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https://www.courtlistener.com/api/rest/v3/opinions/8493851/ | MEMORANDUM-OPINION
THOMAS H. FULTON, Bankruptcy Judge.
THIS CORE PROCEEDING1 is before the Court on the Chapter 7 Trustee Michael Wheatley’s (“Trustee”) Motion to Compel Turnover of Non-Exempt Estate Property, pursuant to Fed.R.Bankr.P. 7001(1), and the Debtor Shirley G. Prich-ard’s (“Debtor”) Objection to Trustee’s Motion to Turnover $1,252.00 per month. The Debtor seeks to exempt monthly annuity payments of $1,252.00 arising out of a personal injury action under KRS 427.150(2)(c), which allows a $7,500.00 exemption for payments received on account of personal injury, and KRS 427.150(2)(d), which allows a debtor to totally exempt payments made for compensation of future earnings that are reasonably necessary for the support of the debtor.2 Based upon the briefs submitted, statements of counsel, testimony of the Debtor and George Carter, Esquire, the attorney who negotiated Debtor’s personal injury settlement, and the entire record in this case, this Court finds that $7,500.00 of the post-petition annuity payments are exempt under KRS 427.150(2)(e), but the remaining annuity payments are not exempt under KRS 427.150(2)(d).
Findings of Fact
Debtor was involved in a car accident in 1998 when a car insured by the Eastwood Volunteer Fire Department/Eastwood Fire Protection District(“Eastwood”) failed to stop at a stop sign and struck her car. As a result of the accident, Debtor suffered two broken legs that required four surgeries and a year of recuperation and rehabilitation. Approximately one year after the accident, the Debtor, represented by George Carter, Esquire, entered into a Settlement Agreement and Release (“Settlement”) with Eastwood, in which Eastwood agreed to pay the Debtor a $75,000.00 lump sum, as well as $1,252.00 per month for twenty years. The Settlement specifically states that “all sums set forth in the section entitled to ‘Payments’ constitute damages on account of personal physical injuries, arising from an occur*637rence, within the meaning of Section 104(a)(2) of the Internal Revenue Code of 1986, as amended.”
At the time of the accident, Debtor was seventy-one years old, and worked two jobs earning approximately $11,000.00 per year. During her year of recuperation, the Debtor was unable to work and spent a great deal of time in the hospital and a nursing home. Debtor eventually was able to live on her own, but had to move to an apartment that was handicapped equipped. Subsequently, Debtor moved into her own home, where she currently resides.
Following her recuperation, the Debtor, now age 78, was able to resume working and currently earns approximately $600 net per month. These earnings supplement her monthly social security income check of $813.00, from which approximately $70 is deducted for Medicare, and her monthly $1,252.00 annuity payment.
Debtor filed for Chapter 7 bankruptcy protection on March 18, 2005. Only two proofs of claim were filed in this case, a $75,325.37 secured claim on the Debtor’s residence, and a claim for $24,566.46 for an unsecured nonpriority credit card. The Debtor testified at the evidentiary hearing that she was forced to seek bankruptcy protection due to increases in utility prices and the rising cost of medications.
At the evidentiary hearing both the Debtor and George Carter testified. The Debtor described the accident and the injuries she sustained as well as her current living and employment situations. Mr. Carter testified that he negotiated the Settlement with the intent of providing the Debtor with enough money to supplement her income so that she could maintain a basic standard of living.
Conclusions of Law
Debtor wishes to utilize two provisions of the Kentucky Revised Statutes to exempt her post-petition annuity payments from the bankruptcy estate. First, she seeks to use KRS 427.150(2)(c), which allows debtors to exempt from the bankruptcy estate a “payment, not to exceed seven thousand five hundred dollars ($7500), on account of personal bodily injury...” There is no dispute that the annuity in the case at bar is a payment received by the Debtor on account of personal bodily injury. Therefore, $7,500 of the post-petition annuity payments are exempt under the personal bodily injury exemption in KRS 427.150(2)(c). The question is then whether the remaining annuity payments are exempt under KRS 427.150(2)(d).
Although a monetary cap is placed on money received for payments specifically earmarked for personal injury, KRS 427.150(2)(d) allows a debtor to exempt proceeds from payments intended to compensate for lost wages. Specifically, KRS 427.150(2)(d) allows a debtor to exempt “a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary, for the support of the debtor and any dependent of the debtor.” Therefore we must determine if any portion of the annuity payment in the present case is for compensation of future lost wages.
Both parties have cited In re Menefee, No. 03-51340(2) (Bankr.W.D. KY 2004). In Menefee, the debtor successfully argued that two lump sum annuity payments stemming from a personal injury action were exempt under KRS 427.150(2)(d). In that case, the debtor fell in the parking lot on her way to work and suffered a herniation in her neck and a herniated disk in her back. She entered into a settlement agreement with her employer in which she received a specified amount of money payable over a period of time in exchange for absolving the other party of liability for *638pain and suffering, bodily injury, past and future medical expenses, past and future lost wages, among other claims. Menefee, No-03-51340(2). This Court found that when the settlement agreement listed a number of claims but gave no indication as to how the annuity was allocated it could not speculate as to the allotments and impose its own judgment as to how the settlement was apportioned. Further, the Trustee, who, pursuant to Fed.R.Bankr.P. 4003(c), bears the burden of showing that property is not exempt, did not provide any evidence that the annuity payments to Ms. Menefee were not, at least in part, for future lost wages. As the Trustee could not meet his burden, the Court found that annuity payments were exempt under KRS 427.150(2)(d) because they were, at least in part, on account of future lost wages, and the Court could not speculate as to the exact apportionment. Id.
The facts of the present case, however, are distinguishable from Menefee. As opposed to Menefee, the Settlement in the present case clearly states that the payments are on account of “personal physical injuries.” The settlement agreement in Menefee stated that the annuity payments were for, among other claims, liability for pain and suffering, bodily injury, past and future medical expenses, and past and future lost wages. The current Settlement clearly states that the annuity is to compensate for “personal physical injuries.” This Court may not find that the Settlement covers future lost wages when a plain reading of the document gives no such indication. Although Mr. Carter testified that his intent was to provide, at least in part, for Ms. Prichard’s lost compensation, the plain language of the Settlement does not reflect this intention. As the Court was unable to speculate as to any underlying meaning of the settlement agreement in Menefee, this Court also cannot speculate as to the true purpose of the Settlement in the present case and insert words or intentions that are not evident from a plain reading of the document. First American Natl. Bank v. Fidelity & Deposit Co. of Maryland, 5 F.3d 982 (6th Cir. 1993) (“We cannot adopt any unexpressed meaning of the phrase merely to create ambiguity where none exists. The court is not authorized to pervert language or exercise its creative powers to find other meanings for a term expressed with sufficient clarity to reflect the parties’ intent.”) (internal citations omitted). Although this Court found that the testimony of Mr. Carter was credible, it cannot speculate as to underlying meanings of a document that is unambiguous on its face. The Court therefore finds that the annuity payments are properly characterized as payments on account of personal injury only, and, as such, only the first $7,500.00 post-petition payments are exempt.
The decision in this case does not end here, however. As a court of equity, this Court is bound to look at the particular circumstances of the case and fashion an appropriate remedy. Only two proofs of claim were filed in this case, a $75,325.37 secured claim on the Debtor’s residence which she has reaffirmed, and a claim for $24,566.46 for an unsecured nonpriority credit card.3 There are approximately 165 payments remaining on the annuity and the total payments are well in excess of the unsecured claim. This Court notes that the Debtor is the epitome of the “honest but unfortunate debtor” who is forced to file bankruptcy despite her best efforts, *639including continuing to work at the age of 78, to fulfill her financial obligations. Further, this Court recognizes that the Debtor needs a certain amount of monthly income to maintain a basic standard of living, and directing all of the annuity payments to the Trustee would prevent Ms. Prichard from attaining even a basic standard of living.
Based on these factors and the Court’s equitable powers under 11 U.S.C. § 105, this Court finds that the post-petition annuity payments are exempt up to $7,500.00 under KRS 427.150(2)(c), but that the annuity payments in excess of $7,500.00 are not exempt under KRS 427.150(2)(d) because they are on account of personal injuries and not future lost wages. The Court therefore ORDERS the Debtor is to remit to the Trustee $150.00 a month beginning April 20, 2006, and on the 20th day of ever month thereafter until the $24,566.46 is paid in full.4 If the Debtor should die prior to the debt being satisfied, the unpaid balance will immediately accelerate and the full monthly annuity payments must be forwarded to the Trustee until the debt is satisfied in full.
A separate Order consistent with the foregoing has been entered in accordance with the Federal Rule of Bankruptcy Procedure 9021.
ORDER
THIS CORE PROCEEDING1 is before the Court on the Chapter 7 Trustee Michael Wheatley’s (“Trustee”) Motion to Compel Turnover of Non-Exempt Estate Property, pursuant to Fed.R.Bankr.P. 7001(1), and the Debtor Shirley G. Prich-ard’s (“Debtor”) Objection to Trustee’s Motion to Turnover $1,252.00 per month. The Debtor seeks to exempt monthly annuity payments of $1,252.00 arising out of a personal injury action under KRS 427.150(2)(c), which allows a $7,500.00 exemption for payments received on account of personal injury, and KRS 427.150(2)(d), which allows a debtor to totally exempt payments made for compensation of future earnings that are reasonably necessary for the support of the debtor. Based upon the briefs submitted, statements of counsel, testimony of the Debtor and George Carter, Esquire, the attorney who negotiated Debtor’s personal injury settlement, and the entire record in this case, this Court finds that $7,500.00 of the post-petition annuity payments are exempt under KRS 427.150(2)(c), but the remaining annuity payments are not exempt under KRS 427.150(2)(d).
The Court therefore ORDERS the Debtor is to remit to the Trustee $150.00 a month beginning April 20, 2006, and on the 20th day of every month thereafter until the $24,566.46 is paid in full. If the Debt- or should die prior to the debt being satisfied, the unpaid balance will immediately accelerate and the full monthly annuity payments must be forwarded to the Trustee until the debt is satisfied in full.
. 28 U.S.C. § 157(b)(2)(B).
. The Debtor also initially alleged that the monthly payments were exempt under KRS 427.110(1). The Debtor did not argue the applicability of this exemption in her pretrial compliance or at the evidentiaiy hearing. Further, the Court, based on its own research, does not find this exemption applicable to the current case. As such, this memorandum-opinion will focus solely on the applicability of KRS 427.150(2)(c) and (d).
. The Debtor's child/children, who stand to step into her shoes under the Settlement in the event of her death, are not precluded from seeking to purchase the claim of Chase Manhattan Bank, a prepetition creditor, at a reduced amount should Chase Manhattan wish to accept an immediate payment. See Fed. R.Bankr.P. 3001(e).
. At the evidentiary hearing the Trustee assured this Court that it was possible to keep the administration of a case open for an extended period of time.
. 28 U.S.C. § 157(b)(2)(B). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493853/ | MEMORANDUM OPINION
DENNIS R. DOW, Bankruptcy Judge.
The matter before the Court in this case is the objection by the trustee to the head of household exemption claimed by debtor Evan Joshua Swigart (“Debtor”) pursuant to Mo.Rev.Stat. § 513.440. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 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). Debtor asserts the head of household exemption based upon his contention that he pays the expenses for the maintenance of a household consisting of himself, his mother and his brother. Trustee contends that this group of individuals does not qualify as a family authorizing the Debtor to claim a head of household exemption and that Debtor has failed to demonstrate that he actually provides economic support for its members. The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure as made applicable to this proceeding by Rule 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure. For all the reasons set forth below, the Court concludes that while the Debtor, his mother and his brother would qualify as a “family” within the meaning of the Missouri head of household exemption statute, the evidence does not demonstrate that Debtor provided a level of economic support which justifies sustaining his claim of exemption.
I. FACTUAL AND PROCEDURAL BACKGROUND
Debtor filed a voluntary petition commencing a case under Chapter 7 of the Bankruptcy Code in this Court on October 13, 2005. In Schedule I of the Schedules of Assets and Liabilities filed with the Court, the Debtor indicated that he is single with no children, but claimed his mother and brother as dependents. In an amended Schedule C, Debtor claims the Missouri head of household exemption in the amount of $1,250 pursuant to Mo.Rev. Stat. § 513.440.
At the hearing convened by the Court on the trustee’s objection, the trustee introduced into evidence the Debtor’s 2005 United States, Kansas and Missouri income tax returns.1 The returns reflect that in each case, the Debtor selected the filing status “single” rather than “head of household” and claimed one exemption, for himself. Those returns also reflect that Debtor did not claim to have any dependents. In addition, the trustee introduced into evidence Debtor’s Schedule J, the schedule of current expenditures, reflecting the Debtor’s average monthly expenses. That schedule shows total expenses of $2,265.83, including rental or home mortgage expense of $450.00 a month, $300.00 a month for food and total utility expenses (including telephone) of $315.00.2
Debtor testified that at the time of the filing of the petition, he lived with his mother and brother in a home which he rented. His mother had a part-time job which, according to the Debtor, paid only enough to make the payment on the loan secured by her automobile. His brother, twenty years old, is unemployed and contributed nothing to the household’s expenses. Debtor claims that he paid all the rent, utilities, groceries and other household items. This arrangement began *727sometime in the year 2003 and existed at the time of the filing of the petition, although it apparently terminated sometime shortly thereafter. Debtor testified that sometime in November or December 2005, he and his mother and brother had a falling out and ceased living together. According to the Debtor, they are no longer on speaking terms.
Debtor asserted that he claimed his mother and brother as dependents on tax returns filed in previous years, but those returns were not introduced into evidence. Confronted on cross-examination with the fact that he had failed to claim either as a dependent in the year 2005, the year in which the petition was filed, he stated that he had not done so because they were no longer on speaking terms and he was concerned that they would file returns claiming themselves and that he might, as a result, have difficulty with the Internal Revenue Service. Debtor also testified that at the time of the filing, he owned another residence, since surrendered to the lienholder, in which his stepfather lived at the time. Debtor claims to have been making the mortgage payment on that residence as well. On cross-examination, Debtor also testified that the expenses shown on his Schedule J are, in most respects, combined expenses representing the maintenance of both households.
II. DISCUSSION AND ANALYSIS
Section 522 of the Bankruptcy Code provides for exemptions which a debtor may claim from property of the estate, but provides each state with the opportunity to “opt out” of the federal exemption scheme and provide for its own exemptions. 11 U.S.C. § 522(b)(1). Missouri has “opted out” of the federal scheme, thus requiring a debtor to claim only those exemptions allowed under state law or federal non-bankruptcy law. Mo. Rev.Stat. § 513.427. Missouri statutes provide that each “head of a family” may exempt property of a value of $1,250, plus $350 for each of such person’s unmarried dependent children. Mo.Rev.Stat. § 513.440. Exemption laws are enacted to provide relief to the debtor and are to be liberally construed in favor of the debtor. In re Schissler, 250 B.R. 697, 700 (Bankr.W.D.Mo.2000); In re Turner, 44 B.R. 118, 119 (Bankr.W.D.Mo.1984). Notwithstanding this maxim of statutory construction, the facts in the case must satisfy the requirements of law for the court to sustain the claim of exemption. In re Crippen, 36 B.R. 7, 8 (Bankr.E.D.Mo.1983). As the party objecting to the exemption, however, the trustee has the burden of proof that the exemption should not be allowed. Fed. R. Bankr.Proc. 4003(c).
A. Whether the Debtor’s Household is a “Family”
The Court must first determine whether the group of individuals living with the Debtor at the time of the filing of the petition constituted a “family” of which the Debtor can be “head” as those terms are used in Mo.Rev.Stat. § 513.440. The trustee contends that since Debtor is single with no children, he cannot be the head of a family. The Debtor argues that the group of persons living together in the household at the time of filing can be a family pursuant to Missouri law. The applicable statute contains no definition of the term “family”. Generally speaking, in order to qualify for the exemption, the debtor must be supporting a household. Murray v. Zuke, 408 F.2d 483, 485-86 (8th Cir.1969); In re White, 287 B.R. 232, 234 (Bankr.E.D.Mo.2002); In re Thorpe, 251 B.R. 723, 724-25 (Bankr.W.D.Mo.2000). This usually entails the support of a spouse and/or dependent children and means that a single person with no dependent children does not qualify for the ex*728emption. White, 287 B.R. at 234; Thorpe, 251 B.R. at 724-25. This, however, begs the question whether a debtor supporting a household including other family members may claim the exemption.
New Missouri cases interpret the phrase “head of a family.” A review of those precedents indicates that they adopt a broad view of the concept of “family.” Although many of these cases are of ancient vintage, there is no reason to believe that they do not still represent Missouri law. In In re Arnold, 193 B.R. 897 (Bankr.W.D.Mo.1996), a more recent case, the Court reviewed many of those precedents and concluded that the cases hold that relatives other than parents can assume the obligation of support and qualify as head of a family. Arnold, 193 B.R. at 901. In that case, the Court held that a debtor whose household consisted of himself, a new spouse and her three children, debt- or’s stepchildren, qualified to assert the head of family exemption. Arnold, 193 B.R. at 902. As the Court in Arnold concluded, a review of the older Missouri cases clearly demonstrates that one need not be a biological father of those in the household in order to be a head of family within the meaning of the Missouri exemption statute.
For example, in Jarboe v. Jarboe, 106 Mo.App. 459, 79 S.W. 1162 (Mo.App. KC 1904), the court held that an individual who furnished a home for himself, his mother, two minor brothers and an invalid sister and provided groceries and money for their support was the head of a family within the meaning of the garnishment statute. Jarboe, 79 S.W. at 1163. The court also noted that a family had been defined as “a collective body of persons who live in one house under one head or manager,” and that a head of a family is “one who contracts, supervises and manages the affairs about the house, not necessarily a father or a husband.” Jarboe, 79 S.W. at 1163; see also e.g., Duncan v. Frank, 8 Mo.App. 286, 1880 WL 9582 (Mo. App. St. Louis 1880) (“there can be no doubt that one who, with his sister, keeps house for his younger brothers and sisters, thus partly contributing to their support, is the head of a family under the exemption laws, though neither a husband nor a father, and though the children be not wholly dependent upon him.”); Wade v. Jones, 20 Mo. 75, 1854 WL 4645 (1854) (holding brother to be head of household consisting of himself, his widowed sister and her children and observing “it is not necessary that the relation of husband and wife, or father and child, or mother and child, should exist in every case, to constitute a family. The man who controls, supervises and manages the affairs about the house, is the head of a family, ... ”). Thus, a household consisting of the Debtor, his mother and brother can qualify as a “family” within the meaning of the term as used in Mo.Rev.Stat. § 513.440.
B. Whether the Debtor Qualifies as the “Head” of the Family
In order to qualify as the “head” of the family, the debtor must in fact be supporting the household. Murray, 408 F.2d at 486; White, 287 B.R. at 234. The determination is based primarily on economic considerations and the exemption is designed to contribute to the preseiwation of the family unit. Crippen, 36 B.R. at 9.
In this case, the evidence fails to demonstrate that Debtor provided the level of economic support to his mother and brother sufficient to constitute him the head of a family for purposes of the exemption statute. As noted, Debtor did not claim head of household status on his 2005 United States, State of Kansas or State of Missouri income tax returns, nor did he claim his mother and brother as dependents, despite the fact that it would have *729been to his economic advantage to do so. Debtor’s explanation for this is unpersuasive. He testified that by the time he filed these returns, his relationship with is mother and brother had deteriorated to the point that he felt they might claim exemptions for themselves out of spite and create a problem with the IRS if he chose to make a similar claim. However, Debtor should have had no problem electing head of household status and claiming them as dependents, no matter what his mother and brother did, if he had the evidence to sustain his claim. Debtor’s elections on his tax returns are thus inconsistent with his assertion that he acted in the capacity of head of the family. Although he asserts that he claimed his mother and brother as dependents on returns for previous tax years, he offered no support for that assertion. At any rate, those returns would have minimal relevance given that the year 2005 is the relevant time period for the Court’s determination.
Other factors undermine Debtor’s claim that he qualifies as the head of the family. The expenses claimed on his amended Schedule J do not support the contention that he sustained a household that included two other people. For example, as the trustee points out, he claims to spend $300 per month on food. The Court doubts that this is sufficient to sustain a household of three persons. In fact, the IRS Collection Financial Standards, now mandated for use by the Courts in making the determination whether a Chapter 7 filing is an abuse, would authorize a household of three persons in the Debtor’s monthly gross income bracket to spend $490 on food. Coincidentally, the comparable figure for a one-person household is $300.3
Finally, Debtor testified that very shortly after he filed the petition, the household dissolved, that is, the Debtor and his mother and brother had a falling out, ceased living together and are no longer on speaking terms. Under the circumstances, allowing the Debtor to claim a head of family exemption would hardly tend to preserve the family unit, the avowed purpose of the exemption. While the Court should assess the Debtor’s entitlement to exemptions as of the date of the filing of the petition, the Court may consider events occurring after that date if they shed light on the situation that existed at the time of filing. The fact that the household disintegrated so quickly after the date of the filing undermines the credibility of the contention that it was a stable “family” of the kind that should qualify the Debtor to assert an exemption as its “head.” Finally, Debtor offered no evidence to establish that he managed the affairs of the household, another of the stated requirements for qualification as “head” of a family. See Murray, 408 F.2d at 486; Jarboe, 79 S.W. at 1163.
For all the reasons stated above, the Court sustains the trustee’s objections to the Debtor’s claim of exemption under Mo. Rev.Stat. § 513.440.
A separate order will be entered in accordance with Bankruptcy Rule 9021.
. Trustee’s Exhibit 1.
. Trustee's Exhibit 2.
. The IRS Collection Financial Standards may be found at http://www.irs.gov/individu-als. The National Standards, which include an allowance for food, provide that a three-person household with gross monthly income in the range of $2,500 — $3,333 may expend $490 per month. Schedule I of the Debtor’s Schedules of Assets and Liabilities reflect his gross monthly income to be $3,250. The allowance for a one-person household in the same gross monthly income bracket is $300. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493854/ | MEMORANDUM OPINION ON INDIVIDUAL DEFENDANTS’ MOTION TO QUASH OR LIMIT DEPOSITIONS (DOC. # 34)
JEFF BOHM, Bankruptcy Judge.
William B. Frederick, Billy W. Goss, Keith Humbert (incorrectly named in the adversary proceeding as “Mumbers”), Joseph Alexander, and Charles Meek (the Individual Defendants) filed a Motion to Quash or Limit Depositions (the Motion) in the above-styled adversary proceeding. The Individual Defendants’ position is that, as directors of Roman Forest Consolidated Public Utility District (PUD), they are immune from a deposition. This Court disagrees for the reasons stated herein.1 This Court holds that Roman Forest Public Utility District No. 3, the Debtor/Plaintiff (the Debtor), a municipal water district, is entitled to depose the Individual Defendants on all subjects and issues raised in the Debtor’s pending complaint.
I. Factual Background and Relevant Procedural History
At the hearing on the Motion, neither party called any witnesses to establish any facts. Rather, the relevant facts were established by reference to the record in this adversary proceeding and in the Debtor’s Chapter 9 case, and by statements and assertions made by counsel of record in pleadings and at the hearing, which constitute judicial admissions. All of the written documents referenced in this opinion are attached as exhibits to pleadings filed by one or all parties, and none of the parties dispute the authenticity of these documents.
The relevant facts, in chronological order, are as follows:
1. On May 11, 1972, PUD and the Debtor entered into a written contract for forty years whereby PUD would provide the Debtor with water and waste disposal services (the Contract).
2. On May 1, 2003, the Debtor filed a petition for relief under chapter 9 of the Bankruptcy Code.2
3. On May 30, 2003, while the automatic stay was in effect, PUD’s counsel sent a letter to the Debtor expressly stating that: (a) the'Contract is no longer valid or enforceable; and (b) PUD would not provide water or sewer service to any water or sewer connections within the Debtor’s district not being served as of the date of the letter.
4. On December 30, 2003, while the automatic stay was still in effect, PUD filed suit against the Debtor in the District Court of Montgomery County, Texas (the State Court Suit). PUD’s petition candidly concedes that since the date that the Debtor and PUD entered into the Contract, the cost of providing water and waste disposal services has risen and, as a result of these increased costs, the rates in the Contract are simply too low. In the State Court Suit, PUD requests the court to de*894clare that the Contract is unenforceable and that PUD is not bound by the terms which cap the rates that PUD may charge. PUD also requests the state court to enjoin the Debtor from authorizing any residents of the Debtor’s district to connect to the water system.
5. On December 30, 2003, once again while the automatic stay was in effect, PUD filed an application for temporary injunction in the Montgomery County District Court. This Court issued an order on this same day scheduling a hearing on PUD’s application for January 16, 2004.
6. On January 12, 2004, the Debtor filed a Suggestion of Bankruptcy in the State Court Suit setting forth that the Debtor had filed a bankruptcy petition in May of 2003.
7. On March 31, 2004, PUD filed a Motion for Relief from the Stay with this Court. In the Motion for Relief, PUD requested this Court to declare that the automatic stay is inapplicable to the State Court Suit or, alternatively, to terminate the stay and permit PUD to prosecute the State Court Suit.
8. On April 2, 2004, the Debtor filed a complaint in this Court (the Complaint) against PUD and the Individual Defendants alleging that PUD and its board of directors (i.e., all of the Individual Defendants), by taking the actions described in paragraphs 3, 4, and 5 above, have (a) violated the automatic stay; (b) sold the water and sewer capacity to third parties at a profit and thereby committed wrongful conversion for which they are liable; and (c) tor-tiously interfered with the Debtor’s contractual rights by wrongfully terminating the Contract and interfering with negotiations with developers that would form the basis of a plan of adjustment in the Debtor’s chapter 9 case. The Complaint also alleges that PUD has breached the Contract by refusing to provide water and sewer supply to all landowners within the Debtor’s district; and that the Individual Defendants have negligently sold water and sewer capacity earmarked for the Debtor to third parties in order to profit from the Debtor’s property rights. Finally, the Complaint requests this Court to issue an injunction requiring PUD to perform its obligations under the Contract.3
9. On April 5, 2004, the Debtor filed on Objection to the Motion to Lift Stay. The Debtor requested this Court to deny the Motion for Relief from the Stay.4
10. On April 27, 2004, this Court (the Honorable William Greendyke) held a hearing on PUD’s Motion for Relief from the Stay and denied the motion.
11. On April 30, 2004, the order denying PUD’s Motion for Relief from the Stay was entered on the docket.
12. On May 3, 2004, the Individual Defendants filed in this Court a *895Motion to Dismiss (Doc. # 12) seeking to have themselves dismissed as parties to the Adversary Proceeding. On this same day, the Individual Defendants, together with PUD, filed an answer to the Complaint. This pleading is entitled “Answer of Defendants” (the Joint Answer). In addition to responding to the allegations in the Complaint, the Joint Answer also contains a counterclaim which is entitled “Counterclaim of Defendants” (the Counterclaim).5 The Counterclaim asserts that: (a) performance of the Contract should not be required due to laches on the part of the Debtor; (b) the Contract is void for lack of consideration; (c) the Contract should be terminated because it presents a severe economic hardship for PUD; and (d) the Contract should be declared void because the specific terms under the Contract which cap the rates are no longer valid under applicable law.
13. On May 7, 2004, the Debtor filed an Objection to the Motion to Dismiss (Doc. # 13).
14. On July 9, 2004, the clerk of this Court entered a Comprehensive Scheduling, Pre-Trial and Trial Order (Scheduling Order), signed by the Honorable Robert C. McGuire. (Doc. # 15). Under the Scheduling Order, the deadline for completing discovery was January 31, 2005, and all dispositive motions are to be filed by February 14, 2005. A pre-trial conference is to be held on February 24, 2005 and trial is to be held during the week of March 14, 2005.
15. On August 9, 2004, PUD filed a Motion to Abstain (Doc. #20) in the Adversary Proceeding.
16. On August 20, 2004, the Debtor filed an Objection to the Motion to Abstain (Doc. # 24).
17. On August 30, 2004, this Court (the Honorable Robert C. McGuire) held a hearing on the Motion to *896Dismiss and the Motion to Abstain and denied both Motions.
18. On August 31, 2004, the order denying the two motions was entered • on the docket (Doc. # 29).
19. On December 29, 2004, the Debtor served subpoenas on the Individual Defendants commanding their appearance for depositions on the 26th, 28th and 31st of January, 2005.
20. On January 21, 2005, the Individual Defendants filed their Motion to Quash or Limit Depositions (Doc. #34).
21. On January 28, 2005, the Debtor filed its Objection to the Motion to Quash or Limit Depositions (Doc. #37).
22. On January 31, 2005, the Individual Defendants filed a Response to the Debtor’s Objection (Doc. # 38).
23. On February 1, 2005, a hearing was held on the Individual Defendants’ Motion to Quash or Limit Depositions (Doc. # 34), the Debtor’s Objection (Doc. # 37), and the Individual Defendants’ Response (Doc. # 38). This Court denied the Individual Defendants’ Motion to Quash at the hearing.
II. Discussion
A. Legislative Immunity does not Shield the Individual Defendants from Deposition
The Individual Defendants put forth three arguments as to why they are not subject to a deposition. First, they assert that they are entitled to legislative immunity. As directors of a utility district, which they contend possesses a legislative or quasi-legislative function,6 they claim to be acting in a capacity comparable to that of a legislator; therefore, they, like legislators, are completely protected from suit and discovery.
In Hughes v. Tarrant County of Texas, 948 F.2d 918, 921 (5th Cir.1991), the Fifth Circuit applied two separate tests to determine if absolute legislative immunity applies. The first test, which focuses on the nature of the facts used to reach the decision, is as follows:
If the underlying facts on which the decision is based are “legislative facts,” such as generalizations concerning a policy or state of affairs, then the decision is legislative. If the facts used in the decisionmaking [sic] are more specific, such as those that relate to particular individuals or situations, then the decision is administrative.
Id. Thus, if the decision is legislative in nature, then the Individual Defendants receive immunity; if the decision is administrative in nature, then the Individual Defendants do not receive immunity. Id.
In the case at bar, the key fact on which the Individual Defendants based their decision to authorize PUD to terminate the Contract7 is the -rising cost of providing water and sewer service. PUD’s Original Petition in the State Court Suit under*897scores this point: “Over the course of thirty years and as a result of dramatic changes in environmental laws and other legal requirements in this area, the cost of providing these services has increased substantially.” (¶ IV of Original Petition.)
This language leaves little doubt that the Individual Defendants decided to have PUD file the State Court Suit based on specific facts of an individual situation and not based on general facts regarding any policy; the decision was based on the fact that the cost of providing services under the Contract had risen too much in their view. Moreover, the Individual Defendants’ decision to authorize PUD to file the State Court Suit did not purport to establish a general policy; rather, the filing of the State Court Suit was particular to the Debtor. The Debtor, and only the Debtor, is the defendant in the State Court Suit, and the relief requested is that the Contract — which is an agreement particular solely to the Debtor — be declared unenforceable. Accordingly, under the first test articulated in Hughes, the Individual Defendants’ decision is administrative; therefore, the Individual Defendants have no legislative immunity.
The Fifth Circuit’s second test, which focuses on the particularity of the impact of the state action, is as follows:
If the action involves establishment of a general policy, it is legislative; if the action single[s] out specific individuals and affect[s] them differently from others, it is administrative.
Id.
In the instant case, the Individual Defendants’ action does not involve the establishment of a general policy. Rather, by authorizing PUD to sue the Debtor in order to terminate the Contract, the action of filing the State Court Suit singles out a specific entity — the Debtor — and treats it differently than other public utility districts. Accordingly, under the second test, the Individual Defendants’ action of authorizing the filing of the State Court Suit is not legislative, but rather administrative. Therefore, the Individual Defendants are not shielded by the doctrine of absolute legislative immunity.
B. Qualified Immunity does not Shield Individual Defendants from Deposition
Even if the Individual Defendants do not have absolute legislative immunity, they next contend that they have qualified immunity. Government officials performing discretionary functions receive qualified immunity — ie., are shielded from liability for civil damages — so long as their conduct does not violate clearly established statutory or constitutional rights of which a reasonable person would have known. Kaplan, 794 F.2d at 1066 (citing Harlow v. Fitzgerald, 457 U.S. 800, 817—18, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982)).
The automatic stay imposed by 11 U.S.C. § 362 is unquestionably a clearly established statutory right under the Bankruptcy Code. The sending of the May 30, 2003 letter and the filing of the State Court Suit on December 30, 2003, both of which actions could not' have occurred without the express authorization of the Individual Defendants, violated the automatic stay. Hence, the conduct of the Individual Defendants has violated a clearly established statutory right.
*898The next inquiry is whether the Individual Defendants knew, or should have known, that the automatic stay was in effect when the letter was sent on May 30, 2003 and when the State Court Suit was filed on December 30, 2003 The Complaint alleges that the Individual Defendants, in their capacities as directors of PUD, intentionally and knowingly violated the automatic stay. (¶ 18 of Complaint.) In determining whether qualified immunity exists, the facts should be construed in the light most favorable to the party asserting the injury. Saucier v. Katz, 533 U.S. 194, 201, 121 S.Ct. 2151, 150 L.Ed.2d 272 (2001). Accordingly, for purposes of ruling on the Individual Defendants’ Motion to Quash, this Court must construe the alleged facts in the light most favorable to the Debtor. In this instance, the Court must therefore accept as true the Debtor’s allegations that the Individual Defendants intentionally and knowingly violated the automatic stay.
Under these circumstances, the Individual Defendants are not entitled to qualified immunity. The automatic stay is a clearly established statutory right the existence of which the Individual Defendants were aware when they authorized the sending of the May 30, 2003 letter and the filing of the State Court Suit on December 30, 2003.8
C. § 101.106 of the Texas Tort Claims Act does not Bar Debtor’s Claims Against Individual Defendants and therefore does not Shield Individual Defendants from Deposition
The Individual Defendants finally contend that they are immune from being deposed because § 101.106 (entitled Election of Remedies) of the Texas Civil Practice and Remedies Code bars the claims asserted by the Debtor in the Complaint. See Tex. Civ. Prac. & Rem.Code Ann. § 101.106 (2004). This Court disagrees for two reasons. First, this statute concerns suits filed under the Texas Tort Claims Act, and it provides for dismissal of individual employees from a suit if certain conditions have been satisfied. In the case at bar, these conditions have not been met. Indeed, the Individual Debtors have already tried to obtain a dismissal of the Complaint against themselves, and they were unsuccessful. Second, even if this statute did apply, it only applies to tort claims under chapter 101 of the Texas Tort Claims Act against the Individual Defendants. The Debtor has asserted non-tort claims against the Individual Defendants as well as tort claims, and therefore even if this statute applied, the Individual Defendants would still be subject to suit on some of the claims asserted in the Debtor’s Complaint; because they would still be subject to suit, they would be subject to a deposition on the claims asserted in the suit.
III. Conclusion
The history of this chapter 9 ease and the Adversary Proceeding leaves little doubt that neither PUD nor the Individual Defendants want this Court to adjudicate the Complaint. By authorizing PUD to file the Motion for Relief from the Stay, the Individual Defendants hoped this *899Court would allow PUD to prosecute the State Court Suit. This approach failed. Then the Individual Defendants attempted to obtain a dismissal of the claims against themselves by filing their own Motion to Dismiss. This strategy also failed. Soon thereafter, the Individual Defendants, once again in their capacity as directors of PUD, authorized PUD to file a Motion to Abstain in the hope of convincing this Court to refrain from adjudicating the Complaint and Counterclaim and granting PUD leave to file a second motion for relief from stay so that PUD could obtain this Court’s permission to prosecute the State Court Suit. This tactic also failed. Now, at the eleventh hour, on the eve of the discovery deadline, the Individual Defendants have sought to quash the Debt- or’s deposition notices. This maneuver must also fail: neither absolute legislative immunity, nor qualified immunity, nor section 101.106 of the Texas Civil Practice and Remedies Code shields the Individual Defendants from being deposed. They now need to come to the realization that this Court will adjudicate the Complaint and the Counterclaim, that they are parties in the Adversary Proceeding, and that they are subject to discovery.
The allegations made by the Debt- or in the Complaint are very serious and involve issues that are fundamental to the bankruptcy process. The Debtor has asserted that the Individual Defendants, in addition to PUD, have intentionally violated the automatic stay. Testimony needs to be adduced at the depositions as to exactly when . the Individual Defendants became aware of the Debtor’s bankruptcy filing and therefore the imposition of the automatic stay.9 Even if the Individual Defendants did not become aware of the filing of the bankruptcy petition until January 12, 2004 — the date that the Suggestion of Bankruptcy was filed in the State Court Suit — testimony needs to be adduced as to whether the Individual Defendant have continually violated the automatic stay since January 12, 2004 by committing acts in violation of 11 U.S.C. § 362(a)(3). This section forbids acts to obtain possession of property of the estate, or to obtain possession of property from the estate, or to exercise control over property of the estate. There is no question that the Contract, and the rights of the Debtor under the Contract, constitute property of the Debtor’s bankruptcy estate pursuant to 11 U.S.C. § 541(a)(1). Hence, the Debtor has the right to examine the Individual Defendants on whether they have committed acts that are in violation of 11 U.S.C. § 362(a)(3).
The Debtor has also alleged that the Individual Defendants have interfered with the Debtor’s negotiations with developers that would form the basis of the Debtor’s plan in this chapter 9 case. This issue is at the very heart of bankruptcy. Any debtor in a chapter 9, including the Debtor in the ease at bar, must have an opportunity to reorganize by proposing a plan; pro*900posing a plan necessarily involves conducting negotiations with creditors and parties-in-interest and, in some instances, other third parties. For this reason, testimony needs to be adduced as to what the Individual Defendants have done to interfere with the Debtor’s negotiations and the extent of the harm, if any. Hence, once again, the Debtor has the right to examine the Individual Defendants.
The Court takes note of these two areas of inquiry- — the violation of the automatic stay and the interference with plan negotiations — because all of the Complaint’s allegations, when boiled down to their essence, involve violations of the automatic stay or interference with the plan process. This Court has jurisdiction to adjudicate these issues pursuant to 28 U.S.C. § 157(b)(2)(A), (C), (E), (L), and (0). AU Trac Transp., Inc. v. Transp. Alliance Bank (In re All Trac Transp., Inc.), 306 B.R. 859, 870 (Bankr.N.D.Tex.2004).10 Accordingly, the scope of the depositions may include the areas relating to all of the allegations in the Complaint.
Under the existing Scheduling Order, discovery was to be completed by January 31, 2005. Because the Motion to Quash was not filed until January 21, 2005, resulting in the hearing being held on February 1, 2005, the January 31, 2005 deadline must be extended. Accordingly, the discovery deadline is extended to February 10, 2005. The Debtor shall have the right to depose any or all of the Individual Defendants, but each deposition shall not exceed 4 hours in length.
A separate order will be issued consistent with this Memorandum Opinion.
. This Court has jurisdiction in this matter under 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and United States District Court for the Southern District of Texas General Order 2002-2 referring all Bankruptcy cases and proceedings to the Bankruptcy Judges of this district. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A),'(B), (C), (E), (L), and (O).
. All references to the Bankruptcy Code herein are references to 11 U.S.C. § 101 et seq.
. The Complaint initiated an adversary proceeding in this Court, which was assigned Adversary No. 04-3269 (the Adversary Proceeding).
. On April 6, 2004, PUD filed an Amended Motion for Relief from the Stay. This amended motion contains the exact same allegations and request for relief as the initial motion. The only difference between the two pleadings is that the amended motion contains a paragraph giving notice that the hearing date has been set for April 27, 2004 and that responses need to be filed at least 5 days prior to the hearing.
. The Court notes that on January 21, 2005, the Individual Defendants filed a pleading in the Adversary Proceeding entitled “Answer of Individual Defendants Frederick, Goss, Mum-bers, Alexander and Meek.” In this pleading, the Individual Defendants assert that they filed the Joint Answer only in their official capacities as directors of PUD and are for the first time answering the Complaint in their individual capacities. Yet, the Joint Answer is clearly entitled “Answer of Defendants” (emphasis added), and this pleading contains a counterclaim that is entitled “Counterclaim of Defendants” (emphasis added). Moreover, throughout the entire Joint Answer, each paragraph refers to "Defendants,” not "Defendant.” Accordingly, it appears that the Individual Defendants did, in fact, file an answer and counterclaim on May 3, 2004 in their individual capacities. The only argument that they did not do so is that in the Joint Answer, the very first sentence states that the Individual Defendants file the answer as PUD’s directors "as their response may be appropriate.” In the Court’s view, this language is insufficient to hold that they were not filing the answer in their individual capacities, particularly when the same sentence states that the answer is being filed subject to the Motion to Dismiss — a pleading, which was filed solely by the Individual Defendants in their individual capacities. Since the Motion to Dismiss was denied, this Court is of the view that the Joint Answer constitutes the pleading in which the Individual Defendants filed their answer and counterclaim under Fed. R, Bankr. P. 7008(a). Accordingly, the Individual Defendants have requested this Court to adjudicate their claims against this chapter 9 estate. In the Counterclaim, the Individual Defendants failed to set forth whether the Counterclaim is a core or non-core proceeding, as required by Fed. R. Bankr. P. 7008(a). This Court believes that the Counterclaim is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O). Accordingly, the Individual Defendants have subjected themselves to this Court's jurisdiction.
. Whether PUD possesses legislative or quasi-legislative functions is not at issue. The Court is operating under the presumption that PUD does possess such a function. See Kaplan v. Clear Lake City Water Auth., 794 F.2d 1059, 1064 (5th Cir.1986).
. In fact, the Individual Defendants, in their capacities as directors for PUD, made two decisions. The first was to send the May 30, 2003 letter unequivocally informing the Debt- or that the Contract was no longer valid and that PUD would not provide water or sewer service to any connections not already receiving such service. The second decision was to file on December 30, 2003 the State Court Suit, in which PUD seeks a declaratory judg-*897merit that the Contract is unenforceable. Apparently, between May 30, 2003 and December 30, 2003, the Individual Defendants, in their capacities as directors for PUD, had a change of heart and decided that the unequivocal decision set forth in the letter (which said nothing about seeking a court order terminating the Contract) needed to be blessed by the Montgomery County District Court. For purposes of the two tests articulated in Hughes, this Court focuses on the decision to file the State Court Suit.
. The Court wishes to emphasize that its holding is that the Individual Defendants do not have qualified immunity for purposes of the depositions. However, once they have testified at their depositions, and depending upon the testimony adduced at those depositions, the Individual Defendants may be able to assert that the doctrine of qualified immunily applies to them with respect to any or all of the claims brought by the Debtor in the Complaint. The Court leaves the decision as to whether any pleadings should be filed in this regard to the discretion of counsel for the Individual Defendants.
. The Individual Defendants have complained in their pleadings and at the hearings that the Debtor failed to list PUD in its schedules and that therefore PUD (and the Individual Defendants) did not receive actual notice of the bankruptcy and the imposition of the automatic stay when the bankruptcy petition was filed. Aside from the fact that under Fed. R. Bankr. P. 1007(b)(1) a chapter 9 debtor does not file schedules, the Debtor should still be allowed to examine the Individual Debtors as to whether they had constructive or inquiry notice of the bankruptcy filing. Constructive notice is no less effective than actual notice in determining whether someone has knowledge of the filing of a bankruptcy petition. In re Texas Tamale Co., Inc., 219 B.R. 732, 739 (Bankr.S.D.Tex.1998) ("The Fifth Circuit in a number of opinions has edged away from formal strict compliance with the technical notice requirement.”) (citing Robbins v. Amoco Prod. Co., 952 F.2d 901, 908 (5th Cir.1992)).
. This Court also has jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(B) because the Individual Defendants have filed the Counterclaim against the Debtor and its estate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493855/ | ORDER
RICHARD D. TAYLOR, Bankruptcy Judge.
Before the Court is the Trustee’s Objection to Exemptions filed by R. Ray Ful-mer, II [the Trustee]. The Trustee objects to the Debtor’s claim of homestead exemption under the Arkansas Constitution. The issue before the Court is whether the Debtor qualifies as a head of household. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157, and it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). The following order constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052, made applicable to this proceeding under Federal Rule of Bankruptcy Procedure 9014.
FACTS
The Debtor filed his Chapter 7 petition on October 14, 2005. On his schedules the Debtor listed his interest in real property located at 1455 N. 40th, Fort Smith, Ar*81kansas, [the House] as exempt under state homestead exemption law. The Debtor asserts that he is entitled to this exemption as a head of household.
The Debtor is unmarried and was unmarried at all times pertinent to his homestead claim. Phillip Lee Morris [Mr. Morris], the Debtor’s brother, currently resides with him. However, the Debtor and Mr. Morris both testified that he is not dependent on the Debtor for support. The Debtor also testified that his mother lived in the House with him from the time he purchased it in 1989 until her death in 2002. The Debtor and Mr. Morris gave credible testimony that their mother was dependent on the Debtor for support while she lived in the house. The Debt- or’s mother received a monthly social security check in the amount of $390.00, and held a part time job at which she earned approximately $320.00 per month. The Debtor testified that he had to transport his mother to the doctor and anywhere she needed to go because she did not drive. The Debtor also testified that he spent money out of his own pocket to care for his mother, such as for groceries and medication. When the Debtor was at work, Mr. Morris would come over and assist their mother, further indicating her dependent status.
Based on the foregoing, the Court finds that the Debtor established himself as head of household under Arkansas law while his mother lived with him. The fact that the Debtor filed bankruptcy after her death does not affect his right to claim the property as exempt.
LAW
Section 522(b)(2)(A) of the Bankruptcy Code allows a the Debtor to exempt any property that is exempt under state law as of the date of the bankruptcy petition. 11 U.S.C. § 522(b)(2)(A). The burden of proof, under both federal bankruptcy law and Arkansas law, is allocated to the party objecting to the homestead exemption. Fed. R. Bankr.P. 4003(c); In re Jones, 193 B.R. 503, 506 (Bankr.E.D.Ark.1995). The Trustee thus carries the burden.
Here, the Debtor claimed a homestead exemption under Article 9, § 3 of the Arkansas Constitution,1 which states:
The homestead of any resident of this State, who is married or the head of a family, shall not be subject to the lien of any judgment or decree of any court, or to sale under execution, or other process thereon, except such as may be rendered for the purchase money, or for specific liens, laborers’ or mechanics’ liens for improving the same, or for taxes, or against executors, administrators, guardians, receivers, attorneys for moneys collected by them, and other trustees of an express trust, for moneys due from them in their fiduciary capacity-
Ark. Const. Art. 9, § 3; Ark.Code Ann. § 16-66-210 (Supp.2003).
As a general matter, homestead exemptions under the Arkansas Constitution are to be liberally construed in favor of the exemption. In re Kimball, 270 B.R. 471, 478 (Bankr.W.D.Ark.2001). Commensurately, all presumptions are to be made in favor of preservation and retention of the homestead. Jones, 193 B.R. at 506.
In order to establish a homestead in Arkansas, the following elements must be met: (a) the party claiming the exemption must be the head of a household or *82married; (b) the property must be occupied as a home; and (c) the party claiming the exemption must be a resident of the state of Arkansas. In re Webb, 121 B.R. 827, 829 (Bankr.E.D.Ark.1990).
Here, the issue raised is whether the unmarried Debtor qualifies as a head of household. Under Arkansas law, “it is not necessary that the homestead claimant be a husband or parent, but something more than a ‘mere aggregation of individuals residing in the same house’ is required” to establish a head of household. In re Collins, 152 B.R. 570, 572 (Bankr.W.D.Ark.1992)(quoting Harbison v. Vaughan, 42 Ark. 539, 541 (1884)). The Arkansas Supreme Court has established three factors that are important in determining whether a claimant qualifies as head of household: “(1) the existence of an obligation upon the claimant to support others residing in the household, (2) the existence of a corresponding state of dependence upon those being supported, and, (3) the existence of a role of authority for the head of the family where the status or relationship of the family exists.” Id. (citations omitted).
Applying these factors in the present case demonstrates that the Debtor was a head of household. With regard to the first factor, the obligation to support, case law indicates that the obligation does not have to be a legal one. See, e.g., Collins, 152 B.R. at 572. The Debtor provided care and support for his mother by driving her to places she needed to be and helping her purchase items such as medication. The Debtor, while perhaps not legally obligated, undertook the obligation of supporting his mother when she resided in the household.
Correspondingly, the mother was dependent on the Debtor for his assistance. Testimony was clear that the mother was unable to drive herself and needed the Debtor to transport her to the doctor, grocery store, and anywhere else. In addition, the mother’s total monthly income was approximately $710.00. With a yearly income of approximately $8520.00, it would appear that the mother was de-pendant at least in part on the Debtor to assist her in meeting her basic needs, including basic housing and medical expenses. The fact that the dependent person is only partially dependent on the Debtor does not defeat a head of family claim. Collins, 152 B.R. at 573. Therefore, the second element has been satisfied.
Finally, the third factor requires a role of authority from the person claiming head of family. While no testimony was proffered to show that the Debtor was in the decision making role with regards to household affairs, no evidence was provided to show that he was not in that role. Given the trustee’s burden of proof to establish that the Debtor is not entitled to the exemption, and coupled with the strong presumption under Arkansas law in favor of finding a homestead, it can be presumed that, given the mothers age the Debtor had assumed the decision making role with regards to household affairs. In addition, the residence was in the Debtor’s name and was purchased by him. Therefore, the Court finds that the Debtor acted as head of household while his mother lived with him, and otherwise established that the House is his homestead under Arkansas law.2
*83The fact that the Debtor filed bankruptcy after his mother’s death, does not affect his right to claim the homestead exemption as a head of household. “When property has been impressed with the homestead character, it will be presumed to continue so until its use as such has been shown to have been terminated.” City Nat. Bank v. Johnson, 192 Ark. 945, 96 S.W.2d 482, 484 (1936). Under Arkansas law, “termination” appears to consist of extinguishment, abandonment, or waiver. See Middleton v. Lockhart, 344 Ark. 572, 43 S.W.3d 113, 121 (2001)(holding that where a person murders his or her spouse, any homestead rights that person enjoys personally by reason of the marriage to the murdered spouse are extinguished by the murder); Monroe v. Monroe, 250 Ark. 434, 465 S.W.2d 347, 349-50 (1971)(stating in order to constitute abandonment, the owner must leave the homestead with the intention of renouncing and forsaking it, or leaving it never to return); Lee v. Mercantile First Nat. Bank of Doniphan, 27 Ark. App. 11, 765 S.W.2d 17, 19 (1989)(stating the execution of a mortgage is a waiver of the homestead exemption as to the debt secured by that mortgage). In the present case, the Trustee failed to prove that the Debtor’s homestead has been terminated. With these facts in mind, the Court turns to the controlling bankruptcy law.
“Bankruptcy exemptions are ‘fixed on the date of filing’ and ‘only ... the law and facts as they exist[ed] on the date of filing the petition’ are to be considered.” Jones, 193 B.R. at 507 (quoting Armstrong v. Peterson (In re Peterson), 897 F.2d 935, 937 (8th Cir.1990)). Accordingly, the Court’s focal point is the state of affairs on October 14, 2005, when the Debtor’s petition was filed. The “snapshot in time approach” taken in the bankruptcy realm has no precluding effect on the Debtor’s claim of homestead exemption in this particular case. Here, the state of affairs on the date of filing was a the Debtor who had established a homestead that had never been terminated under Arkansas law. The Debtor established his head of household status while his mother was living; the fact that she passed away did not act as a termination of his entitlement to homestead in any way. The Trustee’s objection to exemption is denied.
IT IS SO ORDERED.
. The Debtor also cited Article 9, § 4 of the Arkansas Constitution as a basis for his claim of exemption. This section simply deals with the value and acreage entitled to be exempt for a rural homestead.
. The second and third elements of homestead found in In re Webb are not in dispute. The Debtor resides on the property that he is claiming as exempt making this property the Debtor's home. And, the Debtor clearly is an Arkansas resident for purposes of this opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493857/ | MEMORANDUM OPINION DENYING CREDITOR, KAREN HOYO’S, MOTION FOR RELIEF FROM STAY
KAREN S. JENNEMANN, Bankruptcy Judge.
This case came on for hearing on January 10, 2006, on the Motion for Relief from Stay (the “Motion”) (Doc. No. 9), filed by Karen Hoyo, the debtor’s soon to be ex-wife. The issue is whether the debtor or his bankruptcy estate retained any interest in property to be conveyed to Ms. Hoyo via a marital settlement agreement executed but not performed before this Chapter 7 case was filed on October 7, 2005. Upon consideration of the pleadings, evidence, and positions of the parties, the Court denies the Motion. The debtor had at least a contingent interest in the property on the petition date.
The debtor and Ms. Hoyo have lived apart for many months. In an attempt to resolve all issues between them, on June 6, 2005, they entered into a marital settlement agreement (the “MSA”). The MSA stipulated, among other things, that Ms. Hoyo was to receive the marital house, various financial accounts, and other personal property. Some of the property is likely exempt from claims of the debtor’s creditors, such as the marital home and various retirement accounts. Other property may not be exempt.
The MSA was not approved by the state court on the date this bankruptcy was *102filed. No transfers had occurred under the MSA. Moreover, the MSA had one significant contingency that was not completed prior to this bankruptcy. Specifically, the MSA was contingent on the termination of parental rights by the debtor. The termination of parental rights was not effected until November 23, 2005, over a month after the bankruptcy filing. Therefore, transfers required under the MSA were not completed on the date this case was filed.
Ms. Hoyo contends, however, that the parties were steadfastly trying to satisfy the contingencies and conclude the settlement on the petition date. The movant’s attorney was drafting the necessary Qualified Domestic Relations Order1 when this bankruptcy case was initiated. Ms. Hoyo argues that the debtor voluntarily relinquished his equitable or legal rights in the Property, because those rights were extinguished by the MSA, which Ms. Hoyo claims was final. In exchange for the property in the MSA, she gave up all claims to alimony and child support and assumed all debts from the acquisition of the property she obtained under the MSA. Additionally, Ms. Hoyo states that court approval was merely delayed because the debtor had not relinquished his parental rights.
Both the Chapter 7 trustee, Kenneth D. Herron, Jr., and a creditor, Cohen Fox, object to any modification of the stay. The trustee claims that the MSA was not finalized and that the bankruptcy estate retains an interest in the property that he should administer for the benefit of creditors. He argues that the MSA was contingent on a final judgment of the state court, which was not entered before the petition date. Relying on Meininger v. Wood, 205 B.R. 324 (Bankr.M.D.Fla.1996), the trustee asserts that the debtor’s interest in the marital property existed on the petition date and became property of this bankruptcy estate. In Wood, the state court approved a marital settlement agreement prior to the husband’s bankruptcy and later directed him to transfer a promissory note to his former wife. However, the order directing the transfer of the promissory note was defective and unenforceable. As a result, the property interest was not transferred and, at the moment of filing the bankruptcy petition, the debtor still retained interest in the disputed property. In this case, the trustee contends that, similar to Woods, the MSA was not even initially approved by the state court prior to the petition date and, thus, no property interest transferred from the debtor to Ms. Hoyo.
The issue before the Court is to determine if the debtor had an interest in the property listed in the MSA at the time this bankruptcy petition was filed. Under 11 U.S.C. § 362(d)(2), relief from stay is appropriate only when the debtor has no equity in the property and the property is not necessary for an effective reorganization. In this Chapter 7 case, the debtor is not seeking to reorganize, and the only consideration is whether the debtor has an interest in the property. State law determines whether a debtor had legal or equitable interest in property as of the bankruptcy petition date, so as to render it property of the bankruptcy estate. In re Health Care Products, Inc., 159 B.R. 332, 337 (M.D.Fla.1993).
In Florida, a husband and wife may execute an agreement concerning their property and upon approval by the *103court (emphasis added), such agreement will be incorporated into the final decree. 25A Fla. Jur.2d Family Law § 716 (2005). In dissolution actions, when questions of property rights are raised, the court must determine the issue since final judgment of dissolution settles all property rights of the parties and bars further action to determine such rights. Craig v. Craig, 404 So.2d 413, (Fla. 4th DCA 1981). Furthermore, a judgment by the state court is needed to consummate a marital dissolution agreement.
Here, the parties’ MSA was not final when Mr. Hoyo filed this ease. No property interests had been transferred. No final judgment approving the MSA had been entered into by the state court. The contingency relating to the debtor’s termination of his parental rights still existed on the petition date. Thus, there was no final determination as to the property rights of the parties. The property (or at least the non-exempt property) is subject to administration by the Chapter 7 trustee as property of the estate. As a result, the debtor retained an interest in all property stipulated under the MSA. Ms. Hoyo has failed to demonstrate any reason to modify the stay. The motion is denied. A separate order consistent with this opinion shall be entered.
The Court recognizes that this places Ms. Hoyo in a very difficult situation. She needs to finalize her divorce but cannot do so until the property issues are resolved. She cannot enforce the MSA or resolve these property issues until the trustee has completed administration of this estate. The Court further is concerned that the timing of the debtor’s bankruptcy filing may have been a surreptitious attempt to evade his obligations under the MSA, which certainly could and does prejudice the movant, Ms. Hoyo. Unfortunately, the Court can do little to address this problem. However, to the extent that the trustee can quickly administer this estate, abandon exempt assets, or otherwise assist Ms. Hoyo to solve her dilemma, the Court encourages him to do so.
. The Qualified Domestic Relations Order is a court order signed by the judge that requires a retirement plan administrator to divide the property according to the proportion stated in the order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493896/ | ORDER DENYING TSSI’S MOTION TO DISMISS
(Doc. No. 230)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THIS CASE came on for hearing on January 15, 2005 to consider the Motion to Dismiss filed by Tower Square Securities, Inc. (TSSI) pursuant to Bankruptcy Rules 7012 and 7009 which incorporate into the Bankruptcy Code Fed.R.Civ.P. 12(b)(6) and 9(b). TSSI moves to dismiss the Amended Complaint filed by 21st Century Satellite Communications, Inc. and 21st Century Satellite Communications, Inc., Liquidating Trust (Plaintiffs) in which Plaintiffs allege fraud on the part of the Defendants. For the reasons stated orally and in open court, the motion should be denied.
Accordingly, it is
ORDERED, ADJUDGED and DECREED that the Motion to Dismiss (Doc. No. 230) be, and is hereby, denied without prejudice. The Defendants shall have thirty (30) days from the date of this order to file an answer to the Amended Complaint. If an answer is filed, the matter shall be set for pre-trial conference. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493897/ | ORDER GRANTING DEBTORS’ MOTION FOR ORDER AUTHORIZING DISTRIBUTION OF REMAINING SALES PROCEEDS PURSUANT TO SECOND AMENDED JOINT PLAN OF REORGANIZATION
JERRY A. FUNK, Bankruptcy Judge.
This case came before the Court upon Debtors’ Motion for Order Authorizing Distribution of Remaining Sales Proceeds Pursuant to Second Amended Joint Plan of Reorganization. Upon Findings of Fact and Conclusions of Law separately entered, it is
ORDERED:
Debtors’ Motion for Order Authorizing Distribution of Remaining Sales Proceeds Pursuant to Second Amended Joint Plan of Reorganization is granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493898/ | ORDER ON (1) MOTION TO REQUIRE RELEASE OF POST-PETITION LIENS OF INTERNAL REVENUE SERVICE; (2) DEBTOR’S MOTION FOR SUMMARY JUDGMENT; AND (3) UNITED STATES’ MOTION FOR SUMMARY JUDGMENT
PAUL M. GLENN, Chief Judge.
THIS CASE came before the Court for hearing to consider (1) the Motion to Require Release of Posb-Petition Liens of the Internal Revenue Service filed by the Debtor, William O’Callaghan; (2) the Debtor’s Motion for Summary Judgment; and (3) the United States’ Motion for Summary Judgment.
The preliminary issue in this case is whether the Internal Revenue Service (IRS) violated the automatic stay by refiling two Notices of Federal Tax Lien, to prevent the expiration of its prepetition liens, while the Debtor’s Chapter 7 case was pending.
If the Court determines that the tax liens remain in effect, the second issue is whether the amount of the liens was established by the value of the Debtor’s property as of the petition date, or whether the IRS is entitled to the benefit of any increase in the value of the Debtor’s property that occurred postpetition.
Background
The Debtor worked as an investment manager on Wall Street in the early 1980’s, and filed Form 1040 income tax returns for the 1981, 1982, 1983, and 1984 tax years. (Adv. Pro. 99-589, Doc. 121, Findings of Fact, Conclusions of Law, and Memorandum Opinion, p. 2).
The IRS subsequently audited the Debb or’s returns for the tax years in question, and determined that additional taxes were owed. The taxes were assessed in 1986, 1987, and 1994. (Adv.Pro.99-589, Doc. 121, p. 2).
The Debtor relocated to Florida in June of 1994. On July 7, 1994, he purchased a home located at 738 Mandalay Avenue, Clearwater Beach, Florida. (Adv.Pro.99-589, Doc. 121, pp. 3-4).
On March 29, 1995, the IRS filed Notices of Federal Tax Liens in Pinellas County, Florida, where the Debtor’s home is located. (Doc. 126, Debtor’s Motion for Summary Judgment, p. 2; Doc. 128, IRS’s Memorandum in Support of Motion for Summary Judgment, p. 1). The Notices related to the taxes that had been assessed *366for the 1981, 1982, 1983, and 1984 tax years.
The Debtor filed a petition under Chapter 7 of the Bankruptcy Code on September 10,1999.
The Debtor contends that his home in Clearwater was valued at $191,000.00 on the date that he filed his Chapter 7 petition. The Debtor further contends that the home was encumbered by a mortgage in the amount of $120,000.00 as of the filing date, with the result that his equity in the home at that time equaled the amount of $71,000.00. (Doc. 126, Debtor’s Motion for Summary Judgment, p. 3).
The IRS filed a proof of claim in the Chapter 7 case (Claim Number 1) in the amount of $2,064,448.00, based on the Debtor’s income tax liabilities for 1981, 1982,1983, and 1984.
On October 7, 1999, the Debtor filed a Complaint against the IRS seeking a determination that the tax liabilities were dischargeable in his bankruptcy case.
On March 18, 2004, and April 26, 2004, before the dischargeability action was resolved, the IRS re-filed its Notices of Federal Tax Lien in Pinellas County, Florida. (Doc. 120, Debtor’s Motion to Require Release of PosL-Petition Liens, Exhibit B).
The Debtor contends that the Notices of Federal Tax Liens originally filed on March 29, 1995, would have expired as a matter of law in March of 2005. (Doc. 126, p. 3). The IRS acknowledges that the tax liens “would have otherwise expired” if the Notices had not been re-filed. (Doc. 128,
pp. 1-2).
On September 14, 2004, the Court entered its Findings of Fact, Conclusions of Law, and Memorandum Opinion, and also a Final Judgment, in the dischargeability action. (Adv. No. 99-589, Docs.121, 122). In the Memorandum Opinion and Final Judgment, the Court found that the “Debt- or’s income tax liabilities for the 1981, 1982, 1983, and 1984 tax years, as set forth in Proof of Claim No. 1 filed by the United States of America, Internal Revenue Service, are dischargeable in the chapter 7 case of the Debtor, William O’Callaghan.”
On May 2, 2005, the Debtor filed the Motion to Require Release of Post-Petition Liens that is currently at issue. (Doc. 120). The Debtor asserts that the IRS violated the automatic stay by re-filing the Notices of Federal Tax Liens while his Chapter 7 case was pending, with the result that the liens are void and should be released. Alternatively, in the event that the Court determines that the liens remain in effect, the Debtor asserts that they should be limited in amount to the extent of his equity in the Pinellas County home as of the date that he filed his bankruptcy petition.
On August 24, 2005, the Discharge of Debtor was entered in the Debtor’s Chapter 7 case. (Doc. 131).
Discussion
The Court finds that there are no genuine issues of material fact, and that the Debtor’s Motion to Require Release of PosL-Petition Liens should be denied as a matter of law.
A. The re-filing of the Notices of Federal Tax Lien by the IRS did not violate the automatic stay.
The IRS did not violate the automatic stay by re-filing the Notices of Federal Tax Lien while the Debtor’s bankruptcy case was pending, even though the underlying tax liability was ultimately discharged.
First, “Bankruptcy law clearly holds that a Debtor’s discharge for in per-sonam liability for taxes does not effect [sic] the in rem obligations of a tax lien based on tax liability discharged.” In re *367Dishong, 188 B.R. 51, 54 (Bankr.M.D.Fla. 1995). Tax liens “are still valid even though the underlying tax debt is dis-chargeable.” In re Carpenter, 2003 WL 1908944, at *1, n. 4 (Bankr.M.D.Fla.). Tax liens “remain valid and attached to prepet-ition property despite a discharge.” In re Anderson, 250 B.R. 707, 710 (Bankr. D.Mont.2000). See also In re Pecora, 297 B.R. 1, 3 (Bankr.W.D.N.Y.2003).
In this case, therefore, the prepetition tax lien of the IRS survived the Debtor’s Chapter 7 case, even though the Debtor received a discharge of his personal liability for the tax debts. See Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992).
Second, the renewal or continuance during a bankruptcy case of an existing, pre-petition lien does not violate the automatic stay.
In In re Stuber, 142 B.R. 435 (Bankr. D.Kan.1992), for example, a chapter 11 debtor filed a Motion to Determine Violation of Automatic Stay after the IRS had extended a prepetition tax lien that would have expired had the new Notice not been filed. The Court found that the “IRS’s filing of the Notice of Tax Lien, which extended a previously filed lien, did not violate the automatic stay.” In re Stuber, 142 B.R. at 438.
In reaching this decision, the Court in Stuber relied primarily on the reasoning set forth in In re Morton, 866 F.2d 561 (2d Cir.1989).
In Morton, the Court determined that a creditor’s extension of a judgment lien did not violate the automatic stay, because § 362 operates as a stay only of acts to “create, perfect, or enforce” a lien against property of the estate, but does not prohibit the extension, continuation, or renewal of an otherwise valid statutory lien. In re Morton, 866 F.2d at 564. According to the Court, permitting the creditor to extend its judgment lien during the bankruptcy case does not “threaten property of the estate which would otherwise be available to general creditors.” Instead, it “simply allows the holder of a valid lien to maintain the status quo — a policy not adverse to bankruptcy law, but rather in complete harmony with it.” Id. at 564.
Similar reasoning previously had been applied by the Court in In re Sayres, 43 B.R. 437 (W.D.N.Y.1984). In Sayres, as in the case at bar, the issue was “whether the refiling of a Federal Income Tax Lien for a debtor who has filed for bankruptcy after the initial tax lien is filed, violates the automatic stay provisions of 11 U.S.C. section 362(a).” In re Sayres, 43 B.R. at 438. The Court held that no violation occurred.
After reviewing section 362(a) subsections 4, 5 and 6, this Court must conclude that the refiling of the tax lien did not “create, perfect or inforce” [sic] a lien or act to “collect, assess or recover” the appellant’s claim against the debtor. Rather, this purely ministerial act merely continued a previously created and perfected lien and preserved the status quo. The refiling of the tax lien did not change the debtor’s position vis-a-vis her previously incurred tax liability, or grant the Government any preference it did not have prior to the commencement of the bankruptcy proceeding. All the refiling did was to prevent the lien from lapsing.
Id. at 439. In other words, the refiling did not violate the stay because it “did nothing more than preserve the status quo, (the purpose for which Congress enacted section 362(a)).” Id.
Additionally, no violations were found under analogous circumstances in In re Larson, 979 F.2d 625, 627 (8th Cir. 1992)(Since state law required the creditor to file an “addendum” to preserve its exist*368ing mortgage, the filing did not violate the automatic stay.); In re Jarrett, 293 B.R. 127, 132 (Bankr.N.D.Ohio 2002)(The act of renewing a prepetition lien does not conflict with the discharge injunction provided by § 524, since the creditor is only attempting to preserve its in rem interest.); In re Dinatale, 235 B.R. 569, 573 (Bankr.D.Md.1999)(An “attempt to revive or renew the existing tax lien on Debtor’s property post-discharge does not violate the discharge injunction.”); and In re McCorkle, 209 B.R. 773, 777 (Bankr.M.D.Ga. 1997)(The renewal or continuation of a lien is an in rem action which would not violate the section 524 discharge injunction.)
Based on the authorities discussed above, the Court finds that the IRS did not violate the automatic stay by re-filing the Notices of Federal Tax Lien while the Debtor’s bankruptcy case was pending, even though the Debtor ultimately received a discharge of his in personam liability for the underlying taxes.
The federal tax liens should not be avoided on the basis of the IRS’s postpetition re-filing of the Notices.
The Court makes no determination, however, as to whether the re-filed Notices are otherwise effective to preserve the existing tax liens. It appears that the parties assumed that the prepetition liens had not lapsed before the Notices were refiled, and the parties therefore did not address the timeliness of the renewals. The record does not establish the specific expiration date of the original liens. Consequently, the Court finds only that the liens are not void as a violation of the automatic stay, but does not determine the effect of the re-filed Notices under non-bankruptcy law.
B. The amount of the tax lien was not fixed by the value of the Debtor’s property as of the petition date.
The Court has determined that the re-filing of the tax liens by the IRS did not violate the automatic stay. Consequently, the liens should not be voided on that basis. The second issue, therefore, is whether the amount of the liens should be fixed as of the date that the Debtor filed his bankruptcy petition.
The Court finds that the amount of a federal tax lien is not established by the value of the subject property on the petition date. Instead, the IRS should be permitted to receive the benefit of any increase in the value of the property that occurs postpetition.
Any increase in the value of property that secures a lien accrues to the benefit of the lien holder. United States v. Comer, 222 B.R. 555, 563 (E.D.Mich.1998). This principle was confirmed by the Supreme Court of the United States in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773,116 L.Ed.2d 903 (1992).
In Dewsnup, a debtor asked the Court to reduce a lien to the fair market value of the property securing the claim pursuant to § 506 of the Bankruptcy Code. The Supreme Court held that § 506(d) “does not allow petitioner to ‘strip down’ respondents’ lien, because respondents’ claim is secured by a lien and has been fully allowed pursuant to 502.” Dewsnup, 502 U.S. at 417,112 S.Ct. 773.
In reaching its decision, the Supreme Court first recognized the well-established rule that “liens pass through bankruptcy unaffected.” Id. at 417, 112 S.Ct. 773. The Court then reasoned as follows:
The practical effect of petitioner’s argument is to freeze the creditor’s secured interest at the judicially determined valuation. By this approach, the creditor would lose the benefit of any increase in the value of the property by the time of the foreclosure sale. The *369increase would accrue to the benefit of the debtor, a result some of the parties describe as a “windfall.”
We think, however, that the creditor’s lien stays with the real property until the foreclosure. That is what was bargained for by the mortgagor and the mortgagee.... Any increase over the judicially determined valuation during bankruptcy rightly accrues to the benefit of the creditor, not to the benefit of the debtor and not to the benefit of other unsecured creditors whose claims have been allowed and who had nothing to do with the mortgagor-mortgagee bargain.
Id. Consequently, the debtor was not permitted to reduce the creditor’s lien to the value of the collateral as of a specific date.
Following Dewsnwp, courts have consistently rejected the efforts of debtors to restrict the amount of secured claims to the value of the collateral securing the claims.
In In re Thomas, 260 B.R. 884 (Bankr. M.D.Fla.2001), for example, the debtors objected to the IRS’s secured claim, and filed a motion to value the claim based on the amount of the equity in their home. The Court overruled the objection and denied the motion to value the claim.
If the collateral were to subsequently appreciate, then the debtor could keep such appreciation upon post-bankruptcy sale of the collateral, resulting in a windfall. (Citation omitted.) The Supreme Court in Dewsnwp found such a result in conflict with the established principle that liens should pass through bankruptcy unaffected.
... It would be impermissible, pursuant to Dewsnup, for the Court today to place a cap on the value of the IRS’ lien and therefore on its eventual collection from that perhaps far-off sale, leaving any appreciation between now and that date for Debtors to enjoy.
In re Thomas, 260 B.R. at 885(quoted in In re Stone, 329 B.R. 882, 884 (Bankr.M.D.Fla.2005)). “In other words, pursuant to Deivsnwp and its progeny, chapter 7 debtors should not be permitted to obtain a ‘determination of secured status’ as of the petition date, since the effect of such a determination would be to ‘improperly freeze the creditor’s secured interest at the judicially determined value.’ ” In re Stone, 329 B.R. at 884(quoting In re Phillips, 2005 WL 995001, at *1 (Bankr.M.D.Fla.)).
Based on the authorities discussed above, the Court finds that the alternative relief requested by the Debtor should be denied. The amount of the tax liens asserted by the IRS should not be limited in amount to the extent of the Debtor’s equity in his home as of the date that he filed his bankruptcy petition.
Conclusion
The Debtor initiated this contested matter by filing a Motion to Require Release of Posb-Petition Liens of the IRS. The Court finds that there are no genuine issues of material fact, and that the Debtor’s Motion should be denied as a matter of law.
First, the IRS did not violate the automatic stay by re-filing the Notices of Federal Tax Lien, even though the Debtor ultimately received a discharge of his in personam liability for the underlying taxes. Generally, such a re-filing simply preserves the status quo by preventing the expiration of the prepetition liens. Accordingly, the liens should not be avoided on the basis of the IRS’s postpetition conduct.
Second, the amount of the IRS’s liens should not be established by the value of the Debtor’s property as of the petition *370date, since the IRS’s lien “stays with the real property until the foreclosure” or sale. Dewsnup, 502 U.S. at 417, 112 S.Ct. 773.
Accordingly:
IT IS ORDERED that:
1. The Motion to Require Release of Post-Petition Liens of Internal Revenue Service, filed by the Debtor, William O’Callaghan, is denied.
2. The Motion for Summary Judgment filed by the Debtor, William O’Callaghan, is denied.
3. The Motion for Summary Judgment filed by the United States of America, Internal Revenue Service, is granted as set forth in this Order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493899/ | MEMORANDUM-OPINION
JOAN L. COOPER, Bankruptcy Judge.
This matter is before the Court on the Motion to Dismiss of Defendant/Debtor Timothy Sneed (“Debtor”) and the Objection to Motion to Dismiss of PlaintiffiCred-itor George Rodriguez (“Rodriguez”). The Court reviewed the written submissions and arguments of counsel for the parties and for the following reasons DENIES the Debtor’s Motion to Dismiss.
FACTS
On March 29, 2005, Debtor filed his Voluntary Petition seeking relief under Chapter 7 of the United States Bankruptcy Code. Also on March 29, 2005, the Court issued a Notice Scheduling the First Meeting of Creditors pursuant to 11 U.S.C. § 341 for May 13, 2005. The Notice also stated that objections for discharge were due by July 12, 2005.
On May 17, 2005, Debtor filed an Amended Schedule F listing Rodriguez as a creditor with an unsecured non-priority claim in the amount of $15,000.
On July 12, 2005, Rodriguez filed a Motion for Leave to File Objections, requesting additional time to file “objections to the Discharge” of the Debtor. Rodriguez’s Motion stated that “Creditor George Rodriguez’s debt is the result of intentional physical injury caused by Debt- or.” Attached to the Motion was an Affidavit of Rodriguez’s counsel stating “... George Rodriguez will be able to prove that his debt should not be Discharged if given leave to file Objections to Discharge outside the Notice Period.”
On July 14, 2005, the Court entered an Order giving Rodriguez “leave to file objections outside the Notice period to the Discharge of the above named debtor until the date of August 1, 2005.”
On August 1, 2005, Rodriguez filed the Complaint instituting this adversary proceeding against Debtor seeking that the debt owed to him be determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(6).
On August 26, 2005, Debtor filed a Motion for More Definite Statement asserting that the Complaint sounded in both an objection to discharge and a nondischargeable petition.
On January 5, 2006, Rodriguez filed his Definite Statement asserting that he seeks a judgment of nondischargeability pursuant to 11 U.S.C. § 523(a)(6) based on damage allegedly caused by the Debtor’s intentional assault on him.
On February 14, 2006, Debtor filed his Motion to Dismiss this adversary proceeding.
LEGAL ANALYSIS
Debtor requests this Court to dismiss this adversary proceeding because it is a nondischargeable petition which is time barred. The Court finds that this action was timely filed.
It is clear that in the Complaint Rodriguez seeks to have the debt owed to him by Debtor declared nondischargeable pursuant to 11 U.S.C. § 523(a)(6). Under Rule 4007, a petition to determine a debt nondischargeable under Section 523(a)(6) must be filed 60 days after the first date set for the meeting of creditors. In this *507ease, that date was July 12, 2005. Rule 4007 provides that the time may be extended for cause so long as it is filed before the time has expired. Here, Rodriguez filed a request to extend the July 12, 2005 deadline in order to object to discharge. The Motion and the Affidavit of Creditor’s Counsel clearly indicated that the debt should not be discharged because Rodriguez could prove that it was the result of an intentional physical injury by the Debtor. The Court granted Rodriguez’s Motion and gave him until August 1, 2005 to file an action.
On August 1, 2005, Rodriguez filed his Complaint instituting this adversary proceeding. The Complaint alleges that the Debtor intentionally assaulted Rodriguez and requests relief in the form of a nondis-charge petition by requesting, “this debt be determined nondischargeable pursuant to 11 U.S.C. § 523(a)(6).”
Debtor, however, asked for a more definite statement contending the Complaint sounded in both an objection to discharge and a nondischargeable petition. Rodriguez responded that the action was a non-dischargeable proceeding based on § 523(a)(6).
Debtor contends that the adversary proceeding must be dismissed because Rodriguez did not specifically request an extension of time to file a nondischargeable petition, but rather requested leave to file an objection to discharge, an action based on 11 U.S.C. § 727 rather than § 523(a)(6). The Court finds that Debtor’s contentions place form over substance.
There can be no dispute that Rodriguez timely requested an extension to file an action to have the debt declared nondis-chargeable based on Debtor’s intentional assault of Rodriguez. These facts were set forth in the Motion and the Affidavit attached to the motion requesting the extension of time. Furthermore, the same facts form the basis of the Complaint. Debtor can hardly claim prejudice by these allegations when these same allegations were clearly set forth in support of the request for additional time to file this action.
Rodriguez points out that his Request for Extension of Time used the same language as that used by the Court in its Notice setting the deadline for objections to discharge and the date for the Section 341 Meeting. Experienced bankruptcy practitioners know that the deadline set forth in the Section 341 Notice refers to the deadline for filing nondischargeability petitions. The deadline set forth in the Notice is keyed to the date set for the Section 341 Meeting as referenced in Rule 4007 of the Bankruptcy Rules of Procedure. It would be inequitable to have a creditor’s timely filed nondischargeability action dismissed simply because it references an objection to discharge, rather than a request for a declaration of nondis-chargeability. In essence, a nondischarge-ability petition is a creditor’s objection to having a specific debt discharged.
Rule 7008 of the Bankruptcy Rules of Procedure incorporates Fed.R.Civ.P. 8 which provides that “All pleadings shall be so construed as to do substantial justice.” Debtor cannot claim that he was not on notice of the nature of the claim asserted. It would be a substantial injustice to dismiss Rodriguez’s adversary proceeding based on the technicality alleged by Debt- or.
The cases cited by Debtor in support of his Motion to Dismiss are distinguishable from the matter at bar. In In re Magno, 216 B.R. 34 (9th Cir. BAP 1997), In re Firsdon, 70 B.R. 719 (Bankr.N.D.Ohio 1987), In re Koppel, 165 B.R. 376 (Bankr. E.D.N.Y.1994) and In re Rasmussen, 299 B.R. 902 (W.D.Wis.2003), the issue before *508those courts was whether an untimely § 523 claim or § 727 claim could relate back to a timely claim. Those cases turned on whether the new claim arose out of the same conduct, transaction or occurrence as set forth in the original pleading.
Here, Rodriguez is not trying to append a § 523 claim to a § 727 action. His original action states a claim under 11 U.S.C. § 523(a)(6). The Order extending time to file objections outside the Notice period to the Discharge of the Debtor clearly encompasses the Section 523(a)(6) action that Rodriguez timely filed on August 1, 2005. Accordingly, Debtor’s Motion to Dismiss must be denied.
CONCLUSION
For all of the above reasons, the Motion to Dismiss of Debtor Timothy Sneed to the Complaint of Creditor George Rodriguez is DENIED. 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 to Dismiss of Defendant/Debtor Timothy Sneed to the Complaint of Creditor George Rodriguez, be and hereby is DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493900/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JERRY A. FUNK, Bankruptcy Judge.
This case came before the Court upon Motion of Mazak Corporation to Reclassify the Claim of Tennessee Engine Works (the “Motion to Reclassify”). The Court conducted a hearing on the matter on November 3, 2005. At the conclusion of the hearing, the Court directed the parties to submit memoranda in support of their respective positions. Upon the evidence and the arguments of the parties, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
On or about October 27, 1999 Jay R. Vass (“Vass”), the president of JRV Industries, Inc. (“JRV”), executed a promissory note to Tennessee Engine Works (“TEW”) for the purchase of certain equipment (the “Equipment”). To secure payment of the promissory note, on or about October 27, 1999 Vass and JRV executed and delivered to TEW a security agreement (the “Security Agreement”) by which Vass and JRV granted to TEW a security interest in the Equipment. The Security Agreement referred to Vass and JRV as “individually and collectively ‘Debtor’ ”. Vass signed the Security Agreement in his individual capacity and as president of JRV. On November 3, 1999 TEW filed a UCC-1 financing statement with the Secretary of State of Florida listing Vass as the debtor and JRV as an additional debtor. Vass signed the financing statement in his individual capacity and as president of JRV.
JRV filed a Chapter 11 bankruptcy petition on June 17, 2004. On January 19, 2005 TEW filed a proof of claim which the clerk’s office designated as Claim 20. Claim 20 was filed as a secured claim in the amount of $655,262.00. Attached to the claim was the promissory note, the Security Agreement, and a bill of sale.
On January 28, 2005 Debtor filed a Chapter 11 Plan of Reorganization (the “Plan”). The Plan provided for TEW to have a secured claim in the amount of $150,000.00 and an unsecured claim in the amount of $505,000.00. The Plan provided for TEW’s unsecured claim to be classified with all other unsecured claims.
Mazak filed the Motion to Reclassify. Therein Mazak conceded that TEW has a secured claim against JRV but argued that TEW has no recourse against JRV for any amount in excess of the value of the Equipment. Mazak asserted that the Plan should treat TEW’s claim as secured to the extent of the value of the Equipment. Additionally, Mazak requested that to the extent 11 U.S.C. § 1111(b) gives TEW an unsecured deficiency claim, that amount should be separately classified from the general unsecured claims.
*637At the hearing on the Motion to Reclassify JRV asserted that the loan documents were ambiguous and sought to introduce parol evidence as to whether the parties intended the loan to be recourse or nonre-course. Notwithstanding its earlier concession that TEW has a secured claim against JRV, Mazak asserted that the Equipment is owned solely by Vass and there is a question as to whether TEW even has a claim against JRV.
In its post-hearing memorandum JRV contends that the loan documents are ambiguous and that the Court should consider parol evidence as to the parties’ intent at the time of the sale of the assets by TEW. However, JRV argues that even if the Court does not consider the parties’ intent, it has properly classified TEW’s § 1111(b) deficiency claim with all other unsecured creditors. In its post-hearing memorandum Mazak argues that TEW has no claim against JRV. Mazak argues that the promissory note, the Security Agreement, and the bill of sale do not create a debt or evidence ownership in the collateral by anyone other than Vass. Mazak asserts that the Court should not consider parol evidence to establish that TEW has a claim against JRV.
CONCLUSIONS OF LAW
The introduction of parol or extrinsic evidence to aid in the interpretation of a contract is prohibited unless the contract is ambiguous. Hashwani v. Barbar, 822 F.2d 1038, 1040 (11th Cir.1987). The existence of ambiguity in a contract is a question of law for the judge to decide. Bivens Gardens Office Bldg. v. Barnett Banks, Inc., 140 F.3d 898, 905 (11th Cir. 1998) (applying Florida law). The Court finds that the loan documents are not ambiguous, but they establish that TEW has a claim against JRV. Section 101(5) of the Bankruptcy Code defines a claim as a right to payment. TEW has a claim against JRV by virtue of JRV being a party to the security agreement, notwithstanding the fact that JRV is not a party to the promissory note. However, the loan documents do not provide TEW recourse against JRV. Notwithstanding that the loan documents do not provide TEW recourse against JRV, the Court must determine whether TEW must be treated as if it has recourse against JRV pursuant to § 11 U.S.C. 1111(b)(1)(A).
With certain exceptions, none of which applies here, section 1111(b) of the Bankruptcy Code provides:
(b)(1)(A) A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse.
Section 1111(b)(1)(A) enables a non-recourse undersecured creditor to have a secured claim for the value of its collateral and an unsecured claim for the amount of the debt in excess of the value of the collateral. Mazak argues that § 1111(b) does not apply to TEW’s claim because the claim is not secured by a lien on property of the estate. Section 541 of the Bankruptcy Code defines property of the estate as “all legal or equitable interests of the debtor in property as of the commencement of the case.” At a minimum JRV has a possessory interest in the Equipment. The Court finds that the Equipment is property of the estate. Because TEW’s claim is secured by a lien on the Equipment, § 1111(b)(1)(A) applies to TEW’s claim, giving TEW a secured and an unsecured claim against JRV. Having found that § 1111(b)(1)(A) applies to TEW’s claim, the Court must determine whether TEW’s unsecured claim should be *638classified in a separate class from the other unsecured claims.
Section 1122 of the Bankruptcy Code provides that “a plan may place a claim or interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.” Mazak asserts that TEW’s claim is dissimilar from the other unsecured creditors and must be separately classified. The Seventh Circuit Court of Appeals has held that because deficiency claims of non-recourse claims that become recourse pursuant to § 1111(b) would not exist outside of a bankruptcy case, the claims are so dissimilar to general unsecured claims that they mandate separate classification. In re Woodbrook Associates, 19 F.3d 312, 319 (7th Cir.1994). All of the other Circuit Courts that have addressed the issue have held to the contrary. See Barakat v. Life Ins. Co. of Va. (In re Barakat), 99 F.3d 1520, 1525 (9th Cir.1996) (finding that § 1111(d) deficiency claim was similar to general unsecured claims and holding that absent a legitimate business or economic justification, it is impermissible for a debtor to separately classify such claims); In re Boston Post Road Ltd. P’ship v. FDIC (In re Boston Post Road Ltd. P’ship), 21 F.3d 477, 482 (2nd Cir.1994), cert. denied, 513 U.S. 1109, 115 S.Ct. 897, 130 L.Ed.2d 782 (1995) (noting that § llll(b)’s purpose is to allow the undersecured creditor to vote with other unsecured creditors and that separately classifying such claims would “effectively nullify the option that Congress provided to undersecured creditors to vote their deficiency as unsecured debt.”); John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assoc. (In re Route 37 Bus. Park Assoc.), 987 F.2d 154, 161 (3rd Cir. 1993) (rejecting classification scheme which separately classified § 1111(b) deficiency claim from other unsecured creditors); Lumber Exch. Bldg. Ltd. P’ship v. Mutual Life Ins. Co. of New York (In re Lumber Exch. Bldg. Ltd. P’ship), 968 F.2d 647, 649 (8th Cir.1992) (rejecting debtor’s argument that unsecured creditor’s recourse claim should be classified separately from the claims of unsecured trade creditors because the former arose by operation of law and the latter were bargained for); Travelers Ins. Co. v. Bryson Props., XVIII (In re Bryson Props.), 961 F.2d 496, 502 (4th Cir.1992), cert. denied, 506 U.S. 866, 113 S.Ct. 191, 121 L.Ed.2d 134 (1992) (noting that “where all unsecured claims receive the same treatment in terms of the Plan distribution, separate classification on the basis of natural and unnatural recourse claims is, at a minimum, highly suspect”); Phoenix Mutual Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274 (5th Cir.1991), cert. denied, 506 U.S. 821, 113 S.Ct. 72, 121 L.Ed.2d 37 (1992) (noting that “the alleged distinction between the legal attributes of the unsecured claims is that under state law Phoenix has no recourse against the debtor personally. However, state law is irrelevant where, as here, the Code has eliminated the legal distinction between non-recourse deficiency claims and other unsecured claims.”) The Court agrees with the Second, Third, Fourth, Fifth, Eighth and Ninth Circuits and holds that a non-recourse deficiency claim is not sufficiently dissimilar from other unsecured claims to mandate separate classification.
CONCLUSION
TEW has a claim against JRV. TEW’s claim is secured by a lien on property of JRV’s estate. As a result of U.S.C. § 1111(b), TEW’s claim is secured in part and unsecured in part. TEW’s claim is not sufficiently dissimilar from the other unsecured claims to mandate separate classification. The Court will enter a sepa*639rate order denying Mazak’s Motion to Reclassify TEW’s claim.
ORDER DENYING MOTION OF MA-ZAK CORPORATION TO RECLASSIFY THE CLAIM OF TENNESSEE ENGINE WORKS
This case came before the Court upon Motion of Mazak Corporation to Reclassify the Claim of Tennessee Engine Works. Upon Findings of Fact and Conclusions of Law separately entered, it is
ORDERED:
Motion of Mazak Corporation to Reclassify the Claim of Tennessee Engine Works is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493901/ | ORDER ON MOTION TO ASSUME LEASE AGREEMENT AND LEASE AGREEMENT ADDENDUM
(Doc. No. 162)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration in the above-captioned, yet-to-be confirmed Chapter 11 case is a Motion to Assume Lease Agreement and Lease Agreement Addendum (Doc. No. 162) (Motion to Assume) involving an unexpired non-residential lease entered into by Southwest Florida Heart Group, P.A. (Debtor) and Heart Group Realty, LLP (Realty). Ordinarily, the disposition of the Motion would not present any special problems; however, due to the interconnection of the parties involved and the unique issues raised by the Motion, the resolution of the dispute between the parties is complex.
In order to put the controversy and the precise issues under consideration into proper focus, it is appropriate to consider the historical background of the entities involved, the relationship between the parties and the interconnection between the principals of the entities.
The Debtor was formed by a group of physicians who established a medical practice providing cardiac care services. The Debtor operated under the name of Southwest Florida Heart Group, P.A. The Debt- or maintained three operations; one in Naples, Florida; one in Bonita Springs, Florida; and one at 8540 College Parkway, Fort Myers, Florida 33919 (the Fort Myers Facility). The Fort Myers Facility is a four-story medical office building and is owned by Realty.
Realty was originally formed as a Florida General Partnership in April 23, 1993, by Dr. Richard A. Chazal (Dr. Chazal), Dr. James A. Conrad (Dr. Conrad), Dr. Michael D. Danzig (Dr. Danzig), Dr. M. Erie Burton (Dr. Burton), Dr. David Axline, Dr. William M. Miles, Dr. Herman L. Spilker, Dr. Lawrence A. Kline, Dr. Brian Hanlon, Dr. Carlos Santos Ocampo, Dr. Steven Lee, and Dr. Michael Corbellini. Realty was registered with the State of Florida as a General Partnership, with Dr. Danzig as its managing partner. On December 14, 2000, Realty changed its legal format and became Heart Group Realty, LLP. The registration filed with the State of Florida (Realty Exh. No. 3) indicates that Dr. Danzig is the Registered Agent for both the General Partnership and the LLP.
At the time relevant, the physicians involved with the Debtor, notably Dr. Cha-zal, Dr. Danzig, Dr. Burton, and Dr. Conrad, were the principals of Realty and also of an entity know as The Heart Group PL (The Heart Group), which was formed shortly before the Debtor ceased its operations and before it filed its Petition for relief under Chapter 11.
The record reveals that on or about January 1, 1997, Realty, as landlord of the Fort Myers Facility, entered into a Lease Agreement, and a later signed Lease Agreement Addendum, with the Debtor, (together, the Lease). The effective date of the Lease was January 1, 1997, and the property was leased for a ten year period. The Lease Agreement Addendum later extended the term until 2017. Pursuant to Paragraph 3 of the Lease, the annual rent was $807,360.00, plus Florida sales tax. The Lease further provided for an increase of the base rent by the greater of 5 percent or the applicable Consumer Price Index (CPI).
It is without dispute that the principals of the landlord Realty were also principals *641of the Debtor, all of whom were practicing physicians with the group under the aegis of Southwest Florida Heart Group, P.A. An apparent dissension between the shareholders led to the decision to terminate the business operation of the Debtor. Several of the physicians left the State of Florida and several formed their own groups and currently occupy the facilities used by the Debtor in Naples and in Bonita Springs, respectively. None of these operations are involved in the current controversy.
However, this is not the case with the Fort Myers Facility. On August 25, 2005, or a few days before the Debtor filed its Petition for Relief under Chapter 11 on August 29, 2005, the Debtor and The Heart Group entered into a sublease (Debtor’s Exhibit No. 1) (the Sublease). The principals of The Heart Group at the time of the Sublease were Dr. Burton, Dr. Danzig, Dr. Chazal, and Dr. Corbellini. The fact of the matter is, that Sublease was signed by Dr. Burton as president of the Debtor/Sublessor, and by Dr. Burton as president of The Heart Group/Subles-see.
Pursuant to the terms of the Sublease, The Heart Group subleased the first floor of the Fort Myers Facility. The Sublease required a monthly rent payment to be paid to the Debtor, fixed at twenty-five percent of the rent the Debtor was obligated to pay to Realty under the Lease. The Sublease commenced on September 1, 2005. It did not specify a fixed termination date, but provides that the sublease includes and is subject to the terms of the Debtor’s lease with Realty. The Sublease further provides that if any of the following occurs the Sublease may be terminated:
(1)Written notice of the sale of the premises by Realty;
(2) Written requirement of Realty to the Debtor to terminate the Sublease; or
(3) Such other event, which under the terms of the Lease will result in the termination of that Lease.
Notably, the Sublease may also be terminated at any time by either party upon a sixty (60) day written notice to the other party.
It is without dispute that The Heart Group did occupy and is currently still occupying the first floor of the Fort Myers Facility and has not paid the Debtor the rent fixed by the Sublease, which became due for the months of September, October, November, and December of 2005. It was not until January 28, 2006 that The Heart Group made a payment to the Trustee in the amount of $70,000. It is further without dispute that, at the time the Debtor ceased its operations on August 31, 2005, the Debtor had on the subleased first floor a large amount of medical equipment. Although the Trustee, shortly after his appointment on November 21, 2005, made several requests of The Heart Group to designate which of the equipment and fixtures described above it desired to purchase, it was not until mid-January of 2006 that The Heart Group provided the list to the Trustee. This Court notes that the list provided to the Trustee was never offered or admitted into evidence.
On August 29, 2005, the Debtor filed a Petition for Relief under Chapter 11. On August 31, 2005, the Debtor-in-Possession sought the approval of the Sublease of the Fort Myers Facility (Doc. No. 14). On September 13, 2005, Steven R. West, a creditor, filed an Objection to the Approval of the Sublease (Doc. No. 43). On November 8, 2005, this Court entered an Order and deferred ruling on the Motion for Approval of the Sublease (Doc. No. 118).
*642On November 21, 2005, this Court entered an Order Approving Appointment of Trustee, and appointed Louis X. Amato as Chapter 11 Trustee (Trustee) (Doc. No. 138). In due course, the Trustee reviewed the situation and, on December 7, 2005, commenced an adversary proceeding naming as defendants The Heart Group, PL; Heart Group Realty, LLP; Collier Heart Group, PLLC; Richard A. Chazal, Erick M. Burton; and Michael D. Danzig. (Adv. Pro. No. 05-910). In his lawsuit, the Trustee asserts numerous causes of action, including trespass, fraudulent transfers, and breach of fiduciary duty, and seeks injunc-tive and other equitable relief, as well as money damages.
On December 29, 2005, the Trustee filed the instant Motion to Assume. On January 11, 2006, Realty filed a Response to Motion to Assume Lease and Lease Agreement Addendum (Doc. No. 168). At this point it should be noted that earlier, on November 15, 2005, Realty filed an Application for Payment of Administrative Expenses (Doc. No. 131). On December 6, 2005, the Trustee filed a Response and Objection to Heart Group Realty LLP for Payment of Administrative Expenses (Doc. No 148). It is without dispute that neither the Debtor-in-possession nor the Trustee has paid any money to Realty so far.
The hearing on the Motion to Assume was set for January 19, 2006. On January 18, 2006, the Trustee commenced a second adversary proceeding naming the Debtor, The Heart Group, and Realty as defendants. (Adv.Pro. No. 06-031) (together with Adv. Pro. No. 05-910, Adversary Proceedings). In this lawsuit, the Trustee asserts a substantive consolidation action and seeks a declaration that the assets of The Heart Group and Realty are the assets of the Debtor.
In the interim, Realty entered into a contract to sell the Port Myers Facility. (Exh. No. 1 to Motion to Supplement Record, Doc. No. 190). It appears that if the sale, which is scheduled to close on February 8, 2006, is consummated, the Lease will be cancelled. It should be evident from the foregoing, if this occurs, that the Trustee’s Motion to Assume is rendered moot since no valid lease will remain in existence that could be assumed.
To further complicate the matter, a few days before the scheduled final evidentiary hearing on the Motion to Assume, the Trustee announced that it had an Agreement for the sale of the Fort Myers Facility (Agreement) (Trustee’s Exhibit 1). The Agreement identifies the sellers as the Heart Group Realty, LLP, Louis X. Ama-to, as Trustee, and identifies College Riv-erwalk, LLC, a Florida Limited Liability Company (College Riverwalk), as the purchaser. Notwithstanding the recitation in this Agreement and notwithstanding that Realty is identified as a seller, Realty never agreed to be a party to the Agreement, and never agreed to sell the Fort Myers Facility to College Riverwalk LLC. Thus, the statement in Paragraph 1 of the Agreement, that the seller (i.e. Realty) agrees to sell and the buyer agrees to purchase is untrue. Realizing the impossible posture of the Trustee to bring the Agreement to fruition and effectuate the sale to College Riverwalk absent Realty’s consent, the Trustee, by a Motion to Sell Property filed on February 2, 2006 (Doc. No. 188), seeks to sell the property free and clear of Realty’s interest pursuant to Section 363(f) of the Bankruptcy Code.
The immediate matter under consideration is the Trustee’s Motion to Assume. Section 365(b)(1) dictates the conditions a debtor must comply with in order to assume an unexpired lease after a default, and provides:
*643(b)(1) If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee—
(A) cures, or provides adequate assurance that the trustee will promptly cure such default ...
(B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and
(C) provides adequate assurance of future performance under such contract or lease.
11 U.S.C. § 363(b).
The Trustee is capable of meeting the first two requirements. The record reveals that the Trustee has more than $1 million in cash and will be able to pay Realty whatever amount this Court ultimately determines is the total amount required to cure the default. Also, there is nothing in this record that shows what actual pecuniary loses were suffered by Realty as a result of the default.
It is equally clear that the Debtor will not be able to provide adequate assurance of future performance. The Debtor is economically defunct and does not operate now and does not intend to operate in the future and will not generate the income necessary to perform if the Trustee is permitted to assume the Lease. However, the Trustee does not contend that it can assure future performance and indeed does not intend to perform under the Lease in the future.
The Trustee instead intends to assign its leasehold interest in the Fort Myers Facility in conjunction with a sale to College Riverwalk, pursuant to Section 363(f), free and clear of Realty’s interest. Under the Trustee’s plan, College Riverwalk, as the assignee of the lease and purchaser under a Section 363 sale, will become the landlord and the owner, which interests would merge. The Lease would cease to exist, mooting the requirement of adequate assurance of future performance.
Section 363(f) permits the Trustee to sell property free and clear of any interest of such property of an entity other than the estate under certain conditions, which are as follows:
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding to accept a money satisfaction of such interest.
11 U.S.C. § 363(f).
The Trustee claims he can sell the Fort Myers Facility free and clear of Realty’s interest, as one of the above provisions is satisfied. This Court is not willing to accept this proposition for the following reasons: (1) the Trustee’s attempt to sell pursuant to Section 363(f) cannot succeed for the simple reason that the Trustee is unable to meet any of the conditions set forth in the section; and (2) the Trustee’s claimed interest in the property is merely its interest in the Lease with Realty and certain rights arising from the Adversary Proceedings previously filed.
The Trustee cannot satisfy any of the conditions of Section 363(f). Realty does not consent to the sale, and it holds an *644ownership interest, not a lien on the property. Also, Realty cannot be compelled to accept money for its interest in the property, and the Trustee has not pointed to a provision of applicable nonbankruptcy law that would allow this Court to sell the property free and clear of Realty’s interest.
Finally, while Realty’s interest is partially the subject of the pending Adversary Proceedings initiated by the Trustee, such claims do not establish a bona fide dispute as to Realty’s ownership interest, and are insufficient as a basis to sell the property free and clear of the interest.
Further, it is self-evident that the Trustee can only sell property of the estate. E.g. Connolly v. Nuthatch Assocs. (In re Manning), 831 F.2d 205, 207 (10th Cir.1987) While a leasehold interest is property of the estate, the leasehold interest is not an ownership interest, and does not qualify the Fort Myers Facility as property of the estate. Even when combined with the claims asserted in the Adversary Proceedings, the validity of which is yet to be determined, the Debtor’s interest does not form the basis upon which this Court can authorize a Section 363(f) sale free and clear of Realty’s ownership interest. As this Court is satisfied that a leasehold interest and any potential rights arising from the Adversary Proceedings are insufficient to support a Section 363(f) sale, and the Trustee has not satisfied any of the conditions of Section 363(f), the Trustee cannot assure future performance, and therefore cannot assume the Lease. The Motion to Assume shall be denied.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Trustee’s Motion to Assume Lease Agreement and Lease Agree-
ment Addendum be, and the same is hereby, denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493903/ | *665
ORDER DISCHARGING ORDER TO SHOW CAUSE AND ORDER ON CREDITOR RONALD A. SBROCCO AND ANGELA M. SBROCCO’S SECOND MOTION FOR CLARIFICATION OR ORDERS REGARDING AMOUNT OF SECURED CLAIM AND TO DETERMINE WHETHER THE DISCHARGE INJUNCTION HAS BEEN OR WILL BE VIOLATED BY ENFORCEMENT ACTIONS
(Doc. Nos. 69 and 70)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTERS under consideration in this Chapter 13 case of Patricia J. Hamilton (Debtor) are two Motions. One is filed by the Debtor and is entitled Motion for Rule to Show Cause as to Violation of Discharge Injunction (Doc. No. 68). The second is filed by Ronald A. Sbrocco and Angela M. Sbrocco (the Sbroccos) and is entitled Second Motion for Clarification of Orders Regarding the Amount of Secured Claim and to Determine Whether a Discharge Injunction Has Been or Will be Violated by Enforcement Action (Doc. No. 69).
In order to properly identify and deal with the precise issues raised by both Motions, a brief recap of the procedural history of this closed Chapter 13 case should be helpful. On February 5, 2001, the Debtor filed her Petition for Relief under Chapter 13 of the Bankruptcy Code. Her Petition was accompanied by the Chapter 13 Plan in which she proposed, inter alia, that the secured claim of the Sbroccos’ secured by the Debtor’s homestead in the approximate amount of $6,062.00, representing the amount of prepetition arrearages accrued up to the date of filing and which will be paid through the Plan. The Debtor’s Plan further provided that the current payments in the approximate amount of $443.00 per month would be paid outside of the Plan and the Sbroccos would retain their lien securing the balance of the mortgage loan encumbering the Debtor’s homestead.
On March 7, 2001, the Sbroccos filed a secured Proof of Claim, Claim No. 3, in the amount of $65,710.32 representing the claimed arrearages which became due as of the date of the commencement of the case. According to the document attached to the Proof of Claim, the amount claimed as arrearages included late charges, court costs, attorney fees, and other miscellaneous expenses, plus an item described as “unpaid balance on the mortgage and the note” in the amount of $58,880.44.
