ proposed disposition or use of the property in the plan).
In applying § 506 and the analysis from Rash to the matter before the Court, the question is not whether the Court is to consider the debtor’s proposed disposition or use of collateral — that is clear enough based upon the language of § 506. It is the meaning and extent of this phrase that the parties in this case dispute, and where courts such as in Donato and Bell have disagreed. In the matter before the Court, the only support provided by Ag-*600South for its proposition that this Court need not consider Debtor’s proposed use of his Property as rural residential is based upon the analysis by the court in Bell— that proposed disposition or use means whether a debtor intends to retain or surrender the collateral. Accordingly, Ag-South argues that the highest and best use of the Property as a broiler farm is to control. Were the Court to accept Ag-South’s argument, it appears that Debtor would be precluded from retaining the Property because the record shows that Gold Kist would not resume poultry operations with Debtor, and Debtor has no other ability to obtain a poultry integrator necessary for resumption of his operations.
The Court is convinced that consideration must be given to the actual use proposed by Debtor. The reasoning made by the court in Bell that consideration of a debtor’s “proposed disposition or use” is solely based upon whether the debtor intends to surrender or retain the collateral appears excessively restrictive. The language of the statute clearly provides that valuation is to be considered “in light of the purpose of the valuation and of the proposed disposition or use of such property.” 11 U.S.C. § 506. The Supreme Court stated in Rash that “[s]ection 506(a) calls for the value the property possesses in light of the ‘disposition or use’ in fact ‘proposed,’ not the various dispositions or uses that might have been proposed.” Rash, 520 U.S. at 964, 117 S.Ct. 1879 (emphasis added). This reference to “various dispositions or uses” implies a broader range of options than that of either retention or surrender of the collateral, as contemplated by the court in Bell. The Supreme Court’s mandate that the consideration of the proposed use, and not the various dispositions or uses that might have been proposed, lends lesser credence to AgSouth’s appraisal, which contemplates a speculative use not intended by Debtor.
If the Court were to accept the position of AgSouth, it would appear to give creditors a trump not intended by Congress. Based upon the relationship between Debtor and Gold Kist, it would be impossible for Debtor to commence a poultry operation. Gold Kist, as the only poultry integrator in the area, has made it clear that it will not do business with Debtor. Without an integrator, there would be no market for Debtor’s poultry. Debtor would then find himself in a Catch 22 — he would be unable to retain the Property and unable to pay the present value of his Property based upon a completely different use for his Property (a broiler farm as proposed by AgSouth), but would also be foreclosed from operating the Property in such a fashion. Debtor testified that he does not have the funds to pay for such a conversion, and there was no evidence of any way in which Debtor could retain the Property under such valuation. Even if Debtor was able to convert his operations to a broiler facility, Gold Kist stated that it would not do business with Debtor.10 Adopting the position of AgSouth would severely limit or eliminate the protections afforded Debtor by the Bankruptcy Code and give creditors in such instances excessive control over the outcome of a debtor’s case.
The Court is not being presented with a situation where Debtor is being unreasonable, speculative, or capricious with respect to the proposed use for the Property, nor has any measure of bad faith *601been exhibited. Instead, Debtor is pursuing the limited options he has available to him in order to retain his Property. Implicit in the Bankruptcy Code is the opportunity to check and balance the valuation process. Abusive or bad faith efforts on the part of a debtor to manipulate the valuation process based upon a contrived proposed use can be controlled by, i.e., the plan confirmation process and the good faith corollary imposed for all reorganizing debtors. Debtor is the title owner of the Property, and has filed his Chapter 12 case in order to reorganize for the benefit of Debtor and for the benefit of his creditors.11 It appears more in line with the language of § 506 and the Supreme Court’s emphasis upon the paramount importance of a debtor’s proposed use to consider Debtor’s intended use. 520 U.S. at 962, 117 S.Ct. 1879.
The definition of “replacement value” provided by the Supreme Court in Rash is further instructive. Replacement value is defined as:
the price a willing buyer in the debtor’s trade, business, or situation would pay a willing seller to obtain property of like age and condition.
Rash, 520 U.S. at 959 n. 2, 960, 117 S.Ct. 1879.12 In the first instance, the Court is to consider valuation from the perspective of a willing buyer in the debtor’s trade, business, or situation. In addition, the benchmark for evaluating the property is that of comparable age and condition.
In the matter before the Court, Ag-South’s appraisal at $225,000 contemplates converting the Property to a broiler farm and bases the value upon the “willingness of Goldkist to allow another operator to set up a broiler operation in this facility and giving them a contract.”13 The appraisal also notes that income projections are based upon upgraded equipment being installed inside poultry houses to complete the conversion and that costs to upgrade may exceed $50,000. The remarks on the appraisal also indicate that bids for the conversion would be $49,000 per house for equipment and fixtures.14 Furthermore, the comparable properties used appear to be that of broiler farms, and not properties that reflect the present condition or use *602proposed by Debtor.15 Accordingly, even setting aside the issue of Debtor’s proposed use, AgSouth’s appraisal fails to fully consider the perspective of a willing buyer in Debtor’s situation, fails to compare properties of like condition, and does not appear to reflect the Property’s true replacement value.
The purpose of the valuation in this case it to value the Property for future plan confirmation purposes. It is clear from Debtor’s testimony at the hearing and from a review of his Chapter 12 Plan that Debtor cannot utilize the real estate to conduct a poultry operation. He intends to use the Property for his residence, and to grow crops on a portion of the Property.
The appraisal submitted by Debtor is based on the use of the Property as rural residential. Such valuation is in conformity with Debtor’s intended disposition and use for the Property. Debtor’s intended use does not appear unreasonable. The parties presented the Court with no other appraisals or figures, and indicated to the Court that their evidence was submitted in contemplation of a choice by the Court of one appraisal or the other. Accordingly, for the reasons stated herein, the Court accepts Debtor’s appraisal of the Property in the amount of $77,500.00.
Therefore, it is
ORDERED that the claim of AgSouth with respect to the Property is secured in the amount of $77,500.00. The balance, if any, of AgSouth’s claim is unsecured; and it is further
ORDERED that the claim of PSA with respect to the Property is wholly unsecured. AND IT IS SO ORDERED.
JUDGMENT
Based upon the Findings of Fact and Conclusions of Law as recited in the attached Order of the Court, the claim of AgSouth Farm Credit with respect to Debtor’s real property at issue in Debtor’s 11 U.S.C. § 506(a) motion to value is secured in the amount of $77,500.00, and the balance, if any, of AgSouth Farm Credit’s claim is unsecured. The claim of Farm Service Agency with respect to the real property is wholly unsecured.
. The Court notes that, to the extent any of the following Findings of Fact constitute Conclusions of Law, they are adopted as such, and, to the extent any Conclusions of Law constitute Findings of Fact, they are so adopted.
. FSA did not present its own expert testimony, instead relying upon the appraisal and testimony of AgSouth’s appraiser.
. Debtor indicated that he will rent the additional farm land needed for crop production.
. AgSouth’s appraisal also provided figures based upon an income capitalization approach and a summation (cost) approach.
. The Property was originally used as a breeder farm as opposed to a broiler farm.
. Further references to the Bankruptcy Code will be by section number unless otherwise indicated.
. In its entirety, Section 506(a) provides:
.A foreclosure value standard takes into consideration the amount the creditor would realize upon foreclosure and sale of the collateral.
. The court noted that the debtor's appraiser attributed no value to 17 acres of marshland based upon the property's use as a farm. The creditor's appraisal was not based upon sufficiently comparable properties. The court concluded that the value of the property was of some amount higher than that presented by the debtor and therefore denied confirmation.
. The Court was also not presented with any testimony of a possibility of Debtor leasing his Property to a third party that could potential-Iy obtain a contract with Gold Kist and generate an income stream.
. Debtor's schedules indicate that there is a lien on his mobile home and that there are approximately $133,000 in nonpriority claims.
. The Supreme Court in Rash noted that a creditor is exposed to double risks of potential default and property deterioration when a debtor retains property, and found that replacement value "accurately gauges the debt- or's use’ of the property.” 520 U.S. at 962-63, 117 S.Ct. 1879.
. Testimony was presented by Gold Kist that they would be willing to place flocks with a new owner. The Court was not convinced that such testimony is sufficient to overcome the deficiencies and contingencies in Ag-South’s appraisal as set forth herein.
. Following a hearing on this matter, the parties submitted memoranda on the proposed valuations. Based upon correspondence received from the parties, there appears to be some dispute about whether AgSouth's value of $147,500.00 is the value only after expending in excess of $100,000.00 to convert the chicken houses and purchase equipment. Counsel for Ag-South indicates that the figures are based upon "as is” values. Counsel for Debtor cites references in the appraisal, which are cited herein, that clearly indicate that the value is contingent upon costs expended for conversion as well as upon a contract being obtained by the operator from Gold Kist in order to continue operations. To the extent the value is based upon the improvements in their current condition, the Court is convinced that $147,500.00 is not the proper measure of the value of the improvements based upon the present condition and state of the buildings and related improvements as testified to by the parties.
. The appraisal specifically states in the remarks that only broiler facility sales were used as value indicators. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493849/ | ORDER
JOHN E. WAITES, Bankruptcy Judge.
THIS MATTER comes before the Court upon a Motion to Stay Appeal (the “Motion”) pursuant to Federal Rule of Bankruptcy Procedure 8005 filed by AgSouth Farm Credit (“AgSouth”) on June 7, 2005. The Motion is predicated upon a Notice of Appeal (the “Appeal” or “Notice of Appeal”) filed by telefax1 on June 3, 2005, which purported to appeal the Order on Craig Lewis Bishop’s (“Debtor”) Motion to Establish Value of certain real property and improvements pursuant to 11 U.S.C. § 506(a). The Order on the Motion to Establish Value determined the extent of AgSouth’s and Farm Service Agency’s (“FSA”) secured interest. Upon the emergency request of AgSouth, a hearing was held on the Motion on June 9, 2005, immediately prior to the confirmation hearing on Debtor’s Chapter 12 Plan. All parties and the Court proceeded at that hearing based upon a belief that the Notice of Appeal had been timely filed.
The Court indicated that it would deny the Motion because, in its view, AgSouth would not likely prevail on the merits of the Appeal and Debtor would suffer considerable prejudice if the confirmation of his Chapter 12 Plan, otherwise recommended by the Chapter 12 Trustee, was delayed. Language preserving the parties’ rights was suggested which would facilitate approval of an amended plan without further hearing and contemplated the denial of the Motion. It now appears that an issue exists as to the filing of the Notice of Appeal, which provides additional grounds to deny the Motion. Further, given the potential for Debtor to be prejudiced by not having been fully informed of the context within which the Appeal was filed, the Court issues this Order on the Motion for Stay Pending Appeal taking into consideration all relevant factors and the circumstances surrounding the filing of the Notice of Appeal.