On June 1, 2001, the Sbroccos filed an Amended Proof of Claim, Claim No. 10. Claim No. 10 was filed in the amount of $67,210.32, again describing it as the amount representing the prepetition ar-rearages. On August 6, 2001, the Debtor filed an Objection to Claim No. 10 (Doc. No. 22). It should be noted that the Debt- or never filed an Objection to Claim No. 3, although it appears that Claim No. 10 replaces Claim No. 3. On October 22, 2001, the Court sustained the Debtor’s Objection to Claim No. 10 and disallowed the claim without prejudice, with leave granted to file a proof of claim within fifteen (15) days (Doc. No. 30). On October 29, 2001, the Sbroccos filed an Amended Proof of Claim, Claim No. 13, in the amount of $8,329.88. On November 21, 2001, the Debtor filed an Objection to the Proof of Claim (Doc. No. 31). On March 14, 2002, this Court sustained the Debtor’s Objection to Claim No. 13 and for the first time indicated that this Claim was alleged as a secured claim based on “postpetition arrearages in the final sum of $8,329.88” (Doc. No. 37). However, the Order failed to indicate *666whether or not this claim also included the prepetition arrearages.
On September 5, 2002, this Court entered an Order and confirmed the Chapter 13 Plan which was never amended and which dealt only with prepetition arrearag-es and never contemplated to pay any postpetition arrearages. On the contrary, the Order of Confirmation expressly provided that all postpetition payments per contract will be paid directly to the secured creditor and the secured creditor would not receive any distribution under the Plan. On November 18, 2002, this Court entered an Order Mowing and Disallowing Claims and Ordering Disbursements (Doc. No. 43). According to the schedules submitted by the Chapter 13 Trustee, Exhibit A, the Trustee intended to pay Ronald and Angela Sbrocco the sum of $8,329.88 in full, which is the amount allowed as stated in Claim No. 13, although it purported to represent postpetition arrearages, notwithstanding that, the Confirmed Plan never intended to deal with postpetition arrearages.
On December 17, 2004, this Court granted the Debtor her discharge pursuant to Section 1328 of the Code, based on the report by the Trustee that the Plan had been fully consummated. On February 18, 2005, the Chapter 13 Trustee issued his Final Report and Account (Doc. No. 54) and on March 22, 2005, this Court entered a Final Decree (Doc. No. 55) and closed the case.
It is clear from the record that the allowed claim of the Sbroccos, Claim No. 13, has been paid in full. This record is devoid of any evidence which indicates that the current attempts by the Sbroccos to enforce their mortgage lien against the Debtor’s homestead is based on any default by the Debtor in making her postpe-tition contractual payments. It appears that Mr. Louis D’Agostino (Mr. D’Agosti-no), who was representing the Sbroccos, contacted Mr. Edward Miller (Mr. Miller), counsel of record for the Debtor until her Chapter 13 case was closed. Mr. D’Agos-tino had inquired as to whether Mr. Miller was still representing the Debtor post confirmation and whether or not the Debtor is willing and able to clear all postpetition defaults. Mr. Miller advised Mr. D’Agosti-no that neither he nor his firm was representing the Debtor any longer and advised Mr. D’Agostino that he should contact the Debtor directly. Mr. D’Agostino mailed a Notice of Default to the Debtor pursuant to the advice of Mr. Miller. Mr. D’Agosti-no sent a demand letter to the Debtor informing her of the default under the mortgage and demanded the Debtor cure the defaults. Subsequent to sending the demand letter, Mr. Miller contacted Mr. D’Agostino and informed him that he is now representing the Debtor and “that the entry of the confirmation order and the Order had reduced the principal balance of the Mortgage to $8,329.88 as a result of the recent filing of proof of claim by the Sbroccos; and that any subsequent attempt to enforce the Mortgage would constitute a violation of Section 1328 of the Bankruptcy Code.” Apparently not having received any response from Mr. D’Agosti-no, Mr. Miller filed his Motion in which he sought an issuance of an Order to Show Cause ordering Mr. D’Agostino and the Sbroccos to appear before this Court to show cause, if they have any, why they should not be held in civil contempt for violation of the Discharge Injunction. This in turn prompted counsel for the Sbroccos to file Creditor Ronald A. Sbroc-co and Angela M. Sbrocco’s Second Motion for Clarification of Orders Regarding Amount of Secured Claim and to Determine Whether the Discharge Injunction Has Been or Will be Violated by Enforcement Actions (Doc. No. 69). It is evident from the foregoing, that before this record *667is clarified it is impossible to consider the merits of the Debtor which claimed that the Sbroccos should be held in civil contempt for violating the discharge injunction.
Although the record of this Chapter 13 case represents somewhat of a comedy of errors, in the last analysis it is clear that the prepetition default of the Debtor in the amount of $8,329.88 has been paid in full pursuant to the terms of the Confirmed Plan. Accordingly, any attempt by the Sbroccos to assert a claim for any additional prepetition arrearages is barred by the Order of Confirmation and would be a violation of the discharge injunction. To the extent of the current collection attempts by the Sbroccos involve a postpetition default under the Mortgage, which was not dealt with the Chapter 13 Plan and is unaffected by the Order of Confirmation, and therefore, it is not protected by the Discharge granted by Section 1328 of the Code to the Debtor. Concerning the Debtor’s Motion for Rule to Show Cause as to Violation of the Discharge Injunction (Doc. No. 68), this Court is satisfied that based on this record that the actions of the Sbroccos were not willful and, therefore, the Motion should be denied and the Motion to Show Cause should be discharged.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Creditor Ronald A. Sbrocco and Angela M. Sbrocco’s Second Motion for Clarification of Orders Regarding Amount of Secured Claim and to Determine Whether the Discharge Injunction Has Been or Will be Violated by Enforcement Actions be, and the same is, hereby granted. Further, the Plan which was confirmed by this Court provided for curing under the Plan the prepetition arrear-ages and a payment direct to the Sbroccos of the contractual accruing charges postpe-tition; that notwithstanding the Order entered on March 14, 2002, which allowed Claim No. 13 in the sum of $8,329.88, which stated that it was postpetition ar-rearages, the amount was clearly prepetition arrearages. It is further
ORDERED, ADJUDGED AND DECREED that the Order to Show Cause entered on March 21, 2006 (Doc. No. 70) be, and the same is hereby, discharged. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493904/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court is a motion for partial summary judgment filed by On Point, LLC (“On Point”); responses and/or memoranda of law having been filed by the debtor, Mary A. Isom (Isom), the Chancery Clerk of Sunflower County, Mississippi (Chancery Clerk), and Greenpoint Credit, LLC (Greenpoint); and the court, having considered same, hereby finds as follows, to-wit:
I.
The court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(A) and (O).
II.
On April 2, 2001, the Tax Collector of Sunflower County, Mississippi, conducted a tax sale and sold the residential real property owned by Isom to On Point for delinquent taxes. Isom filed a voluntary petition for bankruptcy relief under Chapter 13 of the Bankruptcy Code on December 4, 2002. This court must now determine what interest, if any, the debtor and her bankruptcy estate have in this property. The facts are not disputed by the parties.
III.
Summary judgment is properly granted when pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Bankruptcy Rule 7056; Uniform Local Bankruptcy Rule 18. The court must examine each issue in a light most favorable to the nonmoving party. Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, *74591 L.Ed.2d 202 (1986); Phillips v. OKC Corp., 812 F.2d 265 (5th Cir.1987); Putman v. Insurance Co. of North America, 673 F.Supp. 171 (N.D.Miss.1987). The moving party must demonstrate to the court the basis on which it believes that summary judgment is justified. The non-moving party must then show that a genuine issue of material fact arises as to that issue. Celotex Corporation v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Leonard v. Dixie Well Service & Supply, Inc., 828 F.2d 291 (5th Cir.1987), Putman v. Insurance Co. of North America, 673 F.Supp. 171 (N.D.Miss.1987). An issue is genuine if “there is sufficient evidence favoring the nonmoving party for a fact finder to find for that party.” Phillips, 812 F.2d at 273. A fact is material if it would “affect the outcome of the lawsuit under the governing substantive law.” Phillips, 812 F.2d at 272.
rv.
At the time of the bankruptcy filing, the tax collector had already sold Isom’s property for delinquent taxes. “The right to redeem property from a tax sale is an asset that becomes property of the estate ... The real property involved in the sale is not itself an asset. Where the redemption period has not expired as of the date the petition is filed, section 108 applies to guarantee a minimum redemption period of sixty days after the entry of the order for relief.” 5 Collier on Bankruptcy 541.05[2]. Other courts throughout the country who have dealt with this issue have agreed with the aforesaid principle. In In re Haynes, 283 B.R. 147 (Bankr.S.D.N.Y.2002), the bankruptcy court held, “[i]f a petition is filed while the redemption right is unexpired (emphasis added), the equitable right of redemption becomes part of the bankruptcy estate.” Id. at 155. See also, Multnomah County v. Rudolph, 166 B.R. 440, 442 (D.Or.1994); In re Argyle-Lake Shore Building Corp., 78 F.2d 491, 494 (7th Cir.1935).
Consequently, the court is of the opinion that once the tax sale was conducted on April 2, 2001, only Isom’s equitable right of redemption became property of the bankruptcy estate when she filed on December 4, 2002.
V.
As to the amount of time that a debtor has to redeem property sold for taxes, § 27-45-3, Miss.Code Ann. (1972), states, “[t]he owner ... or any person interested in land sold for taxes, may redeem the same ... at any time within two (2) years after the day of sale by paying to the Chancery Clerk ... the amount of all taxes for which the land was sold ...” As such, Isom had two years from April 2, 2001, to redeem her property. As of the date of the bankruptcy filing, Isom had nearly four months remaining to redeem.
11 U.S.C. § 108(b) states in pertinent part:
Except as provided in subsection (a) of this section, if applicable non-bankruptcy law, an order entered in a non-bankruptcy proceeding, or an agreement fixes a period within which the debtor or an individual protected under § 1201 or § 1301 of this title may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 60 days after the order for relief.
*746Pursuant to § 108(b), since the state law redemption period had not expired before the bankruptcy filing date, Isom had the balance of the two year period to redeem the tax sale as opposed to the shorter sixty day period which would apply only if the state law period expired earlier than sixty days post-petition. Therefore, the redemption period, which is not tolled by the automatic stay as discussed immediately hereinbelow, expired on April 2, 2003.
In the case of Smith v. Phoenix Bond & Indemnity, 288 B.R. 793, 796-97 (N.D.Ill. 2002), the facts of which are similar to this case, the court held that a debtor is only guaranteed a minimum of 60 days to redeem under the Bankruptcy Code, and that the automatic stay does not toll the running of the redemption period. See, In re Froehle, 286 B.R. 94, 100 (8th Cir. BAP 2002). Several other courts have dealt with this issue in a foreclosure context and have reached the same conclusion. Once a foreclosure sale has been conducted and the debtor thereafter files bankruptcy, the automatic stay does not toll the running of the state law foreclosure redemption period. See, In re Canney, 284 F.3d 362 (2nd Cir.2002) (citing In re Tynan, 773 F.2d 177 (7th Cir.1985); In re Glenn, 760 F.2d 1428 (6th Cir.1985); Johnson v. First Nat’l Bank, 719 F.2d 270 (8th Cir.1983)). Consequently, the automatic stay does not prevent the running of the tax sale redemption period.
VI.
In keeping with § 108(b) of the Bankruptcy Code, Isom, on the date of her bankruptcy filing, possessed only the statutory right to redeem the subject tax sale afforded by § 27-45-3, Miss.Code Ann. Her right of redemption, which is not tolled by the automatic stay, was not timely exercised. As such, her real property is not an asset of this bankruptcy estate. Since there are no material factual issues in dispute as to this question, the court is of the opinion that On Point is entitled to partial summary judgment as a matter of law.
A separate order, consistent with this opinion, will be entered contemporaneously herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493905/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JACK B. SCHMETTERER, Bankruptcy Judge.
This Adversary Proceeding relates to the joint Chapter 7 bankruptcy case of Michael and Kelly Donlevy.1 The plaintiffs, David and Kay Lefelstein (“Plaintiffs”) allege that pursuant to a construction contract between the Plaintiffs and *777the Defendant, the Defendant agreed to use funds given to him as a “material deposit” of $9,470 for payment to Chicago Granite and Marble, Inc. (“Chicago Granite”), an entity supplying materials on the job for that sum. Defendant, however, failed to use the funds paid to him by Plaintiffs for that purpose. Chicago Granite was not paid at all, and it placed a mechanic’s lien on Plaintiffs’ property in the amount of $10,985, which included charges related to the unpaid $9,470.
Plaintiffs therefore filed this' three-count Adversary Complaint. They assert that the failure of Defendant caused them damages in the amount of $10,985, and seek to bar dischargeability of that debt. Count I seeks to have Plaintiffs’ claim found non-dischargeable under 11 U.S.C. § 523(a)(2)(A) based on the assertion that Defendant obtained the $9,470 by fraud and false pretenses. Count II seeks to have Plaintiffs’ claim found nondischargeable under 11 U.S.C. § 523(a)(4) based on the assertion that Defendant committed fraud or defalcation of the $9,470 while acting in a fiduciary capacity, embezzlement, or larceny. Count III seeks to have Plaintiffs’ claim found nondischargeable under 11 U.S.C. § 523(a)(6) based on the assertion that Defendant willfully and maliciously injured the property of Plaintiffs.
Following trial, the Court now makes and enters the following Findings of Fact and Conclusions of Law. For reasons stated below and pursuant to a separate judgment order, judgment is separately entered in favor of Defendant on Counts I and III, but Plaintiffs’ claim against the Defendant in the amount of $10,985 is found to be nondischargeable under Count II pursuant to 11 U.S.C. § 523(a)(4) and judgment will separately enter for Plaintiff on Count II.
BACKGROUND AND PROCEDURAL HISTORY
Defendant is a contractor in the business of home remodeling. He does business as “Design Custom Woodworking” and/or “Design Custom Homes, Inc.” Plaintiffs and Defendant entered into a contract on July 25, 2002 wherein the Defendant agreed to perform and furnish certain work, labor, and materials necessary for the remodeling of certain kitchen, bar, and lavatory countertops in Plaintiffs’ house. Pursuant to the contract, Defendant agreed to provide all materials and labor to complete the project for $12,629. The contract required a “material deposit” of $9,470 for use to pay the granite supplier on this job, which Plaintiffs then provided to Defendant. However, Defendant did not use those funds to pay Chicago Granite for the granite used in the Plaintiffs’ home. Defendant later tendered three checks to Chicago Granite (supposedly drawn on funds from other sources to pay for the granite), but all were returned for insufficient funds. As a result, Chicago Granite placed a lien on Plaintiffs’ property in the amount of $10,985, and they have the burden of paying off that lien.
FINDINGS OF FACT2
1. The Defendants filed their voluntary petition for relief under Chapter 7 of the Bankruptcy Code on April 26, 2004.
2. Prior to the filing of the instant bankruptcy petition, Plaintiffs filed suit against Defendant in the Circuit Court of the Sixteenth Judicial Circuit Kane County, Illinois.
*7783. A contract was entered into on July 25, 2002 between the Plaintiffs and Defendant whereby the Defendant agreed to provide certain remodeling services which were to include new granite material to be installed.
4. The total due under the contract for material and labor was to be $12,629.
5. The contract required a “material deposit” in the amount of $9,470. Defendant told Plaintiff Kay Lefelstein that Chicago Granite required the deposit of $9,470 to be paid in advance in order for Defendant to obtain delivery of material to use on the job at the Lefelstein home.
6. Plaintiff Kay Lefelstein wrote a check to Defendant for $9,470, check No. 9672 bearing the notation “granite.”
7. Defendant cashed check No. 9672 for $9,470 at the Harris Bank in St. Charles, Illinois on the same day said check was issued.
8. Defendant never used the $9,470 or any part of it to pay Chicago Granite. He used that money to pay other expenses of his business. He never paid Chicago Granite for the granite used in the Lefel-stein home.
9. Defendant did tender three checks to Chicago Granite late in the year 2002, purportedly drawn on funds from other sources in order to pay the debt owed to it, but all were returned for insufficient funds. The copies of checks numbered 1098, 1093, and 1063 written and signed by Defendant attached to the Request for Admissions as Exhibit A are true and correct copies of those checks.
10. As a result of Defendant’s failure to pay Chicago Granite, that company recorded a lien against Plaintiffs’ property in the amount of $10,985, which included charges related to the granite cost. Pursuant to the contract between Plaintiffs and Defendant, it was Defendant’s obligation to pay Chicago Granite, but he failed to do so.
11. A copy of the lien filed by Chicago Granite, attached to the Request for Admissions as Exhibit B, is a true and correct copy of the lien filed by Chicago Granite.
12. Defendant admitted that he has engaged in substantially similar conduct on other occasions, that is by providing for “material deposits” in his construction contracts, accepting such deposits but by failing to pay the suppliers for materials supplied.
13. Statements of fact contained in the Conclusions of Law shall constitute additional Findings of Fact.
CONCLUSIONS OF LAW Jurisdiction
Jurisdiction over this matter lies under 28 U.S.C. § 1334 and under District Court’s Internal Operating Procedure 15(a). Determination of the dischargeability of a debt is a core proceeding under 28 U.S.C. § 157(b)(2)(I). Venue is proper under 28 U.S.C. § 1409.
Applicable Standards
The party seeking to establish an exception to the discharge of a debt bears the burden of proof. In re Harasymiw, 895 F.2d 1170, 1172 (7th Cir.1990). The burden of proof required to establish an exception to discharge is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see also In re McFarland, 84 F.3d 943, 946 (7th Cir.), cert. denied, 519 U.S. 931, 117 S.Ct. 302, 136 L.Ed.2d 220 (1996). To further the policy of providing a debtor a fresh start in bankruptcy, “exceptions to discharge are to be construed strictly against a creditor and liberally in favor of a debtor.” In re Scarlata, 979 F.2d 521, 524 (7th Cir.1992) (quoting In re *779Zarzynski, 771 F.2d 304, 306 (7th Cir. 1985)).
Count 1-11 U.S.C. § 523(a)(2)(A)
Section 523(a)(2)(A) provides in relevant part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing 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.
Section 523(a)(2)(A) excepts debts from discharge that are based on either intentional misrepresentation or fraud. McClellan v. Cantrell, 217 F.3d 890, 893-94 (7th Cir.2000) Section 523(a)(2)(A) is not limited to false representations but includes actual fraud. Fraud has been defined as the following:
[A] generic term, which embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain an advantage over another by false suggestions or by the suppression of truth. No definite and invariable rule can be laid down as a general proposition defining fraud, and it includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated. McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000).
Alternatively, to establish a claim under § 523(a)(2)(A), a creditor must usually prove that (1) the debtor made a false representation of fact (2) which the debtor (a) either knew to be false or made with reckless disregard for its truth and (b) made with an intent to deceive, and (3) the creditor justifiably relied on the false representation. In re Bero, 110 F.3d 462, 465 (7th Cir.1997); Citibank (S.Dakota), N.A. v. Michel, 220 B.R. 603, 605 (N.D.Ill.1998); Golant v. Care Comm, Inc., 216 B.R. 248, 253 (N.D.Ill.1997).
Plaintiffs have not sustained their burden to prove by a preponderance of evidence that Defendant obtained the funds in issue by means of fraud, false pretenses, or a false representation.
Plaintiffs have established that they entered into a contract with the Defendant whereby the Defendant agreed to provide home remodeling services. (Pls.Ex.l.) The contract stated the following:
Design Custom Woodworking does hereby propose to provide all materials and labor to complete the project described above for the amount of $12,629.00 and will require a material deposit of $9,470.00 the entire balance to be due at time of completion of installation.
(Pls.Ex.l.)
Plaintiffs have also established that they gave a check payable to the Defendant specified to be used to pay for the granite material to be used, but the Defendant did not use it for that purpose and ultimately was unable to pay Chicago Granite for the granite material used on the Plaintiffs’ job.
Plaintiffs argue that the Defendant committed fraud by intending to use the funds advanced to him for his personal gain by using it to pay his business bills. (CompU 15.) Although Defendant did admit to the practice of using payments from customers for “material deposits” on his jobs for general business needs, it was not proved the Defendant acted with the requisite intent to deceive when he accepted the check for material deposits.
In this case, Defendant did in fact attempt to pay the amount due for materials to Chicago Granite. Defendant tendered three checks to Chicago Granite in 2002, *780but all were returned for insufficient funds in the account when the checks were presented. Defendant’s actions in attempting to pay Chicago Granite the full amount for the costs of the material demonstrate that he had some intent to pay for the granite out of his cash flow. Therefore, Plaintiffs have not demonstrated by a preponderance of evidence that Defendant acted with the requisite intent required to find a debt nondischargeable under 11 U.S.C. § 523(a)(2)(A).
Count 11-11 U.S.C. § 523(a)(4)
Section 523(a)(4) of the Bankruptcy Code provides that
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.
11 U.S.C. § 523(a)(4). To prevail under § 523(a)(4), the Plaintiffs must prove that the Defendant committed (1) fraud or defalcation while acting as a fiduciary; or (2) embezzlement; or (3) larceny. In order to establish that a debt is non-dischargeable for reason of defalcation while acting in a fiduciary capacity, the Plaintiffs must demonstrate by a preponderance of the evidence the existence of an express trust or fiduciary obligation, and a debt caused by the Defendant’s defalcation while he was acting as a fiduciary. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Woldman, 92 F.3d 546, 547 (7th Cir.1996).
To establish that a debt is nondis-chargeable under 11 U.S.C. § 523(a)(4) a creditor must establish that: (1) an express trust existed, (2) the debt was caused by fraud or defalcation, and (3) the debtor acted as a fiduciary to the creditor at the time the debt was created. Kling-man v. Levinson, 831 F.2d 1292, 1295 (7th Cir.1987).
Therefore, a threshold inquiry is whether a fiduciary obligation exists between the Plaintiffs and the Defendant. In determining whether a particular debt- or was acting in a fiduciary capacity for purposes of section 523(a)(4), the Court must look federal law. In re Frain, 230 F.3d 1014, 1017 (7th Cir.2000). However, state law is relevant to the inquiry. In re McDade, 282 B.R. 650, 659 (Bankr.N.D.Ill.2002).
Fiduciary Duty
To qualify as a fiduciary under § 523(a)(4), a fiduciary relationship must have an existence independent of the debt- or’s wrongdoing. In re Marchiando, 13 F.3d 1111, 1115-16 (7th Cir.), cert. denied, 512 U.S. 1205, 114 S.Ct. 2675, 129 L.Ed.2d 810 (1994). The difference between a fiduciary relationship that imposes real duties in advance of the breach and the fiduciary relationship that does not involves a difference in knowledge and power between the fiduciary and principal that gives the former a position of ascendancy over the latter Id. A Seventh Circuit panel has noted:
The fiduciary may know much more by reason of professional status, or the relation may be one that requires the principal to repose a special confidence in the fiduciary; both factors are present in the case of a lawyer-client relation and also the relation between director and shareholder or managing partner and limited partner. Or the principal may be a child, lacking not only knowledge but also the power to act upon it. These are all situations in which one part to the relation is incapable of monitoring the other’s performance of his undertaking, and therefore the law does not treat the relation as a relation at arm’s length between equals.
*781
Id.
Pursuant to Illinois law, various relationships constitute fiduciary relationships: attorney and client; joint venturers or partners; corporate directors and shareholders; and trustee and beneficiary under an express trust. Rae v. Scarpello (In re Scarpello), 272 B.R. 691, 702 (Bankr.N.D.Ill.2002). Here, an express trust was established.
Under Illinois law, the requirements of a valid express trust are: (1) intent of the parties to create a trust, which may be shown by a declaration of trust by the settlor or by the circumstances which show that the settlor intended to create a trust; (2) a definite subject matter of trust property; (3) ascertainable beneficiaries; (4) a trustee; (5) specifications of a trust purpose and how the trust is to be performed; and (6) delivery of the trust property to the trustee. In re Estate of Wilkening, 109 Ill.App.3d 934, 940-41, 65 Ill.Dec. 366, 441 N.E.2d 158, 163 (1st Dist.1982). If any of the above requirements are not described with certainty, an express trust is not created. Id.
In this case, the six requirements to establish an express trust are satisfied: (1) there was an intent to create a trust: evidenced by the contract between Defendant and the Plaintiffs wherein the Defendant was to use a “material deposit” given to him by the Plaintiffs to pay for required materials; (2) a definite subject matter of trust property: the money Plaintiffs caused to be paid to the Defendant was specified to be used to pay for the material as required by the contract; (3) ascertainable beneficiaries: the Plaintiffs; (4) a trustee: the Defendant; (5) specifications of a trust purpose: Defendant was to pay Chicago Granite the funds for the job material; and (6) delivery of the trust property to the trustee: the check issued by the Plaintiffs was delivered to the Defendant, and was drawn on the bank account of Plaintiffs and paid.
Further, the Restatement (Second) of Trusts § 12 cmt. g (1959) supports such a ruling providing as follows:
If one person pays money to another, it depends upon the manifested intention of the parties whether a trust or a debt is created. If the intention is that the money shall be kept or used as a separate fund for the benefit of the payor or a third person, a trust is created. If the intention is that the person receiving the money shall have the unrestricted use thereof, being liable to pay a similar amount whether with or without interest to the payor or to a third person, a debt is created.
In this case, it is clear that the Defendant did not have the unrestricted use of the funds to be obtained from the check for material deposits. Rather, he was required to keep the funds separate from his own and use them to pay a third party, Chicago Granite. Thus, a trust was created.
“It is immaterial whether or not the settlor knows that the intended relationship is called a trust, and whether or not he knows the precise characteristics of the relationship which is called a trust.” Restatement (Second) of Trusts § 23 cmt. a (1959). Even though the contract between the Defendant and the Plaintiffs does not specifically describe the material deposit as trust property, it is clear from the actions of the parties and the contract that an express trust was created. The Defendant was entrusted with funds that were to be used only for the materials.
“A trustee owes a fiduciary duty to the beneficiaries and is obligated to carry out the trust according to its terms and to act with the highest degree of fideli*782ty and utmost good faith.” Dick v. Mid-Illinois Corp., 242 Ill.App.3d 297, 304, 609 N.E.2d 997, 1003, 182 Ill.Dec. 463, 469 (1993). The Defendant, as trustee, owed the beneficiaries, the Plaintiffs, a fiduciary duty to carry out the terms of the trust according to the contract.
Defalcation
Having determined that a fiduciary relationship existed between these parties, the next issue is whether a “defalcation” occurred. Defalcation is not defined in the Bankruptcy Code.
An objective standard is used to determine a defalcation, and intent or bad faith is not a requirement. Rae v. Scarpello (In re Scarpello), 272 B.R. 691, 702 (Bankr.N.D.Ill.2002). While the Seventh Circuit has not clearly defined defalcation within the context of § 523(a)(4), it has required something more than mere negligence or mistake, but less than fraud. Meyer v. Rigdon, 36 F.3d 1375, 1385 (7th Cir.1994). One court has defined defalcation within the context of 11 U.S.C. § 523(a)(4) as “the misappropriation of trust funds held in any fiduciary capacity, and the failure to properly account for such funds.” Nuchief Sales, Inc. v. Harper (In re Harper), 150 B.R. 416, 419 (Bankr.E.D.Tenn.1993).
In this case, the Defendant did not have the right to use the funds given to him by the Plaintiffs for any other purpose other than to pay for the granite materials. Defendant, however, testified that it was his typical practice to deposit checks given to him specifically for material deposits into a general business account. Defendant testified that it was not his usual practice to pay funds given to him for material deposits to the supplier, despite being entrusted with such funds for that purpose. Defendant misappropriated the funds from the “material deposit” check when he used them for general business expenses and not for their designated purpose. Further, the Defendant has since failed to account for the funds.
Therefore, the Plaintiffs have proven by a preponderance of the evidence that Defendant defalcated while acting in a fiduciary capacity with respect to those funds. Accordingly, the amount of the mechanics lien placed on Plaintiffs property in the amount of $10,985 as a direct result of Defendant’s defalcation while acting in a fiduciary capacity is found nondischargeable under § 523(a)(4).
Count III-ll U.S.C. § 523(a)(6)
Section 523(a)(6) of the Bankruptcy Code provides:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt-
id) for willful and malicious injury by the debtor to another entity or to the property of another entity.
11 U.S.C. § 523(a)(6). In order for a debt to be found nondischargeable under § 523(a)(6) the Plaintiffs must prove three elements by a preponderance of the evidence: (1) that the Debtor intended to and caused an injury; (2) that the Debtor’s actions were willful; and (3) that the Debt- or’s actions were malicious. Rae v. Scarpello (In re Scarpello), 272 B.R. 691, 704 (Bankr.N.D.Ill.2002) (multiple citations omitted).
For purposes of § 523(a)(6) “willful” means actual intent to cause injury, not merely the commission of an intentional act that leads to injury. Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). To satisfy the elements under § 523(a)(6) the Plaintiffs must plead and prove that the Defendant actually intended to harm them and not merely that the Defendant acted intention*783ally and they were thus harmed. Id. at 61-62, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90. The Defendant must have intended the consequences of his act. Id.
In this case, the evidence does not establish that Defendant intended to injure the Plaintiffs or their property or that he did willfully or maliciously injure Plaintiffs or their property.
CONCLUSION
Plaintiffs satisfied their burden of establishing nondischargeability by proving that they paid Defendant $9,470.00 to be held in trust as a material deposit and that the defalcation by the Defendant occurred when he used these funds for his own purposes.
For the above-stated reasons, this Court finds that the debt owed by Defendant to the Plaintiffs for his failure to use funds entrusted to him for their proper purpose, as trustee of the funds to the Plaintiffs as beneficiaries, constitutes a defalcation under 11 U.S.C. § 523(a)(4), and thus is non-dischargeable.
As a result of the defalcation by Defendant while acting in a fiduciary capacity, he caused damages of $10,985.00 to the Plaintiffs, and that debt is found nondis-chargeable in Count II under title 11 U.S.C. § 523(a)(4).
But judgment will enter for Defendant on Counts I and III.
. The Adversary Complaint named both Debtors as defendants, however, pursuant to agreement by Plaintiff's counsel and on motion of this Court, Kelly Donlevy was dismissed from this Adversary Complaint without prejudice for failure to state any basis for relief or cause of action against her. (See Order, Jan. 24, 2005.) Therefore, only Michael Donlevy will hereinafter be referred to as "Defendant” or "Debtor.”
. Findings of fact are based on pleadings and evidence presented at trial, and on facts deemed admitted based on Defendant’s failure to respond to Plaintiffs’ First Request For Admission of Facts within the time required by Fed.R.Civ.P. 36. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493906/ | MEMORANDUM OPINION
DAVID P. McDONALD, Bankruptcy Judge.
General Electric Capital Corporation (“GE Capital”) filed this adversary complaint against Union Planters Bank (“Union Planters”). The parties’ dispute centers on which entity’s security interest had priority with respect to certain cash proceeds (the “Lift Proceeds”) generated post-confirmation by Debtor, Machinery, Inc. (“Machinery”). Because Union Planters was a transferee of the Lift Proceeds, it took those proceeds free of GE Capital’s superior security interest. The Court will accordingly enter judgment in favor of Union Planters.
JURISDICTION AND VENUE
This Court has jurisdiction over the parties and subject matter of this proceeding under 28 U.S.C. §§ 1334, 151, and 157 and Local Rule 9.01(B) of the United States District Court for the Eastern District of Missouri.1 This is a core proceeding under 28 U.S.C. § 157(b)(2)(K), which the Court may hear and determine. Venue is proper in this District under 28 U.S.C. § 1409(a).
FACTUAL AND PROCEDURAL BACKGROUND
Machinery was in the business of leasing aerial lifts (the “Lifts”) to end users for construction projects. GE Capital and Machinery entered into a floor plan financing and security agreement (the “GE Financing Agreement”) in November, 1997. Under the terms of the GE Financing Agreement, GE Capital agreed to loan Machinery up to $5,000,000 to finance Machinery’s purchase of the Lifts. Machinery executed a promissory note in favor of GE Capital in exchange for the loan and secured its obligation by granting GE Capital a security interest in the Lifts and all proceeds derived therefrom. GE Capital properly perfected its security interest.
*794Union Planters extended a line of credit to Machinery in March, 2000 to provide Machinery with working capital. Machinery executed a series of promissory notes in favor of Union Planters in exchange for the line of credit. Machinery secured its obligation under the promissory notes by granting Union Planters a security interest in specific items as well as a blanket lien on Machinery’s inventory, accounts and proceeds from the inventory, which Union Planters perfected, (the “Union Planters Financing Agreement”).
Contemporaneous with executing the Union Planters Financing Agreement, Union Planters executed a subordination agreement (the “Subordination Agreement”) in favor of GE Capital. The Subordination Agreement provided that Union Planters’ security interest in the Lifts and the proceeds therefrom was junior to GE Capital’s security interest.
Machinery filed a petition for relief under Chapter 11 of the United States Bankruptcy Code on March 29, 2001. Machinery filed its proposed plan of reorganization on July 27, 2001, and then an amended plan on August 28, 2001 (the “Amended Plan”). Sections 3.7 and 3.4.14.C of the Amended Plan gave Union Planters a senior security interest in Machinery’s accounts receivables and cash. Section 3.7, however, also provided that any other secured creditor claiming a security interest senior to Union Planters in Machinery’s cash proceeds could object to the general provisions of Section 3.7 on or before the hearing on confirmation of the Amended Plan.
GE Capital objected to confirmation of the Amended Plan, arguing that Section 3.7 of the Amended Plan improperly gave Union Planters a senior security interest in all of Machinery’s post-confirmation cash proceeds. The Court held a hearing on the confirmation of the Amended Plan on October 3, 2001. At the hearing on confirmation, GE Capital withdrew its objection to the Amended Plan when Machinery and Union Planters both agreed that GE Capital would be deemed as having filed a valid objection under Section 3.7 of the Amended Plan.
The Court confirmed the Amended Plan in an order dated October 5, 2001. (the “Confirmation Order”). Paragraph (n)(3) of the Confirmation Order states that based on the compromise reached by Machinery, Union Planters and GE Capital, GE Capital was deemed to have filed a timely objection to the portion of Section 3.7 of Amended Plan giving Union Planters a senior lien on the proceeds of the Lifts.
Machinery defaulted on its obligation to its secured creditors, including GE Capital and Union Planters, under the Amended Plan sometime in late 2002. Machinery then notified its secured creditors in April, 2003 that it was ceasing operating as a going concern and would liquidate its assets.
Shortly after receiving Machinery’s default notice, GE Capital requested that Union Planters remit the Lift Proceeds in its possession to GE Capital. Union Planters’ attorney, in a letter dated April 28, 2003, stated that it would not remit the cash proceeds to GE Capital because under Section 3.7 of the Amended Plan, Union Planters possessed a superior lien in the Lift Proceeds.
GE Capital filed the instant adversary complaint in response to Union Planters’ refusal to remit the Lift Proceeds to it. GE Capital’s complaint contains three counts. Count I is a request for a declaration that GE Capital’s security interest in the Lift Proceeds is superior to Union Planters’ interest. GE Capital maintains in Count II that because Union Planters *795took control of Lift Proceeds, the Court should order Union Planters to give an accounting of those proceeds. Finally, GE Capital asserts in Count III that Union Planters converted its property interest in the Lift Proceeds by failing to remit those proceeds to it upon demand.
Union Planters filed an answer to GE Capital’s complaint, asserting that under Section 3.7 of the Amended Plan, it has a superior interest in all of Machinery’s post-confirmation cash proceeds, including the Lift Proceeds. Specifically, Union Planters contends that because GE Capital failed to timely object to the priority of the liens established in Section 3.7 of the Amended Plan, it waived any right to challenge the superior interest that Section 3.7 gave to Union Planters.
Both parties filed motions for summary judgment on the issue of liability. The Court granted GE Capital’s motion, finding that GE Capital retained the senior security interest in the Lift Proceeds, (the “Summary Judgment Order”). The Court specifically noted in the Summary Judgment Order that although Section 3.7 of the Amended Plan attempted to eviscerate GE Capital’s senior Article 9 interest in the Lift Proceeds, GE Capital timely objected to that provision. Accordingly, the Court held that the Amended Plan did not alter GE Capital’s senior Article 9 lien in the Lift Proceeds. The Court found in the Summary Judgment Order, therefore, that GE Capital had the senior security interest in the Lift Proceeds.
The Court then conducted a trial on the amount of damages, if any, GE Capital suffered as a result of Union Planters’ conversion of GE Capital’s senior security interest in the Lift Proceeds. The Court finds that the following facts were adduced at trial.
GE Capital did not require Machinery to segregate the Lift Proceeds from its other cash proceeds, although it did attempt to obtain post-confirmation reports from Machinery. Machinery, therefore, deposited the Lift Proceeds into its general account at Union Planters as required by Section 3.4.2(c) of the Amended Plan.
The evidence adduced at trial additionally demonstrates that Union Planters vigorously negotiated with Machinery in drafting the terms of the Amended Plan. And the evidence suggests that Machinery was amenable to Union Planters’ request to draft the Amended Plan favorably with respect to Union Planters. For example, as indicated in the Summary Judgment Order, Machinery attempted to assert a provision in the plan that would rearrange the secured parties’ Article 9 seniority with respect to Machinery’s post-confirmation cash proceeds.
The evidence also demonstrates that Union Planters retained significant control over Machinery’s operations post-confirmation. For example, Union Planters had the ability to approve Machinery’s expenditures and to review and approve Machinery’s budget post-confirmation. Union Planters further contacted ATEC to wind down Machinery’s operation and liquidate its remaining assets.
The Court finds that this evidence established that the Lift Proceeds were cash proceeds of the Lifts. The evidence also demonstrates that Union Planters was a transferee of the Lift Proceeds. Additionally, the Court finds that although the evidence does support a finding that Union Planters exercised considerable control over Machinery’s post-confirmation operation, it does not support a finding that Union Planters colluded with Machinery to violate GE Capital’s rights in the Lift Proceeds. The Court finds, therefore, that Union Planters took the Lift Proceeds free from GE Capital’s senior security interest *796in those proceeds under Mo.Rev.Stat. § 400.9-332(a).
CONCLUSIONS OF LAW
A. Elements of GE Capital’s Conversion Claim
The essence of GE Capital’s claim is that Union Planters converted its senior security interest in the Lift Proceeds when Union Planters refused to remit those proceeds to it upon demand. The Court will apply Missouri’s substantive law in determining whether Union Planters converted GE Capital’s security interest in the Lift Proceeds. Gen. Elec. Capital Corp. v. Union Planters Bank, N.A., 409 F.3d 1049, 1053 (8th Cir.2005).
Under Missouri law, conversion is the unauthorized assumption of the right of ownership in personal property to the exclusion of the true owner’s rights in the property. Bell v. Lafont Auto Sales, 85 S.W.3d 50, 54 (Mo.Ct.App.2002). In the secured transaction context, a plaintiff secured creditor must prove that it had a superior right to immediately possess the collateral at issue. MFA Inc. v. Pointer, 869 S.W.2d 109, 111 (Mo.Ct.App.1993).
Here, the Court has already determined in the Summary Judgment Order that the Amended Plan could not alter GE Capital’s Article 9 senior security interest in the Lift Proceeds. The question remains, however, whether Union Planters took the Lift Proceeds free of GE Capital’s senior security interest when Machinery placed the cash proceeds in its general account at Union Planters. The Court finds that under Revised Article 9, because there is no evidence of collusion between Union Planters and Machinery, Union Planters took the Lift Proceeds free from GE Capital’s senior security interest.
B. Revised Article 9 governs the parties’ respective rights in the Lift Proceeds.
GE Capital argues that the parties’ respective rights in the Lift Proceeds are governed solely by the Amended Plan and not applicable state law, namely Article 9 of Missouri’s version of the Uniform Commercial Code. There is no doubt that a confirmed plan of reorganization acts like a contract that binds the interested parties in the bankruptcy, including creditors who did not vote in favor of the plan. 11 U.S.C. § 1141(a); Gen. Elec, Capital Corp. v. Dial Bus. Forms, Inc. (In re Dial Business Forms, Inc.), 341 F.3d 738, 743-44 (8th Cir.2003). Also, the UCC allows the parties to vary their rights by agreement. Mo.Rev.Stat. § 400.1-102(3). The terms of a confirmed plan, therefore, may override the provisions of Article 9 and rearrange the parties’ respective seniority. Dial Bus. Forms, 341 F.3d at 743 n. 3. Here, however, there is nothing in Amended Plan that altered the parties’ respective pre-petition Article 9 rights in the Lift Proceeds.
Because the Amended Plan is essentially a contract, the Court will interpret the Amended Plan as any other contract. Fieber’s Dairy, Inc. v. Purina Mills, 331 F.3d 584, 587 (8th Cir.2003). The Court will additionally apply applicable state law, in this case Missouri, in construing the terms of the Amended Plan. UNR Indus., Inc. v. Bloomington Factory Workers, 173 B.R. 149, 158 (N.D.Ill.1994).
Missouri law requires the Court to construe the terms of the Amended Plan as a whole and not in isolation. Reese v. United States Fire Ins. Co., 173 S.W.3d 287, 299 (Mo.Ct.App.2005). Thus, the Court will read different provisions of the Amended Plan together when those provisions deal with the same issue. Id. Also, if two provisions arguably address the same issue, the provision that more specifically addresses the issue must gov*797ern. A & L Holding Co. v. S. Pac. Bank, 34 S.W.3d 415, 418-19 (Mo.Ct.App.2000).
GE Capital argues that the portion of Section 3.7 of the Amended Plan that recognizes the rights of the purchase money secured creditor’s overrides the provisions of Article 9 with the respect to the Lift Proceeds. The Court disagrees.
Section 3.7 recites in relevant part that the Amended Plan is not “intended to grant UP Bank a security interest in equipment and inventory that is senior to that of a holder of a properly perfected purchase money security interest in such equipment and inventory”. Section 3.7 also gives purchase money secured parties a senior security interest in proceeds stemming from the sale, but not the lease or rental, of any equipment. More importantly, as this Court has previously noted elsewhere, Section 3.4.13.b of Amended Plan recites that with respect to the secured creditors’ rights in Machinery’s post-confirmation assets, “all terms and conditions of the pre-petition documents executed by Machinery shall remain in full force and effect.” See JCB v. Union Planters Bank, N.A. (In re Machinery, Inc.), 337 B.R. 368, 373 (Bankr.E.D.Mo.2005).
The Court finds that the provisions of Section 3.7 of the Amended Plan, read as a whole, merely preserve the Article 9 senior security interest of the purchase money secured parties. As noted above, one provision of Section 3.7 of the Amended Plan did purport to give Union Planters a senior security interest in the Lift Proceeds despite GE Capital’s superior Article 9 rights. As the Court noted in the Summary Judgment Order, however, that portion of Section 3.7 could not alter GE Capital’s superior Article 9 rights in the Lift Proceeds over GE Capital’s timely objection.2 Accordingly, there is nothing in Section 3.7 of the Amended Plan that altered the parties’ Article 9 rights in the Lift Proceeds.
Additionally, Section 3.4.13.b of the Amended Plan expressly refers to the pre-petition documents executed by Machinery in defining the scope of the secured creditors’ rights in Machinery’s post-confirmation assets. The Court, therefore, finds that Section 3.4.13.b of the Amended Plan, which specifically addresses the secured creditors’ rights in Machinery’s post-confirmation assets, points to applicable state law, specifically Missouri’s version of Article 9, in governing the parties’ rights in the Lift Proceeds.
The next question is whether Revised Article 9 applies in determining the parties’ relative interest in the Lift Proceeds. Revised Article 9 applies to any lien or transaction after July 1, 2001, regardless of when the lien was originally created. Mo.Rev.Stat. § 400.9-702(a). Therefore, the rules contained in Revised Article 9 apply with respect to any security interest after July 1, 2001, even if the secured transaction was originally executed prior to the effective date of Revised Article 9. Mo.Rev.Stat. § 400.9-702, cmt. 1. Here, because the Lift Proceeds were generated on or after October 1, 2001, Revised Article 9 applies even though the liens of both GE Capital and Union Planters were created prior to the effective date of Revised Article 9.
C. Union Planters took the Lift Proceeds Free and Clear ofGE Capital’s Senior Security Interest under Revised Article 9.
GE Capital argues that even if Revised Article 9 applies, its senior securi*798ty interest in the Lift Proceeds remained valid after Machinery deposited those proceeds into Machinery’s general account at Union Planters. The Court disagrees.
Section 9-332 of Revised Article 9 recites that a transferee of cash proceeds takes the cash free of any security interest in the cash proceeds unless the transferee acts in collusion with the debtor in violating the rights of the secured party. Mo. Rev.Stat. § 400.9-332(a). The Court does not believe the evidence adduced at trial demonstrates that Union Planters colluded with Machinery to violate GE Capital’s rights in the Lift Proceeds. Thus, the Court finds that Union Planters took the Lift Proceeds free of GE Capital’s senior security interest under Mo.Rev.Stat. § 400.9-332(a).
Section 9-332 of Revised Article 9 is completely new and is a codification of comment 2(c) to section 9-306 of Prior Article 9. Section 9-306 of Prior Article 9 contained the basic rule that a secured party’s security interest continued in proceeds of the original collateral. Comment 2(c) noted, however, that this general rule only applied to a transferee of cash proceeds if the transferee took the proceeds outside of the ordinary course of business.
The Eighth Circuit held that Comment 2(c) to § 9-306 of prior Article 9 protected a transferee of cash proceeds unless the transferee took the cash “out of the ordinary course of business or otherwise in collusion with the debtor”. Gen. Elec. Capital Corp. v. Union Planters Bank, N.A., 409 F.3d 1049, 1056 (8th Cir.2005). The transferee’s knowledge of the existence of the secured party’s security interest was insufficient to take the transfer out of the scope of Comment 2(c), even if the transferee was a junior secured creditor. Id. at 1058. Additionally, the transferee was under no duty to identify and segregate the cash proceeds even if it knew of the secured party’s interest, provided that the transferee had no contractual obligation to do so. Id. at 1057. Rather, the secured creditor was required to demonstrate something more than the transferee’s mere knowledge of its security interest to prove that the payment was outside the ordinary course of business. Id. at 1058-59; Barber-Greene Co. v. Nat’l. City Bank, 816 F.2d 1267, 1272 (8th Cir.1987).
GE Capital argues quite persuasively that Union Planters did not receive the Lift Proceeds in the ordinary course of business. But the ordinary course of business test is the standard under Prior Article 9. Revised Article 9 is significantly more differential to transferees of cash proceeds because it requires the secured creditor to show that the transferee acted in collusion with debtor in receiving the funds rather than merely taking them out of the ordinary course. Barkley Clark & Barbara Clark, The Law Of Secured Transactions Under The Uniform Commercial Code, ¶ 10.01[2][G]. Thus, there are cases where the secured party would have prevailed under comment 2(c) to section 9-306 but cannot prevail under the more deferential collusion standard contained section 9-332(a) of Revised Article 9.4 White & Summer, Uniform Commercial Code § 33-19.5 (5th ed.2005). The Court believes that this is such a case.
The drafters of Revised Article 9 stated that the purpose underlying section 9-332 was to ensure that security interests in cash proceeds and deposit accounts do not impede the flow of funds in the banking system. Mo.Rev.Stat. § 400.9-332, cmt. 3. Thus, only truly “bad actor” transferees of cash proceeds are not protected by the collusion standard of § 9-332(a). Mo.Rev. Stat. § 400.9-322, cmt. 4. The drafters additionally noted that the collusion standard is the most protective contained in the UCC and pointed to the protection afford*799ed to transferees from securities intermediaries under Article 8 of the UCC for guidance as to what constitutes collusion under § 9-332. Id.
Article 8 recites that the principles contained in Restatement (Second) of Torts § 876 (1977) govern the collusion standard under the UCC. Mo.Rev.Stat. § 400.8-115 cmt 5. Section 876 recites that a person may be liable for the injury to a third-party inflicted by another if that person: (a) does a tortious act in concert with the other or pursuant to a common design with him, or (b) knows that the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or (c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.
Missouri courts have held that a person may only be liable for the action of another under the collusion standard of Section 876 of the Restatement if there is evidence that the two parties acted pursuant to an agreement or otherwise in concert with each other. Zafft v. Eli Lilly & Co., 676 S.W.2d 241, 245 (Mo.1984); Richardson v. Holland, 741 S.W.2d 751, 754 (Mo.Ct.App.1987). Missouri courts also require that the purpose of the concerted action be illegal, fraudulent or otherwise wrongful towards the injured third-party. Weaver v. Schaaf, 520 S.W.2d 58, 66 (Mo. 1975); Macke v. Laundry Serv. v. Jetz Serv. Co., 931 S.W.2d 166, 179 n. 6 (Mo.Ct. App.1996). Missouri law additionally requires that the defendant’s action itself, separately considered, be wrongful with respect to the injured third-party. Richardson, 741 S.W.2d at 754; see also Restatement (Second) of Torts § 876 cmt. c.
GE Capital first argues that Union Planter’s cooperation with Machinery in formulating the terms of the Amended Plan constitutes collusion under § 9-332(a). As discussed in the Court’s findings of fact, GE Capital did adduce evidence at trial that Union Planters negotiated extensively with Machinery in formulating the terms of the Amended Plan. GE Capital also produced evidence that Machinery was quite amenable to including provisions in the Amended Plan that favorably treated Union Planters.
This behavior, however, does not rise to the level of collusion between Union Planters and Machinery under § 9-332(a). There is no question that Union Planters vigorously attempted to protect and even expand its Article 9 rights-in Machinery’s post-confirmation assets in negotiating with Machinery. But Missouri law requires that Union Planter’s action in protecting its rights, separately considered, to be wrongful with respect to GE Capital. See also Restatement (Second) of Torts § 876, cmt. c. (Noting that a person does not collude with another when that person rightfully acts, even if that action has the effect of furthering the tortuous conduct of the other). And Union Planters certainly had the right to vigorously attempt to receive the most favorable treatment it could in the Amended Plan. Thus, the Court cannot find that Union Planters colluded with Machinery in negotiating the terms of the Amended Plan.
GE Capital also contends that Union Planters should not be afforded the protection of § 9-332(a) because Union Planters could have segregated the Lift Proceeds, but failed to do so. As stated above, however, a junior secured creditor was under no obligation to identify and segregate cash proceeds for the benefit of the senior secured creditor under Comment 2(c) to § 9-306 to Prior Article 9. Union Planters, 409 F.3d at 1057. This was the case even if the junior secured *800creditor knew of the senior secured party’s interest. Id. Given that the collusion standard in § 9-332(a) is more deferential to transferees, § 9~332(a) does not impose a duty on a transferee of cash proceeds to identify and segregate the proceeds absent a contractual obligation to do so. See 4 White & Summer, Uniform Commercial Code, § 33-10 (5th ed.2005); William D. Hawkland, Hawkland Uniform Commercial Code Series, § 9-205:1.
Here, GE Capital failed to require Machinery to segregate the Lift Proceeds from its other post-confirmation cash proceeds. Rather, Machinery simply remitted the Lift Proceeds into its general account at Union Planers as required by Section 3.4.2(c) of the Amended Plan. Further, and most importantly, Union Planters was under no contractual obligation to identify and segregate the Lift Proceeds. Given this evidence, the Court finds that Union Planters did not collude with Machinery under 9-332(a) in receiving but failing to identify and segregate the Lift Proceeds.
GE Capital additionally contends that Union Planters did not take the Lift Proceeds free of its interest under § 9-332(a) because Union Planters actively participated in Machinery’s post-confirmation operations. The Court does believe that GE Capital adduced credible evidence that Union Planters played an active role in Machinery’s post-confirmation operations, particularly just prior to and after Machinery’s default on its obligations under the Amended Plan.
Such evidence would be sufficient to find that Union Planters took the Lift Proceeds out of the ordinary course of business under Comment 2(c) to Prior Section 9-306. See Union Planters, 409 F.3d at 1058-59; Barber-Greene, 816 F.2d at 1272-73. But, as illustrated above, the collusion standard contained in § 9-332(a) of Revised Article 9 is more protective of transferees of cash proceeds in that it requires the senior secured party to demonstrate actual collusion between the debtor and cash transferee.
Here, there is no evidence that Union Planters had any duty or obligation to GE Capital to act in a particular manner with respect to Machinery’s operation. Nor is there any evidence that Union Planters required or encouraged Machinery to violate its obligations to GE Capital when Union Planters began to more closely monitor Machinery’s post-confirmation operation. In fact, as discussed above, Union Planters was receiving the Lift Proceeds because the Amended Plan required Machinery to place those proceeds into its account at Union Planters. Simply put, there is no evidence that Union Planters’ activity in participating in Machinery’s post-confirmation operation was, when separately considered, wrongful in any way to GE Capital. GE Capital, therefore, failed to establish that Union Planters acted in collusion with Machinery under Mo. Rev.Stat. § 400.9-332(a) in participating in Machinery’s operation.
GE Capital finally argues that ATEC was acting as Union Planters’ agent in winding down Machinery’s operations. GE Capital, therefore argues that ATEC’s actions should be imputed to Union Planters. The evidenced adduced at trial, however, does not support GE Capital’s contention. ATEC’s president, Paul Lerman, testified that although Union Planter’s contacted him about winding down Machinery’s operation, ATEC was working to protect the interest of, and responsible to, all of Machinery’s secured creditors.
The Court finds that there is insufficient evidence to find an agency relationship between ATEC and Union Planters with respect to ATEC’s winding down Machin*801ery’s operation. Accordingly, there was no concert of action between Union Planters and Machinery to support a finding of collusion under Missouri law between Machinery and Union Planters with respect to ATEC’s winding down of Machinery’s operation.
Additionally, even assuming ar-guendo that there was some concerted action between Union Planters and Machinery, there is no evidence that Union Planters’ action in retaining ATEC to wind down Machinery’s operation, when separately considered, was in any way wrongful to GE Capital. Rather, Union Planters was simply attempting to rightfully protect its interest in Machinery’s remaining assets when retaining ATEC. GE Capital produced no evidence that Union Planters directed ATEC to act in particular manner that was illegal, fraudulent or in any way wrongful with respect to GE Capital. Therefore, even if there was some concert of action between Union Planters and ATEC, there is no evidence that the action constituted collusion under Missouri law.
In conclusion, § 9-332(a) of Revised Article 9 provides significant protection to transferees of cash proceeds. Specifically, § 9-332(a) of Revised Article 9 mandates that provided that the transferee of the cash proceeds is not truly a “bad actor” and colludes with the debtor, the transferee will take the cash proceeds free of the senior secured party’s interest. GE Capital has failed to produce evidence that Union Planters was such a bad actor and colluded with Machinery to violate GE Capital’s rights in the Lift Proceeds. Union Planters, therefore, took the Lift Proceed free of GE Capital’s senior security interest under Mo.Rev.Stat. § 400.9-332(a).
CONCLUSION
Missouri’s version of Revised Article 9 governs the parties’ respective rights in the Lift Proceeds. Section 9-332(a) of Revised Article 9 provides that a transferee of cash proceeds takes free of a senior secured party’s interest in those proceeds unless the transferee acted in collusion with the debtor to violate the rights of the senior secured party.
GE Capital failed to produce evidence that Union Planters colluded with Machinery in violating GE Capital’s senior rights in the Lift Proceeds. Union Planters, therefore, took the Lift Proceeds free of GE Capital’s senior security interest under Mo.Rev.Stat. § 400.9-332(a). Thus, GE Capital did not have the immediate right to possess the Lift Proceeds when it demanded them from Union Planters. Accordingly, Union Planters did not convert GE Capital’s senior interest in the Lift Proceeds under Missouri law. The Court will accordingly enter judgment in favor of Union Planters.
The above constitutes the Court’s findings of fact and conclusions of law under Bankr. R. 7052.
. The Court notes that although the disputed Lift Proceeds were generated post-confirmation, the Court must interpret its order confirming Machinery's plan of reorganization to determine which party had a superior interest in the Lift Proceeds. The Court, therefore, has subject matter over this adversary complaint pursuant to 28 U.S.C. § 157(b)(1). United Taconite, LLC v. Minnesota (In re Eveleth Mines, LLC), 318 B.R. 682, 687 (8th Cir. BAP 2004).
. If anything, therefore, Section 3.7 of the Amended Plan attempted to override the provisions of Article 9 in favor of Union Planters. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493907/ | ORDER DENYING DEFENDANT SUMMIT BROKERAGE SERVICE’S MOTION TO DISMISS
(Doc. No. 200)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THIS CASE came on for hearing on January 15, 2005 to consider the Motion to Dismiss filed by Summit Brokerage Services (Defendant) pursuant to Bankruptcy Rules 7012 and 7009 which incorporate into the Bankruptcy Code Fed.R.Civ.P. *84212(b)(6) and 9(b). The Defendant seeks to dismiss the Amended Complaint of 21st Century Satellite Communications, Inc. and 21st Century Satellite Communications, Inc., Liquidating Trust (Plaintiffs) in which Plaintiffs allege fraud on the part of the Defendant. For the reasons stated orally and in open court, the motion should be denied.
Accordingly, it is
ORDERED, ADJUDGED and DECREED that the Motion to Dismiss (Doc. No. 200) be, and is hereby, denied without prejudice. The Defendants shall have thirty (30) days from the date of this order to file an answer to the Amended Complaint. If an answer is filed, the matter shall be set for pretrial conference. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493908/ | ORDER DENYING FSC SECURITIES CORPORATION AND SUNAMERI-CA SECURITIES, INC.’S MOTION TO DISMISS AMENDED COMPLAINT (Doc. No. 244)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THIS CASE came on for hearing on January 15, 2005 to consider the Motion to Dismiss filed by FSC SECURITIES CORPORATION AND SUNAMERICA SECURITIES, Inc. (Defendants) pursuant to Fed.R.Civ.P. 12(b)(6) and made applicable to these proceedings by Bankruptcy Rules 7012 and 7009. The Defendants seek to dismiss the Amended Complaint of 21st Century Satellite Communications, Inc. and 21st Century Satellite Communications, Inc., Liquidating Trust (Plaintiffs) in which Plaintiffs allege that the Defendants were involved in a fraudulent ponzi scheme. For the reasons stated orally and in open court, the motion should be denied.
Accordingly, it is
ORDERED, ADJUDGED and DECREED that the Motion to Dismiss (Doc. No. 244) be, and is hereby, denied without prejudice. The Defendants shall have thirty (30) days from the date of this order to file an answer to the Amended Complaint. If an answer is filed, the matter shall be set for pretrial conference. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494352/ | ORDER ON MOTION FOR RELIEF FROM STAY (Doc. No. 31)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration is a Motion for Relief from Stay, filed by John and Linda Grother (the Grothers) on May 26, 2009 (Doc. No. 31). Inasmuch as the underlying facts are identical to the facts setforth in the Order entered by this Court on July 17, 2008, on the Grothers’ Motions to Dismiss Chapter 11 Cases (Doc. No. 56), this Court is satisfied that the comments stated in its Order on Motions to Dismiss Chapter 11 Cases entered in July 17, 2009 are applicable to the Motion for Relief from Stay (Doc. No. 31). Based on the foregoing, the Motion as filed should be denied without prejudice.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Grothers’ Motion for Relief from the Automatic Stay (Doc. No. 31) be, and the same is hereby, denied without prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493911/ | *845
ORDER DENYING MOTION FOR REHEARING ON AND/OR RECONSIDERATION OF ORDER DENYING PRELIMINARY INJUNCTION and DENYING PLAINTIFFS’ EMERGENCY RENEWED MOTION FOR PRELIMINARY INJUNCTION AND/OR TO APPOINT PROPERTY MANAGER FOR METZ PROPERTIES and ORDER DEFERRING RULING ON DETERMINATION ON THE OWNERSHIP STATUS OF THE PROPERTIES
(Doc. Nos. 30 and 36)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTERS under consideration in the above-captioned adversary proceeding are two Motions; (1) Motion for Rehearing on and/or Rehearing of Order Denying Preliminary Injunction (Doc. No. 30), and (2) Emergency Renewed Motion for Preliminary Injunction and/or to Appoint Property Manager for Metz Properties (Doc. No. 36) filed by the Plaintiffs, North Mandalay Investment Group, Inc., Metco Real Estate and Insurance, Inc., Robert J. Metz, and Metco Holdings, Incorporated, (the Debtors).
The Court after having considered the evidence, testimony and arguments of counsel for the Plaintiffs and counsel for the Defendants, Financial Warehouse Group, L.L.C., Dale Ayers, Myron Dims-dale, Fairview Commercial Lending, Inc., Oak Grove FL L.L.C., Baybreeze Hotel FL, L.L.C., Williamsburg Apartments FL, L.L.C. and Pioneer Motorsports, L.L.C. finds that the Plaintiffs’ (1) Motion for Rehearing on and/or Rehearing of Order Denying Preliminary Injunction and (2) Emergency Renewed Motion for Preliminary Injunction and/or to Appoint Property Manager for Metz Properties should be denied.
Based on the foregoing, this Court authorizes the agents of Financial Warehouse Group, L.L.C. to notify the tenants in the above-mentioned properties by serving a copy of this Order to collect all rents due and further deposit immediately into the trust account of counsel of record for Financial Warehouse Group, L.L.C., Ms. Camille Iurillo, minus all expenditures expended for the preservation and maintenance of the properties. Furthermore, the agents of Financial Warehouse Group, L.L.C. shall file a bi-weekly report of expenditures to this Court by specifically identifying each item and the purpose of the expenditure. The Debtor shall have ten (10) days to object to any line item provided in the report on the basis that the expenses were unreasonable and not justified.
This Order shall remain in effect until further Order of this Court and until the ruling resolving the ownership status of the above-mentioned properties are determined.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Rehearing on and/or Reconsideration of Order Denying Preliminary Injunction (Doc. No. 30) and the Emergency Renewed Motion for Preliminary Injunction and/or to Appoint Property Manager for Metz Properties (Doc. No. 36) be, and the same are hereby, denied. It is further
ORDERED, ADJUDGED AND DECREED that Financial Warehouse Group, L.L.C. shall notify the tenants in the above-mentioned properties by serving a copy of this Order to collect all rents due and further deposit all rents collected immediately into the trust account of counsel of record for Financial Warehouse Group, L.L.C., Ms. Camille Iurillo. It is further
ORDERED, ADJUDGED AND DECREED that the agents of Financial *846Warehouse Group, L.L.C. shall file a biweekly report of expenditures with this Court, which specially identify each item and the purpose of the expenditure. It is further
ORDERED, ADJUDGED AND DECREED that this Order shall remain in effect until further Order of this Court.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493912/ | AMENDED ORDER
ARTHUR B. BRISKMAN, Bankruptcy Judge.
This matter came on for consideration upon debtor’s Motion to Dismiss (Doc. No. *84928). The issue is whether a debtor may obtain a dismissal of voluntary Chapter 7 proceedings, over the objection of the trustee, where the debtor filed Chapter 7 based on misguided legal advice. After reviewing the pleadings and considering the parties’ arguments and the applicable law, this court finds that a debtor may dismiss the voluntary Chapter 7 proceedings, over the objection of the trustee.
FINDINGS OF FACT
The debtor filed a voluntary Chapter 7 petition (Doc. No. 1), without the benefit of counsel, on December 3, 2004.1 The debt- or moved to dismiss on May 27, 2005 (Doc. No. 28). Dismissal was granted on June 29, 2005, and the trustee filed a Motion for Rehearing. The court granted the trustee’s motion and the rehearing on the Motion to Dismiss occurred on August 8, 2005.
At the time of filing, the debtor was engaged in civil litigation with a former business partner, Paul Gregg. The debt- or’s attorney in that matter advised him to file for Chapter 7 liquidation and resolve the matter in bankruptcy court to avoid the increasing costs of litigating in state court. That attorney does not practice bankruptcy law and his advice that the debtor should file bankruptcy was misguided. The civil litigation is not currently active and there is no benefit at this point to pursuing Chapter 7 relief. The debtor’s debts in addition to the civil litigation are approximately $150,000.
The trustee brought adversary proceedings against the debtor twice, alleging that the debtor wrongfully transferred assets to family members in an attempt to hinder, delay, or defraud creditors or the trustee. The trustee believes these transfers were preferential and were made with actual intent to defraud the existing creditor from the civil litigation.
The debtor maintains that he spent and gifted his assets out of a belief that he was terminally ill and would no longer need the assets, rather than to avoid his major creditor. The state court litigation was not initiated until six months after the debtor gifted money to his family. The debtor attempted to engage in estate planning in light of his belief that he was terminally ill.
Pursuant to 11 U.S.C. § 707(a), cause for dismissal exists in this case since the debtor filed a Chapter 7 case based upon misguided legal advice and there is no purpose in pursuing the Chapter 7 case.
CONCLUSIONS OF LAW
The court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(E).
The court may dismiss a Chapter 7 case for cause, after notice and hearing. 11 U.S.C. § 707(a). Notice was given on June 3, 2005 (Doc. No. 32) and the hearing was held on June 27, 2005. The trustee filed a Motion for Rehearing, which was granted. The rehearing was held on August 8, 2005. Cause for dismissal is the only issue before the court at this time.
The court finds that cause to dismiss exists where the debtor filed for Chapter 7 relief based on misguided advice. The statute provides a non-exhaustive list of sample dismissal causes: unreasonable delay by the debtor that is prejudicial to creditors, nonpayment of any required fees or charges, and failure of a debtor in a voluntary case to provide *850required information. 11 U.S.C. § 707(a). The reasons listed in the statute focus on the debtor’s wrongdoing, and the legislative history of 11 U.S.C. § 707 is limited. Although the legislative history specifies that the debtor’s willingness and ability to pay creditors outside of bankruptcy does not give rise to cause for dismissal, the issue at hand is actually whether bankruptcy court was the appropriate forum for this debtor. H.R.Rep. No. 595, 95th Cong. 1st Sess. 380 (1977); S.Rep. No. 989, 95th Cong.2d Sess. 94 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5963, 6336, 5787, 5880.
The debtor filed Chapter 7 without competent legal counsel and now realizes that he was misinformed about Chapter 7. The court may dismiss the case for cause, after notice and a hearing. 11 U.S.C. § 707(a). Nothing in the statute, case law, or legislative history precludes the court from dismissing a Chapter 7 case based on misguided filing. The bankruptcy court has the discretion to dismiss a voluntary Chapter 7 case. In re Atlas Supply Corp., 857 F.2d 1061, 1063 (5th Cir.1988); In re Komyathy, 142 B.R. 755, 757 (Bankr.E.D.Va.1992); 2-301 Collier on Bankruptcy—15th Edition Revised P 301.15.
“A central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.’ ” Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), citing to Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). In keeping with the spirit and intent of the Bankruptcy Code, this court finds cause for dismissal exists where the debtor filed for Chapter 7 relief based on misguided legal advice. Accordingly, the debtor may obtain dismissal of a voluntary Chapter 7 case over the objection of the trustee. Therefore, it is
ORDERED, ADJUDGED, AND DECREED
That the trustee’s objection to the debt- or’s Motion to Dismiss is OVERRULED; it is further
ORDERED, ADJUDGED, AND DECREED
That the debtor’s Motion to Dismiss is GRANTED; it is further
ORDERED, ADJUDGED, AND DECREED
That the automatic stay imposed by 11 U.S.C. § 362 is lifted and the filing of this case no longer acts as a stay against collections and other actions against the debtor and the debtor’s property; it is further
ORDERED, ADJUDGED, AND DECREED
That concurrent with this order, Adversary Proceeding Number 6-05-ap-00090-ABB and Adversary Proceeding Number 6-05-ap-00175-ABB are hereby DISMISSED without prejudice; and it is further
ORDERED, ADJUDGED, AND DECREED
That pursuant to 11 U.S.C. § 105 and 109(g), the debtor is enjoined from filing for relief under either 11 U.S.C. § 301 or 302 for a period of one (1) year from the date of this order.
DONE AND ORDERED.
. This Order is amended to correct a scrivener's error. The original order listed December 3, 2005 as the petition filing date. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493914/ | ORDER ON EXAMINER’S APPLICATION FOR ALLOWANCE OF FEE COMPENSATION (Doc. No. 144); OBJECTION TO EXAMINER’S APPLICATION FOR ALLOWANCE OF FEE COMPENSATION (Doc. No. 150); JOINDER BY VILLAMORA, LTD., IN DEBTOR’S OBJECTION TO APPLICATION FOR ALLOWANCE OF FEE COMPENSATION BY EXAMINER (Doc. No. 160)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTERS under consideration in this Chapter 11 case are (1) Examiner’s Application for Allowance of Fee Compensation (Application) (Doc. No. 144) filed by Kevin D. Dennis of Navigant Consulting, Inc. (Examiner) and the Objections to the Application filed by Mohan Kutty (Debtor) and Villamora, LTD, (Villamora).
At the duly noticed hearing on the Application, this Court heard Arguments in support and in opposition to the Application. This Court, having considered the Application and the Objections and the relevant part of the record, now finds and concludes as follows:
On December 15, 2004 the Debtor filed for relief under Chapter 11 of the Bankruptcy Code. On March 21, 2005, this Court entered an Order Appointing Exam*877iner which allowed the Office of the U.S. Trustee to appoint an examiner to perform specific duties which were outlined in the Order. On March 30, 2005, this Court entered an Order approving Kevin D. Dennis of Navigant Consulting as Examiner (Doc. No. 71). On July 27, 2005, the Examiner filed his preliminary report (Doc. No. 128) and on August 19, 2005, the Examiner filed his Final Report (Doc. No. 143).
On August 23, 2005, the Examiner filed his Application. In his application the Examiner set forth and described the services rendered and, according to his application, spent 445.10 hours on the Preliminary and the Final Reports and on the investigations he conducted in order to prepare the Reports. The Examiner’s hourly rate is $290.00 per hour. Based on the foregoing, the Examiner is seeking $103,003.00 in professional fees for services rendered during the period of April 19, 2005 up to and including August 9, 2005. The Examiner also requests and additional $2,500.00 for compensation for estimated fees for the services which might be required of him to be performed from August 20, through August 31, 2005.
In due course, the Debtor filed his Objection to the Application for Fee Compensation contending first that the hours spent by the Examiner, that is the 445.10 hours, was disproportionate to the task involved and was not necessary to be spent for the investigation authorized by the Court. In addition, the Debtor contends that although the Examiner was appointed March 30, 2005, the Examiner spent only 3.2 hours in April and May 2005, which period included the time spent on negotiations between the Bank of America who sought the appointment of the Examiner, and the Debtor to resolve the position of the Bank of America.
It is without serious dispute that the bulk of the significant documents relied on were easily available to the Examiner from the Bank of America. The Debtor also contends that the representatives of In-terMed, LLC (InterMed), met on numerous occasions with the Examiner presenting records and analyzing payments from InterMed, and transactions between In-terMed and the Debtor. Specifically, the Debtor contends that the Examiner spent nine (9) hours reviewing transcripts of the special board meetings of InterMed, which had little or no relevance to the area of the task assigned to the Examiner by the Order of Appointment. The Debtor also points out that the Examiner spent thirteen (13) hours reviewing the transcript of the Section 341 Meeting, which is equally of no relevance to the task assigned to the Examiner.
The Debtor points out that, according to the Application, the Examiner spent time to investigate and conduct research on the usury issue which, again, was not involved in the area of the investigation. Lastly, it is contended that there were sixty-four (64) hours spent to prepare the preliminary report and seventy-eight (78) additional hours spent preparing the final report, and there were no major differences between the findings set forth in the Preliminary and the Final report.
On September 13, 2005, Villamora joined in the Debtor’s Objection to the Application by the Examiner. The bulk of the submission of Villamora sets forth no basis to the Objection to the Application of the Examiner, but consists of disputing the factual findings of the Examiner and, basically, criticizing the Reports filed by the Examiner. The only basis which merits consideration in the Objection by Villamo-ra is the Objections already set forth by the Debtor which Villamora adopted and incorporated in its Objection.
*878In due course, the Examiner filed his Response to Debtor’s Objection to Examiner’s Application for Allowance of Fee Compensation (Response) (Doc. No. 164). In his Response, the Examiner points out that once the documentation was obtained by the Examiner, it became evident that significant ancillary issues arose which required a review, such as transactions which might appear to be a potential fraudulent transaction, and possibly some other avoidable transfers which required additional reviews and work.
The Examiner doesn’t dispute that significant documents were available to the Examiner from counsel for Bank of America, but contends that they required a review, nevertheless, which was time consuming due to the complexity of the transactions of the Debtor. The Examiner points out that the documents which had to be reviewed were essential to the understanding of the Debtor’s complex financial transactions and to developing opinions for each of the Court ordered areas of the investigation.
A careful review of the Objections under consideration and the Response of the Examiner together with the Application, and considering the specific areas which the Examiner was to investigate and report on, this Court is satisfied that there were, indeed, several hours spent which were not reasonable or necessary for the Examiner to spend. For instance, this Court is unwilling to accept the proposition that a review of the minutes of the special meeting of the members of the board of In-terMed was necessary. Neither was the time spent to review the transcripts of the Section 341 Meeting. The Application also reveals that time was spent by Charles West of the Examiner’s Firm on research of historical interest rates and also detailing historical trends of prime interest rates, as well as identification of usury statutes in Florida and Tennessee.
Having considered the Application and Objections, together with the record, this Court is satisfied that the Objections should be sustained in part, overruled in part. The Application should be approved and a reasonable fee shall not be more than $84,619.00.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Examiner’s Application for Allowance of Fee Compensation (Doc. No. 144) be, and the same is hereby, approved and a reasonable fee for services rendered is hereby determined to be in the amount of $84,619.00. It is further
ORDERED, ADJUDGED AND DECREED that the Objection to Examiner’s Application for Allowance of Fee Compensation (Doc. No. 150) be, and the same is hereby, sustained in part and overruled in part. It is further
ORDERED, ADJUDGED AND DECREED that the Joinder by Villamora, Ltd., in Debtor’s Objection to Application for Allowance of Fee Compensation by Examiner (Doc. No. 160) be, and the same is hereby, sustained in part and overruled in part. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493915/ | ORDER DENYING DEBTOR’S MOTION TO ENFORCE DISCHARGE INJUNCTION AND FOR CONTEMPT
STEVEN H. FRIEDMAN, Bankruptcy Judge.
THIS CAUSE came on to be heard on May 23, 2006, upon the debtor’s Motion to Enforce Discharge Injunction and for Contempt. The Court, having reviewed the Motion, the response memorandum filed by Horwitz & Associates, Inc. (“Horwitz”), having considered the argument of counsel, and being otherwise fully advised in the premises, denies the debtor’s Motion to Enforce Discharge Injunction and for Contempt, for the reasons set forth herein.
1. This is a contested matter pursuant to Rule 9014 of the Federal Rules of Bankruptcy Procedure, which incorporates Rule 52 of the Federal Rules of Civil Procedure and Rule 7052 of the Federal Rules of Bankruptcy Procedure.
2. At the conclusion of the May 23, 2006 hearing, and based upon the submissions of the parties, the Court announced its findings of fact and made conclusions of law, which are incorporated by reference.
3. On or about March 9,1999, the debt- or was employed as an investment advisor of Horwitz, a registered securities broker-dealer. On July 3, 2001, and several months after the debtor’s employment with Horwitz had terminated, the debtor filed his chapter 7 petition initiating this case. In his bankruptcy schedules, the debtor listed Horwitz as an unsecured creditor with a claim in the amount of $8,000, ostensibly unrelated to any claims *890or assertions of securities fraud deriving from the debtor’s employment by Horwitz or any representations made by the debtor to customers of Horwitz. Other than the $8,000 claim, no customer claims for securities fraud were listed in the debtor’s schedules. Furthermore, none of the clients or customers of either the debtor or Horwitz were scheduled as creditors. On October 9, 2001, the debtor received his discharge. On October 31, 2001, the Trustee issued a Report of No Distribution, and the case subsequently was closed.
4. Beginning on or about September 9, 2002, seven of Toppin’s clients who he serviced through Horwitz filed three (3) separate demands for arbitration with the National Association of Securities Dealers (“NASD”) against Horwitz (Toppin was also named as a respondent in two of the three arbitrations), based upon various securities fraud violations allegedly committed by Toppin during the course of his employment with Horwitz as the clients’ investment advisor. Thereafter, arbitration proceedings ensued before a board designated by the NASD against both the debtor and Horwitz. At no time during the course of the arbitration proceedings did the debtor contend that, by virtue of the issuance of his Discharge of Debtor prior to the commencement of the arbitration proceedings, he had been discharged as to any liabilities owed to his former clients. Furthermore, the debtor failed to list any of the seven former clients on his bankruptcy schedules, and also failed to list Horwitz as a creditor for any potential indemnification claim which Horwitz might have been able to assert against the debtor arising from the debtor’s conduct as to the referenced clients.
5. Thereafter, Horwitz settled the referenced NASD arbitrations. Horwitz then sought to recoup these monies from the debtor through an indemnification agreement which the debtor executed upon entering employment with Horwitz. More specifically, on March 2, 2005, Horwitz commenced an action in the Circuit Court of Cook County, Illinois (the “State Court Action”), seeking damages from the debtor relating to the allegations of securities fraud. Apparently, at no time during the course of the state court litigation did the debtor either seek to dismiss the state court action based upon his Discharge of Debtor, or seek to enjoin the state court action by invoking the authority of this Court to enforce the discharge injunction imposed pursuant to 11 U.S.C. § 524(a)(2). Instead, the Debtor advised the state court that he wanted to have the State Court Action stayed and to compel arbitration before the NASD. On July 16, 2005, the court in the State Court Action issued an order granting the debtor’s motion to compel arbitration as to Horwitz’ claim (hereinafter “State Court Order”).
6. Pursuant to the State Court Order, Horwitz filed an NASD arbitration against the debtor. The debtor moved to dismiss the Statement of Claim filed by Horwitz and raised, for the first time, the issue of the dischargeability of Horwitz’ indemnification claim. The parties were given an opportunity to fully brief the issue of the dischargeability of the debt which Horwitz was seeking to enforce before the arbitrators, and a hearing was conducted before the arbitration panel. On March 21, 2006, the NASD panel rendered its decision wherein it denied the debtor’s motion to dismiss the arbitration based upon the debtor’s discharge (the “NASD Order”).
7. On April 19, 2006, the debtor filed his motion to reopen his bankruptcy case, to enforce the discharge and for a finding of contempt against Horwitz.
8. This Court holds that the debt- or was afforded a fundamentally fair opportunity to address the dischargeability *891of the debts referenced in Horwitz’ claims before the NASD. See Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th Cir.2001) (NASD arbitration panel has full authority to grant a pre-hearing motion to dismiss with prejudice based solely on the parties’ pleadings); Wise v. Wachovia Securities LLC, 2005 WL 1563113 (N.D.Ill. May 4, 2005).
9. The Court further holds that, as to any liability that may be imposed against the debtor relating to claims raised by his former clients (who were neither scheduled nor listed on the debtor’s bankruptcy schedules), no stay has been in effect through May 23, 2006.
10. Based upon the fact that the claims raised by Horwitz are those of unlisted and unscheduled debts, this Court does not have exclusive jurisdiction to address the merits of the debtor’s Motion to Enforce the Discharge and Motion for Contempt. See, In re Snedaker, 39 B.R. 41, 42 (Bankr.S.D.Fla.1984) (movant is “entitled to a second bite at the judicial apple if, but only if, this court has been granted exclusive jurisdiction to determine the effect of a bankruptcy discharge”). Therefore, this Court’s jurisdiction is, and has been, concurrent with that of the NASD arbitration panel. A decision of another tribunal with competent jurisdiction is fully enforceable in a bankruptcy court. Therefore, the NASD Order has a preclusive effect as to any subsequent determination to be made by this Court. Id.
11. As an additional basis for denial of the debtor’s motion, the debtor did not avail himself of the opportunity to file a request to reopen his case to add omitted creditors. Local Rule 5010-1(B) sets forth the procedure whereby a debtor may move the Court to reopen his or her case to add omitted creditors. The procedure under Rule 5010-1(B) includes the filing of amended schedules and the commencement of an adversary proceeding to determine the dischargeability of the indebtedness owed to each omitted creditor. This procedure is available to a debtor even after his or her case has been administratively closed. In the instant case, the debtor failed to move to amend his schedules, and also failed to add the omitted creditors and to commence an adversary proceeding to determine the dischargeability of the claims for which Horwitz seeks indemnification. It should nonetheless be noted that even if the Debtor had followed this procedure, it is not certain that the debts relating to his former clients for securities fraud would have been discharged. Accordingly it is
ORDERED:
(a) The parties are not precluded from proceeding with the pending State Court Action and NASD arbitration against the debtor.
(b) The Debtor’s Motion to Enforce Discharge Injunction and for Contempt is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493916/ | RULING SUSTAINING OBJECTION TO MOTION TO EXTEND TIME FOR SERVICE OF SUMMONS AND COMPLAINT
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
Roger Cowles (“the debtor”) filed a Chapter 7 petition on July 12, 2005. Webster Bank, National Association, f/k/a Webster Bank (“the plaintiff’), on October 11, 2005, the last date established by court order for the filing of objections to the dischargeability of certain debts, filed a complaint alleging that obligations due it from the debtor were not discharged pursuant to Bankruptcy Code § 523(a)(2)(A) and/or (B) (debt for money obtained by fraud or by use of fraudulent financial statements not discharged). The debtor, on November 17, 2005, filed an answer to the complaint. The debtor, on December 19, 2005, filed a motion to dismiss the complaint, asserting the summons issued to the plaintiff on October 13, 2005 was not served on the debtor until October 26, 2005, beyond the 10 days required by Fed. R. Bankr.P. 7004(e) (“Service ... shall be by delivery of the summons and complaint within 10 days after the summons is issued.”). The plaintiff, on March 20, 2006, filed an objection to the motion.
At a court hearing held on April 12, 2006, the court sustained the motion to dismiss on the ground asserted. The same day (and more than 120 days after issuance of the summons) the plaintiff filed a Motion to Extend the Time for Service of Summons and Complaint (“the motion”), pursuant to Fed.R.Civ.P. 4(m)1, made ap*20plicable by Fed. R. Bankr.P. 7004(a). The debtor, on May 1, 2006, filed his objection (“the objection”) to the motion, and the court heard the matter on May 4, 2006.
II.
Fed. R. Bankr.P. 7004(e) requires that the summons and complaint be served “within 10 days after the summons was issued.” If service is not effected within such 10-day period, a new summons must be issued and served. Fed.R.Civ.P. 4(m), made applicable to bankruptcy proceedings by Fed. R. Bankr.P. 7004(a)(1), provides, in relevant part:
Time Limit for Service. If service of the summons and complaint is not made upon a defendant within 120 days after the filing of the complaint, the court ... 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.
At the hearing, the plaintiff offered no evidence to support granting its motion, and stated it relied on the following allegations in ¶ 5 of the motion:
5. The Defendant will suffer no prejudice in this matter as a result of the Summons and Complaint being served at this time. A Fed.R.Civ.P. 26(f) form has been filed by mutual consent and a pretrial conference has been held by the Court. In addition, the Plaintiff believes that this case will benefit from and may be disposed of by a court ordered mediation.
The debtor argued that the plaintiff, based on the record made, has not established “good cause” for the granting of the motion. He contends that none of the reasons set forth in ¶ 5 of the motion are “sufficient to support a finding of good cause.” (Objection at 2.)
III.
A.
Good Cause
As summarized by Wright & Miller, 4B Federal Practice and Procedure § 1137 (3d ed.2002), discussing “good cause” under Rule 4(m):
The burden is on the plaintiff to establish good cause.... [Gjood cause is likely (but not always) to be found when the plaintiffs failure to complete service in timely fashion is a result of the conduct of a third person, typically the process server, the defendant has evaded service of the process or engaged in misleading conduct, the plaintiff has acted diligently in trying to effect service or there are mitigating circumstances, or the plaintiff is proceeding pro se or in forma pauper-is.
The plaintiff has offered no such reason for its delay, and cites no conduct by itself, the debtor or any third party, that would constitute grounds for a finding of good cause. The court thus concludes that the plaintiff has not established good cause.
B.
Discretion of the Court
In the absence of good cause, “courts have been accorded discretion to enlarge the 120-day period.” Henderson v. United States, 517 U.S. 654, 656, 116 S.Ct. 1638, 134 L.Ed.2d 880 (1996). The court, in the exercise of its discretion, looks to both the reasons for the delay and the effects of granting or denying the requested extension.
*21The debtor, on December 19, 2005, filed a Motion to Dismiss the adversary proceeding on grounds that service was not timely made. The plaintiff made no attempt to timely serve the complaint together with a new summons prior to the expiration, on February 8, 2006, of the 120-day period under Fed.R.Civ.P. 4(m). Only after dismissal of the complaint did the plaintiff file the present motion in which it presented no argument for its failure to effect timely service.
“[Dismissal based on Rule 4(m) ... where the statute of limitations has expired effectively functions as a dismissal with prejudice. However, case law indicates that expiration of the statute of limitations does not require a court to use its discretion to grant an extension of time for service in every time-barred case.” Savage & Assoc., P.C. v. Williams Communications (In re Teligent Services, Inc), 324 B.R. 467, 474 (Bankr.S.D.N.Y.2005) (citations omitted). This is particularly so where, as in the present proceeding, such prejudice to the plaintiff arises from its own failure to act, and is outweighed by the prejudice to the defendant, for whose benefit statutes of limitation are intended, and who, in filing his motion to dismiss on such grounds, gave the plaintiff adequate time to remedy the situation. Cf. Sullivan v. Hall (In re Hall), 222 B.R. 275, 280 (Bankr.E.D.Va.1998) (“Plaintiff has done nothing to warrant the Court’s exercise of its discretion. To allow relief under these circumstances would otherwise render the procedural requirements of the Bankruptcy Rules and Rules of Civil Procedure a nullity, and contradict Chapter 7’s expeditious fresh start policy by extending the 120 days and the statute of limitations indefinitely.”). In the absence of good cause, the court, having weighed the equities involved, concludes, in the exercise of its discretion, that the motion be denied.
IV.
CONCLUSION
The court concludes that the plaintiff is not entitled to the requested extension of time for service. Accordingly, the debtor’s objection is sustained, and the plaintiffs motion is denied. It is
SO ORDERED.
. Fed.R.Civ.P. 4(m), "Time Limit for Service,” states, in relevant part:
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 on 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 *20shall extend the time for service for an appropriate period. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493917/ | OPINION
JOHN J. THOMAS, Bankruptcy Judge.
The United States Trustee (“UST”) has moved to dismiss the above-referenced Chapter 11 cases based on her belief that an artificial entity, such as a corporation or limited liability corporation, cannot file a bankruptcy case without the aid of legal counsel. For the reasons articulated below, the UST’s motions are granted.
Statement of Facts
1. Mount Laurel Cemetery Association & Harry Samuel Dombek
A voluntary Chapter 11 Petition (Official Form 1) was filed on January 28, 2005 in the name of Mount Laurel Cemetery Association. Harry Samuel Dombek is listed as the joint debtor. In the “Information Regarding the Debtor (Check the Applicable Boxes)” section on the first page, “Chapter 11” is selected in the “Chapter or Section of the Bankruptcy Code Under Which the Petition is Filed” box. There is also a notation in the “Type of Debtor” box that the Debtor is a corporation. On the second page, the signature of “Rabbi Harry S. Dombeck” is included in the “Signature of Debtor (Corporation/Partnership)” box in the “Signatures” section as the “Authorized Individual.” In the “Signature of Attorney” box, “N/A” is typed. Exhibit C (Form Bl, Exh. C) and an “Exhibit C-l” were included with the Petition. Also included with the filing were a number of completed bankruptcy schedules.
A hearing on the UST’s motion was held on February 24, 2005. The Court heard oral argument from Rabbi Dombeck and the UST’s counsel. Rabbi Dombeck . also indicated that he is not an attorney and is not engaged in the practice of law. The matter was thereafter taken under advisement.
2. Pocono Land, LLC
A voluntary Chapter 11 Petition (Official Form 1) was filed on behalf of Poconos Land, LLC on February 8, 2005. In the “Information Regarding the Debtor (Check the Applicable Boxes)” section on the first page, “Chapter 11” is selected in *110the “Chapter or Section of the Bankruptcy-Code Under Which the Petition is Filed” box. The “Chapter 11 Small Business” box contains a marking indicating that Poconos Land, LLC is a “small business as defined in 11 U.S.C. § 101.” On the petition’s second page, a signature, telephone number and date is included in the “Signature^) of Debtor(s) (Individual/Joint)” box in the form’s “Signature” section.
A hearing on the UST’s motion was held on March 10, 2005. No one appeared on behalf of Poconos Land, LLC and the Court heard oral argument from the UST’s counsel. The matter was thereafter taken under advisement.
Jurisdiction
This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A). This Court has jurisdiction under 28 U.S.C. §§ 157, 1334 and Middle District of Pennsylvania Standing Order Misc. 84-0203 to render this decision.
Conclusions op Law
Upon a review of the evidence and those arguments that may have been proffered by the parties, the pertinent issue which this Court must decide, is whether an individual, who is not a licensed attorney, may commence a bankruptcy case on behalf of an artificial business entity.
The heart of the UST’s arguments focus on a passage in the Supreme Court’s decision in Rowland v. California Men’s Colony wherein the Court noted:
It has been the law for the better part of two centuries, for example, that a corporation may appear in the federal courts only through licensed counsel, [(citations omitted)]. As the courts have recognized, the rationale for that rule applies equally to all artificial entities. Thus, save in a few aberrant cases, [(footnote omitted)] the lower courts have uniformly held that 28 U.S.C. § 1654, providing that “parties may plead and conduct their own cases personally or by counsel,” does not allow corporations, partnerships, or associations to appear in federal court otherwise than through a licensed attorney, [(citations omitted)].
506 U.S. 194, 201-202, 113 S.Ct. 716, 121 L.Ed.2d 656 (1993).
The UST also directs this Court’s attention to a series of opinions for additional support: Pritchard v. Lubman (In re Tamojira, Inc.), 20 Fed.Appx. 133 (4th Cir.2001), Licht v. America West Airlines (In re America West Airlines), 40 F.3d 1058 (9th Cir.1994), Simbraw, Inc. v. United States, 367 F.2d 373 (3d Cir.1966), Move Org. v. United States Dep’t of Justice, 555 F.Supp. 684 (E.D.Pa.1983); In re Beech St. Holding Corp., 344 F.Supp. 548 (E.D.Pa.1972), and In re Buck, 219 B.R. 996 (Bankr.W.D.Tenn.1998).1 However, these cases only focus on the question of whether a non-attorney can appear in court for an artificial business entity and not the issue currently in play.
In order to resolve this query, this Court must examine the inter-relationship of certain statutory provisions and procedural rules, along with their resulting impact on a bankruptcy case. In particular, § 1654 of Title 28 of the United States Codes provides:
In all courts of the United States the parties may plead and conduct their own cases personally or by counsel as, by the rules of such courts, respectively, are *111permitted to manage and conduct causes therein.
28 U.S.C. § 1654.
However, once a matter is adjudicated within the confines of a bankruptcy proceeding, a party’s actions are further controlled by Rule 9010 of the Federal Rules of Bankruptcy Procedures. The rule states, in relevant part, that:
(a) AUTHORITY TO ACT PERSONALLY OR BY ATTORNEY. A debtor, creditor, equity security holder, indenture trustee, committee or other party may (1) appear in a case under the Code and act either in the entity’s own behalf or by an attorney authorized to practice in the court, and (2) perform any act not constituting the practice of law, by an authorized agent, attorney in fact, or proxy.
Fed. R. Bankr.P. 9010(a).
The 1983 Advisory Committee Note to the rule indicates that the rule “is substantially the same as former Bankruptcy Rule 910 and does not purport to change prior holdings prohibiting a corporation from appearing pro se.” See Fed. R. Bankr.P. 9010 advisory committee’s note; see generally 10 Collier on Bankruptcy, ¶ 9010.07 (15th ed. rev.).
It is clear from a contemporaneous reading of Rule 9010(a)(1), § 1654 of Title 28, and Rowland, that an artificial business entity may only appear in a bankruptcy case through the aid of an attorney authorized to practice in the court. However, the question that is left unanswered is whether the commencement of a bankruptcy case by a non-attorney, on behalf of an artificial business entity, is permissible under Rule 9010(a)(2) and § 1654 of Title 28 as the “performance of] any act not constituting the practice of law.” The answer to this question must initially rest upon a determination that an artificial business entity, such as the ones currently before this Court, is not prohibited from voluntarily filing a bankruptcy petition.
Section 301 of the Bankruptcy Code (“Code”) permits the voluntary filing of a bankruptcy petition under any chapter provided under Title 11 of the United States Code “by an entity that may be a debtor under such chapter.” See 11 U.S.C. § 301. With the exception of certain individuals, nothing in the Code prohibits an artificial business entity from commencing a case under Title 11 by filing a voluntary Chapter 11 petition. See 11 U.S.C. §§ 109(b) & (d). As such, Rule 9010(a)(2) allows an artificial business entity to “commence a bankruptcy case by filing a petition without representation by legal counsel unless it has been determined that such an act (filing a petition) constitutes the unauthorized practice of law.” See In re Elshiddi Enter., Inc., 126 B.R. 785, 788 (Bankr.E.D.Mo.1991).2
In Pennsylvania, the unauthorized practice of law is regulated by statute and states, in relevant part:
*112(a) General Rule. — Except as provided in subsection (b), any person, including, but not limited to, a paralegal or legal assistant, who within this Commonwealth shall practice law, or who shall hold himself out to the public as being entitled to practice law, or use or advertise the title of lawyer, attorney at law, attorney and counselor at law, counselor, or the equivalent in any language, in such a manner as to convey the impression that he is a practitioner of the law of any jurisdiction, without being an attorney at law or a corporation complying with 15 Pa.C.S. Ch. 29 (relating to professional corporation), commits a misdemeanor of the third degree upon a first violation. A second or subsequent violation of this subsection constitutes a misdemeanor of the first degree.
42 Pa. Cons.Stat. Ann. § 2524(a).
The statute specifically prohibits a non-attorney from engaging in two specific acts — practicing law and holding oneself out to the public as an individual licensed to practice law. With regard to the second act, the Court has not been presented with any facts that indicate that either “filer” held him, herself or itself out to the public as a licensed attorney. The courts must therefore consider whether a non-attorney’s act of filing a bankruptcy petition on behalf of an artificial business entity constitutes the practicing of law in Pennsylvania.
Although the phrase “practice law” is not statutorily defined, Pennsylvania’s Supreme Court outlined a number of principles in Dauphin County Bar Ass’n v. Mazzacaro that courts should consider when confronting this issue. See 465 Pa. 545, 351 A.2d 229 (1976). The Court noted:
Marking out the abstract boundaries of legal practice would be an elusive, complex task ‘more likely to invite criticism than to achieve clarity.’ Shortz v. Farrell, supra, 327 Pa. at 84, 193 A. at 21. The threads of legal consequences often weave their way through even casual contemporary interactions. There are times, of course, when it is clearly within the ken of lay persons to appreciate the legal problems and consequences involved in a given situation and the factors which should influence necessary decisions. No public interest would be advanced by requiring these lay judgments to be made exclusively by lawyers. Where, however, a judgment requires the abstract understanding of legal principles and a refined skill for their concrete application, the exercise of legal judgment is called for. Shortz v. Farrell, 327 Pa. 81, 85, 193 A. 20, 21 (1937). While at times the line between lay and legal judgments may be a fine one, it is nevertheless discernible. Each given case must turn on a careful analysis of the particular judgment involved and the expertise that must be brought to bear on its exercise.
Id. at 233.
Upon consideration of Dauphin County Bar Ass’n, this Court concludes that the filing of the petitions at issue by non-attorneys on behalf of an artificial business entity constitutes the practice of law in the Commonwealth of Pennsylvania. This conclusion turns upon the filer’s selection of which bankruptcy chapter the petition was to be filed under. In comparison to the rest of the form, the act of selecting the chapter of a debtor’s petition cannot be viewed as an act devoid of an “understanding of legal principles and a refined skill for their concrete application, the exercise of legal judgment.” See id. at 233. A determination as to the appropriate chapter for a debtor’ case involves the application of certain legal principles to a debtor’s particular needs. This application requires an understanding of the legal nu-*113anees associated with each chapter and the resulting effect each particular chapter could have on a debtor’s rights and legal interests. Accord, In re Dunkle, 272 B.R. 450, 455-56 (Bankr.W.D.Pa.2002)(Court determined that bankruptcy petition preparer selection of the bankruptcy chapter the debtors would elect involved a “familiarity with legal principles beyond the ken of the ordinary layman.”). “The acquisition of such knowledge is not within the ability of lay persons, but rather involves the application of abstract legal principles to the concrete facts of the given claim. As a consequence, it is inescapable that [the filer] ... must exercise legal judgments in so doing.”3 Dauphin County Bar Ass’n, 351 A.2d at 234. In fact, the majority view supports the proposition that the preparation of bankruptcy petitions constitutes the practice of law. 1 Collier on Bankruptcy ¶ 8.02[4][d][ii] (15th ed. rev.).
A determination of whether an artificial business entity may commence- a bankruptcy case by filing a petition without representation by a licensed attorney must focus on the document’s actual content. With regard to the bankruptcy petitions at issue, this Court finds that these were not permitted under the current statutory scheme and should be dismissed as null and void. The U.S. Trustee’s motions are hereby granted.
. During the March 9, 2005 hearing, the UST's attorney stated that he was offering a bankruptcy case from the Western District of Tennessee, located at "219 B.R. 966", for further support. Based on this Court's research, this Court is confident that counsel meant to cite Buck, which is located at 219 B.R. 996 and is in line with the UST's position, and not a page from of In re Xacur, 219 B.R. 956 (Bankr.S.D.Tex.1998).
. This conclusion is based on the premise that the act of filing a petition is not the equivalent of making an appearance in federal court. Compare Rowland, 506 U.S. at 201-202, 113 S.Ct. 716; Fed. R. Bankr.Pro. 9010(a)(2). This Court relies on Black’s Law Dictionary for further support. Black's Law Dictionary defines the verb “file,” in part, as "1. To deliver a legal document to the court clerk or record custodian for placement into the official record ... 2. To commence a lawsuit.” Black's Law Dictionary, 8th ed. (2004). The noun form of the word "appear,” "appearance,” is defined in Black’s Law Dictionary as "[a] coming into court as a party or interested person, or as a lawyer on behalf of a party or interested person; esp., a defendant's act of taking part in a lawsuit, whether by formally participating in it or by an answer, demurrer, or motion, or by taking post judgment steps in the lawsuit in either the trial court or an appellate court.”
. This Court’s analysis and conclusion equally applies to the notation made on Poconos Land’s petition that it is a "small business as defined in 11 U.S.C. § 101.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493918/ | ORDER
KATHY A. SURRATT-STATES, Bankruptcy Judge.
The matter before the Court is Debtor’s Motion to Dismiss for Failure to State A Claim Upon Which Relief Can Be Granted (the “Motion to Dismiss”) and Creditor’s Reply to Debtor’s Motion to Dismiss. A hearing on the Motion to Dismiss was held on December 6, 2005, where both Debtor and Creditor appeared by counsel and presented oral argument. Upon consideration of the arguments raised by each party in this matter, the Court issues the following FINDINGS OF FACT:
Debtor Vernon C. Hackett (“Debtor”) filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on May 15, 2005. Trustee, Robert J. Blackwell, is the duly appointed Chapter 7 Trustee. This adversary proceeding was filed by Creditors James P. Delsing and Kathleen Delsing (“Creditors”) for fraud and deceit under 11 U.S.C. § 523(a)(2)(B) (2005).
Creditors’ claims arise from a loan and extension of credit obtained by Debtor from Allegiant Bank. AUegiant Bank assigned all claims arising out of the loan and extension of credit to Creditors for a reasonable fee. Debtor’s company defaulted under the promissory note as extended by the subsequent renewal agreements and modification agreements on January 2, 2004, by failing to pay the loan balance and accrued interest due. Creditors thereafter foreclosed upon the collateral for Debtor’s loan resulting in a deficiency balance. Creditor's obtained a deficiency judgment against Debtor for damages arising out of those loan transactions in the amount of $285,408.55 in the St. Louis County, Missouri, Circuit Court on February 2, 2005.
The amount of the judgment debt due *224Creditors is $292,604.35.1 Creditors contend that Debtor’s obligations to Allegiant Bank, constitutes a debt obtained by use of a fraudulent financial statement which Al-legiant Bank, as Creditor’s predecessor in interest, reasonably relied upon for such money or credit. Debtor contends that Creditor’s adversary should be dismissed for failure to state a claim upon which relief can be granted pursuant to Fed. R.Civ.P. 12(b)(6), made applicable to this adversary proceeding by Fed. R. Bankr.P. 7012(b)(6),2 since Creditors lack standing. Debtor’s position is that actions for fraud and deceit are not assignable under Missouri law. The Court resolves this dispute below after carefully weighing the merits of each argument.
JURISDICTION
The Court has jurisdiction of this matter pursuant to 28 U.S.C. §§ 151, 157, and 1334 (2005), and Local Rule 81-9.01(B) of the United States District Court for the Eastern District of Missouri. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) (2005). Venue is proper under 28 U.S.C. § 1409(a) (2005).
CONCLUSIONS OF LAW
This action arises under Missouri contract law. Under Missouri law, where an assignee tenders full consideration for an assignment, the assignment includes “all of the remedies that were inherent in the notes, including the right to sue for fraud.” Beall v. Farmers’ Exchange Bank of Gallatin, 76 S.W.2d 1098, 1099 (Mo. 1934). “A contract is assignable unless it involves personal services which involve personal skill, knowledge or a relation of personal confidence.” Sympson v. Rogers, 406 S.W.2d 26, 30 (Mo.1966). “An action for fraud is assignable where the wrong is not regarded as one to the person but is assignable where the injury is regarded as affecting the estate or arising out of contract.” Houston v. Wilhite, 224 Mo.App. 695, 27 S.W.2d 772, 775 (1930).
Here, the promissory note at bar neither involves personal skill, knowledge, nor a relation of personal confidence. The allegations raised by Creditors are not based in tort but arose out of a contract between the assignor Allegiant Bank and Debtor. Creditors tendered full consideration to Allegiant Bank for its assignment of the promissory note to Creditors. Creditors allege that Debtor obtained the aforementioned promissory note by fraud and deceit. Therefore, Creditors are entitled to bring an action against Debtor for any fraud or deceit that may have existed between Allegiant Bank and Debtor when the promissory note was originally executed and later modified and extended.
Debtor cites Mullinax v. Lowry, 140 Mo.App. 42, 124 S.W. 572 (1910), which in dicta, theorizes that an action for fraud and deceit cannot be maintained under Missouri law. However, the weight of this dictum is found wanting in comparison with the jurisprudence supra of the Missouri Supreme and Appellate Courts analyzing this exact issue in cases subsequent to Mullinax. Consequently, Debtor’s argument is without merit since Creditors have stated a cause of action for which relief can be granted under Missouri law. Therefore,
*225IT IS ORDERED THAT Debtor’s Motion to Dismiss For Failure to State A Claim Upon Which Relief Can Be Granted is DENIED.
. Ex. 8 to Creditor's Complaint.
. "Every defense, in law or fact, to a claim for relief in any pleading, whether a claim, counterclaim, cross-claim, or third-party claim, shall be asserted in the responsive pleading.. .except that the following defenses may.. .be made by motion: (6) failure to state a claim upon which relief may be granted. Fed. R. Bankr. P. 7012(b)(6) (2005). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493919/ | MEMORANDUM DECISION RE: DEFENDANT’S MOTION FOR JUDGMENT ON THE PLEADINGS
PATRICIA C. WILLIAMS, Chief Judge.
This is an adversary lawsuit brought by two Chapter 11 debtors, Summit Securi*248ties, Inc. and Metropolitan Mortgage & Securities Co., Inc. The debtor corporations are suing Helen Sandifur, the former wife of Paul Sandifur. Before the debtor corporations filed their petitions for relief under Chapter 11, the corporations were in large part controlled by Mr. Sandifur. In their Complaint, the debtor corporations seek a money judgment against Ms. Sandi-fur, alleging that she was the beneficiary of a number of preferential and fraudulent transfers that should be set aside under applicable bankruptcy and state law.