This Court entered an Order on May 24, 2005 on the Motion to Establish Value, which valued the secured claim of AgSouth at $77,000.00 and the secured claim of FSA at $0.00. AgSouth, through counsel Marvin Jones, apparently determined to appeal the Order and, on June 1, 2005, mailed for filing and served by mail a Notice of Appeal. The Notice of Appeal was mailed for filing to the former address of the Bankruptcy Court’s Clerk’s Office, Post Office Box 1448. That address was discontinued in April 2005 pursuant to a February 16, 2005 Public Notice, provided to the bar and affected parties by the posting of that *604information on the Court’s Web Page, by prominent postings outside all the courtrooms, in the Clerk’s Office public areas, and by providing the information by electronic transmission to all participants of the Court’s Case Management/Electronic Case Filing system (“CM/ECF”) pursuant to Federal Rule of Civil Procedure 5. Mr. Jones’ firm is apparently not a participant in the Court’s CM/ECF system.2 Jones attended hearings before the Court in this and other cases subsequent to February 16, 2005.
Due to the Notice of Appeal being mailed to an incorrect address, the original Notice did not arrive at the Clerk’s Office on or before the last day for the timely filing of an appeal, June 3, 2005. The circumstances surrounding the telefax filing are as follows. On Friday, June 3, 2005, at midday, another lawyer participating in the case, an Assistant United States Attorney representing FSA, inquired with a courtroom deputy clerk (the “Courtroom Deputy Clerk”) as to whether the Court had yet received the Notice of Appeal.3 Identifying concern with Jones’ use of the incorrect address, the Courtroom Deputy Clerk advised the Chief Deputy (Type II) Clerk of Court,4 whereupon the Chief Deputy directed the Courtroom Deputy Clerk to initiate contact with Jones to inquire about the filing of the Notice of Appeal.
Jones’ office is located in Walterboro, South Carolina, approximately 95 miles from the Clerk’s Office, with a travel time of approximately 1 % hours. After inquiring with Jones and upon confirmation that the Assistant U.S. Attorney had previously received a copy of Jones’ Notice, but without providing information or contact with Debtor’s counsel, the undersigned, or his Chambers staff, the Chief Deputy allowed the filing by telefax and directed the docketing of the Notice of Appeal with a filed date of June 3, 2005. The Notice was entered on the docket on Monday, June 7, 2005. The telefax transmission information visible on the Notice of Appeal indicated a transmission at 3:22 p.m. on June 3, 2005.
The undersigned Judge and his Chambers staff of 3 were all present and working on June 3, 2005, and no inquiry or request regarding the Notice of Appeal was made to them by either counsel or any *605member of the Clerk’s Office. The originally mailed Notice of Appeal was not received by the Court until June 15, 2005.
Facsimile filings are not allowed by the United States Bankruptcy Court for District of South Carolina except under the strictest of demonstrated circumstances. However, no Local Rule expressly references the allowance. As previously referenced, the Guidelines for the Filing of Documents (the “Guidelines”) were implemented by Operating Order 04-11 on October 18, 2004. The twenty-three (23) page document governs the filing of all documents, including both electronically transmitted documents and paper filings (described as conventional filings). The Guidelines allow electronically transmitted filings under the Court’s CM/ECF system and contemplate facsimile filings only in the event of a technological failure of the Court’s CM/ECF system (not that of the filing party). Furthermore, the filing is subject to Court review of the circumstances of such an emergency filing, including whether the filing would be made untimely as a result of a technological failure of the Court’s CM/ECF system.
The Guidelines do not provide for paper or conventional filings by telefax. Additionally, the Guidelines at Section II.A.1. require all filings by parties with legal representation who are not registered on CM/ECF to file electronically through submission of a CD rom or a 3.5 inch computer disk. Furthermore, no Local Rule of this Court authorizes filing by telefax. Accordingly, such filings are not authorized beyond the above-described circumstances.5
Despite the newly enacted comprehensive Guidelines, as well as subsequent revisions to the Local Rules, and unbeknownst to the undersigned, the Clerk’s Office may continue to refer to an Order entered on August 22,1997 entitled Emergency Filing of Documents During Non-Public Business Hours. Any reliance thereon appears misplaced for a number of reasons.
First, the enactment of the comprehensive Guidelines governing the filing of documents appears to supercede the 1997 Order. The Guidelines are recognized in the Court’s most recent revision of the Local Rules in March 2005 with respect to the filing of pleadings and other documents. See SC LBR 1007-1, 9014-l(b)(4), and 9014 — 1(d).
Second, the 1997 Order was based upon former South Carolina Local Bankruptcy Rule 5005-1, which provided wide latitude to the Clerk of Court regarding filing requirements and the issuance of controlling “Clerk’s Instructions.” Local Rule 5005-1 *606and the resulting Clerk’s Instructions were abrogated upon the adoption of a comprehensive set of new Local Rules on April 15, 2005. In addition, the Local Rules have been revised on at least two occasions since 1997. The most recent revisions in 2005 were specifically contemplated to incorporate existing operating and procedural orders (regardless of title) into the Local Rules in an effort to consider continuation of their effectiveness through the Local Rules. The 1997 Order was never incorporated into the Local Rules through any of the post-1997 revisions. To the extent any Order was not incorporated into the Local Rules, effort was further undertaken to note all outstanding operating and procedural orders affecting parties on the Court’s web page. The 1997 Order was not identified by the Clerk’s Office, through its Chief Deputy, as such an effective order nor has it been posted on the Court’s web page as such a governing order. It is the view of the undersigned that the 1997 Order cannot be viewed as currently effective.6
Third, the 1997 Order provides that the Clerk or her designee remain at the Court until 6:00 p.m. on a regular business day to accept emergency filings and allows telefax filings only after 6:00 p.m., or on a weekend or a legal holiday. The record here indicates that Jones could have delivered the original documents for filing on or before 5:00 p.m. on Friday, June 3, 2005, a regular business day. Finally, the telefax procedures described in the Order require the original to be delivered to the Clerk’s Office by 9:30 a.m. on the day following the request. The record demonstrates the original Notice of Appeal was not presented until twelve (12) days thereafter. Accordingly, even if the 1997 Order were to be considered, the procedures thereunder were not followed.
The undersigned did not authorize the telefax filing of the Notice of Appeal, despite being available for such consideration, and no Local Rule or equivalent order contemplated the filing in the manner executed. Therefore, the Court believes it was unauthorized.
Pursuant to Federal Rule of Bankruptcy Procedure 8005, the Court considered the Motion for Stay Pending Appeal on June 9, 2005 and had determined to deny the Motion. The circumstances surrounding the telefax filing of the Appeal and receipt of the original Notice of Appeal twelve (12) days after the deadline for such filing,7 *607which this Court became fully aware subsequent to the hearing on June 9, 2005, provide additional information for this Court to consider prior to issuing its Order on the Motion for Stay Pending Appeal, particularly given the potential for prejudice to Debtor.8
Accordingly, for the reasons stated on the record of the hearing held on Thursday, June 9, 2005, and for the reasons stated herein, the Motion for Stay Pending Appeal is denied.
AND IT IS SO ORDERED.
. The terms "telefax” and "facsimile” are used interchangeably herein.
. This Court converted to the Case Management/Electronic Case Filing system, approved by the Judicial Conference of the United States, on January 21, 2003. On October 18, 2004, the Court revised its prior guidelines relating to CM/ECF and implemented the Guidelines for the Filing of Documents, adopted by Operating Order 04-11, which comprised a comprehensive set of procedures for filings with this Court. While participation in CM/ECF is not mandatory, the Guidelines express that those parties with legal representation who are not registered CM/ ECF participants shall effect filings electronically through submission of a CD rom or a 3.5 inch computer disk. Only parties without legal representation are to effect filings conventionally (i.e. by a paper filing).
. The Order affected the rights of FSA. Pursuant to Federal Rule of Bankruptcy Procedure 8002, if a timely notice of appeal is filed by a party, any other party may file a notice of appeal within 10 days of the date on which the first notice of appeal was filed, or within the time otherwise prescribed by the rule, whichever period last expires. Accordingly, FSA had an additional period beyond the filing of AgSouth's Appeal within which to file its appeal. Rule 8002 specifically contemplates that the additional time given to any other party to appeal is dependent upon the timely filing of an appeal by the initial filing party. Nevertheless, FSA did not file a Notice of Appeal and its time for doing so has expired pursuant to Rule 8002.
.Effective June 4, 2005, the Chief Deputy was appointed Acting Clerk of Court by the Chief Judge during the pendency of the Court's selection process for a successor Clerk.
. Pursuant to the United States District Court for the District of South Carolina Local Rule 83.Di.02, the Bankruptcy Judges of this District are authorized to make such rules of practice and procedure as they may deem appropriate, thus it appears the rules of this Court would govern the filing of documents before this Court. Nevertheless, even considering the Local Rules for the District Court, Local Rule 5.02 references the filing of documents by facsimile in the event of an emergency after-hour filing when the party making the request contacts the Clerk of Court or his designee during normal business hours to make arrangements to accept the after-hour filing. Local Rule 5.02 specifically provides that the filing party must subsequently deliver the original document to the Clerk of Court by 9:30 a.m. on the first business day following the request. Furthermore, in the District Court's Electronic Case Filing Policies and Procedures, facsimile filings appear to be defined as an "alternative submission” to filing via the District Court's CM/ECF system. "Alternative Filings” include e-mail, facsimile, or physical presentation, all of which appear to be permitted in the event of a technical failure of the Court's system. Therefore, even if applicable, the filing of the Notice of Appeal did not comply with the District Court’s Local Rules and Procedures.
. Furthermore, with the advent of CM/ECF, the procedures provided in the 1997 Order appear outdated, and the filing of post-CM/ ECF documents are now more appropriately addressed in the Guidelines.
. It appears that no motion has been made pursuant to Federal Rule of Bankruptcy Procedure 8002(c)(2), which may have extended the time for filing an appeal based upon a showing of excusable neglect. Furthermore, the Court is aware of a narrowly applied "unique circumstances doctrine” which may apply where "a party has performed an act which, if properly done, would postpone the deadline for filing his appeal and has received specific assurance by a judicial officer that this act has been properly done.” Panhorst v. United States, 241 F.3d 367, 372 (4th Cir.2001) (citing Ostemeck v. Ernst & Whinney, 489 U.S. 169, 109 S.Ct. 987, 103 L.Ed.2d 146 (1989)). The continuing viability of this doctrine has been called into doubt. Id. Nevertheless, the unique circumstances doctrine may not be available inasmuch as it does not appear that an act was performed which if properly done would have postponed the appeal deadline, and there was no specific assurance by a judicial officer as contemplated by the doctrine. Id. See also Moore v. South Carolina Labor Bd., 100 F.3d 162, 164 (D.C.Cir.1996) (statements made by clerk’s office cannot be characterized as official judicial action); United States v. Henry Bros. Partnership (In re Henry Bros. Partnership), 214 B.R. 192, 196 (8th Cir. BAP 1997) (must be affirmative representation by the judge).
. The Court notes that the telefax filing was originally contemplated by the Clerk’s Office to be replaced by the original Notice of Appeal (not received until June 15, 2005) and reflect a filed date of June 3, 2005. Under these circumstances, a party reviewing the docket may not be fully aware of the circumstances surrounding the filing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493850/ | MEMORANDUM OPINION ON THE UNITED STATES OF AMERICA’S MOTION TO ALLOW UNTIMELY PROOF OF CLAIM FOR LACK OF NOTICE (DOCKET NO. 837)
JEFF BOHM, Bankruptcy Judge.