Ms. Sandifur filed a Motion for Judgment on the Pleadings pursuant to Fed. R. Bankr.P. 7012(b). In deciding her motion, the Court must accept as true all of the allegations of the debtor corporations’ Complaint. In other words, the corporations’ cause of action should not be dismissed unless it appears, beyond a doubt, that the corporations can prove no set of facts in support of the claim entitling them to relief. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Specifically, the motion asks the Court to rule as a matter of law that the second cause of action in the Complaint, as it relates to two of the many transfers, is barred by the applicable statute of limitations.1
The first transfer at issue is evidenced by a check dated July 30, 2001 from Metropolitan Mortgage & Securities Co., Inc. payable to Ms. Sandifur in the amount of $450,000. The notation on the Metropolitan’s records refers to the transfer of “Div-Partial Redemption of Stock National Summit Corp.” The check cleared the bank on August 2, 2001. The second transfer at issue is evidenced by a check dated February 11, 2002, from an affiliate of the debtor corporations. The check was payable to Ms. Sandifur in the amount of $1,620,000. The notation in the debtor corporations’ records states “I/C Repurchase of Common Shares.” The Complaint does not state when the check was honored by the issuing bank. When a transfer of funds occurs by check, the date that the check was honored by the bank is the date the transfer occurred. Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). For the purpose of the Court’s analysis, the Court will assume that the second transfer occurred on February 11, 2002, the earliest possible date of transfer.
The debtor corporations allege that the two transfers are avoidable under 11 U.S.C. § 544(b), which is commonly referred to as the trustee’s “strong arm powers.” A Chapter 11 debtor shares these powers with the Chapter 7 Trustee by virtue of 11 U.S.C. § 1107(a). Under §§ 544(b) and 1107(a), a Chapter 11 debt- or, like a Chapter 7 Trustee, is granted the same rights as a creditor to set aside transfers under applicable non-bankruptcy law. Here, the relevant non-bankruptcy law is wash. rev. code § 19.40 (1988), et. seq., Washington’s codification of the Uniform Fraudulent Transfer Act. Specifically, in their second cause of action, the debtor corporations allege recovery under wash. rev. code §§ 19.40.041(a)(2) and 19.40.051(a) (1988).2
*249Causes of action under these two statutory provisions are limited by wash. rev. code § 19.40.091(b) (1988) which states that any cause of action based upon wash, rev. code § 19.40.041(a)(2) or .051(a) (1988) is extinguished “within four years after the transfer was made.” Thus, the applicable non-bankruptcy law, upon which the debt- or corporations rely contains a four-year statute of limitations measured from the date of the transfer.
In this ease, the transfers occurred on August 2, 2001 and February 11, 2002. To be timely, actions based upon wash. rev. code § 19.40.041(a)(2) or .051(a) (1988) must have been brought before August 2, 2005, as to the first transfer, and before February 11, 2006, as to the second transfer. The debtor corporations’ lawsuit against Ms. Sandifur was commenced on February 2, 2006, the date on which it was filed. Fed. R. Bankr.P. 7003. Accordingly, the cause of action seeking to set aside the August 2, 2001, transfer extinguished before the lawsuit was commenced. Conversely, the cause of action based upon the February 11, 2002 transfer was timely.
The debtor corporations’ second cause of action does not rely solely on state law. It also includes claims based upon the “strong arm powers” of § 544(b). For causes of action based upon § 546(b), the applicable statute of limitations is stated in § 546, which provides:
(a) ... 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 such election occurs before the expiration of the period specified in subpara-graph (A); or
(2) the time the case is closed or dismissed.
11 U.S.C. § 546. Here, the debtor corporations’ bankruptcy cases have not been closed or dismissed. No Chapter 11 Trustee has been appointed. The inquiry thus narrows to the applicability of § 546(a)(1)(A). If the applicable non-bankruptcy law extinguishes a cause of action after the bankruptcy is commenced, but before the limitation period in § 546(a)(1)(A), which statute of limitation is applicable?
The right of a debtor-in-possession or trustee to exercise strong arm powers does not exist prior to the commencement of a bankruptcy proceeding. Strong arm powers under § 544(b) are substantive rights granted by the Bankruptcy Code and come into existence with the filing of the bankruptcy petition. Absent commencement of a bankruptcy case, these plaintiffs would not have rights under wash. rev. code § 19.40 (1988). The rights sought to be exercised under the Complaint’s second cause of action are substantive bankruptcy law rights. The statute of limitation under § 546(a) is the substantive law that controls.
If the state law limitations period governing a fraudulent transfer action has not expired at the commencement of a bankruptcy case, the trustee may bring *250the action pursuant to section 544(b), provided that it is commenced within the section 546(a) limitations period.
4 Collier on Bankruptcy, Section 546.02(l)(b) (L. King 15th ed.1989).
In In re Mahoney, Trocki & Associates, Inc., 111 B.R. 914 (Bankr.S.D.Cal.1990), the court reached the conclusion— § 546(a) is the applicable statute of limitation although it applied the pre-1994 version of § 546(a). The focus of a statute of limitation is to protect defendants from having to defend against stale claims. However, the ability of a trustee to recover property for the bankrupt estate’s benefit is a congressional goal intended to be accomplished by the Code. Absent the § 546(a) two-year period, that power could be diminished if the trustee fails to immediately determine what potential claims may be brought for the recovery of assets, particularly early in the bankruptcy. Such a result would contravene the broad powers Congress has granted to the trustee under § 544. In re Dry Wall Supply, Inc., 111 B.R. 933 (D.Colo.1990).
A trustee has two years to pursue the cause of action if the state law cause of action has not expired and a bankruptcy proceeding has not been commenced. Even though the state law cause of action may expire after the filing of the petition, but before the two-year limitation in 546(a), the two-year limit in § 546(a) is applicable.
CONCLUSION
The bankruptcy petition was filed February 4, 2004, and this adversary lawsuit was commenced February 2, 2006. The plaintiffs’ claim arising under § 544(b) as to these two transfers is timely as the Bankruptcy Code, not state law, establishes the limitation period to commence an action. Ms. Sandifur’s Motion for Judgment on the Pleadings, as to the debt- or corporations’ second cause of action, is DENIED.
. The motion originally sought dismissal of the complaint's third cause of action. At oral argument, counsel agreed the third cause of action was not relevant to the only two transfers now at issue.
. Former WASH. REV. CODE § 19.40.041(a)(2) (1988)states:
"(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation ...
*249Former wash. rev. code § 19.40.051(1) (1988) states:
"(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493920/ | ORDER DENYING MOTION FOR SANCTIONS AS TO JEAN LAMB
(Doc. No. 5)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THIS CAUSE came on for hearing with notice to all parties in interest upon a Motion for Sanctions (Doc. No. 5) (the Motion) filed by Rose M. Pomeroy (Debt- or). The Motion, filed pursuant to 11 U.S.C. § 362(h), requests the imposition of sanctions against Jean Lamb (Mr. Lamb) for willful violation of the automatic stay imposed by 11 U.S.C. § 362(a). The Motion is based on the allegation that the letters sent by Mr. Lamb to numerous business associates of the Debtor, attached as Exhibits 1 and 2 to the Motion, coupled with the letter sent to Lee County Health Department, attached as Exhibit 3 to the Motion, were willful and contumacious, thus, a direct violation of the automatic stay.
The Court heard argument of counsel, considered the exhibits attached to the Motion and finds that while the letters by Mr. Lamb were highly inappropriate, none of them contain any intimation that it was sent for the purpose of coercing or attempting to coerce the Debtor into the payment of a debt allegedly owed by the Debtor to Mr. Lamb. There is no doubt that the correspondence sent by Mr. Lamb to the business associates of the Debtor and to the Lee County Health Department were letters of harassment; however, this Court is satisfied that they were not a violation of the automatic stay and, therefore, are not sanctionable.
Notwithstanding the foregoing, this Court is satisfied that the communications were improper and Mr. Lamb shall cease from sending any additional correspondence containing derogatory remarks and allegations to anyone associated with the Debtor and/or the Debtor’s business. Mr. Lamb should not assume that he may continue to harass the Debtor with impunity. The Motion is denied; however, if Mr. Lamb does continue to harass the Debtor this Court will enter such order as is appropriate under the circumstances.
ORDERED, ADJUDGED AND DECREED that the Debtor, Rose M. Pomer-oy’s Motion for Sanctions as to Jean Lamb (Doc. No. 5) be, and the same is hereby, denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493922/ | ORDER ON DEBTOR’S OBJECTION TO CLAIM NO. 34 FILED BY S.T.D. ENTERPRISES OF NAPLES, INC. (CREDITOR) (Doc. No. 377)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration in this confirmed Chapter 11 case of D.W. Walters Enterprises, Inc., (the Debtor or D.W. Walters) is an Objection to Claim No. 34 filed by S.T.D. Enterprises of Naples, Inc. (S.T.D.). The Proof of Claim *286was originally filed in the amount of $60,737.28. Based on a clerical error, S.T.D.’s claim is actually for the principal sum of $55,308.00, plus pre-petition interest in the amount of $1,663.47, for a total amount of $56,971.47. It is the contention of the Debtor that the amount of the claim filed by S.T.D. is excessive and the claim should be allowed in the reduced amount of $40,000.00. The Debtor’s contention is based on: (1) the rates S.T.D. charged the Debtor for hauling fill dirt (fill) and base rock (base) material and (2) the number of loads of fill and base S.T.D. actually delivered to the Debtor.
In due course the Objection to Claim No. 34 filed by STD (Objection) was set for Final Evidentiary Hearing. At the duly scheduled and noticed hearing on the Objection, this Court heard argument of counsel for the Debtor, and for STD. In addition, this Court has considered the record including testimony of witnesses and all documentary evidence offered and admitted into evidence and now makes the following findings and conclusions based on the record.
Prior to the commencement of this Chapter 11 case, the Debtor was the site development, underground or utilities subcontractor to Lodge Construction Inc. (Lodge Construction) on six construction projects in Southwest Florida. Under its contract with Lodge Construction, the Debtor was the site developer on the Upriver Campground (Upriver) and the Im-mokalee Dormitory (Immokalee) projects.
The Debtor hired S.T.D. to haul and deliver fill and base to the various Southwest Florida projects. Although the relationship of the parties was never formalized, it is without dispute that the Debtor employed S.T.D. to render hauling services for the Upriver and the Immokalee projects.
During the relevant time the Debtor received invoices from S.T.D. The Debtor’s representative, Ms. Amburgey “would pull that day’s package and verify the ticket numbers,” confirm the number of tickets, the materials delivered and the amounts charged for the each load.1,2 If Ms. Ambur-gey determined the amount of the invoice was different from the amount that was owed by the Debtor she would contact Daniel Montero (Mr. Montero), comptroller of S.T.D. to make the appropriate corrections. It is Ms. Amburgey’s contention that when she contacted Mr. Montero and discussed the specific discrepancies, he “acknowledged the correct amount,”3 or would tell her “to correct the bill,”4 or “adjust [the specific] invoice.”5
The following are the specific Invoice numbers which are in dispute, the amount S.T.D. billed D.W. Walters, the amount per invoice the Debtor claims is the correct amount due to S.T.D., and the reason for the discrepancy:
Invoice Invoice Debtor’s Number Amount Amount Discrepancy
30764 $ 11,716.00 $ 11,600.00 2 tickets missing
*287Creditor-30778 1,856.00 0.00 Citifactors 6
30881 8,330.00 5,745.00 4 tickets missing
30931 11,760.00 9,075.00 3 tickets missing
30982 4,270.00 3,327.00 1 ticket missing
30983 4,183.00 2,262.00 8 tickets missing
31047 5,250.00 3,310.00 5 tickets missing
31112 2,730.00 2,145.00 Amount per load
31113 580.00 580.00 No discrepancy
31161 2,380.00 1,460.00 2 tickets missing
31181 1,869.00 1,102.00 2 tickets missing
31215 2,240.00 1,760.00 Amount per load
Total $ 57,236.00 $ 42,366.00
It appears from the record the discrepancy between the parties is a result of: (1) missing delivery tickets, (2) S.T.D. charging a higher amount per load than what was agreed upon, (3) S.T.D. charging the same amount per load for different types of material delivered, and (4) whether or not certain conversations took place between the Debtor’s representative and Mr. Montero.
Ms. Amburgey stated at the hearing that she counted the number of delivery tickets daily, and S.T.D. had charged the Debtor for more loads than were actually received. Therefore, the Debtor contends that Invoice No. 30764 was missing two tickets, and as a result, the claim should reflect the reduced amount of $116.00. Ms. Amburgey testified that, in addition to missing tickets, the amount per load charged by S.T.D. was not the agreed upon amount. S.T.D. also charged the same amount per load for different material delivered, which should have been invoiced at a different dollar amount.
The following are the discrepancies which Ms. Amburgey contends Mr. Monte-ro agreed to adjust and/or correct:
(1) Invoice No. 30881 — in addition to four missing tickets, S.T.D. charged the Debtor $70.00 dollars per load. Ms. Amburgey testified that the correct amount charged should have been as follows: (a) 57 loads of fill at $55.00 per load, and (b) 58 loads of base at $45.00 per load.
(2) Invoice No. 30981 — in addition to three missing tickets, S.T.D. should have charged the Debtor $55.00 dollars per load and not $70.00 per load.
(3) Invoice No. 30982 — in addition to one missing ticket, there were two different jobs and the amounts charged should have been as follows: (a) Upriver — 51 loads at $55.00 per load, and (b) Dormitory — 9 loads at $58.00 per load.
(4) Invoice No. 30983 — in addition to the eight missing tickets, the amount charged should have been $58.00 per load.
(5) Invoice No. 31047 — in addition to the five missing tickets, there were two different materials delivered and the amount charged should have been as follows: (a) 16 loads of fill at $55.00 per load, and (b) 54 loads of base at $45.00 per load.
(6) Invoice No. 31112 — S.T.D. charged the Debtor $70.00 per load, the Debtor contends the amount charged should have been $55.00 per load.
(7) Invoice No. 31161 — in addition to the two missing tickets, the amount charged should have been as follows: (a) 30 loads of base at $45.00 per load, and (b) 2 loads of fill at $55.00 per load.
(8) Invoice No. 31181 — in addition to the two missing tickets, the Debtor con*288tends that the incorrect dollar amount per load was charged and the correct amount should have been $58.00 per load.
(9) S.T.D. charged the Debtor $70.00 per load, the Debtor contends the amount charged should have been $55.00 per load.
Thus, based on Ms. Amburgey’s calculations, the correct amount owed to S.T.D. for the foregoing invoices was, $42,366.00.
The Debtor also called Darrel Walters (Walters) to testify on rebuttal. Walters testified that he had never agreed to the rate of $70.00 per load on the Upriver project nor did he agree to the rate of $89.00 per hour with respect to the Im-mokalee project. Walters also stated that he was the only person who has the authority to set the rates for D.W. Walters and that no one, other than himself, had the authority to bind D.W. Walters of any financial commitments. Walters further testified that he was present on various occasions when Ms. Amburgey contacted Montero regarding the incorrect invoices
In addition to the Proof of Claim, in support of its claim, S.T.D presented the testimony of Bern Smith (Mr. Smith), a salesman of S.T.D., who was responsible for negotiating the verbal agreements with the Debtor. Mr. Smith testified that he negotiated rates with “Mike” of D.W. Walters. As stated above, Walters testified that Mike did not have the authority to set rates for D.W. Walters.
In further support of their claim, S.T.D. presented the testimony of Danny Monte-ro who claimed he did not have any conversation with Ms. Amburgey regarding any of the discrepancies outlined above. Montero maintained that the only conversations he had with Ms. Amburgey regarded past due invoices and Mr. Montero testified that, when the Debtor was going to pay S.T.D., he spoke with Ms. Ambur-gey “at least a dozen times,” and they never discussed any invoicing discrepancies.7
S.T.D. has made only broad denials of having any contact with Ms. Amburgey despite her and Mr. Walters’s contentions that several conversations regarding invoice discrepancies took place. As noted before, in rebuttal to Mr. Smith’s testimony that he had discussed rates with “Mike” of D.W. Walters, Mr. Walters testified that Mike did not have the authority to set rates for the company. No further evidence was presented to support these claims of S.T.D.
While it is true if a proof of claim was filed in the proper form, it carries the presumptive validity of the claim. Once an objection is interposed either to the validity or the amount claimed, the presumption is overcome and the ultimate burden to establish with the requisite degree of proof the validity or the amount of the claim falls upon the creditor. See In re O’Callaghan, 304 B.R. 500 (Bankr.M.D.Fla.2003); See also In re Harford Sands Inc., 372 F.3d 637 (4th Cir.2004). If the evidence is in equilibrium and equally consistent with the position of the creditor and debtor, the creditor failed to carry its burden and the objection should be sustained. In the present instance, the Debtor does not challenge the validity of the claim, but does contend that the amount is excessive. Thus, the claim shall be allowed albeit in the reduced amount of $42,366.00.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Objection to Claim No. 34 filed by S.T.D. Enterprises of Naples, *289Inc. (Doc. No. 377) be, and the same is hereby, sustained in part. It is further
ORDERED, ADJUDGED AND DECREED that Claim No. 34 of S.T.D. Enterprises of Naples, Inc. be, and the same is allowed as an unsecured claim in the reduced amount of $42,366.00.
DONE AND ORDERED.
.Id.. Trial Trans. 18, 20-24. As further reference, when material was delivers to a specific site, the dump-truck driver for S.T.D. would provide the superintendent, or the person on the site on that particular date, with a ticket describing the delivery of fill or base. At the conclusion of the day, all tickets were taken into the office by the above-mentioned individuals, counted, placed into a package and held until the invoices were received by the Debtor.
. Id. Trial Trans. 18, 25 and 19, 1.
. Id. at 42, 1-5.
. Id. at 42, 23-43, 2.
. Id. at 45, 8-9.
. The parties stipulated that Invoice No. 30778, in the amount of $1,856, had been assigned to another creditor, Citifactors, therefore, S.T.D.'s claim shall be reduced by the foregoing amount. Trial Trans. 35, 24-36, 16.
. Trial Trans. 121, 1. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493923/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Bankruptcy Judge.
(Doc. No. 16)
THE MATTER under consideration in this Chapter 7 liquidation case is a Motion for Summary Judgment filed by Hydro Partners, LLC (Hydro) in the above-captioned adversary proceeding commenced by Hydro against Celso R. Gilberti (Debt- or). In its Complaint, Hydro sets forth three claims in three separate counts. The claim in Count I is based on the allegations of Hydro that the Debtor knowingly and fraudulently made a false oath in the bankruptcy case, and therefore is not entitled to the general bankruptcy discharge pursuant to Section 727(a)(4). In Count II, Hydro alleges that the Debtor concealed property of the estate with intent to hinder, delay, or defraud a creditor, and therefore is not entitled to a discharge pursuant to Section 727(a)(2)(B).
The claim in Count III of the Complaint is based on a final judgment against the Debtor, entered on February 18, 2005 in the Court of Common Pleas of Cuyahoga County, Ohio, Case No. CV 03-503016 (the Judgment). According to Hydro, the claim in Count III is based on the specific findings of the Ohio court which entered the Judgment, and the Debtor is estopped from relitigating the issues specified in the Judgment. Based on the doctrine of collateral estoppel, Hydro contends it is entitled to a judgment in its favor as a matter of law on Count III determining that the debt owed by the Debtor to Hydro is excepted from the overall protection of the general bankruptcy discharge, pursuant to Sections 523(a)(2) of the Bankruptcy Code.
Although the Debtor was represented by counsel when he filed his Chapter 7 case, the law firm of Miller and Hollander filed a Motion to Withdraw from any further representation of the Debtor (Doc. No. 8), which Motion was granted on November 9, 2005 (Doc. No. 18). Thus, the Debtor personally filed his Answer to the Complaint (Doc. No. 10) and Response to the Motion for Summary Judgment (Doc. No. 22), and appeared without the assistance of counsel.
Prior to presenting its argument at the duly scheduled heading on the Motion for Summary Judgment, counsel for Hydro announced that they no longer wanted to *292pursue the claim set forth in Count II of the Complaint. For this reason, this Court will deny the Motion for Summary Judgment to the extent that it requests relief under this Count. This leaves for consideration the remaining counts: the claim based on the charge of the alleged false oath (claim in Count I); and, the claim for dischargeability (claim in Count III).
In support of the Motion for Summary Judgment, counsel for Hydro contends that there are no issues of material facts and, based on the same, Hydro is entitled to a judgment in its favor, as a matter of law, both on the claims in Count I and Count III of the Complaint. Hydro relies on the exhibits attached to its Complaint, including but not limited to a portion of the deposition of the Debtor taken on January 20, 2005, in a lawsuit filed by Victor J. Scaravilli, et al. against the Debtor in the Court of Common Pleas of the County of Cuyahoga in the State of Ohio (Exhibit C to the Complaint). In addition, Hydro relies on the Schedule of Assets filed by the Debtor. According to Hydro, the Debtor made a false oath in connection with his bankruptcy case when he failed to schedule and failed to disclose his ownership interest in certain real property located in Mangabal, Brazil, and understated the values under oath of his interest in certain real properties located at 16328 Glynn Road, Cleveland Heights, Ohio, 44112 (the Cleveland Heights Property), and 326 Wal-worth Drive, Euclid, Ohio, 44132 (the Euclid Property). In addition, Hydro relies on an admission by the Debtor concerning the value of the properties as shown by an appraisal of both Ohio properties made on December 22, 2002, and January 3, 2003, respectively, which represent the correct value of the properties involved.
The record reveals the following facts which are part of the record, are indeed without dispute, and can be summarized as follows. At the time relevant, the Debtor was a partner in an entity know as Hydro Partners, LLC. (Hydro LLC). Hydro LLC formed several Brazilian corporations referred to as Hydro I, II, III, IV, V, VI, and VII. These entities were formed for the purpose of developing utility facilities for the generation of hydro-electric power in Brazil. At the time relevant the Debtor was a partner in Hydro. The Debtor also served as director of Hydro I and Hydro II. While serving as a director of these entities, he received monetary compensation for his services. According to him, the compensation was required to be paid pursuant to the corporate laws of Brazil, but, according to Hydro, the compensation was unauthorized and improper.
The Debtor became embroiled in a dispute with the other partners of Hydro and as a result Hydro filed a Complaint on June 10, 2003 against the Debtor in the Court of Common Pleas of Cuyahoga County, Ohio, Case No. CV 03-503016 (the State Court Complaint). In the State Court Complaint, Hydro asserted claims for: (1) Specific Performance; (2) Breach of Contract; (3) Breach of Fiduciary Duty; (4) Fraud; (5) Conversion; (6) Promissory Estoppel; (7) Declaratory Judgment; and (8) Injunctive Relief.
In due course, the Debtor filed his Answer to the State Court Complaint, coupled with his Counterclaim against the Plaintiff. In the course of the discovery process, the Debtor was properly noticed to appear for a deposition on September 9, 2004. The Debtor failed to appear and Hydro filed a Motion to Compel the Debt- or’s Appearance. On December 16, 2004, the Court of Common Pleas granted the Motion to Compel and ordered the Debtor to appear for Deposition under Penalty of Default Judgment for Non-Compliance. The Debtor again failed to appear and on *293February 18, 2005, the Court of Common Pleas entered a default judgment against the Debtor in the amount of $224,622.10. (See Exhibit B to the Complaint). In the Judgment, the Court of Common Pleas stated that the Judgment is based on Count Three (Breach of Fiduciary Duty); Count Four (Fraud); and Count Five (Conversion). The Judgment was never appealed, thus it became a final non-ap-pealable judgment.
After the entry of the Judgment, Hydro commenced a post-judgment proceeding to collect its judgment. On January 20, 2005, Hydro deposed the Debtor. During his deposition the Debtor gave the following answers to the following questions:
“Q: Do you have any assets in Brazil. A: No.
Q: Do you own any land in Brazil?
A: I used to but it is gone.
Q: Where did it go?
A: I use to have a lot in a place called Ilea de Mangabal. It is a reservoir, I have not paid taxes on those things in 20 years and I do not know the status of that.
Q: Well, you have not paid the taxes, but do you still own it?
A: I would assume so, but — cause I never transferred it to anybody.”
Gilberti Tr. pg. 55, In. 5:
“Q: The land that you own in Brazil— do you own it with anybody else or by yourself?
A: No, No. It is all paid for but it is very — the value is very small — maybe worth a couple of thousand of dollars if you find it free — if no one is living there.”
Gilberti Tr. pg. 66, In. 5:
On February 4, 2005, the Debtor filed his voluntary Petition for Relief under Chapter 7. On his Schedule of Assets, the Debtor failed to disclose any interest in the real property located in Brazil, and stated that the value of the Cleveland Heights Property was $87,650, and the value of the Euclid Property was $50,150. According to an appraisal dated December 27, 2002, the Cleveland Heights Property was valued at $245,000 (Exh. D to the Complaint). An appraisal dated January 3, 2003 valued the Euclid Property at $118,000. (Exh. E to the Complaint).
In order to explain the glaring discrepancy between the values as scheduled and as they appear on the appraisal, the Debt- or stated that he told his attorney that he only had a half interest in the properties and he received a notice of foreclosure that stated the value of the properties, which he then reduced by half. No competent evidence was produced in support of these propositions advanced by the Debtor.
The Debtor did not present any competent acceptable evidence to this Court that the basis for scheduling the values of these assets on the schedules was some notification, not put in evidence, issued by an Ohio state court in conjunction with the foreclosure proceeding, which value was then cut in half by then counsel for the Debtor based on the understanding that the Debt- or owns half of the property and holds the homes joint with his wife, who is not a debtor in bankruptcy.
These are the basic facts established which according to counsel for Hydro supports the proposition that they are entitled to a judgment in their favor on both Count I (pursuant to Section 727(a)(4)) and Count III (pursuant to Section 523(a)(2)). Summary judgment is proper where there is no genuine issue as to any material fact, and a party is entitled to judgment as a matter of law. Fed. R. Bank. P. 7056. As this Court is satisfied that no question of material fact exist, and that the claims in the Complaint are ripe for summary judgment, *294the Debtor’s Response shall be treated as a cross-Motion for Summary Judgment.
FALSE OATH IN BANKRUPTCY
Section 727(a)(4)
It has been long recognized, even prior to the adoption of the Bankruptcy Code, that the provisions dealing with discharge of debtors must generally be construed liberally in favor of the debtor and strictly against those who challenge the debtor’s right to a discharge. Matter of Garman, 643 F.2d 1252 (7th Cir.1980); Kentile Floors, Inc. v. Winham 440 F.2d 1128 (9th Cir.1971). However, it is equally true that the discharge privilege is reserved only to honest debtors. Accordingly, the burden of establishing any of the specific grounds set forth in Section 727(a), which would warrant the denial of the discharge, is on the party challenging the debtor’s right to a discharge. F.R.B.P. 4005. But the burden is no longer by clear and convincing evidence, but a mere preponderance of the evidence is sufficient to prevail and block the debtor’s right to a discharge. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
One of the grounds to deny the debtor’s discharge, which is under consideration at this time, is the claim by Hydro that the Debtor made a false oath in connection with this bankruptcy case. There is no question that Section 727(a)(4) was established to ensure that the trustee and the creditors would receive reliable information in order to assist the trustee in the administration of the estate. Discenza v. MacDonald (In re MacDonald), 50 B.R. 255 (Bankr.D.Mass.1985). The Statement of Financial Affairs and the Schedules executed by the Debtor under oath serve the crucial purpose of ensuring that all relevant and adequate information is available to the Trustee.
In applying the standard and the elements necessary to establish a viable claim under Section 727(a)(4), the Eleventh Circuit, in the case of Chalik v. Moorefield (In re Chalik), 748 F.2d 616 (11th Cir.1984), held that a false oath is made even though the properties omitted are worthless, and the omission was, in fact, material. In the case of In re Robinson, 506 F.2d 1184, 1188 (2d Cir.1974), the court held that even though truthful responses to the questions propounded by the attorney for the bank would not have increased the value of the estate, they were certainly material and essential for the discovery of what, if any, assets the debtor may have had. It is clear that the subject of false oaths is always material and bears a relationship to the debtor’s business transactions or estate. In re Steiker, 380 F.2d 765, 768 (3d Cir.1967). A debtor may not escape the charge of making a false oath by asserting that the admittedly omitted statement of financial information concerned a worthless business relationship or holding, and thus did not have to be disclosed. Such a defense was held to be specious. Diorio v. Kreisler-Borg Construction Co. (In re Diorio) 407 F.2d 1330 (2d Cir.1969). It makes no difference whether or not the debtor intended to injure his creditors; the creditors are entitled to judge for themselves what will benefit and prejudice them. Morris Plan Industrial Bank v. Finn, 149 F.2d 591 (2d Cir.1945); Duggins v. Heffron, 128 F.2d 546, 549 (9th Cir.1942).
It is without dispute that an occasional omission from schedules will seldom be accepted as satisfactory a basis to establish the claim of a false oath, and some innocent omissions due to oversight may be excused. However, numerous omissions that display a pattern of misleading conduct are sufficient to establish a fraudulent false oath. See, Boroff v. Tully (In re Tully), 818 F.2d 106 (1st Cir.1987).
In the present instance the claim of a false oath is based on the undisputed facts *295that the debtor did not schedule his interests in certain real properties located in Brazil. The Debtor admitted that he purchased these properties more than twenty-years ago and they were free and clear of any mortgage, but for years he did not use them at all, never paid the taxes on the properties and believes that the properties might have been taken by the government for the non-payment of taxes.
The second ground for the false oath charged is that the Debtor knowingly and fraudulently understated the values of his interests in the properties located in Ohio. Ordinarily the statement of value of property is subjective and it is rarely sufficient grounds to sustain the claim for false oath unless the debtor actually knew the true value or the value stated is so outrageously low that any reasonable person would immediately recognize the valuation as baseless and that the value stated was a reckless disregard of the true value.
Before discussing the two claims, it should be pointed out that the Debtor appeared pro se at the hearing on the Motion for Summary Judgment. It cannot be gainsaid that the false oath claim contains a scienter element, showing knowing and fraudulent intent. Considering the charge of false oath relating to the omission of the properties in Brazil, this Court is satisfied that these omissions did not meet the standard required for false oath. The Debtor had no contact with these properties for several years and never paid the taxes on them. It was not unreasonable for him to assume that the property was taken away and he had no longer any interest in the property.
Considering the false oath as it relates to the valuation of the Ohio properties, the Debtor explained that he furnished a foreclosure notice to his attorney which stated the value of the Ohio properties and told his attorney that they were jointly owned by he and his wife, a non-debtor. Therefore, the value stated was only one-half of the total of the value which appeared on the foreclosure notice. Ordinarily it would have been, of course, more appropriate to put into evidence the foreclosure notice or present an affidavit from his attorney to verify the facts stated by the Debtor. But, again, considering that he is not a legally trained person, this omission is not fatal and would be insufficient to form the basis to sustain the claim of false oath concerning the undervaluation of the Ohio properties.
NONDISCHARGEABILITY
Section 523(a)(2)
This leaves for consideration the claim of nondischargeability set forth in Count III by Hydro based on Section 523(a)(2).
The Motion for Summary Judgment is based on the contention of Hydro that the Debtor is estopped from relitigating the issues raised due to the doctrine of collateral estoppel. It is without dispute and is clear that, in the Ohio litigation, Hydro asserted several claims against the Debtor including obtaining money by fraud, breach of fiduciary duty, and conversion. While it is true the case was not actually tried and the Judgment entered by the Ohio court was by default, the default was not based on the debtor’s failure to respond to the complaint, but on a willful violation of discovery rules by failing to appear for a deposition when compelled to do so by the court. The debtor not only filed an answer to the complaint but also a counterclaim and actively participated in the litigation until he decided not to do so any further and his failure to appear at the deposition was noted by the court.
It is well established that before the doctrine of collateral estoppel applies the record must show the following:
(1) the issue at stake must be identical to the one decided in the prior litigation;
*296(2) the issue must have been actually-litigated in the prior proceeding;
(3) the prior determination of the issue must have been a critical and necessary part of the judgment in that earlier decision; and
(4) the standard of proof in the prior action must have been at least as stringent as the standard of proof in the later case.
In re St. Laurent, 991 F.2d 672, 676 (11th Cir.1993). The only possible argument against collateral estoppel is that the issue was not actually litigated. However, there is no support for that proposition. The fact that the judgment is by default does not prevent the doctrine application as long as the relevant issues could have been litigated. In re Jaquis, 131 B.R. 1004 (Bankr.M.D.Fla.1991); In re Halpern, 810 F.2d 1061 (11th Cir.1987).
Based on the foregoing, this Court is satisfied that the Debtor is, in fact, es-topped from relitigating the issues found to exist by the Ohio Court which based its judgment on the claim for breach of fiduciary duty (Count III), fraud (Count IV) and conversion (Count V). This judgment was never appealed, thus became a final, nonappealable judgment.
Accordingly, the facts established by the Ohio judgment satisfy the elements of Section 523(a)(2), and the debt owed by the Debtor to Hydro is within the exception to the discharge set forth in Section 523(a)(2), and is non-dischargeable.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by Hydro Partners, LLC be, and the same is hereby, granted in part and denied in part. It is further ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by Hydro Partners, LLC be, and the same is hereby, granted as to Count III of the Complaint. The debt owed to Hydro Partners, LLC by the Debtor is nondischargeable pursuant to 11 U.S.C. § 523(a)(2). It is further
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by Hydro Partners, LLC be, and the same is hereby, denied as to Count I of the Complaint. The Debtor’s cross-Motion for Summary Judgment as to Count I of the Complaint is granted. Count I of the Complaint is dismissed with prejudice. It is further
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by Hydro Partners, LLC be, and the same is hereby, denied as withdrawn as to Count II of the Complaint, and Count II of the Complaint is dismissed with prejudice.
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 its Order on Motion for Summary Judgment (Doc. No. 16). 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 Plaintiff, Hydro Partners, LLC and against the Defendant, Celso R. Gilberti, as to Count III of the Complaint. The debt owed to Hydro Partners, LLC by the Debtor is nondischargeable pursuant to 11 U.S.C. § 523(a)(2). It is further
ORDERED, ADJUDGED AND DECREED that Final Judgment be, and the *297same is hereby, entered in favor of the Defendant, Celso R. Gilberti and against Plaintiff Hydro Partners, LLC as to Count I of the Complaint. Count I of the Complaint is dismissed with prejudice. It is further
ORDERED, ADJUDGED AND DECREED that Final Judgment be, and the same is hereby, entered in favor of the Defendant, Celso R. Gilberti and against Plaintiff Hydro Partners, LLC as to Count II of the Complaint. Count II of the Complaint is dismissed with prejudice.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494000/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
(Doc. No. 22 — Adv. No. 06-81)
ALEXANDER L. PASKAY, Bankruptcy' Judge.
In this Chapter 11 case, the matter under consideration is a Motion for Summary Judgment filed by Louis X. Amato, the Trustee appointed for the estate of Southwest Florida Heart Group, P.A. The motion is directed to a suit filed against the named Defendants, three doctors, and based upon the contention of the Plaintiff that they have received substantial sums of money by way of bonuses, which were paid on account of an antecedent debt while the Debtor was insolvent and, as such, the payments are avoidable pursuant to Section 547(b).
It is the contention of the Trustee that there are no genuine issues of material fact and, based on the same, the Trustee is entitled to a money judgment against the Defendants equal to the amount of the alleged preferential transfers.
The Court has heard extensive argument in support of and in opposition to the Motion and is satisfied there are, in fact, genuine issues of material fact and, therefore, the claims asserted by the Trustee should not be disposed of by way of summary judgment. Accordingly, it is
ORDERED ADJUDGED AND DECREED the Motion for Summary Judgment of the Plaintiff Louis X. Amato (Doc. No. 22) be, and the same is hereby denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493924/ | ORDER DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT AND DENYING FINOVA CAPITAL CORPORATION’S RENEWED MOTION FOR SUMMARY
ALEXANDER L. PASKAY, Bankruptcy Judge.
(Doc. No. 63 and 68)
THE MATTERS under consideration in these confirmed Chapter 11 cases of Optical Technologies, Inc., and its several affiliates, collectively referred to as the RE-COMM Debtors, are Defendant’s Motion for Summary Judgment (Doc. No. 63) and a Renewed Motion for Summary Judgment (Doc. No. 68) filed by Finova Capital Corporation, the Plaintiff in the above-captioned adversary proceeding.
It is the conclusion of this Court that the crucial issue, the adequacy of notice, is not *298suitable for a summary disposition. Based on the foregoing, the Defendant’s Motion for Summary Judgment and Finova Capital Corporation’s Renewed Motion for Summary Judgment are hereby denied.
Accordingly it is
ORDERED, ADJUDGED AND DECREED that Finova Capital Corporation’s Renewed Motion for Summary Judgment (Doc. No. 68) be, and the same is hereby, denied. It is further
ORDERED, ADJUDGED AND DECREED that the Defendant’s Motion for Summary Judgment (Doc. No. 63) be, and the same is hereby, denied. It is further
ORDERED, ADJUDGED AND DECREED that a pretrial conference shall be held on_, 2006, beginning at __..m. at Courtroom 9A, Sam M. Gibbons United States Courthouse, 801 N. Florida Ave., Tampa, Florida, to schedule the matter for trial.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493929/ | ORDER GRANTING MOTIONS TO COMPEL IN PART AND DENYING IN PART AND GRANTING SANCTIONS
ROBERT A. MARK, Chief Judge.
The issue raised by three pending motions to compel is the scope of the Fifth Amendment privilege available to the debtor’s principal who has previously elected not to assert the privilege in sworn testimony given in this case. The issue is framed by the following motions: First United Bank’s (“First United”) Motion to Compel and for Sanctions (CP # 327); Trustee Joel Tabas’ Motion (1) for Determination of the Applicability and Scope of Fifth Amendment Privilege, (2) to Compel Testimony and (3) for Sanctions Against Debtor’s Principal (CP # 350) and Petitioning Creditors’ Motion to Compel Testimony and for Sanctions (CP # 352) (collectively, the “Motions to Compel”). The Motions to Compel arise from the events surrounding a 2004 examination of Jason Madow (“Madow”), principal of the Debt- or, conducted on November 22, 2005 (“the November deposition”). At the November deposition, Madow selectively invoked his Fifth Amendment privilege when examined by counsel for First United, the Trustee and the Petitioning Creditors.
Factual and Procedural Background
On December 14, 2004, an involuntary petition was filed against Cotillion Investments, Inc. (“Debtor” or “Cotillion”) by the Petitioning Creditors. The Petitioning Creditors consist of several individuals who loaned approximately nine million dollars to the Debtor and failed to receive repayment on these loans. The Debtor contested the involuntary petition. Finding it necessary to prevent further loss to the estate, the Court, by Order dated February 15, 2005, granted the Petitioning Creditors’ motion to appoint an interim *348trustee (CP #37), and Joel Tabas was appointed.
During the so-called “gap period,” discovery was sought from the Debtor. It was during this initial discovery that Ma-dow asserted his Fifth Amendment privilege. Specifically, when he appeared as Cotillion’s representative at a Rule 30(b)(6) deposition conducted on February 8, 2005 (“the February deposition”), Madow asserted the privilege to nearly all questions posed to him by Petitioning Creditors’ counsel. As discovery continued, Madow shifted his position and chose not to assert the privilege when he appeared for further depositions on June 30, July 1 and July 5, 2005 (“the June/July depositions”). At the June/July depositions, Madow stated on the record that he would not assert the privilege and he proceeded to answer questions posed to him by Petitioning Creditors’ counsel covering a broad range of topics relevant to the Debtor’s financial affairs. In addition, at subsequent Court hearings, Madow and his personal attorney, Barry G. Roderman (“Roderman”), informed the Court that Madow would no longer assert the privilege.
On September 23, 2005, an Order for Relief was granted on the involuntary petition (CP #249). Cotillion filed its bankruptcy schedules on October 11, 2005 (CP # 270). Madow aided Cotillion’s bankruptcy counsel in assembling the schedules and signed the schedules under oath as Cotillion’s president.
Because the June/July depositions concentrated primarily on issues related to whether Cotillion was generally paying its debts as they came due, the Petitioning Creditors, Trustee and First United sought further discovery from Madow concerning the Debtor’s assets and operations. Pursuant to a hearing held on November 8, 2005, this Court entered its Order Requiring Jason Madow to Appear for 2004 Examination (CP # 302) (“Order Requiring 2004 Examination”). The Order Requiring 2004 Examination stated in relevant part that Madow would sit for examination beginning on November 22, 2005 and that First United, the Trustee and the Petitioning Creditors would have an opportunity to examine Madow. On November 18, 2005, Debtor’s counsel filed his Motion for Protective Order which raised a litany of issues that the Debtor and Madow had concerning the Order Requiring 2004 Examination. One of these issues concerned Madow’s reluctance to sit for examination on November 22, 2005, because Roderman would be unable to attend. The Motion for Protective Order did not state that Madow was intending to assert the privilege. The Court rejected this request for extension, entering its Order denying Motion for Protective Order (CP #321) on November 21, 2005. The court faxed each party a copy of this Order at or around 2:30 p.m. on November 21, 2005. The next day, when Madow appeared for the November deposition, he again changed his position and reasserted the privilege.
Due to the seriousness and complexity of issues concerning privilege, along with the fact that the Trustee has been hampered in administering this estate, resulting in large part from Madow’s refusal to cooperate, the Court, after reviewing the Motions to Compel, entered its Order Resetting Hearing and Setting Briefing Schedule (CP # 376). The purpose of this Order was to allow the movants an opportunity to set forth the particular subject areas in which they asserted Madow had waived privilege and to allow Madow’s new personal counsel an opportunity to present argument on why no such waiver resulted. In response, First United filed its Supplemental Memorandum of Law on Motion to Compel (#383) and the Trustee and the Petitioning Creditors jointly filed their *349Joint Supplement to Motions to Compel Testimony (CP # 387). Madow in turn, filed his Memorandum of Law in Support of Fifth Amendment Privilege (CP # 396). The Trustee and the Petitioning Creditors then filed their Reply in Support of Motions to Compel Testimony (CP # 393). Following submission of the memoranda, the Court conducted a hearing on the Motions to Compel on February 1, 2006.
Following this hearing, the issue of Ma-dow’s potential criminal exposure took on a new twist when the Court was alerted to a criminal indictment brought by the United States Attorney’s Office against Madow in the Middle District of Florida, Orlando division. As part of a plea agreement, Madow pled guilty to one count of conspiracy to commit wire fraud. The facts in the plea agreement center on Madov/s active participation in a conspiracy to defraud various lending institutions. Madow, partly in his capacity as president of the Debt- or, submitted false documentation and information concerning various real estate investments to these lending institutions. Acting on this false information, the lending institutions loaned excessive funds to his co-conspirator, Terry Mughar. Mug-har in turn, kicked back some of these proceeds to Madow. Once alerted to this criminal indictment and subsequent plea agreement, the Court entered its Order Requesting Further Briefing (CP #419). The Order requested the parties to brief whether the plea agreement affected the Fifth Amendment issues raised before this Court. Petitioning Creditors and the Trustee along with Madow filed their respective Responses (CP # 429, 436).
Neither the Petitioning Creditors nor the Trustee believe the Orlando indictment and subsequent plea agreement affect this Court’s analysis of the privilege issues raised in the Motions to Compel. By contrast, Madow asserts a direct impact, claiming that the testimony he gives in this case could be used to violate the terms of the plea agreement “and subject Madow to an increased sentence, prosecution for perjury or the resurrection of charges dismissed by entry of the plea.” Madow Response, p. 2.
The Court finds that the Orlando indictment and plea agreement do not affect the issues pending before this Court. The plea agreement certainly does not preclude Madow from testifying in this case. The alleged risk that his testimony here could conflict with testimony or statements he provides in Orlando is a risk over which Madow has full control. There is no risk of perjury if Madow simply tells the truth to the United States Attorneys Office and tells the truth in further depositions in this case.
With the above hurdle removed, as previously stated, the issue this Court addresses is the scope of the privilege available to Madow following his prior sworn testimony given in this case. After a review of the legal memoranda and consideration of the arguments of counsel and the relevant case law, the Court will grant the Motions to Compel in part and deny them in part.
Discussion
I. General Fifth Amendment Principles
The Fifth Amendment privilege allows for an individual to refuse to testify on the basis that such testimony will incriminate him. It can be asserted in any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory; and protects against any disclosures which the witness reasonably believes could be used in a criminal prosecution or could lead to other evidence that might be so used. Kastigar v. United States, 406 U.S. 441, 444-45, 92 S.Ct. 1653, 32 L.Ed.2d 212 (1972). “The privilege afforded not *350only extends to answers that would in themselves support a conviction under a federal criminal statute but likewise embraces those which would furnish a link in the chain of evidence needed to prosecute the claimant for a federal crime.” Hoffman v. United States, 341 U.S. 479, 486, 71 S.Ct. 814, 95 L.Ed. 1118 (1951).
The Fifth Amendment privilege has limitations. A corporation has no privilege. Braswell v. United States, 487 U.S. 99, 103, 108 S.Ct. 2284, 101 L.Ed.2d 98 (1988). As a result, a custodian of corporate records may not refuse to produce corporate documents on the basis of an individual corporate representative’s personal privilege, even if the documents may tend to incriminate the custodian individually. Id. at 113, 108 S.Ct. 2284. The privilege may also be waived. The privilege is waived if not invoked. Rogers v. United States, 340 U.S. 367, 371, 71 S.Ct. 438, 95 L.Ed. 344 (1951). The privilege may also be waived when an individual offers testimony in his own behalf. Brown v. United States, 356 U.S. 148, 155-57, 78 S.Ct. 622, 2 L.Ed.2d 589 (1958).
II. Madow has waived any protection as to several areas of inquiry because he voluntarily revoked his right to assert the privilege
Madow offers three arguments against waiver: (1) No waiver occurred at the November deposition because any privilege that was waived in the June/July depositions was at a separate proceeding or stage; (2) any waiver by Madow at the November deposition was not knowing and intelligent; and (3) Madow has not waived privilege because any statements he made at the June/July depositions and the November deposition did not inculpate him; however, if Madow answers further questions, those answers could include incriminating statements.
A. The Court rejects Madow’s arguments that the November deposition was during a separate proceeding or stage
Madow argues that a waiver of one’s right against self-incrimination in one proceeding or stage of a proceeding is not a waiver of the privilege in a separate proceeding or stage. See In re Neff, 206 F.2d 149, 152 (3d Cir.1953). Based on the above premise, Madow asserts that the June/July depositions occurred during either a “separate proceeding” or a different “stage” because the contested involuntary petition had not been adjudicated and no order of relief had been entered. Thus, Madow argues that any waiver which occurred during the involuntary proceeding’s depositions in June and July would not apply to the November deposition, which was conducted after the Debtor stipulated to relief on the involuntary petition and the case was proceeding as a chapter 7 case.
Madow is correct in his statement of the law but not in its application to the facts here. “It is settled by the overwhelming weight of authority that a person who has waived his privilege of silence in one trial or proceeding is not estopped to assert it as to the same matter in a subsequent trial or proceeding.” In re Nam, 245 B.R. 216, 228 (Bankr.E.D.Pa. 2000); see also United States v. Gary, 14, F.3d 304, 312 (1st Cir.1996) (stating it is “hornbook law” that a witness’ waiver of his right against self-incrimination is limited to the particular proceeding in which the witness appears). The question is: Did entry of an order for relief on the involuntary petition make this a “separate proceeding” or “stage”? Clearly, the answer is no.
In In re Mudd, 95 B.R. 426 (Bankr.N.D.Tex.1989), the court held that a debt- or had waived his privilege against self-*351incrimination in an adversary proceeding brought against him because of statements he made at several section 341 meetings of creditors and Rule 2004 examinations. In regard to the issue of separate judicial proceedings, the court found that the debt- or’s statements at these prior proceedings occurred during the same “judicial proceeding” as the dischargeability action because the “subject matter of the [dis-chargeability action was] so interwoven” with the main bankruptcy case. Id. at 431.
Likewise, the Court finds that in this case the subject matter of the June/July depositions, which occurred in the so-called gap period, is “interwoven” with the matters raised at the November deposition involving the administration of the estate. During both periods, the intention has been to decipher the business operations of the Debtor, and more importantly, to find out what happened to assets acquired with several million dollars of creditor funds. To that extent, at both the June/July depositions and the November deposition, questions have been posed to Madow regarding Cotillion’s assets and operations, document retention and Madow’s involvement with the Debtor. Cf. Nam, 245 B.R. at 233 (proper analysis as to separate proceeding issue should focus on the relatedness of the matters raised at the section 341 meeting in the main case and in the later brought adversary proceeding). Madow’s argument focuses solely on cosmetic differences between the gap period and the administration period, such as the nomenclature of the parties, matters of procedure and administration of the estate. Under the reasoning and analysis set forth in Mudd and Nam, the Court finds these distinctions irrelevant.
B. Madow’s waiver at the November deposition was knowing and intelligent
At the November deposition Ma-dow did answer some questions which movants now argue waived privilege as to any follow-up questions regarding the same subject areas. Aside from asserting that no waiver occurred, Madow also claims that any waiver of the privilege at the November deposition was not knowing and intelligent because Roderman, his personal attorney, did not attend the November deposition and the moving parties failed to “educate” Madow about his Fifth Amendment rights at this deposition. This argument is rejected. Just because his attorney did not appear at the November deposition, Madow cannot shout “do over” for the statements he voluntarily made. Madow does not cite nor is this Court aware of any case that holds that no waiver results in a civil matter when the witness’ lawyer was not present. Rather, the opposite appears to be true. See United States v. White, 846 F.2d 678, 691 & n. 19 (11th Cir.1988) (overruling lower court’s finding that witness had not waived privilege partly because witness did not have attorney present at deposition).
To begin with, Madow’s argument is somewhat specious since Roderman was not present at the June/July depositions either. Moreover, this Court will not rehash the many instances in which the issue of Madow asserting or not asserting the privilege was raised. Simply, since the first time Madow asserted the privilege at the February deposition and then later announced he would not assert the privilege at the June/July depositions, there is no doubt that Madow has been aware of his right to assert the privilege and the consequences of electing to testify. To now state that at the November deposition, he was suddenly and conveniently unaware of his right to assert the privilege is to engage in some perverse form of revisionist history. Madow is not nearly as naive or incompetent as he selectively wants this Court and the other parties to believe.
*352Moreover, Madow and Roderman had sufficient time to confer and consider whether Madow should assert the privilege at the November deposition. Based on the hearing conducted on November 8, 2005, and this Court’s Order Requiring 2004 Examination, it is undeniable that Madow and Roderman were fully aware that the examination was going forward on November 22, 2005. This awareness was further reinforced when the Court rejected the Debtor’s Motion for Protective Order on November 21, 2005. Thus, Madow had at least a two-week period starting from the time of the November 8th hearing to confer with Roderman and discuss any concerns he had regarding the assertion of privilege. Accordingly, the Court rejects Madow’s assertion that any waiver of privilege was not knowing and intelligent because Roderman was not present. Finally, as for the failure of opposing counsel to educate Madow on his right to assert privilege, Madow cannot cite to any case which holds that a party in a civil action is required to educate its opponent on the assertion of privilege or the consequences of failing to assert it. The only cases that so hold involve custodial interrogations and therefore, are not applicable here. See Garner v. United States, 424 U.S. 648, 654 n. 9, 96 S.Ct. 1178, 47 L.Ed.2d 370 (1976) (stating that in non-custodial interrogation, “an individual may lose the benefit of the privilege without making a knowing and intelligent waiver”).
Madow also alleges that any advice by Roderman relating to the November deposition was tainted because Roderman was contemplating a lawsuit against Madow on the date of the November deposition. A review of the facts defeats this argument. On November 29, 2005, the Trustee sent a demand letter to Roderman requesting return of the funds that Madow paid to Roderman.1 The Trustee then filed an adversary proceeding against Roderman to recover such funds on December 14, 2005.2 Roderman in turn, filed his third party complaint against Madow on December 30, 2005.
Based on this timeline, it is apparent that at the time the November deposition was conducted, no conflict existed between Roderman and Madow. From the time that the demand letter was sent to Roder-man, at least one week passed from the November deposition before Roderman would have even contemplated bringing suit against Madow. As such, Madow’s assertion that Roderman’s advice was potentially tainted is unavailing in light of the actual facts. Finally, the Court finds Ma-dow’s attack on Roderman to be disingenuous since a reading of the plea agreement between Madow and the United States Attorneys Office, which was entered into on January 31, 2006, reflects that Madow was once again represented by Roderman.
C. Madow has waived the privilege as to all topics at the June/July deposition and to matters related to the Debtor’s bankruptcy schedules
1. Waiver at the June/July depositions
The Court now addresses Ma-dow’s primary argument, that the privilege *353has not been waived and in particular, his argument that providing non-incriminating testimony on various topics did not waive his right to assert the privilege if further testimony in these areas might be incriminating. The Court starts with the basic premise: The privilege is waived if it is not invoked. Rogers, 340 U.S. at 371, 71 S.Ct. 438. It is without dispute that at the beginning of the June/July depositions, Madow unequivocally stated he would not assert the privilege:
Q: Okay, and let me just make clear for the record what has been announced in Court, but I want to make sure that we have it here as well. You have previously appeared for deposition as the corporate representative of Cotillion Investments, correct?
A. Correct.
Q. And at the prior deposition, you, on the advice of your counsel, Mr. Ro-derman, invoked the 5th Amendment privilege against self-incrimination in response to several of the questions that I asked at that deposition, correct?
A. Correct.
Q. Okay. You are represented by counsel at this deposition as well?
A. Correct.
Q. And I have been advised that you will not, for purposes of this deposition be invoking your 5th Amendment privilege against self-incrimination in response to questions, is that correct?
A. I object to one part, it’s overly broad, but I do not anticipate — -
Q. Okay.
A. —invoking the 5th Amendment.
Q. And you have conferred with counsel regarding your decision to appear and testify here today?
A. Correct.
Q. And you are doing so freely and without coercion, and after having obtained the advice of your counsel, correct?
A. Correct.
Deposition of Jason Madow, June 30, 2005, p. 74-76. Based on this express, voluntary renunciation by Madow, the Court finds that Madow waived the privilege by not invoking it as to those issues raised at the June/July deposition. With this in mind, after a review of the June/July deposition transcripts and the scope of the topics raised, Madow has waived privilege to the following areas of inquiry:
a. Madow’s association with the Debt- or;
b. Madow prior employment and occupation;
c. The extent of the Debtor’s business activities;
d. The Debtor’s documents and business records, including but not limited to, its document retention policies and manner of storing documents;
e. The Debtor’s bank records and bank accounts;
f. The Debtor’s bookkeepers and accountants and the scope of their duties;
g. All information regarding mortgages located in the DIP report of December 31, 2004;
h. Properties owned by the Debtor;
i. Transactions with Madow family members, including Bonnie Madow;
j. Assignment of Debtor’s mortgages to satisfy obligations owed to members of the Petitioning Creditors;
k. Transfers of Petitioning Creditors funds directed to title agencies and Joseph Ganguzza’s account;
*354l. Use of Simon Posen’s funds by the Debtor;
m. Purpose of Cotillion Investment I, Inc., its relationship with the Debt- or and its business transactions;
n. Latour Mortgage Corporation and its relationship with the Debtor and Glen Cove project;
o. Purchase, financing and management of the Glen Cove property, including payment history of loans made to finance the acquisition of Glen Cove and payment history of tenants occupying units owned by the Debtor;
p. First Capital mortgage and its relationship with the Debtor;
q. Operation and management of Timbuktu Properties and its relationship with the Debtor;
r. Debtor’s relationship with Amne Steffenson;
s First Capital American Express card and debts incurred on the card;
t. Antonio Duque/ Elite Bulldozing/ Endeavor Properties and its relationship with the Debtor;
u. Debtor’s relationship with Marian Szabo;
v. Debtor’s relationship with Terry Mughar;
w. Loans made to the Debtor, payment history and terms of such loans; and
x. Debtor’s purchase and sale of tax certificates.
Madow argues that his prior testimony as to the above subjects did not inculpate him and therefore, he did not waive the privilege as to follow up questions which, if answered, could incriminate him. The Court rejects this argument. Once Madow testified on these subjects, he waived the right to assert the privilege as to the details. See, e.g., Mitchell v. United States, 526 U.S. 314, 119 S.Ct. 1307, 143 L.Ed.2d 424 (1999); United States. v. Gwinn, 2003 WL 23357667 (M.D.Fla. Aug.15, 2003).
Madow’s characterization of his prior testimony is improperly narrow and indeed, contrary to the arguments his counsel presented at the February 1st hearing. As his counsel correctly noted at the hearing, albeit in response to an argument that Madow had improperly invoked the privilege at the November deposition in response to seemingly innocuous questions, the privilege may be invoked if testimony, which itself is not incriminating, could provide a link in the chain of evidence to prosecute Madow. See Hoffman, 341 U.S. at 486, 71 S.Ct. 814. Applying that standard here, if Madow was concerned about potential criminal liability arising out of the disposition of Cotillion’s assets, he should have asserted the privilege at the June/July depositions when asked about these assets. Instead, he chose to testify. Some clear examples (of the many reflected in the transcripts) appear in the following excerpts regarding Cotillion’s disposition of assets, including mortgages and real property:
Q: Excluding [the Latour mortgage], the DIP report represents that Cotillion held ten mortgages as of when that document was prepared, which was the end of December 2004, correct?
A: Correct.
Q: What happened to all of the rest of the mortgages?
A: They were either refinanced or sold.
Deposition of Jason Madow, July 5, 2005, p. 472. Madow’s testimony went even further in discussing condominium properties owned by Cotillion:
Q: What happened to the rest of the properties that are identified in the *355documents that you produced, but are not listed in the DIP report?
A: Some of them were sold because the condo laws in the individual associations changed, which prohibited rentals.
Q: Okay. What about other properties?
A: They were sold.
Q: Where were the proceeds of sales of these condo units deposited?
A: They were always sent to Cotillion.
Deposition of Jason Madow, July 5, 2005, p. 479-80, 482-83.
These quoted exchanges highlight a simple point. If Madow had a fear of prosecution based on conduct relating to the disposition of any of the mortgages or properties discussed at the June/July depositions, he should have asserted the privilege in response to questions about these topics. The above testimony could certainly be a link in the chain of evidence if, for example, Madow personally misappropriated funds. Madow could not voluntarily testify that Cotillion sold assets and received the money and then refuse to answer follow-up questions about the Debtor’s disposition or use of those funds. Thus, in sum, by voluntarily answering questions involving the above listed topics at the June/July depositions, Madow waived the privilege as to all follow-up questions regarding these topics.
2. Waiver at the November deposition
Unlike the June/July depositions, Madow did not voluntarily state on the record at the November deposition that he would waive his right to assert privilege. Instead, Madow began to answer questions on several topics not addressed at the June/July depositions. These topics all revolved around the completion of the Debt- or’s bankruptcy schedules and certain statements contained therein. Specifically, the areas of inquiry related to a potential fraudulent transfer made to Madow, particular auto leases and the various values attributed to assets listed on the Debtor’s bankruptcy schedules. At a certain point during the examination, Madow asserted the privilege. Based on the initial answers Madow gave to questions on these topics, movants argue that Madow could not close the door on further inquiry. Conversely, Madow again asserts that the statements, by themselves, did not inculpate him but answering further questions on these topics could lead to incriminating statements. The issue then, is whether Madow’s initial conduct waived his right to now assert the privilege as to inquiries regarding Cotillion’s schedules.3
In Brown, the Supreme Court held that when a witness voluntarily takes the stand and offers testimony on his own behalf, even if his testimony is not incriminating, he waives the right to assert the privilege against self-incrimination in response to cross-examination on matters raised by his testimony. Nam, 245 B.R. at 227 n. 8 (Bankr.E.D.Pa.2000) (citing Brawn, 356 U.S. at 148, 78 S.Ct. 622). Explaining the rationale for this rule, the Supreme Court stated:
[W]hen a witness voluntarily testifies, the privilege against self-incrimination is *356amply respected without need of accepting testimony freed from the antiseptic test of the adversary process. The witness himself, certainly if he is a party, determines the area of disclosure and therefore of inquiry. Such a witness has the choice, after weighing the advantage of the privilege against self-incrimination against the advantage of putting forward his version of the facts and his reliability as a witness, not to testify at all. He cannot reasonably claim that the privilege gives him not only this choice but, if he elects to testify, an immunity from cross-examination on the matters he has himself put in dispute. It would make of the Fifth Amendment not only a humane safeguard against judicially coerced self-disclosure but a positive invitation to mutilate the truth a party offers to tell.... The interests of the other party and regard for the function of courts of justice to ascertain the truth become relevant, and prevail in the balance of considerations determining the scope and limits of the privilege against self-incrimination.
Brown, 356 U.S. at 155-56, 78 S.Ct. 622 (internal citation omitted) (footnote omitted).
The Court finds the holding and reasoning in Brown applicable here to questions arising from the Debtor’s schedules. The end of the Debtor’s schedules, in conspicuous typeface, includes the following statement:
DECLARATION UNDER PENALTY OF PERJURY ON BEHALF OF CORPORATION OR PARTNERSHIP: I, the President of the Corporation named as debtor in this case, declare under penalty of perjury that I have read the foregoing summary and schedules, consisting of 20 sheets, and that they are true and correct to the best of my knowledge, information, and belief.
Following this statement, is Madow’s signature, dated October 11, 2005. The Court concludes that by making this sworn statement, Madow has waived the privilege in regard to the information contained within the Debtor’s schedules. The opposite conclusion would allow Madow to swear to the veracity of the Debtor’s assets and liabilities without answering inquiries to the very information he provided and thus, grant him “an immunity from cross-examination on the matters he has himself put in dispute.” Id. at 155, 78 S.Ct. 622. Madow, through the above sworn statement, has painted a picture of the Debtor’s assets and liabilities and the corresponding values associated with these items.4 The movants must then be allowed to question his portrayal by, for example asking Madow what information he relied upon to calculate the values set forth in the Debtor’s schedules and to confirm that the asset or liability listed was in fact, still owned or owed by the Debtor as of the date of the involuntary petition.5
*357D. Madow must testify about documents
Finally, the Court finds it necessary to specifically address the issue of document production. The battle over documents has dogged this case from its inception, and in the process, taken up an inordinate amount of this Court’s time. Although numerous hearings have been held and several orders entered compelling production of documents, basic questions still remain unanswered. The issue here is twofold: (1) Whether Madow can refuse to produce documents, and (2) whether Ma-dow can refuse to answer questions concerning document production.
First, Madow cannot refuse to turnover the Debtor’s documents on the basis that such documents may incriminate him. It is hornbook law that a corporation has no Fifth Amendment privilege. Therefore, a corporate custodian, Madow in this case, must turn over all documents requested. Braswell, 487 U.S. at 113, 108 S.Ct. 2284. Second, as to whether Madow can refuse to answer questions concerning document production, Madow has waived any privilege regarding the existence and location of documents pursuant to the reasoning espoused in Brown, 356 U.S. at 148, 78 S.Ct. 622.
By stating on the record at both the June/July deposition, as well as the November deposition, that he (Madow) “turned over all documents in my possession,” Madow has opened the proverbial door. He “cannot reasonably claim that the privilege gives him not only this choice but, if he elects to testify, an immunity from cross-examination on the matters he has himself put in dispute.” Id. at 155-56, 78 S.Ct. 622. The movants shall be allowed to test the veracity of his conclusory statement by, for example, asking Madow where the Debtor’s documents were located or are currently located, what has happened, if anything, to documents previously stored at these locations and whether Cotillion or Madow has or had electronic records/computers containing information about Cotillion’s assets, liabilities and operations. To allow Madow to make such a blanket, self-serving statement without allowing the movants to test the veracity of this statement, gives Madow a “positive invitation to mutilate the truth.” Id. at 156, 78 S.Ct. 622.
E. Madow has not waived his assertion of the privilege as to First United on some topics
First United stands in a different posture than the Trustee and Petitioning Creditors. First United’s involvement in this case centers around certain mortgages issued by the Debtor to third parties. These mortgages were collaterally assigned to First United (“First United Mortgages”). Madow, when asked about the status of these mortgages at a hearing, informed the Court that some of them had been satisfied. These unsworn statements came as a surprise to First United, considering that it has not yet been paid on its loan which was secured by these mortgages. At the November deposition, First United had its first opportunity to get formal discovery from Madow concerning the satisfaction of the mortgages. When asked about the First United Mortgages, Madow asserted the privilege. Madow also asserted the privilege in response to certain general questions asked by First United unrelated to the specific mortgages.
First United’s argument is that Madow’s assertion of the privilege is improper, not necessarily because of waiver, but rather, because Madow does not face any criminal liability from answering the general questions posed to him. First United lists several topics in which it *358claims Madow’s refusal to answer lacks any foundation for criminal exposure. The Court agrees with First United that several questions do no appear to raise any criminal exposure nor “furnish a link in the chain of evidence needed to prosecute the claimant.” Hoffman, 341 U.S. at 486, 71 S.Ct. 814. Therefore, unless Madow can show why “a responsive answer to the question or an explanation of why it cannot be answered might be dangerous because injurious disclosure could result,” id. at 487, 71 S.Ct. 814, the Court finds that inquiry into the following areas is not protected by the privilege:
a. Dates which Madow met with counsel to discuss privilege;
b. Whether Madow is presently employed;
c. Whether the Debtor ever had any other licensed mortgage broker in its employ besides Madow; and
d. Whether the Debtor had any lawyer on retainer prepetition.
However, this Court disagrees with First United that other issues listed in its Motion will not possibly result in criminal exposure for Madow. The issues listed pertain in some manner to the First United Mortgages. Specifically, they are as follows:
a. Madow’s signature on certain documents related to First United;
b. Whether Madow ever maintained records relative to the First United Mortgages;
c. When the last time was that the Debtor received payment on the First United Mortgages;
d. Efforts Madow made to locate records relevant to the First United Mortgages; and
e.Whether any lawyers advised Ma-dow in any way with respect to the First United Mortgages.
Here, Madow’s assertion of the privilege is proper, primarily because the answers to these questions could incriminate him or “furnish a link in the chain of evidence needed to prosecute the claimant.” Id. at 486, 71 S.Ct. 814. This however, does not end the inquiry.
Although the assertion of the privilege may well have been justified, Madow has waived his rights in regard to several of the above topics. In particular, Madow has waived the privilege as to issues “b”, “c” and “d”. In regard to issues “b” and “d”, as explained above, by stating on the record that he turned over all documents in his possession when queried about the First United Mortgages, First United is permitted to find out exactly what documentation Madow had in his possession regarding these mortgages and where it was located. As for issue “c”, to the extent that the First United Mortgages are listed in the Debtor’s schedules,6 Madow is obligated to answer questions regarding the information he employed to calculate the values set forth in the Debtor’s schedules and the status of these mortgages as of the involuntary petition date. Finally, it is unclear from the record whether the ten mortgages listed in the DIP report as of December 31, 2004 are part of the First United Mortgages. Thus, unless any of these mortgages are listed in this report, with regard to all other remaining issues concerning the First United Mortgages, Madow may assert the privilege.
III. Sanctions are appropriate against Madow
In connection with the Motions to Compel, the movants have requested sanctions against Madow in his individual ca*359pacity. The movants argue that based on a review of the record, including the events that transpired immediately before the November deposition, an award of sanctions is appropriate. As to First United, the Court finds Madow’s conduct leading up to the November deposition sufficient, in of itself, to warrant an award of sanctions. Based on the June/July depositions, Madow gave the Court and the mov-ants the clear impression that he would testify and not assert the privilege. In subsequent hearings, Madow, although not sworn in, voluntarily answered questions posed by the Court in regard to the First United Mortgages. Moreover, Madow has engaged in discussions with First United’s counsel regarding the First United Mortgages as detailed in the e-mails attached to First United’s Motion to Compel. Specifically, in a September 8, 2005, e-mail to counsel for First United, Madow provided summary information regarding four of the five loans which secured First United’s loan to Cotillion and stated, “I wish to cooperate in every which way.” First United’s Motion to Compel, Exhibit “B”. In addition, in a September 30, 2005 e-mail to First United’s counsel, Madow stated “I want to make it clear that I will be available at all times for you in the future.” First United’s Motion to Compel, Exhibit “C”. Finally, Madow gave no indication that he would assert the privilege when the scheduling of the November deposition was discussed at the November 8th hearing. Rather, it was not until the November deposition that the issue of privilege was once again sprung upon the parties and this Court.
Under these circumstances, the Court finds it appropriate to sanction Madow, at a minimum, for a portion of the fees incurred by counsel for First United in attending the November deposition. Although an award of fees might not fit perfectly into Rule 37(a)(4), under 11 U.S.C. § 105 of the Bankruptcy Code and this Court’s inherent power to control the proceedings, sanctions are appropriate. Simply stated, you cannot jerk people around as Madow has done and not suffer some consequence.
As to the Trustee and Petitioning Creditors, the request for sanctions will be denied without prejudice. Madow did provide some testimony in response to their questions at the November deposition and the privilege issues addressed in this Order are not frivolous. However, denial of sanctions comes with a warning. Unless this Order is stayed or modified by the District Court, Madow must now provide testimony. If Madow refuses to appear for deposition and provide the testimony as compelled by this Order, the Court will find him in contempt and consider all appropriate remedies to coerce compliance, including incarceration. Moreover, appearing for deposition but providing evasive or incomplete answers will not be tolerated. Thus, to the extent that Ma-dow, who was the sole owner, officer and director of the Debtor, suddenly has memory lapses concerning topics which the Court has found he has waived his Fifth Amendment privilege to, this evasive or incomplete testimony will also result in a finding of contempt. Simply, this Court’s leniency is at an end. Madow can now choose to cooperate or suffer further consequences.
Conclusion
Waiver of the Fifth Amendment privilege is something that “is not to be lightly inferred.” Klein, 667 F.2d at 287. Conversely, this Court will not tolerate invocation of privilege when there is no sound basis in law or fact, and instead, is invoked solely for the purpose of obstructionism. Therefore, it is—
*360ORDERED as follows:
1.Trustee Joel Tabas’ Motion (1) for Determination of the Applicability and Scope of Fifth Amendment Privilege, (2) to Compel Testimony and (3) for Sanctions Against Debtor’s Principal and Petitioning Creditors’ Motion to Compel Testimony and for Sanctions are granted. Madow has waived the right to assert his Fifth Amendment privilege to questions relating to the following topics:
a. Madov/s association with the Debt- or;
b. Madow prior employment and occupation;
c. The extent of the Debtor’s business activities;
d. The Debtor’s documents and business records, including but not limited to, its document retention policies and manner of storing documents;
e. The Debtor’s bank records and bank accounts;
f. The Debtor’s bookkeepers and accountants and scope of their duties;
g. All information regarding mortgages located in the DIP report of December 31, 2004;
h. Properties owned by the Debtor;
i. Transactions with Madow family members including Bonnie Madow;
j. Assignment of Debtor’s mortgages to satisfy obligations owed to members of the Petitioning Creditors;
k. Transfers of Petitioning Creditors funds directed to title agencies and Joseph Ganguzza’s account;
l. Use of Simon Posen’s funds by the Debtor;
m. Purpose of Cotillion Investment I, Inc., its relationship with the Debt- or and its business transactions;
n. Latour Mortgage Corporation and its relationship with the Debtor and Glen Cove project;
o. Purchase, financing and management of the Glen Cove property, including payment history of loans made to finance the acquisition of Glen Cove and payment history of tenants occupying units owned by the Debtor;
p. First Capital mortgage and its relationship with the Debtor;
q. Operation and management of Timbuktu Properties and its relationship with the Debtor;
r. Debtor’s relationship with Anne Steffenson;
s. First Capital American Express card and debts incurred on the card;
t. Antonio Duque/ Elite Bulldozing/ Endeavor Properties and its relationship with the Debtor;
u. Debtor’s relationship with Marian Szabo;
v. Debtor’s relationship with Terry Mughar;
w. Loans made to the Debtor, payment history and terms of such loans;
x. Debtor’s purchase and sale of tax certificates; and
y. Information x-elied upon to calculate the values set forth in the Debtor’s schedules and whether asset or liability listed in the schedules was still owned or owed by the Debtor as of the date of the involuntary petition.
2. First United’s Motion to Compel is granted in part. Madow has waived the privilege to the following topics:
a. Dates which Madow met with counsel to discuss privilege;
b. Whether Madow is presently employed;
*361c. Whether the Debtor ever had any other licensed mortgage broker in its employ besides Madow;
d. Whether the Debtor had any lawyer on retainer prepetition;
e. Whether Madow ever maintained records relative to the First United Mortgages;
f. To the extent that the First United Mortgages are located within the Debtor’s schedules, how Madow calculated the value of these mortgages and their disposition as of the involuntary petition date; and
g. Efforts Madow made to locate records relevant to the First United Mortgages.
3. First United’s Motion to Compel is denied in part. Madow has not waived the privilege to the following topics:
a. Madow’s signature on certain documents related to First United;
b. Whether any lawyers advised Ma-dow in any way with respect to the First United Mortgages; and
c. To the extent that the First United Mortgages are not located in the DIP report of December 31, 2004, all other inquiries concerning the First United Mortgages.
4. First United’s request for sanctions is granted. Madow shall pay First United $1,000 as a sanction. This amount represents the unnecessary fees incurred by First United due to Madow’s failure to disclose his intention that he would refuse to provide testimony at the November deposition regarding the First United Mortgages.
5. This Court will not consider a request to stay this Order if Madow files an appeal to the District Court. Therefore, pursuant to Fed.R.Bankr.P. 8005, Madow must seek a stay in the District Court if he files an appeal.
6.Absent entry of a stay pending appeal by the District Court, Madow shall appear for further examination within thirty (30) days after entry of this Order at a time and date mutually convenient to counsel for the movants.
. Madow allegedly paid Roderman $80,000 in retainers to represent him.
. The adversary proceeding, styled as Joel Ta-bas v. Barry G. Roderman and Associates, P.A., 05-6133-RAM-A, sought recovery of an $80,000 retainer paid to Roderman. The complaint alleged, among other things, that the payment by Cotillion to hire criminal counsel for Madow individually was an unauthorized postpetition transfer. Roderman ultimately agreed to a settlement in which he is paying $70,000 to the Trustee and receiving an allowed $30,000 unsecured claim against the estate.
. The movants argue that in regard to the topics raised at the November deposition, Ma-dow implicitly waived the privilege, specifically, by testimonial waiver. The movants ask this Court to apply the test set forth in Klein v. Harris, 667 F.2d 274, 287-88 (2d Cir.1981) and find a testimonial waiver. Although Klein is good law, the Court finds Brown to be more applicable in these particular circumstances and therefore, declines to apply the Klein test.
. A review of the November deposition reveals that the effective date of the Debtor's schedules was the date that the involuntary petition was filed.
. The Court is not finding that by signing the bankruptcy schedules, Madow has waived the privilege as to all questions regarding the Debtor's assets and liabilities. By way of example, if the schedules do not list an asset which was at one time owned by the Debtor according to its records and the asset does not fall within one of the areas of inquiry listed earlier in which the privilege was waived, Madow may invoke the privilege if asked about the disposition of the asset or the proceeds realized from the disposition of the asset. In addition, Madow may assert the privilege regarding postpetition disposition of assets listed on the schedules if the asset does not fall within one of the areas of inquiry listed earlier in which the privilege was waived.
. Conditioned on the limitation set forth in footnote 5, supra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493930/ | *504MEMORANDUM OPINION GRANTING SUMMARY JUDGMENT TO THE DEFENDANTS AND RELIEF FROM THE AUTOMATIC STAY TO THE MARYLAND PORT ADMINISTRATION
The Chapter 11 debtor is a tenant holding over land owned by the State of Maryland after the expiration and nonrenewal of a long-term lease. The instant Chapter 11 case was filed to prevent the State from evicting the debtor from the property. The debtor filed the instant complaint against the defendants in them official capacities as officers of the State to for damages and to compel the Maryland Port Administration1 to execute a new lease to the debtor on terms more favorable than those the State found acceptable. Because the defendants are entitled to judgment as a matter of law, them motion for summary judgment will be granted, as well as the motion of the Maryland Port Administration for relief from the automatic stay.
FINDINGS OF FACT
The debtor, Premier Automotive Services, Inc. (“Premier”), is a Baltimore-based import/export vehicle processing center located at the Dundalk Marine Terminal (the “Terminal”), a facility of the port of Baltimore that is owned and managed by the Maryland Port Administration (“MPA”), an agency of the State of Maryland, created in Title 6 of the Maryland Transportation Code.2
*505Premier, formerly known as “The Maryland Undercoating Co., Inc.,” has occupied Lot 90 at the Terminal as a tenant of MPA continuously since 1964. Its business is the processing of motor vehicles, including automobile, trucks, military, agricultural and construction equipment through the port. Lot 90 is the location upon which the debtor constructed a 27,500 square-foot building (“the Building”) at the beginning of its occupancy. The Building contains a body shop, a paint shop, offices and a wash line. Premier also occupies Lot 401 at the Terminal pursuant to a separate sublease. Lot 401 is used for equipment assembly and as a storage facility.
On July 28, 1992, Premier and MPA entered into a written lease for Lot 90 and other parcels not relevant to this lawsuit. On July 1, 1997, Premier and MPA renewed the lease for ten years, continuing in effect the terms and conditions of the original lease. The renewed lease with a slightly different acreage terminated on June 30, 2002. Upon its expiration, the lease provided that Premier became a month-to-month tenant. The lease provided that at the conclusion of its tenancy, Premier was required to remove any buildings it had erected or, with the approval of MPA, to abandon the buildings to the MPA. Lease, Article 4, Sec. 2.3
As of June 30, 2002, the parties had not executed a new lease. Premier objected to certain proposed terms contained in a new five-year lease submitted by MPA. One such provision contained in Section 2.1(b)(the “vehicle guarantee,” or “thru-put”), required that Premier “receive, process and distribute a minimum of 1,700 vehicles per acre of useable vehicle storage area of the Premises” per lease year to avoid additional fees. A second provision Section 1.5 (“Relocation”), gave MPA “the right and option, at MPA’s sole discretion, to relocate the Premises or any portion thereof, to a comparable facility” with 180 days’ notice. During the years 2002 through 2004, MPA proposed leases to Premier similar to that proposed in 2002. Each time, Premier refused to accept the terms proposed by MPA.
On March 29, 2005, MPA requested that Premier vacate Lot 90 on or before May 1, 2005. On April 29, 2005, Premier filed the instant Chapter 11 bankruptcy case. The schedules and statements filed by the debtor [P. 28] indicate that it was solvent *506on the date of filing.4 MPA is listed as a creditor holding a claim in the amount of $17, 045.08, that is not included in the schedules. MPA did not file a proof of claim. The schedules indicate that Premier had no secured creditors. On Schedule G, Premier listed the real property lease with MPA “dated July 28, 1992 as amended from time to time” as an executory contract or unexpired lease.5
On May 6, 2005, Premier filed the first of three complaints for declaratory judgment, preliminary and permanent injunction and ancillary damages against the defendants, Robert L. Flanigan, in his official capacity as Secretary of the Maryland Department of Transportation, M. Kathleen Broadwater, in her official capacity as Acting Executive Director of MPA, and MPA itself. The complaint was based on MPA’s alleged failure to negotiate in good faith the terms of a new long term lease of Lot 90, and was brought pursuant to 42 U.S.C. § 1983 for an alleged denial of substantive due process and equal protection and unlawful taking. In addition to injunctive and declaratory relief, the complaint sought an award of damages and attorneys fees.
Count I alleged that MPA infringed the debtor’s property interests, including the Building, fixtures and improvements, contracts with customers, goodwill and the business as a “going concern,” that are subject to protection by the Fourteenth Amendment.6
Count II claimed that MPA intends to take Premier’s private property, namely the Lot 90 leasehold, together with the Building, fixtures and its business, for governmental use without just compensation.
Count III alleges a denial of equal protection by MPA having targeted the debt- or for discrimination out of a group of similarly situated tenants. Premier argued that MPA refused to negotiate a commereially-fair and reasonable lease with Premier while it offered a leasehold interest to The Pasha Group (“Pasha”), a competitor of Premier on more favorable terms.
Count IV alleged a violation of the State law requirement of “fair dealing.” On June 13, 2005, the defendants filed a motion to dismiss [P. 6], to which the debtor responded by filing an amended complaint [P.13], on June 22, 2005. The amended complaint substituted F. Brooks Royster, III, in his official capacity as Executive Director of MPA, in place of M. Kathleen Broadwater, and deleted Count IV (fair dealing). On October 28, 2005, the MPA filed its motion for relief from stay, to evict Premier from Lot 90.
■ Meanwhile, MPA, through M. Catherine Orleman, Esquire, as its “Principal Coun*507sel,” sent the following letter on letterhead of the Attorney General of the State of Maryland, dated October 3, 2005, to Charles S. Fax, Esquire, counsel to Premier:
As you know, I met with Jim Robinson,7 Janet West8 and Helen Bentley9 recently. During that meeting, Mr. Robinson expressed the opinion that the MPA was delaying approval of a proposed sublease from APS North Terminal, Inc. (“Amports”) to Premier Automotive Services, Inc. (“Premier”) for a portion of Lot 401 because of a dispute between Premier and MPA regarding Lot 90. I have investigated Mr. Robinson’s concerns and can inform Premier that Mr. Robinson is mistaken. While it is true that MPA has decided not to authorize the proposed sublease, MPA’s reasons stem from Premier’s financial condition rather than from the current dispute between MPA and Premier over Lot 90.
Premier filed for bankruptcy on April 29, 2005. It has not yet filed a plan of reorganization. In the bankruptcy action, Premier has alleged it must have a long-term lease at Lot 90 in order for its business to survive. However, Premier has no lease at Lot 90 and MPA has already made arrangements to lease Lot 90 to Pasha Automotive Services. Based on the information presented in the bankruptcy action, it is not clear to MPA that Premier will be able to reorganize and function as a viable port tenant.
MPA had discussions with Premier for approximately three years over a long-term lease at Lot 90. Premier refused to do more than stay there on a month-to-month basis. It is MPA’s understanding that Premier is not financially in a position to make a long-term commitment to MPA. The bankruptcy filing confirms MPA’s concerns that Premier is not a credit-worthy tenant.
Letter from Orleman to Fax, dated October 3, 2005.
On December 7, 2005, Premier filed a second amended complaint [P. 51], that restated the provisions of the amended complaint, but added a new Count IV, based upon 11 U.S.C. § 52510 which is intended to protect a Title 11 debtor from *508discrimination. Premier claims that that MPA has refused to consent to a proposed sublease between Amports as sublandlord and Premier as subtenant for Lot 401, because Premier is in bankruptcy.11
The defendants did not renew their motion to dismiss but filed a motion for summary judgment [P. 52] against the second amended complaint on December 27, 2005.
MPA asserts as a complete defense to the complaint the Eleventh Amendment bar that protects the State from being sued in Federal court without its consent.12
*509MPA takes the position that the debtor has no Fifth or Fourteenth Amendment claims to Lot 90 because any rights to property that the debtor enjoyed were subject to the terms of the written lease that has since expired. Therefore, any rights to which the debtor may be entitled are entirely contractual and must be litigated in the State court.
Premier claims that it is entitled to seek injunctive relief from the bankruptcy court to prevent a violation by the State of its rights under the Fifth and Fourteenth Amendments, arguing that the decision of the Supreme Court in Ex parte Young, 209 U.S. 123, 159-160, 28 S.Ct. 441, 453 52 L.Ed. 714, 728-729 (1908), entitles it to seek injunctive and declaratory relief against state officers in Federal bankruptcy court to enjoin the infringement of its constitutional rights. The complaint asserts that this Court has subject matter jurisdiction over the instant complaint pursuant to 28 U.S.C. § 157,13 1331,14 133415 *511and 1343,16 and that it has the power to grant declaratory relief pursuant to 28 U.S.C. §§ 105(a)17, 220118 and 2202.19
*512
CONCLUSIONS OF LAW
BANKRUPTCY JURISDICTION
“Bankruptcy jurisdiction, at its core, is in rem. ” Cent. Va. Cmty. Coll. v. Katz, 546 U.S. -, -, 126 S.Ct. 990, 995, 163 L.Ed.2d 945, 953 (2006), citing Gardner v. New Jersey, 329 U.S. 565, 574, 67 S.Ct. 467, 472, 91 L.Ed. 504, 515 (1947) (“The whole process of proof, allowance, and distribution is, shortly speaking, an adjudication of interests claimed in a res.)” See also Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230, 1235 (1934) (“Generally, proceedings in bankruptcy are in nature of proceedings in rem, and orders of discharge are equity decrees determining a status.”). “A bankruptcy court’s in rem jurisdiction permits it to ‘determin[e] all claims that anyone, whether named in the action or not, has to the property or thing in question.’ ” Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 448, 124 S.Ct. 1905, 1911, 158 L.Ed.2d 764, 775 (2004), quoting 16 J. Moore, et al., Moore’s Federal Practice § 108.70[1], p. 108-106 (3d ed.2004).
“Property of the estate” as set forth in Section 541(a) of the Bankruptcy Code is an all-encompassing description of the debtor’s interest in property over which the bankruptcy court has exclusive jurisdiction.20 As was stated in the case of In re Stoltz, 283 B.R. 842, 844 (Bankr.D.Md.2002):
Federal bankruptcy law sets the inclusive bounds of property of the bankruptcy estate, casting an all-encompassing net over assets of every kind and description in which a debtor enjoys any interest. 11 U.S.C. § 541(a). Non-bankruptcy state law governs the nature of the debtor’s interest in property. American Bankers Ins. Co. v. Maness, 101 F.3d 358, 362 (4th Cir.1996); Butner *513v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
Id.
LOT 90
In order for this Court to have subject matter jurisdiction over the complaint as it touches upon Lot 90, the debt- or’s interest in Lot 90 must be property of the estate.21 As will be recalled, the debt- or had only a month-to-month tenancy since before the petition date, because the terms of the expired lease so provided. However, the debtor’s right to occupy the premises as a tenant holding over is wholly dependent upon the expired lease. Section 541(b) of the Code provides that a lease that expired before the filing of the bankruptcy petition is not property of the estate.22
Premier’s tenancy of Lot 90 is terminable at the will of MPA as landlord. Chesapeake Bank of Maryland v. Monro Muffler/Brake, Inc., 166 Md.App. 695, 891 A.2d 384 (2006); Md. Real Property Code Sections 8-402 (the “tenant holding over” statute),23 which permits recovery upon a *515finding that the lease has expired, notice to quit has been given and that the tenant has refused to vacate, cited in Carter v. Maryland Management Co., 377 Md. 596, 597-8, 835 A.2d 158, 159 (2003); and Brown v. Housing Opportunities Comm., 350 Md. 570, 714 A.2d 197 (1998).
The bankruptcy court has no authority to resuscitate a lease of real property that expired by its own terms prepetition, not even pursuant to Section 105 of the Code. P & J Marketing, Inc. v. Old Chepachet Village, Inc., 142 B.R. 608 (Bankr.D.R.I.1992). In the case of In re Plaza de Diego Shopping Center, Inc., 911 F.2d 820 (1st Cir.1990), the First Circuit stated that “even as a court of equity ... the bankruptcy court’s equitable discretion is limited and cannot be used in a manner inconsistent with the commands of the Bankruptcy Code.” 911 F.2d at 830. Thus, Section 105 “does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law, or constitute a roving commission to do equity.” Wilner Wood Products Co. v. State of Maine, Dept. of Environmental Protection, 128 B.R. 1, 3 (D.Me. 1991) (citing United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir.1986)).
Similarly, the debtor has no cause of action against MPA pursuant to Section 542 of the Bankruptcy Code to recover non-estate property. Cf. U.S. v. Whiting Pools, Inc., 462 U.S. 198, 204-6, 103 S.Ct. 2309, 2313-14, 76 L.Ed.2d 515, 522, fn. 8 and fn. 10 (1983) (11 U.S.C. § 542 permits the recovery of property of the estate seized prepetition by a secured creditor, in that case, the Internal Revenue Service).24
*516LOT 401
As to the debtor’s claim of alleged discrimination based upon the refusal of MPA to approve Premier’s sublease of Lot 401, this Court has core jurisdiction pursuant to 28 U.S.C. 157(b)(2)(0), to entertain a suit brought pursuant to 11 U.S.C. § 525. In re Hopkins, 66 B.R. 828, 829 (Bankr.W.D.Ark.1986). The claim is a core proceeding because it arises under Title 11. Blue Diamond Coal Co. v. Angelucci (In re Blue Diamond Coal Co.), 145 B.R. 895, 906 (Bankr.E.D.Tenn.1992) (discussing Fourteenth Amendment due process claim and § 525 claim related to revoking certificate of self-insurance). “Core proceedings are those matters ‘integral to the core bankruptcy function of restructuring of debtor-creditor rights’ including ‘all necessary aspects of a bankruptcy case.’ ” Edgcomb Metals Co. v. Eastmet Corp., 89 B.R. 546, 548 (D.Md.1988). Allnutt v. Assoc. Leasing, Inc. (In re Allnutt), 220 B.R. 871, 884 (Bankr.D.Md.1998), aff'd, 238 F.3d 410 (4th Cir.2000), cert. denied, 534 U.S. 814, 122 S.Ct. 40, 151 L.Ed.2d 13 (2001). As a core bankruptcy proceeding, the Eleventh Amendment to the Constitution does not present a bar to this Court asserting subject matter jurisdiction over it. Cent. Va. Cmty. Coll. v. Katz, 546 U.S. at-, 126 S.Ct. at 1003-5, 163 L.Ed.2d at 962-4.
“Section 525(a) evolved from Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971), a seminal bankruptcy case in which the Supreme Court struck down a state statute that withheld driving privileges from debtors who failed to satisfy motor-vehicle-related tort judgments against them, even if the judgments were discharged under bankruptcy law.” In re Stoltz, 315 F.3d 80, 87 (2d Cir.2002). Congress codified the result in Perez when it enacted what is now Section 525(a) of the Bankruptcy Code, prohibiting governmental units from discriminating against debtors who have filed bankruptcy.
The debtor points to the October 3, 2005 letter from MPA counsel to Mr. Fax as undeniable proof that MPA has violated Section 525 by basing its refusal to assent to a sublease by Premier upon the latter’s status as a debtor in bankruptcy. However, even with this seemingly damning evidence, the debtor cannot prevail. Section 525 requires a showing that the prohibited conduct was based “solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, *517has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.” Emphasis supplied. 11 U.S.C. § 525(a). The letter itself makes clear that the filing of bankruptcy by the debtor was not the only reason the MPA denied approval of the sublease, although it may have been the dominant one. Also mentioned was the protracted refusal of the debtor to accept the terms of a long term lease of Lot 90 proposed by the State. The refusal was not based upon the failure of the debtor to pay a debt,
The MPA is a State agency created by the Maryland General Assembly and clothed with comprehensive powers to administer the ports and harbors in the state.25
*519The record is clear that in addition to the fact that the debtor has filed bankruptcy, the MPA has an interest in maintaining creditworthy tenants in possession of property at the Terminal. The State through MPA owns and has complete control over the Terminal and the many tenants who operate businesses there. In this regard, the instant case is similar to that of Christmas v. Md. Racing Comm’n (In re Christmas), 102 B.R. 447, 460-61 (Bankr.D.Md.1989), in which this Court upheld the revocation of a horse trainer’s license by the State Racing Commission, holding that horse racing was an industry strictly-regulated by state government for the benefit of the sport and the economic welfare of the State.
RELIEF FROM THE AUTOMATIC STAY
The Court has core jurisdiction to grant or deny relief from the automatic stay of 11 U.S.C. § 362,26 pursuant to 28 U.S.C. § 157(b)(2)(G) (motions to terminate, annul, or modify the automatic stay).
The MPA has moved for relief from stay based upon Section 362(d).27
*520Relief from the automatic stay is appropriately accorded to a lessor of property subject to a lease that expired prepetition because the debtor may only assume an executory lease in bankruptcy. Prudential Investments Co. v. Physique Forum Gym, Inc. (In re Physique Forum Gym, Inc.), 27 B.R. 691 (Bankr.D.Md.1982). An expired lease is therefore “beyond the pale” of Section 365.28 For purposes of the automatic stay, the debtor’s “slight” possessory interest in property is sufficient to trigger the protection of 11 U.S.C. § 362(a).29 Phoenix Assoc., Inc. v. *521Pagoda International, Inc. (In re Pagoda International, Inc.), 26 B.R. 18 (Bankr.D.Md.1982). To the extent that the debt- or’s month to month tenancy is considered an executory lease, it is a mere allusion because the debtor’s assumption of it will not provide permanent relief.
There is an additional ground to grant relief from the automatic stay in this case. The Court finds that Premier filed the instant Chapter 11 bankruptcy petition in bad faith. See Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir.1989), in which the Fourth Circuit held that both objective and subjective bad faith must be found in order to find that a bankruptcy petition was filed in bad faith. To find subjective bad faith, the facts must indicate that the true motivation of the debtor in filing for bankruptcy relief was “to abuse the reorganization process” and “to cause hardship or to delay creditors by resort to the Chapter 11 device merely for the purpose of invoking the automatic stay, without an intent or ability to reorganize his financial activities.” Carolin, 886 F.2d at 702, quoting In re Thirtieth Place, Inc., 30 B.R. 503, 505 (9th Cir. BAP 1983). The finding of objective bad faith requires the Court to determine that the debtor’s expectations of rehabilitation in the context of a bankruptcy case are objectively futile. Carolin, 886 F.2d at 701.
With respect to subjective bad faith, this Court finds that Premier filed the instant bankruptcy case for the sole purpose of halting and/or delaying its ultimate eviction from the Terminal by MPA. The debtor was not experiencing financial difficulties when it filed the petition. As indicated, it was solvent, according to the information it supplied in its schedules.
The debtor’s only nemesis is MPA, and its dispute did not relate to any claim by MPA against Premier. Cf. In re William Steiner, Inc., 139 B.R. 356 (Bankr.D.Md.1992) (Filing of Chapter 11 proceeding held to be per se in bad faith, where debt- or, who had no unsecured debts, other than state taxes, which it denied owing, had no demonstrable need to reorganize, had no legitimate reorganization purposes, had not exhausted remedies available under state law and was using the automatic stay to thwart collection of taxes by State.); and In re Fooks, 139 B.R. 623 (Bankr.D.Md.1992) (The filing of a bankruptcy proceeding for the sole purpose of thwarting Federal tax collection efforts, when other courts (including Federal tax courts) are available to resolve disputes *522between taxpayers and taxing authorities, held, in bad faith, where Chapter 13 debtors had no demonstrable need to reorganize, no legitimate reorganization purpose and had not exhausted their administrative remedies.)
The relief sought by Premier in the filing of the complaint was wholly illusory, because its was not the failure of the State to negotiate in good faith that created the impasse between the parties, but the inability of the parties to come to terms on a new lease. While the complaint is couched in terms of constitutional deprivations, the taking of the Building and other deprivations of property were the products of the agreement of Premier when it entered into the original lease. The lease does not require MPA to compensate Premier for the Building upon termination of the lease.
Premier must have known that any rights it may have had with respect to the Terminal property were dependent upon the lease and, being based upon the State law of contract and State-owned real property, would have to be adjudicated through the administrative processes of the State Courts.
This Court may neither compel MPA to enter into a long term lease with Premier as to Lot 90, nor compel MPA to agree to Premier’s sublease of Lot 401.
The land in question is State-owned land, under the control and authority of the MPA, which is a unit of the Maryland State Government, over which the State has plenary authority to regulate commerce and the operation of businesses. This Court would not presume to tell the State of Maryland how to operate the Dun-dalk Marine Terminal. It does not have the authority to tell the State with which tenants to negotiate or those tenants with whom to execute leases. This Court has no authority to tell the State that it may or may not enter into a new lease with a competitor of the debtor. It has no authority to dictate to the State those terms that it must incorporate in any lease because the State has the complete regulatory power to control the operation of the Port of Baltimore. The filing of the petition and the instant complaint were means to the end of tying up the State in endless, fruitless litigation.
As to subjective bad faith, the Court finds that there is no possible mechanism in bankruptcy by which the debtor can achieve a legitimate reorganization. It has thus so far, after more than a year, failed to file a plan, and indeed, it acknowledges that no plan can be filed, let alone confirmed, without the favorable resolution of the litigation against MPA.
A finding of bad faith in the filing of a bankruptcy petition is sufficient cause to grant relief from stay against an offending debtor. In re Shady Grove Tech Ctr. Assoc. Ltd. P’ship., 216 B.R. 386, 388 (Bankr.D.Md.1998) (“circumstances which form cause for relief from stay may include a bad faith filing of the case.”), supplemented by Mass. Mut. Life Ins. Co., v. Shady Grove Tech Ctr. Assoc. Ltd. P’ship. (In re Shady Grove Tech Ctr. Assoc. Ltd. P’ship), 227 B.R. 422 (Bankr.D.Md.1998).
SUMMARY JUDGMENT
Summary judgment is appropriate when: (1) the pleadings, depositions, answers to interrogatories, admissions on file and affidavits show that there is no genuine issue of material fact; and (2) the moving party is entitled to judgment as a matter of law. In determining the facts for summary judgment purposes, the court *523may rely on affidavits made with personal knowledge that set forth specific facts otherwise admissible in evidence and sworn or certified copies of papers attached to such affidavits. Fed.R.Civ.P. 56(c); Fed. R. Bankr.P. 7056; Bailey v. Blue Cross & Blue Shield of Virginia, 67 F.3d 53, 56 (4th Cir.1995); Miller v. FDIC, 906 F.2d 972, 973 (4th Cir.1990). As further delineated in a recent decision of the U.S. District Court for the District of Maryland (Bennett, D.J.):
In Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986), the Supreme Court explained that only “facts that might affect the outcome of the suit under the governing law” are material. Anderson, 477 U.S. at 248, 106 S.Ct. 2505, 91 L.Ed.2d 202. In that context, a court must consider the facts and all reasonable inferences in the light most favorable to the nonmov-ing party. Matsushita Elec. Indus. Co. v. Zenith Radio Gorp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). However, “[w]hen the moving party has met its responsibility of identifying the basis for its motion, the nonmoving party must come forward with ‘specific facts showing that there is a genuine issue for trial.’ ” White v. Rockingham Radiologists, Ltd., 820 F.2d 98, 101 (4th Cir. 1987) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Fed.R.Civ.P. 56(e)).
French v. Peninsula Bank, 338 B.R. 668, 673 (D.Md.2006).
For the reasons stated, the defendants’ motion for summary judgment will be GRANTED, the complaint will be DISMISSED, and the motion for relief from stayed filed by MPA will be GRANTED.
ORDER ACCORDINGLY.
TITLE 6. PORTS
SUBTITLE 1 — DEFINITIONS; GENERAL PROVISIONS
§ 6-102. Legislative purpose
Amendment XIV
§ 525. Protection against discriminatory treatment
Amendment XI. Suits Against States
§ 157. Procedures
§ 1331. Federal question
§ 1334. Bankruptcy cases and proceedings
§ 1343. Civil rights and elective franchise
§ 105. Power of court
DECLARATORY JUDGMENTS.
§ 2201. Creation of remedy
§ 2202. Further relief
§ 6-204. General authority of Administration
Section 362. Automatic stay
§ 365. Executory contracts and unexpired leases
§ 362. Automatic stay
. When it was first created by Laws 1956, Special Session, ch. 2, s 1, the MPA was known as the Maryland Port Authority. Its name was changed to Maryland Port Administration by Laws 1970, ch. 526, s 1, at which time it became a part of the Department of Transportation, Md.Transp.Code Ann. s 6-201. Maryland Port Administration v. I.T.O. Corp. of Baltimore, 40 Md.App. 697, 699, 395 A.2d 145, 146, fn. 3 (1978).
. The State's comprehensive scope of its interest in and control over the operation of its ports is set forth in Maryland Transportation Code § 6-102:
TITLE 6. PORTS
SUBTITLE 1 — DEFINITIONS; GENERAL PROVISIONS
§ 6-102. Legislative purpose
(a) The General Assembly of Maryland makes the following declarations of its intent in the enactment of this title.
(b) The ports and harbors of this State are assets of value to the entire State. The residents of all parts of this State benefit directly from the waterborne commerce that they attract and service. Any improvement to these ports and harbors that increases their export and import commerce will benefit the people of the entire State.
(c)(1) The purpose of this title is to increase the waterborne commerce of the ports in this State and, by doing so, benefit the people of this State.
(2) Commerce may be attracted to these areas by:
(1) Developing existing facilities to provide quicker, cheaper, and better handling of cargoes; and
(ii) Effectively advertising and promoting the facilities and the use of the several port areas.
(d)(1) Since existing port and terminal facilities of Baltimore and other port areas have been provided mostly by private enterprise, the General Assembly seeks primarily to improve the facilities and strengthen the workings of the private operators.
(2) However, the private operators in the port areas have a public responsibility to provide modern port and harbor facilities suited to the needs of the public that they serve. Therefore, the Administration should have power to obtain information about the rates and practices of private operators, and, while it should assist and encourage the extension and improvement of privately operated port facilities, it also should have the power, if private facilities are inadequate or inadequately operated at any time, to construct and, if necessary, to operate any supplementary public facilities that it considers to be required in the public interest.
(e) The development of ports able to attract increasing amounts of waterborne commerce will require the construction of additional modern facilities and installations. A public port authority, using public *505funds, will be able to construct and, if necessary, operate these facilities and installations if the immediate financial returns are not sufficient to attract private capital.
(f) In order to meet increased competition from other states' ports that are operated with public funds either directly as state agencies or indirectly as private operating companies, the Administration should have the authority, subject to approval of the Commission, to operate public port facilities either directly or indirectly in the form and manner that the Commission deems necessary.
Id.
. Article 4.2 of the lease provided, as follows:
Any and all buildings ... erected or caused to be erected by PREMIER upon the leased premises at PREMIER' s expense shall be owned by PREMIER and must be removed by it at its expense upon the termination of this LEASE or any renewal thereof; or, in the event that PREMIER request, in writing, MPA’s permission to leave any and all buildings ... erect and intact and MPA specifically notifies PREMIER in writing that MPA specifically allows and agrees that the buildings ... erected by PREMIER may remain in place.... In the event that MPA does allow and agree that the buildings ... erected by PREMIER are to remain intact after the termination date of this LEASE or any renewal thereof, PREMIER agrees that ownership of all of the aforementioned buildings ... shall pass to and be made the property of MPA ...
Id.
. Premier’s summary of schedules discloses assets of $105,511.29, and liabilities of $14,091.40.
. On July 29, 2005, this Court granted the debtor’s unopposed motion to extend time to assume or reject unexpired leases of nonresidential real property [P. 35] until 60 days after the entry of a final order in the instant adversary proceeding.
. The Fourteenth Amendment to the U.S. Constitution provides, as its pertains to the debtor's claims, as follows:
Amendment XIV
Section 1. All persons bom or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws....
Id.
. James G. Robinson, Director of Premier, who signed the corporate resolution that accompanied the voluntary Chapter 11 petition.
. Janet M. West, the corporate secretary of Premier, signed all three complaints.
. Helen Delich Bentley is a former Member of Congress from Maryland and Chairman of the Federal Maritime Commission. Governor Robert Ehrlich recently announced that the port will be renamed the "Helen Delich Bentley Port of Baltimore,” at ceremonies marking the port’s 300th anniversary.
. Section 525 of the Bankruptcy Code provides, as follows:
§ 525. Protection against discriminatory treatment
(a) Except as provided in the Perishable Agricultural Commodities Act, 1930, the Packers and Stockyards Act, 1921, and section 1 of the Act entitled "An Act making appropriations for the Department of Agriculture for the fiscal year ending June 30, 1944, and for other purposes,” approved July 12, 1943, a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not *508paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.