The United States of America, through its agent, the Internal Revenue Service (IRS), filed a Motion to Allow Untimely Proof of Claim for Lack of Notice (the Motion) in the above-styled chapter 7 case. The chapter 7 Trustee (the Trustee) and Baker Hughes Oilfield Operations, Inc. (Baker) filed pleadings opposing the Motion. This Court believes the positions of the Trustee and Baker are meritorious with respect to the issue of timeliness, and therefore holds that the IRS’s proof of claim was untimely filed. However, despite this holding, this Court also holds that the portion of the IRS’s late-filed proof of claim which constitutes a priority claim must be paid in full before the Trustee makes any distribution to Baker for application against its allowed unsecured claim. This memorandum explains how this Court arrived at these holdings.
I. FACTUAL BACKGROUND AND RELEVANT PROCEDURAL HISTORY
The hearing on the Motion was held on February 9, 2005 and none of the parties called any witnesses to establish any facts. Rather, the relevant facts were established by reference to the record in this case and by assertions made by counsel of record in pleadings and at the hearing, which constitute judicial admissions.
The relevant facts, in chronological order, are as follows:
(1) On May 30, 1995, Profco, Inc. (Debt- or) filed a voluntary chapter 11 Petition;
(2) On June 6,1995, the IRS’s automatic insolvency system reflected that the IRS was aware of the chapter 11 case;
(3) On June 7,1995, the Order for Relief was entered, and this Order set forth that the proof of claim deadline *616was October 3, 19951 and that the first date set for the meeting of creditors was July 5,1995;
(4) The Debtor scheduled the IRS as a creditor on its Schedules, which were filed on June 30,1995;
(5) On July 5, 1995, the Debtor’s chapter 11 case was converted to a chapter 7 case;
(6) After the case was converted to a chapter 7, the Trustee discovered that the estate had assets, and therefore, on May 16, 1996, a Notice of Assets was sent out to all creditors setting forth that the Trustee had discovered assets and that the deadline for governmental entities to file their proofs of claim was November 12, 1996. It is unclear whether the IRS received this Notice of Assets;
(7) The IRS failed to file a proof of claim by the initial deadline of October 3, 1995, and also by the deadline of November 12, 1996 set forth in the Trustee’s Notice of Assets;
(8) The IRS did not file its proof of claim until January 10, 2003 — which was 7 1/4 years after the initial bar date of October 3, 1995 and 6 1/6 years after the bar date of November 12, 1996 in the Trustee’s Notice of Assets;
(9) The IRS’ proof of claim (the Claim) sets forth that the IRS has an unsecured priority claim of $132,833.08 and a general unsecured claim of $59,447.60;
(10) The IRS did not file the Motion until December 17, 2004 — which was approximately 9 1/4 years after the initial bar date, almost 8 years after the bar date in the Trustee’s Notice of Assets, and almost 2 years after the filing of the Claim;
(11) The Trustee presently holds approximately $600,000 for distribution to creditors. Baker holds a general unsecured claim of $3,165,092.77 and the total amount of all general unsecured claims is $6,214,134.95.
(12) The Trustee has made some payments to administrative claimants, and he also paid certain wage claims and taxes. The Trustee has not yet filed a final Report, and no order approving such a report has been signed and entered on the docket.
(13) A hearing on the Motion was held on February 9, 2005 at 1:30 p.m. Alan Gerger appeared for the trustee, David Whitcomb appeared for the IRS, and Patrick Devine appeared for Baker. The Court considered the Motion, responses and objections thereto, heard the arguments of parties, and took the matter under advisement.
II. DISCUSSION
The Motion requests that this Court allow the Claim as timely filed. The Trustee’s response does not expressly state the basis for the Trustee’s objection; it simply requests that the Court deny the Motion.2 *617Baker’s objection expressly requests disal-lowance of the Claim in the penultimate paragraph of Baker’s pleading, and then the prayer paragraph requests the Court to deny the Motion. In sum, the issues raised and the relief sought in these pleadings can be boiled down to one question: Should the Claim, in whole or in part, be barred from payment? In answering this question, this Court will consider three issues: (1) the timeliness of the Claim; (2) the allowance of the Claim; and (3) the relative priority of the Claim.
A. The Timeliness of the Claim
Rule 3003(c)(3), which governs the time for filing proofs of claim in chapter 9 and chapter 11 cases, sets forth that: “The court shall fix ... the time within which proofs of claim or interest may be filed.” Fed. R. Bankr. P. 3003(c)(3) (2004). In the case at bar, which was initially filed as a chapter 11 case, this Court set the bar date for October 3, 1995.3 Although the IRS had actual knowledge of this case by no later than June 6, 1995, the IRS failed to file a proof of claim by the October 3, 1995 deadline. Accordingly, the Claim is untimely filed unless, as Rule 3003(c)(3) notes, the IRS can show that conditions existed as described in Rule 3002(c)(2), (c)(3), or (c)(4). Id. Unfortunately for the IRS, none of these conditions are present in this case; therefore, assuming that Rule 3003(c)(3) applies in this case,4 the Claim is untimely filed. In re 50-Off Stores, Inc., 220 B.R. 897, 900 (Bankr.W.D.Tex.1998); In re Lee Way Holding Co., 178 B.R. 976, 984—986 (Bankr.S.D.Ohio 1995); In re Honeycutt Grain Co., Inc., 41 B.R. 678, 681 (Bankr .W.D.La.1984).
If Rule 3003(c)(3) is inapplicable because the case was converted from a chapter 11 to a chapter 7 before the bar date of October 3, 1995 expired, then Rule 3002(c) must apply. This Rule governs the time for filing proofs of claim in chapter 7 cases.