(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt—
(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;
(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or
(3) has not paid a debt that is dischargea-ble in a case under this title or that was discharged under the Bankruptcy Act.
(c)(1) A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a student grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, or another person with whom the debtor or bankrupt has been associated, because the debtor or bankrupt is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of a case under this title or during the pendency of the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.
(2) In this section, "student loan program" means any program operated under title IV of the Higher Education Act of 1965 or a similar program operated under State or local law.
11 U.S.C. § 525.
. This claim not set forth in the original complaint. In the second amended complaint, Premier added Count IV alleging a violation of 11 U.S.C. § 525 and 42 U.S.C. § 1983 stemming from MPA's denial of consent to a proposed renewed sublease for Lot 401 agreed to by Premier and Amports, the sublandlord, on March 31, 2005. Premier argues that consent is withheld solely because it filed the instant bankruptcy case.
. The Eleventh Amendment to the U.S. Constitution provides, as follows:
Amendment XI. Suits Against States
The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.
Id. In Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842, 849 (1890), the Supreme Court extended the prohibition of the Eleventh Amendment to suits brought against a State in Federal court by that State's own citizens. The court pointedly added, however:
... [Although the obligations of a state rest for their performance upon its honor and good faith, and cannot be made the subjects of judicial cognizance unless the state consents to be sued or comes itself into court, yet, where property or rights are enjoyed under a grant or contract made by a state, they cannot wantonly be invaded. While the state cannot be compelled by suit to perform its contracts, any attempt on its part to violate property or rights acquired under its contracts may be judicially resisted, and any law impairing the obligation of contracts under which such property or rights are held is void and powerless to affect their enjoyment. It is not necessary that we should enter upon an examination of the reason or expediency of the rule which exempts a sovereign state from prosecution in a court of justice at the suit of *509individuals. This is fully discussed by writers on public law. It is enough for us to declare its existence. The legislative department of a state represents its polity and its will, and is called upon by the highest demands of natural and political law to preserve justice and judgment, and to hold inviolate the public obligations. Any departure from this rule, except for reasons most cogent, (of which the legislature, and not the courts, is the judge,) never fails in the end to incur the odium of the world, and to bring lasting injury upon the state itself. But to deprive the legislature of the power of judging what the honor and safety of the state may require, even at the expense of a temporary failure to discharge the public debts, would be attended with greater evils than such failure can cause.
Hans v. Louisiana, 134 U.S. at 20-1, 10 S.Ct. at 509, quoted In Westel Woodbury Willoughby, 3 Constitutional Law of the United States 1391 (1929).
. Section 157 of Title 28 provides, as follows:
§ 157. Procedures
(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.
(b)(1) 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.
(2) Core proceedings include, but are not limited to—
(A) matters concerning the administration of the estate;
(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter II, 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;
(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 *510personal injury tort or wrongful death claims; and
(P) recognition of foreign proceedings and other matters under chapter 15 of title 11.
(3) The bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11. A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law.
(4) Non-core proceedings under section 157(b)(2)(B) of title 28, United States Code, shall not be subject to the mandatory abstention provisions of section 1334(c)(2).
(5) The district court shall order that personal injury tort and wrongful death claims shall be tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose, as determined by the district court in which the bankruptcy case is pending.
(c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
(2) Notwithstanding the provisions of paragraph (1) of this subsection, the district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments, subject to review under section 158 of this title.
(d) The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.
(e)If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially designated to exercise such jurisdiction by the district court and with the express consent of all the parties.
28 U.S.C. § 157.
. Section 1331 of Title 28 provides:
§ 1331. Federal question
The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.
28 U.S.C. § 1331.
. Section 1334 of Title 28 provides:
(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.
(b) Except as provided in subsection (e)(2), and notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.
(c)(1) Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
(2) Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
(d) Any decision to abstain or not to abstain made under subsection (c) (other than a decision not to abstain in a proceeding described in subsection (c)(2)) is not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of this title or by the Supreme Court of the United States under section 1254 of this title. Subsection (c) and this *511subsection shall not be construed to limit the applicability of the stay provided for by section 362 of title 11, United States Code, as such section applies to an action affecting the property of the estate in bankruptcy.
(e) The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction—
(1) of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate; and
(2) over all claims or causes of action that involve construction of section 327 of title 11, United States Code, or rules relating to disclosure requirements under section 327.
28 U.S.C. § 1334.
.Section 1343 of Title 28 provides:
§ 1343. Civil rights and elective franchise
(a) The district courts shall have original jurisdiction of any civil action authorized by law to be commenced by any person:
(1) To recover damages for injury to his person or property, or because of the deprivation of any right or privilege of a citizen of the United States, by any act done in furtherance of any conspiracy mentioned in section 1985 of Title 42;
(2) To recover damages from any person who fails to prevent or to aid in preventing any wrongs mentioned in section 1985 of Title 42 which he had knowledge were about to occur and power to prevent;
(3) To redress the deprivation, under color of any State law, statute, ordinance, regulation, custom or usage, of any right, privilege or immunity secured by the Constitution of the United States or by any Act of Congress providing for equal rights of citizens or of all persons within the jurisdiction of the United States;
(4) To recover damages or to secure equitable or other relief under any Act of Congress providing for the protection of civil rights, including the right to vote.
(b) For purposes of this section—
(1) the District of Columbia shall be considered to be a State; and
(2) any Act of Congress applicable exclusively to the District of Columbia shall be considered to be a statute of the District of Columbia.
28 U.S.C.A. § 1343.
. Undoubtedly, the debtor meant to refer to 11 U.S.C. § 105(a), the so-called "All Writs Act," which provides, as follows:
§ 105. Power of court
(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
Id.
. Section 2201 of Title 28 provides:
DECLARATORY JUDGMENTS. § 2201. Creation of remedy
(a) In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986, a proceeding under section 505 or 1146 of title 11, or in any civil action involving an antidumping or countervailing duty proceeding regarding a class or kind of merchandise of a free trade area country (as defined in section 516A(f)(10) of the Tariff Act of 1930), as determined by the administering authority, any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.
(b) For limitations on actions brought with respect to drug patents see section 505 or 512 of the Federal Food, Drug, and Cosmetic Act.
28 U.S.C. § 2201.
. Section 2202 of Title 28 provides:
§ 2202. Further relief
Further necessary or proper relief based on a declaratory judgment or decree may be granted, after reasonable notice and hearing, against any adverse party whose rights have been determined by such judgment.
*51228 U.S.C. § 2202.
. Section 541(a) provides as follows:
(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
(2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—
(A) under the sole, equal, or joint management and control of the debtor; or
(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor's spouse, to the extent that such interest is so liable.
(3) Any interest in property that the trustee recovers under section 329(b), 363(n), 543, 550, 553, or 723 of this title.
(4) Any interest in property preserved for the benefit of or ordered transferred to the estate under section 510(c) or 551 of this title.
(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement agreement with the debtor's spouse, or of an interlocutory or final divorce decree; or
(C) as a beneficiary of a life insurance policy or of a death benefit plan.
(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.
(7) Any interest in property that the estate acquires after the commencement of the case.
11 U.S.C. § 541(a).
. Assuming that the debtor seeks to recover property of the estate from MPA, this Court would have core jurisdiction over the complaint pursuant to 28 U.S.C. § 157(b)(2)(E) to issue "orders to turn over property of the estate." Id.
. Section 541(b)(2) provides as follows:
(b)(2) any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before the commencement of the case under this title, and ceases to include any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease during the case[.]
11 U.S.C. § 541(b)(2).
. § 8-402. Tenant holding over; liability
(a)(1) A tenant under any periodic tenancy, or at the expiration of a lease, and someone holding under the tenant, who shall unlawfully hold over beyond the expiration of the lease or termination of the tenancy, shall be liable to the landlord for the actual damages caused by the holding over.
(2) The damages awarded to a landlord against the tenant or someone holding under the tenant, may not be less than the apportioned rent for the period of holdover at the rate under the lease.
(3)(i) Any action to recover damages under this section may be brought by suit separate from the eviction or removal proceeding or in the same action and in any court having jurisdiction over the amount in issue.
(ii) The court may also give judgment in favor of the landlord for the damages determined to be due together with costs of the suit if the court finds that the residential tenant was personally served with a summons, or, in the case of a nonresidential tenancy, there was such service of process or submission to the jurisdiction of the court as would support a judgment in contract or tort.
(iii) A nonresidential tenant who was not personally served with a summons shall not be subject to personal jurisdiction of the court if that tenant asserts that the appearance is for the purpose of defending an in rem action prior to the time that evidence is taken by the court.
(4)Nothing contained herein is intended to limit any other remedies which a landlord may have against a holdover tenant under the lease or under applicable law.
(b)(1)(f) Where any tenancy is for any definite term or at will, and the landlord shall desire to repossess the property after the expiration of the term for which it was leased and shall give notice in writing one month before the expiration of the term or determination of the will to the tenant or to the person actually in possession of the property to remove from the property at the end of the term, and if the tenant or person in actual possession shall refuse to comply, the landlord may make complaint in writing to the District Court of the county where the property is located.
(ii) 1. The court shall issue a summons directed to any constable or sheriff of the county entitled to serve process, ordering the constable or sheriff to notify the tenant, *514assignee, or subtenant to appear on a day stated in the summons before the court to show cause why restitution should not be made to the landlord.
2. The constable or sheriff shall serve the summons on the tenant, assignee, or subtenant on the property, or on the known or authorized agent of the tenant, assignee, or subtenant.
3. If, for any reason those persons cannot be found, the constable or sheriff shall affix an attested copy of the summons conspicuously on the property.
4. After notice to the tenant, assignee, or subtenant by first-class mail, the affixing of the summons on the property shall be conclusively presumed to be a sufficient service to support restitution.
(iii)Upon the failure of either of the parties to appear before the court on the day stated in the summons, the court may continue the case to a day not less than six nor more than ten days after the day first stated and notify the parties of the continuance.
(2)(i) If upon hearing the parties, or in case the tenant or person in possession shall neglect to appear after the summons and continuance the court shall find that the landlord had been in possession of the leased property, that the said tenancy is fully ended and expired, that due notice to quit as aforesaid had been given to the tenant or person in possession and that the tenant or person in possession had refused so to do, the court shall thereupon give judgment for the restitution of the possession of said premises and shall forthwith issue its warrant to the sheriff or a constable in the respective counties commanding the tenant or person in possession forthwith to deliver to the landlord possession thereof in as full and ample manner as the landlord was possessed of the same at the time when the tenancy was made, and shall give judgment for costs against the tenant or person in possession so holding over.
(ii) Either party shall have the right to appeal therefrom to the circuit court for the county within ten days from the judgment.
(iii) If the tenant appeals and files with the District Court an affidavit that the appeal is not taken for delay, and also a good and sufficient bond with one or more securities conditioned that the tenant will prosecute the appeal with effect and well and truly pay all rent in arrears and all costs in the case before the District Court and in the appellate court and all loss or damage which the landlord may suffer by reason of the tenant’s holding over, including the value of the premises during the time the tenant shall so hold over, then the tenant or person in possession of said premises may retain possession thereof until the determination of said appeal.
(iv) The appellate court shall, upon application of either party, set a day for the hearing of the appeal, not less than five nor more than 15 days after the application, and notice for the order for a hearing shall be served on the opposite party or that party's counsel at least 5 days before the hearing.
(v) If the judgment of the District Court shall be in favor of the landlord, a warrant shall be issued by the appellate court to the sheriff, who shall proceed forthwith to execute the warrant.
(3)(i) The provisions of this subsection shall apply to all cases of tenancies at the expiration of a stated term, tenancies from year to year, tenancies of the month and by the week. In case of tenancies from year to year (including tobacco farm tenancies), notice in writing shall be given three months before the expiration of the current year of the tenancy, except that in case of all other farm tenancies, the notice shall be given six months before the expiration of the current year of the tenancy; and in monthly or weekly tenancies, a notice in writing of one month or one week, as the case may be, shall be so given.
(ii) This paragraph (3), so far as it relates to notices, does not apply in Baltimore City.
(iii) In Montgomery County, except in the case of single family dwellings, the notice by the landlord shall be two months in the case of residential tenancies with a term of at least month to month but less than from year to year.
(4) When the tenant shall give notice by parol to the landlord or to the landlord's agent or representatives, at least one month before the expiration of the lease or tenancy in all cases except in cases of tenancies from year to year, and at least three months' notice in all cases of tenancy from year to year (except in all cases of farm tenancy, the notice shall be six months), of the intention of the tenant to remove at the end of that year and to surrender possession of the property at that time, and the landlord, the landlord's agent, or representative shall prove the notice from the tenant by competent testimony, it shall not be nec*515essary for the landlord, the landlord's agent or representative to provide a written notice to the tenant, but the proof of such notice from the tenant as aforesaid shall entitle the landlord to recover possession of the property hereunder. This paragraph shall not apply in Baltimore City.
(5) Acceptance of any payment after notice but before eviction shall not operate as a waiver of any notice to quit, notice of intent to vacate or any judgment for possession unless the parties specifically otherwise agree in writing. Any payment accepted shall be first applied to the rent or the equivalent of rent apportioned to the date that the landlord actually recovers possession of the premises, then to court costs, including court awarded damages and legal fees and then to any loss of rent caused by the holdover. Any payment which is accepted in excess of the foregoing shall not bear interest but will be returned to the tenant in the same manner as security deposits as defined under § 8-203 of this title but shall not be subject to the penalties of that section.
(c) Unless stated otherwise in the written lease and initialed by the tenant, when a landlord consents to a holdover tenant remaining on the premises, the holdover tenant becomes a periodic week-to-week tenant if the tenant was a week-to-week tenant before the tenant's holding over, and a periodic month-to-month tenant in all other cases.
Id.
. FN8. Section 541(a)(1) speaks in terms of the debtor's "interests ... in property,” rather than property in which the debtor has an interest, but this choice of language was not meant to limit the expansive scope of the section. The legislative history indicates that Congress intended to exclude from the estate property of others in which the debtor had some minor interest such as a lien or bare legal title. See 124 Cong. Rec. 32399, 32417 (1978) (remarks of Rep. Edwards); id., at 33999, 34016-34017 (remarks of Sen. DeCon-cini); cf. § 541(d) (property in which debtor holds legal but not equitable title, such as a mortgage in which debtor retained legal title to service or to supervise servicing of mortgage, becomes part of estate only to extent of legal title); 124 Cong. Rec. 33999 (1978) (remarks of Sen. DeConcini) (§ 541(d) "reiterates the general principle that where the debtor holds bare legal title without any equitable interest, ... the estate acquires bare legal title without any equitable interest in the property”). Similar statements to the effect that § 541(a)(1) does not expand the rights of *516the debtor in the hands of the estate were made in the context of describing the principle that the estate succeeds to no more or greater causes of action against third parties than those held by the debtor. See H.R.Rep. No. 95-595, pp. 367-368 (1977), U.S.Code Cong & Admin.News 1978, pp. 5963, 6322-24. These statements do not limit the ability of a trustee to regain possession of property in which the debtor had equitable as well as legal title.
FN10. See, e.g., §§ 543, 547, and 548. These sections permit the trustee to demand the turnover of property that is in the possession of others if that possession is due to a custodial arrangement, § 543, to a preferential transfer, § 547, or to a fraudulent transfer, § 548. 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. See § 541(b); H.R.Rep. No. 95-595, p. 368 (1977); S.Rep. No. 95-989, p. 82 (1978), U.S.Code Cong & Admin.News 1978, pp. 5963, 6323-24, 5787, 5868. Although it may well be that funds that the IRS can demonstrate were withheld for its benefit pursuant to 26 U.S.C. § 7501 (employee withholding taxes), are excludable from the estate, see 124 Cong. Rec. 32417 (1978) (remarks of Rep. Edwards) (Service may exclude funds it can trace), the IRS did not attempt to trace the withheld taxes in this case. See Tr. of Oral Arg. 18, 28-29.
Id.
. Section 6-204 of the Maryland Transportation Code sets forth the powers and authority of the MPA:
§ 6-204. General authority of Administration
(a) In addition to the specific powers granted under this title, and subject to the supervision of the Commission, the Administration has the powers granted by this section.
(b) The Administration may sue and be sued in its own name.
(c) The Administration may propose for adoption by the Commission regulations to carry out the provisions of this title.
(d) Either directly or by expert consultants, the Administration may make any investigations and surveys, including:
(1) Studies of business conditions, freight rates, and port services;
(2) Physical surveys of the conditions of channels and structures;
(3) Studies of the need for additional port facilities to develop, improve, and more speedily handle commerce; and
(4) Any other study, survey, or estimate necessary for the exercise of its powers under this title.
(e) The Administration may apply for and receive grants from any federal agency for the planning, construction, operation, or financing of any port facility and may receive aid or contributions of money, property, labor, or other things of value from any source, to be held, used, and applied for the purposes for which the grants, aid, and contributions are made.
(f) The Administration may do anything necessary to promote and increase commerce within its territorial jurisdiction, including:
(1) Purchasing advertising;
(2) Engaging in public relations programs;
(3) Publishing literature;
(4) Soliciting business by correspondence and traveling representatives; and
(5) Cooperating with civic, technical, professional, and business organizations and associations.
(g) To increase the commerce of ports in this State, the Administration may establish and maintain a traffic bureau or other office to investigate and seek improvement in rates, rate structures, practices, and charges affecting these ports.
(h)(1) Except as provided in paragraph (2) of this subsection, the Administration may apply for the establishment, maintenance, and operation of foreign trade zones within its territorial jurisdiction and may operate and maintain these zones under the laws or regulations of the United States for the establishment, operation, and maintenance of foreign trade zones in ports of entry of the United States.
(2) The Administration may not apply for the establishment, operation, and maintenance of a foreign trade zone unless it has the specific approval of the Board of Public Works. Approval of the Board of Public Works shall be based on information and advice, as received from the Department of Natural Resources, the Department of Business and Economic Development, other interested agencies of this State, and the county government of each involved county, on the potential effects of the foreign trade zone on the water resources, fisheries, and economic life of this State.
(i) The Administration may acquire, construct, reconstruct, rehabilitate, improve, maintain, lease as lessor or as lessee, repair, and operate either directly or through State created private operating companies port facilities within its territorial jurisdiction, including the dredging of ship chan-*518neis and turning basins and the filling and grading of land.
(j) The Administration may designate the location and character of all port facilities and improvements that the Administration holds, owns, or over which it is authorized to act, and it may regulate all matters related to the location and character of these facilities and improvements.
(k)(l) In the exercise of its powers and the performance of its duties under this title, the Administration may acquire and hold in its own name and may lease, convey, or otherwise dispose of any property, including:
(1) Lands lying under water;
(ii) Riparian rights in and adjacent to lands; and
(iii) Property devoted to a public use in or near the navigable waters within the territorial jurisdiction of the Administration.
(2) The acquisition by or on behalf of the Administration of personal property to be used outside of this State is not subject to Title 4, Subtitle 3 of the State Finance and Procurement Article requiring purchases through the Department of General Services.
(!) The Administration may fix, revise, charge, and collect rates, fees, rentals, or other charges for the use of any project under its control.
(m) The Administration may appear in its own behalf before any board, commission, department, or agency of the federal government, of any state, or of any international conference and before any committee of the Congress of the United States or the General Assembly of Maryland, or any appropriate nongovernmental body, in any matter:
(l) That relates to the design, establishment, construction, extension, operation, improvement, repair, or maintenance of a project operated and maintained by the Administration under this title;
(2) That relates to rail rates, water rates, port services and charges, demurrage, switching, wharfage, towage, pilotage, differentials, discriminations, labor relations, trade practices, river and harbor improvements, aids to navigation, or permits for structures in navigable waters; or
(3) That affects the physical development or business interest of the Administration and those it serves.
(n)(l) The Administration may employ consulting engineers, accountants, attorneys, construction and financial experts, superintendents, traveling representatives, managers, clerks, stenographers, and laborers, and any other agents and employees that it considers necessaiy to carry out the provisions of this subtitle.
(2) This subsection does not affect the duties of the Attorney General specified in § 2-106 of this article.
(o) The Administration may do anything else necessary or convenient to carry out the powers granted in this title.
(p) The exercise of the powers under this title is an essential governmental function of the State.
(q)(l) The Administration, with the approval of the Commission, may create private operating companies for the purpose of operating public port facilities.
(2)(i) The Commission may appoint up to a total of 12 management personnel employees to perform services for all private operating companies created under this subsection.
(ii) Notwithstanding any other provision of law, the Commission may determine the qualifications and appointment, as well as compensation and leave, for employees appointed under this subsection.
(iii) At least 10 days before the effective date of the change, the Commission shall submit to the Secretary of Budget and Management each change to the salaries of these employees that involves increases in salary ranges other than those associated with general salary increases approved by the General Assembly.
(iv) The Secretary of Budget and Management shall:
1. Review the proposed changes; and
2. Within 10 days of receipt of the proposed changes, advise the Commission whether the changes would have an adverse effect on special fund expenditures.
(v) Failure of the Secretary of Budget and Management to respond in a timely manner is deemed to be a statement that the change will have no adverse effect.
(vi) Employees appointed under this subsection are State employees and shall be entitled to participate in the retirement and pension systems for employees of the State of Maryland authorized under Division II of the State Personnel and Pensions Article.
(vii) On or before December 1 of each year, the Commission shall report to the Governor and the Legislative Policy Committee of the General Assembly on actions *519taken by the Commission under this subsection during the previous fiscal year with regard to individuals subject to this subsection.
(3) The budget submitted by the Governor to the General Assembly shall include personnel detail for the private operating companies in the form and manner provided for an agency in the State Personnel Management System.
(4) Other than employees appointed by the Commission under paragraph (2) of this subsection, employees of a private operating company created under this subsection are not State employees.
Id.
. 11 U.S.C. § 362(a) provides, as follows:
Section 362. Automatic stay
(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 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 debt- or 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 properly 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 a corporate debtor's tax liability for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.
11 U.S.C. § 362.
. Section 362(d) provides as follows:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if—
*520(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization;
(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later—
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that—
(i) may, in the debtor’s sole discretion, notwithstanding section 363(c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor's interest in the real estate; or
(4) with respect to a stay of an act against real property under subsection (a), by a creditor whose claim is secured by an interest in such real property, if the court finds that the filing of the petition was part of a scheme to delay, hinder, and defraud creditors that involved either—
(A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting such real property.
If recorded in compliance with applicable State laws governing notices of interests or liens in real property, an order entered under paragraph (4) shall be binding in any other case under this title purporting to affect such real property filed not later than 2 years after the date of the entry of such order by the court, except that a debtor in a subsequent case under this title may move for relief from such order based upon changed circumstances or for good cause shown, after notice and a hearing. Any Federal, State, or local governmental unit that accepts notices of interests or liens in real property shall accept any certified copy of an order described in this subsection for indexing and recording.
11 U.S.C. § 362(d).
. Section 365(a) of the Bankruptcy Code provides as follows:
§ 365. Executory contracts and unexpired leases
(a) Except as provided in sections 765 and 766 of this title and in subsections (b), (c), and (d) of this section, the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor.
11 U.S.C. § 365.
. Section 362(a) provides:
§ 362. Automatic stay
(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 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 debt- or 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 judg*521ment 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 a corporate debtor’s tax liability for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.
11 U.S.C. § 362. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493931/ | MEMORANDUM DECISION
WILLIAM F. STONE, JR., Bankruptcy Judge.
The matter before the Court is the affirmative defense raised by each Defendant in his Motion to Dismiss that the statute of limitations set forth in 11 U.S.C. § 546(a) expired before the adversary proceeding was filed. A hearing was held on the Motion to Dismiss on February 1, 2006. At that time, the Court took the matter under advisement and requested written argument from counsel. Both parties have since submitted written arguments to the Court. The matter is now ready for decision. For the reasons noted below, the Court concludes that the Complaint in each adversary proceeding was timely filed and will deny the Defendant’s affirmative defense.
FINDINGS OF FACT
An involuntary bankruptcy petition was filed for General Creations, Inc., (the “Debtor”) on April 28, 2003. The order directing that the case be administered under Chapter 7 and the order for relief were entered on July 22, 2003. William E. Callahan, Jr. (the “Trustee”) was appointed interim trustee. At the section 341 meeting held on September 21, 2003, Mr. Callahan became the permanent trustee pursuant to 11 U.S.C. § 702(d). On July *55022, 2005, Counsel for the Trustee filed a Complaint commencing each of the adversary proceedings alleging avoidance actions pursuant to 11 U.S.C. §§ 547, 548, and 550. Subsequently, Counsel for the Defendants filed a Motion to Dismiss raising the affirmative defense that the statute of limitations set forth in 11 U.S.C. § 546(a) expired before the adversary proceedings were filed.
The Defendants argue that the Court should dismiss the adversary proceedings because, they assert, counsel for the Trustee filed the Complaint one day after the two-year statute of limitations set forth in 11 U.S.C. § 546(a)(1)(A) expired. Counsel for the Defendants argues that two years means 730 days. Because 2004 was a leap year, it contained 366 days. Consequently, the Defendants conclude that the Complaint was filed in each adversary proceeding 731 days after the July 22, 2003 order for relief and missed the statute of limitations by one day.
Counsel for the Trustee asserts that each Complaint was timely filed under 11 U.S.C. § 546(a)(1)(A) because it was filed on the day before the statute of limitations expired. The Trustee argues that the language of § 546(a) is unambiguous and plainly provides that the Complaint be filed no later than two years after entry of the order for relief, not 730 days. Reasoning that a year is twelve months, which can consist of 365 or 366 days, the Trustee’s counsel determines that the statute of limitations did not begin to run until July 23, 2003 and did not expire until 11:59 p.m. on July 22, 2005.
CONCLUSIONS OF LAW
This Court has jurisdiction of this proceeding by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the delegation made to this Court by Order from the District Court on July 24, 1984. Recovery of alleged preferential pre-bank-ruptcy transfers made by a bankruptcy debtor is a “core” bankruptcy matter pursuant to 28 U.S.C. 157(b)(2)(F).
The parties agree that the applicable statutory provision is 11 U.S.C. § 546(a)(1)(A). Section 546(a) provides that an action under section 547 or 548 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 such election occurs before the expiration of the period specified in subparagraph (A); or
(2) the time the case is closed or dismissed.
For each of the Complaints to have been timely filed, each must have been filed no later than two years after July 22, 2003, the date of entry of the order for relief. Rule 9006(a) of the Federal Rules of Bankruptcy Procedure governs the computation of time when a period of time to take action is prescribed by an applicable statute, such as 11 U.S.C. § 546.
[T]he day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is a Saturday, Sunday, or a legal holiday, or, when the act to be done is the filing of a paper in court, a day on which weather or other conditions have made the clerk’s office inaccessible, in which event the period runs until the end of the next day which is not one of the aforementioned days.
Fed. R. Bankr.P. 9006(a). Accordingly, the two-year statute of limitations began to run on July 23, 2003. Under the Defendants’ reasoning, the statute of limitations *551would end Thursday, July 21, 2005, which is 730 days from July 23, 2003. However, under the Trustee’s method of analysis the statute of limitations would end on Friday, July 22, 2005, two calendar years from July 23, 2003.
In United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), the Supreme Court stated “[t]he plain meaning of legislation should be conclusive, except in the Tare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’” Id. at 242, 109 S.Ct. 1026 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)). The Court reasoned that “Congress worked on the formulation of the [Bankruptcy] Code for nearly a decade.” Id. at 240, 109 S.Ct. 1026. Consequently, “it is not appropriate or realistic to expect Congress to have explained with particularity each step it took. Rather, as 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.” Id. at 240-41, 109 S.Ct. 1026. Section 546(a)(1)(A) requires the Complaint to be filed no later than two years after entry of the order for relief. Year is not defined by Section 546 or by any other provision of the Bankruptcy Code. Absent a contrary definition, American Jurisprudence declares that a year consists of twelve calendar months. 74 Am.Jur.2d Time § 7 (2004).
In the context of the measurement of a period of time preceding or following a specific event or date, the term “year” or “calendar year” means a period of 12 months commencing at a fixed or designated month and terminating with the day of the corresponding month in the next succeeding year thereafter, rather than a period commencing January 1 and terminating December 31.
Under the Uniform Statute and Rule Construction Act, in computing a period of years prescribed or allowed by a statute or rule for taking or withholding action before, during, or after the period, the period ends on the day of the concluding month of the concluding year which is numbered the same as the day of the month of the year on which an event determinative of the computation occurred unless the concluding month has no such day, in which case the period ends on the last day of the concluding month of the concluding year.
To settle any question as to the effect of a leap year in computing a period measured by years or fraction of a year, statutes sometimes provide that the added day of a leap year and the day immediately preceding shall be counted as one day.
74 Am.Jur.2d Time § 7 (2004). Based on this reasoning, the statute of limitations would have expired at midnight on July 22, 2005. Certainly, if Congress had wanted to define the term “year” in a different manner, it would have done so. While Counsel for the Defendant does cite cases where the court has recognized that a year means 365 days, the court was merely applying and enforcing established law in the relevant jurisdiction. See deParrie v. City of Portland, No. 92-312-FR, 1993 WL 8376, at *3 (D.Or. Jan. 4, 1993) (stating “[t]he law of the State of Oregon is that a statutory period of limitation described in terms of a ‘year’ means 365 days, and a year is not extended beyond 365 days because it contains 366 days”); Olivo Ayala v. Lopez Feliciano, 729 F.Supp. 9, 10 (D.P.R.1990) (providing “the tolling doctrine of Puerto Rico dictates that a year must be understood to be 365 days in length”).
*552The Trustee’s method of calculating the statute of limitations has been described as the “anniversary date rule.” “Under this rule, when a statute of limitations is measured in years, the last day for instituting the action is the anniversary date of the relevant act. The anniversary date is the ‘last day to file even when the intervening period includes the extra leap year day.’ ” United States v. Hurst, 322 F.3d 1256, 1260 (10th Cir.2003) (quoting United States v. Marcello, 212 F.3d 1005, 1010 (7th Cir.2000)). The Court concludes that the Trustee’s analysis is more consistent with the common understanding of the matter for attorneys, legislators, and the general public. “The anniversary date [rule] is clear and predictable, so that it is easy for litigants and attorneys to remember and for courts to administer.” Id. Here, the Bankruptcy Code does not provide an alternative method for computing the statute of limitations set forth in 11 U.S.C. § 546(a) and Congress has not otherwise expressed an intent to preclude the application of the anniversary date rule. The Court holds that the statute of limitations set forth in 11 U.S.C. § 546(a)(1)(A) ended at midnight on July 22, 2005. Counsel for the Trustee filed a Complaint commencing each of the adversary proceedings on July 22, 2005. Accordingly, the Court concludes that each Complaint was timely filed and will deny the Defendants’ Motion to Dismiss by a contemporaneous order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493936/ | ORDER ON TRUSTEE’S MOTION FOR ORDER VACATING SALE TO DEBTOR AND FOR AUTHORITY TO SELL CERTAIN ASSETS
(Doc. No. 130)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration in this Chapter 7 liquidation case is the Trustee’s Motion for Order Vacating Sale to Debtor and for Authority to Sell Certain Assets (the “Motion”). The assets involved in this sale are U.S. Patent Nos. 6,032,606 and 6,161,496 (the “Patents”), which were sold by the Trustee to the Debtor for $1,000. In support of the Motion the Trustee contends that she has newly discovered evidence to establish fraud, misrepresentation by the Debtor, and mistake made ostensibly by the Trustee. Specifically, the Trustee alleges that she learned recently that the Debtor failed to disclose known pre-petition claims for “unquestionable” past infringement of the Patents which were sold by the Trustee to the Debtor. The Trustee also learned recently that the Debtor failed to disclose the valuation of the Patents made by the Debtor and his CPA, which valuation indicated that the Patents were worth hundreds and maybe thousands of dollars per boat.
The Debtor filed Debtor’s Response to Trustee’s Motion for Order Vacating Sale to Debtor and Objection to Trustee’s Proposed Sale of Assets (the “Response”). In his Response, the Debtor contends that there is no legal or factual basis to set aside the sale and that the only fraud, misrepresentation, or newly discovered evidence was the result solely of the mistakes of the Trustee in drafting the Motion and the failure of the Trustee to review the record in this case. It is further the contention of the Debtor that the Debtor fully informed the Trustee under oath in the Summer of 2003, at the beginning of the administration of this Chapter 7 case, of the very patent infringement claim which the Trustee alleges the Debtor concealed.
The Trustee attached the following exhibits to the Motion:
(1) A copy of the Debtor’s Schedules, for this Court to take Judicial Notice of, Exhibit A;
(2) A copy of the Petition to Make Special under 37 C.F.R. 1.102(d) filed in the United States Patient and Trademark Office, Exhibit B;
(3) A copy of a letter sent to Mariah Boats, Inc. Engineering, Manufacturing, Sales & Purchasing employees regarding the marking of patent 6,032,606 on new boats with the “integrated floor and stringer system and associated method of manufacturing,”, Exhibit C;
(4) A copy of the October 21, 2005 Deposition of the Debtor in a suit pending in the United States District Court for the Eastern District of Texas Marshall Division, filed by the Debtor against Marinemax TX, L.P., Sea Ray Boats, Inc., Baja Marine Corporation, Chaparral Boats, Inc., Campion Marine Inc., and Brunswick Corporation, Exhibit D;
(5) A partial transcript of testimony of the Debtor given at the Meeting of the Creditors scheduled in the Debtor’s Chapter 7 case and held June 11, 2003, Exhibit E.
In opposition of the Trustee’s Motion the Debtor in his response attached the following exhibits:
*700(1) A letter, dated October 8, 2003, by council for the Debtor to the Trustee, Exhibit A;
(2) Copies of several e-mail communications by an individual identified as Tim Teter to the Trustee, dated October 19, 21 and 22, 2005 and November 4, 2005, Exhibit B;
(3) The Trustee’s Work In Process Report dated November 9, 2005, Exhibit C;
(4) A complete transcript of the Debt- or’s Testimony at the 341 Meeting of Creditors held on June 11, 2003, Exhibit D;
(5) A transcript of the Debtor’s Testimony at the continuation of the 341 Meeting of Creditors held on June 25, 2003, Exhibit E;
(6) Unidentified unsigned handwritten note, Exhibit F;
(7) A letter from John Fowler to the Trustee dated July 2, 2003, Exhibit G;
(8) A letter from the Trustee to John Fowler dated August 6, 2003, Exhibit H;
(9) A letter from the Trustee addressed to council for the Debtor, dated October 3, 2003, Exhibit I;
(10) Transcript of the deposition of the Debtor in the lawsuit pending in the United States District Court for the Eastern District of Texas Marshall Division, filed by the Debtor against Marine-max TX, L.P., Sea Ray Boats, Inc., Baja Marine Corporation, Chaparral Boats, Inc., Campion Marine Inc., and Brunswick Corporation filed by the Debtor on October 21, 2005, Exhibit J;
(11) A letter from council of the Debtor to the Trustee dated December 2, 2003, Exhibit K;
(12) A letter from council of the Debtor to the Trustee dated December 11, 2003, Exhibit L;
(13) The Trustees Report and Notice of Intention to Sell Property of the Estate at Private Sale, Exhibit M;
(14) A letter from the Trustee to council of the Debtor dated January 21, 2004, Exhibit N;
(15) A letter to the Trustee by the Debtor dated January 28, 2004, Exhibit O;
(16) A Bill of Sale executed by the Trustee as seller to the Debtor for patent numbers 6,032,606 and 6,161,496 dated February 3, 2004, Exhibit P;
(17) A certification of the Trustee’s final report dated May 18, 2005, Exhibit Q.
It should be evident from the foregoing that the issues raised by the Motion and in the Response to the Motion under consideration are largely raised by the documentation attached as exhibits to the Motion and to the Response filed by the Debtor, none of which have been properly authenticated or offered and admitted into evidence. It should follow from the foregoing that it would be inappropriate for this Court to resolve the issues raised by the parties until proper foundation has been presented for the admissibility of these documents. For the reasons stated above it is appropriate to schedule this matter for pretrial conference to be held before the undersigned to resolve the issues to be tried if necessary and to determine the admissibility of the documents attached to the Motion and to the Response for this Court’s determination.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that a pretrial conference shall be held on January _, 2006 beginning at__m. at the United States Bankruptcy Courthouse, Fort Myers, Federal Building and Federal Courthouse, Room 4-117, Courtroom D, 2110 First Street, Fort Myers, Florida, to consider *701the admissibility of the documentation attached as exhibits to the Trustee’s Motion for Order Vacating Sale to Debtor and for Authority to Sell Certain Assets and to the Response filed by the Debtor.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493937/ | SECOND ORDER ON TRUSTEE’S MOTION FOR ORDER VACATING SALE TO DEBTOR AND FOR AUTHORITY TO SELL CERTAIN ASSETS (Doc. No. 130)
ALEXANDER L. PASKAY, Bankruptcy Judge.
This is the Chapter 7 liquidation case of Jimmie Joe Fulks (Debtor) and the instant matter under consideration is a Motion for Order Vacating Sale to Debtor and for Authority to Sell Certain Assets, filed by Diane Jensen, Trustee of the estate of the Debtor (Trustee).
In her Motion, the Trustee requests (1) the entry of an Order vacating the sale of two boat design Patents, U.S. Patents Nos. 6,032,606 and 6,161,496 (the Patents) to the Debtor for $1,000.00 on the grounds of fraud, misrepresentation, new evidence and mistake, and (2) approval of the Trustee’s anticipated sale of the Patents to a higher bidder free and clear of liens together with all rights of past actions for infringement. In her Motion, the Trustee further states that she has received a firm offer to purchase all rights in the Patents described, including all rights of past actions, for $250,000.00 cash. If necessary, she is willing to hold an auction to determine the highest bid.
In support of her allegations of fraud, misrepresentation, and mistake, the Trustee states that she learned for the first time recently that the Debtor failed to disclose known pre-petition claims for “unquestionable” past infringement of the Patents on his Chapter 7 Schedule B. The Trustee contends that she just recently learned that the Debtor also failed to disclose valuations that the Debtor and his C.P.A. performed on the Patents that indicated that the Patents could be worth hundreds or perhaps thousands of dollars per boat, the valuation of which if true would make the Patents worth a large sum in view of the significant number of the boats with this design sold in the market. The Trustee also contends that the Debtor failed to disclose his interest in unliquidat-ed and contingent claims based on past infringement of the Patents by stating in his Response to Question 20 or Schedule B that he had “none.”
The Trustee contends that, relying on these facts, she sold the Patents back to the Debtor for $1,000.00 in a private sale and that after the Debtor acquired the Patents, he filed Patent infringement cases in Texas against several boat manufacturers asserting prepetition claims which he had omitted on his asset schedules.
The Trustee contends that she had no intention of transferring any right of action for past infringements of Patents, and nothing in the Bill of Sale, or any of the sale documents, indicates that the Trustee was transferring any past claims or right of action for past infringement. Based on the foregoing, the Trustee contends that the Debtor should not be permitted to profit from the misrepresentation at the estate’s expense.
In opposition to the Trustee’s Motion, the Debtor contends that there is no legal or factual basis to set aside the sale of the Patents to the Debtor and the only fraud, misrepresentation or newly discovered evidence, if the Court finds it may have existed, they were the results of mistakes of the Trustee in drafting the Motion to Sell and the Trustee’s failure to review the *704record in this case and to investigate the true value of these two Patents.
In addition, the Debtor contends that the record is clear that the Debtor did identify under oath the potential market for these Patents, the existence of actual and potential Patent infringement claims, and the identity of the potential infringers of these Patents. All these disclosures were made in the summer of 2003 at the very outset of this ease. According to the Debtor, the Trustee made a knowing, conscious, deliberate decision to sell to the Debtor all right title and interest to the Patents, following which she certified to the Court that all assets of the estate had been fully administrated.
In opposing the Trustee’s Motion, the Debtor also contends that the Motion should be denied in its entirety based on the following:
(1) The Motion is untimely.
(2) The Motion fails to disclose any newly discovered evidence, mistake or fraud regarding the potential infringement claims and the Patents.
(3) The Trustee and the current bidders waived any objection to the sale of the Patents to the Debtor.
(4) The sale of the Patents included any past, actual or potential infringement claims.
Both the Trustee and the Debtor now rely on a stipulated record of the following facts which are relevant and germane to the issues raised by the motion and they can be summarized as follows:
On April 29, 2003, the Debtor filed his voluntary Petition for Relief under Chapter 7. The Petition was filed with a Summary of Schedules, Schedules A — J, Statement of Financial Affairs, Attorney Statement of Compensation.
On his Schedule B, the Debtor listed numerous personal properties in which he had an interest. Among the numerous specifically identifiable properties, he listed his interest in Patent Nos. 6,032,606 and 6,161,496 with the U.S. Patent and Trademark Office. The interest was identified that “the Debtor was the inventor of the boat design covered by the Patents.” On the right-hand column of the schedules the Debtor valued his interest in these Patents at “zero.”
In response to Question No 20 on Schedule B which calls for the disclosure of the Debtor’s interest in any contingent, and unliquidated claims of every nature, the Debtor responded by stating “none.”
In due course, the Trustee scheduled a Meeting of Creditors pursuant to Section 341 which was initially held on June 11, 2003. But because the Debtor failed to present his Social Security number, it was not concluded and was rescheduled for June 25, 2003. At the first session of the Meeting of Creditors, the Trustee questioned extensively the Debtor about the Patents and the value of the Patents. The following colloquy ensued which reads as follows:
THE TRUSTEE: Okay. You have a Patent that you list on here?
THE WITNESS: Yes, ma’am.
THE TRUSTEE: Have you ever tried to sell the Patent?
THE WITNESS: No, ma’am.
THE TRUSTEE: Does it have any particular value, independent value?
THE WITNESS: I believe it does.
THE TRUSTEE: Okay. Who — if I were to try to sell it, to whom would I try to sell it?
THE WITNESS: Boat (inaudible)
THE COURT REPORTER: I’m sorry?
THE TRUSTEE: To whom?
THE WITNESS: Boat Builders.
*705THE TRUSTEE: Boat Patent. What is — what is the Patent to do?
THE WITNESS: It’s a design, a structural design that I developed.
(Exhibit D, Transcript of 341 hearing on June 11, 2003, page 23).
At the rescheduled meeting of creditors, the Trustee further questioned the Debtor about the Patents. The record leaves no doubt that the Debtor informed the Trustee of the infringement on the Patents by Chaparral and by other infringers. The Debtor again testified under oath and stated in response to the question whether he ever tried to sell the Patents that he did not. In response to the question whether the Patents have any value, he stated again in the affirmative. The following colloquy is of great importance. For this reason it is set forth verbatim.
Q. Do you have any idea who the market — what market — how to market them?
A. Well, they were infringed upon at one time or they still are, and the attorneys, Philadelphia attorneys we retained, said it would take over half a million dollars to start to enforce our Patents, so I didn’t pursue it.
Q. But you believe they still have value.
A. Yes, ma’am.
Q. Do you have any idea who the appropriate people to sell them might be — if there is a — how to get—
A. Most any upscale boat company, pleasure boat company.
Q. Upscale pleasure boat company. Can you give me suggestions of names?
A. They are infringing, Sea Ray is one, Chaparral is one of the major ones, Four Winds.
Q. You say they are infringing now?
A. Yes, ma’am.
(Exhibit E, Transcript of 341 hearing on June 25, 2004, pp. 5-6)
The record reveals that shortly after the second 341 meeting, on or about July 2, 2003, prior to the sale of the Patents to the Debtor, the Trustee received an inquiry regarding the purchase of the Patents from D.V. & A, a company seeking Patents for inventory in successful consumer product companies (Exhibit G, DJ149). It does not appear that this interest was explored any further.
On or about October 2003 the Trustee inquired of counsel for the Debtor if the Debtor intended to surrender the Patents to the Trustee and whether the Debtor would be interested in repurchasing them (Exhibit I, DJ78). On October 8, 2003, counsel for the Debtor confirmed in writing to the Trustee that the Debtor is surrendering his interest in the Patents to the Trustee but expressed no interest in repurchasing his interest in the Patents. (Exhibit A, DJ81)
There is no evidence in this record that would warrant the finding that the Trustee attempted to sell the Patents to anyone between October 2003 and December 2003, even though the Debtor informed the Trustee about the potential market for the sale and, in fact, identified the parties that were or may be infringing on those Patents.
On December 2, 2003, the Trustee offered to sell to the Debtor all the estate’s right, title and interest in the two Patents for $1,000.00 (Exhibit K, DJ72). Specifically, the Trustee’s offer was read as follows: “Please let me know if [Fulks] might be willing to repurchase the interest in the Patent for $1,000.00. Otherwise, I will put it up for public sale on the NABT site and sell it in that fashion.”
On December 11, 2003, the Debtor accepted the Trustee’s offer through his counsel (Exhibit L, DJ170). On December *70617, 2003, the Trustee prepared and served her “Report and Notice of Intention to Sell Property of the Estate at Private Sale” (Docket No. 80). In her Notice she identified the property to be sold as the two Patents. In her Notice she also stated that pursuant to Local Rule 2002-4, the Court will consider the Motion, objections to the sale, if any, or any other matter without further notice of hearing unless a party in interest files an objection within 20 days of date of the service of the Notice. The notice indicated that if no one files an objection within the time fixed by the notice, the matter will be considered without further notice and hearing and the relief requested may be granted. In paragraph 3 of the Notice, the Trustee stated that the properties would be sold subject to any and all liens of record as well as any and all easements, restrictions, reservation of record, back taxes if any, current and subsequent taxes if any, any and all maintenance fees and/or assessment of any sort.
It appears that the Trustee’s Report and Notice of Intent to Sell was properly mailed to all parties of interest and all scheduled creditors, including Brunswick Corporation at 1 North Field Court, Lake Forrest, Illinois, 60045-4811. Brunswick was listed on Schedule F as a holder of an unsecured claim in the amount of $2,500,000.00 based on a judgment it obtained against Mariah Boats, Inc., and possibly the Debtor. Mariah Boats, Inc., was a corporation of which the Debtor was the President and principal owner.
Since no objection to the proposed sale was filed by any one, the Trustee closed the sale on February 3, 2004, and executed a Bill of Sale of the two Patents previously described. In the Bill of Sale the Trustee recited that she covenants that she is the lawful owner of the goods and chattels, they are free from all encumbrances except as noted above, and she has good right to sell the same. The Bill of Sale does not indicate any encumbrances of any sort of any kind. It is without dispute that the Trustee received the $1000.00 purchase price agreed upon.
On May 18, 2005, the Trustee filed her Final Report in which she stated in Paragraph 2 that she conducted a settlement of the estate, that all assets belonging to the estate had been converted into cash or disposed of pursuant to and in accordance with the Rules and practices of this Court. The Report was accompanied by the required forms by the Office of the U.S. Trustee and indicates, as stated by the Trustee, that the estate of the Debtor had been fully administered and no properties of the estate remain undisposed of.
It was not until October 28, 2005, or approximately eighteen months after the sale was concluded, that the Trustee filed the instant Motion for Order Vacating Sale to Debtor and for Authority to Sell Certain Assets, the matter currently before this Court.
Basically these are the relevant facts which appear from the stipulated record based upon which the Trustee contends that she is entitled to the relief she seeks. The Debtor contends that the Motion is without merit and should be denied in its entirety.
Before discussing the specific contentions of the parties, it is appropriate to make the following comments. A central purpose of Bankruptcy is to maximize creditor recovery. Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 548 (7th Cir.2003). There is also an equally recognized principle that the finality and integrity of Bankruptcy sales is an overriding matter for consideration and should not be overlooked. There must be a stability in sales and the time must come *707when a fair bid is accepted and the proceeding is ended. In re Chung King 753 F.2d 547, 550 (7th Cir.1985), (quoting In re Webcor, Inc., 392 F.2d 893, 899 (7th Cir.1968)). See also In re Shlensky v. H.R. Weissberg Corp., 410 F.2d 1182, 1185-86 (7th Cir.1969).
Although the Trustee’s Motion doesn’t specify the basis for the relief sought, since it alleged that she is entitled to the relief based on fraud, misrepresentation, newly discovered evidence or a mistake, one must assume that the Motion is filed pursuant to F.R.B.P. 9024, as adopted by Rule 60 of the Federal Rules of Civil Procedure. The Rule is entitled “Relief from Judgment or Order.” At first blush it appears that reliance on this Rule is inappropriate since it is without dispute that no judgment or order was ever entered concerning the sale of the Patents by the Trustee.
However, case law interpreting this Rule does not limit the relief available to cover judgments and orders, but also includes proceedings. The text of the Rule also includes “proceedings.” For this reason it might be contended that the sale of the Patents in question was a “proceeding,” therefore, it was governed by F.R.B.P. 9024. This Court is not inclined to accept this proposition and is satisfied that the Final Judgment, order or proceeding which may be subject for relief under F.R.B.P. 9024 means there must be a judicial determination which has finality. The Rule cannot be used to enlarge it to cover a proceeding which might occur in the Bankruptcy Case which does not involve a judicial determination with finality. Hulson v. Atchison, Topeka and Santa Fe Railway Company, 27 F.R.D. 280 (N.D.Ill. 1960). The proposed sale was never presented for this Court’s consideration, no Motion was filed to approve the sale and, of course, no Order was ever entered to approve the sale.
Based on the foregoing, this Court is satisfied that the matter under consideration is not governed by and cannot form the basis to grant the relief to the Trustee under F.R.B.P. 9024. This leaves for consideration whether the Trustee’s claim for relief could be granted on the general principles of common law for fraud, misrepresentation, newly discovered evidence or mistake.
As noted earlier, the Trustee did not expressly rely on F.R.B.P. 9024, but relied specifically on the alleged fraud, misrepresentation, newly discovered evidence or mistake. It is necessary to consider the record to determine whether any of these allegations has been established by persuasive and competent evidence, thus would warrant granting the relief sought by the Trustee.
Considering these allegations seriatim, it is a well established principle that in order to establish a viable claim for fraud the party asserting the claim has the burden to prove all the required elements of an actionable fraud. According to Black’s Law Dictionary: “To constitute ‘actionable fraud,’ it must appear that defendant made a material representation; that it was false; that when he made it he knew it was false, or made it recklessly without any knowledge of its truth and as a positive assertion; that he made it with intention that it should be acted on by plaintiff; that plaintiff acted in reliance on it; and that plaintiff thereby suffered injury.” Black’s Law Dictionary 27 (5th ed.1979). Vertes v. GAC Properties, Inc., 337 F.Supp. 256, 260 (S.D.Fla.1972).
There is absolutely nothing presented here by the Trustee which would warrant the finding of any fraud committed by the Debtor in conjunction with the sale. The idea to purchase these Patents *708was not his. The fact of the matter is that the Debtor turned down the Trustee at first. The sale and the price were both the Trustee’s idea and not the Debtor’s.
The closest the Trustee comes to establishing a viable claim is her allegation that the Debtor was guilty of misrepresentation. To prevail on a claim of fraud based on misrepresentation, it is the burden of the party asserting it to establish with clear and convincing evidence that the Debtor knowingly made a fraudulent statement concerning an existing fact with intent to deceive and the Trustee relied on same and, as a result, suffered a measurable harm.
It is undisputed that the valuation of these Patents on the Schedules were not correct as developed eighteen months later. First, the valuation of these Patents at zero was not a statement of an existing fact, but an opinion. It is true that stating an opinion may be found to be fraudulent if the declarant has knowledge of the true value of the asset involved and grossly undervalues the asset with intent to defraud the Trustee and his creditors. In the present instance, the testimony of the Debtor at the Section 341 Meetings of Creditors belies any fraudulent intent by scheduling the value at zero. Not only did the Debtor state repeatedly at the first and second meeting of creditors that he believed that the Patents have value, that there were and are actions which have and are infringing on the Patent, the Debtor identified the potential market and specifically named some of the infringers as Sea Ray, Chaparral and Four Winds. Sea Ray is apparently a subsidiary of Brunswick and Brunswick was listed on Schedule F as the holder of an unsecured claim based on a judgment it obtained against Mariah Boats, Inc., and possibly the Debtor. Brunswick received the Trustee’s Report and Notice of Intention to Sell.
The same comments are also applicable to the claim to the alleged misrepresentation by the Debtor concerning contingent and unliquidated claims which were not scheduled by the Debtor. At the time the Debtor executed the Schedules, there were no suits pending seeking to recover damages for the infringement of these Patents and, according to a patent attorney, it would cost about half-a-million dollars to pursue these claims, a sum certainly not within current budget of this Chapter 7 Debtor.
The contention of the Trustee that she relies on newly discovered evidence is not supported by this record at all. All information was disclosed at the two meetings of creditors for her to make a decision to pursue or not to pursue the matter. She was told that the Debtor, not withstanding the schedules, believed that the Patents had value. This information was more than ample to put the Trustee on notice that the Patents had value and the Patents were being infringed upon. She was told of the ongoing infringement and she was told as to the possible market and also was disclosed the identity of the infringers, all of which would have been logical prospects to purchase the Patents. In fact, the new prospective purchaser is one of the infring-ers named in the suit filed by the Debtor in the United States District Court seeking injunction and damages for the infringement on his Patents. The fact that the Trustee received an offer to purchase the Patents eighteen months after the sale was concluded from one of the infringers is not newly discovered evidence and cannot be the basis to grant the relief sought by the Trustee. The newly discovered evidence to support the motion must be competent evidence to show that at the time of the sale the Trustee was excusably ignorant of material facts that would have likely produced a different result. In re St. Ste*709phen’s 350 East 116th Street, Inc., 313 B.R. 161, 173 (Bankr.S.D.N.Y.2004). Clearly it was the duty of the Trustee to exercise reasonable care to ferret out the evidence and before executing the Bill of Sale to conduct sufficient investigation as to the value of the sale and the extent of the infringement and the value of that interest concerning the viability of the claim for infringement. In the present instance the record indicates that the Trustee did not conduct any meaningful investigation of the true value of the Patents, in spite of the fact that she was repeatedly told that the Patents had value and was informed about not only the infringement of the Patents but also the identify of the infringers.
Next, this record is totally devoid of any competent evidence which would warrant the conclusion that there was a mistake. If there was one, it was not a mutual mistake of material fact, but a unilateral mistake of the Trustee by not pursuing and properly marketing the Patents when the Trustee received sufficient information to be alerted to the facts which could have helped the Trustee market the Patents. Unilateral mistake is not sufficient to rescind a contract or to set aside a sale. Generally, relief in equity will be granted by way of rescission or cancellation of an instrument because of a material mistake of fact that is unilateral where the mistake goes to the substance of the agreement, the party against whom rescission is sought has not changed position in reliance on the contract so as to make rescission unconscionable. Maryland Cas. Co. v. Krasnek, 174 So.2d 541 (Fla.1965), Pennsylvania Nat. Mut. Cas. Ins. Co. v. Anderson, 445 So.2d 612 (Fla.Dist.Ct. App.3d Dist.1984). Relief from a written contract is not available if the alleged mistake was a unilateral mistake, when the mistake is the result of the party’s own negligence and lack of foresight. Limehouse v. Smith, 797 So.2d 15 (Fla.Dist.Ct. App. 4th Dist.2001).
The Debtor in his Response also raised the issue concerning what was included in the sale. It is the Debtor’s contention that the sale of the Patents clearly included any past, actual or potential infringement claims.
It is well established that the as-signee of a Patent may bring an action to redress any violation of the exclusive rights conferred by the Patent. 35 U.S.C. § 271 (1994). It is self evident, however, that an infringement harms only the owner of the Patent at the time of the infringing acts. United States v. Loughrey 172 U.S. 206, 211-12, 19 S.Ct. 153, 155, 43 L.Ed. 420 (1898). Thus the conveyance of a Patent does not necessarily normally include the right to recover for injury occurring to the prior owner before the assignment or sale of the Patent. Crown Die & Tool Co. v. Nye Tool & Mach. Works, 261 U.S. 24, 43, 43 S.Ct. 254, 259, 67 L.Ed. 516 (1923)
In the case of Arachnid, Inc., v. Merit Industries, Inc., 939 F.2d 1574 (1991) the Court held that the transfer of the right to sue cannot be inferred from the assignment of the Patent itself. As the Supreme Court stated in the case of Moore v. Marsh, 7 Wall. 515, 74 U.S. 515, 522, 19 L.Ed. 37 (1868) it would be a great mistake to suppose that the assignment of the Patent carries with it the right to sue for past infringements. The foregoing cases leave no doubt that the general rule is the right to sue for prior infringement is not transferred unless the assignment agreement manifests a clear intent to transfer the right. While it is true that neither the Statute nor common law precedent requires a particular formula or set prescription of words to express that conveyance, nevertheless, it must be evident from the documentation of the transaction *710a clear intent to sell or assign the right to sue when the interest in the Patent was assigned or sold to a party.
In the present instance the transaction is documented by a very simple boilerplate Bill of Sale which purported to transfer to the Debtor “Patent No. 6,032,-606 and Patent No. 6,161,495.” The Bill of Sale further indicates that the buyer is taking title to the property with the understanding that the “Buyer is taking the property in an ‘as-is, where-is’ condition, and Trustee makes no representations as to condition, value or authenticity of any property.” The Trustee in her Bill of Sale also recited that she covenants that she is the lawful owner of the “good and chattels” that they are free from all encumbrances except as noted above, she has a good right to sell the same. Although there is nothing expressly spelled out in the Bill of Sale form used by the Trustee which, by the way, was not very suitable to reflect this transaction, the totality of the picture leaves no doubt that the Trustee’s sale was contemplated to include all right flowing from the sale, including the right to sue for past and future infringement on the Patents.
The totality of the evidence compels the conclusion that these rights were intended to be included based on the fact the Trustee filed her final report and accounting. Her final report stated under oath that all assets of the estate had been liquidated and there were no properties remained which were to be administered.
This leads to the ultimate question concerning whether or not the relief sought by the Trustee, which is to set aside the sale should be granted based on this record. Ordinarily one would have no difficulty to conclude that the Trustee has failed to establish the right to the relief she is seeking to have the sale set aside. However, the Court has a duty to assure that administration of assets are done properly and serves the paramount interest of the creditors of the estate by maximizing the return the Trustee realizes from the liquidation of assets. Thus, based on Section 105 of the Bankruptcy Code it is proper for this Court to consider whether the sale should be set aside on equitable grounds.
The only redeeming feature of her position is that the price paid by the Debtor for the Patents is grossly inadequate. It should be noted that in her Motion, the Trustee does not actually seek to set aside the sale on the grounds of grossly inadequate price.
In the case of Standard Fuel & Furnace Oil Co. v. Mason (In re Jewett & Sowers Oil Co.), 86 F.2d 497 (7th Cir.1936) the Trustee sold the bankrupt’s contract pursuant to which the debtor was entitled to receive commissions from a company for services performed as a salesman. The dispute arose whether or not commissions already earned by the debtor prior to the date of sale were sold. The court stated that while the Bankruptcy Trustee was careless in execution of the assignment of the contract without reservation of earnings which had already been made, thus conveying too great an interest to purchaser. The disproportion between the sale price of $300 and value of contract extending to almost $5,000, was such as to shock the conscience of the court which would not permit buyer to take advantage of such carelessness.
In sum, the fact that the Trustee was careless in not investigating the true value of the Patents in question, and she executed the contract ostensibly intending to divest the estate of whatever interest the estate had in the Patents, including the right to sue for infringement past or future, does not change the undisputed fact *711that the Patents were sold by the Trustee to the Debtor and not to an innocent third party. The price paid for these Patents by the Debtor was grossly inadequate and for this reason the sale should be set aside.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Trustee’s Motion for Order Vacating Sale to Debtor and for Authority to Sell Certain Assets be, and the same is hereby, granted, and the Trustee shall forthwith tender the purchase price received from the Debtor to the Debtor. The Trustee shall submit an appropriate order nullifying and canceling the Bill of Sale executed February 3, 2004.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493939/ | ORDER ON CONFIRMATION AND MOTION FOR CRAMDOWN
(Doc. Nos. 124 and 143)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTERS under consideration in this Chapter 11 case of Chapin Revenue Cycle Management, LLC (Debtor) are the confirmation of the Debtor’s Amended Plan of Reorganization (Doc. No. 124) (the Plan) and the Debtor’s Motion for Cram-down (Doc. No. 143). The Plan was subsequently modified by the First, Second, and Third Modifications to Debtor’s Amended Plan of Reorganization (Doc. Nos. 173,176, 182, respectively) (together, the Modifications). At the confirmation hearing, this Court reserved ruling on whether Section 1129(a)(ll) was satisfied, as well as whether the Debtor had satisfied the provisions of Section 1129(b)(1) with respect to the only non-accepting class of creditors — the secured claim of D.K. Smith Holdings Corporation, successor in interest to AmSouth Bank (D.KSmith). This Court ruled that the remaining provisions of Section 1129(a) were satisfied. (Order on Confirmation Hearing, Doc. No. 150). D.K. Smith has objected to confirmation of the Plan on the basis that the requirements of 11 U.S.C. § 1129(a)(ll) and (b)(2)(A) are not met: the Plan is not feasible; and, the Plan improperly treats D.K. Smith’s unaccept-ing secured claim.
The matters relevant to the remaining issues as appear from the record and from the last Modification of the Plan may be summarized as follows.
The Debtor is in the business of providing auditing and collection services to hospitals and insurance companies for managed care receivables on a contingency fee basis. The Debtor began operating in January, 2003. The Debtor’s initial capital requirements were met by loans from two sources: individuals (Friends & Family), including Keith Henthorne, the current President, Chief Executive Officer, and majority shareholder of the Debtor, and Katherine Seletos, a former officer, director, and member of the Debtor; and a line of credit taken out from AmSouth Bank. In 2004, Seletos left the Debtor and initiated litigation over her loans to the Debtor and money alleged to be owed to her by the Debtor under an employment agreement. In this same time period, Am-South began litigation over the line of credit. AmSouth sued not only the Debt- or, but also the principals of the Debtor who had given personal guarantees under the line of credit, including Henthorne and Seletos (the Guarantors). D.K. Smith subsequently acquired AmSouth’s interest in the note and security agreement. (Debt- or’s Exh. 13).
*725As successor to AmSouth’s fully matured claim, D.K. Smith filed a secured claim in the amount of $539,850.26. The Plan classifies the D.K. Smith claim in Class One. The Plan provides for D.K. Smith to retain its lien and receive payment in full by monthly payments of principal and interest at the contract rate, calculated on a ten year amortization basis, for sixty months, with a balloon payment due within thirty days following the sixtieth month. (Amended Plan, § 4.1). The Plan also provided for a temporary injunction in favor of the Guarantors. (Amended Plan, § 9.2).
The First Modification to Debtor’s Amended Plan of Reorganization, filed January 23, 2006 (Doc. No. 173) (First Modification) extended D.K. Smith’s lien to the Debtor’s goods, furniture, fixtures, equipment. The First Modification also shortened the payment schedule, providing for the balloon payment after thirty-six months, and provided for a Note and Security Agreement to replace the original Am-South loan documents.
The Second Modification to Debtor’s Amended Plan of Reorganization, filed January 25, 2006, (Doc. No. 176) (Second Modification) enhanced the Debtor’s reporting requirements and default events under the loan documents provided for by the First Modification, and limited the outside duration of the Guarantors Temporary Injunction to one year.
The Third Modification to Debtor’s Amended Plan of Reorganization, filed on February 13, 2006, (Doc. No. 182) (Third Modification) shortened the balloon payment to the eighteenth month, restricted payments to Henthorne under the Plan, and eliminated the Temporary Injunction. As already determined, the Plan as Modified, has been approved by all impaired classes, but rejected by D.K. Smith whose claim is in Class One.
FEASIBILITY OF THE PLAN AS AMENDED AND MODIFIED
A court may not confirm a Chapter 11 plan of reorganization unless the plan meets certain requirements. 11 U.S.C. § 1129(a). One of these requirements is feasibility of the Plan, namely that “[cjonfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debt- or under the plan ....” § 1129(a)(ll). The proponent of the Plan must show that the Plan “offers at least a reasonable prospect of success and ... is workable.” In re Landmark at Plaza Park, Ltd., 7 B.R. 653 (Bankr.D.N.J.1980); In re Haas, 162 F.3d 1087, 1090 (11th Cir.1998). A showing of a reasonable assurance of success, not a guarantee of success, is required. See In re New Midland Plaza Assocs., 247 B.R. 877, 885 (Bankr.S.D.Fla.2000); In re Patrician St. Joseph Partners L.P., 169 B.R. 669, 674 (D.Ariz.1994) (“The mere potential for failure of the plan is insufficient to disprove feasibility.”).
In considering feasibility, a court looks at the earning power of the business; its capital structure; the economic conditions of the business; the continuation of present management; and the efficiency of management in control of the business after confirmation. In re Immenhausen Corp., 172 B.R. 343, 348 (Bankr.M.D.Fla.1994). Plans that involve “pipe dreams” or “visionary schemes” are not confirmable. In re Sovereign Oil Co., 128 B.R. 585, 587 (Bankr.M.D.Fla.1991).
This Court is satisfied that the projections in the Pro Forma Statements of Operations provided by the Debtor are realistic and, considering the earning power and the economic conditions of the Debtor’s business, warrant the conclusion *726that the Plan is not a “pipe dream.” (See Ex. 2, Ex. D; Ex. 6). The updated Pro Forma projects net operating income of $328,641 in the year 2006, $382,582 in 2007, and $573,918 in 2008. (Ex. 6). After projected payments under the Plan, this would result in net income of $42,772 in the year 2006, $147,713 in 2007, and $339,049 in 2008. (Id.).
The Debtor has realized a significant savings in its previous expenses due to the rejection of its pre-petition lease for office space. The updated pro forma provides for a $300,000 reserve for the landlord, Teachers Insurance & Annuity Association of America, damage claim. (Ex. 6). The proof of claim actually filed was for $157,692.20. (Claim No. 24). The amount the Debtor will have to pay to the landlord as liquidated damages is actually overstated in the updated Pro Forma, giving a further cushion to the Debtor in its operating income projections.
The original Plan, as came up for consideration, provided that Henthorne would not have to repay $86,000 to the estate, would be a paid employee of the Debtor after reorganization, and would receive distributions under the Plan. The updated Pro Forma' also does not reflect the changes made to the Plan by the Third Modification. Under the Third Modification, Henthorne will repay the approximately $86,000 bonus payment made to him by the Debtor, and the Debtor will not pay any salary to Henthorne nor make any distributions on behalf of Henthorne’s Class Two claims until D.K. Smith’s claim, is paid in full. These changes will result in a savings of $22,100 per month.
The Debtor’s previous experiences seem to indicate that the projected revenues will be difficult to reach. (See D.K. Smith Exhs. 3,4 (Debtor’s Federal and state tax returns for the years 2003 and 2004)). However, these experiences reflect start-up expenses incurred by the Debtor when it began operations in 2003. Moreover, the current projections paint a different picture. The Debtor’s summary of cash collateral reflects $234,721 in cash on hand and $381,894 in accounts receivable as of December 31, 2005, a 28% increase, or $133,089, in cash and accounts receivable post-petition. (Ex. 7).
Henthorne testified as to the basis of the Pro Forma statements, and that the Debt- or has several new clients and new projects from existing clients. (Ex. 8). Although Henthorne testified that he does outside consulting work in addition to his management responsibilities with the Debtor, he also testified that he works full-time for the Debtor and is capable of managing the reorganization. There was also expert testimony that the Debtor would have no difficulty obtaining financing, so that making the balloon payment on time would not be a problem. Finally, Rene Zarate, the Debtor’s accountant, testified that, in his opinion, based on the revenues the Debtor expects to generate from new and current clients, the Plan is feasible. This Court is satisfied that the Plan has a reasonable prospect of success and is workable.
CRAMDOWN
One of the requirements for confirmation is that each impaired class of claims accept the plan. 11 U.S.C. § 1129(a)(8). Notwithstanding, a plan can be confirmed in spite of the failure of the impaired class to accept the Plan. The plan may be confirmed despite the rejection by an impaired class, if the plan does not discriminate unfairly, and is fair and equitable. § 1129(b)(1). A plan is fair and equitable with respect to a secured claim if, under the plan, the holder of the secured claim retains the lien securing the claim and receives payments over the life of the plan *727totaling at least the allowed amount of the claim of a value as of the effective date, of the value of the secured claim. § 1129(b)(2)(A)(i). The requirement of payments with a value as of the effective date requires interest to offset the fact that payments are made over time, not upon the effective date of the plan. The plan may also be fair and equitable as to a secured claim if it provides for the indubitable equivalent to the secured party. § 1129(b)(2)(A)(iii). However, the Debtor need only satisfy one of these requirements, not all three. Midland Plaza, 247 B.R. at 891.
D.K. Smith’s objection to cramdown is based on the contention that it will not receive the indubitable equivalent of its claim. The loan documents underlying the AmSouth line of credit contains several provisions related to events constituting default and financial reporting requirements that are not in the documents provided by the First Modification, the documents under which D.K. Smith’s claim will be treated post-petition. Moreover, D.K. Smith argues that the guarantees underlying the documents are functionally unavailable due to the stay provided in favor of the Guarantors under the Plan.
The arguments of D.K. Smith, as they pertain to the Amended Plan of Reorganization, are well-taken. A plan of reorganization may not unfairly shift the risk of failure to the secured creditor. In re Consul Rest. Corp., 146 B.R. 979 (Bankr.D.Minn.1992); In re Miami Center Assocs. Ltd., 144 B.R. 937 (Bankr.S.D.Fla.1992); In re Monarch Beach Venture, Ltd., 166 B.R. 428, 436 (C.D.Cal.1993). The Plan as offered at the hearing on confirmation had the effect of unfairly shifting the risk of failure of the Plan to D.K. Smith by limiting the availability of the guarantees, significantly narrowing the conditions upon which D.K. Smith could declare a default, and eliminating financial reporting requirements on behalf of the Debtor.
However, even if these provisions in the Plan may have the effect of unfairly shifting the risk to D.K. Smith, the Modifications, as outlined above, cured those defects. The Second Modification provides for monthly reporting to D.K. Smith of the following: profit and loss statements; balance sheet; bank statements; and accounts receivable reports. (Second Modification, ¶ 1(a)). The Second Modification also provides for a default in the event the Debtor’s accounts receivable and cash balance falls below $386,820.80 at the end of each calendar month. (Second Modification, ¶ 1(b)). Finally, the Second Modification provides for reasonable access of D.K. Smith to the Debtors books and records. (Second Modification, ¶ 1(c)).
The Third Modification to Debtor’s Amended Plan of Reorganization, filed on February 13, 2006, (Doc. No. 182) (Third Modification), modifies the Plan in the following respects: provides for the balloon payment to be made within thirty days following the due date of the eighteenth monthly payment; provides for Henthorne to immediately repay to the Debtor the $86,543.56 bonus payment he received from the Debtor; restricts any salary payments to Henthorne until the DK Smith claim is paid in full; and defers distribution to Henthorne on account of his Class Two claims until the DK Smith claim is paid in full. (Third Modification, 1). The Third Modification also eliminates the temporary injunction in favor of the Guarantors in Section 9.2 of the Plan. (Third Modification, 2).
Based on the foregoing, with these modifications to the Plan, this Court is satisfied that the Amended Plan of Reorganization filed by the Debtor, as amended and modified, does not unfairly discriminate against the D.K. Smith and is fair and equitable, in *728that D.K. Smith retains the lien securing its claim and will receive deferred cash payments totaling the full amount of its allowed secured claim, as required by 11 U.S.C. § 1129(b)(2)(A)(i)(I). Additionally, the Plan does not unfairly shift the risk of failure to D.K. Smith. Henthorne will not receive any distributions under the Plan until D.K. Smith’s claim is paid in full.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Amended Plan of Reorganization (Doc. No. 124), as modified by the First, Second, and Third Modification to the Debtor’s Amended Plan of Reorganization (Doc. Nos. 173, 176, 182) be, and the same is hereby, confirmed. It is further
ORDERED, ADJUDGED AND DECREED that the Debtor’s Motion for Cramdown (Doc. No. 143) be, and the same is hereby, granted.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493940/ | MEMORANDUM OPINION
PATRICK M. FLATLEY, Bankruptcy Judge.
Steven Craig Hartley and Cynthia Sue Hartley (the “Debtors”) filed a motion to reopen their Chapter 7 bankruptcy case to add two creditors, Richard and Tricia Goodwin (the “Goodwins”), who have sued Steven Hartley and his corporation, Precise Enterprises, Inc. (“Precise Enterprises”), in the Circuit Court of Monogalia County, West Virginia. The Debtors also seek to reopen their bankruptcy case to obtain a declaratory judgment that any pre-petition claim that the Goodwins had against Steven Hartley was discharged, and to amend Schedule B to add tools, having a stated value of $1,000, on the grounds that the Debtors had inadvertently omitted those items when filling out their original petition and schedules.
For the reasons stated herein, the court will grant the Debtors’ motion to reopen their bankruptcy case.
I. BACKGROUND
According to the State court complaint filed by the Goodwins, they executed a residential construction contract with Precise Enterprises on May 23, 2005, whereby the Goodwins would pay it $120,000 in five draws for a home to be built by September 30, 2005. The complaint alleges that the project was not completed in time, Precise Enterprises did not pay all of its suppliers, work was negligently preformed, and that Precise Enterprises and Steven Hartley grossly mishandled and misappropriated the monies disbursed by the Goodwins. As a result of these purported bad acts, the Goodwins request $60,000 in compensation from both Precise Enterprises and Steven Hartley.
On May 24, 2005 — one day after Precise Enterprises executed its contract with the Goodwins — the Debtors filed their Chapter *8247 bankruptcy petition. The Goodwins were not listed in the Debtors’ bankruptcy schedules as creditors. The Debtors also failed to disclose their ownership interest in about $1,000 worth of tools. According to the schedules filed by the Debtors, they do not own any real property, and the total value of all personal property assets listed on Schedule B was less than $20,000.
On May 24, 2005, the Bankruptcy Clerk’s Office mailed a notice to all creditors not to file claims in the case. After completion of the Debtors’ meeting of creditors, the Chapter 7 trustee filed a report of no distribution on July 15, 2006. The Debtors received their discharge on September 13, 2005, and the case was closed on the same day.
II. DISCUSSION
The Goodwins filed a State court lawsuit against Precise Enterprises and Steven Hartley in 2006. On June 16, 2006, the Debtors filed this motion to reopen their bankruptcy case to add the Goodwins as creditors, obtain a declaration that any personal obligation that Steven Hartley owed to the Goodwins had been discharged, and to add the Debtors’ tools to Schedule B.
A. Reopening a Case to Add a Creditor
The Debtors seek to amend Schedule F of their bankruptcy petition to include the Goodwins’ claim against Steven Hartley.
Section 727(b) of the Bankruptcy Code states that a Chapter 7 discharge “discharges the debtor from all debts that arose before the date of the order for relief under this chapter .... ” 11 U.S.C. § 727(b). No requirement exists in § 727(b) that a claim be scheduled before it may be discharged. E.g., Judd v. Wolfe (In re Judd), 78 F.3d 110, 114 (3rd Cir.1996) (“Because section 727(b), on its face, does not create an exception for unlisted or unscheduled debts, every prepetition debt is discharged under section 727(b) ....”). Thus, motions to reopen a case to add a pre-petition creditor are routinely denied. E.g., Horizon Aviation of Va., Inc. v. Alexander, 296 B.R. 380, 382 (E.D.Va.2003) (affirming the bankruptcy court’s holding that reopening “would be futile because 11 U.S.C. § 727(b) discharges all prepetition debts, whether those debts were scheduled or not.”); In re Serge, 285 B.R. 632, 634 (Bankr.M.D.N.C.2002) (denying a motion to reopen to add five creditors); McMahon v. Harmon (In re Harmon), 213 B.R. 805, 807 (Bankr.D.Md.1997) (“The most persuasive argument against reopening a no-asset case is that reopening will not afford debtors greater relief than they have already obtained.”).
Accordingly, to the extent that the Goodwins’ claim arose pre-petition,1 that claim was discharged. Ordinarily, no basis would exist to reopen a ease for the purpose of adding a creditor to the Debtors’ schedules; however, in this case, the Debtors’ also seek to add omitted assets to Schedule B. While the court has reservations about whether the omitted assets will result in any benefit to the estate, that possibility exists.2 Therefore, the court *825will allow the Debtors’ case to be reopened to add the Goodwins to Schedule F.
B. Exception from Discharge
In their motion to reopen their bankruptcy case, the Debtors state that they seek a declaratory judgment that their debt to the Goodwins, if any, is discharged, i.e., that the debt is not excepted from their discharge pursuant to 11 U.S.C. § 523(a)(3).
Section 523(a)(3) of the Bankruptcy Code details the consequences of a debt- or’s failure to notice a potential creditor of the debtor’s bankruptcy filing:
(a) A discharge under section 727 ... does not discharge an individual debtor from any debt-
(3) neither listed nor scheduled under section 521(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—
(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or
(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;
§ 523(a)(3).
In this case, § 523(a)(3)(A) is not applicable because the Bankruptcy Clerk’s office notified creditors not to file claims, and the Debtors’ Chapter 7 trustee filed a report stating that no assets were available for distribution to creditors. Accordingly, no deadline was ever set for filing a proof of claim. See, e.g., Serge, 285 B.R. at 634 (“[Bjecause there is no bar date in a no-asset Chapter 7 ease, there never can be a time in such cases when it is too late ‘to permit timely filing of a proof of claim.’ ”).
Pursuant to § 523(a)(3)(B), however, if the claim is of a kind that falls within an exception from discharge pursuant to § 523(a)(2),(4), or (6), which generally encompasses claims for fraud and willful and malicious injury, and if the holder of that claim did not have notice of the bankruptcy in time to file an exception to discharge action, then the claim is excepted from discharge under § 523(a)(3)(B). See § 523(c) (providing that a debt categorized under § 523(a)(2), (4), or (6) will be discharged unless the holder of that claim objects); Fed. R. Bankr.P. 4007(c) (allowing a creditor 60 days from the date first set for the debtor’s meeting of creditors to file an adversary complaint based on § 523(a)(2), (4), or (6)). As noted by Judge Stocks in the Middle District of North Carolina, three general procedural methods exist whereby a debtor may litigate the issue of whether a claim has been discharged in bankruptcy pursuant to §§ 523(a)(3)(B) and 727(b).
If there is a genuine dispute between the parties regarding the dischargeability of the debts under any of the subsections of § 523(a), other than § 523(a)(3)(A), there are several ways to litigate the matter. First, if the creditors pursue a lawsuit on the claim, [the] Debtor can assert the bankruptcy discharge as an affirmative defense and the court with jurisdiction over that lawsuit *826can decide whether the debt falls within and of the exceptions to discharge. Second, under Bankruptcy Rule 4007(b) either [the] Debtor or the creditors can move to reopen this case for the purpose of filing a complaint to determine dis-chargeability. Third, [the] Debtor can bring an action in this court to enforce the discharge injunction contained in § 524(a) against any creditor who is attempting to collect discharged claims. “The virtue of any of these procedures, as opposed to a motion to reopen to amend schedules, is that it will focus on the real dispute (if there is a real dispute) between the parties — the dis-chargeability of the debt.”
Serge, 285 B.R. at 634 n. 2 (citation omitted).
Accordingly, to the extent that the Debtors seek to reopen the case to file a declaratory judgment action under Part VII of the Bankruptcy Rules, the Debtors’ motion to reopen the case will be granted.
C. Amending Schedule B
The Debtors also seek to reopen their bankruptcy case to add personal property assets to Schedule B. The Debtors state that they inadvertently omitted an ownership interest in various tools having a value of approximately $1,000.
Rule 1009(a) provides that a debtor may amend a schedule “as a matter of course at any time before the case is closed.” Fed. R. Bankr.P. 1009(a). Section 350(b) of the Bankruptcy Code states that a “case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b).
In this case, it is unlikely that the addition of the Debtors’ ownership interest in tools to Schedule B would result in the Debtors’ case becoming an asset case. The Debtors’ tools would likely be fully exempt under West Virginia law. See W. Va.Code § 38-10-4(f) (exempting “[t]he debtor’s interest, no to exceed one thousand five hundred dollars in value, in any ... tools of the trade of the debtor .... ”). Even if the tools of the trade exemption were not available, according to Schedule C, the Debtors used less than $20,000 in exemptions, well below the $25,000 wild card exemption allowed to the Debtors under State law. § 38-10^4(a), (e). However, because the Debtors’ have not yet claimed an exemption in the tools, and because their entitlement to an exemption in previously omitted assets has not been adjudicated, a possibility exists that the tools may be administered for the benefit of the estate; thus, the court will allow the estate to be reopened for the purpose of scheduling the previously omitted tools. Nothing in this opinion will prejudice the rights of the United States trustee or the Debtor’s Chapter 7 trustee to take any action against the Debtors based on their original omission of the tools from their schedules.
III. CONCLUSION
The court will grant the Debtors’ motion to reopen their case.3 A separate order will be entered pursuant to Fed. R. Bankr.P. 9021.
. The court expresses no opinion in regards to the extent that the Goodwins claim against the Debtors arose post-petition.
. For example, in the appropriate circumstances, the trustee may attempt to surcharge a debtor’s exemption in personal property. See, e.g., In re Karl, 313 B.R. 827, 831 (Bankr.W.D.Mo.2004) ("When a debtor's contemptuous conduct involves the suppression of estate property, or when a debtor fails to adequately explain its loss, a court may surcharge the debtor’s exemptions in an effort to prevent a fraud on the bankruptcy court and to protect creditors by preventing the debtor from sheltering more assets than permitted by the Bankruptcy Code.”). Likewise, as discussed in Subpart B, if the Debtors elect to file a declaratory judgement action against the *825Goodwins, they may also include a cause of action for a violation of the discharge injunction.
. The Debtors also requested that the court waive the fee required to reopen their case on the grounds that paying the fee would create an undue hardship on them. Pursuant to 28 U.S.C. § 1930(f), the bankruptcy court may waive fees for debtors whose income is less than 150 percent of the official poverty line. The Debtors' motion to waive the reopening fee does not contain information that would allow the court to make that determination; thus, the motion will be denied without prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493941/ | OPINION
MARY P. GORMAN, Bankruptcy Judge.
This matter comes before the Court upon an involuntary petition filed February 17, 2006, under Chapter 7 of the Bankruptcy Code by Charter One Bank, N.A. (“Petitioning Creditor”) against the alleged debtor, DemirCo Group (North America), L.L.C. (“Group”). Group has filed an Answer and Motion to Dismiss the involuntary petition.
Factual Background
Petitioning Creditor and Group have stipulated to most of the relevant facts. Group is one of several affiliated companies that borrowed money from Petitioning Creditor. In addition to Group, the affiliated companies include DemirCo Holdings Inc. (“Holdings”), DemirCo Industries, L.L.C. (“Industries”), and Western Precision (“WPI”). Prior to the liquidation of the various companies, Group held a 100% ownership of Industries and a 95% ownership interest of Holdings, while Holdings held a 100% ownership of WPI. Petitioning Creditor has also filed involuntary petitions in this Court against Industries and Holdings. Industries consented to the entry of an order for relief in the case filed against it. Holdings filed an Answer and Motion to Dismiss the petition filed against it but, after hearing, this Court entered an Order for Relief against Holdings. WPI has filed a voluntary petition under Chapter 7 in the United States Bankruptcy Court for the Northern District of California.
Group has stipulated that it is jointly and severally liable with Industries, Holdings, and WPI for all amounts borrowed from and owed to Petitioning Creditor. Group and Petitioning Creditor agree that the principal amount due as of July 15, 2005, was $20,213,645.95. Petitioning Creditor asserts that the total amount remaining due to it as of February 17, 2006, was not less than $12,879,684.29. Although Group declined to stipulate to that amount, Group did stipulate that, even if all partial defenses which it may have as to the amount due were decided in its favor, the remaining amount owed by it to Petitioning Creditor would be millions of dollars. Group also stipulated that, as of February 17, 2006, it owed Petitioning Creditor at least $12,300, which was not subject to a dispute and which was non-contingent.
Group and the affiliated companies entered into an initial forbearance agreement with Petitioning Creditor on April 19, 2005, and a second forbearance agreement on July 18, 2005. Pursuant to those agreements, the assets of Group and the affiliated companies which secured their liabilities to Petitioning Creditor have been liquidated. Group’s business consisted of providing accounting, payroll, graphic design, computer and other corporate services to the affiliated companies. Group has not conducted any business since its assets were sold on August 13, 2005.
Legal Analysis
The involuntary petition in this case was filed pursuant to Section 303 of the Bankruptcy Code, which provides in pertinent part:
(a) An involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that *901may be a debtor under the chapter which such case is commenced.
(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such non-contingent, undisputed claims aggregate at least $12,300 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $12,300 of such claims;
(c) After the filing of a petition under this section but before the case is dismissed or relief is ordered, a creditor holding an unsecured claim that is not contingent, other than a creditor filing under subsection (b) of this section, may join in the petition with the same effect as if such joining creditor were a petitioning creditor under subsection (b) of this section.
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(h) If the petition is not timely controverted, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed. Otherwise, after trial, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed, only if—
(1) the debtor is generally not paying such debtor’s debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount; or
(2) within 120 days before the date of the filing of the petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession.
11 U.S.C. § 303.
In its Answer and Motion to Dismiss, Group raised three issues. First, Group asserted that, because it had more than 12 creditors on the date of filing, three petitioning creditors were required to file the involuntary petition. Second, Group argued that, because portions of the amounts due to Petitioning Creditor are subject to a bona fide dispute, Petitioning Creditor does not meet the statutory requirements for an entity to be eligible to file an involuntary petition. Third, Group asserted that the dispute between it and Petitioning Creditor is a two-party dispute which does not belong in the Bankruptcy Court and, accordingly, the ease should be dismissed on bad faith grounds. Group does not contest the allegation in the involuntary petition that it is not generally paying its debts as they become due.
Because it alleged in its Answer and Motion to Dismiss that it had more than 12 creditors, Group was required to file a list of such creditors. See Fed. R.Bankr.P. 1003(b). Group filed a list with its original Answer and has amended its creditors list on several occasions. Group’s third amended list (“Group’s List”) was filed April 13, 2006, and it is that list that the Court will consider in deciding whether *902three petitioning creditors were required in order to file the involuntary petition in this case.
Group’s List contains the names and requisite information for 52 different creditors. The parties have stipulated, however, that 29 of the listed creditors are insiders and should not be counted in determining the number of creditors necessary to file the involuntary petition. Further, the parties have agreed that four more of the listed creditors hold claims which are either contingent as to liability or subject to a bona fide dispute and, accordingly, should also not be counted. See 11 U.S.C. § 303(b)(1). Thus, only 19 creditors remain to be considered.
Group’s List discloses obligations to the State of California for unemployment taxes in the amount of $951.28 and to United Heartland Insurance Company for insurance in the amount of $1,000. Petitioning Creditor has not raised any issue with respect to these two creditors. Both should be counted in determining the number of Group’s creditors.
The crux of the dispute between Group and Petitioning Creditor involves the remaining 17 creditors, all of whom are former employees of Group and all of whom are owed vacation pay earned while previously so employed. Predictably, Group says that these creditors must be counted while Petitioning Creditor says they should be excluded from the count.
In determining the number of creditors of an alleged debtor, creditors who are employees, insiders, or who have received avoidable transfers from the debtor are not counted. 11 U.S.C. § 303(b)(2). The policy for these exclusions from the count has been explained as “logical in that these are creditors whose financial or other relationship with the debtor would make them unlikely to join in an involuntary petition against the debtor.” 1 Robert E. Ginsberg & Robert D. Martin, Ginsberg & Martin on Bankruptcy § 2.03[C] (4th ed.1996, Supp.2006).
This Court has been unable to find any case where a court has previously considered whether “former employees” are “employees” for purposes of being excluded from the count of creditors. Group has cited In re Gill Enterprises, Inc., 15 B.R. 328 (Bankr.D.N.J.1981) in support of its position that former employees must be counted. Gill deals, however, with whether the claims of certain former employees were contingent or disputed when those former employees sought to participate voluntarily as petitioning creditors. Gill does not directly address the issue to be decided here.
This Court believes that “former employees” are a different group than “employees” and, accordingly, should be counted in determining the number of creditors of Group as of the date of filing. Upon termination of employment, employees lose the relationship with the employer and the financial self-interest which causes “employees” to be excluded from the count. “Former employees” are no longer under the control or supervision of the employer. No policy reasons support excluding “former employees” from the count.
Petitioning Creditor, relying on In re United Kitchen Associates, 33 B.R. 214 (Bankr.W.D.La.1983), has argued that the basis for excluding employees from the count is that they are “friendly” to the employer. Petitioning Creditor thus suggests that whether the “former employees” in the case remain “friendly” to Group is a question of fact and urges this Court to explore the issue further as to the individual former employees. The Court declines to proceed in that fashion. Although the policy behind excluding groups such as employees and insiders from the count is based on the notion that they are “friendly” or have some self-interest which makes *903them unlikely to participate in an involuntary case, the statute neither requires nor allows an inquiry into whether a particular excluded creditor is actually friendly or self-interested. Likewise, creditors who do not fall into one of the excluded groups cannot be excluded on an individual basis simply because the creditor may have a friendly relationship with the debtor or may have some self-interest in keeping the debtor out of bankruptcy. No authority exists for an inquiry into the motivations of individual members of either included or excluded groups, and no such inquiry will be made here.
Petitioning Creditor has also urged this Court to consider the employment of some of the former employees by an affiliate of Group after the termination of their employment by Group. CCI Acquisition Company, L.L.C., n/k/a T/CCI (“T/CCI”) was the buyer of a substantial portion of the assets of Group, Holdings, and Industries. The parties have stipulated that T/CCI is an affiliate of Group, Holdings, and Industries. T/CCI hired some former employees of Group after their termination from Group, including 15 of the 17 employees who now hold vacation pay claims. Nine of the 15 hired by T/CCI were still employed by T/CCI as of the filing date.
Petitioning Creditor argues that, by reason of the fact that T/CCI, as an affiliate, is an insider to Group, its nine employees should be excluded from the count of Group’s creditors. This Court disagrees. Insiders are defined by statute and the definition does not include “employees of affiliates.” 11 U.S.C. § 101(31). There is no authority or reason to expand the definition of the term “insider” to include some of Group’s former employees because they are now employees of an affiliate.
Finally, Petitioning Creditor raises the question of whether some of the former employees should be excluded because they may have received from T/CCI “vacation pay comparable to what the employee had accrued with (Group) but which were (sic) not paid.” The evidence presented on this issue is sketchy, at best. The parties did not stipulate to the details, but it appears to the Court from what was presented that T/CCI may have granted employees accrued vacation time immediately upon employment in amounts similar to what those employees had accrued at Group. The Court cannot find that such an offer, in and of itself, constitutes a release of Group’s obligations to these employees. Payment of benefits by T/CCI to the former employees is not relevant, absent proof that the employees accepting employment and the corresponding benefits with T/CCI actually waived or released their claims against Group and, therefore, are no longer creditors of Group. The existence of such proof has not been suggested.
This Court concludes that the 17 former employees on Group’s List should all be counted in determining the number of creditors of Group as of the date of filing. Including the State of California and United Heartland Insurance Company, Group had at least 19 creditors who held unsecured claims which were not contingent as to liability and which were not subject to a bona fide dispute as to liability or amount. The total amount of these 19 claims exceeds $12,300. Three petitioning creditors were necessary to file an involuntary petition against Group on February 17, 2006. Group’s Motion to Dismiss should be granted because the involuntary petition was not filed by three petitioners.1
*904Petitioning Creditor has requested additional time to seek to have other creditors join the petition. Bankruptcy Rule 1003(b) requires the Court to afford a reasonable opportunity for other creditors to join in a petition before a hearing is held. See Fed.R.Bankr.P. 1003(b). In this case, a hearing has already been held, but the Court believes that a short additional time for Petitioning Creditor to add creditors would not be inappropriate. Petitioning Creditor’s defenses to the Motion to Dismiss were not frivolous and there was limited case law authority to guide the parties. Group is out of business and, therefore, the usual concern of creating “gap” creditors when there is a delay in an involuntary case is not an issue here.
Petitioning Creditor will be given 30 days to file an amended petition with the requisite number of creditors. If such amended petition is not filed, the case will be dismissed without further notice.
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 Charter One Bank, N.A., be and is hereby granted until July 14, 2006, to file an amended involuntary petition consistent with the Opinion entered this day.
IT IS FURTHER ORDERED that, if an amended involuntary petition is not filed on or before July 14, 2006, the Motion to Dismiss of DemirCo Group (North America) L.L.C. will be granted and this case will be dismissed without further notice.
. Because the Court’s decision on the issue of the number of required petitioners may be dispositive of the case, the Court did not reach the other issues raised in Group's Motion to Dismiss. The Court did, however, *904decide the identical issues based on the same stipulated facts in the related case, In re DemirCo Holdings, Inc., Case No. 06-70122. The parties are directed to the Opinion and Order entered by this Court on June 9, 2006, in the Holdings case for a discussion of all other issues raised by the Motion to Dismiss. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493942/ | OPINION AND ORDER
MILLER, Chief Judge.
Deborah Countryman commenced an adversary proceeding in the United States Bankruptcy Court for the Northern District of Indiana seeking a declaration that her claim against Linda Prue is not dis-chargeable. She now appeals the bankruptcy court’s orders denying her leave to proceed in forma pauperis in her adversary proceeding and on appeal.
The only issue on appeal is whether creditors may bring adversary proceedings in forma pav/peris in bankruptcy eases. The court reviews the bankruptcy court’s orders pursuant to 28 U.S.C. § 158, see, e.g., House v. Belford, 956 F.2d 711, 716 (7th Cir.1992) (denial of a motion to proceed in forma pauperis is an appealable order), and because the decisions were based on purely legal conclusions the court reviews them de novo. See Meyer v. Rigdon, 36 F.3d 1375, 1378 (7th Cir.1994).
The general authority to proceed in for-ma pauperis, found in § 1915(a), provides “any court of the United States” may “authorize the commencement, prosecution or defense of any suit, action or proceeding, civil or criminal, or appeal therein, without prepayment of fees or security therefor, by a person who submits an affidavit that ... the person is unable to pay such fees or give security therefor.” For purposes of Title 28, “court of the United States” includes the Supreme Court of the United States, courts of appeals, district courts constituted by chapter 5 of this title, including the Court of International Trade and any court created by act of Congress the judges of which are entitled to hold office during good behavior. 28 U.S.C. § 451.
Although bankruptcy courts aren’t listed in § 451, our court of appeals hasn’t determined whether bankruptcy judges can exercise the authority of a court of the United States irrespective of § 1915. Matter of Volpert, 110 F.3d 494, 499-500 (7th Cir.1997).1 Ms. Countryman says bankruptcy courts have the power to waive fees under 28 U.S.C. §§ 151 et seq., which authorizes the district court to refer certain matters to the bankruptcy court, a “unit” of the district court, for decision. See, e.g., In re Melendez, 153 B.R. 386 (Bankr.D.Conn.1993); In re McGinnis, at 295. The court cannot agree.
Section 451 excludes bankruptcy courts as a “court of the United States” under title 28, and 28 U.S.C. § 157 allows bankruptcy judges to “hear [ ]all core pro-*906ceedings arising under title 11” and “enter appropriate order and judgments.” The starting point for interpreting a statute is the statute’s language. Consumer Product Safety Comm’n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 64 L.Ed.2d 766 (1980). Bankruptcy courts aren’t explicitly listed in § 451, and bankruptcy judges are not “entitled to hold office during good behavior”; they serve a specified term of fourteen years. Matter of Volpert, 110 F.3d at 498. The statute’s plain language indicates that Congress expressly and unequivocally deprived bankruptcy courts of authority to permit litigants to proceed in forma pauperis. 28 U.S.C. § 1915(a). Section 157 makes no mention of the right to waive fees, so any authority to do so would be implied from a general grant of authority.
Ms. Countryman argues that Congress has directly taken away authority with one hand, while indirectly giving it back with the other. This court agrees with the court in In re Perroton, 958 F.2d 889, 896 (9th Cir.1992), that “this argument [ ] fails given the clear expression of congressional intent to exclude the bankruptcy court[s] from those court authorized to waive fees under § 1915(a)----” Perhaps Congress should vest the bankruptcy court with such authority, but it hasn’t done so.
No binding authority giving bankruptcy courts the power to waive filling fees, so the court affirms the bankruptcy court’s denial of the plaintiffs motion for leave to proceed in forma pauperis. The court also affirms the bankruptcy court’s denial of her motion to waive the appeal filing fee for the same reasons.
SO ORDERED.
. The bankruptcy court cited United States v. Kras, 409 U.S. 434, 440, 93 S.Ct 631, 34 L.Ed.2d 626 (1973), for the proposition § 1915 "does not allow the waiver of fees in a bankruptcy case.” United States v. Kras dealt with the waiver of a debtor's filing fee in commencing a bankruptcy case and was decided before Congress enacted 28 U.S.C. § 1930 — the statute providing bankruptcy courts the authority to require a filling fee — so some courts have questioned whether it is binding precedent in modern adversary proceeding cases. See, e.g., In re McGinnis, 155 B.R. 294, 295 (Bankr.D.N.H.1993); In re Palestino, 4 B.R. 721, 722-723 (Bankr.M.D.Fla.1980). The court also held § 1930 forbids the waiver of fees in adversary proceedings. Section 1930(a) was amended in May 2005 (Pub.L. N. 109-8, § 418) by striking "[n]ot-withstanding section 1915 of this title” and by adding subsection (f)(3) which provides "[t]his subsection does not restrict the district court or the bankruptcy court from waiving, in accordance with Judicial Conference policy, fees prescribed under this section for other debtors and creditors.” The amendment, however, was not effective until October 17, 2005 and is not controlling on the bankruptcy court's July 18, 2005 order denying Ms. Countryman’s request to proceed in forma pauper-is. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493943/ | DECISION AND ORDER
ROBERT E. GRANT, Bankruptcy Judge.
The debtors filed a petition for relief under chapter 13 of the United States Bankruptcy Code on February 15, 2006. The petition was not prepared on the official form (Official Form 1), but on a custom-designed form used by their counsel. Because this form did not correspond with the official form, the court issued an order requiring the debtors to file an amended petition using the official form. Instead of complying with the court’s order, debtors’ counsel filed a response contending that the debtors should not be required to do so, that counsel’s form constituted an appropriate alteration of the official form, and was permitted by Rule 9009 of the Federal Rules of Bankruptcy Procedure. That issue is before the court following a hearing held to consider the question.
To commence a bankruptcy case a petition is filed with the clerk of the bankruptcy court. 11 U.S.C. § 301; Fed. R. Bankr.P. Rule 1002(a), 9001(3). Prior to 1987, Rule 1002(a) of the Federal Rules of Bankruptcy Procedure required the petition to be filed on the official form. Although the reference to that requirement was removed when the rule was amended in 1987, that was “not intended to change the practice” because “Rule 9009 provides that the Official Forms ‘shall be observed and used’ in cases and proceedings under the Code.” Fed. R. Bankr.P. Rule 1002, Advisory Committee Note (1987), reprinted in Norton Bankruptcy Rules, 2005-06 ed. p. 7. Even though Rule 9009 states that the official forms “shall be observed and used” that commandment is immediately softened by the remainder of that sentence, which goes on to say that they shall be used “with alterations as may be appropriate.” Fed. R. Bankr.P. Rule 9009. The rule then states that “[fjorms may be com*908bined and their contents rearranged to permit economies in their use.” Id.
Debtors’ counsel focuses on the second sentence of Rule 9009 and argues that her office has done nothing more than modify the official form so that it can be used more efficiently.1 This has been accomplished by condensing the form from three pages down to two and rearranging its contents, while still providing all of the required information. Although counsel asserts that these changes allow the form to be used more efficiently, she never explains just how this is so or why her version of the form is preferable to that prescribed by the Judicial Conference. More importantly, whether a particular modification is appropriate or permits the form to be used more efficiently should be considered not just from the perspective of the one who is completing it but also from the perspective of those who will be using the completed form. Consequently, even if counsel’s version of the official form may somehow allow her office to use it more efficiently, if those changes make it more difficult for others to use the completed form, the modifications are not permitted by Rule 9009. See, In re O’Dell, 251 B.R. 602, 616 (Bankr.N.D.Ala.2000); In re Mack, 132 B.R. 484, 485 (Bankr.M.D.Fla.1991).
If no one ever read the petition or made use of the information it contained, whether or not it was prepared on the official form would not matter at all. But, that is not the case. Even if no one else looks at that document, it is reviewed by the clerk’s office to make certain that it is complete. When filings were made in hard copy, information contained in the petition was compiled and used by the clerk’s office “to make a rough estimate of the resources needed to handle the case, to monitor multiple and repeat filings, to assign cases to judges, and to provide certain statistical information the court is required by law to compile.” Instructions for Completing Official Form 1, ¶ I. p. 1. Now that filings are made electronically, most of that information is provided by counsel during the electronic case filing process, rather than being manually extracted from the petition by the clerk’s office after the case is filed. Nonetheless, the clerk’s office still reviews the petition and compares the information it contains with that provided by counsel during the case filing process, to make certain that the data was input correctly and if not to make any changes needed to bring the docket and the data into line with the information contained in the petition, and to determine whether the petition satisfactorily reflects the debtor’s eligibility for relief under title 11.
Information which cannot be found or can be found only with difficulty is less useful than information which is readily available. Consequently, the petition must not only provide all of the information required, it must do so in a way that facilitates an easy and efficient review of its contents. Although counsel’s in-house version of the petition contains all of the information required by the official form, *909because of the changes counsel has made that information cannot be located and cannot be reviewed as easily and as efficiently as it is on the official form. Among other changes, counsel has rearranged the contents of the petition so that information found in one place on the official form is located in an entirely different place on counsel’s form. For example, by comparison to the official form, counsel’s version:
1. Switches the location of the boxes indicating which chapter of the bankruptcy code the debtor is filing under and the nature of the debtor’s business;
2. Moves the box indicating the nature of debts from the right side of the page to the left side;
3. Moves the box captioned statistical information from the left side of the page to the right side;
4. Places information concerning pre-petition credit counseling at the bottom of the first page, rather than on the second page;
5. Moves Exhibit B from the upper right-hand quadrant of the second page to the bottom of that page; and,
6. Places the signatures of the debtors and debtors’ counsel on the second, rather than the third, page.
These changes increase the amount of time the clerk’s office must devote to reviewing counsel’s unique version of the petition by forcing case administrators to hunt for the information they need instead of being able to quickly find it in the expected place. This slows down the administration of cases and places an unnecessary burden on the clerk’s office. As such, counsel’s changes to the official form for the petition do not offer economies in its use, but have precisely the opposite effect; they create inefficiencies, confusion and additional work for those who read counsel’s completed form.
Although Rule 9009 allows alterations to the official forms, that does not give parties a free pass to make whatever changes they want whenever they want to do so. “[Alteration will be appropriate only in rare circumstances.” In re Mitchell, 255 B.R. 345, 363 (Bankr.D.Mass.2000). Alterations that “eonfuse[ ] and confound[ ] a streamlined administrative process,” O’Dell, 251 B.R. at 616, or which frustrate “a quick and easy comprehension of the information presented,” Mack, 132 B.R. at 485, are not appropriate. The version of the official form used by debtors’ counsel does not facilitate a quick and easy review of the information it contains. It undermines the efficient administration of the case and is not appropriate. THEREFORE, debtors shall file an amended petition using the official form within ten (10) days of this date. Should they fail to do so, this case will be dismissed, without further notice or hearing.
SO ORDERED.
. Counsel also argues that her version of the official form has been used for some time, without complaint, elsewhere in this district and in other districts outside of Northern Indiana, and the lack of any challenge means that other courts view it as an acceptable variation of the official form. The argument is not persuasive. Simply because counsel may have gotten away with something in the past or has previously successfully slipped something by does not mean the practice is acceptable. See e.g., Askin & Marine Co. v. Commissioner of Internal Revenue, 66 F.2d 776, 777 (2nd Cir.1933); In re Peterson, 2004 WL 1895201 *3 fn. 17 (Bankr.D.Idaho). Furthermore, the petition was significantly changed because of the bankruptcy reforms that went into effect on October 17, 2005, so the present iteration of counsel’s form does not have a history of longevity. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493944/ | MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
C.Q., LLC filed Chapter 11 bankruptcy in this court on September 29, 2003. On *916November 21, 2003, the debtor’s motion to assume its long term lease with Madison East Shopping Center Partners (MESC) was granted.
On December 8, 2004, the debtor’s case was converted to Chapter 7. After conversion, the debtor did not assume or reject the lease, nor were any payments made for the amount due under the lease as required by 11 U.S.C. § 365(d)(3). Sixty days after conversion, the lease automatically terminated pursuant to 11 U.S.C. § 365(d)(4). The Chapter 7 trustee and MESC then entered into an agreement allowing the trustee to store items in the formerly leased building.
On October 25, 2005, MESC filed a motion for payment of an administrative claim in the amount of $21,133.30: $4,226.66 due for two months post conversion rent under the assumed lease, and $16,906.64 due under the storage agreement. MESC seeks immediate payment of $4,226.66 under 11 U.S.C. § 365(d)(3), and- payment of the remaining $16,906.64 an administrative expense under 11 U.S.C. § 503(b)(1). There is no dispute about the $16,906.64 storage claim. However, the trustee (and a creditor, but that makes no difference) objects to immediate payment in full of MESC’s pre-rejection rent claim for $4,226.66.
The trustee argues that the disputed amount is entitled only to administrative expense priority, because there is no provision in the Bankruptcy Code granting “super-priority” status to claims under Section 365(d)(3). The trustee also states that the bankruptcy estate does not have funds sufficient to make a payment of $4,226.66 to MESC.
Does Section 365(d)(3) create a super-priority for pre-rejection lease obligations? Section 365 provides in relevant part:
§ 365. Executory contracts and unexpired leases
(d)(3) The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title. The court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the date of the order for relief, but the time for performance shall not be extended beyond such 60-day period. This subsection shall not be deemed to affect the trustee’s obligations under the provisions of subsection (b) or (f) of this section. Acceptance of any such performance does not constitute waiver or relinquishment of the lessor’s rights under such lease or under this title.
Section 365 clearly requires timely performance of pre-rejection lease obligations, but does not establish any consequence for failing to make the required payments. The Seventh Circuit Court of Appeals has not ruled on whether unpaid rent due under the requirement of “timely performance” is entitled to a super-priority. Our analysis is further complicated by the fact that bankruptcy courts addressing this issue have reached divergent results, even within this circuit. Compare In re Joseph C. Spiess Co., 145 B.R. 597 (Bankr.N.D.Ill.1992), with In re Telesphere Communications, Inc., 148 B.R. 525 (Bankr.N.D.Ill.1992).
With all due respect to the several courts that have found unpaid rent to be a mere administrative priority, it is certain to me that the language in Section 365(d)(3) requiring “timely performance” places payment of rent before the payment of administrative expenses. That is true even where the bankruptcy estate is administratively insolvent. Congress has spoken clearly.
*917The courts that deny super-priority status to claims under Section 365 do not heed the directive Congress has given in § 365(d)(3). They say that Section 365 claims are administrative expenses under Section 503(b)(1) despite the absence of any reference between § 365(b)(3) and § 503 except the clear statement in Section 365 that Section 503(b)(1) is not to be withstood. They assert that if Congress had intended a super-priority status for Section 365 claims, it could have easily expressed that intent. Spiess, 145 B.R. at 608. Since Section 365 does not use the words “super-priority” for Section 365 claims, these courts determine that the priority scheme of Section 507 applies. Id. The reasoning of these courts is muddled and result oriented. Conversely, Judge Wedoffs analysis in Telesphere is simple and compelling.
Telesphere, contains a thorough analysis of the history of Section 365 and examines how it has been construed by bankruptcy courts. It concludes that 11 U.S.C. § 365(d)(3) entitles lessors to immediate payment of their claims, regardless of administrative insolvency of the debtor. 148 B.R. at 532. I agree.
Claims under Section 365 are not specifically identified as administrative claims allowed under Section 503. Section 503(b)(1) provides, in relevant part:
§ 503. Allowance of administrative expenses
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—
(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case;
But, rent under § 365(d)(3) is payable, whether necessary or not, for the protection of landlords. It is not, nor is it intended to be, measured in any way by benefit to the debtor or the estate. Section 503 establishes a court-supervised process for allowing administrative claims, which includes notice and hearing. Section 507 provides, in relevant part:
§ 507. Priorities
(a) The following expenses and claims have priority in the following order:
(1) First, administrative expenses allowed under section 503(b) of this title, and any fees and charges assessed against the estate under chapter 123 of title 28.
Section 507 then affords first priority to administrative expenses allowed under section 503(b). Section 365, however, requires timely performance of the debtor’s obligations. No notice or hearing is required, the obligations are simply required to be met in a timely fashion. This difference in prescribed procedure suggests that Section 365 claims are not to be paid according to Section 507.
The priority scheme established under Section 507 is not the exclusive method of paying obligations under the Code. For instance, the procedure for making payments under Section 363(c)(1) allows a trustee or debtor in possession to make payments of operational expenses in the ordinary course of business without notice or hearing. Section 363(c)(1) provides in relevant part:
§ 363 Use, sale, or lease of property
(c)(1) If the business of the debtor is authorized to be operated under section 721,1108, 1203,1204, or 1304 of this title and unless the court orders otherwise, the trustee may enter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing.
*918Payment of lease obligations under Section 365 is similar to payment of operational expenses under Section 363, in that both require payment of obligations as they come due, without court supervision. “Operational payments, by their nature, enjoy a de facto priority over administrative expenses, without any express provision for superpriority.” Telesphere, 148 B.R. at 531. The Section 365 mandate that the trustee shall timely perform obligations indicates that “payment of claims under Section 365 should be made according to the procedure for making operational payments under Section 363(c)(1).” Id. “There is nothing in the language of Section 365(d)(3) suggesting that it involves any of the procedures for court supervised payment. To the contrary, Section 365(d)(3) provides that its terms apply ‘notwithstanding Section 503(b)(1)’ — the section providing a right to court supervised payment-and it requires the trustee or debtor in possession to act without application and without court review.” Id.
The absence of specific language granting a super-priority to Section 365 claims does not indicate Congressional intent that Section 365 claims are to be lumped together with administrative expenses under Section 503. “There would have been no reason for Congress to have provided any express grant of superpriority for Section 365(d)(3) rent payments-such a ‘superpri-ority’ is implicit in the direction that the debtor make the payments without court involvement. The absence of an express grant of superpriority cannot, then, be a basis for disregarding the plain language of Section 365(d)(3).” Id.
To treat obligations under Section 365(d) the same as administrative expense claims under Section 503 would render the requirement that the trustee “timely perform” meaningless. Section 365 reflects congressional intent to ensure that lessors not be forced to extend credit to an estate during the time given for assumption or rejection of the lease. A lessor need not become an “involuntary extender of unsecured credit.” Id. at 529. Tenants in bankruptcy must pay their lease obligations on time.
There is no indication Congress intended that the lessor would be required to give back rent that is timely paid, or that the lessor could opt not to pay rent at all in the event the estate is administratively insolvent. “Indeed, to withhold payment when the debtor may be administratively insolvent would actually reverse legislative intent, because it would require involuntary extensions of credit by lessors in the very circumstances where the debtors are least likely to honor their lease obligations.” Id.
Pre-rejection lease payments are required to be timely made. Where the trustee does not perform that obligation, he cannot be excused from the consequence of his nonperformance. The claims must be paid when due, or in any event prior to allowed administrative expenses.
The trustee must immediately pay the rent obligation to MESC. It may be so ordered.
ORDER
IT IS HEREBY ORDERED that C.Q., LLC’s motion for immediate payment of pre-rejection lease obligations is granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493947/ | OPINION
MONTALI, Bankruptcy Judge.
A chapter 13 debtor’s amended plan provided that attorneys’ fees remaining unpaid at the completion of the case would not be discharged and would be paid directly by the debtor after entry of his discharge. Debtor’s counsel filed a fee application requesting approval of fees incurred after confirmation of debtor’s plan and requesting that the court permit the fees to be paid directly by debtor outside of the plan. The bankruptcy court entered an order approving the requested fees and allowing collection of the fees directly from debtor. The court nevertheless indicated in its civil minutes that counsel could not collect fees from the debtor after entry of discharge and that any fees remaining unpaid at that time would be discharged. Counsel appealed and we REVERSE.
I.
FACTS
Appellant Mark A. Wolff, Esq. (“Attorney”) is counsel for chapter 132 debtor Jerry Johnson (“Debtor”). On June 12, 2003, Debtor filed his third modified chapter 13 plan and a motion to confirm that plan. Debtor signed the third modified plan, which provided that “[a]dditional attorney fees remaining unpaid upon completion of this case shall not be discharged and shall be paid directly by debtor after entry of discharge.” The third modified plan also states that “[Attorney] opts to have his or her fees approved and paid in accordance with the court’s Guidelines for Payment of Attorneys’ Fees in Chapter 13 Cases.” The bankruptcy court entered an order confirming the third modified plan on August 6, 2003.
The Eastern District of California’s Guidelines for Payment of Attorneys’ Fees in Chapter 13 Cases (“Guidelines”) provide that, except for pre-petition retainers, all attorney fees “shall be paid through the *106plan unless otherwise ordered.” Guidelines at Paragraph 5 (emphasis added). “Absent court authorization, the attorney may not receive fees directly from the debtor .... ” Id. (emphasis added). Therefore, direct payment of fees by a debtor is acceptable under the Guidelines if the court approves it.
On March 23, 2005, appellee Lawrence Loheit (“Trustee”), chapter 13 trustee in Debtor’s case, filed a final report and account indicating that Attorney had been paid $1,450 through the chapter 13 plan. On April 28, 2005, Attorney filed an application for additional compensation for post-confirmation services in the amount of $1,116.64 (the “Application”). Attorney requested that these additional fees be paid through the chapter 13 plan “to the extent available” and “directly by Debtor to the extent not available through the Chapter 13 plan.” No one opposed the Application.3
On June 7, 2005, the bankruptcy court held a hearing on the Application, but continued the hearing so that Attorney could file further briefs. Attorney did so and the court held a further hearing on June 21, when it approved the Application. According to the civil minutes, the court authorized Attorney to collect the approved fees directly from Debtor prior to discharge,4 but held that Attorney could not collect any unpaid amounts after entry of Debtor’s discharge, citing In re Hanson, 223 B.R. 775 (Bankr.D.Or.1998).
On June 27, 2005, the bankruptcy court entered a Civil Minute Order stating “IT IS ORDERED that the [Application is approved for a total of $1,116.64 in fees and costs and may presently be collected directly from the debtor.”5 (Emphasis added.) Interestingly, even though the order does refer to the civil minutes, it does not specify that Debtor’s liability for any unpaid fees would be discharged upon entry of the discharge. It simply allows the fees and permits collection “presently” from Debtor. Attorney filed a timely notice of appeal.
II.
ISSUE
Did the bankruptcy court err in concluding that approved attorneys’ fees remaining unpaid as of the date of Debtor’s discharge would be discharged?
III.
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error, and con-*107elusions of law are subject to de novo review. Devers v. Bank of Sheridan, Mont. (In re Devers), 759 F.2d 751, 753 (9th Cir.1985). To the extent that questions of fact cannot be separated from questions of law, we review these questions as mixed questions of law and fact, applying a de novo standard. Ratanasen v. Cal. Dep’t of Health Servs., 11 F.3d 1467, 1469 (9th Cir.1993).
IV.
DISCUSSION
Citing Hanson, the bankruptcy court held that upon entry of Debtor’s discharge, the debtor’s personal liability for any unpaid administrative expenses owed to Attorney would be discharged. In Hanson, the court held that “in Chapter 13, if a confirmed plan provides for the postconfirmation services of the debtor’s counsel, the Chapter 13 discharge bars collection of the debt for those services.” Hanson, 223 B.R. at 778.
The attorney in Hanson pursued collection of postconfirmation fees directly from his debtor clients even though he never sought approval of such fees from the court and even though the chapter 13 plan provided for payment of postconfirmation fees. Hanson, 223 B.R. at 777-79. The plans in question directed the chapter 13 trustee to pay administrative expenses. Id. at 778. As noted in Hanson, “[t]he reasoning in this opinion applies only to cases in which the plan provides for payment of postconfirmation fees.” Id. at 778 n. 7.
Here, unlike in Hanson, the confirmed third modified plan specifically provided that attorney fees remaining unpaid at the completion of plan payments would be paid directly by Debtor. Thus, while the third modified plan did “provide for payment of postconfirmation fees,” it explicitly set forth a treatment different than that contained in Hanson. The reasoning of Hanson is thus inapplicable. Instead, the explicit and approved provision of the confirmed third modified plan governs. Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1086 (9th Cir.1999) (when a chapter 13 plan is confirmed, it is binding on all parties, even if a provision is inconsistent with the Bankruptcy Code); 11 U.S.C. § 1329 (a chapter 13 plan as modified becomes the plan); 11 U.S.C. § 1327(a) (provisions of a confirmed plan are binding).
Section 1322(b)(10) allows a chapter 13 plan to “include any other appropriate provision not inconsistent with this title.” 11 U.S.C. § 1322(b)(10). In this case, the pertinent provision of the confirmed third modified plan is consistent with both the Bankruptcy Code and the Guidelines. Section 1322(a) provides that a chapter 13 plan shall provide for the full payment of priority claims, including administrative expenses “unless the holder of a particular claim agrees to a different treatment of such claim.” 11 U.S.C. § 1322(a)(2) (emphasis added). In addition, section 1326(c) recites that the trustee shall make payments to creditors under the plan “[ejxcept as otherwise provided in the plan.” 11 U.S.C. § 1326(c). Here, Debtor and Attorney agreed to a treatment of Attorney’s priority claim whereby Attorney waived his right to full payment under the plan as long as full payment was made directly by debtor after completion of the plan.6 This *108enabled Debtor to complete his plan payments without reducing or stretching out payments to other creditors. The Bankruptcy Code contemplates such arrangements, and the court confirmed a plan that explicitly provided such an arrangement.7 In addition, the Guidelines permit direct payment by debtors of attorneys’ fees if the court permits it. The bankruptcy court permitted such payment in this case by confirming the third modified plan.
V.
CONCLUSION
Because the confirmed plan explicitly provided that fees owed to Attorney could be paid directly by Debtor upon completion of plan payments, the bankruptcy court erred in holding that Hanson mandated discharge of unpaid fees. We therefore REVERSE.
. Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date (October 17, 1995) of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8, Apr. 20, 2005, 119 Stat. 23.
. Debtor has taken no position either before us or at the bankruptcy court, even though our decision will obligate him to pay Attorney. We question Trustee's standing before us since he took no position on the Application. Investors Thrift v. Lam (In re Lam), 192 F.3d 1309, 1310-11 (9th Cir.1999). Nevertheless, we are obligated to decide the merits of Attorney’s position whether or not there is opposition.
. The bankruptcy court's docket reflects entry of an order discharging Debtor on October 11, 2005, even though Attorney and Trustee stated at oral argument that the discharge has not been entered. We believe that the docket and the discharge order linked to it are accurate.
.Attorney appeals because the bankruptcy court mandated in its civil minutes that he could not collect fees directly from Debtor after entry of the discharge (which occurred on October 11, 2005). Unfortunately, the aspect of the court’s decision about which Attorney complains is not in the order itself. Nonetheless, because the order is vague (not defining "presently”) and because it refers to the civil minutes, we believe that the court intended to foreclose Attorney's ability to collect his fees post-discharge. Accordingly, we treat the order as incorporating the civil minutes, particularly in defining the term "presently.” We therefore will review the error identified by Attorney.
. While a debtor may not provide for the payment of a priority or administrative claim outside the plan without the consent of the creditor (Florida v. Randolph (In re Randolph), 273 B.R. 914, 918 (Bankr.M.D.Fla. 2002)), the creditor here (Attorney) drafted and filed the third modified plan, thus affirming his consent. Debtor demonstrated his consent by signing the Plan and by filing a *108declaration in support of the payment arrangement.
. If, as the bankruptcy court’s decision suggests, express provisions whereby priority claimants agree to be paid outside the plan constitute "treatment” which would discharge the debt upon completion of the plan, such creditors would have no incentive to waive priority treatment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493948/ | AMENDED MEMORANDUM DECISION RE: DEFENDANT’S MOTION FOR JUDGMENT ON THE PLEADINGS
PATRICIA C. WILLIAMS, Chief Judge.
This is an adversary lawsuit brought by two Chapter 11 debtors, Summit Securities, Inc. and Metropolitan Mortgage & Securities Co., Inc. The debtor corporations are suing Helen Sandifur, the former wife of Paul Sandifur. Before the debtor corporations filed their petitions for relief under Chapter 11, the corporations were in large part controlled by Mr. Sandifur. In their Complaint, the debtor corporations seek a money judgment against Ms. Sandi-fur, alleging that she was the beneficiary of a number of preferential and fraudulent transfers that should be set aside under applicable bankruptcy and state law.
Ms. Sandifur filed a Motion for Judgment on the Pleadings pursuant to Fed. R. Bankr.P. 7012(b). In deciding her motion, the Court must accept as true all of the allegations of the debtor corporations’ Complaint. In other words, the corporations’ cause of action should not be dismissed unless it appears, beyond a doubt, that the corporations can prove no set of facts in support of the claim entitling them to relief. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Specifically, the motion asks the Court to rule as a matter of law that the second cause of action in the Complaint, as it relates to two of the many transfers, is barred by the applicable statute of limitations.1
The first transfer at issue is evidenced by a check dated July 30, 2001 from Metropolitan Mortgage & Securities Co., Inc. payable to Ms. Sandifur in the amount of $450,000. The notation on the Metropolitan’s records refers to the transfer of “Div-Partial Redemption of Stock National Summit Corp.” The check cleared the bank on August 2, 2001. The second transfer at issue is evidenced by a check dated February 11, 2002, from an affiliate *140of the debtor corporations. The check was payable to Ms. Sandifur in the amount of $1,620,000. The notation in the debtor corporations’ records states “I/C Repurchase of Common Shares.” The Complaint does not state when the check was honored by the issuing bank. When a transfer of funds occurs by check, the date that the check was honored by the bank is the date the transfer occurred. Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). For the purpose of the Court’s analysis, the Court will assume that the second transfer occurred on February 11, 2002, the earliest possible date of transfer.
The debtor corporations allege that the two transfers are avoidable under 11 U.S.C. § 544(b), which is commonly referred to as the trustee’s “strong arm powers.” A Chapter 11 debtor shares these powers with the Chapter 7 Trustee by virtue of 11 U.S.C. § 1107(a). Under §§ 544(b) and 1107(a), a Chapter 11 debt- or, like a Chapter 7 Trustee, is granted the same rights as a creditor to set aside transfers under applicable non-bankruptcy law. Here, the relevant non-bankruptcy law is Wash. Rev. Code § 19.40, et. seq., Washington’s codification of the Uniform Fraudulent Transfer Act. Specifically, in their second cause of action, the debtor corporations allege recovery under RCW 19.40.041(a)(2) and 19.40.051(a).2
Causes of action under these two statutory provisions are limited by RCW 19.40.091(b) which states that any cause of action based upon RCW 19.40.041(a)(2) or .051(a) is extinguished “within four years after the transfer was made.” Thus, the applicable non-bankruptcy law, upon which the debtor corporations rely, contains a four-year statute of limitations measured from the date of the transfer.
In this case, the transfers occurred on August 2, 2001 and February 11, 2002. To be timely, actions based upon RCW 19.40.041(a)(2) or .051(a) must have been brought before August 2, 2005, as to the first transfer, and before February 11, 2006, as to the second transfer. The debt- or corporations’ lawsuit against Ms. Sandi-fur was commenced on February 2, 2006, the date on which it was filed. Fed. R. Bankr.P. 7003. According to state law, the cause of action seeking to set aside the August 2, 2001 transfer extinguished before the lawsuit was commenced. Conversely, the cause of action based upon the February 11, 2006 transfer was timely.
The debtor corporations’ second cause of action does not rely solely on state law. The claim is based upon the “strong arm powers” of § 544(b). For causes of action based upon § 544(b), the applicable statute of limitations is stated in § 546, which provides:
(a) ... may not be commenced after the earlier of—
(1) the later of—
(A) 2 years after the entry of the order for relief; or
*141(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 such election occurs before the expiration of the period specified in subpara-graph (A); or
(2) the time the case is closed or dismissed.
11 U.S.C. § 546. Here, the debtor corporations’ bankruptcy cases have not been closed or dismissed. No Chapter 11 Trustee has been appointed. The inquiry thus narrows to the applicability of § 546(a)(1)(A). If the applicable non-bankruptcy law extinguishes a cause of action after the bankruptcy is commenced, but before the limitation period in § 546(a)(1)(A), which statute of limitation is applicable?
The right of a debtor-in-possession or trustee to exercise strong arm powers does not exist prior to the commencement of a bankruptcy proceeding. Strong arm powers under § 544(b) are substantive rights granted by the Bankruptcy Code and come into existence with the filing of the bankruptcy petition. Absent commencement of a bankruptcy case, these plaintiffs would not have rights under RCW 19.40. The rights sought to be exercised under the Complaint’s second cause of action are substantive bankruptcy law rights. The statute of limitation under § 546(a) is the substantive law that controls.
If the state law limitations period governing a fraudulent transfer action has not expired at the commencement of a bankruptcy case, the trustee may bring the action pursuant to section 544(b), provided that it is commenced within the section 546(a) limitations period.
4 Collier on Bankruptcy, Section 546.02(l)(b) (L. King 15th ed.1989).
In In re Mahoney, Trocki & Associates, Inc., 111 B.R. 914 (Bankr.S.D.Cal.1990), the court reached the conclusion that § 546(a) is the applicable statute of limitation although it applied the pre-1994 version of § 546(a). The focus of a statute of limitation is to protect defendants from having to defend against stale claims. However, the ability of a trustee to recover property for the bankrupt estate’s benefit is a congressional goal intended to be accomplished by the Code. Absent the § 546(a) two-year period, that power could be diminished if the trustee fails to immediately determine what potential claims may be brought for the recovery of assets, particularly early in the bankruptcy. Such a result would contravene the broad powers Congress has granted to the trustee under § 544. In re Dry Wall Supply, Inc., 111 B.R. 933 (D.Colo.1990).
A trustee has two years to pursue the cause of action if the state law cause of action has not expired and a bankruptcy proceeding has been commenced. Even though the state law cause of action may expire after the filing of the petition, but before the two-year limitation in 546(a), the two-year limit in § 546(a) is applicable.
CONCLUSION
The bankruptcy petition was filed February 4, 2004, and this adversary lawsuit was commenced February 2, 2006. The plaintiffs’ claim arising under § 544(b) as to these two transfers is timely as the Bankruptcy Code, not state law, establishes the limitation period to commence an action. Ms. Sandifur’s Motion for Judgment on the Pleadings, as to the debt- or corporations’ second cause of action, is DENIED.
. The motion originally sought dismissal of the Complaint’s third cause of action. At oral argument, counsel agreed the third cause of action was not relevant to the only two transfers now at issue.
. RCW 19.40.041(a)(2) states:
"(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation .... ”
RCW 19.40.051(1) states:
"(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493949/ | ORDER GRANTING DEPENDANT’S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
A. BRUCE CAMPBELL, Bankruptcy Judge.
THIS MATTER comes before the Court on the Cross-Motions for Summary Judgment filed by Plaintiff, Jeffrey L. Hill (“Plaintiff’ or “Trustee”) and Defendant WFS Financial Services, Inc. (“Defendant”) on March 3, 2006. The Court finds and concludes as follows:
Federal Rule of Civil Procedure 56(c), which is made applicable to bankruptcy proceedings by Bankruptcy Rule 7056, provides that 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.” Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
In this case, summary judgment is appropriate because Plaintiff and Defendant have filed a Joint Statement of Stipulated Facts and Law which includes the following material facts:
The Debtors, Terrance and Cynthia O’Neill (“Debtors”) filed a Chapter 7 petition on July 12, 2005 (the “Petition Date”). Plaintiff is the Chapter 7 Trustee of the Debtor’s estate. On July 2, 2005, the Debtors purchased a 2005 Mazda (the “Vehicle”) from John Elway Olds Mazda Hyundai North (“Elway”). Defendant financed the Debtors’ purchase of the Vehicle. The Debtors took possession of the Vehicle and Elway assigned its security interest in the Vehicle to Defendant on the date of purchase. Nine days after the purchase of the Vehicle, and one day prior to the Petition Date, on July 11, 2005, Defendant submitted the title and lien documents to the Boulder County Clerk and Recorder (“Clerk”). Sixteen days after the purchase of the Vehicle, and six days after the Petition Date, on July 18, 2005, the Clerk entered the lien information for Defendant’s lien into the DMV database. The title to the Vehicle shows “Date Filed” and “Date Accepted” for the lien as July 18, 2005. The Debtors did not make any payments on the loan prior to the Petition Date. As of February 1, 2006, the Debtors had paid $3,551.36 to Defendant on account of the loan on the Vehicle.
Plaintiff filed this adversary proceeding seeking to avoid Defendant’s lien under 11 *144U.S.C. § 544(a) and/or 11 U.S.C. § 547(b)1 , and to preserve it for the benefit of the estate. Plaintiffs complaint also sought recovery of the pre- and post-petition payments made by the Debtors to Defendant on account of the loan on the Vehicle. Based on the fact that no payments were made by the Debtors pre-petition, Plaintiff has stipulated to the dismissal of this claim, which was the Third Claim for Relief in the Complaint. He has also stipulated to the dismissal of his First Claim for Relief to void the lien as a preference under § 547(b).
Thus, Plaintiffs only remaining claims are the Second, Fourth, Fifth and Sixth Claims for Relief. These are the claims to avoid Defendant’s lien under § 544(a) and to preserve it for the benefit of the estate under § 551, and the claims to recover the post-petition payments to Defendant as proceeds of the avoided lien or as a part of the “value” of the avoided lien.
Section 544(a) gives a trustee the same rights that an ideal hypothetical judgment lien creditor possesses as of the date the bankruptcy petition is filed. Consequently, § 544(a) allows the trustee to avoid any unperfected liens on property belonging to the bankruptcy estate. In re Charles, 323 F.3d 841 (10th Cir.2003)(citing Pearson v. Salina Coffee House, Inc., 831 F.2d 1531 (10th Cir.1987)). A hypothetical judgment lien creditor can defeat the interest of a creditor holding an unperfected lien on a motor vehicle. In re Richards, 275 B.R. 586 (Bankr.Colo.2002) The determination of whether a creditor’s security interest is unperfected, and therefore avoidable under § 544(a), is controlled by state law. Charles, supra; In re Yeager Trucking, 29 B.R. 131 (D.Colo.1983).
This Court has previously determined that, in order for a security interest in a motor vehicle to be perfected, the lien must be entered in the motor vehicle database. See, Rodriguez v. Americredit (In re Maes), Adv. Pro. No. 05-1729 (May 5, 2006). See, also, In re Baker, 338 B.R. 470 (Bankr.D.Colo.2005). Under this analysis, Defendant’s lien was not perfected until July 18, 2005, six days after the Debtors’ bankruptcy was filed, and would be voidable by the Trustee under § 544(a). The facts of this case, however, require the consideration of the effect of limitations on the Trustee’s powers found at § 546(b)(1)(A).
Section 546(b)(1)(A) provides that the avoidance powers of a trustee under § 544 are subject to “any generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection ...” The purpose of this limitation, as reflected in the legislative history, is to “protect, in spite of the surprise intervention of a bankruptcy petition, those whom state law protects by allowing them to perfect their liens ... as of an effective date that is earlier than the date of perfection.” S.Rep.No. 989, 95th Cong., 2d Sess. 86-87, U.S.Code Cong. & Admin.News 1978, p. 5787 (1978); H.R.Rep. No. 595, 95th Cong., 1st Sess. 371-72, U.S.Code Cong. & Admin.News 1978, p. 5787 (1977). In order to show it is entitled to the protection of § 546(b)(1)(A), creditor must demonstrate: (1) a generally applicable (i.e.non-bankruptcy) law, that (2) permits perfection of a security interest, and (3) allows the security interest to be effective against any entity that acquires rights in the property before the date of perfection. *145In re Microfab, Inc., 105 B.R.152 (Bankr.D.Mass.1989).
The Colorado Certificate of Title Act is not a “generally applicable law that permits” relation back of perfection, because that statute has no provision for relation back of perfection to a date prior to the date the lien is entered into the database. Although some states do have statutes allowing the date of perfection of a lien on a motor vehicle to relate back to the date lien documents are presented to the proper state official or to the date of the creation of the lien, Colorado is not one of them. See, In re Baker, supra. (Noting that Georgia, Alabama, Connecticut, Florida, Louisiana, and New Hampshire have relation back provisions, but Colorado does not.)
However, Defendant has argued that the provision in the Colorado Uniform Commercial Code allowing relation back of purchase-money security interests applies to hens on automobiles. The applicable section is C.R.S. § 4-9-317(e) which provides that if the holder of a purchase-money security interest files a financing statement within twenty days after the debtor receives the collateral, the security interest will take priority over an intervening lien creditor.2 Defendant never filed a financing statement with respect to its purchase-money security interest in the Vehicle, because C.R. S. § 4-9-311(a) provides that the filing of a financing statement is neither necessary nor effective to perfect a security interest in property subject to a certificate-of-title statute. However, Defendant relies on C.R.S. § 4-9-311(b) which states that compliance with the requirements of a certificate of title statute is “equivalent to the filing of a financing statement.”
Defendant contends that it “complied” with the Colorado Certificate of Title Act on July 18, 2005, when its lien was noted in the DMV database. Therefore, under § 4-9-311(b), this “compliance” was the “equivalent” to filing a financing statement to perfect its purchase money security interest on July 18, 2005. Defendant argues that since July 18 was within twenty days of the date the Debtors took possession of the Vehicle, C.R.S. § 4-9-317(e) and 11 U.S.C. § 546(b)(1)(A) allow Defendant’s interest to take priority over the Trustee’s interest as a hypothetical intervening lien creditor.
Cases from other jurisdictions have applied the relation back provisions of § 9-317 of the UCC to motor vehicle liens, if the lien is perfected under the terms of the motor vehicle statute within the twenty day period. See, In re Lockridge, 303 B.R. 449 (Bankr.D.Ariz.2003)(lien noted on title, and thereby perfected, within twenty days); Custer v. Amer. Honda Finance Corp. 50 U.C.C.Rep.Serv.2d 608 (Bankr.N.D.Iowa 2003)(state law provided for perfection upon delivery of title application to clerk which was done within twenty days).
Additionally, comment 8 to C.R.S. § 4-9-317, states that “a person who perfects a security interest in goods covered by a certificate of title by complying with the perfection requirements of an applicable certificate-of-title statute ‘files a financing statement’ within the meaning of subsection (e).”
Thus, Defendant has met the requirements for application of 11 U.S.C. § 546(b)(1)(A). C.R.S. § 4-9-317(e) is a generally applicable law which permits perfection of a security interest to be effective against any entity that acquires rights in the property prior to the actual *146date of perfection, and the Trustee’s rights under 11 U.S.C. § 544(a) are subject to this relation-back statute. Defendant’s security interest in the Vehicle takes priority over the intervening rights of the Trustee under 11 U.S.C. § 544(a), and Defendant is entitled to summary judgment on all of the Trustee’s remaining claims.
Based upon this finding and in accordance with the parties’ Joint Statement of Stipulated Facts and Law, it is hereby
ORDERED that the Defendant’s Motion for Summary Judgment is GRANTED and judgment shall enter in favor of Defendant on all the Plaintiffs Second, Fourth, Fifth and Sixth Claims for Relief; and it is
FURTHER ORDERED that Plaintiffs Motion for Summary Judgment is DENIED.
. All future statutory references to "Section” will be to Title 11 of the United States Code, unless otherwise noted.
. “Lien Creditor” is defined in the UCC as “[a] trustee in bankruptcy from the date of the filing of the petition ...” C.R.S. § 4-9-102(52)(C) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493951/ | ORDER ON MOTION FOR RELIEF FROM STAY
(Doc. No. 103)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration in this Chapter 11 case of Spancrete of Florida, LLC (Debtor) is a Motion for Relief from Stay (Doc. No. 103), filed by CORE Construction Services Southeast, Inc. d/b/a/ CORE Construction (CORE) (the Motion). In the Motion, CORE seeks actually not relief from the automatic stay in the orthodox sense, but a determination by this Court that certain funds placed on deposit with HHG III, Inc. d/b/a/ Employee Professionals (Employee Professionals) are not property of the estate of the Debt- or and that CORE is entitled to the funds in dispute. The facts relevant to the resolution of the dispute as established at the final evidentiary hearing can be briefly summarized as follows:
On June 8, 2004, the Debtor and CORE entered into a construction contract concerning a condominium complex referred to as Artisan Park Club (Artisan Park). It was the Debtor’s obligation under this contract to supply and install pre-cast, hollow-core concrete plank and it was CORE’S obligation to pay to the Debtor the price agreed upon and fixed by the contract. (CORE Exh. 1.) On September 17, 2004 the Debtor and CORE entered into a second construction contract referred to as Sonoma Phase II, Inc. condominiums (So-noma Phase II). The terms of the Sonoma Phase II contract were basically the same as that fixed by the Artisan Park contract. (CORE Exh. 2.) Pursuant to the terms of each contract, CORE was required to make monthly progress payments to the Debtor for the products supplied and actually installed by the Debtor.
Near the end of 2004 the Debtor began to experience financial problems. CORE was aware of the problems but anxious to use the services of the Debtor, and was especially interested in ensuring that it would receive the property supplied and installed on these two projects on a timely basis. To assist the Debtor, CORE began to make payments directly to certain of the Debtor’s suppliers and vendors and would debit these payments against the progress payments that were due and owing to the Debtor during any given payment period.
CORE would treat these payments made to third parties as payments made to the Debtor and correspondingly offset these amounts against the amounts due and owing under the contracts. This arrangement permitted the Debtor to oper*166ate its business and to perform under the contracts.
The parties are not in agreement as to the legal nature of these payments to third parties and the corresponding offsets. It is the Debtor’s position that these transactions were in fact contributions to capital by CORE. It is CORE’S position that these transactions were loans made to the Debt- or for the purpose of assisting the Debtor to complete the Artisan Park and Sonoma Phase II contracts.
One vendor paid under this system was Employee Professionals. The Debtor used Employee Professionals to handle its payroll and also to manage the compensation services for the employees of the Debtor. Under the arrangement with CORE, if the Debtor received an invoice from Employee Professionals for which it did not have sufficient funds, the Debtor would forward the invoice to CORE for payment.
The first payment CORE sent to Employee Professionals on behalf of the Debt- or was in payment of an invoice dated January 14, 2005, submitted by Employee Professionals, totaling $51,490.18. (CORE Exh. 6.) For this particular payment the description on the wire transfer receipt shows, and the subcontractor payment record confirms, that CORE in fact debited the sum of $51,490.18 against the amounts owed to the Debtor under the Artisan Park contract. (CORE Exhs. 4 and 6.)
On January 20 and 27, 2005, respectively, CORE paid under Employee Professionals invoices, dated January 21, 2005 and January 28, 2005, respectively, $39,532.31 and $40,996.54. (CORE Exhs. 7, 8.) These two payments were also debited against the amounts due to the Debtor under the Artisan Park contract. (CORE Exhs. 4, 7, and 8.) All payments to Employee Professionals by CORE were made by wire transfer. (CORE Exhs. 6, 7, and 8.)
Employee Professionals became concerned about the Debtor’s financial stability. Therefore, on February 1, 2005, Employee Professionals sent a letter (the Letter) to the Debtor requesting a $45,000 “deposit”, to be used in the event the invoices submitted by Employee Professionals for services rendered were not paid. (Debtor Exh. 8.) More specifically, the Letter provided, and it was understood, that Employee Professionals would hold the $45,000 on deposit until the final payroll of the Debtor was completed and use the amount only in the event that the Debtor ceased operations and the outstanding balances remaining on any invoices remained unsatisfied.
It is fair to infer that the Debtor did not have the amount of the deposit requested by Employee Professionals, and that the Debtor forwarded the letter to CORE, requesting assistance. On February 4, 2005, CORE made a payment to Employee Professionals in the amount of $89,343.09 by wire transfer. (CORE Exh. 9.) This amount included the sum of $44,343.09 for payroll services rendered by Employee Professionals invoiced on February 4, 2005, and the sum of $45,000, which was the deposit requested by Employee Professionals. It is without dispute that CORE debited the sum of $44,343.09 against the progress payment due to the Debtor on the Artisan Park contract and debited the $45,000 payment against the progress payment due to the Debtor on the Sonoma Phase II contract. (CORE Exhs. 4, 9; Debtor Exh. 7.)
After making these payments, CORE continued to make payments to the Debt- or’s vendors. These payments included a wire transfer on February 17, 2005 in the amount of $53,212.17 to Employee Professionals for its invoice dated February 17, 2005. (CORE Exh. 10.) As earlier, this *167amount was debited against the progress payments due to the Debtor under the Artisan Park contract. (CORE Exhs. 4, 10.)
On April 7, 2005, the Debtor filed a Petition for relief under Chapter 11 of the Bankruptcy Code. Shortly after the commencement of the case, Employee Professionals used the $45,000 deposit described earlier to meet the Debtor’s weekly payroll obligations twice: once in amount of approximately $28,000 and the second in the amount of approximately $16,000. As requested by Employee Professionals, the Debtor did replenish and replace the deposit which was used up by making a payment in the full amount of $45,000.
There is no question and this record leaves no doubt that the $45,000 to replace the exhausted deposit were funds paid by the Debtor and no part of the same was supplied or furnished by CORE.
As noted earlier, facially CORE seeks relief from the automatic stay, but in reality it seeks a determination that the funds on deposit with Employee Professionals is not property of the Debtor’s estate, thus it is free to recover the funds and use them as a setoff against amounts due to the Debtor under the contracts. Whether CORE is entitled to execute upon any interest it may have in the funds on deposit depends on whether the funds are property of the estate. Property of the estate is broadly defined to include “all legal or equitable interests of the debtor in property as of the commencement of the case,” and includes property “wherever located and by whomever held.” 11 U.S.C. § 541. The scope of § 541(a) is broad. United, States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983).
It appears from the record that the funds paid by CORE to Employee Professionals were credited against payments owed to the Debtor under the two contracts. Even assuming that the $45,000 originally put on deposit with Employee Professionals was never intended to ultimately become property of the estate, the result is unchanged. Assuming the parties intended the money to be held in escrow by Employee Professionals, to be used in the case the Debtor was unable to pay any outstanding invoices, and in the event the Debtor ceased operations and the outstanding balances remaining on any invoices remained unsatisfied, the funds were in fact used to satisfy outstanding invoices. This is similar to the occurrence of the conditions precedent to an escrow agreement, entitling one party to receive the funds previously held.
When the funds on deposit were applied by Employee Professionals to outstanding invoices and subsequently replaced by the Debtor’s own funds, any claim CORE had to the deposit was extinguished. After the initial $45,000 deposit was used to satisfy outstanding invoices, there was no longer a deposit on hand with Employee Professionals. The $45,000 currently on deposit with Employee Professionals came from funds of the Debtor, from its operations, and CORE never had any cognizable interest in the funds.
This Court has considered T & B Scottdale Contractors, Inc. v. United States, 866 F.2d 1372 (11th Cir.1989), and finds that it is not controlling under the facts presented in this case. In T & B, R & R, the debtor/subcontractor, had a joint bank account with T & B, a general contractor, and the debtor’s contracts with the contractor expressly stated that the funds in the account were to be used only to pay materialmen. The court held that where funds deposited in a bank account in the debtor’s name were meant solely for oth*168ers, those funds, held for the benefit of another, were not property of the estate.
The facts involved in the present dispute are distinguishable from those in T & B. As in the instant case, R & R would forward to T & B any unpaid invoices, and T & B would deposit enough money into the account to cover that invoice. However, the joint account of T & B and R & R, as well as the contract, were explicit with regards to all funds being on deposit for the materialmen’s benefit. The letter requesting the deposit contained no such terms, and there is nothing in the record to establish any such terms between CORE and the Debtor.
Additionally, in T & B the funds at issue were not property of the estate because they were earmarked for a party other than the debtor. It was “undisputed that the funds were meant solely for the mate-rialmen.” T & B, 866 F.2d at 1376. Here it is unclear for whose benefit the funds were placed on deposit: clearly it was to ensure that Employee Professionals would get paid, but also to ensure that the Debt- or would continue to receive services it needed and its employees would continue to receive their salaries.
Additionally, the difference between the funds at issue in T & B and the funds currently at issue is an important one. The trustee in T & B claimed as property of the estate money held in a bank account in the debtor’s name. Here, the Debtor claims as property of the estate funds that it paid to replace a deposit, exhausted according to the terms contemplated when the deposit was originally made. The funds at issue in this case were actually paid to Employee Professionals by the Debtor, not held by the Debtor for the benefit of Employee Professionals.
Based on the forgoing, this Court is satisfied that the $45,000 currently on deposit with Employee Professionals came from funds of the Debtor, and CORE never had any interest in the funds. This being the case the funds currently on deposit are property of the estate protected by the automatic stay, there is no provision in the Bankruptcy Code that grants the relief sought by CORE, and the Motion should be denied.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Relief from Stay (Doc. No. 103), filed by CORE Construction Services Southeast, Inc. d/b/a/ CORE Construction, be, and the same is hereby, denied.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493952/ | ORDER ON DEBTOR’S MOTION TO DETERMINE ENTITLEMENT TO ATTORNEYS’ FEES AND COSTS AND MOTION BY CITY OF NAPLES AIRPORT AUTHORITY FOR THE ASSESSMENT OF ATTORNEYS’FEES AND COSTS
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTERS under consideration in the above styled adversary proceeding in this Chapter 11 case of Jet 1 Center, Inc. (Debtor) are a Motion by City of Naples Airport Authority for the Assessment of Attorneys’ Fees and Costs (Doc. No. 206), filed by the City of Naples Airport Authority (Authority) and a Motion to Determine Entitlement to Attorneys’ Fees and Costs (Doc. No. 219), filed by the Debtor. The record reveals that this Court previously entered its Findings of Facts, Conclusions of Law and Memorandum Opinion (Doc. No. 191) on August 26, 2005, and its Order on Debtor’s Emergency Motion for Reconsideration or to Alter or Amend the Final Judgment (Doc. No. 231) on October 26, 2005. Final judgment on the merits having been entered, both parties argue they are entitled to attorneys’ fees and costs. This Court has reviewed the legal memo-randa submitted by both parties in support of their respective motions, and rules as follows.
The parties entered into a series of leases, which form the basis of the controversy underlying this Adversary Proceeding. Second Amended Complaint *170(Doc. No. 29), Exhs. A, B, C, and D. The Leases between the parties provides for the recovery of attorneys’ fees and costs to the prevailing party. 1997 Leasehold Agreement, Second Amended Complaint, Exh. B, ¶21. Indeed, the parties do not dispute that the Leases at issue in the Adversary Proceeding provide for such an award to the prevailing party. See Jet 1 Brief on Support of Its Motion to Determine Entitlement to Attorneys’ Fees and Costs, pg. 8. Under Florida law, the “prevailing party” is the party that prevails on the most significant issues in the litigation. Moritz v. Hoyt Enters., Inc., 604 So.2d 807, 810 (Fla.1992) (holding “the party prevailing on the significant issues in the litigation is the party that should be considered the prevailing party for attorney’s fees.”).
The facts and issues in dispute in this Adversary Proceeding are well-known to all involved, and do not require recitation here. The significant issue was a determination as to the termination by the Authority, pre-petition, of a leasehold claimed by the Debtor. This Court found that the Leases were validly terminated pre-petition, and ruled against the Debtor on all of the counts in its Complaint, and denied the Debtor’s Motion to Assume the Leases. In the Final Judgment, this Court ordered the Debtor to vacate the premises, subject to a stay pending appeal.
In addition to the Leases termination issue, this Court considered the Authority’s counterclaim for damages based on lost profits as a result of the Debtor’s breach, and ruled that the Authority presented insufficient proof to sustain a claim for damages. The Debtor argues that because this Court awarded no damages to the Authority, the Authority cannot be the prevailing party. However, this Court is satisfied that the significant issue at stake in the litigation was the termination or assumption of the Leases. A court-appointed examiner stated, with respect to this issue: “If the [Authority] is successful in terminating the lease arrangement pre-petition, taking away the Debtor’s main asset and only real source of income, then obviously the Debtor is no longer a viable entity.” Examiners’ Report, submitted by Gerard A. McHale, Jr., P.A., (Filed in the main case, Doc. No. 162), p. 4. The Debt- or’s leasehold interest is the main asset in this case, and the continuing validity of that interest was the significant issue in the Adversary Proceeding.
The Authority was the prevailing party on the significant issue in the litigation, and is thus entitled to an award of attorneys’ fees and costs; the Debtor was not the prevailing party, and is not entitled to fees and costs. The Debtor’s Motion shall be denied. The Authority’s Motion shall be granted, and the Authority shall file with the Court a detailed summary and calculation of its fees and costs, and an affidavit describing the services rendered and the hourly rate charged. The Authority shall serve the affidavit on the Debtor, who will have twenty days from receipt to file any objections to the fees and costs.
The present ruling is only directed to the entitlement of the respective parties to attorneys’ fees and costs. This Court makes no ruling as to the claims process in this case at this time.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion by City of Naples Airport Authority for the Assessment of Attorneys’ Fees and Costs (Doc. No. 206), filed by the City of Naples Airport Authority be, and the same is hereby, granted. It is further
ORDERED, ADJUDGED AND DECREED that the Motion to Determine Entitlement to Attorneys’ Fees and Costs *171(Doc. No. 219), filed by the Debtor be, and the same is hereby, denied. It is further
ORDERED, ADJUDGED AND DECREED that the Authority shall file with the Court a detailed summary and calculation of its fees and costs, and an affidavit describing the services rendered and the hourly rate charged. The Authority shall serve the affidavit on the Debtor, who will have twenty (20) days from receipt to file any objections to the fees and costs.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493953/ | ORDER ON DEFENDANT MANATEE COUNTY’S DISPOSITIVE MOTION FOR JUDGMENT ON THE PLEADINGS
ALEXANDER L. PASKAY, Bankruptcy Judge.
The MATTER under consideration in this Chapter 7 liquidation case is Defendant Manatee County’s Dispositive Motion for Judgment on the Pleadings (Doc. No. 43), filed by Manatee County Board of Commissioners (Defendant). This Motion was filed in connection with an adversary proceeding commenced by the Trustee against Manatee County Board of Commissioners, Manatee County Tax Collector, Manatee County Property Appraiser, North River Fire District, and Florida Department of Revenue.
The Trustee sets forth three distinct claims in three separate counts in its Chapter 7 Trustee’s Amended Complaint for Refund of Overpaid Taxes, Objection to Claims and to Determine Amount and Secured Status of Claims of Manatee County (Doc. No. 13). In Count I of the Amended Complaint the Trustee requests a claim of refund under 11 U.S.C. § 505(a)(1). In Count II the Trustee objects to claims of Manatee County under 11 U.S.C. §§ 502 and 704(a)(5). In Count III of the Amended Complaint, the Trustee requests this Court determine the amount and secured status of claims of Manatee County under 11 U.S.C. § 506(a).
The immediate matter under consideration is addressed to Count III of the Amended Complaint. The precise and narrow issue raised is whether the eighteen (18) percent statutory interest rate imposed by Defendant as taxes on the property owned by the Debtor constitutes a penalty and thus cannot be allowed as part of the secured claim of Defendant.
In Count III the Trustee alleges facts as follows. The Manatee Tax Collector filed various secured claims. It is the Trustee’s contention that the values of the real and tangible personal property assessed by Manatee County are considerably overstated and therefore the claims are based on taxes which were improperly assessed. *178The Trustee asserts that the property has little or no value because of environmental contamination. Citing this Court’s opinion in In re Mulberry Phosphates, Inc., 283 B.R. 347 (Bankr.M.D.Fla.2002), the Trustee argues that secured claims may be secured only to the extent of the collateral, in this case, the value of the property, and the rest must be treated as a general unsecured claims.
Based on the foregoing, the Trustee contends that Defendant’s claims consist of penalties and interest on delinquent taxes at the rate of 18 percent per annum. Implementing the reasoning from this Court’s decisions in Mulberry and in In re Koger Properties, Inc., 172 B.R. 351 (Bankr.M.D.Fla.1994), the Trustee claims that this interest rate is clearly excessive of the rate necessary to compensate Defendant for the loss of use of funds. The Trustee requests this Court reduce the claim consisting of statutory interest and unpaid taxes because the interest rate amounts to a penalty.
In opposition of the Trustee’s contentions, Defendant asserts that it is entitled to Judgment on the Pleadings as to Count III as a matter of law because the statutory interest rate is not a penalty and therefore cannot be reduced. In support of its position Defendant relies on cases from this District, other Districts in Florida, and various courts across the countries, which have held that Florida’s statutory interest rate is not a penalty. E.g., In re Cone Constructors, Inc., 304 B.R. 513 (Bankr.M.D.Fla.2003); In re R & W Enterprises, 181 B.R. 624 (Bankr.N.D.Fla.1994); In re P.G. Realty Co., 220 B.R. 773 (Bankr.E.D.N.Y.1998).
In Cone, Chief Judge Glenn held that the Tax Collector was entitled to the statutory interest rate on his secured claim, reasoning “[s]uch a rate is not wholly disproportionate or excessive in relation to market risks and conditions.” 304 B.R. at 518. Furthermore, the court stressed that no evidence was offered which indicated that the provision was meant to penalize delinquent taxpayers instead of compensate the tax authority for delayed payment. Id.
In its Motion, Defendant indicates that this Court’s decisions in Mulberry and Roger are at odds with various other courts. In fact, some courts have expressly rejected the position adopted by this court. See In re Liuzzo, 204 B.R. 235, 240 (Bankr.N.D.Fla.1996); In re Haskell, 252 B.R. 236, 242 (Bankr.M.D.Fla.2000). At the hearing Defendant urged this Court to reconsider its position regarding the statutory interest rate and align itself with the other courts.
In this liquidation case it cannot be gainsaid that the interest on money due and owing is a compensation of the holder of a claim for the loss of use of the funds. In the context of bankruptcy the competing interest is the interest of the general estate and the equities of the circumstances which must always be taken into consideration. In the present instance the interest rate is determined by the Legislature of the State, ostensibly based on the determination that the interest rate is a reasonable amount to compensate the taxing authority for the loss of the use of the funds which have not been paid when they became due and owing. It is equally true that the Legislature no doubt also intended, in determining the rate of interest on default, to deter taxpayers from not paying tax obligations.
Since the eighteen (18) percent per an-num interest rate is not supported by actual evidence, the Court may take into consideration that under the current market conditions, the taxing authority could not have invested the funds and obtained an *179eighteen (18) percent annual return if it had collected on time. Of course, besides investing the funds, the taxing authority has the responsibility to meet the obligations and costs of operating the government. Both are significant factors which weigh heavily in favor of recognizing the validity of the eighteen (18) percent interest rate and conclude that it is not a penalty. Against these factors, the Bankruptcy Court must also consider the interest of the general estate, particularly the interest of the general unsecured creditors because if the eighteen (18) percent interest rate is recognized and paid, that will diminish the funds available to distribute to the general unsecured creditors whose claims have been allowed.
In the present instance there is no question that the likelihood that funds will be available for distribution to the general unsecured creditors is nill, even if the interest rate is reduced. Thus, in the last analysis it is clear that in balancing the competing interests, the scale is tipped heavily in favor of the Manatee County, and therefore Manatee County is entitled to partial Judgment on the Pleadings determining that the eighteen (18) percent interest in this particular situation is not a penalty and shall be allowed as part of the secured claim of the Defendant.
Although the specific factual scenario presented in this case does not warrant a departure from the statutory interest rate, this decision should not be construed to be a categorical and unconditional endorsement of the eighteen (18) percent interest rate. In certain situations, it would be appropriate to depart from the eighteen (18) percent statutory rate and conclude that the rate is actually a penalty because the interest of the general unsecured creditors was seriously impacted by the acceptance of the eighteen (18) percent interest rate as a penalty. However, in the present instance it is clear that rejection of the eighteen (18) percent interest rate would have no impact on the interests of general unsecured creditors simply because the estate is administratively insolvent and the possibility of paying dividends to generally unsecured creditors is nill.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Defendant Manatee County’s Dispositive Motion for Judgment on the Pleadings (Doc. No. 43) treated as a partial Motion for Judgment on the Pleadings, be, and the same, is hereby granted. It is further
ORDERED, ADJUDGED AND DECREED that the appropriate interest rate to be charged as part of the secured claim of Defendant shall be the statutory interest rate of eighteen (18) percent.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493955/ | Memorandum Opinion
DIANE WEISS SIGMUND, Chief Judge.
Before the Court is the Motion for Contempt of Automatic Stay (the “Motion”) filed by the Debtor against the Philadelphia Parking Authority (“PPA”). An evi-dentiary hearing at which only the Debtor testified was held on March 14, 2006 to supplement the Stipulation of Facts filed on March 13, 2006. As the pre-hearing briefs that were filed did not adequately address the legal issues identified by the Court, the parties were granted leave to supplement those as well. The briefs now having been submitted, the Motion is ripe for decision. For the reasons that follow, the Motion is granted.
BACKGROUND
The Debtor’s husband, a former mechanic, purchased a 1991 Chrysler sedan (the “Vehicle”) for her on December 17, 2003 for approximately $100. He purchased parts and made repairs to it to put it in drivable condition, including installing a new timing belt, water pump, one tire, rebuilding the carburetor and fixing the electrical windows, at a cost for the parts of $1,000.1 The PPA issued three tickets to Debtor on account of expired meters on February 26, 2004, April 26, 2004 and October 1, 2004. On November 12, 2004 PPA issued another ticket on account of an expired registration sticker on the Vehicle. It is undisputed that the Vehicle was not properly registered in Debtor’s name with the Commonwealth of Pennsylvania, Bureau of Motor Vehicles (apparently because the registration had expired).2
On September 9, 2005 Debtor filed a petition for relief under Chapter 13. She scheduled the PPA as an unsecured creditor in the amount $571 for unpaid parking tickets. On September 14, 2005 the PPA immobilized (booted) the Vehicle. On that *334date the Vehicle had no valid registration. On September 19 and 25, Debtor went to the PPA to find out how to recover her Vehicle. She did not ask for the return of any property located in the Vehicle because she believed the Vehicle would be returned. She was given a form “Statement of Rights and Responsibilities” regarding a hearing. Exhibits D-2 and D-3. She was told that if her bankruptcy was effective, she would be given her keys. However, as she could not produce a petition with the seal of the bankruptcy court, the PPA would not release the Vehicle.3
On October 13, 2005 PPA filed a “Petition for Leave to Sell Motor Vehicles for Impounding Charges and Outstanding Fines and Any and All Related Costs and Best Title and Purchaser Pursuant to President Judge General Court Regulation No. 96-1” (the “Petition”) in the Court of Common Pleas as of October Term, 2005, No. 0903. Exhibit D-l. The Vehicle was covered by this Petition. On October 11, 2005 4 an Order was entered by the Court of Common Pleas authorizing the sale of, inter alia, the Vehicle on October 22, 2005. Id. It was sold at an auction later that day. The record is silent as to the auction sale price for the Vehicle, and Debtor contends its trade-in value to be $1,200.
While Debtor apparently informed the PPA representatives she met of her pending bankruptcy case, it was not raised in the state seizure proceeding. On October 25, 2005 her counsel faxed a copy of a Note and the Notice of Bankruptcy Filing to PPA and followed it the next day with this Motion.
DISCUSSION
I.
The application of the most fundamental principle of bankruptcy law leads to the inescapable conclusion that PPA’s post-petition conduct in seizing and impounding the Vehicle and selling it to recover the costs of unpaid prepetition parking fines and storage costs violated the automatic stay of § 362(a). PPA’s arguments to contend that there was no stay violation are simply incredible.
First PPA’s contends that it was free to collect the post-petition obligation for the storage fees, conveniently ignoring that it also sought to recover the prepetition claim for the unpaid parking tickets. The commencement of process against the debtor to recover a prepetition claim is stayed under § 362(a). The fact that the action also seeks to recover a postpetition claim does not cleanse the illegal conduct. Then PPA seeks to split hairs by stating that it was not collecting a money judgment since it held the sale proceeds and Debtor just didn’t come to claim them. In support of that contention, it attaches the regulations that proscribe its procedures when a seized vehicle is sold. Aside from the fact that there was no testimony of what actually occurred in this case and that even the belatedly produced documents do not refer to Debtor, the procedure described does not support PPA’s contentions. The generic notice that is supplied specifically advises that the owner will be required to pay all outstanding parking tickets issued to the vehicle as well as a towing fee and the per diem storage charge before recovery of the *335seized vehicle will be authorized. PPA’s request to the Court which is styled “Petition for Leave to Sell Motor Vehicles For Impounding Charges and Outstanding Fines and Any and All Related Costs...” states that “City of Philadelphia has a financial interest on said vehicles for towing and storage charges and related fines, if any, in the amounts specifically set forth in Exhibit A, ...”5 and “pursuant to the aforestated financial interest, the City requests the auction.” Exhibit D-l (emphasis added). Judge Massiah Jackson’s Order states that the net proceeds of sale shall be distributed as provided in Section 6 of General Court Regulation No. 96-1 and “any remaining proceeds shall be held for the owner.” Id. (emphasis added). Thus, PPA’s own submissions belie the statement that it was not collecting a money judgment. In any event, even if PPA did not complete the process of paying itself, the acts it took in furtherance of that end violated the stay. See Internal Revenue Service v. Norton, 717 F.2d 767, 772 (3rd Cir.1983) (rejecting IRS contention that withholding overpaid taxes to preserve its setoff rights under the Internal Revenue Code did not violate the automatic stay.)
Moreover, even had the only claim been for post-petition impoundment and storage costs which PPA would have been free to pursue, it could not do so by seizing estate property. Section 362(a)(3) prohibits any act to obtain property of or from the estate. 11 U.S.C. § 362(a)(3). See In re Fisher, 198 B.R. 721 (Bankr.N.D.Ill.1996) (City’s action in booting, towing and crushing the debtor’s vehicle for her failure to pay post-petition parking tickets violated the stay under § 362(a)(3)). PPA contends that the Vehicle was not estate property but I respectfully disagree. Its position is based on a misrepresentation of the Debtor’s file. First PPA states that as Debtor exempted the Vehicle, it cannot be property of the estate, attaching Debtor’s Amended Schedule C dated October 31, 2005. Doc. No. 11. PPA fails to mention that at the time all of its actions to sell the Vehicle were taken, Debtor had not yet exempted the Vehicle. The Court takes judicial notice of Debtor’s original Schedule C filed September 9, 2005 which does not claim an exemption for the Vehicle. Doc. No. 1. The law is clear that when a debtor files for bankruptcy, all of the debtor’s property becomes property of the estate. This necessarily includes any property which the debtor intends to exempt under § 522. Taylor v. Freeland & Kronz, 503 U.S. 638, 641, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). Unless the debtor takes affirmative steps to exempt the property, it remains property of the estate. Furthermore property for which an exemption is claimed remains estate property for at least thirty days of the first meeting of creditors to allow objections to the exemptions to be lodged. Fed. R.Bankr.P. 4003. Thus, even had the Debtor included the Vehicle on her original Schedule C, it still would have been property of the estate when PPA sought to sell the Vehicle since the § 341 meeting was held on October 31, 2005.
PPA also contends the Vehicle was not property of the estate because it had revested in the Debtor pursuant to § 1327(b) which states that except as otherwise provided, the confirmation of a plan vests all of the property of the estate in the debtor. Seemingly to prove its point, it attaches the confirmation order dated March 16, 2006, again glossing past the *336temporal flaw of its argument. Property of the estate revested in the Debtor upon confirmation which occurred on March 16, 2006, five months after it was sold by PPA. Since the Vehicle had not revested in the Debtor when the seizure occurred, the seizure was an impermissible act to obtain property of the estate.
II.
PPA next contends that its actions were permissible based on two statutory exceptions to the operation of the automatic stay. First, PPA argues that § 362(b)(1) applies contending that the enforcement of parking regulations is a quasi-criminal enforcement proceeding. Second, PPA contends that its conduct was insulated by § 362(b)(4) since the enforcement of parking regulations is an exercise of the PPA’s police powers. I find no merit to the first argument and while I agree that § 362(b)(4) allows PPA to take certain actions in furtherance of its police powers, it does not allow it to sell estate property to pay a prepetition debt.
A. Section 362(b)(1) Exception
Section 362(b)(1) provides an exception to § 362(a) for the commencement or continuation of a criminal action or proceeding. On it face § 362(b)(1) appears to have nothing to do with the enforcement of parking regulations contained in the City Traffic Code. By counsel’s own admission, this is not a criminal law.6 Rather PPA relies on In re Cuevas, 205 B.R. 457 (Bankr.D.N.J.1997), to contend that “[t]he Courts in this Circuit have held that the enforcement of traffic offenses and fines is a quasi-criminal activity that falls under this exception of criminal activities.” Philadelphia Parking Authority Brief in Support of Objection to Motion at 3. While Cuevas did rely on this exception, it did so under facts so disparate from those at issue here that it is surprising that PPA offers it.
In Cuevas, the debtor was convicted pre-petition of driving without insurance, for improper tag display and for driving with a revoked license. His license was suspended and he was fined. When he failed to remit the fines, the municipal court issued a warrant and placed him in jail. The statute under which he was incarcerated mandates the imprisonment of a person convicted of a motor vehicle violation if the person defaults in the payment of any of the fines imposed. That statute was described by the New Jersey Supreme Court as imposing a fíne to punish, and that imprisonment upon non-payment, was not a collection device but rather further punishment. Accepting the state court’s characterization, the bankruptcy court held that the incarceration was the continuation of a criminal proceeding substituting incarceration as the penalty for the earlier convictions.
Unlike the criminal proceeding in Cue-vas, the action taken by PPA was civil in nature. The Traffic Code allows the PPA to tow, boot and impound vehicles that are unregistered as was the Vehicle. Philadelphia Code and Charter § 12-1130. The Petition PPA filed with the state court for leave to sell the Vehicle at auction recites that the City has a “financial interest” for towing and storage charges and parking tickets and related fines. Pursuant to that “financial interest,” the City requested leave to auction the Vehicle for payment of *337the charges, fines and costs of the auction. That PPA was acting to collect a debt could not be plainer. Cuevas is simply inapposite and notwithstanding the further briefing opportunity, no other authority is provided for the broadly stated proposition, which I reject, that PPA’s enforcement of parking fines under applicable state law is a quasi-criminal proceeding to which the exception of § 362(b)(1) is applicable.
B. Section 362(b)(4) Exception
Section (b)(4) provides an exception under subsection (a)(1), (2),(3) and (6) for “the commencement or continuation of an action or proceeding by a governmental unit ... to enforce such governmental unit’s police and regulatory powers, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such unit’s ... police or regulatory power.” 11 U.S.C. 362(b)(4). I accept PPA’s general position that the seizure, booting and impoundment of vehicles under authority of § 12-1130 is the commencement of an action by a governmental unit to enforce its police powers. The question is whether PPA’s police or regulatory powers extend to its further action, ie., selling the Vehicle to collect its costs of the storage and unpaid parking fines, or is more properly viewed as the enforcement of a money judgment.
The parties cite me to the controlling authority in this Circuit, Penn Terra Limited v. Department of Environmental Resources, 733 F.2d 267 (3d Cir.1984).7 In Penn Terra, the Third Circuit held that the Pennsylvania Department of Environmental Resources’ enforcement of a judgment to compel a strip mining company to backfill land was governed by the § 362(b)(4) exception to the automatic stay. Discussing the parameters of the limitation for enforcement of money judgments, the Court reasoned that if all orders requiring the expenditure of money were “money judgments,” the exception for police action which should be construed broadly would be “narrowed into virtual nonexistence.” Id. at 277-78. In noting that the injunction sought by the state did not present the characteristics traditionally associated with a money judgment, the Court provided guidance to lower courts by indicating what these characteristics are.
We believe that the inquiry is more properly focused on the nature of the injuries which the challenged remedy is intended to redress — including whether plaintiff seeks compensation for past damages or prevention of future harm— in order to reach the ultimate conclusion as to whether these injuries are traditionally rectified by a money judgment and its enforcement. Here, the Commonwealth Court injunction was, neither in form nor substance, the type of remedy traditionally associated with the conventional money judgment. It was not intended to provide compensation for past injuries. It was not reduceable to a sum certain. No monies were sought by the Commonwealth as a creditor or obli-gee. The Commonwealth was not seeking a traditional form of damages in tort or contract, and the mere payment of money, without more, even if it could be estimated, could not satisfy the Commonwealth Court’s direction to complete the backfilling, to update erosion plans, to seal mine openings, to spread topsoil, and to implement plans for erosion and sedimentation control. Rather, the Commonwealth Court’s injunction was *338meant to prevent future harm to, and to restore, the environment.
Id. at 278. On the contrary here, PPA is seeking compensation for past damages (ie., the unpaid parking tickets and im-poundment costs), an amount that was reduced to a sum certain in the Petition. Its actions were that of a creditor and in liquidating estate property for its benefit, PPA secured a preference over other similarly situated creditors with a claim against the estate. Equal treatment of creditors is one of the fundamental legislative objectives of the Bankruptcy Code and is implemented by the automatic stay which protects creditors by preventing a race to seize the debtorjs assets. H.R.Rep. No., 595, 95th Cong., 1st Sess. 174-75 (1977), S.Rep. 989, 95th Cong., 2d Sess. 49-50 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5963, 5787. The sale of the Vehicle did not enhance PPA’s regulatory purpose but rather, as its own Petition made clear, merely served its pecuniary interest.
In short, I find that PPA’s conduct was not governed by either stay exception relied upon. I am also unpersuaded by certain other justifications for the stay violation which are advanced by PPA. PPA’s argument that it followed the state proscribed regulations for a sale of seized vehicles, providing appropriate notices and hearings, misses the point. A sale conducted in accordance with state law is not a fortiori in compliance with bankruptcy law. Nor does the fact that the Debtor failed to defend the Petition by pleading the pendency of the bankruptcy limit the Debtor’s position under principles of res judicata. As I stated to PPA’s counsel at the hearing, if its actions were in violation of the stay, they were void ab initio. Maritime Electric Co. v. United Jersey Bank, 959 F.2d 1194, 1206 (3d Cir.1992). Debtor’s active participation in the void state court proceedings and silence about her bankruptcy case cannot validate a void action. In re Izzi, 196 B.R. 727, 729 (Bankr.E.D.Pa.1996).8
This is not to state that PPA was without recourse. If contrary to her testimony, Debtor had refused to reclaim the Vehicle, PPA was not compelled to store it indefinitely, thereby incurring additional costs. A simple motion for relief from stay on notice to Debtor would have provided an appropriate resolution. Had Debtor failed to appear as PPA claimed was the case with its state court process, it would have received relief from stay to dispose of the Vehicle and turn over the proceeds to the Chapter 13 trustee so long as it was property of the estate or to pay its post-petition claim if it was not.
C. Damages
Section 362(k) of the Bankruptcy Code provides that “[a]n individual injured by any willful violation of a stay provided by this section [ie., section 362] shall recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k). Accordingly, PPA will be liable for damages if I find its actions in violation of the stay to be willful. Willfulness in the context of a stay violation has been interpreted by the Third Circuit Court of Appeals to mean “an intentional or deliberate act done with knowledge that the act is in violation of the stay.” Cuffee v. Atlantic Business and Community Development Corp. (In re Atlantic Business and Community Development Corp.), 901 F.2d 325, 329 (3d Cir.1990).
*339A ‘willful violation’ does not require a specific intent to violate the automatic stay. Rather, the statute provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant’s actions which violated the stay were intentional.
Id. (quoting In re Bloom, 875 F.2d 224, 227 (9th Cir.1989)). The uncontroverted evidence is that PPA knew of the Debtor’s pending bankruptcy case as she made multiple contacts to recover the Vehicle before it was sold. PPA knew it was required to return the Vehicle in the event of bankruptcy but its representatives were not convinced that a bankruptcy case was initiated because Debtor did not produce a time stamped petition. However, her advice to PPA was sufficient, and put PPA on notice that its acted at its own peril in violating the stay.9 In knowing about the stay and ignoring it, PPA acted willfully so as to require it to compensate the Debtor for her actual damages and attorneys’ fees.10
The damage claimed by Debtor is loss of her Vehicle measured by its fair market value. Courts do not hesitate to compensate a debtor for the value of property seized in violation of the automatic stay. See McCarthy v. Imported Cars of Maryland, Inc. (In re Johnson), 230 B.R. 466 (Bankr.D.D.C.1999) (appropriate measure of damages was the amount the trustee could have secured for sale of car had it not been seized in violation of the stay).
Debtor provided the only valuation evidence, testifying that the Vehicle cost $100 and $1,000 was spent on parts to repair and make it functional. The repairs were performed by her husband, a former mechanic. She opined that the trade-in value was $1,200 and seeks a judgment in that amount. PPA put on no evidence of value and was unable to elicit from the Debtor the amount it had received when it sold the Vehicle at auction.
It is generally accepted that an owner, because of her personal interest in the property, the uses to which it is put, the condition or the improvements made to it, is competent to provide valuation testimony. In re Blakey, 76 B.R. 465, 469 (Bankr.E.D.Pa.1987) (quoting Kinter v. United States, 156 F.2d 5, 7 (3d Cir.1946)). Federal Rule of Evidence 701, which supports the admission of this testimony, does not address its weight which, as with any evidence, must be determined by the trier of fact. PPA is correct that the $1,200 number stated a conclusion without any reason. I would have thought that the value of the Vehicle would have been greater than its purchase price of $100 given the repairs that had been made by the time it was seized. Parts costing $1,000 and unpaid labor arguably accomplished an improvement in the Vehicle’s condition and utility, not mere maintenance as PPA contends. Sensing that the $1,200 may have been inflated for a 1991 automobile purchased for $100,1 turned to the Debtor’s Schedules and found that on October 31, 2005 when she filed her Amended Schedule C to claim the Vehicle as exempt, she stated its value as $100. This court may take judicial notice of the Debtor’s Schedules filed under penalty of *340perjury. In re Indian Palms Assoc., 61 F.3d 197, 205 (3d Cir.1995) (citing Fed.R.Evid. 201(f) advisory committee note (1972 proposed rules)). Moreover, “factual assertions in pleadings, which have not been superceded by amended pleadings, are judicial admissions against the party that made them.” Larson v. Groos Bank, 204 B.R. 500, 502 (W.D.Tex.1996) (statements in schedules). See also In re Musgrove, 187 B.R. 808 (Bankr.N.D.Ga.1995) (same); In re Leonard, 151 B.R. 639 (Bankr.N.D.N.Y.1992) (same). As Debtor fixed the value of the vehicle at $100 for the purposes of her exemption, I find she is bound to it now that she seeks a cash equivalence for its disposition. However, since PPA admits that it received $125 upon auction of the Vehicle, she will be awarded the greater amount.11
Because the violation is willful, Debtor is also entitled to her attorneys’ fees. However, as I have no evidence of what they are, I cannot liquidate that portion of the judgment. Rather I will give the parties time to negotiate an appropriate fee. If no agreement is reached, Debtor’s counsel shall file an application detailing his services as to which PPA may respond, and I will supplement this Order as needed.
An Order consistent with this Memorandum Opinion shall issue.
Order
AND NOW, this 12th day of April 2006, upon consideration of the Motion for Contempt of Automatic Stay (the “Motion”) filed by the Debtor against the Philadelphia Parking Authority (“PPA”), after notice and an evidentiary hearing and for the reasons stated in the accompanying Memorandum Opinion;
It is hereby ORDERED that the Motion is GRANTED. The Debtor is awarded $125 for the loss of her Vehicle and attorney’s fees in an amount to be determined.
. Debtor could produce no receipts of these expenditures contending that they were located in the Vehicle which was seized without the return of her property.
. PPA does not contend that the Vehicle is not owned by the Debtor.
. Her counsel claims that the reason that she could not produce the document in the form demanded was that documents are now electronically' filed and are longer stamped by the Court.
. Either this date or the filing date is incorrect as an Order cannot be entered before the pleading is filed. The error is not material to the outcome of this contested matter.
. Exhibit A was not provided but it is undisputed that debtor had three outstanding parking fines and that PPA is scheduled as a prepetition unsecured creditor with a claim for parking tickets of $671.00.
. Indeed Chapter 12-2800 of the Traffic Code provided by PPA’s counsel recites that the then existing system of parking violation within the criminal justice system was an inefficient and unfair system for the collection of parking fines, and that the City of Philadelphia is therefore authorized to provide for parking violation enforcement outside of the criminal justice system. § 12-2801 (Legislative Findings).
. The Debtor cites a number of other cases, noting that Penn Terra has not been universally followed. Debtor's Brief on Motion at 3. While that may be true, Penn Terra is binding precedent on lower courts in this Circuit and I will follow its dictates. Fortunately for Debtor, I do not read the case as generously as does PPA.
. Debtor's failure to raise the pendency of the bankruptcy in response to the Petition might have mitigated a finding of willfulness had PPA not been advised by Debtor on at least two occasions of her bankruptcy filing and gone ahead anyway with the sale of the Vehicle.
. The notion that Debtor was required to produce a petition with the court's seal before PPA would be obligated to cease its actions is misguided. The Debtor's mere advice to PPA is constructive notice of the bankruptcy without the requirement of any proof, Patterson v. Chrysler Financial Co.(In re Patterson), 263 B.R. 82, 91 (Bankr.E.D.Pa.2001), not that verification is at all difficult for the creditor since the court’s entire docket is available through the PACER system at www.paeb.uscourts.gov.
. While punitive damages are available under this section in appropriate cases, Debtor does not seek them nor do I find them warranted.
. PPA's misstates the record in its Supplemental Brief when it states that "the only definite facts that have been established is that she bought the car for $100 and it was sold at auction for $125.” Even if I could understand the unauthenticated document purporting to evidence the auction price of the Vehicle in the documents attached to PPA's Supplemental Brief, it certainly is not admissible by an attachment to a brief and after the record is closed. In re MacDonald, 222 B.R. 69, 72 (Bankr.E.D.Pa.1998) loan documents attached to brief as exhibits and not offered into evidence cannot be considered; In the Matter of Holly's, Inc., 190 B.R. 297, 301 (Bankr.W.D.Mich.1995) documents attached to brief not admitted into evidence will not be considered. Nonetheless, since the $125 amount is greater than the value claimed by Debtor in her Amended Schedule C, I will treat it as an admission by PPA which will allow her damages to be slightly increased. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493956/ | MEMORANDUM OPINION1
JUDITH K. FITZGERALD, Bankruptcy Judge.
J.P. Morgan Trust Company, N.A., is the Indenture Trustee under an Indenture of Trust and filed a general unsecured proof of claim against Debtor A.P. Green Industries, Inc., in the principal unpaid balance of $5,200,000 plus interest of $128,917 through the petition date, plus certain compensation, fees and expenses that had also been incurred as of the date the bankruptcy was filed. The proof of claim also includes compensation, fees and expenses to be incurred postpetition. Debtor objects to the postpetition portion of the claim.
The Indenture of Trust is attached to J.P. Morgan’s proof of claim.2 The relevant portion is Section 8.06, Compensation of Trustee, which states:
The Trustee shall be entitled to payment for its services and reimbursement of advances, counsel fees and other expenses as shall be agreed to between the Trustee and the Company or, in the absence of any such agreement, to payment of such fees and expenses as may be reasonably made or incurred by the Trustee and reasonable in amount in connection with its services under the Indenture. To secure the payment or reimbursement to the Trustee provided for in Section 5.2(b) of the Loan Agreement, the Trustee shall have a senior claim, to which the Bonds are made subordinate, on all money or property held or collected by the Trustee, except that held in the Bond Fund, the Retirement Fund or under Article VI, or otherwise held in trust to pay principal of and interest on particular Bonds.
Debtor contends that the contractual provision is no different from similar provisions in any contract and that the postpetition counsel fees are not allowable for unsecured creditors. Debtor relies on an opinion this court previously issued in this same case, In re Global Industrial Technologies, Inc. (Global Industrial Technologies Services Company, et al. v. Tanglewood Investments, Inc.), 327 B.R. 230 (Bankr.W.D.Pa.2005), for the proposition that postpetition attorneys’ fees and expenses are not allowable to unsecured creditors.
J.P. Morgan contends first that, because it has fiduciary obligations imposed upon it by statute (such as reporting to its bondholders and meeting certain filing requirements under the Trust Indenture Act), pursuant to 11 U.S.C. § 502 its compensation, fees and expenses are allowable, even *384though they actually arise postpetition. J.P. Morgan cites two cases in support of its claim, the applicability of which Debtor disputes, as addressed below.
Debtor asserts that, as a matter of law, an unsecured creditor cannot recover postpetition expenses, fees and costs as part of its claim absent the consent of the parties through a plan negotiation process. Thus, Debtor distinguishes the first case cited by J.P. Morgan, In re Worldwide Direct, Inc., 334 B.R. 112 (Bankr.D.Del.2005), which permitted partial allowance of the indenture trustee’s claim for postpetition attorneys’ fees and expenses based on binding language in the confirmed plan that expressly provided for those items as “an additional component of the Allowed Noteholder Claims.” Id. at 129. In the case at bench, the plan has not been confirmed and, therefore, there is no obligation under a plan to pay J.P. Morgan’s postpetition attorneys’ fees and expenses.
J.P. Morgan further relies on In re Flight Transportation Corp. Securities Litigation, 874 F.2d 576 (8th Cir.1989), a case in which the indenture trustee sought administrative expense allowance for post-petition attorneys’ fees and expenses, but also argued in the alternative that the fees and expenses were allowable under 11 U.S.C. § 502 as a general unsecured claim. Its claim for administrative expense status was pursuant to 11 U.S.C. § 503(b) for making a substantial contribution to the reorganization by fulfilling its fiduciary duties under the Trust Indenture Act of 1939. That argument did not prevail. Both the district court sitting in bankruptcy, 78 B.R. 562, 564 (D.Minn.1987), and the Court of Appeals for the Eighth Circuit found that carrying out its duties as indenture trustee for the benefit of the debenture holders was not evidence of a substantial contribution to the estate. 874 F.2d at 581. Thus, the estate was not responsible for paying for services that were primarily for the benefit of the debenture holders and only incidentally for the benefit of the bankruptcy estate.
In the pending matter, J.P. Morgan does not seek administrative expense status under § 503(b). Rather, it relies on § 502 for the proposition that the indenture agreement provided it with a contractual right to payment for its services and reimbursement of its expenses', including its attorneys’ fees. Because this contractual right existed when the bankruptcy case was filed, J.P. Morgan finds comfort in Flight Transportation, a case in which the indenture trustee argued that its post-petition fees constituted part of its prepetition claim. The Court of Appeals for the Eighth Circuit ruled in Flight Transportation that the indenture trustee’s claim included postpetition counsel fees because the definition of “claim” is to be given the broadest interpretation. However, the Court of Appeals did not allow the fees under § 502. Rather, the Court of Appeals held that a claim existed on the date of filing but the amount of that claim was not known. The issue was remanded to the district court for determination of whether the indenture trustee had waived its claim. There is no indication in Flight Transportation that an indenture trustee can collect postpetition attorneys’ fees as a prepetition claim.
J.P. Morgan acknowledges that its position would enable every unsecured contractual creditor to claim postpetition attorneys’ fees, even though that creditor had only state law rights. As J.P. Morgan’s counsel noted, virtually every promissory note has a provision for reimbursement for attorneys’ fees and expenses and many other contracts also contain those entitlements. Nonetheless, J.P. Morgan asserts, these claims are allowable under § 502 because Congress specified certain *385exceptions to allowance, such as claims for unmatured interest, limitations on landlords’ claims, and claims for items that are not recoverable under applicable nonbank-ruptcy law. Those exceptions, J.P. Morgan continues, do not include attorneys’ fees. Thus, because Congress has chosen to specify certain limitations, J.P. Morgan asserts that there are no others. This argument is not persuasive, as we addressed in Tanglewood, and will restate below.
Next, J.P. Morgan argues that its postpetition attorneys’ fees constitute an unsecured claim allowable under § 506. J.P. Morgan asserts that in making it clear that a fully secured creditor can recover its attorneys’ fees, Congress did not mean to suggest that an unsecured creditor cannot also recover attorneys’ fees. J.P. Morgan distinguishes the concept that an undersecured creditor cannot recover interest on its claim from entitlement to the requested attorneys’ fees because of the historical premise that it is inequitable to permit secured creditors to collect interest payments from unencumbered estate assets before other unsecured creditors have recovered any principal. This appears to be a difference without distinction. The filing of the bankruptcy creates an estate that consists of all assets and all claims against those assets as of the date the case commences. To permit the payment of postpetition attorneys’ fees of unsecured creditors to be paid out of unencumbered estate assets also diminishes the resources available to pay prepetition unsecured claims. When proofs of claim are filed, the unsecured creditors stand in parity — all seek to share in the distribution from the estate based on what they were owed on the day the bankruptcy was filed. If we were to permit certain unsecured creditors to recover fees incurred postpetition, as part of their prepetition claims, for actions taken with respect to the bankruptcy case such as to monitor the unsecured claim or protect the distribution, imposition of a bar date would be meaningless. Thereafter, every unsecured contractual creditor could continue to “monitor” the bankruptcy at the expense of the estate. If we were to permit unsecured contractual creditors to recover, as a prepetition claim, their legal fees for actions taken postpetition, debtors would never be out from under the burden of ongoing costs, the claims would continue to rise throughout the case, and the universe of prepetition claims would never be ascertainable. Thus, the Debtor’s fresh start and discharge would be impaired. The concept of parity of distribution among similarly situated creditors would evaporate because some unsecured creditors would be “more equal” than others by virtue of the ability to have the claim continue to grow postpetition. It is difficult to envision anything more at odds with the spirit of the Bankruptcy Code’s scheme for payment to creditors.
There is no binding precedent in the Third Circuit on this issue and it has sharply divided the courts that have examined the question. In In re Global Industrial Technologies, Inc. (Global Industrial Technologies Services Company, et al. v. Tanglewood Investments, Inc.), 327 B.R. 230, 239 (Bankr.W.D.Pa.2005), this court reviewed the split of authority and found the majority’s analysis to be persuasive. We ruled that the maxim of expressio uni-us est exclusio alterius (the expression of one is the exclusion of the alternatives) applied to analysis of § 506(b) attorneys’ fees claims. Because Congress specifically authorized payment of postpetition attorneys’ fees for oversecured creditors and said nothing about allowance of such fees for unsecured creditors, there is no clear entitlement to such fees for unsecured creditors. In Tanglewood the court also found support for this determination in the *386United States Supreme Court’s opinion in United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). In Timbers of Inwood the Supreme Court found that only oversecured creditors, not undersecured creditors, were entitled to postpetition interest on their claims. Because § 506(b) provides for allowance of both postpetition interest and fees to ov-ersecured creditors, the majority of courts addressing this issue apply the reasoning-in Timbers of Inwood to allow postpetition attorneys’ fees only to oversecured creditors. Section 502(b) requires calculation of the amount of a claim as of the petition date.3 Because postpetition attorneys’ fees have not been incurred on the date the bankruptcy is filed, a claim cannot include postpetition fees. Finally, to permit one group of unsecured creditors to recover more than their prepetition debt unfairly discriminates against other unsecured creditors because it reduces the pool of assets available to that group.
An appropriate order will be issued.
ORDER SUSTAINING IN PART DEBTORS’ SEVENTH OMNIBUS OBJECTION WITH RESPECT TO J.P. MORGAN TRUST COMPANY, N.A.
AND NOW, this 5th day of June, 2006, for the reasons expressed in the foregoing Memorandum Opinion, it is ORDERED that Debtors’ objection to the postpetition portion of the claim of J.P. Morgan Trust Company, N.A., is SUSTAINED.
. This Memorandum Opinion constitutes the court’s findings of fact and conclusions of law. The court’s jurisdiction was not at issue.
. The proof of claim is attached as Exhibit A to J.P. Morgan’s Limited Objection to Confirmation of Debtors’ Plan filed at Dkt. No. 5846.
. Section 502(b) states in relevant part: "... If such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition and shall allow such claim in such amount....” No part of the postpetition attorneys' fees were incurred pre-petition and thus, none can be determined in an amount as of the filing of the bankruptcy petition. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493957/ | MEMORANDUM DECISION
WILLIAM F. STONE JR., Bankruptcy Judge.
Jackson and Laura Kiser acquired by separate deeds two lots, apparently adjoining, in Russell County, Virginia. One of these lots was approximately .56 acre and the other was approximately .75 acre. The Kisers proceeded to build a house on the .75 acre lot and purchased materials for such purpose from Builders’ Supermarket. The credit agreement between the Kisers and Builders’ Supermarket provided for interest at 1.5% per month on any balance more than thirty days old, an annual percentage rate of 18%. While this agreement appears to contemplate monthly compounding of interest, Builders’ Supermarket in its brief has consented to the use of a simple interest rate of 18% per annum and the Court will treat the claim as such. As part of the credit agreement the Kisers executed a personal guarantee of the debt which provided for the inclusion of attorney’s fees equal to 25% of the indebtedness if the account was turned over to a collection agency or attorney for the purposes of collection. Builders’ Supermarket last provided materials to the Kisers on October 5, 2001. On January 22, 2002 Builders’ Supermarket recorded a Memorandum of Mechanics’ Lien using a very general property description not clearly designating one or the other or both of the tracts on which it intended to place its hen. On June 11, 2002 Builders’ Supermarket filed a Bill of Complaint to enforce its lien in the Circuit Court of Russell County.1 On January 2, 2003 the Kisers filed a Chapter 13 petition in this Court and on May 22, 2003 they filed this adversary proceeding seeking a determination of the priority of various liens recorded against the subject property.
In addition to Builders’ Supermarket’s lien, the parties have stipulated that Russell County has a lien for unpaid real estate taxes, New People’s Bank (“Bank”) has recorded a Credit Line Deed of Trust, Jackson R. Kiser, the male Debtor’s father, has a judgment lien against the property, and the United Way of Southwest Virginia also has recorded a Deed of Trust on the property. The Debtors filed a Motion for Summary Judgment seeking to have the lien of Builders’ Supermarket declared invalid due to the failure of such creditor’s Memorandum of Lien to name Mrs. Kiser as an owner of the property *435with Mr. Kiser.2 Said Motion was denied in an Order and Memorandum Opinion issued by this Court on December 2, 2003, which held that the Memorandum of Lien substantially complied with Virginia’s statutory requirements and therefore that the lien was valid. After the hearing on the Motion for Summary Judgment, but before the Court’s ruling thereon, the case was converted to Chapter 7 at the request of the Debtors.
A trial was held on the matter on February 18, 2004 at which the parties agreed to submit briefs on their respective positions and a joint stipulation of facts and issues to be decided, of which the substantive portion immediately follows:
STIPULATION OF FACTS AND STIPULATION OF ISSUES
1. The liens and encumbrances of record in the Clerks Office of the Circuit Court of Russell County, Virginia against the property of the debtors appear of record in the following order of priority:
a. Russell County Real Estate taxes.
b. Builders’ Supermarket Memorandum of Mechanic’s lien.
c. New People’s Bank Deed of Trust.
d. The judgment of Jack [Jackson R.] Kiser.
e. The Deed of Trust of United Way of Southwest Virginia.
2. The value of the real estate of the debtors is as follows:
0.56 acre lot — $ 7,000.00
0.75 acre lot — $ 4,600.00
Improvements — $64,700.00
3. The improvements were constructed on the tract which has Tax Map # 116 L 749B and that tract is the 0.75 acre tract.
4. On the petition date, January 2, 2003, the balance due and owing to Builders Supermarket was $10,695.60. This figure includes $8,331.12 in principal and interest service charges of $2,364.48.
5. Of the principal owed to Builders’ Supermarket, $5,118.53 represents the balance owed for materials used in the construction of the improvements placed upon the real estate prior to August 2, 2001 which was the recordation date for the Deed of Trust to New People’s Bank.
6. The $5,118.53 represents a lien on the tract improved subject only to unpaid real estate taxes and said lien attaches to both the real estate and improvements.
7. The amount due and owing to New People’s Bank as of the petition date January 2, 2003, was $57,188.07. The balance due and owing on the Jackson Kiser judgment as of January 2, 2003 was $8,034.51.
8. Builders’ Supermarket is entitled to a secured claim by the filing of its mechanics lien only to the extent of the materials provided and the lien does not protect Builders’ Supermarket on any award of attorney’s fees pursuant to the agreement with the debtors.
The following issues are submitted for decision to this Court:
1. Is Builders’ Supermarket entitled to post petition interest on its secured claim and, if it is entitled to such *436interest, what is the appropriate rate of said interest?
2. Is Builders’ Supermarket entitled to an unsecured claim for attorney’s fees for the services of counsel, and if so, what is the appropriate award?
3. Of the 0.56 acre tract, 0.75 acre tract and the improvements, to which does the lien of Builders’ Supermarket attach and in what amount?
4. Is Builders’ Supermarket entitled to an order from this Court requiring the property to be sold enforcing the security interest that it has by means of the mechanics’ lien, and if not, is it entitled to relief from the stay so it can go to State Court to enforce this mechanics’ lien?
On March 19, 2004 the Debtors filed a Motion to Reconvert their case to one under Chapter 13. Mr. Kiser testified at a hearing on the Motion on April 21, 2004 that the case was originally converted to Chapter 7 because they did not have sufficient income to fund a Chapter 13 plan. Since that time Mrs. Kiser has become employed and they now have enough income to fund a plan and would like to keep their house. Counsel for the Bank, which has a Motion for Relief from Stay pending, was present and did not object to the Motion, which the Court granted. Neither Builders’ Supermarket nor any other creditor appeared to oppose the Reconversion Motion. Although the Stipulation does not mention it, the Complaint alleges that Superior Financial Services, Inc., which has not appeared in this adversary proceeding, has a judgment lien against both tracts of land in the amount of $510.86, docketed March 27, 2002, subsequent to the docketing of the judgment in favor of Jackson R. Kiser on March 2, 2002, but prior to the recordation on April 2, 2002 of the Deed of Trust in favor of United Way of Southwest Virginia. None of these liens has been avoided during the course of the bankruptcy case.
CONCLUSIONS OF LAW
This Court has jurisdiction of this proceeding by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the delegation made to this Court by Order from the District Court on July 24, 1984. This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(K).
1. Is Builders’ Supermarket entitled to post petition interest on its secured claim and, if it is entitled to such interest, what is the appropriate rate of said interest?
Before the Court can determine whether Builders’ Supermarket is entitled to interest on its claim in Bankruptcy, it must first determine whether that right exists outside of Bankruptcy. In other words, does state law provide for interest on a claim secured by a mechanics’ lien? Although Va.Code § 43-3 does not provide for interest on a mechanics’ lien claim, nor is it expressly provided for anywhere in Title 43 of the Virginia Code, sections 43-5, -8, -10, and -22 all contemplate the inclusion of interest by including the time from which interest is claimed in its description of the memoranda required to perfect and the itemized statement required to enforce a mechanics’ lien. The Virginia Supreme Court has upheld this implicit provision of interest on a mechanics’ lien claim. American Standard Homes Corp. v. Reinecke, 245 Va. 113, 121-122, 425 S.E.2d 515, 519-520 (1993). Because Virginia law allows a mechanics’ lien claimant to include interest in his or her claim, such a claim will be allowed if Bankruptcy law permits it.
11 U.S.C. § 506(b) states:
To the extent that an allowed secured claim is secured by property the value of *437which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.
This section provides that a secured creditor is entitled to post-petition interest on its claim if it is oversecured. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 240, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)(“The natural reading of [506(b)] entitles the holder of an oversecured claim to postpetition interest.”) Furthermore, the Court in Ron Pair held that § 506(b) applies to nonconsensual liens such as tax and mechanics’ liens as well as consensual liens. Id. at 242-243, 109 S.Ct. 1026. Because the Code entitles the holder of an oversecured, nonconsensual lien to postpe-tition interest, the Court must determine to what extent, if any, Builders’ Supermarket is an oversecured creditor.
The parties have stipulated that the $5,118.53 in principal that represents the materials supplied by Builders’ Supermarket prior to the recordation of the Bank’s Credit Line Deed of Trust has priority over all other liens except for that of Russell County. The parties have not stipulated to the status of the remaining $3,272.47 in principal or the $2,304.00 in interest charges. The Court has reviewed New People’s Bank’s Credit Line Deed of Trust as well as applicable Virginia law and concludes that the intervening Deed of Trust has no effect on the status of any portion of Builders’ Supermarket’s mechanics’ lien. Credit Line Deeds of Trust are authorized by Va.Code § 55-58.2, which provides a great deal of protection to mortgagees against the intervening interests of third parties. However, that statute states that “[m]echanics’ liens created under Title 43 shall continue to enjoy the same priority as created by that title.” Id. at 55-58.2(3). As for the priority between mechanics’ liens and Deeds of Trust, Va.Code § 43-21 provides that
No lien or encumbrance upon the land created before the work was commenced or materials furnished shall operate upon the building or structure erected thereon, or materials furnished for and used in the same, until the lien in favor of the person doing the work or furnishing the materials shall have been satisfied; nor shall any lien or encumbrance upon the land created after the work was commenced or materials furnished operate on the land, or such building or structure, until the lien in favor of the person doing the work or furnishing the materials shall have been satisfied.
The Virginia Supreme Court, interpreting a previous, but materially similar, Virginia Code section, held that any lien created after work commenced or materials were furnished was subordinate to the mechanics’ liens as to both the structure and the land. Pace v. Moorman, 99 Va. 246, 37 S.E. 911 (1901). The pertinent time for determining the priority of a mechanics’ lien is “commencement of work, or the first furnishing of materials, as the case may be.” 12B Michie’s Jurisprudence, Mechanics’ Liens § 36 at p. 635 (Repl.Vol. 2003). Thus, the fact that the Bank’s Deed of Trust was recorded prior to delivery of some of the materials supplied by Builders’ Supermarket has no effect on the priority of the mechanics’ lien as to those materials vis-a-vis those previously delivered. All of the materials supplied by Builders’ Supermarket for the construction of the Kisers’ house have the same lien priority as the materials supplied on the first day regardless of intervening hens.
Because Builders’ Supermarket has a lien in the amount of $10,695.60 against property valued at $69,300, an issue the Court will address later in this opinion, *438subject only to the relatively small real estate tax lien of Russell County, the Court determines that Builders’ Supermarket is an oversecured creditor for the purposes of § 506(b). As an oversecured creditor, Builders’ Supermarket is entitled to post-petition interest on its secured claim.
As for the appropriate rate of interest the Virginia Supreme Court has held that “the legal rate of interest applies only in the absence of a lawful contract rate. Where a specified rate of interest is contracted for upon an obligation, and the rate is lawful, that rate will continue to apply after maturity of the obligation, and even after judgment, until the debt is fully paid.” Reinecke, 245 Va. at 122, 425 S.E.2d 515, 519. In the Bankruptcy context most courts have held that postpetition interest for purposes of § 506(b) should be computed at the contract rate of interest. See 4 Collier on Bankruptcy, ¶ 506.04[2][b][i]. Indeed, the District Court for the Western District of Virginia has held that absent special circumstances, such as a violation of state usury laws, or where the rate is effectively a penalty, there is a presumption that the contract rate is the appropriate rate of interest for claims under § 506(b). Florida Asset Fin. v. Dixon, 228 B.R. 166 (W.D.Va.1998)(upholding the use of a contract default rate). Because the Court finds no special circumstances warranting a rebuttal of the presumption, nor have any such circumstances been alleged, the Court holds that Builders’ Supermarket is entitled to post-petition interest at the rate contracted for in the purchase agreements, 18% per year.
2. Is Builders’ Supermarket entitled to an unsecured claim for attorney’s fees for the services of counsel, and if so, what is the appropriate award?
In its brief Builders’ Supermarket withdrew its claim that its mechanics’ lien secured its attorney’s fees and the parties have stipulated that the lien does not protect Builders’ Supermarket on any award of attorney’s fees. Such a position is in accordance with Virginia law. See Reinecke, 245 Va. at 124, 425 S.E.2d 515, 521. Therefore, any award of attorneys fees must arise out of a contract between the Kisers and Builders’ Supermarket, rather than out of a statute. As such, any award of attorney’s fees would be an unsecured debt dischargeable in bankruptcy. When Builders’ Supermarket extended credit to the Kisers, the Kisers executed a personal guarantee in which they agreed “to pay all cost of collection, including reasonable attorney fees of twenty-five percent (25%)” if the account was turned over to a collection agency. Stipulations of attorney’s fees as a percentage of a debt due under a contract are permissible under Virginia law. “In Virginia a stipulation in a note for compensation to attorneys for collection fees incurred, if payment of the note is not made at maturity, is a valid, binding and enforceable contract.” Schwab v. Norris, 217 Va. 582, 587, 231 S.E.2d 222, 225-226 (1977)(quoting Merchants & Planters Bank v. Forney, 183 Va. 83, 94, 31 S.E.2d 340, 345 (1944)). In the Bankruptcy context this Court (Wilson, J.) has upheld the inclusion of a stipulated 25% allowance for attorneys fees in a note secured by a deed of trust as an unsecured claim. In re Lawson, 48 B.R. 31 (Bankr.W.D.Va.1985). Because Virginia law provides for such a stipulation of attorney’s fees and no party has challenged the reasonableness of the fees in this case under Code § 506(b), the Court will grant Builders’ Supermarket’s request for an unsecured claim for attorney’s fees equal to 25% of the amount owed by the Kisers under the Credit Agreement as of the petition filing date. Accordingly, the *439amount of this claim is 25% of $10,695.60, which the Court calculates as $2,673.90.
3. Of the 0.56 acre tract, 0.75 acre tract and the improvements, to which does the lien of Builders’ Supermarket attach and in what amount?
Virginia Code § 43-3 states that “[a]ll persons performing labor or furnishing materials ... shall have a lien, if perfected as hereinafter provided, upon such building or structure, and so much land therewith as shall be necessary for the convenient use and enjoyment thereof’. Pursuant to Bankruptcy Code § 363(p)(2) the burden of proof falls on the party asserting an interest in the property. Because Builders’ Supermarket is asserting a lien on the Kisers’ property it has the burden of proving to what property its lien attaches. There is a presumption, absent proof to the contrary, that the tract on which a house sits is necessary for the convenient use and enjoyment of the house. See Pairo v. Bethell, 75 Va. 825 (1881). Because Builders’ Supermarket has not presented any evidence of what land is necessary for the convenient use and enjoyment of the Kisers’ house, the Court will presume that only the tract on which the house sits, the .75 acre tract, is necessary and, as such, the mechanics’ lien will only attach to that tract and the house thereon. The lien does not attach to the .56 acre tract.
The Court has discussed and held above that, based on Va.Code § 43-21, the full amount of Builders’ Supermarket’s claims is subordinate only to the real estate tax lien of Russell County and has priority over the Bank’s lien as to both the land and improvements. The parties have stipulated that the balance of the claim, including accrued interest as of the petition date, was $10,695.60. The principal balance of $8,331.12 will continue to accrue interest at the per annum rate of 18% after the petition date until paid in full.
4. Is Builders’ Supermarket entitled to an order from this Court requiring the property to be sold enforcing the security interest that it has by means of the mechanics’ lien, and if not, is it entitled to relief from the stay so it can go to State Court to enforce this mechanics’ lien?
As stated above, subsequent to the trial in this case, the Debtors filed a Motion to Reconvert their case to one under Chapter 13 of the Code which was heard in this Court on April 21, 2004. Mr. Kiser testified to his and his wife’s desire to keep their home and their financial ability to do so given their changed circumstances. Based on these representations the Court granted their Motion. Because the Debtors have indicated a willingness and an ability to reorganize under Chapter 13 and to pay the secured claims against their home, the Court will not at this time issue an Order allowing enforcement of the mechanics’ lien through a forced sale of the house. Nor will the Court grant relief from the automatic stay for the same to be done in state court. If the Debtors prove unable to propose a Chapter 13 Plan which is confirmed by the Court, or obtain confirmation of such a Plan but then prove unable to complete it successfully, the Court on motion of any party in interest will reopen this adversary proceeding and deal with the enforcement of the liens against the subject property. In summary, in the current state of the bankruptcy case it is premature to attempt to answer this question.
. No copy of the Bill of Complaint has been filed with this Court. According to a brief filed with the Court in connection with an earlier Motion for Summary Judgment, that Complaint sought to enforce the lien against the .56 acre lot.
. The Debtor also claimed that the mechanics’ lien was invalid due to an inaccurate description of the property to which it attached. The Court denied that contention from the bench and took under advisement the issue of the failure to name Mrs. Kiser in the Memorandum. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493960/ | MEMORANDUM OPINION
PATRICK M. FLATLEY, Bankruptcy Judge.
Steven Edward Shipman and Kimberly Sue Shipman (the “Debtors”) filed a motion for appropriate relief to purchase or redeem the non-exempt portion of their principal residence from Robert W. Trum-ble, the Chapter 7 trustee (“Trustee”). The Debtors contend that the value of the real property is about $126,900, as stated in their August 7, 2000 petition, and seek to purchase the property from the Trustee based on that value. The Trustee states that the value of the real property as of April 2006 is $288,500, which is not contested by the Debtors, and the Trustee objects to any sale of the Debtors’ principal residence for less than its current fair market value.
This matter came before the court for a telephonic hearing on April 4, 2006, at which time the court considered the arguments of the parties and took the matter under advisement. For the reasons stated herein, the court finds that — if the Debtors desire to purchase their principal residence from the Trustee — the Debtors must pay the Trustee the value of the excess equity in the property based on the property’s current fair market value, $288,500.
To the extent that the Debtors’ motion is styled as a motion to redeem under 11 U.S.C. § 722 of the Bankruptcy Code, the motion is denied. Section 722 redemption only applies to tangible personal property. § 722 (“An individual debtor may ... redeem tangible personal property ....”); In re Laubacher, 150 B.R. 200, 203 (Bankr.N.D.Ohio 1992) (“Section 722 is by its terms inapplicable to real property .... ”); In re Douthart, 123 B.R. 1, 3 (Bankr.D.N.H.1990) (“[I]t is evident from a reading of section 722 that Congress did not intend to permit chapter 7 debtors to redeem real property....”).
Money received from the sale of property constitutes the proceeds of that property; consequently, when a Chapter 7 trus*495tee sells property of the estate, the trustee is entitled to any post-petition appreciation in value of the property. 11 U.S.C. § 541(a)(6) (stating that the bankruptcy estates is comprised of, inter alia, “[p]ro-ceeds ... of or from property of the estate .... ”). E.g., In re Reed, 940 F.2d 1317, 1323 (9th Cir.1991) (“We interpret this language to mean that appreciation enures to the bankruptcy estate, not the debtor.”); Potter v. Drewes (In re Potter), 228 B.R. 422, 424 (8th Cir. BAP 1999) (“Nothing in Section 541 suggests that the estate’s interest is anything less than the entire asset, including any changes in its value which might occur after the date of filing.... Except to the extent of the debt- or’s potential exemption rights, post-petition appreciation in the value of property accrues for the benefit of the trustee.”); In re Paolella, 85 B.R. 974, 977 (Bankr.E.D.Pa.1988) (“Because a sale does not generally, if ever, occur simultaneously with formation of a bankruptcy estate, § 541(a)(6) mandates that the estate receive the value of the property at the time of the sale. This value may include appreciation or be enhanced by other circumstances creating equity which occur post-petition.”).