Rule 3002(c) sets forth that “a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors.” Fed. R. Bankr. P. 3002(c) (2004). However, Rule 3002(c)(1) is a provision expressly carved out for governmental entities of which the IRS is assuredly one. Rule 3002(c)(1) states that: “A proof of claim filed by a governmental unit is timely filed if it is filed not later than 180 days after the date of the order for relief.” Fed. R. Bankr. P. 3002(c)(1) (2004). Thus, governmental entities are given more time than non-governmental claimants to file their proof of claim. The date of the order for relief in this case was May 30, 1995. The Claim was not filed by November 26, 1995 (i.e., 180 days after May 30, 1995); therefore, the Claim was untimely filed.
Even if the date of the order for relief is not the date of the filing of the chapter 11 petition, but rather the date of the conversion of the case under 11 U.S.C. § 348(b) — which was July 5, 1995 — the Claim was still untimely filed. 180 days following July 5, 1995, is January 1, 1996, and the Claim was not filed until January 10, 2003. There is no doubt that the Claim was tardily filed under any scenario.
Rule 3002(c)(1) does provide that the bar date for a governmental entity may be extended “for cause shown” so long as the governmental entity files a motion before *618the expiration of the 180 day period for filing the proof of claim. In the case at bar, the IRS filed the Motion on December 17, 2004. Regardless of whether the 180 day period expired on November 26, 1995 or January 1, 1996, the Motion did not come within hailing distance of being timely filed. Accordingly, even if the IRS could show cause — which it cannot given that it had actual notice of the bankruptcy filing as early as June 6, 1995 — the Motion itself was still not filed within the 180 day period; therefore, the IRS may not avail itself of the provision in Rule 3002(c)(1) allowing for an extension of time to file its proof of claim.
Rule 3002(c)(5) is also worth reviewing because this provision provides yet another avenue for a claimant to file a claim. This rule sets forth that: “If notice of insufficient assets to pay a dividend was given to creditors pursuant to Rule 2002(e), and subsequently the trustee notifies the court that payment of a dividend appears possible, the clerk shall notify the creditors of that fact and that they may file proofs of claim within 90 days after the mailing of the notice.” Fed. R. Bankr. P. 3002(c)(5) (2004).
This Court has reviewed the docket sheet in the case at bar, and it is unclear whether a Notice of Insufficient Assets was ever sent. However, it is clear that the Clerk’s office sent a Notice of Assets on May 16, 1996 (Docket No. 310), which arguably triggers Rule 3002(c)(5) even if no Notice of Insufficient Assets was ever initially sent. The Notice of Assets set forth that the Trustee had discovered assets, that non-governmental entities had until September 19, 1996 to file their proofs of claim, and that governmental entities had until November 12, 1996 to file their claims.
It is unclear whether the IRS received this Notice of Assets. If it did, then it certainly had notice of the bar date of November 12, 1996, and the IRS failed to file the Claim by this deadline. If the IRS did not receive this Notice, the IRS nevertheless knew about the existence of the chapter 11 case as early as June 6, 1995, and the IRS therefore had a duty to investigate and check the docket sheet to determine when the bar date was for filing proofs of claims. Robbins v. Amoco Prod. Co., 952 F.2d 901, 908 (5th Cir.1992) (“When the holder of a large, unsecured claim receives any notice that its debtor has initiated bankruptcy proceedings, it is under constructive or inquiry notice that its claim may be affected, and it ignores the proceedings to which the notice refers at its peril.”) (internal citations omitted); Grossie v. Sam, 894 F.2d 778, 779-82 (5th Cir.1990) (holding that a creditor was bound by the terms of the debtor’s reorganization plan where the creditor had general notice of the debtor’s bankruptcy but did not receive notice of the claims bar date); In re TLI, Inc., 1998 WL 684242, at *4-5 (N.D.Tex. Sept. 25, 1998) (holding that if a creditor receives actual notice of the debtor’s bankruptcy, due process is satisfied and the creditor is bound by the terms of any plan of reorganization confirmed by the bankruptcy court). This, the IRS did not do; and its lack of diligence should not now be rewarded by allowing the IRS to invoke Rule 3002(c)(5) and contend that it did not receive notice of the November 12, 1996 deadline. See generally In re TLI, Inc., 1998 WL 684242, at *5.
All in all, under either Rule 3002 or Rule 3003, the Claim is tardily filed. Once a claim is untimely filed, this Court cannot grant a retroactive extension of the time to file. In re Rago, 149 B.R. 882, 884 (Bankr.N.D.Ill.1992). Indeed, Bankruptcy Rule 9006(b)(3) expressly prohibits this Court from enlarging the time limits of *619Rule 3002(c). Even if this Court had the discretion to do so, it would not under the facts of this case. The IRS had actual knowledge about this case since June 6, 1995, and yet did nothing for several years. The IRS was not only excessively late in filing the Claim; it was excessively late in filing the Motion. Such conduct, whether negligent or deliberate, merits no assistance from any discretionary powers that this Court might have.
For all of these reasons, the Claim is untimely filed, and this Court denies the Motion to the extent that it requests an order stating that this Claim is deemed to be timely filed.
B. Allowance of the Claim
The fact that the Claim was untimely filed does not resolve the question of whether the entire Claim is barred from payment by the estate. Rago, 149 B.R. at 885. Those cases that so hold or suggest otherwise are incorrect. In re Waindel, 65 F.3d 1307, 1309 n. 6 (5th Cir.1995) (agreeing with other circuit courts that have held that “to the extent that Rule 3002(a) declares every untimely filed claim to be disallowed, the Rule impermissibly conflicts with the Code” and thus Rule 3002(a) “must be viewed as providing a dividing line between timely and tardy claims, rather than a flat ban on the allowance of late-filed claims”) (internal citations omitted).