Moreover, a trustee’s decision to sell a debtor’s real property outside the ordinary course of business under 11 U.S.C. § 363(b) is reviewed by the court for compliance with the business judgment rule, i.e., the court must ensure that the trustee is making a decision that is not based on self interest or self dealing, and that the decision to sell is made on an informed basis, in good faith, and in the honest belief that the sale is in the estate’s best interest. Black’s Law Dictionary 212 (8th ed.2004). See also In re G.S. Distrib., 331 B.R. 552, 559 (Bankr.S.D.N.Y.2005) (“In determining whether to approve a proposed sale under this section, courts require that the sale be based upon the sound business judgment of the debtor.”); 3 Collier on Bankruptcy ¶ 363.02[l][f] (15th ed. rev.2006) (“In determining whether to approve a proposed sale under section 363, courts generally apply standards that, although stated variously ways, represent essentially a business judgment test.”). In determining if the business judgment rule is satisfied, a sale is generally reviewed against four requirements: “(1) a sound business purpose exists for the sale; (2) the sale price is fair; (3) the debtor has provided adequate and reasonable notice; and (4) the purchaser has acted in good faith.” In re Decora Indus., 2002 WL 32332749 at *2, 2002 U.S. Dist. LEXIS 27031 at *8 (D.Del. May 20, 2002). Had the Trustee proposed to sell property having a current fair market value of $288,500 to the Debtors for $126,900, the court would not likely be able to approve that sale as being a sound exercise of the Trustee’s business judgment.
Consequently, consistent with § 541(a)(6) of the Bankruptcy Code, post-petition appreciation of property of the estate enures to the benefit of the Trastee. Therefore, if the Debtors wish to purchase property of the estate from the Trustee, they must pay the appreciated value of the property since the time of the petition. The Trustee has stated that the current fair market value of the property is $288,500, which is not contested by the Debtors.
The court will enter a separate order pursuant to Fed. R. Bankr.P. 9021. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493963/ | MEMORANDUM OPINION
ROBERT F. HERSHNER, JR., Chief Judge.
William K. Holmes and Airtrek, LLC, Plaintiffs, filed on May 2, 2006, their Motion To Amend Pleadings Pursuant To Federal Rule Of Civil Procedure 15(b) and Bankruptcy Rule 7015(b). General Electric Capital Corporation, Defendant, filed its response on May 11, 2006. The Court, having considered the motion, the response, and the applicable law, now publishes this memorandum opinion.
This adversary proceeding came on for a bench trial on April 10, 2006. The Court heard some four and one-half days of testimony. After the close of the evidence, Plaintiffs inquired as to whether they needed to amend their pleadings to include two issues raised at trial. Defendant urged the Court not to consider the two issues. The Court suggested that Plaintiffs could file a motion to amend and that Defendant could file a response. The Court would then consider the merits of Plaintiffs’ motion.
Plaintiffs, in their brief in support of their motion to amend, state that they do not believe that amendments of their pleadings 1 and the pretrial order are necessary but seek the relief out of an abundance of caution. Defendant objects to the proposed amendments. Defendant contends that the pretrial order entered following the final pretrial conference controls the issues for the trial of this adversary proceeding. Defendant also contends that Plaintiffs have made no attempt to meet the requirements for modification of a final pretrial order.
Plaintiffs rely upon Federal Rule of Civil Procedure 15(b)2 which provides:
Rule 15. Amended and Supplemental Pleadings
(b) Amendments to Conform to the Evidence. When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so freely when the presentation of the merits of the action will be sub-served thereby and the objecting party fails to satisfy the court that the admission of such evidence would *706prejudice the party in maintaining the party’s action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence.
Fed.R.Civ.P. 15(b)
Defendant, in opposition to Plaintiffs’ motion to amend, relies upon Federal Rule of Civil Procedure 163. Rule 16(d) and (e) provides:
Rule 16. Pretrial Conferences; Scheduling; Management
(d) Final Pretrial Conference. Any final pretrial conference shall be held as close to the time of trial as reasonable under the circumstances. The participants at any such conference shall formulate a plan for trial, including a program for facilitating the admission of evidence. The conference shall be attended by at least one of the attorneys who will conduct the trial for each of the parties and by any unrepresented parties.
(e) Pretrial Orders. After any conference held pursuant to this rule, an order shall be entered reciting the action taken. This order shall control the subsequent course of the action unless modified by a subsequent order. The order following a final pretrial conference shall be modified only to prevent manifest injustice.
Fed.R.Civ.P. 16(d), (e) (emphasis added)
Plaintiffs, in their motion to amend, seek to amend their pleadings under Rule 15(b). Plaintiffs do not seek to modify the final pretrial order by showing “manifest injustice” under Rule 16(e).
Defendant contends that Rule 16(e) “trumps” Rule 15(b). Defendant contends that the final pretrial order supercedes Plaintiffs’ pleadings and controls the trial of the adversary proceeding. Defendant contends that an amendment of the pleadings under Rule 15(b) would be futile. See State Treasurer of the State of Michigan v. Barry, 168 F.3d 8, 9-10 (11th Cir.1999) (pretrial order superseded the pleadings and had the effect of eliminating part of plaintiffs complaint); 2 Moore’s Manual: Federal Practice and Procedure § 18.43[3] (2006) (final pretrial order supersedes the pleadings; defendant may waive a potential defense by failing to ensure that the issue is clearly preserved in the final pretrial order).
Plaintiffs cite a number of pre-1983 cases that hold that Rule 16 must be read in light of the more liberal Rule 15. See Wallin v. Fuller, 476 F.2d 1204 (5th Cir.1973) (defendant, by failing to object at trial, impliedly consented to the trial of issues not raised in the pretrial order; amendment of pleadings under Rule 15(b) should be allowed). Rule 16 was amended in 1983 by adding subdivision 16(e). Defendant contends that the pre-1983 cases cited by Plaintiffs are distinguishable and are not relevant.
The Advisory Committee Notes to the 1983 amendment which added subsection (e) to Rule 16 states: “Rule 16(e) does not substantially change the portion of the original rule dealing with pretrial orders .... In the case of the final pretrial order, however, a more stringent standard is called for and the words ‘to prevent manifest injustice,’ which appeared in the original rule, have been retained.” Advisory Committee Notes, 1983 Amendment, Discussion, Subdivision (e).
*707The Court is persuaded that pleadings may be amended under Rule 15(b) even though a final pretrial order has been entered. See Courtney v. Safelite Glass Corp., 811 F.Supp. 1466, 1474 (D.Kan.1992) (Rule 15(b) may be used to amend pleadings to include issues not raised in final pretrial order). See also Barrett v. Fields, 941 F.Supp. 980, 982 n. 1 (D.Kan.1996) (Rule 15(b) may be invoked to effect an amendment of the pretrial order); 6A C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure: Civil 2d § 1491 (2nd ed. 1990 & Supp.2006).
Rule 15(b) provides that when issues not raised by the pleading are tried by express or implied consent of the parties, the issues shall be treated in all respects as if they had been raised in the pleading. Rule 15(b) also provides that if evidence is objected to at trial on the ground that it is not within the issues raised by the pleadings, the court may allow the pleadings to be amended and shall do so freely when the presentation of the merits of the action will be subserved and the admission of the evidence will not prejudice the objecting party.
Turning to the case at bar, Plaintiffs leased an Astra airplane from Defendant. Defendant contends that Plaintiffs defaulted on their October 2000 lease payment. Defendant sold the Astra to a third party. Plaintiff Holmes filed a petition under Chapter 11 of the Bankruptcy Code. Plaintiffs filed this adversary proceeding seeking in part a return of the security deposit made on the Astra. Defendant filed a counterclaim contending in part that it is entitled to retain the security deposit and to recover the “stipulated loss value” of the Astra under the terms of the Astra lease. During the trial of this adversary proceeding, Plaintiffs raised the issue that the “stipulated loss value” constitutes an unenforceable and illegal penalty. Plaintiffs also raised the issue that Defendant had failed to properly demand that Plaintiffs pay the “stipulated loss value.” The witnesses questioned on these issues are employees of Defendant. The documents examined are leases and other documents prepared by Defendant.
The penalty and demand issues concerning the “stipulated loss value” of the Astra are not expressly set forth in Plaintiffs’ pleadings or in the final pretrial order. Plaintiffs argue that the terms “illegal, penalty, and demand” are used several times in the pleadings and in the final pretrial order. Plaintiffs contend that the issues of penalty and demand concerning the “stipulated loss value” were tried by implied consent of the parties. Plaintiffs contend that Defendant did not object to the questioning of witnesses on these issues except to argue that “demand” called for a legal conclusion. Defendant contends that it made timely objections.
Plaintiffs contend that Defendant, to recover on its counterclaim, must show that it is entitled to recover the stipulated loss value of the Astra under the Astra lease. The Astra lease was a “form lease” prepared by Defendant. Defendant has the burden of showing that it is entitled to recover the “stipulated loss value.” Defendant must show that Plaintiffs were in default and that Defendant complied with its obligations under the Astra lease including making proper demand. The Court is persuaded that Defendant must also show that it is legally entitled to recover the stipulated loss value under the Astra lease and under relevant state law.
The Court is not persuaded that Defendant would suffer any prejudice. The witnesses questioned on the demand and penalty issues are employees of Defendant. The documents examined are leases and other documents prepared by Defendant. Defendant’s counsel was prepared to cite *708case law on the amendment issue after the close of the evidence. Thus, Defendant cannot contend that is was surprised by Plaintiffs’ request for the Court to consider the demand and penalty issues.
The Court is persuaded that Plaintiffs’ motion to amend the pleadings should be granted.
An order in accordance with this memorandum opinion shall be entered this date.
. Plaintiffs seek to amend their answer and their defenses to Defendant’s counterclaim.
. Federal Rule of Civil Procedure 15(b) applies in this adversary proceeding. Fed. R. Bank. P. 7015.
. Federal Rule of Civil Procedure 16 applies in this adversary proceeding. Fed. R. Bank. P. 7016. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493964/ | OPINION
MARY D. FRANCE, Bankruptcy Judge.
Procedural History and Factual Background
Before me is the complaint of Douglas J. Thatcher (“Debtor”) to determine the dis-chargeability of a debt to the Internal Revenue Service (“IRS”). The debt at issue arises from Debtor’s alleged “responsible person” liability for unpaid trust fund taxes of C & M Catering (“C & M”), his former employer.1
In addition to the catering business, C & M operated a restaurant called “Casey’s Clubhouse,” which was located on a golf course in Millersville, Pennsylvania. On July 1, 2001, Debtor was hired by the President of C & M, Mike Casey (“Casey”), to help manage the restaurant. Specifically, Debtor was hired to develop a new menu, obtain new vendors and customers, and control food costs. Debtor was responsible for opening the restaurant each day, managing its operations, and supervising approximately twenty employees. Debtor had authority to hire new employees, and did so on several occasions, although the customary practice was for Debtor and Casey to make hiring decisions jointly. Debtor did not have formal signatory authority on C & M’s bank account, but he was authorized by Casey to sign checks, and the checks he signed were honored by the bank. In 2001 and 2002, Debtor signed more than 150 checks totaling more than $60,000.00, including payments to vendors and employees, as well as checks made payable to cash and to Casey.
Debtor also had payroll related duties. Each week, Debtor calculated the hours worked by individual employees and forwarded the information to C & M’s accountant, Deborah Carr (“Carr”).2 With the information provided by the Debtor, Carr calculated the amounts to be paid to *736each employee and the amounts to be withheld from his or her wages. Carr then would print payroll checks for Casey’s signature. Debtor testified that on several occasions, he received envelopes from Carr that contained payroll checks and payroll tax forms. Debtor signed payroll checks when Casey was not available. Each quarter, Carr prepared a completed “941” form for Casey’s signature. When a “941” form was delivered at the time Debt- or was in the restaurant, he would inform Casey verbally that the payroll checks and tax forms had arrived. For the period ending September 30, 2001, Debtor signed the “941” return prepared by Carr as well as the check for a partial payment of the third quarter withholding taxes. Although he remitted a $66.00 payment to the IRS, the tax due as stated on the return was $6,520.00. Debtor testified that he did not sign any other federal tax returns while employed by C & M, which was not challenged by the IRS. For the third quarter of 2001, Debtor signed checks for withholding tax payments to the Pennsylvania Department of Revenue and the Lancaster County Tax Collection Bureau. Prior to being employed by C & M, Debtor owned and operated a restaurant known as “DJ’s Hideaway,” where he was responsible for filing payroll tax returns on behalf of the business.
Debtor and Casey shared a desk in an “office” located in a storage area in the basement of the restaurant. This shared office arrangement afforded Debtor access to C & M’s mail, deposit slips, invoices, checkbooks and bank statements. In the office were folders for various categories of invoices and account statements. Debtor occasionally opened the mail of the restaurant and placed any bills or statements received into the appropriate folder. Debtor wrote checks from C & M’s bank account to pay invoices or paid vendors in cash who required COD payment. For other bills, Casey alone or Debtor and Casey jointly would decide whether payment to a vender would or would not be made.
Shortly after commencing employment at Casey’s Clubhouse, Debtor became aware that the restaurant was having cash flow problems. Debtor withheld payments to creditors on an average of twelve times a month. On at least one occasion, Casey asked Debtor not to cash his paycheck for a week so that there would be adequate funds in the account to cover the paychecks of other employees. If requested to delay cashing his paycheck, Debtor would comply with the request. During one period in which cash was particularly tight, Debtor loaned C & M $6,000.00 to cover current expenses. Debtor met occasionally with Casey to discuss pricing, strategies to increase revenue and C & M’s cash flow problems. When Debtor became aware that C & M was delinquent on rent payments, Debtor discussed with Casey what invoices would not be paid in order to accumulate sufficient funds to pay C & M’s landlord. Debtor testified that he was unaware of whether C & M had sufficient funds to cover checks when he wrote them and that he would withhold payments to some vendors to pay others.
Pursuant to 26 U.S.C. § 6672, the Internal Revenue Service assessed trust fund recovery penalties against Debtor on account of C & M’s failure to pay withholding taxes from the wages of its employees during the fourth quarter of 2000, all four quarters of 2001, and the first three quarters of 2002. On September 15, 2003, Debtor was notified that he was being charged penalties for failing to pay withholding taxes for the quarters for which an assessment had been issued. On June 16, 2004, Debtor filed a petition under Chapter 7. In his schedules, Debtor reported as a disputed claim “941” employment taxes *737in the amount of $47,806.78. Thereafter, Debtor filed a complaint to determine the dischargeability of the tax obligations. After Debtor’s motion for summary judgment was denied, a hearing on the matter was held on August 25, 2005.
Discussion
The Internal Revenue Code (“IRC”) requires employers to withhold from the wages of their employees certain “trust fund taxes.” 26 U.S.C. §§ 3102, 3402 and 7501. Section 6672(a) of the IRC provides that:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
26 U.S.C. § 6672(a).
Under this provision, a “person” is defined as “an officer or employee of a corporation ... under a duty to perform the act in respect to which the violation occurs.” 26 U.S.C. § 6671(b). This definition is broad and includes anyone who is “required to collect, truthfully account for or pay over any tax due to the United States.” United States v. Carrigan, 31 F.3d 130,133 (3d Cir.1994). After the IRS makes an assessment, the burden shifts to the assessed party to show that the assessment is incorrect and that the debtor is not a “responsible person” or that he did not willfully fail to pay the tax. Brounstein v. United States, 979 F.2d 952, 954 (3rd Cir.1992); Psaty v. United States, 442 F.2d 1154, 1160 (3d Cir.1971). “If the taxpayer offers evidence that the determination was incorrect and the Commissioner offers no evidence to support the assessment, the taxpayer will have met his ultimate burden ‘unless such evidence is specifically rejected as improbable, unreasonable, or questionable.’ ” Id. A taxpayer may prevail in a tax refund case by showing that the assessment is a “naked assessment without any foundation whatsoever .... ” United States v. Janis, 428 U.S. 433, 442, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976). An assessment is “naked” and “beyond saving” when “the records supporting an assessment are excluded from evidence, ... or are nonexistent, ... so that the basis upon which an assessment is calculated is beyond the knowledge of the court.” Greco v. U.S., 380 F.Supp.2d 598, 611 (M.D.Pa.2005) (citing, United States v. Schroeder, 900 F.2d 1144, 1149 (7th Cir.1990)).
After the establishment of a proper assessment, the test to determine liability under Section 6672 rests on a showing of two factors: “(1) the individual must be a ‘responsible person,’ and (2) his or her failure to pay the tax must be ‘willful.’ ” United States v. Mitchell, 82 Fed.Appx. 781, 785 (3d Cir.2003). See also Greenberg v. United States, 46 F.3d 239, 242 (3d Cir.1994). The burden on the taxpayer to show that he is not a responsible person or that his failure to pay was not willful is not altered because the issue arises in the context of a bankruptcy proceeding. Raleigh v. Illinois Department of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000).
1. Whether Debtor fits the definition of a responsible person.
Whether the Debtor is a responsible person is a matter of “status, duty, or authority and not knowledge.” Quattrone Accountants, Inc. v. IRS, 895 F.2d 921, 927 (3d Cir.1990). There may be several individuals within a single business *738who qualify as responsible persons under the IRC. Id. The Third Circuit recognizes the following factors as indicia of responsibility:
(1) contents of the corporate bylaws; (2) ability to sign checks on the company’s bank account; (3) signature on the employer’s federal quarterly and other tax returns; (4) payment of other creditors in lieu of the United States; (5) identity of officers, directors, and principal stockholders in the firm; (6) identity of individuals in charge of hiring and discharging employees; and (7) identity of individuals in charge of the firm’s financial affairs.
Greenberg, 46 F.3d at 243; Carrigan, 31 F.3d at 133; see also In re Treacy, 255 B.R. 656, 663 (Bankr.E.D.Pa.2000). An employee must have “significant” control over company finances in order to be considered a responsible person. Greenberg, 46 F.3d at 243. But an employee’s control of a company’s finances is not rendered “insignificant” simply because he has been instructed by his superiors not to pay withholding taxes. Id. 46 F.3d at 243-44. It follows that an employee’s control of finances is not rendered “insignificant” simply because he withholds payments to certain vendors on the instructions of his superior. The question of control over finances must be answered in light of the totality of the circumstances; no single factor, or the absence thereof, is determinative. Fiataruolo v. United States, 8 F.3d 930, 939 (2nd Cir.1993).
In the instant case, we do not have a copy of C & M’s corporate bylaws, but it is clear that Debtor exercised significant control over several financial aspects of the company. He had the ability to sign checks on C & M’s bank account. While he was not formally designated as a signatory, he clearly had the “ability” — in terms of the permission of the business owner-— to write checks to pay employee wages and vendor invoices. Further, the checks he signed were honored by the bank. See In re Thomas, 187 B.R. 471 (Bankr.E.D.Pa.1995) (debtor who signed checks without being authorized signor found to be responsible person). Payroll checks, “941” tax forms, and payroll withholding checks generally were prepared by Carr and signed by Casey, but for the third quarter of 2001, Debtor signed the federal, state and local tax withholding forms and signed checks for payroll withholding payments. Generally, Debtor did not have exclusive authority regarding C & M’s financial affairs. However, exclusive authority is not the benchmark for responsible person liability, “significant” authority is the applicable standard. Brounstein, 979 F.2d at 954; Quattrone, 895 F.2d at 927; In re Abel, 200 B.R. 816, 822 (E.D.Pa.1996) (debtor’s power to write cheeks and exercise of that authority to pay creditors showed “significant” control over company finances sufficient to prove that debtor was a responsible person.) Debtor assumed primary operational authority each day until approximately 2:00 p.m. His responsibilities included making determinations about which vendors would be paid and which would not. He made disbursements to himself from cash and paid COD vendors from cash. Debtor consulted with Casey on some of the most significant challenges faced by the business — cash flow problems and strategies to increase revenue.
Debtor did not have sole, final authority to hire and fire employees, but he did have the power to hire employees and exercised that authority on several occasions. Cases interpreting Greenberg indicate that the ability to either hire or fire, but not necessarily the ability to do both, suggests the degree of control necessary to trigger responsible person liability. See Thomas, 187 B.R. at 476 (debtor had hired “at least one employee”); see also Siquieros v. U.S., *7392004 WL 2011367, *9 (W.D.Tex.) (ability to hire or fire employees indicates responsible person status).
The most troubling factor in this analysis is whether Debtor paid other creditors in lieu of the United States. Admittedly, Debtor had no responsibility for making payroll tax calculations and remitting the taxes due to various governmental entities. Carr made these calculations and typically sent the forms and the checks to Casey for execution and filing. Further, Debtor has stated that he was unaware that the taxes were not being paid, although he could have made this determination by reviewing the documents that were available to him. However, after he signed the 2001 third quarter return, which grossly underpaid the taxes due, he either knew or strongly suspected that trust fund taxes were not being remitted.
Reviewing the factors cited by the Third Circuit, I find that Debtor is a responsible person for purposes of liability under Section 6672. He had the ability to sign checks on the company’s account, he signed federal, state and local tax returns for one quarter during the time he was employed by C & M, he was partially responsible for hiring and discharging employees, and he assumed partial responsibility for the company’s financial affairs. Debtor was not a shareholder or officer of C & M, but the statute explicitly includes employees as a “person” liable under Section 6672(a). 26 U.S.C. § 6672(b).
2. Whether Debtor “willfully” failed to pay the taxes at issue.
In addition to finding that an individual is a “responsible person,” a court also must determine that the responsible person “willfully” failed to collect, account for, or pay the tax. 26 U.S.C. 6672(a).
[W]illfulness is a voluntary, conscious and intentional decision to prefer other creditors over the Government. A responsible person acts willfully when he pays other creditors in preference to the IRS knowing that taxes are due, or with reckless disregard for whether taxes have been paid.
Greenberg, 46 F.3d at 244 (citations and internal quotations omitted). Payment of other creditors in preference to the IRS may be considered willful if the responsible person knows that taxes are due, or if he demonstrates reckless disregard for whether taxes have been paid. Brounstein v. United States, 979 F.2d 952, 955-56 (3d Cir.1992). Even when a responsible person denies knowledge about unpaid taxes, he may be liable if he has failed “to investigate or correct mismanagement after being notified that withholding taxes have not been paid.” Morgan v. United States, 937 F.2d 281, 286 (5th Cir.1991). (italics added.) And even more broadly, if a taxpayer “(1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily” the reckless disregard standard is met. United States v. Vespe, 868 F.2d 1328, 1335 (3rd Cir.1989) (quoting Wright v. United States, 809 F.2d 425, 427 (7th Cir.1987)); see also United States v. Carrigan, 31 F.3d 130, 134 (3d Cir.1994).
Under Brounstein and Raleigh, supra, it was Debtor’s burden to show that he was unaware that C & M’s withholding taxes were not being paid. His proof on this issue consists of his own testimony, in which he denies having such knowledge. In his response to interrogatories propounded by the IRS and at trial, Debtor alleged that he was unaware of the unpaid tax liabilities until he was contacted by the IRS in 2003. Debtor’s testimony was countered by the IRS with evidence that Debtor signed a check to pay federal withholding taxes for the third quarter of 2001. *740If he had examined the accompanying return, it clearly would have demonstrated that the remittance was insufficient to pay the tax due. While Debtor’s signature may or may not have been on the return that accompanied the check,3 the Court is not convinced that Debtor wrote the check without looking at the return.4 Thus, I conclude that for the third quarter of 2001, Debtor remitted payment to the IRS for quarterly withholding taxes either aware that the check was insufficient to cover the amount due or in reckless disregard of whether taxes had been paid in full.
A comparison of the facts in the within case with the factual findings in Abel v. United States, 200 B.R. 816 (E.D.Pa.1996) is instructive. In Abel, the bankruptcy court determined that the debtor was liable under Section 6672 for unpaid withholding taxes because he paid other creditors while he was aware that the company had financial problems, and he did not investigate whether taxes had been paid, although he had access to the company’s books and records. The district court reversed, holding that the record supported these factual findings, but that the findings only established simple negligence. Id. at 824. The district court observed that the debtor was not involved in preparing tax returns, signed only a few checks, and performed most of his work outside the office. Although evidence was introduced that the debtor signed one tax return, through other testimony the debtor established that the signature was a forgery. Further, there was no evidence that the debtor in Abel had knowledge of any past tax problems or any reason to suspect that the company’s taxes were not being paid. The district court observed that “[i]f a taxpayer has knowledge of past tax problems, or has reason to believe that the person in charge of paying the taxes is not trustworthy, his actions rise to the level of recklessness more quickly when the company experiences financial problems, or other warning signs arise that suggest unpaid tax liability.” Id. (citations omitted).
In the instant case, no direct evidence was presented that Debtor knew of C & M’s withholding tax problems prior to the filing of the third quarter return in October 2001. Based upon Debtor’s general knowledge of C & M’s financial difficulties, the IRS asks this Court to infer that Debt- or must have known that the company was not paying taxes to the IRS throughout the period of his employment. However, there is inadequate evidence to support this inference. Debtor provided credible testimony that the only creditors he knew were not being paid were trade vendors. Debtor testified, and the IRS did not refute, that he and Casey never discussed the payment of taxes.5 Applying the same test used by the Third Circuit in Quattrone, 895 F.2d at 927, the Seventh Circuit held that “knowledge of financial distress, without more, does not equate to knowledge that [an entity is] not meeting its tax obligations.” United States v. Running, 7 F.3d 1293, 1299 (7th Cir.1993).
*741The facts present in this case closely parallel the facts in Abel until C & M filed the 2001 third quarter return. Until October 2001, Debtor knew of C & M’s financial distress, but he was unaware that withholding taxes were not being paid. After he signed the check for the partial payment of third quarter taxes, however, his eyes should have been opened. From this point forward, Debtor knew, or should have known, that taxes were not being paid in full.
The IRS suggests that since Debtor had previously owned his own business in which he paid withholding taxes for employees, Debtor generally was aware of withholding requirements. Although his prior experience standing alone does not establish that he knew that taxes were not being paid, when coupled with the act of signing the C & M check for the partial payment of the third quarter taxes and the probable signing of the tax return, his claim of ignorance is not credible.
In its Conclusions of Law, the IRS concedes that Debtor is only liable under Section 6672 for those quarters during which he was employed by C & M. Thus, the IRS concedes that Debtor is not responsible for trust fund taxes that accrued in the fourth quarter of 2000 and the first quarter of 2001. The IRS indicates that the assessments for those quarters will be abated. The ending dates of the remaining quarters for which the IRS seeks a responsible person assessment against Debtor are: June 30, 2001; September 30, 2001; December 31, 2001; March 31, 2002; June 30, 2002; and September 30, 2002. Debtor became the manager of Casey’s Clubhouse on July 1, 2001. As the IRS stated in its Conclusions of Law, taxes should have been remitted with each payroll. Therefore, withholdings for all payroll checks distributed during the second quarter of 2001 should have been made before Debtor was employed. Further, a review of the list of checks signed by Debtor, which was submitted in support of the IRS’s objection to Debtor’s motion for summary judgment, reveals that Debt- or did not sign a check on behalf of C & M until August 18, 2001, two weeks after the payroll tax return for the second quarter was due. Insufficient evidence was presented that Debtor otherwise had other information that would have alerted him that withholding taxes were not being paid. I find that although Debtor was aware of C & M’s financial difficulties soon after his employment, there is insufficient evidence that he willfully paid other creditors in preference to the IRS knowing that taxes were due, or in reckless disregard of whether taxes were due for the quarter ending June 2001. After October 2001, however, he either was aware that other liabilities were being satisfied in preference to withholding taxes, or he recklessly disregarded this information. In addition to the third quarter of 2001, I find that Debtor was a responsible person who willfully failed to pay federal withholding taxes for the first, second and third quarters of 2002.6 Based upon this finding, I must hold that the taxes for these quarters are excepted from discharge under Section 523, which includes taxes specified in Section 507(a)(8)(C). This latter section includes “a tax required to be collected or withheld and for which the debtor is liable in whatever capacity,” which includes the responsible person penalty under 26 U.S.C. § 6672.
. I have jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(A), (I) and (O). This Opinion constitutes the findings of fact and conclusions of law made under Fed. R. Bankr.P. 7052.
. The record is not clear as to whether Debtor performed this function for all C & M employees or only for those who worked under his supervision at the restaurant.
.C & M's 941 form for the third quarter of 2001 was not put into evidence at the hearing because the IRS lost it while investigating the case. Debtor denies having signed the return, but the notes of the IRS revenue officer assigned to Debtor's case indicate that he did. Debtor admitted that he signed the check that accompanied the return and signed other checks for withholding taxes remitted to the Lancaster County Tax Collection Bureau and the Pennsylvania Department of Revenue (Transcript at 43-44).
. Debtor admitted at deposition (which was read into the record at trial) that on four occasions he received from the accountant an envelope that contained payroll checks and 940 and 941 forms. (Transcript at 40-42.)
. The IRS did not call Casey as a witness, either in its case in chief or in rebuttal.
. The certification filed in support of the assessment of taxes for the period ending December 2001 states that no balance is due. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493965/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court is the complaint filed by the plaintiff, Citibank (South Dakota), N.A., (Citibank); answer to said complaint having been filed by the debtor, Michael Allen Collier, (Collier); and the court, having heard and considered same, hereby finds as follows, to-wit:
I.
The court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(I).
II.
Citibank filed its complaint against Collier seeking a determination that certain credit card obligations owed by Collier were non-disehargeable pursuant to § 523(a)(2)(A) of the Bankruptcy Code which provides as follows, to-wit:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(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;
*806Collier had two credit cards issued to him by Citibank which are identified here-inbelow, to-wit:
A. Citi Diamond Preferred Card, having a $9,600.00 credit limit and a balance owing of $10,828.33.
B. AT & T Universal Rewards Card, having a $9,600.00 credit limit and a balance owing of $11,546.23.
Collier utilized the aforementioned credit cards and other credit cards to substantially subsidize his living expenses. According to his bankruptcy schedules, Collier has unsecured debts totaling $63,150.00, of which approximately $50,000.00 is credit card debt. He has two secured debts, totaling $39,884.86, one of which is secured by his 2004 mobile home and the other by his 2002 Nissan Xterra. Both of these secured claims are to be reaffirmed.
According to the testimony, Collier had unusually large expenses which were incurred in caring for his terminally ill father, who is now deceased, and his elderly mother. He was required to employ sitters for both of his parents while he was working at his place of employment.
Collier is divorced, but has a daughter, age 23, and a granddaughter, age 10 months. His Schedule I reflects monthly income in the sum of $2,254.16, and his Schedule J reflects monthly expenses in the sum of $2,155.80. Unfortunately, Collier’s current employment at BASF will terminate in late 2006 or early 2007 due to a plant re-location.
For all practical purposes, Collier’s use of the two Citibank credit cards began in January, 2005, and terminated in late March or early April, 2005. Excepting the finance charges and fees, the balances owing on the credit cards, noted hereinabove, were incurred in this short span of time. A listing of Collier’s charges, including several cash advances, are reflected on Citibank’s Exhibit 1 and Exhibit 2, which are the account statements.
In his testimony, Collier testified that he fully intended to pay these debts. However, a review of the statements indicates that he made only a few small payments. Once Collier exceeded the credit limits applicable to the cards, the amounts which exceeded the credit limits were added to the minimum payments which were due each month. This, in effect, escalated the minimum payments to an amount which Collier clearly could not afford, particularly considering that he had exceeded the limits on both of the cards. Collier did not comprehend why the minimum payments had risen so dramatically. He did not realize that if he reduced the outstanding balance below the credit limits for each of the cards that the minimum payments would have then become much more manageable. Fearing that he would be sued and his paycheck garnished, he filed bankruptcy on July 14, 2005.
Because of Collier’s bankruptcy filing date and the dates of the last credit card transactions, Citibank is not entitled to the presumption of non-dischargeability relating to the purchase of luxury goods or to the taking of cash advances that are extensions of consumer credit found in § 523(a)(2)(C)1 of the Bankruptcy Code, the version of which would be applicable to this case since it was filed prior to the effective date of the Bankruptcy Abuse Prevention Consumer Protection Act of 2005 (BAPCPA).
*807III.
The Fifth Circuit Court of Appeals in Matter of Mercer, 246 F.3d 391 (5th Cir.2001), reaffirmed the elements necessary to be established in a credit card non-dischargeability proceeding filed pursuant to § 523(a)(2)(A), as follows:
... Accordingly, for each card-use, and by a preponderance of the evidence, Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), UCS was required to prove: (1) Mercer made a representation; (2) it was knowingly false; (3) it was made with the intent to deceive UCS; (4) UCS actually and justifiably relied on it; and (5) UCS sustained a loss as a proximate result of its reliance.
246 F.3d 391 at 403.
In this proceeding, elements (1) and (5) have obviously been established by Citibank. Elements (2), (3), and (4), which are generally more problematic, will be discussed more thoroughly.
Insofar as “fraudulent intent” is concerned, the tandem label that this court will utilize to discuss Mercer’s elements (2) and (3), the Ninth Circuit Court of Appeals decision in In re Anastas, 94 F.3d 1280 (9th Cir.1996), created a substantial burden for a creditor to prevail in a credit card non-dischargeability case. In Anastas, the debtor had incurred sizeable gambling losses utilizing his credit card cash advances while he was obviously insolvent. The court held, however, that an inability to repay a loan was not sufficient to presume a lack of intent to repay. This meant that the creditor had to prove that the debtor, when the charge was incurred, could not have realistically expected to repay the debt, and, in fact, did not intend to do so.
Another approach to establishing fraudulent intent in credit card cases has actually been in existence since the issuance of the Ninth Circuit Bankruptcy Appellate Panel’s Dougherty decision in 1988, In re Dougherty, 84 B.R. 653 (9th Cir. BAP 1988). In Dougherty, the court crafted a totality of the circumstances test, examining a non-exclusive list of twelve objective factors to determine whether a credit card debt was incurred through fraud. These factors are listed hereinbelow:
1. The length of time between when the charges were made and the filing of bankruptcy;
2. Whether or not an attorney had been consulted concerning the filing of the bankruptcy case before the charges were made;
3. The number of charges made;
4. The amount of the charges;
5. The financial condition of the debtor at the time the charges were made;
6. Whether the charges were above the credit limit of the account;
7. Whether the debtor made multiple charges on the same day;
8. Whether or not the debtor was employed;
9. The debtor’s prospects for employment;
10. The financial sophistication of the debtor;
11. Whether there was a sudden change in the debtor’s buying habits; and
12. Whether the purchases made were for luxuries or necessities.
Id. at 657.
In a case preceding the Anastas decision, the Ninth Circuit used the Dougherty factors in In re Eashai, 87 F.3d 1082 (9th Cir.1996), reasoning that the twelve factors were relevant to an objective analysis of the debtor’s intent. Id. at 1087-88.
*808Drawing from those courts that had earlier stated that an inability to pay should translate into an exception from discharge, the Dougherty twelve part test included the debtor’s lack of an ability to repay. However, although it is only one factor, it is given substantial weight in the ultimate conclusion.
Another decision from the Ninth Circuit is In re Hashemi, 104 F.3d 1122 (9th Cir.1996). Hashemi was cited with approval by the Fifth Circuit in its Mercer decision noted hereinabove. The Hashemi court, perhaps recognizing the onerous burden placed on creditors by the Anastas decision, decided that the creditor needed to prove only that the relevant facts supported a finding that the debtor did not intend to repay the charges at the time they were incurred. The Hashemi court specifically pointed to the twelve Dougherty factors and stated, “these factors are nonexclusive; none is dispositive, nor must a debtor’s conduct satisfy a minimum number in order to prove fraudulent intent. So long as, on balance, the evidence supports a finding of fraudulent intent, the creditor has satisfied this element.” Id. at 1125.
Once the fraudulent intent hurdle has been overcome, the creditor must then establish “actual and justifiable reliance” required by Mercer’s element (4). A significant decision which addresses this element is Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), decided by the United States Supreme Court. Although this was not a credit card case, it involved commercial fraud allegations based on § 523(a)(2)(A). The debtor, an individual guarantor on a corporate loan, had apparently made certain misrepresentations to the lender to induce the loan transaction. After the corporation defaulted on the repayment of the debt, the debt- or filed bankruptcy and the lender sought to have the individual guaranty excepted from discharge. Id. at 61-2, 116 S.Ct. 437. The bankruptcy court dismissed the lender’s complaint concluding that the lender had not reasonably relied upon the debt- or’s representations. The decision was appealed to the Supreme Court which determined that the standard of reliance was not reasonable, but justifiable. Id. at 74, 116 S.Ct. 437. Although this conclusion may seem like splitting hairs, the bottom line is that justifiable reliance is a less severe standard than reasonable reliance in establishing a commercial fraud case.
More importantly, the Field v. Mans decision made it abundantly clear that the reliance element had to be proved in fraud cases where the complaint was based on § 523(a)(2)(A). Ironically, § 523(a)(2)(B), which pertains to a false written financial statement, expressly provides that the standard is reasonable reliance.
Quite frankly, many courts in credit card cases had begun to ignore the reliance element altogether, whether reasonable or justifiable, primarily focusing attention on the fraudulent intent elements. After Field v. Mans, the courts realized that this element had to be addressed.
In the Fifth Circuit’s Mercer decision, the en banc court determined that each use of a pre-approved credit card by the Chapter 7 debtor was in the nature of an implied representation by the debtor of an intent to repay any credit extended. The court also concluded that the credit card issuer “actually relied,” as a matter of law, on the debtor’s implied card-use representation regarding her intention to repay her credit card debts. The case was remanded through the district court to the bankruptcy court so that determinations could be made as to the debtor’s knowing falsity, her intent to deceive, as well as, whether her representations were justifiably relied upon by the credit card issuer. The fol*809lowing language in Mercer is instructive, to-wit:
Even assuming UCS, a sophisticated lender with considerable resources, could have conducted the type investigation envisioned by the bankruptcy court, its failure to do so does not .per se preclude finding it was justified in relying on Mercer’s card-use representations of intent to pay, because the information it obtained prior to card-issuance appears, based on the earlier-discussed evidence, not to have raised “red flags” requiring further investigation. Of course, justifiable reliance is a question of fact. See Coston v. Bank of Malvern (In re Coston), 991 F.2d 257, 260 (5th Cir.1993) (en banc) (pre-Field; reasonable reliance question of fact). Because the bankruptcy court applied an incorrect legal standard in finding no justifiable reliance, on remand it must make that determination, under the correct legal standard.
For justifiable reliance, the focus should be on whether UCS, based on its credit screening and its relationship with Mercer during her brief card-use, had reason to believe she would not carry out her representation, through card-use, of intent to pay. Relevant to that determination are the circumstances under which the representation was made, including the fact that it was made for the purpose of inducing UCS to act in reliance upon it, and the form and manner in which it was expressed. See Restatement (Second) of Torts § 544 cmt. a. And, facts pertinent to that inquiry include, but are not limited to: (1) UCS’ decision to offer the pre-approved card, based on an examination of Mercer’s credit history-twice before acceptance, and again between acceptance and issuance; (2) the terms of the card-agreement, which provided that Mercer’s card-use signified her acceptance of those terms, including the requirement that she pay the loans incurred, by making at least the minimum monthly payments; and (3) Mercer’s reaching her limit within the first billing cycle, within the scope of the card-agreement, and before UCS had any reason to suspect she would not pay.
246 F.3d 391 at 422-23.
For Mercer’s § 523(a)(2)(A) nondis-chargeability vel non, we hold, as a matter of law, for each card-use: she represented her intent to pay the loan; if her representation was knowingly false, she intended to deceive UCS; it actually relied on the representation by authorizing the requested loan; and its loss was proximately caused by such reliance. On remand, to be determined for each representation is whether: it was knowingly false; and UCS justifiably relied on it.
Id. at 425.
IV.
Applying the law developed by the Fifth Circuit in the Mercer decision, this court must assume that on each occasion that Collier utilized his Citibank credit cards that he impliedly represented an intent to repay the credit extended. Further, the court must assume that Citibank actually relied, as a matter of law, on Collier’s implied representations. Because Collier “ran-up” these charges in a relatively short span of time during which he made a few small payments, as well as, because the total charges did not exceed the credit limits for the two cards until Collier had terminated their use, the court must additionally assume that Citibank justifiably relied on Collier’s implied representations. The court simply does not see that there were any “red flags” that would serve as sufficient warnings to Citibank that would negate this latter reliance as to Collier’s use of the cards.
*810As a result of the foregoing conclusions, Citibank has established all of the Mercer elements by a preponderance of the evidence with the exception of elements (2) and (3), which focus on the credit card user’s fraudulent intent. In making a determination of whether there was fraudulent intent on Collier’s part, this court will look to the twelve factors outlined in the Dougherty case which were adopted by the Ninth Circuit in Hashemi, as well as, by the Fifth Circuit in Mercer. Not surprisingly, there are a number of these factors that squarely apply to this particular proceeding, to-wit:
The length of time between when the charges were made and the filing of bankruptcy.
The number of charges made.
The amount of the charges.
The financial condition of the debtor at the time the charges were made. Whether the debtor made multiple charges on the same day.
Whether there was a sudden change in the debtor’s buying habits.
Whether the purchases made were for luxuries or necessities.
As noted earlier, the Hashemi court, when considering the aforementioned factors, stated, “these factors are non-exclusive; none is dispositive, nor must a debt- or’s conduct satisfy a minimum number to prove fraudulent intent. So long as, on balance, the evidence supports a finding of fraudulent intent, the creditor has satisfied this element.” Hashemi, 104 F.3d at 1125.
The court does not feel that Citibank is completely blameless in its financial relationship with Collier. Citibank furnished two credit cards, each having a credit limit of $9,600.00, to Collier, an individual whose monthly income barely exceeded his expenses, who had recently been divorced, and who was caring for two elderly parents. Collier took what was given to him and “ran-up” charges and cash advances that neared and then exceeded the credit limit for each card in short order. Some of these charges were for necessities and others were obviously not. The court has carefully reviewed the account statements and, in an effort to be fair to both parties, has distinguished between the charges that appear to be for necessities and those that appear to be otherwise. The court, following this allocation, concludes that a non-dischargeable judgment should be rendered against Collier in the sum of $11,155.26. ($5,472.29 on the Citi Diamond Preferred Card and $5,682.97 on the AT & T Universal Rewards Card.) Since the credit card agreements provide for the recovery of costs and attorney’s fees, the court will award attorney’s fees in the sum of $3,715.00, plus allow all costs accrued by virtue of this proceeding to be taxed to Collier. Interest on these sums will be permitted to accrue at the highest lawful rate following the entry of a judgment contemporaneously herewith.
. Subsequently in this opinion, all Code sections will be considered as the U.S. Bankruptcy Code unless designated otherwise. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493966/ | MEMORANDUM OPINION
ROBERT L. JONES, Bankruptcy Judge.
The Court considers whether to grant summary judgment in favor of the defendants Carol Clayton Wilson, et al (the ‘Wilson Parties”).1 Ice Melt Products, L.L.C. (“Ice Melt”) is the plaintiff in this adversary proceeding and debtor-in-possession in the underlying chapter 11 case.
The Wilson Parties submit that, as a matter of law, the relief sought by Ice Melt in this adversary proceeding is barred by the principles of collateral estop-pel and res judicata. In addition, and alternatively, the Wilson Parties contend that the relief sought by Ice Melt in this adversary proceeding is prohibited under the specific terms of a Surface Deed between the parties that gives rise to their dispute.2
Upon consideration of the summary judgment evidence and the arguments made by the parties, the Court is of the opinion that Ice Melt’s claims are barred by res judicata. Given the Court’s conclusion, it is not necessary to address the Wilson Parties’ claims that Ice Melt’s suit is barred by collateral estoppel or by the terms of the Surface Deed between the parties.
Procedural Background
Ice Melt filed bankruptcy under chapter 11 of the Bankruptcy Code on May 5, 2005. On July 27, 2005, Ice Melt filed its complaint initiating this adversary proceeding in which it seeks the determination and declaration by this Court that the drilling of two wells upon property covered by a Surface Deed dated July 6, 2000, is within Ice Melt’s rights and does not violate any prior agreement with the Wilson Parties or violate a prior judgment entered by the 132nd District Court of Borden County, Texas. The 132nd District Court rendered a judgment on April 19, 2005, for injunc-tive, declaratory and monetary relief in cause number 1128 in favor of the Wilson Parties and against Ice Melt and compa*813nies with which it is affiliated.3 This chapter 11 proceeding was filed before the 132nd District Court judgment became final.
On August 24, 2005, the Wilson Parties filed a motion for mandatory and/or discretionary abstention, a motion to dismiss, and their original answer. On November 18, 2005, this Court considered the Wilson Parties’ motions for abstention and dismissal, and, on November 21, 2005, issued its order which (1) denied the motion to abstain; (2) found that, under Federal Bankruptcy Rule of Procedure 7012, the motion to dismiss is more properly and should be considered as a motion for summary judgment; and (3) granted additional time to submit additional briefing and/or evidence in support of the parties’ positions regarding whether Ice Melt’s claims in this adversary proceeding should be dismissed under a summary judgment standard. See FED. R. BANKR. P. 7012(b), 7056(b)-(c).
On December 7, 2005, lee Melt filed its First Amended Complaint and Request for Declaratory Judgment. By this amended complaint, lee Melt sought, in addition to the relief requested by its original complaint, a declaration that it be allowed to drill two wells for the purpose of pumping various kinds of “brackish” water, such water to be loaded and sold as produced. Both Ice Melt and the Wilson Parties filed supplemental briefs in support of their positions on the Wilson Parties’ motion to dismiss (which is treated as a motion for summary judgment) and submitted additional summary judgment evidence in support of their claims.
Discussion
1. Generally
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 when the disputed fact is determinative under governing law of the issue before the court. 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).
2. Res Judicata
Res judicata requires proof of three elements: (1) a prior final judgment *814on the merits by a court of competent jurisdiction, (2) the same identity of parties or those in privity with them, and (3) a second action based on the same claims as were raised or could have been raised in the first action. Amstadt v. U.S. Brass Corp., 919 S.W.2d 644 (Tex.1996) (emphasis added).
“When a federal court is asked to give claim preclusive effect to a state court judgment, the federal court must determine the preclusiveness of that state court judgment according to the principles of claim preclusion of the state from which the judgment was rendered.” United States ex rel. Laird v. Lockheed Martin Eng’g and Sci. Serv. Co., 336 F.3d 346, 357 (5th Cir.2003). “In Texas, ‘[r]es judicata or claim preclusion prevents the relitigation of a claim or cause of action that has been finally adjudicated, as well as related matters that, with the use of diligence, should have been litigated in the prior suit.’ ” Id. (citing Barr v. Resolution Trust Corp., 837 S.W.2d 627, 628 (Tex.1992)).
In the present case, the first two elements are established and uncontested. The third element, whether the same claim was or could have been raised, is disputed. In Barr, the Texas Supreme Court adopted the transactional approach to res judicata as it is described in the Restatement of Judgments. The Court stated,
the transactional approach to claims preclusion of the Restatement effectuates the policy of res judicata ... Discovery should put a claimant on notice of any need for alternative pleading. Moreover, if success on one theory becomes doubtful because of developments during trial, a party is free to seek a trial amendment.
Id.
Ice Melt contends its claim is not barred by res judicata because it could not have anticipated the need for new wells on its own property until after the state court rendered judgment against them. Pl.’s Suppl. Br. in Opp’n to Def.s’ Mot. to Dismiss at 4. This contention does not support an argument against res judicata. As the Court in Barr pointed out, “discovery should put a claimant on notice of any need for alternative pleading.” Barr, 837 S.W.2d at 630 (emphasis added). Ice Melt did anticipate that judgment may be adverse, and, therefore, filed a counterclaim against the Wilson Parties. This counterclaim described potential repercussions should the contested lease agreement be terminated by the state court and asked for damages in that event. Def.’s Ex. G, Part 8 of 10, at 158. Ice Melt offered no credible argument as to why it was capable of anticipating the need for cleanup damages but not a potential need for a new water source. Termination of their lease was clearly an expected result and they could have requested the state court determine its right to drill new wells. Such an alternative pleading is exactly what the Court in Barr envisioned.
Ice Melt contends that fact questions exist because the Surface Deed states that the use of the property is limited to brine water operations and “any additional processing of brine water products and byproducts.” This language, according to Ice Melt,
brings into sharp focus that fact questions exist as regards whether or not what Ice Melt wants to do constitutes a prohibited “activity,” what does “store or process” mean, is what Ice Melt contemplating the type of “brine water operations” that are prohibited, does the activity constitute “additional processing of the brine water products and byproducts,” and is the activity a “type of oper*815ations” that is prohibited by the Surface Deed?
PL’s Supp. Br. at 6.
The Court would note, however, that the judgment specifically provides that Ice Melt is prohibited from storing or processing brine water, which was, in fact, the only “operations” permitted under the Surface Deed. After stating that the use of the property is limited to brine water operations, the Surface Deed specifically states that “[n]o other type of operations shall be conducted on the Property.” Def.’s Ex. G at 0125. No fact question remains. If the drilling of two water wells constitutes brine water operations, it is prohibited by the Surface Deed restriction as construed by the state court. No other operations are allowed. While the precise question of whether the drilling of two wells is allowable may not have been expressly considered by the state court, it certainly could have been raised before the state court.
3. Res Judicata and Ice Melt’s ■State Counterclaim
Ice Melt argues that its claim to drill two new wells did not constitute a compulsory counterclaim in the state court action and therefore is not subject to the preclu-sive effect of res judicata. Because Ice Melt filed a counterclaim for damages in the state court action, it is not necessary for this Court to determine whether the right to drill new wells would constitute a compulsory counterclaim at the state level.
Res judicata only applies to the cause of action filed by the plaintiff and not to the counterclaim, which might have been filed by the defendant, unless the compulsory counterclaim rule is applicable.... However, where a defendant does interpose a claim as a counterclaim and a valid and final judgment is rendered against him on the counterclaim, the defendant becomes a counter-defendant for res judicata purposes and is required to assert all claims against the plaintiff arising from the subject matter of the original claim.
Musgrave v. Owen, 67 S.W.3d 513 (Tex.App. — Texarkana 2002, no pet. h.) (citing Getty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794, 800 (Tex.1992)).
A determination of what constitutes the subject matter of a suit necessarily requires an examination of the factual basis of the claim or claims in the prior litigation. It requires an analysis of the factual matters that make up the gist of the complaint, without regard to the form of action. Any cause of action which arises out of those same facts should, if practicable, be litigated in the same lawsuit.
Barr, 837 S.W.2d at 630.
Using the Texas transactional approach to determine whether the transaction is the same, the court must consider and weigh whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a trial unit conforms to the parties’ expectations or business usage. Musgrave at 519. “The transactional approach requires courts, in order to determine res judicata, to examine the factual basis, not the legal theories, presented in the cases. The main concern is whether the cases share the same nucleus of operative facts.” Id.
The Musgrave case involved a continuing dispute over deeds and restrictive covenants, much like the case at hand. There the court determined the second action arose from the same transaction as the first and fit the parameters of res judicata because the plaintiff in the second action had raised a counterclaim in the first. The Musgrave court explained the res judicata effect arising from counterclaims: “[o]nce *816Musgrave raised a counterclaim in Mus-grave 1 and put himself in the posture of a plaintiff, he was required by both res judi-cata and Tex.R. Civ. P. 97(a) to bring all mature causes of action arising from the same set of facts and circumstances.” Id. Musgrave contested, as does Ice Melt here, the determination that the two claims arose from the same transaction. Id. After an extensive array of examples where two cases arise under the same subject matter, the Musgrave court explained how the legal relationship created by deeds and their covenants obligates the parties to bring all claims in one action. “[T]he subdivision’s restrictive covenant constituted a legal relationship between Musgrave, his successors in interest and the lot owners. Thus, any claim arising from that relationship arises from the same subject matter.” Id. at 520. The Surface Deed between the Wilson Parties and Ice Melt contains a restrictive covenant and created a legal relationship between the parties. Therefore, the claims urged by Ice Melt arise from the same subject matter as did the state court action and Ice Melt, as counter-plaintiff, was required to bring these claims in that action.
Finally, Ice Melt offers the same argument as did Musgrave that the current action would not have been necessary had they been successful in the original action. This argument failed in Musgrave. “[T]he contingent nature of claims does not preclude the operation of res judicata.” Id. (citing Getty Oil Co., 845 S.W.2d at 799-800 (relying in part on Tex.R. Civ. P. 51(b), which permits joinder of two claims even when one of the claims is dependent on disposition of other)).
4. Ice Melt’s Argument under 11 U.S.C. § 105
Ice Melt urges this Court to look to equitable principles under section 105 of the Bankruptcy Code as a means to avoid the binding effect of res judicata. This Court is not within its authority to ignore established principles of res judicata. See Federated Dept. Stores, Inc. v. Moitie, 452 U.S. 394, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981) (“The doctrine of res judicata serves vital public interests beyond any individual judge’s ad hoc determination of the equities in a particular' case. There is simply ‘no principle of law or equity which sanctions the rejection by a federal court of the salutary principle of res judicata.’ ”) (internal citation omitted); Baltimore S.S. Co. v. Phillips, 274 U.S. 316, 47 S.Ct. 600, 71 L.Ed. 1069 (1927) (The effect of a judgment or decree as res judicata depends on whether the second action ... is upon the same or a different cause of action. If upon the same cause of action, the judgment or decree upon the merits in the first case is an absolute bar to the subsequent action or suit between the same parties ..., not only in respect to every matter which was actually offered to sustain the demand, but also as to every ground of recovery which might have been presented.); Browning v. Navarro, 887 F.2d 553, 561 (5th Cir.1989) (“As a general rule bankruptcy courts are bound by both branches of res judicata.”).
Conclusion
As the first two elements of res judicata are not disputed and given the claims raised in this adversary should and could have been raised in the original state court action, this adversary claim is barred by res judicata. The Wilson Parties’ motion to dismiss (treated as a motion for summary judgment) will be granted. It is not necessary to address the remaining claims of the Wilson Parties.
. The defendants in this case are Carol Clayton Wilson, individually and on behalf of A. Mardes Clayton III, Noranne Clayon, in her individual capacity and as trustee of the No-ranne Clayton Living Trust, Theresa Clayton Gregory, Scott Clayton, Individually and as attorney-in-fact for Nan Clayton Martin, Community Bank of Raymore, Trustee for William L. Abernathy, W.D. Johnson Jr, for the benefit of Dorothy Haggerty, Timothy S. Brandom, Laura E. Couch, William S. Brandom Jr., Deborah B. Miller, Robert J. Brandom, Thomas M. Scruggs for the benefit of Lillian Smart, Kern Kenyon, Claudia Kenyon, Abbie J. Burton for the benefit of Lynn Lumbard, Abbie J. Burton for the benefit of Mark Lumbard, Ab-bie J. Burton for the benefit of Nancy Martin, Abbie J. Burton for the benefit of Susan Martin, Abbie J. Burton for the benefit of Laura Martin, Abbie J. Burton for the benefit of Kathleen Field, and Community Bank of Ray-more, trustee for Jacqueline B. Chamo Charitable Lead Trust, Bebe and Tom Dunnicliffe Charitable Lead Trust, David L. Fayman, and Faith Fayman Strong.
. The Wilson Parties actually submit there are two different theories under the Surface Deed that prohibit Ice Melt from going forward in this adversary proceeding. First, the Wilson Parties submit that the relief sought by Ice Melt is prohibited under the terms and restrictions of the Surface Deed. Second, the Wilson Parties submit that Ice Melt has no rights to the brine water under the property covered by the Surface Deed as the brine water is a mineral which is expressly reserved by the grantors of the Surface Deed.
. The Wilson Parties and Ice Melt both refer to the defendants in the state court action other than Ice Melt as “sister" companies, one of which is Snyder Magnesium, Inc. The Wilson Parties also contend, which is not disputed, that the so-called sister companies were owned by the same people who owned Ice Melt, Dick Crill and C.D. Gray, Jr. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493968/ | MEMORANDUM-OPINION
JOAN L. COOPER, Bankruptcy Judge.
This matter is before the Court on the Motion to Dismiss Adversary Complaint of Defendants, R. Gene Smith, Inc. and the *828Estate of R. Gene Smith (“Smith”). Smith seeks an Order dismissing the Adversary Complaint filed against the Defendants by Plaintiff Seiller & Handmaker (“Seiller”). For the following reasons, the Court DENIES the Motion. An Order incorporating the findings herein accompanies this Memorandum-Opinion.
FACTS
Smith was a creditor of the Debtor, Commonwealth Institutional Securities (“Debtor”). Seiller represented Smith in Debtor’s bankruptcy case regarding a claim Smith had against the Debtor. Smith now disputes the fee charged by Seiller for those services. As of February 2, 2005, Smith owed Seiller $19,894.94 with interest at the rate of 8%.
On or about September 7, 2005, the Chapter 7 Trustee in Debtor’s case, John Wilson (“Trustee”), remitted a check to Smith in the amount of $18,083.05 from the Debtor’s bankruptcy estate.
Seiller, in the adversary proceeding, asserts a statutory attorney’s lien pursuant to KRS 376.060 upon that distribution by the estate. Seiller claims that this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (K), and (O).
Smith seeks dismissal of the adversary proceeding contending that the dispute regarding Seiller’s attorney’s lien is not a core proceeding.
LEGAL ANALYSIS
The issue before the Court is whether the validity, priority or the extent of Seiller’s attorney’s lien upon the funds distributed by Debtor’s estate constitutes a core proceeding under the Bankruptcy Code. A core proceeding is one that affects the administration of the bankruptcy estate. In re Nat. Century Financial Enterprises, Inc., 423 F.3d 567, 573 (6th Cir.2005). Cases involving the determination of the validity, extent and priority of a lien are considered core proceedings. 28 U.S.C. § 157(b)(2)(k).
The relevant inquiry is whether the nature of the adversary proceeding falls within the core of federal bankruptcy power. In re Manville Forest Products Corp., 896 F.2d 1384, 1389 (2d Cir.1990). The Court finds this matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), as it is a matter “concerning the administration of the estate as well as one dealing with the validity extent and priority of liens.” See, Gravel and Shea v. Vermont Nat. Bank, 162 B.R. 961, 967 (D.Vt.1993) (holding that a dispute between a secured creditor and a law firm both of whom claimed a lien on escrowed funds was a core proceeding); In re T.C. Assoc., Ltd. Partnership, 163 B.R. 140,145 n. 6 (Bankr.N.D.Ill.1994); and In re Ralph Lauren Womenswear, Inc., 204 B.R. 363 (Bankr.S.D.N.Y.1997).
The deposition of Trustee John Wilson, removes any doubt that the distribution at issue is an asset of the estate. Mr. Wilson clearly testified that he received notice from Seiller with respect to their claimed attorney’s lien on the distribution. The distribution check was never negotiated and the funds are still in the Trustee’s account for the Debtor. Mr. Wilson also testified that these funds are still property of the estate. Under these circumstances, the Court finds that the matter set forth in the Complaint constitutes a core proceeding under both 28 U.S.C. § 157(b)(2)(A), and (K).
CONCLUSION
For all of the above reasons, the Motion to Dismiss of Defendants R. Gene Smith, Inc. and the Estate of R. Gene Smith is DENIED.
*829
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 Dismiss of Defendants R. Gene Smith, Inc. and the Estate of R. Gene Smith, be and hereby is, DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493969/ | MEMORANDUM OPINION
KAY WOODS, Bankruptcy Judge.
This cause is before the Court on the parties’ cross motions for summary judgment on the issues in an adversary proceeding commenced by WCI Steel, Inc. (“WCI”) against Seaway Marine Transport (“Seaway”) seeking a determination of the validity and priority of maritime liens and for damages for unjust enrichment. Each of the parties filed responses and reply briefs to the motions for summary judgment.1
This Court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334(b). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1391(b), 1408 and 1409. Seaway submitted to this Court’s jurisdiction by making an appearance in the underlying bankruptcy proceeding and does not contest that this Court has personal jurisdiction over it. (Seaway’s Answer to First Amended Complaint ¶ 7.) This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(k). The following constitutes the Court’s findings of fact and conclusions of law pursuant to Fed. R. BankrP. 7052.
I. STANDARD OF REVIEW
The procedure for granting summary judgment is found in Fed.R.Civ.P. 56(c), *841made applicable to this proceeding through Fed. R. Bankr.P. 7056, which provides in part that,
[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
Fed. R. Bankr.P. 7056(c). Summary judgment is proper if there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A fact is material if it could affect the determination of the underlying action. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Tenn. Dep’t of Mental Health & Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir.1996). An issue of material fact is genuine if a rational fact-finder could find in favor of either party on the issue. Anderson, 477 U.S. at 248-49, 106 S.Ct. 2505; SPC Plastics Corp. v. Griffith (In re Structurlite Plastics Corp.), 224 B.R. 27 (6th Cir. BAP 1998). Thus, summary judgment is inappropriate “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
In a motion for summary judgment, the movant bears the initial burden to establish an absence of evidence to support the nonmoving party’s case. Celotex, 477 U.S. at 322, 106 S.Ct. 2548; Gibson v. Gibson (In re Gibson), 219 B.R. 195, 198 (6th Cir. BAP 1998). The burden then shifts to the nonmoving party to demonstrate the existence of a genuine dispute. Lujan v. Defenders of Wildlife, 504 U.S. 555, 590, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). The evidence must be viewed in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). However, in responding to a proper motion for summary judgment, the non-moving party “cannot rely on the hope that the trier of fact will disbelieve the mov-ant’s denial of a disputed fact, but must ‘present affirmative evidence in order to defeat a properly supported motion for summary judgment.’ ” Street v. J.C. Bradford & Co., 886 F.2d 1472, 1476 (6th Cir.1989) (quoting Anderson, 477 U.S. at 257, 106 S.Ct. 2505). That is, the nonmoving party has an affirmative duty to direct the court’s attention to those specific portions of the record upon which it seeks to rely to create a genuine issue of material fact. Street, 886 F.2d at 1479.
II. ISSUE
The parties have briefed two issues for the Court, as follows:
1. Did Seaway forfeit its maritime liens over certain iron ore pellets (“Pellets”) when it delivered such Pellets at the contractual destination?
2. Is WCI entitled to the repayment of the One Hundred Thousand Dollar ($100,000.00) adequate protection payment, ordered by this Court, if the liens are held to be invalid?
The parties also briefed the choice of law issue.2
III. FACTS
The material facts in this case are not in dispute. WCI is a corporation incorporat*842ed under the laws of Ohio with its principal place of business at 1040 Pine Avenue, SE, Warren, Ohio. WCI is in the business of producing steel. Seaway is a Canadian company with its principal office located at 20 Corporate Park Drive, Suite 300, St. Catharines, Ontario L2S 3W2. Seaway is a company that operates transport vessels on the Great Lakes, St. Lawrence River and waterways of Eastern Canada.
On October 19, 2001, WCI and Seaway entered into a Contract of Affreightment (“Contract”). Pursuant to the Contract, Seaway agreed to transport Pellets purchased by WCI from Point Noire, Quebec, Canada to Pinney Dock in Ashtabula, Ohio. Pinney Dock is a dock and warehouse facility that receives iron ore shipments for WCI and is owned and operated by a third party.
The Contract provides that WCI is required to pay Seaway within five days of the loading of the Pellets.3 The Contract provided Seaway with rights if WCI did not meet its payment obligations. Specifically, the contract provides:
Freight shall be deemed earned and payable on receipt of the cargo by Carrier and shall be paid in any event, cargo lost or not lost. Provided the Shipper is not in default, freight charges may be paid, without interest, within five (5) days of completion of loading. Time shall, in that respect, be of the essence and if the Shipper fails to pay freight charges within five (5) days:
i) Carrier shall be entitled to suspend the performance of this Agreement until such time as all amounts owed by Shipper have been paid or security in respect thereof has been provided;
ii) Carrier shall be entitled to require, in the case of future shipments under this Agreement, that freight and other charges be paid in advance.
(Contract 7.)
Furthermore, the Bill of Lading, expressly incorporated into the Contract, contained a lien provision, which provides:
The carrier shall have a lien on the cargo for any amount due from the merchant, in respect of freight, salvage, general average or special charges, whether in respect of the cargo or in respect of other cargos shipped by the merchant or other contracts made by the merchant, and shall be entitled to withhold delivery of the cargo until such amounts have been paid or security in respect thereof has been provided.
(Bill of Lading 14.)
Under the Contract, any dispute between the parties was to be resolved by a court or arbitrator using Canadian law. The Contract provides:
(a) This Contract and the rights, duties, privileges., [sic] limitations, and defenses of Carrier and Shipper shall be governed by and construed according to the laws of the Province of Ontario and the laws of Canada....
(Contract 10.) In addition to the choice of law provision in the Contract, the parties *843included a choice of law provision in the Bill of Lading, which states:
In the case of shipments originating in Canada, all disputes or claims arising under this bill of lading, including disputes in connection with loss of or damage to the cargo, shall be subject to the exclusive jurisdiction of the Federal court of Canada and shall be governed by Canadian maritime law.
(Bill of Lading 4.)
Seaway completed loading twenty-eight thousand eight hundred sixteen (28,816) MTS Pellets (valued at Two Hundred Fifteen Thousand One Hundred Two and 95/100 Dollars ($215,102.95)) on the M/V JEAN PARISIEN on September 5, 2003 and twenty-three thousand seven hundred forty-five (23,745) MTS Pellets (valued at One Hundred Ninety Thousand Four Hundred Sixty-Five and 50/100 Dollars ($190,-465.50)) on the M/V ALGOSTEEL on September 6, 2003. The Pellets on the M/V JEAN PARISIEN arrived at Pinney Dock in Ashtabula, Ohio on September 9, 2003 and the Pellets on the M/V ALGOSTEEL arrived at Pinney Dock on September 10, 2003. Seaway discharged both shipments of Pellets at Pinney Dock. At no time prior to discharge did Seaway notify WCI or the wharfinger or warehouseman,4 in writing or otherwise, that it was conditionally releasing the Pellets subject to WCI’s obligation to pay for the Pellets. (Seaway Answer to Interrog. No. 3.) Instead, Seaway discharged the Pellets in accordance with Seaway’s and WCI’s standard operating practices under the Contract and Bill of Lading. (Seaway Answer to Interrog. No. 3.)
On September 16, 2003, WCI filed for protection pursuant to Chapter 11 of Title 11 of the Bankruptcy Code. WCI failed to pay Seaway for these two shipments in accordance with the terms of the Contract. As a result, on September 16, 2003 — seven and six days, respectively, after Seaway discharged the Pellets — Seaway served WCI and Pinney Dock two Notices of Claims of Lien, under general maritime law, against the Pellets delivered on September 9 and September 10, 2003 to Pin-ney Dock.5 As of the date of service, all of *844the Pellets remained in a warehouse at Pinney Dock.
After WCI filed for bankruptcy, Seaway refused to continue providing transport services under the Contract unless WCI paid a portion of the alleged liens. This Court, on October 2, 2003, issued an Order Authorizing Debtors to Provide Adequate Protection to Seaway and Authorizing (a) Payment of Maritime Claim, (b) Granting Replacement Liens in Existing or New Inventory Located at Pinney Dock in Respect of Maritime Claim; (c) Authorizing and Directing Applicable Banks and Financial Institutions to Receive, Possess and Pay any and all Checks and Other Transfers Related to Such Claim (“Adequate Protection Order”). The Adequate Protection Order, as an inducement to Seaway to continue providing shipping services under the Contract, authorized WCI to make payments in three monthly installments of One Hundred Thousand Dollars ($100,000.00) beginning on or before October 31, 2003 and a final payment of One Hundred Five Thousand Five Hundred Sixty-Eight and 45/100 Dollars ($105,-568.45) on or before January 31, 2004. The Adequate Protection Order specifically states:
Nothing in this Order shall be construed as (a) prejudicing the rights of the Debtors or any party in interest to dispute or contest the amount or validity of Seaway’s Maritime Claim and/or the amount, validity and priority of its Maritime Lien; (b) affecting or modifying the rights or obligations of Seaway and Debtors under the Contract of Af-freightment with respect to postpetition shipments; or (c) deeming to constitute postpetition assumption of the Contract of Affreightment between the Debtors and Seaway pursuant to section 365 of the Bankruptcy Code, or (d) prejudicing the rights of Seaway to seek assumption or rejection of the Contract of Affreightment or any other rights Seaway has under the Bankruptcy Code.
(Adequate Protection Order 6.)
Pursuant to the Adequate Protection Order, WCI made one monthly installment payment towards the asserted maritime lien in the amount of One Hundred Thousand Dollars ($100,000.00), while reserving the right to dispute or contest the amount and/or validity of the liens as provided by the Adequate Protection Order.
WCI commenced this adversary proceeding on December 10, 2003 seeking: (1) a determination of the validity of Seaway’s claims; (2) a declaratory judgment declaring the alleged maritime liens invalid; and (3) the recoupment of the One Hundred Thousand Dollar ($100,000.00) adequate protection payment. WCI asserts, in making these claims that: (i) Canadian law applies; (ii) the Pellets were released without condition; and (iii) the adequate assurance payment was made subject to WCI’s right to dispute the payment.
Seaway asserts that: (1) the law of the United States applies; (2) the Pellets were conditionally released pursuant to the Contract and Bill of Lading; and (3) the adequate assurance payment was voluntarily made and may not be recouped.
IV. LEGAL ANALYSIS
A. Choice of Law
Federal law controls the interpretation of a maritime contract as long as the dispute is not inherently local. Norfolk S. Ry. Co. v. James N. Kirby, 543 U.S. 14, 125 S.Ct. 385, 392, 160 L.Ed.2d 283 (2004).
In the instant case, WCI and Seaway contracted to ship, via transport vessels, Pellets from Point Noire, Quebec to Ashtabula, Ohio. There is no question that this Contract consists of maritime contract *845due to Seaway’s exclusive use of vessels on the various international waterways. Furthermore, this Contract is not inherently local because the Contract involves a Canadian company and a company incorporated under the laws of Ohio and the shipment of cargo from Canada to the United States. As a result, this Court must and will use federal contract law to determine the nature of the Contract and the interpretation thereof.
Maritime contracts must be treated like any other contract. Id., 125 S.Ct. at 397. It is well founded in contract law that a contract must be entered into by capable parties and the agreement must contain the elements of mutual assent and consideration. See Restatement (Second) of Contracts, Ch. 2; 3; 4 (1981). In addition, the terms of the contract must be read consistent with the intent of the parties and where the terms have a plain and obvious meaning, all construction, in contravention of that meaning, should be disregarded. Norfolk S. Ry., 125 S.Ct. at 397. However, in determining the validity of a choice of law provision, one must consider the following factors: illegality, bad faith, substantial injustice, unreasonableness, the oppressive use of superior bargaining power, repugnance to the laws of the forum and/or violation of American public policy. See Restatement (Second) of Conflict of Laws, § 187 (1971); Blauschild v. Smartcars, Inc., No. 1:92 CV 0308, 1992 U.S. Dist. LEXIS 21755 (N.D.Ohio, Dec. 2, 1992); Milanovich v. Costa Grociere, S.p.A., 954 F.2d 763, 767-69 (D.C.Cir.1992). These factors should be highly scrutinized because, under American law, choice of law provisions are usually honored. Restatement (Second) of Conflict of Laws, § 187; see also Hawkspere Shipping Co., Ltd. v. Intamex, S.A., 330 F.3d 225, 233 (4th Cir.2003); Milanovich, 954 F.2d at 767.
The parties do not dispute that there is a valid contract in the current case; they differ, however, on what law controls in determining whether Seaway has a valid maritime lien. The question is whether the choice of law provisions in the Contract and Bill of Lading control regarding the validity of the maritime lien. The choice of law clause in the Contract reads:
(a) This Contract and the rights, duties, privileges., [sic] limitations, and defenses of Carrier and Shipper shall be governed by and construed according to the laws of the Province of Ontario and the laws of Canada....
(Contract 10.) To further stress that Canadian law applies, the parties also restated their choice of law in the Bill of Lading. This provision reads:
In the case of shipments originating in Canada, all disputes or claims arising under this bill of lading, including disputes in connection with loss of or damage to the cargo, shall be subject to the exclusive jurisdiction of the Federal court of Canada and shall be governed by Canadian maritime law.
(Bill of Lading 4.)
These provisions evince the parties’ intent that Canadian law should apply in the event of a contractual dispute. Reading these provisions in any other manner would be contra to the plain and obvious meaning of the provision; consequently, any interpretation that excludes Canadian law from governing a dispute is in clear contravention of the meaning of the terms of the Contract and should be disregarded. Norfolk S. Ry., 125 S.Ct. at 397. The choice of law clauses could only be defeated if the Contract was subject to one of the aforementioned factors that invalidate a choice of law provision. However, neither party has demonstrated or even suggested *846that either the Contract or the Bill of Lading was subject to illegality or bad faith, results in substantial injustice, is unreasonable, the result of oppressive or superior bargaining power, repugnant to the laws of the forum and/or against American policy. Accordingly, the parties’ choice of law (i.e., Canadian law) governs the rights and obligations of the parties to this Contract, including the determination of the validity of Seaway’s asserted maritime lien.
Seaway insists that, even if the Court uses Canadian law as the starting point, this is not the end of the choice of law analysis. Seaway contends that there is a significant gap in Canadian law relating to the doctrine of “constructive possession,” and, therefore, the law of the United States should be the controlling substantive law on this issue.
The Court rejects this proposition. Canadian law is well developed in the area of maritime liens even though it may not cover every dispute with an identical case and/or a statute directly on point. Canadian law is well developed and has the ability through the Canadian Shipping Act of 1985 and Canadian common law to govern almost any maritime lien dispute. See Lloyds Bank of Canada v. Lumberton Mills Ltd., [1989], 2 W.W.R. 360 (B.C.C.A.); Coastal Equip. Agencies Ltd. v. Ship “Comer” (The), [1970] Ex. C.R. 13. As a result, this Court will not apply the law of the United States in disregard of the clear intent of the parties, as evidenced by the Contract and Bill of Lading, but will apply Canadian law to resolve this dispute.
Furthermore, both parties are sophisticated and knowledgeable in the area of contract law. They knew the benefits and burdens of their bargain when they entered into the Contract, including the implications of the choice of law provision in the Contract. To allow Seaway to disavow the choice of law provision that it drafted,6 and insist upon the application of another jurisdiction’s law when the contractual choice of law is not favorable to it, is unjust. Such a result would be against public policy, in that the choice of law provision would be read out of the Contract. Furthermore, the Contract would no longer provide uniform treatment and predictable outcome to disputes that arise under the Contract.
Therefore, this Court concludes that, pursuant to the unambiguous provisions of the Contract and Bill of Lading, Canadian law applies.7 This Court further concludes, however, that application of the law of the United States would not result in any different conclusion regarding the validity of the maritime lien.
B. Liens
Under Canadian general maritime law, a shipper has a possessory lien in the cargo of a vessel for freight.8 See Comeau’s Sea *847Foods Ltd. v. Frank and Troy (The), [1971] F.C. 556, 558; Imperial Oil Ltd. v. Petromar Inc., [2002] F.C. 190; William Tetley, Maritime Liens and Claims, 2d Ed., Blais, Montreal, 1998 at 752, 754, 759, 762-63. By maintaining possession of the cargo, a vessel may maintain priority to its claim. Comean’s Sea Foods Ltd., F.C. at 558. The right to retain cargo and/or a lien may also be expressed in the shipping contract. Possession of the cargo may last until the demands of the lienholder are satisfied. Id. A possessory lien is discharged at the moment the vessel surrenders the cargo to a warehouseman or a wharfinger. Canadian Shipping Act, R.S. 1985, c. S-9, s. 597. However, if the owner of the ship gives the warehouseman or wharfinger notice, in writing, that the cargo is to remain subject to a lien or other freight charges as they were prior to discharge, then the warehouseman or wharf-inger shall retain the cargo subject to that hen. Id. If a shipper fails to meet the requirements set forth in Section 597 of the Canadian Shipping Act, the shipper can bring an in rem action. See Imperial Oil Ltd., F.C. at 205-06. The claimant in an in rem action does not receive any privilege or preference in a bankruptcy proceeding and will be treated the same as an ordinary unsecured creditor. Coastal Equip. Agencies Ltd., Ex. C.R. at 31.
Furthermore, parties entering into a shipping contract can provide a provision in the contract granting the shipper a lien on the cargo.9 Under either Canadian or United States law, these clauses will be interpreted using the literal meaning of the words unless to do so would result in absurdity. Gadbois v. Bonte Foods, Ltd., [1988] 94 N.B.R (2d) 21 at P 34.9; see also Norfolk S. Ry., 125 S.Ct. at 397.
There is no doubt that Seaway had a possessory lien on the Pellets for freight under Canadian general maritime law. Comeau’s Sea Foods Ltd, F.C. at 558. However, this lien under general maritime law is only valid as long as Seaway held possession of the Pellets. As a result, when Seaway discharged the Pellets at Pinney Dock — without providing written notice prior to discharge that the Pellets were relinquished subject to the lien — the possessory lien on the Pellets terminated. Canadian Shipping Act, R.S.1985, c. S-9, s. 597.
In order for Seaway to protect its lien, under Canadian law, it would have had to notify the warehouseman or wharfinger, in writing, that it was discharging the Pellets subject to the lien or contract with WCI. Id. Seaway admits that at no time prior to discharge did it notify WCI or the warehouseman or wharfinger that it was releasing the Pellets subject to a lien. (Seaway’s Answer to Interrog. No. 3.) Seaway states that it released the Pellets in accordance with Seaway’s and WCI’s standard operating practices under the Contract and Bill of Lading and in accordance with the lien provisions therein. (Id.)
In addition to the general maritime lien, Seaway had a lien pursuant to section 14 of the Bill of Lading, which was incorporated into and became a part of the Contract.
The carrier shall have a hen on the cargo for any amount due from the merchant, in respect of freight, salvage, general average or special charges, whether in respect of the cargo or in respect of other cargos shipped by the merchant or *848other contracts made by the merchant, and shall be entitled to withhold delivery of the cargo until such amounts have been paid or security in respect thereof has been provided.
(Bill of Lading ¶ 14.) The parties concede that there is no Canadian law that directly interprets this exact contractual language. The language in section 14 conferring this lien is not inconsistent with the requirement that Seaway retain possession of the Pellets for the lien to be effective.10 Seaway contends that the second half of that section — regarding withholding delivery— is a second right in addition to the grant of the lien. This Court finds that a better construction of that language is as a remedy that allows the possessory lien to continue.11 Otherwise, consistent with section 17 of the Bill of Lading, Seaway would have no choice but to immediately discharge the cargo and relinquish the lien. Section 17 of the Bill of Lading provides that: “The cargo is to be received by the merchant ... at the port of discharge as soon as the vessel is ready for discharge .... ”
Seaway is a sophisticated company well acquainted with the intricacies of maritime law. Seaway could have satisfied Section 597 of Canadian Shipping Act by notifying the warehouseman or wharfinger at Pin-ney Dock that it was discharging the Pellets pursuant to a lien (i.e., conditional discharge). Alternatively, the parties could have negotiated a nonpossessory lien provision in the Contract or Bill of Lading.12 Moreover, Seaway could have retained possession of the Pellets until it received full payment from WCI.13 However, Seaway took none of these actions. Instead, it: (1) relinquished the Pellets before payment; (2) failed to negotiate or draft a nonpossessory lien provision in the Contract; and (3) failed to inform Pinney Dock that it was conditionally relinquishing the Pellets.
Although Seaway had many options to protect its interest in the Pellets, it failed to avail itself of any of them. Now Seaway’s only remedy is to bring an in rem action; however, this would be unavailing because such action would only provide protection equal to an unsecured creditor. Coastal Equip. Agencies Ltd., Ex. C.R. at 31.
As a result, this Court holds that Seaway relinquished its possessory lien when it discharged the Pellets at Pinney Dock without providing prior written notice that *849the Pellets were being discharged subject to a lien.
The law of the United States is similar to Canadian law and does not mandate that this Court reach a different result. Even if the law of the United States applied, Seaway does not have a valid non-possessory lien against the Pellets. Under the law of the United States, a shipowner holds a maritime lien on cargo. 4,885 Bags of Linseed, 66 U.S. 108, 111-12, 1 Black 108, 17 L.Ed. 35 (1861). The hen with respect to such cargo is possessory; thus, it is relinquished if the cargo is unconditionally discharged. Id. However, the maritime lien will remain in effect if the cargo is conditionally discharged. Id. To determine if the cargo is conditionally discharged, one may look to the understanding of the parties. Id., 66 U.S. at 114. The factors to determine if the cargo is conditionally discharged must be clear and strictly construed. Atlantic Richfield Co., 604 F.2d at 872-73 (5th Cir.1979).
Seaway’s maritime lien against the Pellets continued as long as it either maintained possession of the Pellets or it did not unconditionally release them. Seaway had not received payment from WCI for either shipment of Pellets by the time the vessels reached Pinney Dock. As a result, Seaway had the following options to maintain a lien on the Pellets: (1) hold the Pellets on the vessels until payment was made or (2) conditionally deliver the Pellets to Pinney Dock. 4,885 Bags of Linseed, 66 U.S. at 112-15, 66 U.S. 108.
Seaway contends that it conditionally delivered the Pellets. To prove that the Pellets were conditionally delivered at Pinney Dock, Seaway must provide clear evidence that the parties intended the delivery to be conditional, that it needed to discharge the Pellets immediately, that it needed to discharge the Pellets so that WCI could inspect them or that the discharge was for the convenience of both parties. See Id. at 114, 66 U.S. 108; Atlantic Richfield Co., 604 F.2d at 872-73. Seaway argues that the liens should survive the discharge of the Pellets because such was the intention of the parties.
In attempting to prove this theory, Seaway relies primarily on Arochem Corp. v. Wilomi, Inc., 962 F.2d 496 (5th Cir.1992) and Eagle Marine Transport Co. v. A Cargo of Hardwood Chips, No. 98-1919, 1998 WL 382141, 1998 U.S. Dist. LEXIS 10547 (E.D.La., Jul. 8, 1998). These cases are distinguishable from the instant case.
In Arochem, the contract required payment for the cargo to be made after delivery of the cargo. By providing a payment date after the date of delivery, the Fifth Circuit Court of Appeals held that the parties intended for the lien to survive the discharge from the vessel. Otherwise, the lien would be futile. Arochem, 962 F.2d at 500. In comparison, in the instant case, payment was pegged to five days after the date the shipment was loaded, not the date it was delivered. Payment could have been made before the delivery of the Pellets.14 Since payment could have been made before or contemporaneously with delivery of the Pellets, there is no clear inference, as in Arochem, that the parties intended the maritime lien to survive the discharge of the Pellets.
Eagle Marine Transport Co. is also distinguishable. In that case, the parties con*850tracted for payment of freight charges to be made within 30 days from the receipt of the invoice. Both parties understood that this would occur after delivery of the cargo, usually 16 to 19 days later. In the instant case, payment was not required after delivery and there is no evidence that the parties intended payment to occur after delivery, as was the situation in Eagle Marine Transport Co.
Seaway’s Notices of Liens is the only evidence that the discharge of the Pellets was conditional. As set forth above, the timing of such notices is suspect as they appear to be merely an attempt to gain an advantage as a secured creditor in WCI’s bankruptcy. Moreover, these notices were not contemporaneous with the discharge of the cargo, but were created days later after WCI had filed for bankruptcy protection. There is no other indication that the parties intended the Pellets to be conditionally discharged at Pinney Dock. Nor is there any indication that Seaway needed to immediately discharge the Pellets, that the Pellets were discharged so that WCI could inspect them or that the Pellets were discharged for the convenience of both parties. As a consequence, this Court finds that none of these factors exist.
Seaway (1) discharged the Pellets before receiving payment, (2) unconditionally discharged the Pellets, and (3) failed to contract with WCI to hold a nonpossessory lien on the Pellets. Accordingly, Seaway relinquished the maritime lien that it held on the Pellets upon discharge thereof. As a result, Seaway does not have a valid nonpossessory maritime lien on the Pellets under the law of the United States.
C. Unjust Enrichment
To recover for unjust enrichment, a plaintiff must prove: (1) the plaintiff conferred a benefit on the defendant; (2) the defendant knew of such a benefit; and (3) defendant retained the benefit under circumstances that would be unjust to do so without payment. Andersons, Inc. v. Consol., Inc., 348 F.3d 496, 501 (6th Cir.2003). It is well established in common law that a party may be compelled to pay money that it has belonging to another by an action for money had and received. See Mandeville & Jameson v. Joseph Riddle & Co., 1 Cranch 290, 5 U.S. 290, 2 L.Ed. 112 (1803).
In the instant case, Seaway refused to continue to provide transport service for WCI unless WCI paid a portion of the amount of the contested liens. As a result, WCI sought and obtained authority of this Court to make such payments, subject to WCI’s right to contest the validity and amount of the purported liens. WCI’s payment, pursuant to the Adequate Protection Order of this Court dated October 2, 2003, conferred upon Seaway the benefit of One Hundred Thousand Dollars ($100,-000.00).15 Thus, the first element is satisfied.
The second element of the test is satisfied because Seaway received a copy of the Adequate Protection Order, is an interested party in this bankruptcy proceeding, and actually received the payment of One Hundred Thousand Dollars ($100,000.00).
Finally, it is unjust for Seaway to retain this One Hundred Thousand Dollar ($100,-000.00) payment. The Adequate Protection Order specifically states: “[n]othing in this Order shall be construed as (a) prejudicing the rights of the Debtors or any *851party in interest to dispute or contest the amount or validity of Seaway’s Maritime Claim and/or the amount, validity and priority of its Maritime Lien[.]” (Adequate Protection Order ¶ 6.) Therefore, the One Hundred Thousand Dollar ($100,000.00) payment was paid and received with both parties aware that the liens asserted by Seaway might be invalidated. By the express terms of the Adequate Protection Order, WCI made the payment to Seaway of One Hundred Thousand Dollars ($100,-000.00) with a reservation of rights. This payment was always subject to being recouped. Seaway’s argument that the payment was voluntary is unavailing. Without a valid maritime lien, Seaway holds only a general unsecured claim. Nothing in the Adequate Protection Order permits WCI to pay — or Seaway to retain — payment on a prepetition general unsecured claim. Since the lien is invalid, the payment constitutes a preferential and inequitable payment to Seaway on an otherwise prepetition general unsecured claim. As a result, invalidation of the lien requires that WCI be allowed to recoup the payment it made against the purported lien under the Adequate Protection Order. To allow Seaway to keep such payment would be unjust.
Therefore, Seaway is holding money “had and received” that belongs to WCI’s bankruptcy estate. Seaway has no right to retain this money. Seaway has been unjustly enriched by WCI’s One Hundred Thousand Dollar ($100,000.00) payment and must return such money to WCI.
V. CONCLUSION
Viewing the evidence and its inferences in the light most favorable to Seaway, the Court has reached the following conclusions: Canadian law governs this dispute as dictated by the Contract and Bill of Lading. Seaway does not have valid maritime liens over the Pellets pursuant to Canadian law. Even if the law of the United States was applied, this Court would reach the same result. Seaway was unjustly enriched in the amount of One Hundred Thousand Dollars ($100,000.00) by WCI’s payment made pursuant to the October 2, 2003 Adequate Protection Order.
Accordingly, Seaway’s motion for summary judgment is hereby denied and WCI’s cross motion for summary judgment is hereby granted. Seaway is required to return to WCI the One Hundred Thousand Dollar ($100,000.00) payment made pursuant to the aforementioned Adequate Protection Order.
An appropriate order will enter.
ORDER
For the reasons set forth in this Court’s Memorandum Opinion entered this date, Seaway’s motion for summary judgment is hereby denied and WCI’s cross motion for summary judgment is hereby granted. Seaway does not have valid maritime liens on the Pellets pursuant to Canadian law. Seaway was unjustly enriched in the amount of One Hundred Thousand Dollars ($100,000.00) by WCI’s payment made pursuant to the October 2, 2003 Adequate Protection Order. Accordingly, Seaway is hereby ordered to reimburse WCI the One Hundred Thousand Dollar ($100,000.00) payment made pursuant to the aforementioned Adequate Protection Order.
IT IS SO ORDERED.
. WCI correctly notes in a footnote in its reply brief that reply briefs were not to be submitted without leave of the Court, which neither party obtained. The Court has read all of the relevant documents, including the reply briefs, but does not look with favor on the practice of submitting reply briefs.
. Seaway also contends that the law of the forum (U.S. law) controls the ranking of liens. This Court has not addressed the issue of ranking because it holds that Seaway does not have a valid lien with respect to either of the two shipments of Pellets.
. In its Reply Brief, Seaway — -for the first time — alleges that the Contract was modified to require WCI to pay Seaway within ten days of the loading of the Pellets. WCI alleges that the ten day reference is probably a typographical error. As WCI correctly points out, Seaway has taken several disparate positions during the summary judgment process regarding when payment was due under the Contract. (WCI's Reply in Further Support of its Motion for Summary Judgment at 5-6.) Because both parties have acknowledged in their pleadings that payment was due five days after loading, which is also the plain language of the Contract, this Court finds that five days after loading was the relevant time period for payment.
. Section 17 of the Bill of Lading provides that: "The cargo is to be received by the merchant ... at the port of discharge as soon as the vessel is ready for discharge....” The definition of "merchant” in the Bill of Lading means "shipper, ... person entitled to possession of the cargo and their respective servants, agents and independent contractors.” Thus, it appears that Pinney Dock, although operated by a third party to receive Pellets on behalf of WCI, was the “agent/independent contractor” for WCI and, consequently, was included within the definition of "merchant” for purposes of the Contract.
. Seaway initially asserts in its motion for summary judgment that the Contract provided that payment for the cargo was due five days after delivery. Seaway alleged that it "waited five days for payment by WCI for its September 9th and 10th, 2003 deliveries of the Cargo. On September 16, 2003, the first day on which WCI was in default of its payment obligations for both shipments, Seaway sent Notices of Claims of Lien to WCI. Thus, Seaway took no actions after the delivery of the Cargo inconsistent with its rights under the Contract to maintain a lien on the Cargo....” (Seaway's Motion for Summary Judgment at 6.) Seaway subsequently changed its position and acknowledged that the Contract provides for payment five days after completion of loading. (Seaway’s Response in Opposition to WCI’s Motion' for Summary Judgment at 10.) The timing of Seaway's Notices of Claims of Lien appears to relate solely to the timing of WCI's filing of its bankruptcy petition and not in recognition that September 16 was the first day that WCI was in default for payment of "both” shipments. Seaway would have more credibility in making this assertion if it had filed separate notices when WCI was in default of payment for each shipment. There is nothing in the record to indicate whether WCI had a history of paying for shipments within five days of loading or if it was ever late in making such payments.
. The choice of law provision on the Bill of Lading appears on Seaway’s printed form. WCI asserts and Seaway does not contest that Seaway drafted the Contract. (WCI's Reply in Further Support of its Motion for Summary Judgment at 3 n.5.)
. It should be noted that the same result would occur if the Contract was interpreted under Canadian law. This is due to the fact that Canada’s law on contract interpretation is virtually identical to the law of the United States. It requires that one apply the literal meaning to a word or term unless to do so would result in absurdity. See Gadbois v. Bonte Foods, Ltd., [1988] 94 N.B.R (2d) 21 at P 34. Furthermore, the parties are presumed to have intended the ordinary meaning of a word. G.H.L. Fridman, The Law of Contract in Canada 492 (4th ed.1999).
.This is also true under the law of the United States. See 4,885 Bags of Linseed, 66 U.S. 108, 115, 1 Black 108, 17 L.Ed. 35 (1861) ("It is true, that such a delivery, without any condition or qualification annexed, would be a *847waiver of the lien; because, as we have already said, the lien is but an incident to the possession, with the right to retain.”)
. This is equally true under American law. See Atlantic Richfield Co. v. Good Hope Refineries, Inc., 604 F.2d 865 (5th Cir.1979).
.This provision must be given its literal meaning. Gadbois, 94 N.B.R (2d) 21 at P 34.9; see also Norfolk S. Ry., 125 S.Ct. at 397. The literal meaning of this provision is that Seaway maintained a possessory lien for freight, salvage, general average or special charges, on the Pellets aboard the M/V AL-GOSTEEL and M/V JEAN PARISIEN and with respect to any unpaid charges relating to other shipments. The lien provision specifically states, Seaway is “entitled to withhold delivery of the cargo until such amounts have been paid or security in respect thereof has been provided.” (Bill of Lading ¶ 14.) Accordingly, Seaway only held a possessory lien and that lien was terminated upon discharge of the Pellets. No provision of the Contract or the Bill of Lading gives Seaway a nonpos-sessory lien against the Pellets or any other cargo owned by WCI.
. See also footnote 14, infra.
. Examples of nonpossessory lien provisions can be seen in Lloyds Bank of Canada v. Lumberton Mills Ltd., [1989], 2 W.W.R. 360 (B.C.C.A.) and in Atlantic Richfield Co. v. Good Hope Refineries, Inc., 604 F.2d 865, 872 (5th Cir.1979).
. This appears especially true here, where WCI's payment for the first shipment was due on the date that the second shipment was unloaded. Seaway could have held the AL-GOSTEEL shipment "hostage” until payment was made for the shipment delivered the previous day.
. Seaway contends that the average elapsed time from completion of loading and completion of delivery was 4.67 days. (Seaway’s Reply Brief at 2.) By this admission, the date of delivery and the date that payment should be made would coincide on the same day. This bolsters the argument that Seaway's remedy was to withhold delivery if payment was not timely made and, thus, retain its possessory lien.
. The Adequate Protection Order authorized WCI to pay three monthly installments of One Hundred Thousand Dollars ($100,000.00) beginning on or before October 31, 2003 and a final payment of One Hundred Five Thousand Five Hundred Sixty-Eight and 45/100 Dollars ($105,568.45) on or about January 31, 2004. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493972/ | DECISION & ORDER
CARL L. BUCKI, Bankruptcy Judge.
Pursuant to the Second Circuit’s decision in Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122 (2001), the debtor seeks to avoid the lien of a third mortgage on her home. This seemingly simple request has opened a Pandora’s box of challenges to the priority of the three outstanding liens. In particular, the present dispute involves the competing claims of the holder of two previously unrecorded mortgages and a subsequent lender who allegedly had notice of those unrecorded instruments at the time that it recorded its own mortgage.
On July 18, 2003, Diane Heubusch executed two notes promising repayment of money that Novastar Mortgage, Inc. (“No-vastar”), had loaned to her. The larger of these notes, in the amount of $60,000, was to be secured by a first mortgage covering Heubusch’s residence on Aris Avenue in the Town of Cheektowaga. The smaller note evidenced an indebtedness of $11,000, and was to be secured by a second mortgage on the same property. Unfortunately, Novastar did not record these mortgages until December 16, 2003, when it perfected the larger lien at 9:45 AM, and the smaller lien at 9:47 AM. Meanwhile, on October 21 and again on December 8 of 2003, Ms. Heubusch submitted loan applications to either of two affiliated companies known as Citifinancial, Inc., and Citi-financial Company (DE). Both entities operated out of the same office in West Seneca, New York; both were serviced by the same employees; together they maintained a joint file for the loan applications that Ms. Heubusch submitted. Collectively, these two entities will herein be referred to as “Citifinancial.”
Shortly after Heubusch arrived at the Citifinancial office on October 21, a loan processor ordered a credit report, which was promptly transmitted to that employee’s computer. Essential terms of this report were then incorporated into a credit application, which Ms. Heubusch signed. Notably, the application recited the existence of two outstanding loans from an entity whose name was abbreviated as “Novastar Mortga.” Additionally, in a section dealing with housing obligations, the application listed Novastar as having both a first and second lien. Unwilling to take a third position on real estate, Citifinan-cial, Inc., agreed to advance $7,500 on a loan to be secured by an otherwise unencumbered interest that Heubusch held in a 1992 Chevrolet Lumina. Citifinancial prepared the necessary loan documents, which Heubusch then signed prior to leaving the lender’s office.
Hoping to borrow more money, Heu-busch returned to Citifinancial’s office on December 8. On this occasion, a different employee downloaded a new credit report, which listed only the smaller of the two loans from Novastar. For Heubusch’s review and approval, Citifinancial then generated a credit application that made no mention of the larger Novastar loan. Despite this error, Heubusch signed the application. Based on that application, Citifi-nancial Company (DE) agreed to loan the total sum of $27,232.47, to be secured by a mortgage on the debtor’s real property on Aris Avenue. As a further condition for this loan, Citifinancial required Heubusch to use part of the proceeds to satisfy its previous loan. After receiving a title report showing no outstanding mortgages, Citifinancial Company (DE) closed the transaction. It then recorded its mortgage on December 11, 2003, a date five days prior to the recording of the two mortgages to Novastar.
*52Diane Heubusch filed a petition for relief under chapter 13 of the Bankruptcy Code on August 6, 2004. Pursuant to 11 U.S.C. §§ 506 and 1322 and under the authority of Pond v. Farm Specialist Realty, Heubusch then moved to avoid the smaller of Novastar’s two mortgages. At the request of Novastar, this court converted the debtor’s motion into an adversary proceeding. Novastar filed an answer to the debtor’s request for relief, and further filed a third party complaint against Citifinancial Company, by which Novastar asked that this court determine relative priority as between Citifinancial and Novastar. Citifinancial Company (DE) then appeared and answered.
In Pond v. Farm Specialist Realty, the Court of Appeals ruled that a chapter 13 plan may avoid a mortgage that encumbers the debtor’s residence, but only if that mortgage is undersecured for the entire value of the obligation. The debtor may not avoid a lien on her residence when the collateral’s value provides security for any portion of the underlying debt. In the present instance, the parties conceded that the value of the debtor’s residence exceeded the sum of the Citifinancial loan and the smaller of the Novastar obligations. To the extent that the larger Novastar mortgage holds third priority, it would still be partially collateralized and would not be subject to avoidance. But the parties also acknowledged that the property’s value might not exceed the sum of the larger Novastar mortgage and one of either of the other mortgages. To the extent that the larger Novastar mortgage holds either first or second priority, the debtor might be able to avoid the third lien if the property’s value were sufficiently small. Rather than to try needlessly a difficult issue of valuation, I directed the parties to first present proof and argument concerning the relative priority of the three outstanding mortgages. Only if necessary would I determine the value of the Aris Avenue property.
Citifinancial contends that its mortgage holds first priority, by reason of the fact that it was first to be recorded. Novastar responds that New York is a race/notice jurisdiction, that Citifinancial received notice of both Novastar loans when Heu-busch first sought credit in October of 2003, and that this notice precludes any right to priority for the mortgage that Citifinancial subsequently granted less than two months later. In reply, Citifinan-cial asserts that the December credit report provides inadequate notice of the No-vastar mortgages, and that Citifinancial appropriately relied upon the title report. Alternatively, Citifinancial argues that it had no obligation in December to review the October loan application, and that Heubusch’s second loan application made reference only to the smaller of the two Novastar mortgages. Consequently, Citi-financial would conclude that its mortgage holds priority over at least the larger of the Novastar liens. Meanwhile, the debtor insists that she should not become an innocent victim of Novastar’s failure to perfect its lien, and that priority should follow the sequence of recording.
New York Real Property Law § 291 establishes the rule of priority for interests in real property. In relevant part, this section provides as follows:
A conveyance of real property, within the state, on being duly acknowledged by the person executing the same, or proved as required by this chapter, and such acknowledgment or proof duly certified when required by this chapter, may be recorded in the office of the clerk of the county where such real property is situated, and such county clerk shall, upon the request of any party, on tender of the lawful fees therefor, *53record the same in his said office. “ Every such conveyance not so recorded is void as against any person who subsequently purchases ... the same real property or any portion thereof ... in good faith and for a valuable consideration, from the same vendor or assign- or, his distributees or devisees, and ivhose conveyance, contract or assignment is first duly recorded, and is void as against the lien upon the same real property or any portion thereof arising from payments made upon the execution of or pursuant to the terms of a contract with the same vendor, his dis-tributees or devisees, if such contract is made in good faith and is first duly recorded.”
(emphasis added). Real Property Law § 290(1) defines conveyance to include a mortgage. Accordingly, an unrecorded mortgage is void as against the interest of a subsequent mortgagee who satisfies three conditions: first, the subsequent mortgage must be received in good faith; second, the subsequent mortgage must be received in exchange for a valuable consideration; and third, the subsequent mortgage must be recorded first.
In the present instance, Citifinancial clearly satisfies the second and third conditions for lien priority. It advanced valuable consideration to Diane Heubusch and recorded its mortgage prior to any recording of mortgages given to Novastar. What the parties now dispute is whether Citifi-nancial acquired its mortgage in good faith.
When Heubusch first applied for a loan from Citifinancial in October of 2003, Citi-financial received notice about the existence of the two Novastar mortgages. Indeed, for this reason, Citifinancial offered only to extend credit that would be secured by Heubusch’s automobile. Later, when Citifinancial gave a mortgage loan to Heubusch in December of 2003, its loan officer did not consider the larger of the two Novastar mortgages. The testimony indicated that although the loan file included the credit report from October, the loan officer did not look at that prior report but instead directed her attention to the new credit report showing only the smaller No-vastar loan. She then verified this perception, when she obtained a title report showing no encumbrance of record upon the debtor’s real estate.
In considering Heubusch’s loan application in December 2003, Citifinan-cial’s loan officer knew about the existence of the smaller Novastar mortgage. As to this smaller mortgage, Citifinancial could not acquire, in good faith, a superior position. Hence, the smaller Novastar mortgage will take priority over Citifinancial’s lien. The more difficult issue is whether the knowledge acquired in October should be treated as knowledge sufficient to preclude the good faith of Citifinancial in December with respect to the larger Novas-tar mortgage.
As a general rule, the knowledge of an agent is imputed to its principal. See 2A N.Y. Jur.2d Agency § 296 (1998). But in the words of Justice Cardozo, this inference requires “the necessary concurrence of memory and information.” Title Guarantee & Trust Co. v. Pam, 232 N.Y. 441, 457, 134 N.E. 525 (1922). Courts will impute to a principal only that knowledge about which its agent was cognizant at the time of the disputed event or transaction. The Distilled Spirits, 11 Wall. 356, 78 U.S. 356, 20 L.Ed. 167 (1870), Phelan v. Middle States Oil Corp., 210 F.2d 360 (2nd Cir.1954). Because Citifinancial’s loan officer was unaware of the larger Novastar mortgage at the time she approved Heubusch’s credit application in December, the prior disclosure of that Novastar mortgage will not speak to the lender’s good faith.
*54The present facts are analogous to those in Constant v. University of Rochester, 111 N.Y. 604, 19 N.E. 631 (1889). In that case, Constant claimed that her unrecorded mortgage should have priority over a subsequent but recorded mortgage given to the University of Rochester. The same attorney had represented Constant and the University with regard to the execution of their respective mortgages. Constant argued that the attorney’s prior knowledge about Constant’s unrecorded mortgage should be imputed to the University, as the principal for whom the attorney was serving as agent when he recorded the University’s mortgage. However, the trial record also contained evidence that “would tend to show very strongly that [the attorney] had no recollection whatever of the existence of the Constant mortgage as an existing lien at the time he took the mortgage to the university.” 111 N.Y. at 613, 19 N.E. 631. The Court of Appeals held that priority would depend upon whether the existence of the earlier mortgage was a fact present in the “mind and recollection” of the attorney at the time of the execution of the subsequent mortgage. 111 N.Y. at 607, 19 N.E. 631. Finding that the trial judge had erroneously presumed an attribution of knowledge to the University, the Court of Appeals reversed a decision in favor of Constant and remanded the matter for a new trial.
In the present instance, the evidence showed that employees approved and closed the Citifinancial mortgage at a time when those employees lacked knowledge of the larger Novastar mortgage. Admittedly, a different employee had such knowledge in October, and such knowledge might have been brought to memory upon a review of papers from the previous transaction. The outcome, however, depends upon the mind and recollection of the employees during the process of loan approval and closing. Having had no present awareness of the larger Novastar lien, the responsible loan officer had no knowledge which could impair the good faith of Citifinancial.
In its memorandum of law, Novastar cites numerous cases where the court recognized that notice or knowledge of a prior lien can operate to negate the good faith of a subsequent purchaser or lienor. For example, in Andy Assocs. v. Bankers Trust, 49 N.Y.2d 13, 16-17, 424 N.Y.S.2d 139, 399 N.E .2d 1160 (1979), the Court of Appeals observed that under Real Property Law § 291, “an unrecorded conveyance of an interest in real property is deemed void as against a subsequent good faith purchaser for value who acquires his interest without actual or constructive notice of the prior conveyance.” About this general rule, I have no quarrel. Rather, the present dispute challenges us to give meaning to the notion of actual notice. Novastar has referenced no authority for the proposition that an agent’s prior knowledge will necessarily constitute notice in the context of all subsequent transactions. To overcome the presumed priority of an earlier recorded mortgage, Novastar must instead demonstrate that Citifinancial, as of the moment of the closing of its own mortgage, had cognizance of information sufficient to give actual notice of the existence of an earlier unrecorded mortgage. We must return, therefore, to the principal stated in Constant v. University of Rochester, that any finding that a mortgagee “still retains [such prior knowledge] and has it present to his mind will depend upon facts and other circumstances.” 11 N.Y. at 609.
The present circumstances include the fact that Citifinancial was an institutional lender with established standards and procedures for the processing of credit applications. Asked to process a high volume of loans, its employees can not reasonably *55be expected to maintain the same level of recall as would an individual who makes a single loan. At the trial, Citifinancial’s branch manager confirmed that she had followed customary protocols, that those protocols required employees to disregard any credit report that was more than 30 days old, and that the processor therefore procured a new credit report in December, rather than rely on the credit report that had been created 48 days earlier in October. Testimony indicated that the Citifi-nancial computer would randomly select one of three credit reporting agencies for production of the credit report. By pure happenstance, a different agency created the December credit report, which lacked critical information that was contained in the October report. By not reviewing the earlier report, the responsible employee did not know about the larger Novastar loan. Thus, Citifinancial had no present recognition of the existence of that unrecorded mortgage, at the time of the processing and closing of Citifinancial’s own loan in December.
Based upon all of the evidence, I must conclude that Citifinancial’s loan processors followed the lending protocols of their employer. Of course, Citifinancial could have established a different policy that would have required a thorough investigation of prior applications. It did not. However, this omission does not speak to good faith, but at most to insufficiencies of procedure. A lender may choose to assume the risk of inadequate title or credit review, but so long as it acts in good faith, any mortgage received to secure a valuable consideration will still take priority over an unrecorded lien.
Real Property Law § 291 contains no explicit reference to the effect of actual notice on the priority of a recorded instrument. Rather, notice has relevance only as an indication of good faith. In the present instance, the evidence supports the conclusion that in December 2003, Citi-financial extended credit with knowledge of the smaller Novastar mortgage but without knowledge of the larger Novastar mortgage. Hence, Citifinancial satisfies the requirement of good faith with respect only to that larger loan. As among the three outstanding mortgages, the smaller Novastar mortgage will enjoy first priority, the Citifinancial mortgage will enjoy second priority, and the larger Novastar mortgage will enjoy third priority. Because the parties concede that the value of the real property exceeds the sum of the first and second liens, the third lien of Novastar is at least partially secured. Pursuant to the decision in Pond v. Farm Specialist Realty, therefore, this court must deny the debtor’s application for lien avoidance in all respects.
By reason of Novastar’s failure to record its mortgages in a timely fashion, Diane Heubusch loses the opportunity to avoid any portion of the liens that encumber her residence. This outcome, however, is a consequence of the debtor’s own making. In December 2003, Ms. Heu-busch signed a loan application which failed to disclose the existence of the larger Novastar mortgage. Even though Heu-busch did not prepare the application, her signature confirmed her acceptance of its representations. For her false representations, Heubusch must now suffer the consequences of inadequate disclosure to Citi-financial.
So ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493974/ | OPINION
BOHANON, Bankruptcy Judge.
The United States Department of Justice and the United States Department of Education (collectively, the “Creditors”), timely appeal a final judgment entered by the United States Bankruptcy Court for the District of Kansas discharging the Chapter 7 debtor’s Department of Education student loans (the “523 Loan”) pursuant to the “undue hardship” provision in 11 U.S.C. § 523(a)(8), and debtor’s Health Education Assistance Loan (the “HEAL loan”) pursuant to the “unconscionable” provision in 42 U.S.C. § 292f(g).1 The parties have consented to this Court’s jurisdiction because they have not elected to have the appeal heard by the United States District Court for the District of Kansas.2 For the reasons stated below, the bankruptcy court’s Judgment is AFFIRMED.
1. Background
Between 1979 through 1983, Larry Lee Woody, the debtor (“Woody” or “debtor”), obtained a series of loans to assist him in procuring a chiropractic degree.3 Woody obtained two different types of student loans. The first type of loan is governed by the dischargeability standard under § 523(a)(8) and the second type is governed by the HEAL program. The original aggregate principal debt on the 523 loan is $25,000 with interest accruing annually at 7% or $4.54 per day. The original principal debt on the HEAL loan is $4,700 with interest accruing annually at 4.550% or $2.31 per day. By July 12, 2005, Woody owed more than $53,000 on the 523 Loan and more than $18,750 on the HEAL loan.
Woody failed to complete the curriculum to receive a chiropractic degree. He had *251approximately one and one half semesters left to complete his degree, but discontinued his studies in 1983. Woody has never worked as a chiropractor.
From 1998 until early 2001, Woody held a number of temporary positions and collected unemployment compensation, presumably during the periods he was eligible to do so. With the exception of two years with no income, Woody’s annual income, while varying considerably, rarely surpassed $15,000. The record does not suggest that Woody quit or was fired from any of the temporary positions he held or that he has otherwise abused his right to collect unemployment benefits.
In May 2002, Woody filed Chapter 7 bankruptcy. Woody’s bankruptcy was precipitated by a heart attack in 2000 when he incurred substantial medical bills (approximately $67,000).4
On October 7, 2002, Woody filed two complaints seeking to discharge his student loan debts. In one, he sought to discharge his 523 loan debt to the DOE alleging “undue hardship” under 11 U.S.C. § 523(a)(8). In the other, he sought to discharge his HEAL loan under the “un-conseionability” standard of 42 U.S.C. § 292f(g).5
On July 12, 2005, the bankruptcy court held a trial on the two adversary proceedings. The bankruptcy court found from the evidence that Woody was 58 years old, single with no dependents; that he was employed full-time by the Internal Revenue Service (“IRS”) with an annual salary of approximately $38,000;6 that it is unlikely Woody’s income will increase materially, either by promotion or other means, over the amount he is now earning; that his monthly net income was $1,856 and his monthly expenses were $1901; that for 2006, his projected monthly net income increased to $1,864 and his monthly expenses decreased to $1,785; that Woody owns no real property and virtually no personal property of note except for a 15 year-old pickup truck with a rebuilt engine, his retirement accounts (worth approximately $3,000),7 and an insurance policy with cash value; and that he paid $995.00 toward his 523 loan through Treasury Department offsets and made one payment of $484.48 toward his HEAL loan in 1987.
At the conclusion of the trial, the bankruptcy court announced its ruling. With respect to the 523 loan, the bankruptcy court held that Woody had demonstrated by a preponderance of the evidence that it would be an undue hardship on him if he were required to repay the 523 loan.8 With respect to the HEAL loan, the bankruptcy court entered an order of partial discharge of the loan, finding that it would be unconscionable for Woody to pay anything more than the original principal on the loan.9
*252On December 15, 2005, the bankruptcy court issued a memorandum opinion and order supplementing its oral findings and conclusions.10 The bankruptcy court concluded that “[Woody] has satisfied his burden and is entitled to discharge, in their entirety, [of] both the 523 Loan and the HEAL Loan.”11 The bankruptcy court noted that upon further consideration, a partial discharge of the HEAL loan was inappropriate since the nondischarge of any portion of the HEAL loan would be unconscionable under the facts and circumstances of the case.
On December 22, 2005, judgment in favor of Woody was entered in both adversary cases. Creditors timely appealed to this Court the bankruptcy court’s final Judgment in favor of the debtor.
II. Discussion
A. The 523 Loan
I. Standard of Review
A decision that repayment of student loans constitutes an undue hardship is a question of law subject to de novo review.12 The underlying factual determinations, however, must be accepted unless they are clearly erroneous.13 “A finding is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.”14
2. Merits15
Section 523(a)(8) excepts from the Chapter 7 discharge any debt “for an educational ... loan made, insured, or guaranteed by a governmental unit,” “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents ....”16 That Woody’s student loan debt owed to the DOE falls within this section is undisputed. The only issue on appeal is whether the bankruptcy court erred in concluding that excepting the debt from discharge under § 523(a)(8) would impose an “undue hardship.”
The phrase “undue hardship” is not defined in the Bankruptcy Code. As correctly noted by the bankruptcy court, the Tenth Circuit in Educational Credit Management Corp. v. Polleys,17 adopted, with some limitations, a test originally established by the Second Circuit in Brunner v. New York State Higher Education Services Corp.18 for determining whether repayment of student loans imposes an “undue hardship” within the meaning of § 523(a)(8). Under the Brunner test, the debtor must prove by a preponderance of the evidence:
*253(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; .
(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
(3) that the debtor has made good faith efforts to repay the loans.19
A student loan debt is nondischargeable under § 523(a)(8) if the debtor fails to show any one prong of this test.20 The debtor bears the burden to demonstrate undue hardship21
Although the Tenth Circuit adopted the Brunner framework, it expressly shunned “overly restrictive interpretation[s]” of the test that “deny discharge [of student loan debt] under even the most dire circumstances.”22 In the Tenth Circuit, therefore, courts have “discretion to weigh all the relevant considerations” within the framework of the Brun-ner test, applying the terms of the test “such that debtors who truly cannot afford to repay their loans may have their loans discharged.”23
In Polleys, the Tenth Circuit clarified how a court should decide if the prongs are met. The first part of the Brunner test requires analysis of the debt- or’s current financial situation. It entails an analysis of all relevant factors, including the health, education, skill level and age of the debtor.24 The second part of the Brunner test requires “a realistic look ... into [the] debtor’s circumstances and the debtor’s ability to provide for adequate shelter, nutrition, health care, and the like.”25 Further, “courts should base their estimation of a debtor’s prospects on specific articulable facts, not unfounded optimism, and the inquiry into future circumstances should be limited to the foreseeable future, at most over the term of the loan.”26 The third part of the Brun-ner test requires consideration of whether the debtors are acting in good faith in seeking the discharge, or whether they are intentionally creating their hardship.27 The Tenth Circuit cautioned that the good-faith requirement “should not be used as a means for courts to impose their own values on a debtor’s life choices.”28
On appeal, Creditors contend that Woody did not carry his burden of proving any of the three prongs. We disagree. The bankruptcy court applied the correct test and made factual findings to support its conclusion that each prong has been met.
With respect to the first prong, maintenance of a minimal standard of living, the bankruptcy court found that even without paying the 523 loan, Woody barely maintains a minimal standard of living. The bankruptcy court found: (1) Woody’s current monthly expenses ($1901) exceeded his currently monthly net income ($1856); (2) it is highly unlikely his income will *254increase materially, either by promotion or other means, over the amount he is now earning; (3) Woody’s projected expenses (i.e., gas consumption, monthly car payments, and medical) are too low and fail to account for day-to-day cost of living and unexpected expenses (ie., costs of replacing an automobile); (4) Woody’s “voluntary” expenses for storage, union dues, retirement contributions, and loan repayment, are not excessive or unnecessary in maintaining a minimal standard of living; (5) Woody’s “voluntary” expense, in reality, will be redirected toward paying for the higher than projected costs of auto repairs/replacement and gas prices; and (6) any garnishment of Woody’s earnings, whether 10% or 25% of his earnings, to repay the student loan debt would deprive Woody of the ability to maintain a minimal lifestyle with his current level of income.
As to the second prong, whether additional circumstances exist to indicate that his state of affairs is likely to persist, the bankruptcy court found “[w]ith his work history, current age, and state of health, [Woody’s] prospect for increased salary is negligible.” The bankruptcy court stated that Woody’s credible testimony reflects that it is highly unlikely his income will increase materially. In addition, the bankruptcy court noted that Woody is not in good health for he suffers from heart disease and endures the medical problems associated with a recent heart attack.
As to the third prong, Woody’s good faith, the bankruptcy court concluded that Woody has demonstrated good faith despite his failure to make any voluntary payments toward the 523 Loan. The bankruptcy court found: (1) Woody has not contrived to create a hardship; (2) when healthy, Woody has continually sought full-time employment and has worked through temporary agencies when no other full-time work could be found; (3) Woody has minimized his expenses as evidenced by his budget; (4) Woody has maximized his earning potential in that he has sought and held a job throughout his working life and currently holds a position that utilizes his skills in accounting; (5) Woody has maximized his income by contributing to a flexible spending account; (6) Woody has had conversations with loan representatives, although sporadic, which indicates his good faith intent to cooperate and desire to repay his student loans, although he was unable to do so because of unemployment or insufficient income; and (7) there is no indication that Woody is attempting to abuse the student loan system by having his loans forgiven before embarking on a lucrative career in the private sector.
At first blush, it appears Creditors do not dispute the bankruptcy court’s factual findings since many of the facts were stipulated and those that were not, are largely undisputed.29 When the bankruptcy court’s factual findings are undisputed, we review de novo whether the facts support a finding that an undue hardship does exist.30 Creditors’ arguments on appeal, however, to some extent attack the bankruptcy court’s factual findings.31 Thus, we *255must review under the clearly erroneous standard the bankruptcy court’s resolution of any factual disputes that are relevant to the test. We then review under the de novo standard the bankruptcy court’s ultimate conclusion whether an “undue hardship” has been shown.
Creditors contend that the bankruptcy court erred in concluding that Woody met the first Brunner prong and could not maintain a minimal standard of living if forced to repay his 523 loan for the following reasons: (1) it improperly assumed the role of advocate for the debtor when it found that he understated his expenses despite the fact that his testimony and schedules actually established those expenses; (2) it presumed that Woody would retire at age 65 or soon thereafter; (3) it failed to consider that Woody has no dependents in its analysis of his circumstances; (4) it incorrectly described Woody as reaching the pinnacle of his earning potential; (5) it failed to find that the elimination of expenses for storage of worthless furniture, repayment of a loan from his mother, and contribution to his retirement would allow Woody to comfortably repay his student loans; and (6) it misunderstood the extent Creditors could offset Woody’s social security benefits to repay the student loans.
Next, Creditors contend that Woody failed to satisfy the second prong of the Brunner test because the bankruptcy court did not take a “realistic look” at Woody’s circumstances and did not base its findings on “specific articulable facts” that are consistent with Woody’s overall financial situation which has improved substantially over the past two years.32 Creditors argue that Woody’s past health problems are not an additional circumstance that satisfies the second Brunner prong.
Creditors likewise argue that Woody failed to establish good faith efforts to repay the debt as required by the third prong of the Brunner test. Creditors claim that the bankruptcy court generously ■ construed the evidence regarding Woody’s cooperation with his lenders and state there is no evidence of any meaningful effort to repay his student loan. Moreover, Woody’s decisions to pay for life insurance, store worthless furniture for $125 a month for the last 12 years, and work temporary or seasonal jobs from 1983 to 2001 are “life choices” which indicate he did not maximize his income and minimize his expenses.
We have reviewed the bankruptcy court’s decision de novo and have considered the testimony and other evidence adduced at trial, as well as all of the pleadings and filings of the parties. Based upon this review, we find that Creditors’ arguments lack merit, and that the decision discharging the 523 loan should be affirmed.
Creditors’ contention that the bankruptcy court improperly assumed the role of advocate for the debtor when it weighed the reasonableness of his scheduled expenses is without merit. As the bankruptcy court correctly stated, it is within the province of the court to account for over- and understatements of scheduled expenses. Moreover, contrary to Creditors’ contention, Woody testified that (1) he anticipated that his vehicle will have to be replaced sometime within the next year or so, (2) he failed to budget for unexpected or emergency expenses, (3) he anticipated increased medical costs due to problems with his foot/ankle and his hands, and (4) his transportation costs should be higher as gas prices continue its upward trend and the distance he has to travel to *256work will increase due to relocation of his workplace.
Creditors’ contention that a person’s desire to retire at age 65 should not be considered a basis for discharging student loan debt is unpersuasive. It is not Woody’s desire to retire at age 65 which drives the bankruptcy court’s analysis, but Woody’s age. Age is a relevant factor to be considered in the Brunner analysis. A person in the his 20s or 30s will certainly have more opportunities to improve their earnings than a person in his late 50s or 60s. In addition, deteriorating health often accompanies old age, which in turn affects the ability to work and increases expenses. The findings are supported by the evidence.
Creditors take issue with the bankruptcy court’s description of Woody as a man who has reached the pinnacle of his earning potential. Creditors claim the evidence indicates Woody just received a raise and could also earn overtime. The record, however, reflects that Woody will not receive a major raise unless he is promoted to management, which Woody testified he did not foresee happening in the future. With respect to overtime, given Woody’s age and recent heart attack, it was not clearly erroneous for the bankruptcy court to find that Woody could not work more than 40 hours without suffering adverse health effects. Woody testified that his health and energy have been diminishing over time and that he does not have the energy to work overtime despite his best intentions.33 Creditors argue that the evidence presented by Woody was outdated, referencing a medical report issued in April 2003. Essentially, Creditors argue that the bankruptcy court’s findings of fact were against the weight of the evidence and the bankruptcy court did not accord the proper weight to the evidence. Creditors urge us to reverse based on their interpretation of the evidence. That we cannot do. We must accept the bankruptcy court’s determination unless “ ‘that determination either (1) is completely devoid of minimum evidentiary support displaying some hue of credibility, or (2) bears no rational relationship to the supportive evidentiary data.’ ”34 We have carefully considered the record and the arguments presented and do not find the bankruptcy court’s findings of fact clearly erroneous regarding Woody’s earning potential.
Likewise, contrary to Creditors’ assertion, the bankruptcy court’s finding regarding the reasonableness of Woody’s budget to maintain a minimal standard of living is not clearly erroneous. Expenses toward storage of worthless furniture and contribution toward his retirement are offset by Woody’s understatement of expenses for lodging, transportation, medical, and other inevitable life expenses. In addition, retirement contributions, under these circumstances, are necessary for the maintenance of a minimal standard of living.35
Finally, it is irrelevant whether the bankruptcy court misunderstood the extent Creditors could offset Woody’s social security benefits and that the right to off*257set is limited to 15%. The bankruptcy court concluded that any garnishment, whether 10 or 25%, would deprive Woody of the ability to maintain a minimal lifestyle. After carefully considering the record and the arguments, we do not find the bankruptcy court’s findings of fact clearly erroneous with respect to the first Brun-ner prong. It was not an abuse of discretion to find that Woody has met his burden here.
As to the second part of the Brunner test, the bankruptcy court found “[w]ith his work history, current age, and state of health, Mr. Woody’s prospect for increased salary is negligible.”36 By listing these factors, the bankruptcy court provided specific articulable facts that support its conclusion. We hold that, based on these factual findings, the bankruptcy court did take a realistic look at Woody’s circumstances. The record reflects that Woody was utilizing his accounting degree. He was fifty-eight years old at the time of the bankruptcy court’s decision and thus has a limited work life. He has maximized his income working for the IRS. While his earnings may increase through cost of living increases and occasional “step” raises, it will be offset by the increase in his medical and other expenses required to maintain a minimal standard of living. Finally, contrary to Creditors’ assertion, Woody’s heart condition is not a “past health problem.” He suffers from the after-effects of a heart attack and has foot/ankle and hand problems. Each of these circumstances indicates that Woody’s state of affairs is likely to persist. Accordingly, the bankruptcy court’s finding that Woody satisfied the second prong of the Brunner test is not clearly erroneous.
Last, we examine Creditors’ claim that the bankruptcy court erred in concluding that the third part of the Brunner test has been satisfied. Although Woody and Creditors are in disagreement as to whether Woody cooperated with his student loan lenders, the record is clear that Woody is not attempting to abuse the student loan system by having his loans forgiven before embarking on a lucrative career in the private sector, and that his past and current income was and is insufficient to support payments toward his student loans. These facts, coupled with evidence that Woody maximized his earning potential by seeking and holding positions throughout his working life that utilize his skills in accounting, maximized his income by contributing to a flexible spending account, and minimized his expenses by living a meager lifestyle, establishes that the bankruptcy court’s finding that Woody satisfied the third factor of the Brunner test is not clearly erroneous.
After reviewing the evidence and testimony in this case and after carefully considering the arguments raised by Creditors, we simply are not left with a definite and firm conviction that a mistake has been committed by the bankruptcy court. As a result, the bankruptcy court’s conclusion that the 528 loan was dischargeable is not clearly erroneous. The decision of the bankruptcy court discharging the 523 loan pursuant to 11 U.S.C. § 523(a)(8) is AFFIRMED.
B. The HEAL Loan
1. Standard of Review
The determination of the meaning of “unconscionable” constitutes a question of law reviewed de novo.37 Application of the unconscionability standard to *258the facts of a case constitutes a mixed question of law and fact, requiring a conclusion regarding the legal effect of the bankruptcy court’s findings as to the debt- or’s circumstances.38 Mixed questions of law and fact are reviewed under a hybrid standard, applying the clearly erroneous standard of review to factual findings and examining de novo the legal conclusions derived from those facts.39
2. Merits
Discharge of a HEAL loan is governed by 42 U.S.C. § 292f(g), which provides that:
Notwithstanding any other provision of Federal or State law, a debt that is a loan insured under the authority of this subpart may be released by a discharge in bankruptcy under any chapter of Title 11, only if such discharge is granted—
(1) after the expiration of the seven-year period beginning on the first date when repayment of such loan is required, exclusive of any period after such date in which the obligation to pay installments on the loan is suspended;
(2) upon a finding by the Bankruptcy Court that the nondischarge of such debt would be unconscionable; and
(3) upon the condition that the Secretary [of Health and Human Services] shall not have waived [certain rights].
The sole question before the bankruptcy court was whether the nondischarge of Woody’s HEAL loan would be unconscionable under § 292f(g).
Creditors claim that the bankruptcy court correctly recognized the judicially-established standards and criteria for determining unconscionability, but failed to correctly apply those standards when it discharged Woody’s HEAL loan.40 Creditors argue that the bankruptcy court’s interpretation of “unconscionability” is inconsistent with its plain meaning and established case law. We disagree.
Section 292f(g) does not define the term “unconscionable,” and the Tenth Circuit has not addressed the question in a published opinion. The Supreme Court has directed, however, that “[i]n the absence of an indication to the contrary, words in a statute are assumed to bear their ‘ordinary, contemporary, common meaning.’ ”41 The dictionary defines “unconscionable” as “excessive;” “exorbitant;” “lying outside the limits of what is reasonable or acceptable;” “shockingly unfair, harsh, or unjust;” or “outrageous.”42 Attempts to further define the standard have not succeeded in developing a straightforward test. As described in Hines v. United States (In re Hines),43 “unconscionability is likened to beauty in that it appeals to the senses and is found in the eyes of the beholder.” Therefore, its “precise definition ... is better left to the discretion of the Bankruptcy Judge.”44
The bankruptcy court, noting that “unconscionable” should be given its plain meaning of excessive, exorbitant, lying outside the limits of what is reasonable or *259acceptable, shockingly unfair, harsh, or unjust, or outrageous, and that the standard imposed by this definition is more stringent than the “undue hardship” standard imposed by § 523(a)(8), summarized the analysis courts should utilize in determining the dischargeability of HEAL loans as follows:
In an “uneonscionability” analysis, a court should look to the plain meaning of the word “unconscionable” in determining whether, within the totality of the circumstances, nondischarge of a HEAL obligation is appropriate. A court should look to factors used by other courts for guidance in examining the totality of the circumstances, but should avoid employing the factors as a rigid, formula-driven calculation. Weight should be given to a debtor’s good faith, or lack thereof. In addition, a court should consider the likely consequences nondischarge of a HEAL obligation will have on the debtor and whether those consequences will adversely affect the debtor's ability to maintain a minimal standard of living into the foreseeable future.45
Factors to consider include (1) the debtor’s income, earning ability, health, educational background, dependents, age, accumulated wealth and professional degree; (2) the debtor’s standard of living, with a view toward ascertaining whether the debtor has attempted to minimize the expenses of himself and his dependents; (3) whether the debtor’s current situation is likely to continue to improve, including whether the debtor has attempted to maximize his income by seeking or obtaining stable employment commensurate with his educational background and abilities; (4) whether the debtor could supplement his income through secondary part-time or seasonal work, even if already employed full time; (5) whether the debtor’s dependents are or could be contributing financially to their own support; (6) the amount of the debt and the rate of interest; and (7) the debtor’s role in accruing the amount of debt, including requesting multiple forbearances and making minimal repayments.46
Following this framework, the bankruptcy court incorporated its findings concerning the dischargeability of the 523 loan, as they are equally applicable under the “un-eonscionability” analysis, and revisited a number of factors with specific regard to the uneonscionability analysis. The bankruptcy court found that Woody’s gross income was insufficient to maintain even a minimal standard of living if he were forced to repay his HEAL loan. The bankruptcy court concluded that depriving Woody of the ability to afford life’s basic necessities, such as health care, transportation, food, housing, utilities, or even the ability to care for one’s self upon impending retirement would be unconscionable.
Creditors claim Woody’s circumstances cannot approach, much less meet, the burden of establishing unconscionability. Creditors argue that the nondischarge of a HEAL loan has only been deemed unconscionable when the debtor demonstrates that he or she is permanently unable to engage in any type of gainful employment. This is not accurate. In Soler v. United States (In re Soler),47 the bankruptcy court granted discharge of a HEAL loan to a dentist, earning approximately $79,000 per year, working 36-hours per week. The court, after examining the totality of facts and circumstances, found the nondischarge of one of her HEAL loans would be unconscionable considering the debtor’s significant repayment efforts, she *260was earning the most she could using her degree and skills, she was working the maximum number of hours recommended by her treating doctor despite her chronic, acute back pain, and she was minimizing her expenses and living a frugal existence. As we have previously noted, there is no straightforward test. While a court should look to factors used by other courts for guidance in examining the totality of the circumstances, it should avoid employing the factors as a rigid, formula-driven calculation.
Creditors also claim that the bankruptcy court improperly based its finding of un-conscionability upon speculation that Woody would be unable to save sufficient income for retirement. First, that was not the sole basis for the bankruptcy court’s findings. Second, contrary to Creditors’ assertion, that is not an improper basis upon which to analyze unconscionability. As part of its analysis, the court must consider whether Woody’s state of affairs is likely to persist and thus requires inquiry into the foreseeable future. Given Woody’s age and health problems, his retirement is inevitable. Retiring, of course, in turn affects his income and ability to repay the loan. What he contributes into retirement now will increase his income later.
After reviewing the evidence and testimony in this case and after carefully considering the arguments raised by Creditors on appeal, we simply are not left with a definite and firm conviction that a mistake has been committed by the bankruptcy court.48 Congress created the “unconscionable” standard for use with HEAL loans to prevent a borrower who obtains a medical degree with a HEAL loan and is on the threshold of a prestigious, high paying medical career, from easily discharging the HEAL loan in bankruptcy.49 Woody does not fit this profile.
The record reflects that Woody incurred his HEAL loan in 1982, but he never received a chiropractic degree. Woody filed for bankruptcy approximately 20 years later, but only after incurring significant medical bills as a result of the heart attack.
The record also reflects that Woody struggled and continues to struggle to make ends meet. He continually sought employment and even took temporary positions when permanent ones were unavailable. He lives on a tight budget. His health, while currently stable, is that of a man who suffers from heart disease and a recent heart attack. He also has foot and hand problems. Given his health condition, he cannot work more than 40 hours per week without suffering adverse health effects. These facts, combined with his age, support the bankruptcy court’s finding that he has maximized his earnings and minimized his expenses.
As for good faith in repaying the HEAL loan, Creditors base their lack of good faith argument on the minimal amount of payments made by Woody. Failure to make a payment, standing alone, does not establish a lack of good faith.50 We agree with the bankruptcy court that Woody’s failure to make more payments was justified because, despite reasonable efforts on his part, he was unable to earn income sufficient to reasonably warrant any attempt at repayment. Because Woody’s lifestyle is modest and unremarkable and he has maximized his income by fully utilizing his accounting degree, the bankruptcy court’s findings regarding unconscionability are not clearly erroneous.
*261III. Conclusion
For the reasons set forth, we AFFIRM the bankruptcy court.
.28 U.S.C. § 158(a)(1); Fed. R. Bankr.P. 8002(a).
. 28 U.S.C. § 158(b)-(c); Fed. R. Bankr.P. 8001(e).
. In 1970, Woody received a Bachelor of Science degree with a major in accounting and a minor in general business.
. Schedule F, in Appellant's Appendix ("App.”), Vol. II, at 0541-0546.
. Woody initially sought to discharge his HEAL loan under 11 U.S.C. § 523(a)(8). The parties, however, stipulated in the pretrial order that the "unconscionability” standard set forth in the HEAL statute, 42 U.S.C. § 292f(g) applied to the determination of the dischargeability of the HEAL loan. Final Pretrial Order at 11, ¶ 21, in App., Vol. I, at 0076.
. Since early 2001, Woody has been employed by the IRS. His initial employment with the IRS was seasonal. In August 2004, the IRS offered Woody full-time employment and he accepted. July 12, 2005, Transcript of Proceedings (“Tr.”) at 14-15, in App., Vol. II, at 0242-0243.
. Schedule C, in App. Appendix, Vol. II, at 0538.
. Tr. at 131, in App., Vol. II, at 0359.
. Id. at 134, in App., Vol. II, at 0362.
.Woody v. U.S. Dep’t of Justice (In re Woody), 335 B.R. 431 (Bankr.D.Kan.2005).
. Memorandum Opinion and Order Supplementing Oral Findings and Conclusions ("Opinion”) at 25, in App., Vol. I, at 215.
. Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1305 (10th Cir.2004).
. Id.
. United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948).
. As part of its research, this court reviewed Rafael I. Pardo & Michelle R. Lacey's law review article, Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the Discharge of Educational Debt. 74 U. Cin. L.Rev. 405 (Winter 2005). This article provides a comprehensive analysis of the section 523(a)(8) issues and the history of the undue hardship exception.
. 11U.S.C. § 523(a)(8).
. 356 F.3d 1302 (10th Cir.2004).
. 831 F.2d 395 (2d Cir.1987).
. Brunner, 831 F.2d at 396, quoted in Polleys, 356 F.3d at 1307.
. Polleys, 356 F.3d at 1307.
. In re Woodcock, 45 F.3d 363, 367 (10th Cir.1995).
. Polleys at 1308.
. Id. at 1309.
. Id. at 1309-1310.'
. Id. at 1310.
. Id. (internal quotation marks omitted).
. Id.
.Id.
. Consolidated Brief of Appellants at 7.
. See Alderete v. Educ. Credit Mgmt. Corp. (In re Alderete), 412 F.3d 1200, 1204 (10th Cir.2005).
. For instance, Creditors challenge the bankruptcy court's factual finding that it is unlikely Woody's income will materially increase. Creditors, however, claim the evidence demonstrates that Woody's salary will continue to increase in the future. The Court notes that it is sometimes difficult to separate "findings of fact” from "conclusions of law” when the matter involves mixed fact and law. Moreover, Creditors likely tailored their argument to attack the bankruptcy court's conclusions instead of its factual findings in order to avoid the more difficult "clearly erroneous” standard of review.
. Consolidated Brief of Appellants at 24.
. Tr. at 29-30, in App., Vol. II, at 257-258.
. In re Mama D’Angelo, Inc., 55 F.3d 552, 555 (10th Cir.1995) (quoting Krasnov v. Dinan, 465 F.2d 1298, 1302 (3d Cir.1972)).
. See Allen v. Am. Educ. Servs. (In re Allen), 329 B.R. 544, 552 n. 3 (Bankr.W.D.Pa.2005) (Retirement contributions, reasonable in amount, are allowable within the context of an undue hardship analysis when debtor is fairly close to retirement, has not thus far saved anything for retirement, and is not likely to improve his earning ability such that he could otherwise save for retirement.).
. Opinion at 13, in App., Vol. I, at 203.
. U.S. Dept. of Health and Human Servs. v. Smitley, 347 F.3d 109, 115 (4th Cir.2003).
. Id.
. Id. at 116.
. Consolidated Brief of Appellants at 33.
. Walters v. Metro. Educ. Enters., Inc., 519 U.S. 202, 207, 117 S.Ct. 660, 136 L.Ed.2d 644 (1997) (citation omitted).
. Webster's Third New International Dictio-naiy 2486 (1993).
. 63 B.R. 731, 736 (Bankr.D.S.D.1986).
. Id.
. In re Woody, 335 B.R. at 447.
. Smitley, 347 F.3d at 117-118.
.261 B.R. 444 (Bankr.D.Minn.2001).
. See discussion, supra, regarding Brunner prongs.
. Soler, 261 B.R. at 463.
. Polleys, 356 F.3d at 1311. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493976/ | ORDER ON VERIFIED MOTION TO SET ASIDE DEFAULT AND DEFAULT JUDGMENT
(Doc. No. 51)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration in the above-captioned adversary proceeding is a Verified Motion to Set Aside Default and Default Judgment filed by Stephen Crawford (Defendant). The Complaint in this adversary proceeding was filed by Steven Oscher, Liquidating Trustee for Atlantic International Mortgage Company (Trustee) who seeks a money judgment against Stephen Crawford.
In support of his Motion, the Defendant contends that the default was the result of the excusable neglect of his counsel and, *393therefore, should be set aside. The Trustee argues that this Court should uphold the default in his favor because the circumstances do not meet the excusable neglect standards established by case law. The facts relevant to the issue under consideration as established by the record, are without dispute and are as follows.
As noted earlier, on November 20, 2002, the Trustee filed a Complaint which sought to recover a money judgment representing the amount the Defendant received as payment for his services as a criminal defense attorney for the former officers of Atlantic International Mortgage Holdings, Inc., American Mortgage Capital Inc., and Atlantic International Mortgage Company (collectively, the Debtors). In his Complaint, the Trustee claimed that the checks drawn and made payable to the Defendant were funds of the Debtors’ estate and such payments were not authorized, therefore, the Defendant should be compelled to return the funds to the estate. In opposing and challenging the Trustee’s claims, the Defendant contends that the funds that he received in the representation of these officers were not funds of the Debtors’ estate and, therefore, he should not be compelled to return the funds to the estate.
In due course, the Defendant filed his Answer, Defenses and Demand for Trial by Jury. On September 19, 2003, the Trustee filed a Motion to Amend Complaint, which this Court granted. On October 24, 2003, the Defendant filed a Motion to Dismiss the Adversary Proceeding. The Court denied that Motion. On May 13, 2004, the Trustee filed a Second Amended Complaint.
On May 19, 2004, the Defendant filed his Motion to Strike Second Amended Complaint. On July 13, 2004, this Court entered its Order Denying Motion to Strike Second Amended Complaint and granted the Defendant ten (10) days to respond to the Second Amended Complaint. On July 28, 2004, the Defendant filed a Motion to Dismiss the Second Amended Complaint, which this Court also denied. The Court granted the Defendant twenty (20) days from the date of the Order in which to answer the Second Amended Complaint. The due date for the Defendant to file his Answer to the Second Amended Complaint was September 13, 2004.
On October 14, 2004, one month after the due date for filing the Answer, the Defendant had not filed an Answer. Accordingly, the Trustee filed a Motion for Entry of Default and a Motion for Final Judgment. On October 15, 2004, the Clerk entered the Default against the Defendant. The Defendant was served with a copy of the Motion for Entry of Default and filed an Answer on October 19, 2004. On October 21, 2004, this Court entered an Order granting the Motion for Final Judgment and entered the Final Judgment for the Trustee in the amount of $90,779.19. On October 25, 2004, the Defendant filed his Verified Motion to Set Aside Default and Default Judgment (Doc. No. 51), which is the Motion presently before this Court.
The Defendant’s counsel contends that his failure to timely plead, although embarrassing, is excusable and, therefore, under Fed.R.Civ.P. 60(b) as adopted by Rule 9024 of Fed. R. Bankr.P., he is entitled to the relief he is seeking and should be relieved from the final default judgment entered against him. In support of his Motion, the Defendant cites Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership et al, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993).
In Pioneer, the Court fixed the bar date to file proofs of claim for August 3, 1989. The notice was sent to Mark A. Burlin (Burlin), the president of the corporate general partners of each of the respondents. Burlin actually attended the meet*394ing of creditors on May 5. The following month Burlin retained an experienced bankruptcy attorney, Marc Richards (Richards). Burlin stated in his affidavit that he provided Richards with a complete copy of the entire case file, which included the notice to creditors informing them of the bar date to file proofs of claim. Burlin also stated in his affidavit that he inquired of Richards whether there was a deadline for filing claims and Richards assured him that no bar date had been set and there was no urgency to file a proof of claim.
The Respondents filed their proof of claim on August 23, 1989, or twenty (20) days past the bar date. The Respondents also filed a Motion to extend a time for filing proof of claims. The Bankruptcy Court refused the late filing, relying on the precedent from the Court of Appeals for the Eleventh Circuit, in which the Court held that a party may claim “excusable neglect” only if its “ ‘failure to timely perform a duty that was due to circumstances which were beyond [its] reasonable [Control.’ ” (quoting In re South Atlantic Financial Corp., 767 F.2d 814, 817 (C.A.11 1985)). Id. at 385, 113 S.Ct. 1489. The Bankruptcy Court, finding that the Respondents received the notice of the bar date and could have complied, ruled that they could not claim “excusable neglect.” Id.
On appeal, the District Court affirmed in part and reversed in part and rejected the narrow reading of the requirement of “excusable neglect,” and concluded that the more liberal approach adopted by the Sixth Circuit would be more appropriate. The District Court remanded the matter with directions to evaluate the Respondents’ conduct against several factors, including: “(1) whether granting the delay will prejudice the debtor; (2) the length of the delay and its impact on efficient court administration; (3) whether the delay was beyond the reasonable control of the person whose duty it was to perform; (4) whether the creditor acted in good faith; and (5) whether clients should be penalized for their counsel’s mistake or neglect.” Id. The District Court further suggested that the Bankruptcy Court should consider whether the failure to comply with the bar date “resulted from negligence, indifference or culpable conduct on the part of a moving creditor or its counsel.” Id. at 386, 113 S.Ct. 1489. (quoting In re Dix, 95 B.R. 134, 138 (9th Cir. BAP 1988) (in turn, quoting In re Magouirk, 693 F.2d 948, 951 (C.A.9 1982))).
On remand, the Bankruptcy Court applied the so-called Dix factors and again denied the Respondents’ Motion. The Bankruptcy Court concluded that the ruling in the Respondents favor, notwithstanding the actual notice of the bar date, “would render nugatory the fixing of the claims bar date in this case.” Id. The District Court affirmed the ruling of the Bankruptcy Court. The Court of Appeals for the Sixth Circuit reversed and, based on the fact that Burlin had inquired from its counsel whether there were any impending filing deadlines and had been told none existed, the Court of Appeals ruled that the Bankruptcy Court had “inappropriately penalized the [respondents] for the errors of their counsel.” Id. The Supreme Court, because of the conflict with the Court of Appeals concerning “excusable negligent,” granted certiorari and affirmed the decision of the Sixth Circuit.
Concerning the standard and its affir-mance of the Sixth Circuit, the Supreme Court stated that it is in substantial agreement with the factors identified by the Court of Appeals in the last analysis, that is, whether or not a failure to perform is “excusable” would involve equitable considerations and taking into account of “all relevant circumstances surrounding the *395parties’ omission.” Id. at 398, 113 S.Ct. 1489. These factors include: the danger of prejudice to the debtor; the length of the delay; its potential impact on judicial proceeding; the reason for the delay, including whether it was within the reasonable control of the movant and that the movant acted in good faith.
The Supreme Court noted that, “in assessing the culpability of the respondents’ counsel, they were unwilling to give little weight to the fact that counsel was experiencing upheaval in his law practice at the time of the bar date.” Id. The Supreme Court emphasized that the notice of the bar date provided by the Bankruptcy Court was outside the ordinary course in bankruptcy cases. As the Court of Appeals noted, ordinarily the bar date “should be prominently announced and accompanied by an explanation of its significance.” Id. The Supreme Court agreed that the notice in this case left “a dramatic ambiguity” in the notification. Based on the foregoing, the Supreme Court concluded that based on “the unusual form of notice employed in this case requires a finding that the neglect of the respondents’ counsel under all circumstances,” was “excusable.” Id. at 399, 113 S.Ct. 1489.
The Defendant’s counsel in the matter before this Court argues that, considering all of the factors present in this case, that his client should not have to suffer for a mistake made by his office procedures. The Defendant points out that on September 13, 2004, the courthouse was closed due to an impending hurricane and that the many closures and power outages that occurred in the surrounding weeks due to the hurricanes created problems with his office procedures.
The Defendant also cites In re Osborne, 379 F.3d 277 (5th Cir.2004), which applies the Pioneer standard. The Fifth Circuit in Osborne held that despite the attorney’s negligence in not responding to a motion to lift the automatic stay after ninety-three (93) days, the default judgment should be set aside. The Court in Osborne reasoned that the equities overall weighed heavily in favor of setting aside the default. The Court further reasoned that upholding the default would have a more adverse effect against the defaulting debtor because her house would be sold. Id. at 284. However, setting the default aside would only harm the non-defaulting creditor by requiring it to receive plan payments instead. Id.
The Trustee heavily relies on the Eleventh Circuit Court of Appeals case of In re Worldwide Web Systems Inc., 328 F.3d 1291 (11th Cir.2003). The Eleventh Circuit upheld a default entered against an attorney who failed to respond to requests for discovery. The Court held that the Defendant, Valdez, had the burden to prove the factors of Pioneer and that he “had not met that burden that the Bankruptcy Court abused its discretion.” Id. at 1295. The Court reasoned that to provide a meritorious defense a party cannot give merely a “general denial.” Id. at 1296. This Court is unable to find any statement in the decision of the Supreme Court in Pioneer to the effect that the party who seeks the relief of a default must provide a meritorious defense and a general denial will not suffice.
This proposition is somewhat surprising because under the rules of pleading governed by Fed.R.Civ.P. 8 as adopted by Rule 7008(b) of Fed. R. Bankr.P. “[a] party shall state in short and plain terms that the party’s ... shall admit or deny the availment upon which the adverse party relies.” This Court is not aware of any rule which requires a defendant in its answer to provide evidence of its defense to the claim asserted against it in the complaint. Equally, there is nothing in the *396Dix factors that there is such a requirement.
The Trustee also points to the Court’s holding in Worldwide, supra, that there was some prejudice to the non-defaulting party resulting from the delay caused by the Defendant. The Trustee argues that the same prejudice exists in this case and, that combined with the lack of meritorious defenses, should tip the balancing test’s scales in favor of denying the Motion to Set Aside the Default. There is no question that the Defendant flatly denied in his Aiswer the very heart of the Trustee’s Complaint, that is, that the funds he received where not the property of the estate of the Debtor.
This Court is at a loss to understand what type of proof a defendant can possibly prove to establish a negative, since it is clear that the burden of proof is for the Trustee to establish that the funds received by the Defendant were funds of the estate of the Debtor. The real test is whether or not there is a required showing of the totality of the picture that equitable consideration should control the issues before this Court. Based on the same, and taking into account the prejudice for the delay of twenty (20) days in an Adversary Proceeding which is still in its embryonic stage, even though it was filed in 2002, would be prejudice to the Plaintiff.
Although the reason given by the Defendant’s counsel for not filing a timely Answer lacks some clarity, this Court is satisfied that there is a major unresolved issue, and that is the source of the funds involved in this law suit. In addition, it is widely recognized that courts disfavor default judgments when such unresolved issues remain. See In re Riverwood Land Co., 216 B.R. 985 (Bankr.M.D.Fla.1997). Therefore, this Court reluctantly finds that the Motion should be granted and the Default Judgment entered on October 20, 2004, should be vacated.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Verified Motion to Set Aside Default and Default Judgment (Doc. No. 51) be, and the same is hereby, granted. It is further
ORDERED, ADJUDGED AND DECREED that the Answer to Amended Complaint Defenses and Demand for Jury Trial (Doc. No. 47), filed on October 19, 2004, shall stand. It is further
ORDERED, ADJUDGED AND DECREED that a pretrial conference shall be held on march 29, 2005, beginning at 1:45 p.m. at Courtroom 9A, Sam M. Gibbons United States Courthouse, 801 N. Florida Ave., Tampa, Florida, to establish discovery deadlines and to prepare the matter for trial.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493977/ | ORDER ON VERIFIED MOTION TO AVOID FIXING OF A LIEN WHICH IMPAIRS AN EXEMPTION
(Doc. No. 16)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration in this Chapter 7 liquidation case is a Verified Motion to Avoid Fixing of a Lien Which Impairs an Exemption pursuant to Section 522(f)(1). In her Motion, Ms. Livia G. Walker (Debtor) contends that the judgment lien on record impairs her right to exemptions and, therefore, she is entitled to a determination by this Court that the judgment lien is unenforceable against her homestead.
The facts relevant to the resolution of the Debtor’s right to relief are without dispute, and may be summarized as follows. On or about May 10,1995, Wachovia Bank, National Association, s/i/i/t First Union National Bank of Georgia (Judgment Creditor) obtained a money judgment against the Debtor in the amount of $51, 857.78, plus interest of $10, 243.09 in the Circuit Court of Lee County. At the time the Judgment Creditor obtained the lien, the Debtor did not reside at the property she later claimed as exempt homestead.
On May 25, 1995, the Judgment Creditor placed a certified copy of the Judgment in the public records of Lee County where the property is located. Some time in 1999, or four years later, the Debtor acquired the subject property located at 4826 Agualinda Blvd., Cape Coral, Florida, 33914, which is her current residence. This is the subject property that she is claiming as exempt under Florida Constitution, Art. X, Section 4. Further, it is without dispute that at the time the judgment was recorded, the Debtor had no interest in the subject property.
*398On September 19, 2005, the Debtor filed her Chapter 7 Petition for Relief and on Schedule C claimed the subject property exempt as homestead. On November 1, 2005, the Section 341 Meeting of Creditors was held in the Debtor’s case and no objection was filed to her homestead claim, during the period provided for objections by F.R.B.P. 4003(b), and even as to date. As a result, this claim of exemption was allowed as a matter of law. The present Verified Motion to Avoid Fixing of a Lien Which Impairs an Exemption was filed on December 1, 2005 (Doc. No. 16).
Based on the foregoing, it is the Debt- or’s contention that under the applicable law of this State, the judgment lien attached simultaneously with the Debtor’s acquisition of the subject property and therefore is subject to avoidance by the Debtor pursuant to Section 522(f)(1). In its Response to the Motion (Doc. No. 25), the Judgment Creditor does not dispute the facts as recited, but contends that the judgment was of record pre-dating the Debtor’s purchase of the property and, under the applicable law, the lien is not avoidable pursuant to Section 522(f)(1), citing Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991), and Owen v. Owen (In re Owen), 961 F.2d 170 (11th Cir.1992) cert. den. 506 U.S. 1022, 113 S.Ct. 659, 121 L.Ed.2d 584 (1992).
To determine whether a debtor may appropriately avoid a judicial lien under Section 522(f)(1), “first, the lien at issue must have fixed on an interest of the debtor in property, and second, the lien must impair an exemption to which the debtor would have been entitled.” In re Cooper, 202 B.R. 319, 322 (Bankr.M.D.Fla.1995). In order for a lien to fix to an interest in property, the property interest must predate the existence of the lien. Farrey, 500 U.S. at 296, 111 S.Ct. 1825. On remand, the court in In re Owen, 961 F.2d at 172, relied on the Supreme Court for the proposition that “unless the debtor had the property interest to which the lien attached at some point before the lien attached to that interest, he or she cannot avoid the fixing of the lien under the terms o'f § 522(f)(1).” The 11th Circuit held that the recorded judgment became a lien on the property at the time the debtor acquired the property and therefore, there was never a fixing of a lien on an interest of the debtor. In re Owen, 961 F.2d at 172
The judgment lien held by the Judgment Creditor presently under consideration attached to property currently owned by the Judgment Debtor. In this case, the lien is said to “spring to life the minute the debt- or acquires property to which it attaches.” Allison on the Ocean, Inc. v. Paul’s Carpet, 479 So.2d 188, 190-91 (Fla. 3d DCA 1985).
The Debtor contends that because the judgment attached simultaneously with her acquisition of the subject property, this Court should deem it unenforceable against her homestead (Doc. No. 16). In support of her position, the Debtor relies on the case of Quigley v. Kennedy & Ely Ins., Inc., 207 So.2d 431 (Fla.1968).
The petitioners in Quigley, owned a 7% acre parcel of homestead property and subsequently purchased a vacant 7lh acre tract of land adjacent to their homestead, claiming the entire 15 acres as exempt homestead. The issue presented in the case was whether the petitioners could, in the face of a recorded judgment against them, purchase the vacant tract and thus secure the benefit of the homestead exemption from levy. The Florida Supreme Court allowed petitioners the protection of the homestead exemption in regard to the entire 15 acre parcel even though the later acquired parcel was acquired subject to the lien of the prior recorded judgment. *399In deciding for the petitioners, the Court reasoned that “[t]he rule appears to be that ‘if the homestead right and the lien attach simultaneously, as in the case of a purchase or inheritance of land by a judgment debtor, priority is also accorded to the claimant of the homestead right.’ ” Quigley, 207 So.2d at 433.
Upon close analysis, this Court is constrained to reject the applicability of Quig-ley based on significant factual differences between the present case and Quigley. Most notably, in Quigley the first parcel of land owned by the petitioners was already protected homestead before the purchase of the adjoining vacant tract. Moreover, acquisition of the vacant tract in Quigley is no different from the situation in which a debtor has a main residence covered by homestead and the adjoining parcel of debtor’s property is used as part of the debtor’s residence, like an addition. Based on the foregoing, this Court is satisfied that the Debtor’s Verified Motion to Avoid Fixing of a Lien Which Impairs an Exemption pursuant to Section 522(f)(1) should be denied.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED the Verified Motion to Avoid Fixing of a Lien Which Impairs an Exemption pursuant to Section 522(f)(1) filed by the Debtor be, and the same is hereby denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493979/ | ORDER DENYING DEBTOR’S HOMESTEAD EXEMPTION CLAIM
ARTHUR N. VOTOLATO, Bankruptcy Judge.
This is a dispute concerning the Debt- or’s (Sacharko) entitlement to a homestead exemption in his 40% interest in the former marital domicile (the Property). Sa-charko no longer lives at the Property, but it is currently occupied by his dependent minor daughter. Sacharko has elected the protections of the Rhode Island Homestead statute, which provides in relevant part:
(a) ... an estate of homestead to the extent of two hundred thousand dollars ($200,000) in the land and buildings may be acquired pursuant to this section by an owner or owners of a home or one or all who rightfully possess the premise by lease or otherwise, and who occupy or intend to occupy the home as a principal residence.
R.I. Gen. Laws § 9-26-4.1(a)(2005)(em-phasis added).
The Trustee argues: (1) that Sacharko fails to qualify for the Rhode Island Homestead Exemption because he neither occu*476pies nor intends to occupy the Property; and (2) the fact that a dependent of the Debtor lives in the Property is irrelevant, under the Rhode Island statute.
Based upon the undisputed facts and the applicable law, I conclude that Sacharko has failed to establish the requisite intent to occupy the Property, and that under Rhode Island law he is therefore ineligible to claim a homestead exemption in the Property.
FACTS
The material facts are not disputed: Under his final divorce decree Sacharko was awarded a 40% interest in the former marital domicile in Narragansett, Rhode Island, and his ex-wife received the remaining 60%, plus the exclusive use of the Property until it is sold. Also, according to the decree, Sacharko’s interest vests when his minor child is eighteen or upon her graduation from high school, whichever occurs later, but no later than the child’s 19th birthday. Sacharko’s daughter will turn 19 in 2007.
Since his divorce Sacharko has remarried, and in July 2005, he and his present wife filed this joint Chapter 7 case. The Debtors elected state law exemptions, and Sacharko claimed his 40% interest in the Property as exempt under R.I. Gen. Law § 9-26-4.1, which he values at $84,000. The Trustee filed a timely objection, and the parties have briefed the issues.
DISCUSSION
In support of his position that the Rhode Island homestead statute applies where a dependent of the debtor (but not the debt- or) occupies the Property, the Debtor cites In re Webber, 278 B.R. 294 (Bankr.D.Mass.2002). There the court held that the debt- or was entitled to a homestead exemption in property which he neither occupied nor intended to occupy, because the debtor’s spouse and dependent children, who did live at the property, satisfied the “intent to occupy” requirement of the Massachusetts statute. Additionally (and alternatively), the Court held that under the Massachusetts statute, once a homestead is established, its validity is not contingent upon the debtor’s occupancy or intent to occupy the premises as the primary residence. The Debtor suggests that because the Massachusetts homestead exemption statute is “similar” to that of Rhode Island, this Court should follow Webber.
While I have in the past looked to Massachusetts jurisprudence to help in addressing Rhode Island homestead issues, see e.g. In re Franklino, 329 B.R. 363, 366 (Bankr.D.R.I.2005), that won’t work in this case. The two statutes bear no similarity as to how homestead estates are created, how they are terminated, or as to occupancy requirements. In addition, Webber is factually dissimilar from the instant case. To use Webber as precedent here would be more than a stretch — it would be a clear abuse of discretion.
For example, a Massachusetts homestead exemption, M.G.L. c. 188 § 1, is created only by a writing that must be recorded in the registry of deeds in the county or district where the property is located. M.G.L c. 188 § 2. The statute also provides three ways to terminate a homestead, all of which must be in writing: (1) by deed conveying the homestead property, signed by both the debtor and his/her (if married) spouse; (2) a written release of homestead signed by both the debtor and his/her (if married) spouse; and (3) the acquisition of a new homestead estate. See M.G.L. c 188 §§ 2-3.
Under Rhode Island law, a homestead is acquired automatically by “an owner or owners of a home or one or all who rightfully possess the premise by *477lease or otherwise, and who occupy or intend to occupy the home as a principal residence.” R.I. Gen. Laws § 9-26-4.1(a) (emphasis added). There is no requirement of any writing to create a homestead, and obviously no requirement to record any documents with the registrar of deeds. See In re Furtado, B.K. No. 00-13949 (Bankr.D.R.I. May 10, 2001). Additionally, unlike the Massachusetts statute, there is no requirement that a termination of the exemption be in writing. The Webber court was concerned with the termination of a homestead, and because the existing homestead had not been terminated in accordance with Massachusetts law, the court ruled that the exemption was valid, notwithstanding that the debtor no longer occupied the subject property. 278 B.R. at 299.
Webber also contained many other facts which do not exist here. For example: (1) In the Webber divorce case the debtor was seeking custody of the children, as well as possession of the marital home, and although the family court ruled against him, the debtor appealed the judgment of divorce nisi, and the appeal remained pending throughout the course of the bankruptcy case. Id. at 295; (2) The debtor maintained all during the bankruptcy that if successful on appeal, he intended to move into the marital home with his children. Id. at 296; and (3) On the date of his bankruptcy filing, the debtor was still married to the co-owner. Id. at 296-97.
Compare the facts in Webber to those in the case at Bench. At the time of his bankruptcy filing, Sacharko’s divorce was final, he had in fact remarried, he did not occupy the Property, and there is no evidence that he had any intention to occupy the property in the future. The Rhode Island statute clearly requires one claiming a homestead to occupy or establish the intent to occupy the property as a primary residence. See In re Franklino, 329 B.R. 363 (Bankr.D.R.I.2005). Sacharko does not fit this fact scenario, even remotely, and his attempt to invoke the statute through his minor daughter is also without merit. Hypothetically, the only person who might claim a homestead exemption (if she were in bankruptcy) is Sacharko’s former wife, who currently occupies the property with their daughter.
For the reasons discussed above, I find and conclude that the Debtor, Theodore Sacharko has failed to establish his entitlement to an exemption under the Rhode Island statute. Accordingly, the Trustee’s objection to the claimed exemption is SUSTAINED.
Enter judgment consistent with this Order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493980/ | MEMORANDUM OPINION AND DECISION
RICHARD L. SPEER, Bankruptcy Judge.
This matter is before the Court after a hearing held concerning whether to extend this Court’s injunction dated December 6, 2005, restraining the Defendant, Jane Hartman, from utilizing those funds she holds in an Individual Retirement Account. Said Motion for an injunction/restraining Order was brought by the Plaintiff, National City Bank. At this Hearing, it was agreed that resolution of this matter hinged on whether Ms. Hartman was entitled to claim the funds held in her retirement account as exempt. After considering the arguments of counsel, and after having had the opportunity to review the applicable law, the Court finds that such funds are exempt, and thus this Court’s restraining order will be terminated.
BACKGROUND
Prior to filing her petition in bankruptcy, the Defendant, Ms. Hartman, held funds of approximately $700,000.00 in an IRA. Although substantial disbursements have since been made therefrom, Ms. Hartman claims the remainder of the funds, having a value now of less than $300,000.00, exempt pursuant to O.R.C. § 2329.66(A)(10)(c). (Doc. No. 27). The relevant part of this section provides:
(A) Every person who is domiciled in this state may hold property exempt from execution, garnishment, attachment, or sale to satisfy a judgment or order, as follows:
(c) Except for any portion of the assets that were deposited for the purpose of evading the payment of any debt ..., the person’s right in the assets held in, or to receive any payment under, any individual retirement account, individual retirement annuity, “Roth IRA,”... that provides benefits by reason of illness, disability, death, or age, to the extent that the assets, payments, or benefits described in division (A)(10)(c) of this section are attributable to any of the following:
(iii) Contributions of the person that are within the applicable limits on rollover contributions under subsections 219, 402(c), 403(a)(4), 403(b)(8), 408(b), 408(d)(3), 408A(c)(3)(B), 408A(d)(3), and 530(d)(5) of the “Internal Revenue Code of 1986,” 100 Stat.2085, 26 U.S.C.A. 1, as amended.
National City Bank does not dispute Ms. Hartman’s right to claim the funds she holds in her IRA exempt to the extent that such funds were permissible “rollover contributions” as defined under subparagraph (iii). But it is National City’s position that the majority of the funds held in her IRA are improperly claimed as exempt under this subparagraph because the source of such funds was from a divorce proceeding, specifically a QDRO (Qualified Domestic Relations Order). In the words of National City:
The majority of the IRA funds were contributed through a QDRO of which Jane Hartman was the alternate payee. These funds were derived from Jane Hartman’s former spouse’s employment— it was his plan. Stated another way, the funds were not contributed by Jane Hartman as a plan participant; rather, according to Merrill Lynch, Jane Hartman did not make any direct plan contributions whatsoever. Notwithstanding that a small portion of the IRA funds might have been derived by Jane *828Hartman herself or that Jane Hartman’s name might be listed on the account, it remains that other of the funds were a product of the QDRO and Jane Hartman’s divorce.
(Doc. No. 39).
As support for the position that funds transferred to an IRA through a QDRO cannot be held as exempt under O.R.C. § 2329.66(A)(10)(c), National City cites to the case of In re Hageman, 260 B.R. 852, (Bankr.S.D.Ohio 2001), and the following language:
The Debtor’s attempts to exclude the $60,000.00 from the estate property based upon Patterson v. Shumate must fail because her property interest does not emanate from the retirement plan itself, but from the QDRO. In re Johnston, 218 B.R. 813, 817 (Bankr.E.D.Va.1998). The funds in the plan were derived from her former spouse’s employment, and it was his plan.
the alternative efforts of the Debtor to exempt the proceeds as a pension plan and/or annuity (O.R.C. § 2329.66(A)(10)(b)) or as an individual retirement account (O.R.C. § 2329.66(A)(10)(c)). First, these arguments suffer from the same faulty premise advanced to exclude the proceeds, i.e., that they emanate from the retirement plan. Instead, we reiterate that they are derived from the QDRO, and the plan participant is not before this Court.
Second, this Court has carefully reviewed the two Ohio retirement-related exemption statutes at issue and determined that they are drafted in such a manner as to protect only the plan participant, and not a former spouse entitled to payment based upon a QDRO. The Ohio exemption provisions, by their express language, firmly tie their protections to the plan participant who made the allowed contributions and who is eligible under the plan to receive benefits, as opposed to an alternate payee entitled to payment pursuant to a QDRO.
Ms. Hartman, however, counters, asserting both a procedural and substantive argument. First, procedurally, Ms. Hartman asserts City Bank’s objection to her exemption is untimely, citing Taylor v. Freeland & Kronz, which held that if a party does not timely object to a claimed objection, the property is exempt even if there is no basis for the claiming of that exemption. 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). Substantively, Ms. Hartman maintains that National City’s argument concerning the rollover of funds to her IRA from a QDRO is immaterial, and that this salient fact remains: she made the contributions, thus entitling her to exempt such funds in accordance with O.R.C. § 2329.66(A)(10)(c). (Doc. No. 36).
DISCUSSION
The Plaintiff in this matter seeks a preliminary injunction “prohibiting Defendants from spending, transferring or otherwise dissipating the funds held” in Ms. Hartman’s retirement account maintained with Merrill Lynch. (Doc. No. 26). The entering of a preliminary injunction is governed by Rule 65 of the Federal Rules of Civil Procedure, made applicable to this proceeding by Bankruptcy Rule 7065. The function of injunctive relief is to afford preventive relief, not to redress alleged wrongs that have been committed already. Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 95 S.Ct. 2069, 45 L.Ed.2d 12 (1975). In this way, primary considerations in determining whether to enter a preliminary injunction under Rule 65 concern whether, (1) the plaintiff has a strong likelihood of succeeding on the merits, and (2) whether *829the plaintiff will suffer irreparable injury-absent the injunction. Gonzales v. National Bd. of Med. Examiners, 225 F.3d 620, 625 (6th Cir.2000).
In this matter, the potential merits of the Plaintiffs complaint, which is one to determine dischargeability and to deny discharge, were not discussed. But as to harm, it is the Plaintiffs position that the Debtor, Ms. Hartman, has and continues to dissipate an IRA account which, if it is eventually successful on its Complaint, it could utilize to satisfy its claim. But as now set forth, a straightforward, but albeit intricate reading of the applicable statutes show that the Plaintiff has no right to the funds held by Ms. Hartman in her IRA account. Thus, no harm will befall the Plaintiff if an injunction is not issued with respect to the Plaintiffs IRA account, making the continuation of the injunction previously entered in this case inappropriate.
Technically speaking, the acronym IRA, short for Individual Retirement Account, is applicable to any account used for that particular purpose. However, under its common usage, what is referred to as an IRA account centers on a single characteristic: it is afforded certain advantages under the Federal Income Tax Code, such as deductibility and deferred taxation. Although not applicable to certain types of retirement accounts, — in particular, those subject to a restriction on the transfer of its beneficial interest1 — as a general rule a debtor’s interest in an IRA account will become property of the estate. 11 U.S.C. § 541(a).
Notwithstanding, in many instances property held in an IRA account, although included in the debtor’s estate, will be exempt. The Supreme Court has defined an exemption as a property “interest withdrawn from the [bankruptcy] estate (and hence from the creditors) for the benefit of the debtor.” Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). For purposes of this controversy, an important aspect of an allowable exemption in bankruptcy is that, subject to some limited exceptions, such property is “not liable during or after the case for any debt of the debtor that arose ... before the commencement of the case[.]” 11 U.S.C. § 522(c). Ergo, to the extent that those funds held in Ms. Hartman’s IRA are exempt, the Plaintiff may not look to such funds as a source to satisfy its claim.
For those debtors domiciled in Ohio, such as the Debtors in this case, their entitlement to claim an exemption in bankruptcy is determined in accordance with Ohio law. Under § 2329.66(A)(10)(c), Ohio law allows for IRA’s to be held by a debtor as exempt, subject to certain restrictions. Following the common usage of the term IRA, these restrictions include whether the value of those transfers to the account fall within those “applicable limits” allowed by the Federal Income Tax Code. To this end, is subparagraph (iii) of O.R.C. § 2329.66(A)(10)(c) which addresses said “applicable limits” for “rollover contributions.”
In subparagraph (iii) of § 2329.66(A)(10)(c), a rollover contribution will fall within the provision’s “applicable limits,” thereby not eliminating it from being an allowed exemption, so long as it also meets the “applicable limits” imposed by any of these sections of the Tax Code: 219, 402(c), 403(a)(4), 403(b)(8), 408(b), 408(d)(3), 408A(c)(3)(B), 408A(d)(3), and 530(d)(5). Relevant in this matter, is the second in this string of statutes,— § 402(c) of the Tax Code — which in pertinent part provides:
*830(c) Rules applicable to rollovers from exempt trusts.-
(1) Exclusion from income. If-
(A) any portion of the balance to the credit of an employee in a qualified trust is paid to the employee in an eligible rollover distribution,
(B) the distributee transfers any portion of the property received in such distribution to an eligible retirement plan, and
(C) in the case of a distribution of property other than money, the amount so transferred consists of the property distributed,
then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.
(emphasis added). Although § 402(c) mentions nothing of a QDRO, which is at the center of this controversy, paragraph (e) of this same section does, and specifically references back to paragraph (c), stating:
(B) Rollovers. — If any amount is paid or distributed to an alternate payee who is the spouse or former spouse of the participant by reason of any qualified domestic relations order (within the meaning of section 414(p)), subsection (c) shall apply to such distribution in the same manner as if such alternate payee were the employee.
(emphasis added).
In interpreting these statutes, Ohio law requires that effect be given to each and every word. Shover v. Cordis Corp., 61 Ohio St.3d 213, 218, 574 N.E.2d 457, 461 (1991). Words and their phrases are then to be read in context and construed according to common usage. Ohio Bus Sales, Inc. v. Toledo Bd. of Edn., 82 Ohio App.3d 1, 610 N.E.2d 1164 (1992); O.R.C. § 1.42. And when these rules of construction are now set into motion, the Court is presented with what are three levels of statutory reference: (1) as a condition to exempting an IRA, § 2329.66(A)(10)(c)(iii) requires that any of the account value attributable to rollover contributions fall within the applicable limits of the Tax Code, such as § 402(c); (2) § 402(c) allows employees to exclude from their taxable income amounts received under a qualified, employer-sponsored retirement plan if the amounts received are then rolled over into qualified IRA; and (3) for purposes of determining who qualifies as an employee under § 402(c), § 402(e) holds that it will include a spouse who receives retirement funds under a QDRO.
Where, as above, a statute refers to another, it is the rule that the statute referenced becomes embodied in the adopting statute, and that the two are to be read as consistent and harmonious with the other. Wooster Republican Printing Co. v. Wooster, 56 Ohio St.2d 126, 132, 10 O.O.3d 312, 315, 383 N.E.2d 124, 128 (1978) (it is a rule of statutory interpretation that statutes be construed together and the Revised Code be read as an interrelated body of law); Suez Co. v. Young, 118 Ohio App. 415, 25 O.O.2d 315, 195 N.E.2d 117 (1963) (a court is to construe statutes which explicitly refer to each other so that they are consistent and harmonious with a common policy and give effect to the legislative intent). Similarly, statutes which relate to the same subject are to be read in pari materia. Shover, 61 Ohio St.3d at 218, 574 N.E.2d at 461. Thus, under any straightforward interpretation of § 2329.66(A)(10)(c), and its interplay with paragraphs (c) and (e) of § 402 of the Internal Revenue Code, leads to but just one result: under Ohio law, (and so long as the account is otherwise qualified) a debtor may exempt any value of an IRA attributable to a rollover made pursuant to a *831QDRO. This is also a perfectly rational result, albeit not always fair.
Generally speaking, a qualified-rollover allows a debtor to take funds from one retirement account (commonly, a 401(k)) and transfer that money to another retirement account (typically an IRA) without incurring any immediate tax consequences. This typically occurs when an employee leaves their place of employment, terminating their participation in their employer’s 401(k). Without, however, the ability to rollover the account, a taxable event would occur which in many instances could be substantial as often large amounts are accumulated in an employee’s 401(k). But by allowing the employee to rollover his retirement account into an IRA, without incurring any immediate tax consequences, the strong policy objective of saving for retirement is encouraged. A QDRO perfectly tracks this scenario. Commonly appreciable sums of money are involved, and like leaving a job, it arises as the result of a significant, and often unforseen, life event: a divorce.
Accordingly, for all these reasons, there is simply no reason to interpret § 2329.66(A)(10)(c) as excluding from its protections contributions made to an IRA under a QDRO. As a result, the Plaintiff has failed to establish that any harm will befall it if Ms. Hartman continues to utilize those funds contained in her IRA, thus making the issuance/extension of an injunction against the IRA account improper under Rule 65 of the Federal Rules of Civil Procedure. To the extent that this ruling conflicts with the court’s holding in In re Hageman, this Court must respectfully decline to follow that decision. Also, as this ruling addresses the substance of the Plaintiffs objection to Ms. Hartman’s claim of exemption, the Court at this time declines to address the procedural deficiency, regarding timeliness, raised by Ms. Hartman as a defense.
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 this Court’s order, dated December 8, 2005, restraining the Defendant/Debtor, Jane Hartman, from utilizing her Merrill Lynch IRA account, be, and is hereby, TERMINATED.
. 11 U.S.C. § 541(c)(2). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493981/ | ORDER RE: OBJECTIONS TO CONFIRMATION ON CUSTODIAL TRUST ISSUES
J. VINCENT AUG, JR., Bankruptcy Judge.
This matter is before the Court on the United States of America, on behalf of the Environmental Protection Agency’s (“EPA”), supplemental objection to confirmation of the Debtors’ joint plan on custodial trust issues (Doc.2053), the Debtors’ response (Doc.2094, 2106), and the Official Committee of Unsecured Creditors’ join-der to the Debtors’ response (Doc.2097). A trial was held on June 1, 2, and 5, 2006.
Also before the Court are the parties’ motions in limine (Does.2098 and 2109). These motions were both DENIED at the start of the trial. The Debtors’ motion for an order waiving the length limitation of its brief (Doc.2092) is hereby GRANTED. The Debtors’ motion for a hearing on its motion in limine (Doc.2099) is hereby DENIED as MOOT.
The Debtors own sixteen properties with various environmental problems. Initially, the Debtors proposed to simply abandon these properties as burdensome to the estate. This proposal was met with fierce opposition from federal and state environmental regulatory agencies. The Debtors then proposed to transfer the properties to trust entities (“Custodial Trusts”) with each Custodial Trust being funded to a level acceptable to the appropriate agencies. Admirably, the parties were able to agree on the amount of funding for all but two sites, one in Urbana, Ohio and the other in Sidney, Ohio.
Thus, the issue before the Court is the adequacy of the Debtors’ proposed funding for the two Custodial Trusts for the Ohio sites. The Debtors propose to fund the Urbana Custodial Trust with $45,000 and the Sidney Custodial Trust with $900,000. The EPA proposes an amount of $1,842,720 for the Urbana Custodial Trust and a range of $5,855,256 to $9,330,420 for the Sidney Custodial Trust.
Contrary to the Debtors’ contention, the issue is not whether the EPA is entitled to an administrative expense claim. Rather, the issue is whether the Debtors have proposed a plan that is forbidden by law. See 11 U.S.C. § 1129(a)(3). The Debtors bear the ultimate burden of proof on this issue. As to the specific issue of whether the Custodial Trusts are adequately funded, the parties differ sharply on the legal standard to be applied. The EPA contends that the funding amounts must allow for the Custodial Trustee to bring each site “into compliance” with state and federal law. See Doc.2053, p. 4-5. The Debtors contend that the EPA must prove that the sites pose an “imminent and identifiable harm to public health and safety.” See Doc. 2106, p. 15.
The definitive case is Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494, 507, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986) wherein the Supreme Court held:
a trustee may not abandon property in contravention of a state statute or regu*862lation that is reasonably designed to protect the public health or safety from identified hazards.
The footnote to the holding states:
This exception to the abandonment power ... is a narrow one. It does not encompass a speculative or indeterminate future violation of such laws that may stem from abandonment. The abandonment power is not to be fettered by laws or regulations not reasonably calculated to protect the public health or safety from imminent and identifiable harm.
Id. at 507, n. 9, 106 S.Ct. 755.
The Supreme Court offered additional guidance by stating:
the Bankruptcy Court does not have the power to authorize an abandonment without formulating conditions that will adequately protect the public’s health and safety.
Id. at 507, 106 S.Ct. 755.
Midlantic has spawned two lines of cases. One line of cases holds that abandonment is appropriate unless there is a showing of an imminent danger to public health and safety while the other line of cases holds that abandonment is appropriate only upon a showing of full compliance with the applicable environmental laws. In re Smith-Douglass, Inc., 856 F.2d 12, 15 (4th Cir.1988). Thus, it is not surprising that the parties in this case have advanced different legal standards. As our analysis below reveals, under the specific facts of this case, the two standards create a distinction without a difference. Therefore, for the purposes of this decision, we will adopt the EPA’s “tougher” full compliance standard.
Although the defense of laches is inapplicable against a governmental entity in an action by that entity to enforce a public right or to protect a public interest, inactivity on the part of a regulatory agency may be relevant to compliance. See In re Anthony Ferrante & Sons. Inc., 119 B.R. 45, 50 (D.N.J.1990)(citing In re Franklin Signal Corp., 65 B.R. 268, 274 (Bankr.D.Minn.1986) and In re Purco, Inc., 76 B.R. 523, 533 (Bankr.W.D.Pa.1987)(“court infers from the [state’s] lack of interest that there is no threat to the public health or safety”)).
Some courts have also considered whether or not the debtor has any unencumbered assets with which to finance any cleanup work. See In re MCI, Inc., 151 B.R. 103, 107 (E.D.Mich.1992). The parties offered no evidence on this issue, so we are unable to consider this factor.
I. Urbana
The Urbana site is a 2.86 acre area which includes a 15,000 square foot U-shaped area surrounding a city water tower. The U-shaped area was initially used as a borrow pit in 1966 for the construction of a porcelain manufacturing facility known as the Chi-Vit facility. From 1966 until 1976, when an off-site disposal area became available, the borrow pit was used for on-site disposal of Chi-Vit’s off-spec metal oxides, raw materials, and general rubbish. The site was eventually covered with topsoil. It is now a lawn. A few bare spots in the grass are visible.
In 1988, Chi-Vit management purchased the Urbana site from the Debtors, except for the U-shaped disposal site. As a part of this transaction, several environmental investigations were performed, including the installation of ten wells for groundwater testing. Dames & Moore performed a phase I investigation in July 1989, a phase II investigation in November 1989, and a phase III investigation in April 1990. ERM-New England performed a supplemental environmental site assessment in September 1992.
*863The Dames & Moore investigations showed the presence of two volatile organic compounds in the groundwater, including trichloroethylene (“TCE”) in excess of the drinking water standards. However, the Dames & Moore report concluded that the source of TCE was from a known TCE plume in the Urbana area and not from the U-shaped disposal site. The ERM-New England report confirmed that the TCE source was off-site.1 The Dames & Moore investigation also showed arsenic at an “above action” level in one well (MW9) and lead at an “above action” level in a second well (MW6). Both arsenic and lead are defined as hazardous substances. There was much testimony at the trial about the questionable placement of the testing wells and which of the wells were downgradient from the disposal site. Both the Debtors’ environmental expert, Gary Vajda, and the EPA’s groundwater expert, Michael Starkey, agreed that one well (MW5) was truly downgradient. The test results for this well showed no level of arsenic or lead.
The Dames & Moore and ERM-New England reports discuss the historical use of the borrow pit as a general disposal site for the Chi-Vit facility. The ERM-New England report references a 1988 site assessment of the overall Chi-Vit facility performed by QSouree, which included several areas of concern including the “mixing of solvent wastes (less than 30 gallons) with general plant wastes for off-site disposal.”
The Debtors’ expert, Gary Vajda, opined that the groundwater test results indicated that “nothing was coming out of this fill.” s His conclusion was further based on the length of time between the closure of the disposal site in 1976 and the groundwater testing done in 1988 which “should have found a problem if one existed.”
Mr. Vajda’s proposal for the Urbana site includes the removal of the existing groundwater testing wells2 and a deed restriction to insure the integrity of the soil in the area at a cost of $45,000.
The EPA’s environmental expert, John Gulch, expressed his concern that the U-shaped disposal site was a known industrial disposal site for ten years and that there was no specific listing of what went into this site. The EPA’s groundwater expert, Michael Starkey, opined that the single groundwater samples taken are insufficient because the industry norm requires quarterly tests performed over a year to obtain measurements throughout a seasonal flow.
Mr. Gulch and Mr. Starkey’s collective proposal for the Urbana site includes a site assessment at a cost of $179,520, the removal of hazardous waste, if necessary, at a cost of $1,650,000 and closure of the wells at a cost of $13,200. The EPA was very clear that the need for the removal of hazardous waste would be entirely dependent upon the results from a site assessment.
Our conclusion as to the amount of funding for the Urbana Custodial Trust turns on Ohio EPA’s inactivity with regard to the site. See In re Anthony Ferrante & Sons, Inc., 119 B.R. at 50. The three Dames & Moore reports and the ERM-New England reports described above, which discuss the historical use of the U-shaped area as a disposal site and show elevated samples of lead and arsenic in two wells from one sampling event, form the basis of the EPA’s concern for the site *864today. These same results were provided to Ohio EPA in approximately 1995 to aid Ohio EPA in its ongoing study of the TCE plume in the Urbana area. Mr. Starkey offered credible3 testimony at the trial that while Ohio EPA reviewed the reports with a focus on the TCE problem, “nothing stuck out as something that needed to be done immediately.”
The only current data regarding this site is the visual observation of the lack of grass in some areas. While the bare areas were described by Mr. Gulch as a “red flag,” Mr. Vajda described the bare areas as being near the water tower and resulting from vehicular traffic. We do not think this warrants the scope of work proposed by the EPA.
Accordingly, we conclude that the Debtors’ proposal for the Urbana site will bring the site into compliance4, that the proposed funding of the Urbana Custodial Trust in the amount of $45,000 is sufficient, and that the Debtors have satisfied their burden of proof and not proposed a plan forbidden by law. The EPA’s objection is hereby OVERRULED.
II. Sidney
The Sidney site is an 11.7 acre parcel consisting of an upper 3 acre sand-fill and a lower 9 acre dumping ground which is heavily wooded. The site adjoins a residential area and the Great Miami River. The site was leased by the Debtors for several years before being purchased by the Debtors in 1988. The 3 acre sand-fill consists of spent nontoxic foundry sand, which is not a hazardous substance, that was deposited by the Debtors from 1986 to 2000 as a byproduct of their nearby aluminum easting operation. The Debtors obtained the necessary regulatory permits from Shelby County, Ohio for the sandfill and samples of the sand were routinely tested. The Debtors received a “final letter” from the county upon closure of the foundry in 2000. There is no evidence that the sandfill at any time was not in compliance with any environmental regulations.
The lower 9 acres has been used as a general public dump for decades. A 1988 site inspection performed in-house by the Debtors relative to their purchase of the property indicates the presence of general rubbish and industrial garbage, including lots of drums (some still containing liquid), vehicles and vehicle parts, lots of metal parts, foam, a tar-like deposit, mattresses, concrete chunks, tires, appliances, safes, culvert pipe, slag, and piles of rubber shoes. Worn trails indicated a fair amount of human activity in the area. Soil samples taken by the Debtors at the time of the 1988 inspection showed elevated levels of arsenic, lead, and chromium, all of which are defined as hazardous substances. The most disturbing test result showed the presence of 28,000 mg/kg of lead in one sample, which is 70 times the action level for that metal.
The Debtors’ expert, Gary Vajda, opined that the sandfill posed no environmental problems. He further opined that the 28,-000 kg/mg sample was a “clear outlier.” He described the lower 9 acres as an “eyesore” that definitely needs to be cleaned up.
Mr. Vajda’s proposal for the Sidney site first includes a “housekeeping” removal of the debris from the lower 9 acres and removal and replacement of 700 square yards of soil. He would add six inches of topsoil and grass seed to the upper 3 acre *865sandfill. The cost of this remediation work would be $380,000. The remediation would be followed by a site assessment at a cost of $430,000. Including oversight costs and a deed restriction, the total cost of Mr. Vajda’s proposal is $900,000. Mr. Vajda’s proposal expressly presumes that the results of the site assessment will yield no results that require further action. Mr. Vajda testified that he based his calculations on the expectation that the Sidney property would be “brought through” Ohio’s Voluntary Action Program (“VAP”). Any property that successfully goes through the VAP would necessarily, upon conclusion, be in compliance with Ohio’s environmental laws.
Mr. Gulch and Mr. Starkey’s collective proposal on behalf of the EPA for the Sidney site includes: 1) a site assessment at a total cost of $552,000; 2) addition of soil to the 3 acre sandfill at a cost of $275,000 or hazardous waste removal, if necessary, at a cost of $3,750,780; 3) hazardous waste removal of the lower 9 acres and replacement of 14,520 square yards of topsoil and grass seed at a cost of $4,174,368; 4) long term (up to 29 years) sampling at a cost of $765,000; and 5) perimeter fencing of the site at a cost of $87,000. The total cost of the EPA’s proposal is from $5,855,256 to $9,330,420.
Although both Mr. Gulch and Mr. Starkey strenuously opined that a site assessment should occur prior to any remediation work, all three experts agreed that this site requires both a site assessment and some type of clean up activity. All three experts also generally agreed as to the scope of the site assessment. The difference stems from the scope of the cleanup thought to be required.
In short, the Court is being asked to choose between the Debtors’ best case scenario and the EPA’s worst case scenario (although the EPA cautions that even their estimate is not indicative of a truly worst case scenario). In this regard, we note that were it not for this bankruptcy, the Sidney site would be receiving no attention at all. It is not currently nor has it ever been under an enforcement action.
The Sidney site is a contrast of knowns and unknowns. The “known” is that the lower 9 acres has been used by the general public as a dump for decades. The “unknown” is what has been dumped there and by whom. There are only a few facts in the record from which we can draw certain inferences. First, although the lower 9 acres appears to have been known for decades to the general public as an available dumping ground, is near a residential area, and is frequented by persons on foot, the site has never been referred to the Ohio EPA as a potential deposit of hazardous waste that warrants an investigation. The inference we draw is that it is more likely than not that most of the dumped material on the site is simply garbage and is not hazardous waste. Second, the site appears to be a place of surface dumpings as opposed to subsurface waste burial. The inference we draw is that this is easier material to clean up and that it will not require as much topsoil removal and replacement as estimated by the EPA. Third, although we think it is far from laudable that the Debtors never cleaned up this eyesore on then- own accord, we infer that the Debtors would not have purchased this property in 1988 if they believed they were purchasing 9 acres of hazardous waste.
For all these reasons, we believe the preponderance of the evidence points to the Debtors’ best case proposal as the most appropriate. To temper this decision, we think it also appropriate to add a 20% contingency to the Debtors’ total *866$900,000 proposal amount.5 Although Mr. Vajda did not include a contingency in his proposal, he testified that it was the industry norm to include a contingency at a range from 5 to 20%. If the 20% contingency proves to be improvidently high, any overage will be returned to the unsecured creditors under the framework of the Custodial Trusts. We do not concern ourselves with the question of whether the site assessment should precede the remediation work as it appears that this decision is more appropriately to be made by the Custodial Trustee.
Accordingly, we conclude that the Debtors’ proposal for the Sidney site with an added 20% contingency fee will bring the site into compliance, that the funding of the Sidney Custodial Trust in the increased amount of $1,080,000 is sufficient, and that with the addition of said contingency amount, the Debtors will have satisfied their burden of proof and not proposed a plan forbidden by law. The EPA’s objection is hereby OVERRULED in PART and GRANTED in PART.
IT IS SO ORDERED.
. The EPA is not asserting that the U-shaped disposal site is the source of the TCE.
. The removal of the wells will eliminate the wells as a possible conduit for contamination of the groundwater.
. On the whole, we found Mr. Starkey's testimony to be clear, thoughtful and very helpful to the Court in its analysis of the scientific evidence.
. We believe the site is already in compliance.
. Contingencies can arise in both site assessments and remediation work. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494001/ | MEMORANDUM OPINION AND ORDER
MARK W. VAUGHN, Chief Judge.
The Court has before it the Plaintiffs “Motion to Alter, Amend or Reconsider Order and Memorandum Opinion Dated September 12, 2005.” On October 4, 2005, the Defendant, ASR Acquisition Corp. (“ASR”), filed its opposition to the motion. On October 5, 2005, the Chapter 7 trustee filed a motion to join in the Plaintiffs motion.
Jurisdiction
While the motion refers to the September 12 opinion generally, the motion only seeks reconsideration of a portion of that opinion, specifically the dismissal of Count IV, the denial of the Plaintiffs request to amend the complaint to add a Count VII, and the Court’s decision to abstain from hearing Counts XI and XII. The motion did not seek reconsideration of the Court’s dismissal of Counts V and VI and the Court’s denial of the Plaintiffs request to amend the complaint to include Counts VIH, IX and X.
*2
Discussion
The Court first finds that the motion brought pursuant to Federal Rule of Bankruptcy Procedure 7052, which adopts Federal Rule of Civil Procedure 52, is not timely filed. Rule 9006 prohibits the enlargement of time under Rule 7052. The Court’s opinion and order was docketed on September 12, 2005. Federal Rule of Bankruptcy Procedure 7052 requires that the motion be brought “no later than 10 days after entry of judgment.” In the instant case, the motion was filed and docketed on September 23, 2005, more than ten days after the Court’s judgment was docketed. Since the motion was not timely filed, it must be denied on that ground.
Alternatively, the Court has also reviewed its September 12, 2005, opinion with respect to the issues raised by the Plaintiff. Based on that review, the Court finds that its findings are supported by the record and denies the Plaintiffs motion to alter, amend or reconsider those findings.
Conclusion
This opinion constitutes the Court’s findings and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
DONE and ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494004/ | MEMORANDUM OPINION CONCERNING DEADLINE FOR FILING OBJECTIONS TO DISCHARGE AND TO DISCHARGEABILITY OF DEBTS WHEN CLERK OF COURT HAS AFFIRMATIVELY MISSTATED THE DEADLINE
WESLEY W. STEEN, Bankruptcy Judge.
In three separate motions, the parties to this bankruptcy case have postured for decision the determination of the deadline for objecting to discharge and to dis-chargeability of debts when the clerk of court has given notice of a date that is different from the one computed under the Federal Rules of Bankruptcy Procedure (FRBP). For reasons set forth below, the Court concludes that the deadline in this case was extended by the clerk’s notice. Because the same issue is raised in 3 different pleadings, the Court directs the Clerk to enter this memorandum in the two adversary proceedings and in the main ease.1 By separate orders, the motions to dismiss in the adversary proceedings are denied and the motion in the main case for extension of time to file an objection to discharge is granted.
FACTS
The April 17 Deadline
Craig and Lisa Crawford (“Debtors”) filed a voluntary petition initiating their chapter 7 bankruptcy case on October 14, 2005. Prosecution of the case was delayed because Debtors did not file their list of creditors or disclose their social security number until January 12, 2006, three months late.2 The chapter 7 Initial Trustee was appointed and the Clerk of Court sent notice that the Initial Creditors’ Meeting would be held on February 16, 2006. The Clerk’s notice stated that the deadline for filing objections to granting a bankruptcy discharge and for filing objections to dischargeability of specific debts would be April 17, 2006.3
The May 8 Deadline
On February 15, 2006, the Initial Trustee rejected his appointment and was removed from the case. The Initial Trustee had neither received nor administered any property and had taken no other action in the case.4 A Successor Trustee was appointed on February 16. On the same day, the Clerk of Court sent out a notice that the creditors’ meeting would be held on March 7, 2006. The Clerk’s notice, contrary to provisions of the FRBP, stated that the deadline for filing objections to granting a bankruptcy discharge and for *44filing objections to dischargeability of specific debts would be May 8, 2006.5
In short, the Clerk of Court sent out two notices in this case. The first notice said that the deadline was April 17 and the second notice said that the deadline was May 8.
PENDING MOTIONS
The Motion in the Main Case to Extend the Deadline or To Dismiss the Case
On May 1, 2006, the Successor Trustee filed a motion6 (i) to extend the deadline for objecting to Debtors discharge, or alternatively, (ii) to dismiss the case. The motion alleges that Debtors were “instructed” at the March 7 creditors’ meeting to turn over certain documents to the Successor Trustee; it further alleges that Debtors had not turned over all of the documents. The motion references the May 8 date announced by the Clerk as the deadline for filing objections to discharge, and asks the Court to extend that deadline to June 8. The motion further states: “Alternatively, if for any reason the request for extension of time is denied, the Trustee requests that the Court dismiss this case for Debtors’ failure to provide all requested information to the Trustee.”
Debtors object to the relief sought by the Successor Trustee.7
Debtor’s Motion to Dismiss Adversary 06-3369
On May 5, Charlsie Idol filed adversary proceeding 06-3369 objecting to discharge-ability of her alleged claims against debtor Craig Crawford. Ms. Idol alleges that Crawford was President of The Project Group, Inc. their mutual employer, and that Crawford terminated Idol’s employment as Controller because Idol blew the whistle on Crawford’s allegedly fraudulent and wrongful conduct. Ms. Idol also alleges that Crawford defamed her by making false reports about her to the Texas State Board of Public Accountancy and that Crawford harassed her by false statements related to the National Gay and Lesbian Task Force. Ms. Idol asserts that her claims are not dischargeable in bankruptcy because her claims allegedly arise out of willful and malicious injuries, Bankruptcy Code § 523(a)(6). Finally, Ms. Idol asserts that her claims arise under the Sar-banes-Oxley Act and therefore the claims are securities claims that are not dis-chargeable under Bankruptcy Code § 523(a)(19).
Debtors have filed a motion to dismiss the adversary proceeding, alleging that it was filed after the deadline established in FRBP 4007(c), which was correctly computed by the Clerk in the first notice of the creditors meeting. Debtors contend that the Clerk’s second notice is not authorized by the FRBP, and that the Clerk’s notice cannot extend the deadline.
Ms. Idol does not deny receiving the first notice from the clerk, but asserts that she reasonably relied on the clerk’s second notice with the incorrect statement of the deadline date.8
Debtors’ Motion to Dismiss Adversary Proceeding 06-3375
On May 8, the unsecured creditors’ committee of The Project Group, Inc.9 filed adversary proceeding 06-3375 objecting to *45issuance of any discharge for either of the Debtors. The complaint alleges that Debtors have transferred, removed, destroyed, or concealed assets with the intent to hinder, delay, or defraud a creditor or the chapter 7 Successor Trustee of their estates, Bankruptcy Code § 727(a)(2). The complaint also alleges that Debtors made a false oath in connection with the case, Bankruptcy Code § 727(a)(4).
Debtors have filed a motion to dismiss the adversary proceeding, alleging that it was filed after the deadline established in FRBP 4004(a), which was correctly computed by the Clerk in the first notice of the creditors meeting. Debtors contend that the Clerk’s second notice is not authorized by the FRBP, and that the Clerk’s notice cannot extend the deadline.
The unsecured creditors’ committee alleges that it was not listed in the Debtors’ schedules or list of creditors, that it did not receive the first notice from the clerk, that it filed a Notice of Appearance on February 8, and that it received only the second notice from the clerk with the incorrect deadline.10
FEDERAL RULES OF BANKRUPTCY PROCEDURE
The Bankruptcy Code does not itself set a deadline for filing objections to discharge or objections to dischargeability of debt. Those deadlines are set in the FRBP.
FRBP 4004(a) and (b) state:
... [A] complaint objecting to the debt- or’s discharge under § 727(a) of the Code shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a) ... At least 25 days’ notice of the time so fixed shall be given ... [by the clerk] ...
On motion of any party in interest, after hearing on notice, the court may for cause extend the time to file a complaint objecting to discharge. The motion shall be filed before the time has expired.
FRBP 4007(c) states:
A complaint to determine the discharge-ability of a debt under § 523(c) shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a). The Court shall give all creditors no less than 30 days’ notice of the time so fixed ... On motion of a party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be filed before the time has expired.
The “first date set” language in these rules is a 1999 amendment. Prior to 1999 there was a split in the jurisprudence concerning the effect of rescheduling a creditors’ meeting or continuing the initial meeting to a later date. The Judicial Conference Advisory Committee on Bankruptcy Rules proposed the amendment to FRBP 4004(a) to make it clear that the deadline was measured from the first date set for the meeting, not any reset commencement or delayed completion date. The Advisory Committee notes state:
Subdivision (a) is amended to clarify that, in a chapter 7 case, the deadline for filing a complaint objecting to discharge under § 727(a) is 60 days after the first date set for the meeting of creditors, whether or not the meeting is held on that date. The time for filing the complaint is not affected by any delay in the commencement or conclusion of the meeting of creditors.
An identical Advisory Committee note annotates the 1999 amendment of FRBP 4007(c).
*46FRBP 9006(b) specifies which deadlines the Court may extend, which deadlines the Court may not extend, and which deadlines the Court may extend only within certain limitations. Rule 9006(b)(3) states:
ENLARGEMENT LIMITED. The court may enlarge the time for taking action under Rules ... 4004(a) [and] 4007(c) ... only to the extent and under the conditions stated in those rules.
ANALYSIS
Firm, But Not Jurisdictional
Although the Supreme Court has not directly ruled on whether equitable principles allow extension of deadlines in FRBP 4004 and 4007, it has issued rulings that are related. The Supreme Court has held that FRBP deadlines for objections to exemptions, are inflexible, even when extensions might be justified by debtor misconduct: Taylor v. Freeland & Kronz 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). The Supreme Court did not rule that the deadline was jurisdictional and expressly did not rule on whether the bankruptcy judge could extend the deadline under authority of Bankruptcy Code § 105. In a subsequent case the Supreme Court ruled that the deadline for objecting to discharge is not jurisdictional; it can be waived: Kontrick v. Ryan 540 U.S. 443, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004). But in that case the Supreme Court expressly declined to rule on whether there were any exceptions other than waiver that might extend the deadline for filing objections to discharge.
Courts of Appeal are Unanimous that Clerks’ Affirmative FRBP 4004 Errors Allow Late Filing
Clerks of court make more errors than one might expect. A number of courts of appeal have addressed affirmative misstatements by clerks concerning FRBP 4004 deadlines. Collier on Bankruptcy, 15th Ed. Rev. ¶ 4004.02[3][b] states:
The courts have not strictly adhered to the rule if the court itself has given confusing or incorrect notice of the deadline. This sometimes occurs when a second notice of the creditor’s meeting is sent and contains a deadline different from that stated in the first notice. Thus, for example, in Themy v. Yu (In re Themy) [6 F.3d 688 (10th Cir.1993)] the creditors’ meeting was continued to permit the debtor to file amended schedules. The bankruptcy court sent out a new notice of the continued meeting, stating a deadline for filing objections to discharge which was incorrect under the rule. The Court of Appeals for the Tenth Circuit held that the bankruptcy court was permitted to hear the untimely filed complaint because the tardiness was caused by the court’s own error and courts have inherent authority to correct their own mistakes. A similar problem occurred in In re Anwiler [958 F.2d 925 (9th Cir.1992)]. After the debtor’s case was transferred to another district a second notice of the section 341 meeting was sent out, stating a later date for objections to discharge than the original notice had stated. The Court of Appeals for the Ninth Circuit held that the bankruptcy court should have exercised its equitable powers to excuse the tardy filing of the complaint in order to correct its own mistake. The Court of Appeals for the Sixth Circuit came to the same conclusion in similar circumstances. [In re Isaacman, 26 F.3d 629 (6th Cir.1994)]
The Court of Appeals for the Eighth Circuit reached the same conclusion: In re Moss, 289 F.3d 540 (8th Cir.2002).
For a bankruptcy court decision on point, see In re Hershkovitz, 101 B.R. 816 (Bankr.N.D.Ga.1989). In that case, the *47clerk issued a first notice of the deadline for objection to discharge; the trustee resigned; a successor trustee was appointed; the clerk issued a second notice with a new deadline for objection to discharge; and a creditor, relying on the date in the second notice, filed an objection. The district court held on appeal that the objection was allowed. In re Riso 57 B.R. 789 (D.N.H. 1986), cited by the Fifth Circuit in Neeley v. Murchison, discussed infra, stands for the same proposition.11
Courts of Appeal Decisions Regarding FRBP 4007(c) Are Not So Directly on Point
The Court has not been able to find a case interpreting FRBP 4007(c) that involves an affirmative misstatement of the deadline by the clerk of court. There are cases, however, that involve the clerk’s failure to give adequate notice.
Three courts of appeal have held that if a creditor has actual notice of the bankruptcy case in time to file an objection to dischargeability of the debt, then the deadline applies even if the clerk has failed to give notice of the deadline. In In re Alton, 837 F.2d 457 (11th Cir.1988) the creditor received timely notice that the bankruptcy case had been filed, but the debtor did not list the creditor in his bankruptcy schedules and therefore the clerk of court did not send the creditor a notice of the deadline. The Court of Appeals for the Eleventh Circuit held that the creditor had notice of the case, that it was the creditor’s duty to determine the deadline, and that failure to give notice of the deadline did not extend the deadline. Accord: Neeley v. Murchison, discussed infra, In re Rhodes, 61 B.R. 626 (9th Cir. BAP 1986).
Other courts have held that the deadline may be extended for cause. In In re Maughan, 340 F.3d 337 (6th Cir.2003) the Court of Appeals for the Sixth Circuit held that the deadline was not jurisdictional, that the bankruptcy judge has discretion under Bankruptcy Code § 105 to extend the deadline, even after it had expired, and that the bankruptcy judge did not abuse his discretion when he extended the deadline because the debtor had failed to provide documents as the judge had ordered.
Analysis by the Court of Appeals for the Fifth Circuit
The most nearly applicable decision by the Court of Appeals for the Fifth Circuit is Neeley v. Murchison, 815 F.2d 345 (5th Cir.1987). In that case the clerk issued the official form that gave notice of the creditors’ meeting, but the space where the clerk should have inserted the deadline for objections to dischargeability of debts was left blank. When the creditor inquired, the clerk’s staff informed the creditor that “no dischargeability date had been set.” Neeley at 345. The court held that the creditor had notice of the bankruptcy proceeding and had time to file its objection. Therefore, the court upheld the deadline and dismissed the objection to dischargeability of the debt.
However, the Fifth Circuit went to great pains to differentiate between “no information” from the clerk and “affirmative but erroneous notice of a bar date” from the clerk. In footnote 5, the Fifth Circuit stated that the “case is not one in which the clerk gave an affirmative but erroneous notice of a bar date upon which the creditor might reasonably have relied.” Id. at 347. The creditor in Neeley apparently did not argue that the clerk gave *48conflicting or erroneous information, but merely that the clerk failed to give the required 30 days notice of the deadline.12
In Coston v. Bank of Malvern, 987 F.2d 1096 (5th Cir.1992) the Fifth Circuit held that the deadline was extended beyond 60 days after “the first date set” for the 341 meeting when the proceedings were stayed due to the pendency of a related action in another state. The court held that the 60 day deadline ran from the second setting of the 341 meeting.
In In re Dunlap, 217 F.3d 311 (5th Cir.2000) the 341 meeting was set, then the case was dismissed, then the bankruptcy judge vacated the order dismissing the case, and a second 341 meeting was set. The Fifth Circuit applied what it termed the Coston rule and held that the “first date set” for a creditors meeting does not mean the date set in the first notice if circumstances (like dismissal or an order of abatement) occur that prevent a creditor from filing a timely complaint objecting to discharge.
CONCLUSION
The jurisprudence that directly addresses a clerk of court’s affirmative misstatements of the deadline all relate to the deadline for filing objections to discharge, not objections to dischargeability of debt. But even though the deadlines are established by separate rules in the FRBP, the language of the rules, the computation of the deadline, and the reasons for the rule are identical. Therefore, the logic of the decisions applies to deadlines for both.
Read together, the decisions by the Court of Appeals for the Fifth Circuit hold that creditors must meet the deadline set by the rule if they have timely notice of the case and if it is possible for them to do so. But the fact that Court of Appeals for the Fifth Circuit has found two exceptions to the deadline indicates that the deadline is not a jurisdictional, absolute, immutable deadline.
Although the Court of Appeals for the Fifth Circuit has not specifically ruled on a fact pattern that involves a clerk’s “affirmative misstatement”, the Court concludes that the Fifth Circuit would follow the Sixth, Eighth, Ninth, and Tenth circuits in holding that an affirmative misstatement of the deadline extends the deadline (i) because the Fifth Circuit has found two exceptions to the deadline and (ii) because the Fifth Circuit has suggested as much in Neeley footnote 5.
Separate orders have been issued effecting this conclusion.
. Unless otherwise indicated, references to docket entries in this opinion refer to docket entries in the main case, Case Number OS-91934, not to docket entry numbers in the adversary proceeding dockets.
. See docket # 6, docket entry of December 20, 2005, and two unnumbered docket entries on January 12 labeled as amended declarations of electronic filing. The list of creditors and the social security number must be filed with the petition, Bankruptcy Code § 521, Federal Rules of Bankruptcy Procedure (FRBP) 1007. The plaintiff in one of the adversary proceedings complains of Debtors’ default as an additional reason to extend the deadline. The Court disagrees. Although the tardy filing explains why the Clerk did not set and did not give notice of the creditors’ meeting as promptly as required by statute and rules, the late filing of these documents does not affect the decision in this case, because the deadlines are computed from the "first date set” for the creditors’ meeting. Since the creditors' meeting could not be, and was not, set until after these documents had been filed, the tardy filing does not affect the deadline addressed in this memorandum.
. Docket # 24.
. Docket # 33.
. Docket # 36.
. Docket #61.
. Docket # 68.
. Adversary proceeding 06-3369 docket # 6.
.The Project Group, Inc. ("TPG”) is the company that employed Craig Crawford and Charlsie Idol. TPG is a debtor in its own bankruptcy case.
. Docket # 70, paragraph 17.
. But In re Gardner, 55 B.R. 89 (Bankr. D.D.C.1985) stands for the opposite proposition. However, unlike Gardner, in the present case, no meeting was actually held on the "first date set" and no meeting could have been held on that date because there was no trustee to preside.
. In Neeley the Court of Appeals for the Fifth Circuit discussed the origins of the requirement that the clerk give notice of the deadline. The court relied heavily on the fact that, prior to FRBP 4007, the court established the deadline and the notice from the clerk was essential to knowing what the deadline was. But, FRBP 4007 changed that. After that change, the rule sets the deadline and the clerk’s notice merely gives information. The gravemen of Neeley is that failure to supply information does not extend the deadline but misinformation may extend it, or may be grounds to exercise § 105 powers to extend the deadline. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494005/ | MEMORANDUM
DAVID T. STOSBERG, Bankruptcy Judge.
This case comes before the Court on the Application for Allowance and Payment of AIK Comp’s Administrative Expense Claim or, Alternatively, Designation as a Post-Confirmation Obligation filed by AIK Comp, (hereinafter AIK). In the motion, AIK requested allowance of an administrative expense in the amount of $91,441, incurred in connection with workers compensation premiums. Precision Tool, Die and Machine Co., Inc. (hereinafter “Precision”), the reorganized debtor, opposed the motion.
On October 7, 2005, this Court entered an order confirming Precision’s plan of reorganization. The Plan provided that any party with an administrative expense that had not been paid by the debtor must, within thirty days from entry of the Confirmation Order, file a motion for payment of the expense, with the added provision that any party failing to do so “shall be forever barred, estopped and enjoined from asserting such Administrative Expense against the Debtor and its estate.” Precision served a copy of the order on AIK.