Disallowance of a claim is governed by § 502, which provides that a claim is deemed allowed unless an objection is made. 11 U.S.C. § 502(a) (2004). § 502(b) sets forth that if an objection is lodged, the court shall allow the claim unless it fits into any one of eight specific categories. 11 U.S.C. § 502(b) (2004). None of these categories includes the untimely filing of a claim. The plain meaning of this statute — which this Court is required to discern under U.S. v. Ron Pair Enterprises, 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) — is therefore that a claim (including the Claim in this case), even though untimely filed, is an allowed claim entitled to be paid.
Support for this interpretation comes from other relevant sections of the Bankruptcy Code. § 726(a)(1) makes express provision for payment of a claim “which is timely filed under section 501 of this title or tardily filed before the date on which the trustee commences distribution under [section 726].” 11 U.S.C. § 726(a)(1) (2004) (emphasis added). Further, § 726(a)(3) makes specific provision for payment of an “allowed unsecured claim proof of which is tardily filed. ” 11 U.S.C. § 726(a)(3) (emphasis added). This statutory language leaves no doubt that the untimely filing of a claim does not constitute grounds for disallowance of that claim.
This Court is mindful that Rule 3002(c)(1), which governs the deadline for filing governmental claims in chapter 7 cases, states that: “A proof of claim filed by a governmental unit is timely filed if it is filed not later than 180 days after the date of the order for relief.” Fed. R. Bankr. P. 3002(c)(1) (2004). This Court is also mindful that Rule 3002(a), entitled “NECESSITY FOR FILING,” sets forth that: “An unsecured creditor ... must file a proof of claim ... for the claim ... to be allowed.” Fed. R. Bankr. P. 3002(a)(1) (2004) (emphasis added). These two bankruptcy rules, when read together, seem to require disallowance of a late filed claim, such as the Claim of the IRS. However, such a construction conflicts with the plain meaning of § 502 and § 726. Where a statute and a rule conflict, the statute governs. Waindel, 65 F.3d at 1309. Therefore, neither the Trustee nor Baker may rely upon Rules 3002(a) and (c)(1) to obtain disallowance of the Claim. Id. The Claim *620is therefore an allowed claim under the facts in this case.
C. Priority of the Claim
Because the Claim is an allowed claim, it is necessary to determine the priority of the Claim so that the Trustee will know how to distribute the monies that he holds from liquidating the estate’s assets. The Claim sets forth that the IRS holds a priority claim of $132,833.08 and a general unsecured claim of $59,497.60. The section governing the priority of distribution is § 726(a), which delineates the tiers of distributees who receive payments from the chapter 7 trustee. 11 U.S.C. § 726(a) (2004). § 726(a)(1) describes the first tier of claimants to whom property of the estate shall be distributed, as follows:
first, in payment of claims of the kind specified in, and in the order specified in, section 507 of this title, proof of which is timely filed under section 501 of this title or tardily filed before the date on which the trustee commences distribution under this section.
11 U.S.C. § 726(a)(1) (2004) (emphasis added).
There is no question that the priority claim of $132,833.08 constitutes a claim “of the kind specified in ... section 507 of this title.” Id. There is also no question that this priority claim was tardily filed. Hence, whether this priority claim falls within the § 726(a)(1) category of first tier distributees turns on whether the Claim was filed “before the date on which the trustee commences distribution under this section.” Id.
The Trustee has made interim distributions in this case. He has paid certain administrative claims and certain wage claim taxes. At first blush, therefore, it appears that the Claim might have been filed after the commencement of distributions by the Trustee and therefore not fall within the § 726(a)(1) category. However, such a conclusion would be wrong. The Fifth Circuit, in interpreting the phrase “the date on which the trustee commences distribution” under § 726(a)(1), held that:
the appropriate interpretation of “commences distribution,” under the totality of the present bankruptcy law, is the date when a bankruptcy court approves the trustee’s final report, thus allowing the trustee to commence final distribution of the estate.
Matter of Van Gerpen, 267 F.3d 453, 457 (5th Cir.2001) (emphasis added).
In the case at bar, this Court has not approved the Trustee’s final report because no such report has yet been filed. Hence, the Claim was filed before “the date on which the trustee commences distribution.” Accordingly, the priority claim of $132,833.08 falls within § 706(a)(1) and must be paid in full before distribution is made to the remaining categories of claimants.
The IRS’s allowed unsecured claim of $59,447.60 does not come within § 726(a)(1) because it is not a claim “of the kind specified in ... section 507.” 11 U.S.C. § 726(a)(1) (2004). Therefore, it falls within either the second tier status created by § 726(a)(2) or the third tier status created by § 726(a)(3). § 726(a)(2) includes allowed unsecured claims that are: (a) timely filed; or (b) tardily filed so long as the claimant “did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section 501(a).” 11 U.S.C. § 726(a)(2)(C)(i) (2004). In the case at bar, the IRS did have actual knowledge of the case well in advance of the deadline for filing proofs of claims. Indeed, the IRS had notice of the case as early as June 6, 1995—when the case was still a chapter 11. Because the *621IRS had this actual knowledge, the general unsecured portion of the Claim does not come -within the second tier of distribution.
By process of elimination, the IRS’s allowed unsecured claim of $59,447.60 falls within the third tier created by § 726(a)(3). This section includes “any allowed unsecured claim proof of which is tardily filed under section 501(a)” — which is exactly the circumstance in this case. 11 U.S.C. § 726(a)(3) (2004).
III. CONCLUSION
Applying § 726 to this case, the Trustee must first pay the IRS its priority claim of $132,833.08. Second, the Trustee must pay the allowed unsecured claims that were timely filed (such as the $3,165,192.77 claim held by Baker) or tardily filed due to lack of notice or actual knowledge. Third, he must pay the allowed unsecured claims that are tardily filed where the claimant had knowledge of the case before the bar date had passed (such as the IRS’s general unsecured claim of $59,447.60). Given the fact that the Trustee holds approximately $600,000 for distribution to all claimants, as a practical matter, there will probably be sufficient funds to pay the entire priority claim of the IRS, a portion of Baker’s claim, and none of the IRS’s allowed unsecured claim.
This result may seem strange and unfair to Baker and the Trustee. By requiring payment of all priority claims first, regardless of their timeliness, § 726(a)(1) imposes no penalty on holders of priority claims who, like the IRS in this case, have ample notice of the bankruptcy, but negligently or deliberately fail to file their claims by the bar date imposed by the Bankruptcy Rules. To permit such a disregard for the rules works against the longstanding policy in bankruptcy of encouraging finality in the administration of claims. Nevertheless, this Court, however concerned it may be about the undermining of this principle, is bound by the statutory language itself and by the Fifth Circuit’s interpretation of when a chapter 7 trustee commences distribution. Indeed, it must be remembered that the Bankruptcy Reform Act of 1994 expressly added the phrase “or tardily filed before the date on which the trustee commences distribution under this section” to make one point absolutely unambiguous: priority claims that are tardily filed receive the same first tier status as timely filed priority claims so long as the tardily filed priority claims are filed before the date on which the trustee commences distribution. See In re Anderson, 275 B.R. 922, 924 (10th Cir. BAP 2002); In re Fortier, 299 B.R. 183, 189 (Bankr.W.D.Mich.2003).
Baker should, however, take some consolation in the fact that the IRS is penalized with respect to the general unsecured portion of the Claim. By having knowledge of the bankruptcy and still filing the Claim late, the IRS’s allowed unsecured claim of $59,447.60 is subordinated to Baker’s allowed unsecured claim of $3,165,092.77. The $59,447.60 allowed unsecured claim is placed into the § 726(a)(3) tier, whereas Baker’s claim falls within the § 726(a)(2) tier because Baker’s claim was timely filed. Thus, while Baker’s claim may not be paid in full, Baker will probably at least receive payment for a portion of its allowed unsecured claim, whereas the IRS will probably receive nothing on its allowed unsecured claim of $59,447.60.
Finally, this Court wants to emphasize that the Trustee and Baker still have the right to challenge the amounts set forth in the Claim. This Court’s ruling is only that the Claim itself was untimely filed; that the Claim is nevertheless an allowed claim in its entirety; that the priority portion of the Claim comes within the § 726(a)(1) category; and that the unsecured portion *622of the Claim falls in the § 726(a)(3) category. Given the Court’s ruling, the only amount that the Trustee and Baker — indeed, perhaps only Baker — would want to challenge is the priority amount of $132,833.08. This Court leaves it to their discretion as to whether they want to pursue such relief.
A separate order consistent with this Opinion will be entered on the docket.
ORDER ON THE UNITED STATES OF AMERICA’S MOTION TO ALLOW UNTIMELY PROOF OF CLAIM FOR LACK OF NOTICE (DOCKET NO. 837)
On February 9, 2005, a hearing was held on the Motion of the United States of America to Allow Untimely Proof of Claim for Lack of Notice (Doc. No. 837) (the Motion), and the responses and objections thereto. The Court finds that the Motion is not meritorious and should be denied to the extent that it requests this Court to determine that the IRS’s proof of claim was timely filed. The Court further finds that, although the proof of claim was not timely filed, the portion of the proof of claim constituting a priority claim must nevertheless be paid in full before any distribution is made to general unsecured claims which were timely filed. It is therefore:
ORDERED that the IRS’s proof of claim is deemed to be an untimely filed proof of claim; and it is further
ORDERED that the priority portion of $132,833.08 set forth in the IRS’s proof of claim falls within the first tier of distribu-tees under 11 U.S.C. § 726(a)(1) and, therefore, this claim must be paid in full before the chapter 7 Trustee makes any distribution to those claimants who fall within the second tier of distributees under 11 U.S.C. § 726(a)(2); and it is further
ORDERED that the proof of claim filed by Baker Hughes Oilfield Operations, Inc., which is a general unsecured claim totaling $3,165,092.77, falls within the second tier of distributees under 11 U.S.C. § 726(a)(2) and, therefore, this claim must be paid in full before the chapter 7 Trustee makes any distribution to those claimants who fall within the third tier of distributees under 11 U.S.C. § 726(a)(3); and it is further
ORDERED that the general unsecured portion of $59,447.60 set forth in the IRS’s proof of claim falls within the third tier of distributees under 11 U.S.C. § 726(a)(3) and, therefore, may not be paid until all claims falling within the second tier of distributees under 11 U.S.C. § 726(a)(2) are paid in full; and it is further
ORDERED that nothing in this order shall bar the chapter 7 Trustee or Baker Hughes Oilfield Operations, Inc. from objecting to the amounts set forth in the IRS’s proof of claim; provided, however, that they must file such objections on or before May 9, 2005 or else the amounts set forth in the IRS’s proof of claim shall be deemed allowed under 11 U.S.C. § 502(a) and shall not be subject to further attack.
. The initial order for relief stated that the deadline to file a proof of claim was October 3, 1995. This date is exactly 90 days following July 5, 1995, which is the first date set for the meeting of creditors. The order for relief does not provide for a different claims bar date for governmental entities. Accordingly, it appears that the deadline of October 3, 1995 applied to both non-governmental creditors as well as governmental creditors.
. At the hearing, the Trustee’s oral argument was primarily based on the need to reward those who timely file claims, and penalize those who do not, so that a firmly established objective of the bankruptcy process, particu*617larly in chapter 7 cases, is achieved; namely, the need for finality in the administration of claims.
. See supra note 1.
. This case was converted to a chapter 7 on July 5, 1995, and Rule 3003 only applies to filing proofs of claims in chapter 9 and chapter 11 cases. | 01-04-2023 | 11-22-2022 |
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