On May 26, 2006, AIK filed the request for administrative expense currently before the Court. Precision oppos*59es the application pointing out this application is filed approximately fifteen months after the alleged claim arose, and more than six months after the passing of the administrative claims bar date of November 7, 2005. AIK explains its tardiness on the basis that the additional assessment was not authorized until December 19, 2005, or after the bar date. The Court does not accept this excuse. Even if the assessment was not “authorized” prior to the bar date, there is no question that AIK was aware of its claim prior to the bar date. While the exact amount of the claim may have been unknown, it is unquestionable AIK knew of its claim prior to the bar date. AIK, a sophisticated entity with competent representation, failed to avail itself to the numerous options available to protect its claim. First and foremost, AIK could have filed an administrative expense claim for an undetermined or unknown amount and at least preserved the issue. AIK could have requested an extension of time to file its administrative claim, until the amount of the claim had been determined. Finally, AIK could have requested permission to file a late administrative claim after the December 19, 2006, assessment, which would at least been relatively close to the administrative claims bar deadline. AIK failed to exercise any of these options. Instead, AIK sat on its hands and waited for over six months before acting. Moreover, had Precision not moved for a Final Decree, it is not clear AIK would have ever filed this request.
While the law does allow for late claims in Chapter 11 in certain circumstances, in order to prevail on a request for a late claim the party requesting it must show that its failure to act was a result of excusable neglect. Pioneer Investment Services Company v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). The inquiry into whether the neglect is excusable “is at bottom an equitable one, taking account of all the relevant circumstances surrounding the party’s omission.” Id. at 395, 113 S.Ct. 1489. The Supreme Court listed several factors to be considered in determining whether a party’s conduct constitutes excusable neglect, including (1) the danger of prejudice to the debtor; (2) the length of the delay and its potential impact on the proceedings; (3) the reason for the delay; (4) whether the delay was within the reasonable control of the late party; and (5) whether the late party acted in good faith. Id.
Reviewing the factors, it is clear that the debtor would be prejudiced should AIK be allowed to file its late claim. This case was confirmed in October, the plan has been substantially consummated, and a Final Decree has been entered. To re-open the proceedings and allow an administrative claim AIK’s nature and magnitude this long after the bar date, certainly hinders the debtors ability to go forward and maintain feasibility. The second, third, and fourth factors also weigh against AIK. AIK does not dispute it received notice of the bar date some seven months before it filed this application. AIK knew of its claim before the bar date and was “authorized” to pursue its claim shortly after the bar date. Nevertheless, AIK waited over six months to act. When questioned about the reasons for AIK’s procrastination, AIK’s counsel could provide no explanation. Turning to the fifth factor, the good faith of the moving party, the Court has no indication AIK’s failure to act was motivated by bad faith.
Taken as a whole and considering the equities of the situation, this Court concludes AIK’s actions do not constitute excusable neglect, as defined by the Supreme Court. As such, the tardy request for administrative expense must be overruled. *60Having decided this matter on a procedural basis, the Court will not address Precision’s other substantive objections. The Court shall enter an Order this same date in accordance with this Memorandum.
ORDER
Pursuant to the Court’s Memorandum entered this same date and incorporated herein by reference, and the Court being otherwise sufficiently advised,
IT IS ORDERED that the that the Application for Allowance and Payment of AIK Comp’s Administrative Expense Claim or, Alternatively, Designation as a Post-Confirmation Obligation filed by AIK Comp, is OVERRULED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494007/ | ORDER ON COUNTER PLAINTIFFS’ AMENDED MOTION FOR SUMMARY JUDGMENT
(Doc. No. 68)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THE MATTER under consideration in this Chapter 11 ease of Guy Keith Harrison (the Debtor) is an Amended Motion for Partial Summary Judgment filed by Peter M. Nascarella, Kelly L. Nascarella and A & J Automotive Group, Inc. d/b/a DJ Foreign Automotive Sales (the Counter Plaintiffs) (Doc. No. 68) on April 24, 2006, in the above-captioned Adversary Proceeding. On March 24, 2006, the Counter Plaintiffs in their Counterclaim set forth three separate claims in three separate counts. In Count I, the Counter Plaintiffs assert breach of contract and seek a final judgment for monetary damages. In Count II, the Counter Plaintiffs request declaratory relief as to the validity of an Agreement executed on March 31, 2004, between the Debtor and Counter Plaintiff, Peter Nas-carella, individually and as president of A & J Automotive Group, Inc. In Count III, the Counter Plaintiffs request declaratory relief against the Debtor and Mary Joan Webb as to the validity of the Amended Partnership Agreement executed on June 25, 2003 (Doc. No. 34). The Counter Plaintiffs in their Motion assert that the Counter Plaintiffs are entitled to partial final judgment on their declaratory judgment claims and also for damages based on breach of contract, which is the Motion presently under consideration.
It is the contention of the Counter Plaintiffs’ that there are no genuine issues of material fact and that they are entitled to partial summary judgment as a matter of law with respect to their claims set forth in Count I, Breach of Contract and Count II, Declaratory Judgment. The thrust of the Counter Plaintiffs argument is that the Debtor breached the March 31, 2004 Agreement, by filing his Complaint and that the Agreement is valid and enforceable and prohibits the Debtor from bringing any type of claim against the Counter Plaintiffs.
To overcome the force and effectiveness of the mutual release, the Debtor contends that there are indeed genuine issues of material fact, which would preclude the disposition of this controversy as a matter of law in favor of the Counter Plaintiffs. *104Specifically, the Debtor contends that Kelly Nascarella is not a party to the March 31, 2004 Agreement and, therefore, the Debtor did not release Kelly Nascarella. The Debtor further contends that the March 31, 2004 Agreement was induced by fraud on the part of Peter Nascarella and Kelly Nascarella and the Debtor relied upon the false representation of Peter Nascarella. In addition, the Debtor contends that a material fact exists as to whether the Debtor executed the March 31, 2004 Agreement as a result of duress. Furthermore, the Debtor contends that material facts exist as to whether the Debtor was a guarantor of the A & J Automotive Group, Inc. corporate debt and whether the Debtor’s liability as a guarantor was released as a result of the March 31, 2004 Agreement.
While it is true that the bare allegations or general denials within a pleading are insufficient to overcome the prima facie case of the movant when considering a motion for summary judgment, this Court is satisfied that the relevant facts surrounding this controversy are in dispute in the present instance and, therefore, it is improper to resolve the issues raised by the Counterclaim by partial summary disposition as a matter of law.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Counter Plaintiffs’ Amended Motion for Partial Summary Judgment (Doc. No. 68) be, and the same, is hereby denied. It is further
DONE AND ORDERED | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494008/ | OPINION
JONES, Chief Judge.
In these consolidated bankruptcy appeals, a bankruptcy trustee seeks to avoid as preferential certain prepetition transfers by the debtor. The primary issues on appeal are (1) whether the portions of the transfers ultimately destined to pay the Virginia fuel tax and petroleum storage tank fund fee meet the antecedent debt requirement of the Bankruptcy Code and (2) whether the transfers in general are excepted from avoidance as (a) contemporaneous exchanges for new value or (b) debts incurred in the ordinary course of business.
*175I first hold that the bankruptcy court’s decision that the portions of the transfers ultimately destined to pay the Virginia fuel tax and petroleum storage tank fund fee did not meet the requirements of a preferential transfer was in error. Second, I find that the bankruptcy court was correct in its conclusion that the transfers in general are not excepted from avoidance under either the exception for a contemporaneous exchange for new value or the exception for debts incurred in the ordinary course of business. Accordingly, I remand the case with instructions to add the amount of the transfers ultimately intended for payment of the tax and fee to the sum previously awarded by the bankruptcy court.
I. Background.
Lambert Oil Company, Inc. (“Lambert Oil”), filed a petition under Chapter 11 of the Bankruptcy Code on March 24, 2003. The bankruptcy court converted the case to Chapter 7 on September 16, 2003. William E. Callahan, Jr., (the “Trustee”) was appointed trustee. The Trustee filed an adversary proceeding in the bankruptcy court against Petro Stopping Center # 72 (“Petro”) on March 23, 2005, seeking the avoidance and recovery of certain prepetition transfers made by Lambert Oil to Petro. See 11 U.S.C.A. §§ 547(b); 550(a) (West 2004 & Supp.2006).
The bankruptcy court held a trial on November 22, 2005, and entered judgment in favor of the Trustee against Petro in the amount of $44,832 on December 28, 2005. Both parties filed timely appeals, which have been consolidated. The parties briefed the issues and oral argument was held on June 20, 2006. The appeals are now ripe for decision.1
II. Facts.
The facts are largely undisputed. Lambert Oil was in the business of operating retail convenience stores where it sold gasoline and diesel fuel. Nick Lambert (“Lambert”) was the president and sole shareholder of Lambert Oil at all relevant times. Petro is also in the business of selling retail gasoline and diesel fuel and operates a retail convenience store, restaurant, and repair shop. Lambert was a fifty percent owner of Petro and its managing member.
Presumably due to the financial difficulties of Lambert Oil, Lambert, in his capacities as the president of Lambert Oil and the managing member of Petro, created an arrangement wherein Petro would use its good credit to buy fuel and transfer it to Lambert Oil without markup. To accomplish these transactions, an employee of Lambert Oil would instruct a trucking company to pick up fuel at Marathon Ash-land, one of Petro’s fuel suppliers, and charge Petro’s account. The fuel would be delivered to one of Lambert Oil’s retail locations, but the invoice sent to Petro. Each invoice would list the date upon which the supplier would electronically draft Petro’s bank account for the cost of that fuel shipment and a later date upon which Petro’s account would be drafted for the separate cost of the applicable Virginia fuel tax and Virginia petroleum storage tank fund fee.2
In theory, Lambert Oil was to pay Petro for the cost of the fuel and applicable tax and fee relating to each purchase prior to the date of the first electronic draft on *176Petro’s account so that Petro would be financially unaffected by these transactions. However, Lambert Oil was only successful in paying Petro prior to the first draft on two occasions, and on the other occasions payment lagged behind the first draft on Petro’s account between four and thirteen days. Lambert Oil always paid Petro for the tax and fee associated with each purchase before the second draft on Petro’s account to pay for such tax and fee.
Certain payments from Lambert Oil to Petro pursuant to this arrangement were made within ninety days preceding the bankruptcy filing. Accordingly, the Trustee initiated the present adversary proceeding to recover these payments on the ground that they constitute avoidable preferential transfers under § 547 of the Bankruptcy Code. In connection with the adversary proceeding, the Trustee and Pe-tro stipulated that, subject to any defenses Petro may prove, the transfers at issue, totaling $61,945.11, satisfied each requirement of § 547(b)(1) through (5), with one exception. The parties left for the decision of the bankruptcy court the question of whether the portion of each of the transfers from Lambert Oil to Petro that went to the Virginia tax and fee, totaling $17,113.11 of the $61,945.11, satisfied the requirement of § 547(b)(2) that the transfer be “for or on account of an antecedent debt owed by the debtor before such transfer was made.” 11 U.S.C.A. § 547(b)(2).
The bankruptcy court found that the payments covering the tax and fee were not “for or on account of an antecedent debt” owed to Petro and thus did not constitute recoverable preferential transfers. The bankruptcy court had three alternate rationales for this holding. First, the bankruptcy court found that the trucking companies that picked up the fuel from Petro’s suppliers were acting as Lambert Oil’s agents. Because of this fact, the court found that Lambert Oil was the entity legally liable to the state for payment of the tax and fee. See Va.Code Ann. § 58.1-2219(B) (2004) (assessing the tax against “the person that first receives the fuel upon its removal from the terminal”). Therefore, the court held that the monies paid for the tax and fee were not antecedent debts that Lambert Oil owed to Petro, but rather were debts that Lambert Oil owed Virginia which it simply paid via Petro. Second, the bankruptcy court held that because Lambert Oil paid Petro the money earmarked for the tax and fee before the amounts were actually due, they were not on account of “antecedent debts” within the reach of § 547. Lastly, the bankruptcy court explained that Petro’s payment of the tax and fee to Virginia, in good faith and without knowledge of the avoidability of the transfers, secured Pe-tro’s entitlement to the protection of § 550(b)(1) of the Bankruptcy Code. 11 U.S.C.A. § 550(b)(1) (West 2004).
After finding that the $17,113.11 attributable to the tax and fee was not avoidable, the bankruptcy court went on to consider whether there were any defenses to the avoidance of the remainder of the $61,945.11 which all parties agreed would constitute avoidable preferential transfers absent a defense. The bankruptcy court found that the parties’ agreement was clearly intended to be a credit arrangement whereby Petro would extend credit to Lambert on a short-term basis. Thus, the bankruptcy court concluded that the transactions did not qualify for the contemporaneous transfer for new value defense. The court explained that if the parties had intended a contemporaneous exchange of value, Lambert Oil would have paid Petro prior to or at the time of picking up the fuel rather than days or weeks later. The bankruptcy court then held that the ordinary course of business de*177fense was not available because the transactions in question were not at arm’s length given that Petro received no benefit and Lambert Oil gave no consideration. Lastly, the court decided that prejudgment interest was inappropriate. The award of prejudgment interest is in the discretion of the court based on the equities of the case, and the bankruptcy court found that such an award was not justified here.
Based on these rulings, the bankruptcy court entered an order in favor of the Trustee in the amount of $44,832.00. Both parties filed motions to reconsider. The Trustee disagreed with the ruling regarding the monies earmarked for the tax and fee, and Petro disagreed with the rulings regarding the availability of the contemporaneous exchange for new value and ordinary course of business defenses. The bankruptcy court denied the motions, and these appeals followed.
III. Analysis.
A.
A district court reviews the factual finding of a bankruptcy court under a clearly erroneous standard. See Fed. R. Bankr.P. 8013. Accordingly, all factual findings of the bankruptcy court in the instant case must be upheld unless after reviewing the record below, this court is “left with the definite and firm conviction that a mistake has been committed.” United States v. U.S. Gypsum, Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948). In contrast, a district court must review a bankruptcy court’s decisions of law de novo. Resolution Trust Corp. v. Murray (In re Midway Partners), 995 F.2d 490, 493 (4th Cir.1993). With these standards in mind, I will address each party’s arguments regarding the application of § 547 to the this case.
Before analyzing each party’s contentions, it is helpful to set forth the statutory framework outlining the relevant law on preferential transfers. In pertinent part, § 547(b) of the Bankruptcy Code provides that:
Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C.A. § 547(b).
This section allows the bankruptcy trustee to avoid certain preferential transfers of the debtor’s property made before the debtor filed for bankruptcy relief, thereby preserving a financially distressed debtor’s estate so that the assets may be distributed fairly among all creditors. See, e.g., De Rosa v. Buildex Inc. (In re F & S Cent. Mfg. Corp.), 53 B.R. 842, 846 (Bankr. E.D.N.Y.1985). Even if all five requirements of preferential transfers are met, however, § 547(c) provides certain exceptions. Relevant to the case at hand are *178the “contemporaneous exchange for new value” and “ordinary course of business” exceptions, contained in § 547(c)(1) and (c)(2), which are intended to insulate from a trustee’s attack those prepetition payments that do not bear the hallmark of payments made under a creditor’s duress or the debtor’s intent to favor. See 11 U.S.C.A. § 547(e)(l)-(2). The defendant has the burden of proving the applicability of these defenses.
If the trustee satisfies his initial burden of establishing five requirements of avoida-bility and the defendant fails to prove an exception applies, § 550 authorizes the trustee to recover the property transferred or its value under certain circumstances. Specifically, § 550 provides, in pertinent part, that:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section ... 547 ... of this title ..., the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under section (a)(2) of this section from—
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee of such transferee.
11 U.S.C.A. § 550(a)-(b).
B.
In his appeal, the Trustee argues that the bankruptcy court was in error when it decided that the portion of Lambert Oil’s transfers that was in payment of the Virginia tax and fee was not “for or on account of an antecedent debt” and thus not a preferential transfer under § 547. I agree. In order to satisfy the antecedent debt element, the Trustee must show that Lambert Oil owed a debt to Petro for the tax and fee and that the debt was incurred before the transfer paying it was made. See Smith v. Arthur Andersen L.L.P., 175 F.Supp.2d 1180, 1202 (D.Ariz.2001). As explained below, regardless of which party was legally responsible under Virginia law for the tax and fee, I find that Lambert Oil incurred a debt to Petro for those amounts when it used Petro’s credit account to purchase fuel.
The bankruptcy judge believed that in order to determine whether the portions of the payments made by Lambert Oil to Petro attributable to the tax and fee were “for or on account of an antecedent debt” and thus preferential transfers turned on whether Petro or Lambert Oil was the party legally responsible to pay such obligations to the state under Virginia law. However, for reasons explained below, I find that this determination is irrelevant to the ultimate resolution of whether the payments in question were preferential transfers.
Virginia imposes a tax upon gasoline and diesel fuel and a petroleum storage tank fund fee that is administered in the same manner as the tax. See Va.Code Ann. §§ 58.1-2217, 62.1-44:34.13. The tax and fee are imposed at the point that the fuel is removed from a supply terminal. Va. Code Ann. § 58.1-2218 (2004). A related statute provides that:
The tax imposed pursuant to § 58.1-2217 [and the underground tank fee imposed pursuant to § 62.1-44:34.13] at the point that motor fuel is removed at a terminal rack in Virginia shall be pay*179able by the person that first receives the fuel upon its removal from the terminal. If the motor fuel is first received by an unlicensed distributor, the supplier of the fuel shall be liable for payment of the tax due on the fuel. If the motor fuel is sold by a person who is not licensed as a supplier, then (i) the terminal operator and (ii) the person selling the fuel shall be jointly and severally liable for payment of the tax due on the fuel....
Va.Code Ann. § 58.1-2219(B) (2004).
There is no indication in the record that the trucking companies employed to pick up the fuel were unlicensed distributors or that the supplier was unlicensed; therefore, the relevant inquiry in determining which entity was legally responsible for the tax and fee at issue here is which entity “first receive[d] the fuel upon its removal from the terminal.”
The bankruptcy court made a factual finding, which must be reviewed under the clearly erroneous standard, that the trucking companies that picked up the fuel from Petro’s suppliers were acting as Lambert Oil’s agents rather than as Petro’s agents. Given that the parties stipulated that an employee of Lambert Oil would instruct a trucking company to pick up the fuel at Petro’s supplier and ship it to Lambert Oil, it cannot be said that the bankruptcy court’s conclusion that the trucking companies were acting as Lambert Oil’s agents is clearly erroneous.
After making this factual finding, the bankruptcy court concluded that Lambert Oil was the party that “first receive[d] the fuel upon its removal from the terminal” and is legally responsible for the payment of the tax and fee under Virginia law. The statute’s plain language supports this conclusion, but I find that this determination does not resolve the question of whether the portions of the transfers earmarked for tax and fee constitute payments for antecedent debts. Regardless of which party is technically responsible under Virginia law for payment to the state of the tax and fee, Lambert Oil incurred a debt to Petro for those amounts as a result of their agreement.
The Bankruptcy Code defines the term “debt” as a “liability on a claim,” and defines “claim” broadly as either a “right to payment, whether or not such right is reduced to judgment, liquidated, unliqui-dated, fixed, contingent, matured, unma-tured, disputed, undisputed, legal, equitable, secured, or unsecured” or a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgement, fixed, contingent, matured, un-matured, disputed, undisputed, secured, or unsecured.” 11 U.S.C.A. § 101(12), (5) (West 2004 & Supp.2006). Under the terms of the agreement here, Lambert Oil was permitted to purchase fuel on Petro’s credit accounts, and Lambert Oil would pay Petro for fuel and the tax and fee imposed thereon before the first date that the fuel supplier would electronically debit Petro’s bank account. In other words, each time Lambert Oil purchased fuel on Petro’s account, Petro undertook the burden of having its account with the supplier charged for the cost of fuel as well as the tax and fee with the understanding that Lambert Oil would in turn pay this amount to Petro. As a result of this agreement, each time Lambert Oil made a fuel purchase, Petro gained a “right to payment,” and thus a “claim,” from Lambert Oil for both the fuel and the tax and fee. Lambert Oil incurred a corresponding “liability on [that] claim,” and thus a “debt.” Therefore, Lambert incurred a debt to Petro no matter which party was legally *180liable under Virginia law for payment to the state.
Having concluded that at the time of each payment Lambert Oil owed a debt to Petro for the tax and fee amounts as well as the cost of the fuel, the next question in determining whether the payments for the tax and fee are preferential transfers is whether the debt was “antecedent.” I find that it was indeed an antecedent debt within the meaning of § 547(b).
While the Bankruptcy Code does not define “antecedent debt,” courts have defined it “as a debt which is incurred prior to the relevant transfer.” Smith v. Arthur Andersen L.L.P., 175 F.Supp.2d at 1202 (citing Intercontinental Publ’ns, Inc. v. Perry (In re Intercontinental Publ’ns, Inc.), 131 B.R. 544, 549 (Bankr.D.Conn. 1991) and Pereira v. Lehigh Sav. Bank (In re Artha Mgmt., Inc.), 174 B.R. 671, 677 (Bankr.S.D.N.Y.1994)). The bankruptcy court reasoned, and Petro argues on appeal, that any debt owed to Petro to cover the applicable tax and fee was not incurred prior to Lambert Oil’s transfers of the funds because in each instance the transfers occurred before the taxes were due under Virginia law. Admittedly, § 547(a)(2) provides that “a debt for a tax is incurred on the day when such tax is last payable without penalty, including any extension.” 11 U.S.C.A. § 547(a)(2). However, this analysis fails to recognize that the relevant inquiry is when Lambert Oil incurred the debt to Petro for the tax and fee amounts, not when the ultimate debt to the state was incurred.
Courts have generally considered a debt to be “incurred” on the “date that the debtor becomes ‘obligated to pay for the services or goods.’ ” Grogan v. Liberty Nat’l Life Ins. Co. (In re Advance Glove Mfg. Co.), 761 F.2d 249, 252 (6th Cir.1985) (quoting Sandoz v. Fred Wilson Drilling Co. (In re Emerald Oil Co.), 695 F.2d 833 (5th Cir.1983)). I find that Lambert Oil became obligated to pay Petro for the fuel acquired and the associated tax and fee whenever it initiated a purchase of fuel on Petro’s credit account with its supplier. Thus, because each time Lambert Oil paid Petro it was after the fuel had been acquired, the payments were in satisfaction of an antecedent debt.
Petro cites Rosenberg v. Rollins, Burdick, Hunter Co. (In re Presidential Airways, Inc.), 228 B.R. 594 (Bankr.E.D.Va. 1999), for the proposition that the debt in question could not be incurred until Petro actually paid the tax and fee, but a close reading of this case reveals that it does not support this conclusion. In Rosenberg, the bankruptcy court held that the debtor’s insurance broker would not have had a claim against the debtor because the broker “had not rendered services to the debtor at the time the payments were made.” Id. at 598. In the present case, Petro had “rendered services to the debt- or” by allowing Lambert Oil to purchase fuel on its credit account with the supplier prior to Lambert Oil’s payment to Petro. Thus, Petro would have had a claim against Lambert Oil at the time of each transfer and the transfers were thus on account of an antecedent debt.
Having concluded that the portions of the transfers covering the Virginia tax and fee were “on or on account of an antecedent debt owed by the debtor before the transfer was made” and thus a preferential transfer under § 547(b), I must now consider whether Petro would be entitled to the protection of § 550(b) as suggested by the bankruptcy court.
Section 550 provides, in pertinent part, that:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section ... 547 ... of this *181title ..., the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from — ■
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under section [subsection] (a)(2) of this section from—
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee of such transferee.
11 U.S.C.A. § 550(a)-(b).
Because Petro was the initial transferee of the funds, rather than an immediate or mediate transferee of such initial transferee, it is not entitled to the protection of § 550(b). An initial transferee is an entity that receives a transfer and that first exercises dominion and control over the property transferred. See Bowers v. Atlanta Motor Speedway, Inc. (In re Southeast Hotel Props. Ltd. P’ship), 99 F.3d 151, 156 (4th Cir.1996). As the Trustee points out in his brief, Petro’s bank account statements show that each payment made by Lambert Oil to Petro, covering the fuel amounts and the tax and fee, was deposited into the business account of Petro over which Petro had dominion and control. Therefore, § 550(b)(2) is inapplicable to the facts in hand and the Trustee can recover these amounts absent any defenses Petro may have under § 547(c).
c.
Contrary to Petro’s argument on appeal, the bankruptcy court was correct in concluding that Petro failed to meet its burden of proof required for the “contemporaneous exchange for new value” defense of § 547(c)(1). Section 547(c)(1) provides that the Trustee may not avoid a transfer that is otherwise avoidable as a preferential transfer “to the extent that such transfer was (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debt- or; and (B) in fact a substantially contemporaneous exchange.” 11 U.S.C.A. § 547(c)(1). The critical inquiry in determining whether there has been a contemporaneous exchange for new value is whether the parties intended such an exchange, and the determination of such intent is a question of fact. Creditors’ Comm. v. Spada (In re Spada), 903 F.2d 971, 975 (3d Cir.1990).
In the instant case, the bankruptcy court specifically found that the parties did not intend the use of Petro’s credit standing to obtain fuel product for Lambert Oil to be a contemporaneous exchange for new value because it was clearly intended to be a credit arrangement whereby Petro would extend credit to Lambert Oil. Given that Lambert Oil did not pay Petro at the time the fuel was received, but rather simply agreed to pay before Petro’s account was first drafted and actually paid after this first draft on most occasions, the bankruptcy court’s determination that this was intended to be a credit transaction and not a contemporaneous exchange for new value cannot be said to be clearly erroneous. While Petro did identify three cases3 in which various courts determined that *182transfers arguably comparable to the transactions at issue in the instant case were intended to be contemporaneous exchanges for new value, this does not mandate a conclusion that the bankruptcy court here committed clear error when it came to a different conclusion on the unique facts of this case.
D.
The bankruptcy court’s decision that Pe-tro also failed to meet its burden of proof required for the “ordinary course of business” defense set forth in § 547(c)(2) must also be upheld. Section 547(c)(2) provides that the Trustee may not avoid a transfer that is otherwise avoidable as a preferential transfer “to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was (A) made in the ordinary course of business or financial affairs of the debtor and the transferee or (B) made according to ordinary business terms” 11 U.S.C.A. § 547(c)(2).
In the present case, the bankruptcy court found as fact that the parties’ arrangement was not in the ordinary course of Petro’s business and thus that the defense failed. While this may be viewed as a mixed issue of fact and law, “[t]he better reasoned decisions hold that a debt will not be considered incurred in the ordinary course of business if creation of the debt is atypical, fraudulent or not consistent with an arms-length transaction.” 5 Collier on Bankruptcy ¶ 547.04[l][a] (15th ed. rev.). Given that Petro allowed the use of its credit for the benefit of Lambert Oil without receiving any benefit, it is clear that this was not an arm’s length transaction. Thus, I find that it was not “incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee.” 11 U.S.C.A. § 547(c)(2). Accordingly, Petro does not qualify for the ordinary course of business defense.
IV. CONCLUSION.
For the foregoing reasons, I will remand the case to the bankruptcy court with instructions to add $17,113.11, the amount of the transfers attributable to the tax and fee, to the $44,832 already awarded to the Trustee.
Appropriate final judgments will be entered.
. This court has jurisdiction pursuant to 28 U.S.C.A. § 158(a) (West 1993 & Supp.2006).
. Virginia imposes a tax upon gasoline and diesel fuel as well as a petroleum storage tank fund fee that is administered in the same manner as the tax. See Va.Code Ann. §§ 58.1-2217 (2004), 62.1-44:34.13 (2001).
. Pine Top Ins. Co. v. Bank of Am. Nat’l Trust & Sav. Ass’n, 969 F.2d 321 (7th Cir.1992); Tyler v. Swiss Am. Sec., Inc. (In re Lewellyn & Co.), 929 F.2d 424 (8th Cir.1991); and Peltz v. Hartford Life Ins. Co. (In re Bridge Info. Sys.), 321 B.R. 247 (Bankr.E.D.Mo.2005). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494009/ | MEMORANDUM OPINION
JERRY A. BROWN, Bankruptcy Judge.
This matter came before the court on June 13 through 16, 2005 as a trial on the complaint of Trevor G. Bryan, as responsible party of Crutcher-Tufts Resources, Inc. and Crutcher-Tufts Resources, L.P., the debtors, seeking declaratory judgment as to whether defendant Tufts Energy, LLC has a limited partnership interest in Crutcher-Tufts Resources, L.P. For the reasons expressed, the court finds that section 13 of the management agreement contains a valid suspensive condition, but that the evidence does not support a finding that the fulfillment of that condition *191was frustrated by either Cruteher-Tufts Resources, L.P. or Cruteher-Tufts Resources, Inc.
I. Background Facts
Cruteher-Tufts Resources, Inc., (“CTR-Inc.”) is the general partner in Cruteher-Tufts Resources, L.P., (“CTR-LP”). Both entities are businesses owned in part by various members of the Crutcher family and the Tufts family.1 J. David Tufts, III (“David Tufts”) indirectly holds an interest in CTR-Inc., sits on its board of directors and is its president and assistant secretary. The other board members of CTR-Inc. at the relevant time were Fred Tufts, Robert Tufts, Albert Crutcher, Mary Crutcher and James Reiss, Albert Crutch-er’s son-in-law. Tufts Energy is an enterprise that is owned and controlled by David Tufts. CTR-LP and Tufts Energy entered into a management agreement on July 7, 2000. The management agreement was drafted primarily by Jeff Zlotky, an attorney with Thompson & Knight, at the direction of David Tufts. There was minimal, if any, input from either CTR-LP, the counter-party to the agreement or the other board members of CTR-Inc., who were required to vote on the agreement. Testimony at trial showed that the other board members were not given a draft of the management agreement until July 6, 2000, one day before the board had to vote on the agreement. The agreement provided that Tufts Energy, as manager, would supply “general and administrative management services” to CTR-LP as defined in section 2 of the management agreement.2 Section 5 of the agreement, entitled “Compensation” further provides: “In consideration of the performance of the General and Administrative Services pursuant hereto, the Partnership shall pay the Manager the G & A Payment in advance of each month on or before the first day of each month.”3 The agreement was approved by a majority of the board of directors of CTR-Inc.,4 and Albert Crutcher was designated as the representative with the authority to execute the agreement.5
After entering into the agreement, Tufts Energy apparently provided management services to CTR-LP for approximately two years, receiving regular G & A payments of $66,667 per month as set forth in the agreement. The parties do not contend that Tufts Energy did not perform its management duties, nor do they contend that the CTR-LP failed to pay Tufts Energy according to the agreement.
Section 9 of the agreement provided:
The initial term of this Agreement shall extend from the date hereof to the close of business on June 30, 2002, provided that this Agreement shall continue thereafter for successive one-year terms ending on the close of business on June *19230 of each succeeding year unless either the Partnership or the Manager shall elect to terminate this Agreement upon at least 90 days written notice to the other party prior to June 30 of any such succeeding year.6
On March 7, 2002, the board of directors of CTR-Inc. met and voted not to renew the agreement, and thus the agreement was to expire on June 30, 2002. On March 15, 2002, David Tufts called a board meeting that resulted in a resolution that removed Fred Tufts and James Reiss from the board and replaced them with David Tufts’ wife and mother. This new board then voted to reinstate the management agreement. Litigation concerning the validity of this action was pursued by the parties in a state court proceeding entitled Albert B. Crutcher, et al. v. J. David Tufts, III, et al. No.2003-9838, Division N, Civil District Court, Orleans Parish. The proceeding was a quo warranto action as to the validity of the board meeting and the resolution changing the board’s composition. On February 16, 2005, the Louisiana Fourth Circuit Court of Appeal issued an opinion and entered a final judgment that the resolution attempting to remove the members of the CTR-Inc. board was invalid.7 This meant that the March 7, 2002 vote by the old board not to renew the agreement was valid, and the management agreement expired on June 30, 2002.
The bone of contention in this adversary proceeding is none of the above but instead section 13 of the agreement, which reads:
Right to Earn Partnership Interest in the Partnership. The Manager shall have the right to earn twenty five percent (25.0%) of the equity of the Partnership upon the achievement by the Partnership of mutually acceptable performance criteria to be agreed upon by the board of directors of the general partner of the Partnership and the Manager and as acceptable to the lenders under the Senior Credit Agreement and the Subordinated Credit Agreement, and in conjunction with a mutually acceptable independent third party consultant (giving due consideration to the amount of the G & A Payment as compared to the Manager’s actual costs of rendering services pursuant to this Agreement).8
The parties strenuously disagree as to the effect of section 13. The responsible party argues that section 13 is simply an agreement to agree and as such is not an enforceable provision of the contract. Tufts Energy argues that section 13 of the agreement is a valid suspensive condition, the fulfillment of which was frustrated by CTR-LP. Tufts Energy further argues that under Louisiana Civil Code Article 1772, the result of this frustration is that the condition is deemed fulfilled, and it is entitled to a 25% interest in CTR-LP.
Prior to beginning the trial on the complaint of the responsible party, the court limited the issues to be presented at trial to 1) whether section 13 of the management agreement constitutes a purely potestative or simply potestative condition; and, 2) whether, if the provisions of section 13 of the management agreement are determined to be a simply potestative condition, performance of the condition was frustrated solely by the acts of Crutcher-Tufts Resources, Inc. and Crutcher-Tufts *193Resources, L.P.9
11. Legal Analysis
A. Purely or Simply Potestative
According to the court’s order of May 12, 2005, the first of two issues to be decided is whether section 13 of the management agreement constitutes a purely potestative or simply potestative condition under the governing law contained in the Louisiana Civil Code. The court’s order was in response to the parties’ motion to limit the issues to be tried and the accompanying briefs.10 Upon analyzing the relevant Civil Code articles, however, the court finds that the concept of simply and purely potestative conditions no longer exists under Louisiana law. Thus, the court analyzes the following articles of the Louisiana Civil Code instead.
I. Louisiana Civil Code Articles 1767 and 1770
The 1985 revisions to the Louisiana Civil Code specifically address conditional obligations in Articles 1767 to 1776.11 Article 1767 defines suspensive and resolutory conditions.12 Although the definition of suspensive and resolutory conditions did not substantively change with the revisions, their treatment in certain circumstances did. Under the pre 1985 articles of the Civil Code, a suspensive or resoluto-ry condition could be either casual, potes-tative or mixed.13 The potestative condition was defined as “that which makes the execution of the agreement depend on an event which it is in the power of the one or the other of the contracting parties to bring about or to hinder.”14 Article 2034 of the pre 1985 Civil Code then stated “Every obligation is null, that has been contracted, on a potestative condition, on the part of him who binds himself.” The next article distinguished between purely and simply potestative conditions, “holding that not all potestative conditions were null.”15
The current version of the Civil Code, in Article 1770, eliminates the term “potesta-tive,” and instead focuses on the concepts of “whim” and “will.”16 Comment (e) to Article 1770 states that the purpose of the article is to recast the concepts surrounding simply and purely potestative condi*194tions in the pre 1985 Civil Code in terms of an implicit dichotomy between the obli-gor’s “whim,” that is, his exercise of mere unbridled discretion or arbitrariness and his “judgment,” or exercise of a considered and reasonable discretion. The comments further explain that the potestative concept was replaced in the Civil Code by the 1985 revisions because of the confusion it engendered and the difficulties the concept caused in Louisiana jurisprudence with respect to the treatment of conditions.17
In keeping with the changes to the Civil Code, the court will not determine whether section 13 is a purely or simply potestative condition but instead will address Section 13 of the agreement in terms of the post-revision Civil Code articles. The court finds that section 13 contains a suspensive condition. The uncertain event is “the achievement by the Partnership of mutually acceptable performance criteria.” Upon the occurrence of that event, the obligation, i.e., the manager’s right to earn 25% of the equity of the partnership, may be enforced, but the suspensive obligation may only be enforced when the uncertain event occurs. In the instant case, no party argues that the uncertain event has occurred. No mutually acceptable performance criteria were ever established by CTR-LP whereby Tufts Energy could earn 25% of the equity of CTR-LP.
The court then turns to Article 1770, which states: “A suspensive condition that depends solely on the whim of the obligor makes the obligation null.” The responsible party and various other interested parties in this proceeding argue that section 13 depends solely on the whim of CTR-LP, and is therefore null. Tufts Energy argues that section 13 does not depend solely on the whim of CTR-LP, and is not null. The court finds the latter argument is the better position. The language of section 13 reads that the right to earn the 25% equity interest depends upon the “achievement by the Partnership of mutually acceptable performance criteria to be agreed upon by the board of directors of the general partner of the Partnership and the Manager and as acceptable to the lenders under the Senior Credit Agreement and the Subordinated Credit Agreement, and in conjunction with a mutually acceptable third party consultant.”
The court finds that the terms of section 13 do not depend on the whim of CTR-LP as whim is used in article 1770. Comment (d) to Article 1770 states:
An event which is left to the obligor’s whim is one whose occurrence depends entirely on his will, such as his wishing or not wishing something. An event is not left to the obligor’s whim when it is one that he may or may not bring about after a considered weighing of interest, such as his entering into a contract with a third party.
Section 13 does not state and cannot be read fairly to mean that the manager has the right to earn a 25% equity interest only if CTR-LP wishes it. Rather, the manager shall have the right to earn the 25% equity interest, and this right is conditioned upon the agreement of criteria to be determined by two parties (the partnership and the manager), with the input of a third (a mutually acceptable independent third party consultant), and the veto rights of a fourth party (the lenders). CTR-LP does not retain unbridled discretion to put forth any criteria it wishes. The criteria must be agreed to by the manager and approved by the lenders under the Senior and Subordinated Credit Agreements. Ostensibly the performance criteria should *195relate to the performance of some act by the manager that has value to the partnership, and in return for such act, the partnership would grant the manager a 25% equity interest. This would place the development of the performance criteria in the category of a condition that CTR-LP “may or may not bring about after a considered weighing of interest.”18 For example, CTR-LP cannot unilaterally decide that the manager’s 25% equity is to be earned by requiring David Tufts to scale Mount Everest, because neither Tufts Energy nor the lenders would agree to that as a mutually acceptable performance criteria, and thus, that criteria would be unenforceable. The respective abilities of Tufts Energy to have input and the lenders to have veto power in the achievement of the performance criteria leads the court to the conclusion that the suspensive condition does not solely depend on the whim of the obligor, and as such, it is not null under the provisions of Article 1770.
Additionally, the performance criteria giving rise to the right to earn the 25% equity interest is to be determined in part by “giving due consideration to the amount of the G & A Payment as compared to the Manager’s actual costs of rendering the services pursuant to th[e] Agreement.” The amount of the G & A payment compared to the actual costs of rendering services is a factor that must be considered by the partnership when determining the performance criteria. If CTR-LP is required to take concrete factors such as this into account when determining the performance criteria, it cannot be said that the decision is entirely dependent on the whim of CTR-LP.
2. “Frustration” under Louisiana Civil Code Article 1772
Holding that section 13 of the agreement is a valid suspensive condition necessitates an analysis of Tufts Energy’s second argument that is grounded on article 1772, which reads: “A condition is regarded as fulfilled when it is not fulfilled because of the fault of a party with an interest contrary to the fulfillment.” Tufts Energy argues that the fulfillment of section 13 of the agreement was frustrated by CTR-LP through the actions of Albert Crutcher in his capacity as the “designated officer” of CTR-LP.19
The responsible party, arguing on behalf of CTR-Inc. and CTR-LP, contends that CTR-LP did not frustrate the fulfillment of section 13. Rather, the argument put forth in defense of CTR-LP is that initially it was never asked to develop performance criteria, and that even had it wanted to develop criteria, it was prevented from doing so by David Tufts’ refusal to provide certain data related to the G & A expenses incurred by Tufts Energy in the course of performing its duties under the management agreement. The responsible party argues that this data was critical to the ability of CTR-LP to assess Tufts Energy’s performance and develop appropriate performance criteria under section 13. The language in section 13 as to the actual cost of the G & A expense was added at the request of Albert Crutcher because he thought the $800,000 annual figure was too high for the G & A payment and wanted CTR-LP to analyze the G & A payment before agreeing to additional compensation for Tufts Energy.
David Tufts and Robert Tufts both testified that they raised the issue of the devel*196opment of performance criteria at the CTR board meeting on May 23, 2001, as well as at other times. Fred Tufts, Albert Crutcher and James Reiss testified that the issue was never discussed at any CTR board meeting. They also denied that David Tufts had approached them even outside board meetings to discuss performance criteria. David Tufts testified that he could not point to any minutes of board meetings that would support his testimony, and indeed the minutes of the CTR-Inc. board meetings do not reflect that the development of performance criteria was ever discussed. Nor could David Tufts point to any documents supporting his testimony even though numerous documents were produced for purposes of this trial. As president of the board of CTR-Inc., David Tufts was responsible for setting the agenda of the board meetings; he could have adjusted the agenda for any of the board meetings to include a discussion and/or vote on the issue of the mutually acceptable performance criteria, but he did not. As assistant secretary, he was also responsible for keeping records of board meetings. If he failed to keep accurate minutes and that later worked to his detriment, he has only himself to blame. The court finds that the evidence presented at trial does not support Tufts Energy’s contention that either CTR-LP, CTR-Inc. or any officer of the corporation refused to discuss the performance criteria, frustrating the fulfillment of the suspensive condition under Article 1772.
Albert Crutcher testified that on February 19, 2002 he requested data related to the G & A expenses from David Tufts so that an evaluation of that data could be made. This request was explained as an attempt to begin discussing the performance criteria in accordance with the provision of section 13 that required any performance criteria to be developed “giving due consideration to the amount of the G & A Payment as compared to the Manager’s actual costs of rendering the services pursuant to this Agreement.” In stark contrast to the lack of written evidence on the part of Tufts Energy to support its contentions, Albert Crutcher points to both a letter he wrote requesting the data,20 and a letter written by David Tufts in response, in which David Tufts stated that he had no obligation to provide the requested data.21 Although David Tufts also stated in the letter that he was nonetheless willing to provide the data, he did not in fact do so despite repeated requests from Albert Crutcher.22 David Tufts admitted in his testimony that he knew that the language in section 13 meant that Tufts Energy had an obligation to furnish the actual costs of rendering the services but weakly argued that he read the language as requiring that the information be furnished in connection with an independent third party consultant. The court finds that this evidence further supports a finding that CTR-LP did not frustrate the negotiation of the performance criteria.
Tufts Energy contends that because Albert Crutcher had an interest in an entity that was a limited partner in CTR-LP, he had an interest contrary to enabling Tufts Energy to earn a limited partnership interest in CTR-LP. Tufts Energy contends that if it were allowed to earn a 25% interest in the partnership, the interests of Albert Crutcher would be reduced, and this led to his opposition to any attempts *197to negotiate mutually acceptable performance criteria. As stated above, David Tufts testified that whenever he tried to discuss performance criteria with Albert Crutcher he was rebuffed. Tufts Energy asserts, correctly, that under Delaware law, a corporation can only act through its officers and agents.23 Tufts Energy also asserts that Albert Crutcher in his capacity as the “designated officer” of CTR-Inc. acted to frustrate the suspensive condition of developing performance criteria. Tufts Energy’s argument ignores, however, that while Albert Crutcher may have had interests in CTR-Inc., the general partner, and CTR-LP, the counter-party to the management agreement, at least Albert Crutcher’s interests were all on the side of the corporate entity and partnership he was representing.
Charges of conflicting interest on the part of Albert Crutcher do not come well from David Tufts. He was a member of the board of CTR-Inc., as well as its president and assistant secretary; he too had an indirect limited partnership interest in CTR-LP.24 He was in addition, however, the owner of Tufts Energy. As such, his actions in drafting a contract between two parties in which he had an interest are subject to greater scrutiny than the actions of a non-conflicted board member. David Tufts put himself into a precarious position when he orchestrated this deal, and as an attorney and experienced businessman, he should have recognized that. Instead, he pushed through a management agreement that, although drafted by CTR-Inc.’s attorney, was essentially dictated by him. David Tufts fully recognized his conflicting interest and tried to claim that the lenders required the manager to have an interest in the partnership. Even if the court accepted the position that the 25% equity interest Tufts Energy hoped to earn was the idea of the lenders, it carries little or no weight on the issue of David Tufts’ conflict of interest in directing the attorney for CTR-Inc. to prepare a contract that was in David Tufts’ best interest. No one else from CTR-Inc.’s board saw the agreement until the day before they were requested to vote on the agreement. The evidence shows the board was uncomfortable with some of the language of the agreement, particularly the amount of the G & A payment, as shown by the changes to it before the final version was signed.
To now complain that Albert Crutcher, acting on behalf of CTR-LP, frustrated the development of mutually acceptable performance criteria because he had a personal interest contrary to the development of those criteria is a rather disingenuous argument. That Tufts Energy has been so unwilling to provide meaningful information to CTR-LP and the CTR-Inc. board of directors both prior to and after the execution of the management agreement does not help its argument. Conjecture about how Albert Crutcher may have had an interest adverse to Tufts Energy because he did not want his limited partnership interest in CTR-LP diluted is not evidence of an adverse interest. Tufts Energy introduced no evidence to support these contentions, and thus, did not carry its burden of proof.
The court finds that by requesting the G & A expenses in order to conduct an examination of the actual expenses of Tufts Energy with respect to its performance of *198the management agreement, Albert Crutcher was fulfilling his fiduciary duties in a responsible way. To have allowed Tufts Energy to receive a 25% equity interest in CTR-LP without an examination of what services it was performing and how it was being compensated for those services would have been to act against the interests of CTR-LP and its general partner, CTR-Inc.
The court finds that Tufts Energy, as the party seeking to prove frustration, carried the burden of proof. The court further finds that Tufts Energy failed to carry this burden. While it is possible that Albert Crutcher did defer or even refuse to discuss performance criteria with David Tufts, the only evidence to show that is the testimony of David and Robert Tufts. Their statements were vague and uncertain as to the times that David Tufts requested such a discussion and were contradicted by testimony from Fred Tufts, Albert Crutcher and James Reiss. The documents entered into evidence at trial do not reflect that David Crutcher requested and Albert Crutcher refused to discuss the performance criteria. Rather, they show that Albert Crutcher requested G & A information from David Tufts and did not receive it. As section 13 is written, the parties were to consider that information when discussing performance criteria. To request the information required to make a reasoned decision involving the finances of CTR-LP is not an attempt to frustrate a condition, rather it is good business judgment. David Tufts appears to have let his interest in Tufts Energy conflict with his role as president and director of CTR-Inc., in that he had a fiduciary responsibility to that entity that he appears to have forgotten in his haste to benefit Tufts Energy.
III. Conclusion
For the reason expressed above, the court finds that section 13 of the management agreement is a valid suspensive condition. Further the court finds that the evidence does not support a finding that the fulfillment of that condition was frustrated by either Crutcher-Tufts Resources, L.P. or Crutcher-Tufts Resources, Inc., or that Albert Crutcher in his capacity as the designated representative of CTR-LP acted to frustrate the fulfillment of section 13.
. CTR-Inc. is owned by the J. David Tufts, III and Claudia Liberto Tufts Children's Trust (200 shares), the JDT/RGT Family Trust (400 shares) and the 241 Trust (400 shares). The limited partners of CTR-LP are Tufts Oil & Gas, L.P., Crutcher Oil & Gas-III, L.P., JDT/ CLT Family Trust, GPH/LTH Family Trust, Succession of Penelope Becker, Priscilla Eaves Reiss, John Crutcher, Michael E. Ro-dan, Cathy Rodan Bowman, Charles A. Dobie, Dennis E. Weiss and Cruteher-Tufts Resources, Inc.
. Trial Exhibit 122.
. Id at p. 4.
. Only Fred Tufts, David Tufts brother, voted against the resolution authorizing the agreement.
. David Tufts abstained from the board's vote because of his interest in Tufts Energy, the counter-party to the contract. He also was not able to act as the president of CTR-LP for purposes of executing the contract because of his interest in Tufts Energy.
. Trial Exhibit 122 at page 6.
. Crutcher v. Tufts, 898 So.2d 529 (La.App. 4 Cir.2005).
.Trial Exhibit 122 at page 8.
. Order dated May 12, 2005 (P-161).
. The parties initially framed the issue as a determination of whether or not the condition was simply or purely potestative, and it was only after the court ruled to set the issues for trial that the parties began referencing the new Civil Code articles.
. Pursuant to Acts 1984, No. 331 § 1, effective January 1, 1985, Title III of Book III of the Louisiana Civil Code of 1870, "Of Obligations” was revised.
.LSA C.C. Art. 1767: “A conditional obligation is one dependant on an uncertain event. If the obligation may not be enforced until the uncertain event occurs, the condition is suspensive. If the obligation may be immediately enforced but will come to an end when the uncertain event occurs, the condition is resolutory.”
. LSA C.C. Art.2022 (1870).
. LSA C.C. Art.2024 (1870).
. LSA C.C. Art.2035 (1870): "The last preceding article is limited to potestative conditions, which make the obligation depend solely on the exercise of the obligor’s will; but if the condition be, that the obligor shall do or not do a certain act, although the doing or not doing of the act depends on the will of the obligor, yet the obligation depending on such condition, is not void.”
. See LSA C.C. Art. 1770: "A suspensive condition that depends solely on the whim of the obligor makes the obligation null. A reso-lutory condition that depends solely on the will of the obligor must be fulfilled in good faith.”
. See LSA C.C. Art. 1770 comment (e).
. LSA C.C. Art. 1770 comment (d).
. As noted above, David Tufts, although president of CTR-Inc., was not able to represent CTR-LP with respect to the management agreement because of his conflicted position as the owner of Tufts Energy.
. Trial Exhibit 187.
. Trial Exhibit 196.
.The February 19, 2002 letter, Exhibit 187, was the first of three written requests by Mr. Crutcher for the data. See letters of March 15, 2002, Exhibit 201, and January 14, 2003, Exhibit 216.
. Hessler, Inc. v. Farrell, 226 A.2d 708 (Del. 1967).
. David Tufts was also the trustee of certain trusts described in footnote 1 and owed a fiduciary duty to the beneficiaries to prevent an unearned issuance of an equity interest in CTR-LP that diluted the percentage of equity interest owned by the trusts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494010/ | DECISION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause is before the Court after a Trial held on the Plaintiffs Complaint to Determine Dischargeability. Present at the Trial were the Plaintiff, Gary Gehring, and Plaintiffs legal counsel, Ira H. Thom-sen. The Defendant/Debtor in this matter, Wendy Gehring, did not appear at the Trial, nor did any legal counsel make an appearance on her behalf. At the Trial, the Plaintiff presented both documentary and testimonial evidence. After considering this evidence, the Court sets forth the following findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
The Plaintiff and the Defendant are former husband and wife. On February 18, 2003, a decree of divorce was entered terminating the marriage between the Parties. Among other things, the divorce decree set forth these terms: the Defendant was to pay the Plaintiff, as legal custodian of the Parties’ minor children, child support; and the Defendant was required to assume as an equitable division of the Parties’ marital property, 39% of the Parties’ marital debt amounting to $17,777.03.
At the time of their divorce, the Parties were required to provide complete and accurate information as to all debts incurred individually during their marriage. But in direct violation thereof, the Defendant failed to disclose two outstanding debts related to the operation of a business: unpaid sales tax and liability to a supplier. These obligations, which respectively total $4,183.31 and $5,724.84 (plus $77.00 court costs), thereafter gave rise to judgment liens which encumbered the Plaintiffs residence. As a result of these encumbrances, the Plaintiffs ability to realize equity in his residence was restricted.
On August 27, 2004, the Defendant filed a petition in this Court for relief under Chapter 7 of the United States Bankruptcy Code. The Plaintiff was listed as Co-obligor in the Defendant’s bankruptcy petition. On December 17, 2004, the Plaintiff commenced a timely complaint to determine dischargeability of the obligations herein stated. Notice of the Trial held in this matter was served upon both the Defendant and her legal counsel. (Doc. No. 22). Defendant’s legal counsel, however, was subsequently granted, through an order entered by the Court, permission to withdraw. (Doc. No. 24). Exclusive of child support, only the Plaintiff has made any payments on the above obligations.
Based upon these facts, the Court hereby finds that as a matter of law:
*259The debt owed by the Defendant to the Plaintiff for the care of their children is “actually in the nature,” and thus is a nondischargeable obligation under 11 U.S.C. § 523(a)(5).
The Defendant is obligated to pay 39% of the Parties’ marital debt, totaling $17,777.03; no amount on this obligation has been paid by the Defendant. This obligation arises directly from the Parties’ decree of divorce. Based thereon, the Plaintiff has met his burden to except this debt from discharge under § 523(a)(15). And the Defendant, having faded to appear at the Trial, did not carry her burden to show that either of the exceptions to nondischargeability as contained in this section are applicable. Hart v. Molino (In re Molino), 225 B.R. 904, 907 (6th Cir. BAP 1998) (“The objecting creditor bears the burden of proof to establish that the debt is of a type excepted from discharge under § 523(a)(15). Once the creditor has met this burden, the burden shifts to the debtor to prove either of the exceptions to nondischargeability contained in subsections (A) or (B).”). Accordingly, this debt is nondischargeable for purposes of bankruptcy law.
The Defendant, owing at the time the Plaintiff a fiduciary duty, acted in a fraudulent, willful and malicious manner by failing to disclose to the Plaintiff, during the course of their divorce, those two outstanding debts which arose in connection with the operation of her business: the outstanding sales tax and supplier obligation. In addition, the Defendant, prior to filing bankruptcy, continued to act in a fraudulent, willful and malicious manner by permitting these debts to operate as a lien against the Plaintiffs residence. As a result, these two debts, totaling $4,183.31 and $5,724.84 respectively, are nondis-chargeable under paragraphs (a)(2)(A), (a)(4) and (a)(6) of § 523 of the Bankruptcy Code.
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 those debts set forth herein are hereby found to be NONDIS-CHARGEABLE.
IT IS FURTHER ORDERED that, based upon the finding of nondischarge-ability, judgment is hereby entered in favor of the Plaintiff, Gary Gehring, against the Defendant, Wendy Gehring, in the amount of Twenty-seven Thousand Seven Hundred Sixty-two and 18/100 dollars ($27,762.18), plus interest at the rate of 10% per annum commencing from March 5, 2002. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494011/ | *358ORDER SUSTAINING OBJECTION TO EXEMPTIONS
DENNIS D. O’BRIEN, Bankruptcy Judge.
This matter came before the Court on the trustee’s objection to exemptions claimed by the debtor. Christine A. Longe appeared on behalf of the Chapter 7 Trustee, Nauni Jo Manty. Jeffrey M. Bruzek appeared on behalf of the debtor, Robin D. Espey. At the conclusion of the hearing, the Court took the matter under advisement. Based upon all of the files, records and proceedings herein, the Court now makes this Order pursuant to the Federal and Local Rules of Bankruptcy Procedure.
I. BACKGROUND
The debtor, Robin Espey, filed her voluntary bankruptcy petition under Chapter 7 on October 14, 2005. She elected the federal exemptions, and claimed portions of her federal and state tax refunds exempt under § 522(d)(10)(A) as “local public assistance benefits,” because the refunds are based on the IRS Earned Income Credit (EIC) and the Minnesota Department of Revenue Working Family Credit (WFC) public assistance programs. The trustee objected arguing that the refunds do not arise from “local” public assistance programs as required by § 522(d)(10)(A).
II. DISCUSSION
“Exemption statutes must be construed liberally in favor of the debtor and in light of the purposes of the exemption.” See In re Tomczyk, 295 B.R. 894, 896 (Bankr.D.Minn.2003), citing Andersen v. Ries (In re Andersen), 259 B.R. 687, 690 (8th Cir. BAP 2001) (citing Wallerstedt v. Sosne (In re Wallerstedt), 930 F.2d 630, 631 (8th Cir.1991)).
The payments at issue are derived from federal and state public welfare programs. The parties do not dispute that the EIC is a federal program and that the WFC (eligibility for which is based on eligibility for the EIC) is a Minnesota state program, and that the payments under the EIC and WFC constitute “relief based on financial need.” Tomczyk, 295 B.R. at 897. In the bankruptcy context, “both types of credits are contingent interests on the petition date.” See Law v. Stover (In re Law), 336 B.R. 780, 783 (8th Cir. BAP 2006). The credits therefore become property of the bankruptcy estate upon filing and remain so until and unless properly claimed exempt. Id. The narrow issue before the Court is simply whether the EIC and WFC contingent interests are public assistance benefits of a “local” nature, as expressly required by § 522(d)(10)(A).
Section 522(d)(10)(a) provides:
(d) The following property may be exempted under subsection (b)(2) of this section:
(10) The debtor’s right to receive—
(A) a social security benefit, unemployment compensation, or a local public assistance benefit.
See 11 U.S.G. § 522(d)(10)(A).
The Code does not define “local,” and no court has done so with respect to the federal exemption for local public assistance benefits. The definition of local has been amply analyzed, however, within the context of state exemption statutes for public assistance benefits.1
*359One court allowed the EIC exemption under a state statute providing the exemption for “local public assistance benefits,” but did so because the trustee failed to object on the basis of whether or not the EIC was a “local” public assistance benefit. See In re Davis, 136 B.R. 203, 207 (Bankr.S.D.Iowa 1991). The same court apparently later held, on a trustee’s objection based particularly on the “local” issue, that the EIC is not a “local public assistance benefit” under Iowa law. See In re Boyett, 250 B.R. 822, 824-825 (Bankr. S.D.Ga.2000), citing Matter of Peckham, No. 97-01117-WH (Bankr.S.D.Iowa 1998) (unpublished); Matter of Crouch, No. 96-23085-D (Bankr.ND.Iowa 1997) (holding that an EIC was neither a social security benefit nor a local public assistance benefit).
In determining that “federal disaster relief payments may [not] be exempted as local public assistance,” the Boyett court noted that “several cases in which bankruptcy courts held that [EIC] federal tax refunds ... were exempt under state statutes exempting public assistance benefits,” were “all off point, because the statutes discussed did not limit exemption of public assistance to ‘local’ public assistance.” Boyett, 250 B.R. at 824-825, citing In re Fish, 224 B.R. 82 (Bankr.S.D.Ill.1998), In re Brown, 186 B.R. 224 (Bankr.W.D.Ky. 1995); In re Goldsberry, 142 B.R. 158 (Bankr.E.D.Ky.1992); In re Jones, 107 B.R. 751 (Bankr.D.Idaho 1989).
The leading case analyzing a state court exemption statute that does limit the public assistance benefits to only “local” public assistance benefits is In re Goertz, 202 B.R. 614 (Bankr .W.D.Mo.1996). The Goertz court noted that “ ‘[l]ocal public assistance benefit’ is not defined in Missouri’s exemption statute or case law,” and held that “[a]bsent a statutory definition, the statute should be examined ‘according to the conventional rules of statutory construction: absent statutory definitions, we accord words and phrases their ordinary and natural meaning and avoid rendering them meaningless, redundant, or superfluous.’ ” Goertz, 202 B.R. at 617, citing In the Matter of Merchants Grain, Inc., 93 F.3d 1347, 1353 (7th Cir.1996). “A fundamental canon of statutory construction is that, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary common meaning.” Goertz, 202 B.R. at 617, citing McMillian v. Federal Deposit Insurance Corp., 81 F.3d 1041, 1054 (11th Cir.1996), quoting Perrin v. United States, 444 U.S. 37, 42-43, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979).
The Goertz court explained:
Whether in common parlance or in legal terms, and certainly in the context in this state statute, “local” denotes a space or application more limited in scope than “federal.” Webster’s Third New International Dictionary (1981) defines “local” as: [C]haracterized by, relating to, or occupying a particular place; characteristic of or confined to a particular place; not general or widespread 3. relating to what is local; not broad or general 4. current only in a particular section of a country — used of words or expressions ... 5a. primarily serving the needs of a particular limited district, often a community or minor political subdivision b. applicable in or relating to such a district only ... (local taxes). [Parenthetical examples and dictionary symbols omitted.]
*360Black’s Law Dictionary (6th ed.1990) defines “local government” as a “[c]ity, county, or other governing body at a level smaller than a .state” and “local law” as “[o]ne which operates over a particular locality instead of over the whole territory of the state.... ” These definitions indicate the term “local” in the Missouri statute references something other than a public assistance benefit or tax credit granted by federal statute. There is nothing to indicate “local” was intended to have some specialized definition within the context of this particular statute, so one must assume the legislature intended that the general, commonly understood meaning of the word be applied.
If Debtor’s definition were applied to include a federal benefit, the illogical result would be that “local” would take on a meaning approaching an antonym, i.e. something federal, general, comprehensive and greater in scope than local. If the legislature had intended a broader meaning, it could have simply omitted the word “local” altogether. Alternatively, the legislature could have defined the term in the statute or employed more explicit language, such as “federal, state or local public assistance benefit.”
Goertz, 202 B.R. at 617-618.
Indeed, some state lawmakers seem to have taken the Goertz decision to heart. For example, “[o]n May 17, 1999, Iowa amended its exemption statute, Iowa Code § 627.6(8)(a), changing ‘a local public assistance benefit’ to ‘any public assistance benefit.’ ” See In re Longstreet, 246 B.R. 611, 613 n. 2 (Bankr.S.D.Iowa 2000). “By removing the disqualifying modifier ‘local’ and replacing it with the general adjective ‘any,’ the Iowa legislature seemingly acted upon Goertz’ drafting suggestion to address the Davis’ observation and to overcome the explicit rulings in Crouch and Peckham.” Id. at 615. Noting the Iowa amendment, a different court recognized that Missouri had not made any such amendments, and continued to adhere to the “local” limitation: “[Bjound by the language in that statute, which limits the exemption to a local public assistance benefit ... [t]he federal program known as EIC is not a local public assistance benefit.” See In re Demars, 279 B.R. 548, 552 (Bankr.W.D.Mo.2002).
Another court recently explained: “The legislative history of the federal bankruptcy provisions indicates that all of the benefits exempted under 11 U.S.C. § 522(d)(10) are grouped together as they are ‘akin to future earnings of the debtor.’ ” See Wilson v. Sergeant (In re Wilson), 305 B.R. 4, 15 (N.D.Iowa 2004), citing Bankruptcy Reform Act of 1978, H.R. REP. NO. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6318. “However, it is noteworthy that while the Iowa exemption statute, unlike the federal bankruptcy provision, was amended in 1999 to exempt not just a ‘local’ public assistance benefit, but ‘any’ public assistance benefit — the federal statute has not been since amended to include this broadening modifier.” Wilson, 305 B.R. at 15. “The Iowa legislature, by providing an exemption for ‘any’ public assistance benefit, broadened the reach of the statute ... indicating] an intent to exempt payments under all types of programs having the same underlying purpose, regardless of the vehicle chosen to implement the program.” Id. at 19. The Wilson court held that direct commodity program payments received by the debtors under the Farm Security and Rural Investment Act qualified as a public assistance benefit ex-emptible under the Iowa statute. Id. at 21. While not an application of § 522(d)(10)(A), the case specifically illustrates and supports the significance of the limiting “local” language of the federal *361statute compared to the broadening modifier “any” in the Iowa statute.
This Court is firmly persuaded by the abundant and detailed exposition of this subject so far that the EIC does not constitute a “local” public assistance benefit for purposes of § 522(d)(10)(A). Likewise, that the WFC does not constitute a “local” public assistance benefit for purposes of § 522(d)(10)(A) is compelling under the same analysis. “Use of the term ‘local’ qualifies the type of benefits that are exemptible.” Goertz, 202 B.R. at 618. “The qualifying language is significant.” Id. “An earned income credit is not a creation of local or even state government. ” Id. (emphasis added). The Goertz court expressly distinguished “local” and “state” from one another, and other courts have aptly done the same, under a variety of statutory circumstances. See, e.g., Walton v. Hammons, 192 F.3d 590, 596 (6th Cir.1999) (noting that 7 U.S.C. § 2015(i)(1) “calls upon the failure of individuals to comport with ‘Federal, State, or local Zawrelating to a means-tested public assistance program.”) (emphasis added); Perales v. Reno, 48 F.3d 1305, 1309 (2nd Cir.1995) (“ ‘Public cash assistance’ means income or needs-based monetary assistance, to include but not limited to supplemental security income, received ... through federal, state, or local programs designed to meet subsistence levels.”) (emphasis added).
Moreover, plain language interpretation mandates the conclusion that “local” is not the same as “state.” A legal dictionary definition of “local law” provides: “A statute that relates to or operates in a partieu-lar locality rather than the entire state.” Black’s Law Dictionary (8th ed.2004).
If Congress had intended § 522(d)(10)(A) to include within the scope of the exemption those public assistance benefits arising under federal and/or state law, it could have enumerated so with particularity, merely by adding the words “federal, state, or” preceding “local,” or simply by replacing the word “local” with the word “any.” But, that is not the language of the statute. Section 522(d)(10)(A) unequivocally provides for the exemption plainly and with precise limitation: “a local public assistance benefit.” The WFC public assistance benefit arises under state law. Accordingly, the WFC is not exempt pursuant to § 522(d)(10)(A).2
III. DISPOSITION
IT IS HEREBY ORDERED:
1. The debtor’s state and federal tax refunds under the IRS Earned Income Credit and MDR Working Family Credit programs do not constitute local public assistance benefits for purposes of 11 U.S.C. § 522(d)(10)(a); and
2. The trustee’s objection to the debt- or’s claimed exemption, pursuant to 11 U.S.C. § 522(d)(10)(a), of state and federal tax refunds under the IRS Earned Income Credit and MDR Working Family Credit programs is SUSTAINED and the claimed exemption as described is DISALLOWED.
. The debtor argues that the rulings arising out of interpretation of state exemption statutes are not comparable sources of analysis for determining the nature of "local” as used in the federal exemption provision under § 522(d)(10)(A). This Court disagrees because the language of the state provisions examined is essentially identical to the lan*359guage of the federal statute, addresses the same substantive topic, and constitutes persuasive and basic legal reasoning relied upon by other federal courts under related or parallel situations.
. The debtor argued that the simple definitions of "local” and "public” work together to broadly limit the § 522(d)(10)(a) exemption to aid arising under any program within the nation. That "local” in effect means "domestic” is specious at best. There is no support for this implausible suggestion, and it is directly controverted by the prevailing body of law on the subject. Finding this assertion to be without merit, the Court need not address it further. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494013/ | MEMORANDUM DECISION RE: DEFENDANTS’ MOTIONS FOR PARTIAL JUDGMENT ON THE PLEADINGS
PATRICIA C. WILLIAMS, Bankruptcy Judge.
Metropolitan Mortgage & Securities Co., Inc., is a Chapter 11 debtor and has brought these consolidated adversary proceedings against two stockholders seeking to recover stock dividends distributed to the defendants. The defendants filed motions to dismiss certain causes of action in the Complaints pursuant to B.R. 7012 and argue that, based solely on the allegations in the Complaints, dismissal is appropriate. For purposes of the motions, it will be assumed that the allegations in the Complaints are true.1 Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
The Complaints allege that at the time of the distributions to the defendants,2 the debtor plaintiff was insolvent or was rendered insolvent by the distributions. Because the corporation was insolvent or was rendered insolvent by the distributions, ar*408guably the distributions were unlawful and may be recouped. The Complaints do not allege that either defendant had any knowledge of the debtor plaintiffs financial affairs nor any role in its management or operation. Both defendants are family members of the individual who controlled the corporation at the time of the distributions. Evidence in the underlying Chapter 11 demonstrates that stock of the corporate plaintiff was publicly traded at the time these distributions occurred and that it had thousands of stockholders. Distributions to other stockholders were also occurring. These defendants, over the course of approximately four years, received in excess of half a million dollars in distributions.
LEGAL ISSUES
1. Do the provisions of RCW 23B.06, etc., and .08, etc., imply a cause of action against the defendants?
2. Has the cause of action granted in RCW 19.40, etc., been superseded by the provisions of RCW 23B.06.400?
RCW 23B.06 AND .08
In 1989, the Washington legislature replaced the state statutory scheme relating to business corporations previously codified as RCW 23A with a new scheme codified as RCW 23B, and titled, ‘Washington Business Corporations Act.” That statutory scheme governs the formation, registration and dissolution of for-profit corporate entities and their corporate governance. RCW 23B.06 focuses on shares of stock: their issuance, record keeping and transfers and also distributions, based on ownership of shares. Subsection 400 provides that directors of a corporation may authorize distributions or dividends based on ownership of shares, unless the corporation is insolvent or the distribution would render the corporation insolvent or unable to meet its financial obligations. Distributions under such circumstances are prohibited by RCW 23B.06.400.
RCW 23B.08, et. seq., is titled, “Directors and Officers.” That portion of the statutory scheme addresses the selection and powers of directors, their duties and responsibilities, and operational matters such as meetings, quorums, etc. Subsection 310 is the specific statute relied upon by the debtor plaintiff in these adversary proceedings. Titled, “Liability for unlawful distributions,” that statute provides that directors who assent to distributions made in violation of RCW 23B.06.400 are personally liable to the corporation for the amount of the wrongful distributions. Such a director is entitled, under RCW 23B.06.310(2), to contributions from other directors and from shareholders who received such distributions, if the shareholder knew the distributions were made in violation of RCW 23B.06.400.
Does an Implied Cause of Action Exist in Favor of the Debtor Plaintiff Against These Defendants?
RCW 23B.08.310 provides the debt- or plaintiff with an express cause of action and a remedy against its directors who assent to and effectuate unlawful distributions. The debtor plaintiff argues that this statute implies a cause of action on behalf of the corporation against shareholders. That implied cause of action, argues the debtor plaintiff, is against not just shareholders who received the distribution with knowledge of the insolvency, but against any shareholder who received a distribution. The result of applying debtor plaintiffs argument is that the expressly granted cause of action to directors to recover from shareholders is narrower than the implied cause of action to corporations to recover from shareholders, as the implied cause of action does not contain a neces*409sary element of the express cause of action, i.e., shareholders’ knowledge of the corporation’s insolvency.
In order for an implied cause of action to exist, Washington courts have determined that certain conditions must be met; (1) The debtor plaintiff must be in the class of persons for whose benefit the statute was enacted, (2) There must be some demonstration of legislative intent to create a cause of action, and (3) The implied cause of action must be consistent with the underlying purpose of the legislation. M.W. v. Department of Social and Health Services, 149 Wash.2d 589, 70 P.3d 954 (2003).
Persons Intended to be Benefitted
RCW 23B.08.310 expressly grants the corporation a cause of action against directors, although it does not grant the corporation a cause of action against shareholders. Should the legislature have desired to grant such a cause of action to corporations, it could easily have done so in the statute, but it did not. A reading of the statute leads to the conclusion that the legislature, which did grant a cause of action to the directors against shareholders, did not intend the corporation to hold such a cause of action. This extrapolation of intent from the statutory language is strengthened by the fact that recently the legislature amended RCW 23B.08.310 to provide that the corporation may recover distributions from a shareholder if that shareholder knew the distribution was in violation of RCW 23B.06.400. The only conclusion which can be drawn is that when it first enacted RCW 23B.08.310, the legislature did not intend corporations to hold such causes of action against shareholders. The class of persons whom the cause of action against shareholders was intended to benefit is the directors.
Intent to Create Cause of Action
When the legislature declares particular conduct to be unlawful or prohibited but does not provide a course of redress to persons injured by that conduct, courts have presumed that the legislature intended the persons harmed to have a remedy. “Equity will not suffer a wrong without a remedy.” 1 Pomeroy’s Equity Jurisprudence, 4th Ed., § 423-424. In this situation, the unlawful activity is the distribution of funds to stockholders during or causing insolvency of the corporation. The legislative right to redress that wrong is the corporation’s right to recover the distribution from the wrongdoer, i.e., the directors. Not only did the legislative intend to provide redress, it expressly did so. If the legislature had intended to create a cause of action against other persons such as stockholders, it could easily have done so in the initial enactment.
Underlying Purpose of Legislation
The existence of a cause of action against shareholders who have no knowledge that the distributions occurred in violation of RCW 23B.06.400(2) would not be consistent with the statutory language. The statute limits the directors’ rights to recover distributions from stockholders to those who accepted the distributions with such knowledge. The Complaints do not allege these defendants had any such knowledge. The recent amendments to RCW 23B.08.310 now allow corporations the right to recover such distributions from shareholders but also limit that right to shareholders with knowledge that the distributions violated RCW 23B.06.400. Expanding the right of recovery to the thousands of shareholders of public companies who play no role in the corporations’ affairs would be contrary to the underlying theory of shareholder liability in corporate organizations. It would also be contrary *410to the legislative intent expressed in the statute.
RCW 23B.06.400 defines the unlawful conduct and RCW 23B.08.310 provides the right of redress. The debtor plaintiff has not demonstrated that an implied cause of action exists in favor of the debtor plaintiff against these defendants. Debtor plaintiff has rights of recovery against its directors as provided in RCW 23B.08.310 and is free to pursue those rights. It has no rights of recovery against these shareholders under the applicable enactment of RCW 23B.08.310.
Has the Cause of Action Provided in RCW 19.40 Been Superseded by RCW 23B.06.400?
The Uniform Fraudulent Transfer Act codified at RCW 19.40, etc., generally provides that creditors of an insolvent corporation may set aside transfers made by the corporation if the corporation did not receive reasonably equivalent value at the time of the transfer. Those causes of action granted to creditors may be exercised by the insolvent corporation if it becomes a debtor in bankruptcy. 11 U.S.C. §§ 544(b) and 550. There is no dispute that this debtor plaintiff has been granted standing to pursue rights under RCW 19.40, etc., by the Bankruptcy Code. The issue is whether the causes of action granted in RCW 19.40, etc., if such causes of action arise from distributions based on stock ownership, have been extinguished and superseded by the enactment of RCW 23B.06.400.
Cause of Action Under RCW 23B.06.400
RCW 23B.06.400(6) reads:
In circumstances to which this section and related sections of this title are applicable, such provisions supersede the applicability of any other statutes of this state with respect to the legality of distributions.
The circumstances to which RCW 23B.06.400 is applicable are those in which directors authorize and corporations make distributions to stockholders based upon stock ownership. RCW 23B.06.400(a). That is the specific topic addressed in this particular statute. Thus, in determining whether such distributions are unlawful, one must look solely to RCW 23B.06.400 or related provisions of RCW 23B, which would include RCW 23B.06.310, rendering it unlawful for directors to make distributions when the corporation is insolvent or would be rendered insolvent by such distributions. RCW 19.40 addresses transfers made by persons or corporations and obligations incurred by persons or corporations. It is a statute of general applicability relevant to many different circumstances, situations and entities. RCW 23B.08.400, however, relates to specific types of transfers to a specific group of recipients made only by for-profit corporations. It does not at all relate to the incurring of obligations. It is certainly the more specific statute, and RCW 23B.06.400(6) has removed its subject matter from the more general applicability of RCW 19.40.
The language of RCW 23B.06.400(6) deprives the debtor plaintiff of a cause of action under RCW 19.40 if such cause of action relates to the unlawful nature of a stock dividend as these Complaints allege. Because the statute is unambiguous and its meaning is clearly articulated in its express language, there is no need to resort to a review of the legislative history. Although the debtor plaintiff argues that the statute is ambiguous, a review of the legislative history reflects that the legislative intent is articulated in the statute and that the statute means what it says. The *411commentary associated with RCW 23B.06.400 reads:
The Proposed Act establishes the validity of distributions from the corporate law standpoint under Proposed section 6.40 and determines the potential liability of directors for improper distributions under Proposed sections 8.30 and 8.31. The federal Bankruptcy Act and state fraudulent conveyance statutes, on the other hand, are designed to enable the trustee or other representative to recapture for the benefit of creditors funds distributed to others in some circumstances. In light of these diverse purposes, and to minimize management difficulties in administering the statutes, Proposed subsection 6.10(f) provides that the provisions in this title supersede those of the state fraudulent conveyances act in determining the legality of a distribution.
Comments, Washington Business Corporation Act, 1989 Journal of the Senate at 3009 (emphasis added).
In conclusion, no cause of action exists under RCW 19.40.041, .051 or .071 under the circumstances of this case. The sole causes of action relating to alleged unlawful distributions of corporate funds to stockholders based upon stock ownership are those set forth in RCW 23B.06 and RCW 23B.08. Unfortunately for debtor plaintiff, no right to sue has been granted the debtor corporation under the applicable enactment of RCW 23B.06.310. Consequently, the first and second causes of action in the Complaints, which are based on Washington state law, must be dismissed, and the defendants’ Motions to Dismiss are GRANTED.
. The two consolidated Complaints allege various causes of action. Only state law causes of action are at issue in the Motions to Dismiss. Those arising under 11 U.S.C. §§ 502(d) and 548 of the Bankruptcy Code are not subject to the pending Motions to Dismiss on the Pleadings and remain to be resolved.
. As alleged in the Complaints, the defendants were beneficiaries of trusts and the distributions were made to the trusts for the benefit of the defendants. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494015/ | ORDER GRANTING MOTION TO EXTEND TIME TO FILE COMPLAINTS OBJECTING TO DISCHARGE
JERRY A. FUNK, Bankruptcy Judge.
This case came before the Court on Motion to Extend Time to File Complaints Objecting to Discharge (“Motion”) filed by S.D. Khan, M.D. (“Creditor Khan”), S.F. Meerza, M.D. and J.K. Raman, M.D. (collectively, “Creditors”). The bar date for filing such a complaint was February 10, 2006. The Motion was filed on February 24, 2006. The Court conducted a hearing on April 5, 2006 (“Hearing”). Debtor and Creditors presented evidence in the form of Debtor’s and Creditor Khan’s testimony at the Hearing. The Court then took the matter under advisement and directed the parties to submit memoranda in support of their respective positions. Creditors and Debtor both submitted briefs supporting their arguments (“Creditors’ Brief’ and “Debtor’s Brief’, respectively).
Creditor Khan testified at the Hearing that Creditors sold Debtor a medical clinic, *448but after approximately six months, Debt- or defaulted on the payments. Creditors obtained a Texas state court judgment against Debtor on April 6, 2004 as a result of such default (the “Judgment”). After entry of the Judgment, Peter Pratt (“Pratt”) was appointed as a receiver by the Texas court pursuant to Texas law. Creditor Khan further testified that Creditors did not receive notice of Debtor’s filing for bankruptcy until February 21, 2006.
Debtor testified at the Hearing that he retained an attorney during the Texas state court lawsuit, whom he had authorized to negotiate with Pratt to inform him of the bankruptcy filing. On cross-examination, Debtor revealed that he knew that Creditors were represented by counsel other than Pratt, namely David McTag-gart, Esq., et. al. (“McTaggart”). At the conclusion of the Hearing, the Court instructed the parties to submit legal authority on the lone issue of whether Pratt, the receiver, was the agent of Creditors so that notice to Pratt of the bankruptcy filing was the agent of Creditors so that notice to Pratt of the bankruptcy filing was notice to Creditors.
Debtor did not present evidence at the Hearing that Creditors, via their attorney McTaggart, had actual knowledge of Debt- or’s bankruptcy filing. Debtor, in Debtor’s Brief, makes profuse arguments and offers affidavits in reference to Creditors’ actual knowledge of the bankruptcy filing. These arguments are based on facts not in evidence, as Debtor did not present testimony at the Hearing consonant with the facts alleged in the affidavits, thereby giving Creditors the opportunity to object to or cross-examine such evidence. Therefore, the Court cannot consider Debtor’s argument that Creditors had actual knowledge of the bankruptcy filing.1 Thus, the argument that the bar date for filing a motion pursuant to Bankruptcy Rule 4004 and 4007 applies to a creditor with actual notice is inapposite.
Since Creditors did not have actual knowledge of Debtor’s bankruptcy filing, that leaves the main issue of whether providing notice to Pratt sufficed as notice to Creditors. According to Texas agency law, “[a]n agency is the consensual relationship between two parties where one, the agent, acts on behalf of the other, the principal, and is subject to the principal’s control.” Schultz v. Rural/Metro Corp., 956 S.W.2d 757, 760 (Tex.App., Fourteenth District, Houston 1997) (citation omitted). Yet Texas courts will not presume that an agency relationship exists, as the party alleging agency bears the burden of proof in establishing its existence. Id. (citation omitted); see also Payne v. Snyder, 661 S.W.2d 134, 144 (Tex.App., Seventh District, Amarillo 1983). With the facts adduced at the Hearing and considering Texas law, it is apparent that Debtor failed in his burden of proving an agency relationship between Pratt and Creditors.
Texas law states that while “a receiver represents all parties interested in the litigation wherein he is appointed,” Payne, 661 S.W.2d at 143 (citation omitted), “the receiver does not act as the agent of the creditors or of any of the other parties.” Security Trust Co. v. Lipscomb County, 142 Tex. 572, 584, 180 S.W.2d 151 (Tex.1944) (citation omitted). In fact, Texas law finds the receiver as an “officer of the court, the medium through which the court acts. He is a disinterested party, the representative and protector of *449the interests of all persons, including creditors, shareholders and others, in the property in receivership.” Id. (citation omitted); see also Spigener v. Wallis, 80 S.W.3d 174, 183 (Tex.App., Tenth District, Waco 2002)(“The receiver is the agent of the trial court, not the owners [of the property in reeeivership].”)(citing Payne, 661 S.W.2d at 143).
To elucidate, the Bankruptcy Court for the Southern District of Ohio, Eastern Division elaborated on the concept of a receiver in Greenleaf Apartments v. Soltesz (In re Greenleaf Apartments), 158 B.R. 456 (Bankr.S.D.Ohio 1993). The Ohio Bankruptcy Court quoted the Ohio Supreme Court in stating that
[a] receiver is defined as an indifferent person between parties to a cause, appointed by the court to receive and preserve the property or fund in litigation, and receive its rents, issues, profits, and apply or dispose of them at the direction of the court as an incident to other proceedings wherein certain ultimate relief is prayed. He is a trustee or ministerial officer representing the court.
Id. at 458 (quoting Ohio ex rel. Celebrezze v. Gibbs, 60 Ohio St.3d 69, 573 N.E.2d 62, 67 n. 4 (1991)(quoting Black’s Law Dictionary 1268 (6th ed.1990)))(internal quotations omitted). As a result, the Ohio Bankruptcy Court found that the “definition establishes that a receiver is an officer of the court subject only to the court’s control.” Id. As a result, “[o]nce a receiver is appointed by the court, the receiver becomes an officer of the court, subject only to the court’s control.” Id. In concluding, the Ohio Bankruptcy Court stated that a receiver
is not an agent, but an officer of and controlled by the appointing court, and subject alone to its directions. Wholly independent of, and not subject to the control of either debtor or creditor, entirely indifferent as between the parties to the cause, he exercises his functions under the order of the court appointing him, for the common benefit of all parties in interest.
Id. at 459 (citations omitted). Therefore, absent a clear showing of agency, in Texas a receiver is considered solely an officer of the court and not an agent of either party involved in the case.
Debtor did not overcome this powerful presumption with the facts offered at the Hearing. Debtor states in his brief that Pratt was appointed at the specific request of Creditors’ attorney. (Debtor’s Br. at 12.) This assertion is extraneous. Because a receiver is controlled exclusively by the appointing court, it is immaterial which party requested his appointment. Pratt was a disinterested party and protected both Debtor’s and Creditors’ interests in the property in receivership. See Security Trust Co., 142 Tex. at 584, 180 S.W.2d 151 (citation omitted). Ergo, Pratt, as an officer of the court, could not seek to advance the interests of Creditors. Thus, Pratt’s participation in negotiations with Debtor to resolve the Judgment against Debtor was in furtherance of his duties as an officer of the court, not as an agent of Creditors. (See Debtor’s Br. at 12.) Debtor did not meet his burden of proving an agency relationship. Pratt had no duty to Creditors to inform them of Debtor’s bankruptcy filing, and it was not logical for Debtor to presume that notice to Pratt of the filing sufficed as notice to Creditors.
Because Creditors did not receive notice of Debtor’s bankruptcy filing, the bar date for filing a motion pursuant to Bankruptcy Rule 4004 and 4007 does not apply. Creditors filed their Motion within a reasonable time after the bar date and shortly after they became aware of Debtor’s bankruptcy case. Debtor did not prove that Creditors *450had actual knowledge of the bankruptcy case. As a result, it is only appropriate to give Creditors 30 days to file a complaint under § 523. Accordingly, it is
ORDERED:
(1) Creditors’ Motion is granted.
(2) Creditors have 30 days from the date of this Order to file a complaint pursuant to § 523.
. In addition, Debtor references several exhibits and affidavits that are not attached to Debtor's Brief. As a result, the Court cannot consider any argument referencing a missing document, since the Debtor is further arguing facts not in evidence. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494016/ | MEMORANDUM OPINION
DOUGLAS D. DODD, Bankruptcy Judge.
Plaintiffs John and Lisa Killough sued to establish nondischargeable claims against debtors Waybrun Hebert III and Shelena Hebert. The claims arise out of an employment agreement under which John Killough went to work for Waybrun Hebert’s professional corporation in September 1998.
The plaintiffs did not establish that any obligation owed them was nondischargeable under 11 U.S.C. § 523(a). According*544ly, the plaintiffs’ complaint as amended1 will be dismissed for reasons set forth in this opinion.
Procedural History
John and Lisa Killough sued Foot Specialists of Louisiana, Inc. (“FSL”) on September 3, 2002. Some time afterward, they amended the state court petition to name the Heberts as defendants. Way-brun and Shelena Hebert filed chapter 7 on October 30, 2003. The complaint in this adversary proceeding urges that the liability for claims made in the state court lawsuit may not be discharged in debtors’ bankruptcy.
After plaintiffs’ case in chief at trial, the court granted defendants’ motions under Fed. R. Bank. P. 7052, incorporating Fed. R.Civ.P. 52(c), for partial judgment on several claims. The court dismissed all claims against Shelena Hebert for lack of evidence. The court also dismissed for lack of evidence plaintiffs’ claims against Way-brun Hebert III under 11 U.S.C. §§ 523(a)(2)(B) and (a)(4).2 The remaining claims against Dr. Hebert are those under 11 U.S.C. §§ 523(a)(2)(A) and (a)(6).
Facts
Dr. Waybrun Hebert (“Hebert”) is a podiatrist practicing in the vicinity of Hou-ma, Louisiana. In the summer of 1998, Hebert contacted Dr. John Killough (“Kil-lough”), another podiatrist then participating in a residency program in Texarkana, Texas, with a proposal for employment. Hebert wanted to hire a podiatrist to staff a podiatric practice he planned to buy from Dr. Richard G. Paleeki.3 After at least one telephone conversation with Hebert concerning a start date and salary, Kil-lough traveled to Louisiana in July 1998 to meet Hebert, to visit one of the hospitals at which Hebert performed surgery and to observe surgical procedures.
After Killough returned to Texarkana, Hebert sent him a draft employment agreement under which FSL would hire Killough.4 Killough paid Margie Gray McMahon, a lawyer, $125 to review the proposed contract. Ms. McMahon faxed Killough a letter on August 5, 1998 with *545proposed changes to the contract.5 The two podiatrists signed a revised employment contract incorporating the changes shortly thereafter.6 Under the agreement, Hebert’s wholly-owned corporation, Foot Specialists of Louisiana, Inc. (“FSL”), hired Killough for two years starting September 1, 1998. FSL agreed to pay Kil-lough $4250 each month, plus a bonus calculated according to the following formula: “to the extent that 30% of all revenues from all sources actually received in collected funds by Employer during any calendar month during the term of this Agreement exceeds $12,750.00, Employer shall pay to Employee 30% of the excess » 7
Killough alleged that there were oral undertakings in addition to the written agreement. Specifically, Killough testified that Hebert promised Killough would be made a' partner, and enjoy a “six figure income.” However, the contract makes no references to Killough’s becoming an owner of the practice.8 Killough also testified that Hebert promised him help in obtaining board certification in surgery without completing a formal training or residency, through a process Killough described as “grandfathering” through an “alternate pathway.”9 The employment agreement contains no reference to the certification process or program, though Killough insisted at trial that he would not have left his residency program without that commitment, because a podiatrist could earn more money with the certification.
Killough moved his family to Louisiana and bought a house. After working at the Palecki clinic for a week in August 1998, he started running FSL’s clinic on September 1,1998. The evidence disclosed no problem in the parties’ working relationship until November or December 1998. Killough believed that by then, for the first time since he started working for FSL, his billings exceeded the agreed point at which he was entitled to a bonus. Killough approached Jodi Rouse, FSL’s office manager, and asked about the bonus calculation. Rouse told the plaintiff to discuss the bonus calculation with Hebert.
The parties’ testimony conflicts at this point.
Killough testified that Hebert said the $4250 bonus threshold was a typographical error, and that $12,750 was the proper bonus threshold. Hebert testified that he and Killough had agreed that $12,750 was the correct threshold, and that Killough *546himself pointed out the error. Hebert also testified that the contract contained another error in paragraph 3.01. He claimed that the plaintiffs bonus should have been based on Dr. Killough’s billings alone, rather than billings of both doctors. Hebert said that Killough knew this all along. Hebert also testified that he had not clarified the alleged errors in the parties’ written agreement before Killough raised them in late 1998 because he’d never read that part of the signed contract until he initialed and altered it, at some point after Dr. Killough began working for FSL.
Dr. Killough disputes Dr. Hebert’s version of events. He insists that he did not agree to the contract changes.
Neither party disputes that FSL calculated Dr. Killough’s bonus using the higher threshold for the duration of the two-year agreement. Dr. Hebert conceded on cross-examination that Dr. Killough’s bonus would have been much higher had it been calculated based on the lower billing threshold in the written agreement.
Dr. Killough completed the initial two year term, and then signed a new contract for a second two year term.10 The 2000 contract established a bonus threshold of $12,750 of funds collected by Killough— precisely the terms Hebert insisted both parties intended in the 1998 contract. Dr. Killough admitted on cross-examination that there had been no breach of the 2000 agreement.
After the second agreement expired, Dr. Killough left FSL’s employment, sold his house and moved away from Houma. He later filed the state court lawsuit concerning the employment agreement, which was stayed upon Hebert’s bankruptcy filing pursuant to 11 U.S.C. § 362(a).
Analysis
I. Claim under 11 U.S.C. § 523(a)(2)(A)
To succeed under section 523(a)(2)(A), the objecting party must prove that: (1) the debtor made representations; (2) at the time the representations were made the debtor knew they were false; (3) the debtor made the representations with the intention and purpose to deceive the creditor; (4) the creditor relied on the representations; and (5) that creditor sustained losses as a proximate result of the representations. RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1293 (5th Cir. 1995).
Debts falling within the ambit of section 523(a)(2)(A) are those obtained by fraud “involving moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made.” In re Martin, 963 F.2d 809, 813 (5th Cir.1992) (citation omitted). Although intent to deceive may be inferred from a “reckless disregard for the truth or falsity of a statement ...,” In re Acosta, 406 F.3d 367, 372 (5th Cir.2005), a debtor’s “honest belief, even if unreasonable, that a representation is true and that the [debtor] has information to justify it does not amount to an intent to deceive.” Id.
Section 523(a)(2)(A) requires that a creditor justifiably rely on the debtor’s representation. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Justifiable reliance is gauged by an individual standard of the creditor’s own capacity and knowledge, or the knowledge that may fairly be charged against him from facts he can observe. In re Vann, 67 F.3d 277, 283 (11th Cir.1995). When relevant facts should have been readily apparent to the creditor, or the creditor learned facts that should have served as a warning *547of deception by the debtor, then the reliance may not be justifiable and the creditor must independently investigate the facts. Id.
Plaintiffs’ confused pleading makes determining the precise claim difficult. The pretrial order describes plaintiffs’ claim as a “breach of contract” that was “broken because of misrepresentations, misconduct and fraud.” However, a breach of contract claim could be brought against only FSL, not Dr. Hebert, who was not a party to Dr. Killough’s employment agreement. Therefore, the plaintiffs’ claim under section 523(a)(2)(A) must be based on Dr. Hebert’s alleged misrepresentations to Dr. Killough concerning the contract.
A. Bonus threshold
Even assuming the terms of the agreement concerning the bonus calculation were misrepresented and changed unilaterally by Dr. Hebert, Dr. Killough’s reliance on the alleged misrepresentations must have been justifiable. Killough testified on direct examination that Hebert’s position concerning the bonus threshold disturbed him. He also claimed that Jodi Rouse, FSL’s office manager, discouraged him from pursuing the matter because it would be detrimental to his practice in Louisiana.11
On cross-examination, however, Dr. Kil-lough conceded that he never communicated his complaint to Dr. Hebert in writing; never consulted a lawyer; and in fact, continued to accept payment under the contract. Although Killough claimed that he was not being compensated properly and despite the contract provision allowing him to terminate the parties’ relationship on 90 days’ notice, the plaintiff apparently elected to forego protesting Hebert’s decision concerning the contract provisions. Dr. Killough’s decision apparently rested on the non-compete clause in the employment agreement that prevented him from practicing in Terrebonne and Lafourche parishes, the cost of re-establishing his practice elsewhere, and the potential disruption to his family members’ lives.
Despite all the problems the changes in the terms of the employment agreement allegedly caused for Dr. Killough, he signed a second two-year contract with essentially the same terms. Thus, even if the original agreement could be considered relatively null because Dr. Killough did not agree to changes Hebert allegedly made unilaterally, Killough’s continued performance under the contract tacitly confirmed the agreement and cured its relative nullity. La. Civ.Code arts.2031, 1842. See also, Gamble v. D.W. Jessen, et al., 509 So.2d 1041, 1043 (La.App. 3d Cir. 1987) (plaintiff accepting calculation of his compensation during business relationship with defendant, and objecting to the calculation method only after the relationship dissolved, not entitled to additional compensation). Killough’s continued performance under the agreement after Dr. Hebert allegedly changed it belies the plaintiffs claim that he justifiably relied on the initial bonus threshold.
B. “Partnership”12 potential
Dr. Killough insisted that he relied on a false promise that he would become a partner in Dr. Hebert’s podiatric practice. However, his testimony concerning the possibility of becoming a co-owner of the *548podiatric practice suggests that the plaintiff did not have a definite agreement for Killough to become partner.
Killough testified that the possibility that he might become a co-owner of FSL was important to his decision to sign the contract. However, although Killough consulted a lawyer concerning the draft agreement, the agreement he signed made no provision for him to become part owner of the practice. Killough admitted on cross-examination that no other writing contained that undertaking. Thus, the contemporaneous written evidence of Dr. Killough’s agreement does not support his claim.
Even more telling is that when Dr. Kil-lough renewed his employment agreement in 2000, the parties did not insert any provision for plaintiffs becoming a co-owner of the practice. The absence of any provision is even more startling, and casts doubt on plaintiffs claims, because it came after Killough’s suggestions for revisions to the earlier form of contract.
Finally, the vagueness of the evidence concerning the agreement supports a finding that there was no definite agreement for Killough to become partner. Specifically, Dr. Killough offered no evidence from which the court could conclude the point — if any — at which Dr. Killough would become eligible to be a co-owner. In addition, Killough acknowledged that he and Hebert had no agreement concerning a percentage of ownership to which Kil-lough would become entitled even if he were to become a co-owner.13
C. Surgical certification
Killough also contends that Hebert promised that Killough could become surgically certified while he worked for FSL. The evidence on this point paints an incomplete picture.
Dr. Killough’s testimony on direct examination provided virtually no information concerning this aspect of his claim. On cross-examination by defendants’ counsel, Killough testified that he understood that Dr. Hebert was board certified, and could help Killough become certified by an “alternate pathway.”14 Killough hoped to complete the certification process within the first two years he worked for FSL.
Dr. Killough conceded on cross-examination that Dr. Hebert’s promise was “vague,” and not an absolute guaranty. Certification was not Dr. Hebert’s to award. Indeed, Killough could not even name the specific body that would confer the certification, and admitted that the “alternate pathway” to certification ended in 2000.
The vagueness of the evidence concerning the agreement supports a finding that Dr. Hebert did not undertake that Kil-lough would become certified with defendant’s assistance. As a result, Killough has failed to prove his claim against Hebert for alleged misrepresentations concerning the certification process.
The evidence proved at most a simple breach of contract claim against only FSL, although Dr. Killough may be estopped from pursuing that claim given his acquiescence in the changes to the contract. A mere breach of contract claim is generally dischargeable in chapter 7. In re Williams, 337 F.3d 504, 509 (5th Cir.2003) (even a knowing breach of contract does not make a debt non-dischargeable). Moreover, *549even if plaintiff did have a direct claim against Dr. Hebert, the evidence supports a finding that Dr. Killough did not justifiably rely on any alleged misrepresentations in continuing to work for Hebert’s corporation, even if he believed that Dr. Hebert misled him into signing the contract.
Additionally, Dr. Killough testified that he was overjoyed when Hebert did not renew his contract with FSL. He moved to Illinois and set up a practice, and is earning more than he did at FSL. According to Dr. Killough, he also made an $11,000 profit on the sale of his home. Thus, Killough did not establish by a preponderance of evidence that the debtor’s alleged misrepresentation regarding the bonus threshold caused him losses.
In sum, Dr. Killough has not proven his claim under 11 U.S.C. § 523(a)(2)(A).
II. Claim under 11 U.S.C. § 523(a)(6)
Finally, Dr. Killough contends that the debtor willfully and maliciously injured him. However, Killough does not specify in his pretrial memorandum or pretrial order the act upon which this claim is based. A deferential reading of the Plaintiffs/Claimants Fourth Objection to the Defendants/Debtors Discharge in Bankruptcy15 suggests that Dr. Killough contends that Dr. Hebert’s management of the podiatric practice and his alleged breach of contract are actions within the scope of 11 U.S.C. § 523(a)(6).
Section 523(a)(6) excepts from discharge debts “for willful and malicious injury by the debtor to another entity or to the property of another entity.” The Fifth Circuit has stated that “an injury is ‘willful and malicious’ where there is either an objective substantial certainty of harm or a subjective motive to cause harm.” In re Keaty, 397 F.3d 264, 270 (5th Cir.2005), citing In re Miller, 156 F.3d 598, 606 (5th Cir.1998). Debts arising from recklessly or negligently inflicted injuries do not fall within section 523(a)(6). Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 978, 140 L.Ed.2d 90 (1998).
The evidence did not establish that Dr. Hebert did anything to Killough that objectively could have been certain to cause harm. Nor did the evidence show that Hebert was motivated to cause Killough harm.
Moreover, the issue of scienter aside, Killough did not show that Hebert actually injured him or his property. Killough made a profit when he sold his house in Houma, and he now earns more than he did while employed by FSL. Dr. Killough did not establish by a preponderance of evidence that the alleged acts of Dr. Hebert caused him to suffer any injury whatsoever.
Conclusion
The Killoughs did not prove that any debt owed to them by Dr. Hebert is non-dischargeable under 11 U.S.C. §§ 523(a)(2)(A) or 523(a)(6). Accordingly, the Killoughs’ Complaint, and all subsequent amendments to the Complaint, however entitled, will be dismissed.
. Plaintiffs' case was not a model of good pleading. It began with an original complaint filed March 11, 2004(P-1). In response to defendants’ motion for a more definite statement, plaintiffs first filed a pleading styled "More Definite Statement” (P-27), and later an amended complaint (P-29). Finally, just days before trial, plaintiffs moved on an expedited basis for leave to file their Third Objection to the Discharge in Bankruptcy (P-127) and Fourth Objection to the Defendants/Debtors Discharge in Bankruptcy (P-129). The court granted leave to file those pleadings on July 12, 2005 (P-157), and treated them as amendments to the complaint. Plaintiffs never obtained leave to file their Second Amended Complaint on June 20, 2005 (P-91), but the claims in the third and fourth amendments essentially are identical to those in the Second Amended Complaint.
. Bankruptcy Code § 523(a)(2)(B) excepts from discharge a debt for money, property or services obtained by—
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor's ... financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property or services ... reasonably relied; and
(iv) that the debtor caused to be made or published with the intent to deceive.
Bankruptcy Code § 523(a)(4) excepts from discharge debts for “fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.” The Court held that the plaintiffs did not show any fiduciary relationship between Dr. Killough and Dr. Hebert, only an employer-employee relationship.
. Dr. Paleeki testified that Hebert eventually bought the building, equipment and good will associated with his practice for $47,744.00.
. Draft employment agreement of July 23, 1998 (Plaintiffs' Ex. 4). Notably, Hebert is not a party to the employment agreement.
. August 5, 1998 letter from Margie McMahon to John Killough (Plaintiffs’ Ex. 5).
. Signed employment agreement (undated) (Plaintiffs’ Ex. 3).
. Signed employment agreement, Article III, paragraph 3.01 (Plaintiff's Ex. 3). Killough testified that in summer 1998, his residents’ salary was only $13,000.
. Because FSL is a corporation, Killough could not become a “partner,” though Kil-lough may have believed that he would become a FSL stockholder at some point.
. Dr. Killough's testimony on direct examination did not identify the specific certification or other credential he expected to secure through the “alternate pathway,” or the certi-tying authority that issued the credential. However, the deposition of James Lamb, the Executive Director of the American Board of Podiatric Surgery (“ABPS”), admitted into evidence at trial, clarified this issue. Lamb testified that until the end of 2000 APBS offered an "alternative method” for becoming board certified in podiatric surgery. (June 15, 2005 Deposition of James Allen Lamb, p. 8. lines 15-21, Defendants’ Ex. 16). The alternative method allowed podiatrists who had not completed the required residency training to become board certified by sitting for an examination and certifying that they had performed a certain number of specified surgical procedures. (Defendants' Ex. 16, p. 10, lines -25, p. 11, lines 1-25, p.12, line 1).
. August 31, 2000 employment agreement (Defendants’ Ex. 4).
. Under cross examination Dr. Killough testified that both Ms. Rouse and Dr. Hebert told him not to pursue the dispute because his future in medicine in Louisiana could be jeopardized.
. See footnote 8, above.
. Killough testified that one third of all collections from the practice would be applied to "buy in” to the practice. However, he did not testify how long this would continue before the "buy in” figure — whatever it may have been — would be reached.
. See footnote 9, above.
. P-129, filed July 8, 2005. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494018/ | OPINION
MARY P. GORMAN, Bankruptcy Judge.
This matter comes before the Court for decision on the issue of whether the Defendant, Capital Crossing Bank (“Capital Crossing”) has a valid, perfected security interest in certain assets of the Plaintiff, Duesterhaus Fertilizer, Inc. (“Duester-haus”). This matter is a core proceeding pursuant to 28 U.S.C. § 157(K) to determine the validity, extent, or priority of a lien.
Duesterhaus is an Iowa corporation with its place of business in Quincy, Illinois. Duesterhaus was a dealer of agricultural chemicals and provided related services to farmers. In 1994 and 1995, Duesterhaus borrowed money from the United States Small Business Administration (“SBA”) and executed two security agreements pledging its inventory, accounts receivable, and other personal property to SBA to secure its obligations. Financing statements needed to perfect the secured interest of SBA were properly filed with the Illinois Secretary of State at the time of each loan.
Capital Crossing took an assignment of SBA’s notes and security interests and filed a continuation statement with the Illinois Secretary of State in 1999 with respect to the 1994 financing statement. In April, 2002, in order to comply with revisions to the Uniform Commercial Code adopted by both Illinois and Iowa, Capital Crossing filed what the parties here refer to as an “in lieu of’ financing statement with the Iowa Secretary of State. The “in lieu of’ financing statement referenced the original 1994 financing statement and the 1999 continuation statement previously filed in Illinois.
On October 14, 2005, Duesterhaus filed a voluntary petition under Chapter 11 of the Bankruptcy Code. Duesterhaus remains a debtor in possession and is currently seeking confirmation of a liquidating Chapter 11 Plan. Duesterhaus filed this adversary complaint against Capital Crossing in April, 2006, and in Count I seeks a determination that the “in lieu of’ financing statement was defective because it did not contain a description of the secured collateral. Capital Crossing has filed a Motion to Dismiss Count I, asserting that the “in lieu of’ statement fully complied with the requirements of Iowa law.1
Prior to July 1, 2001, creditors generally perfected security interests by filing financing statements with the Secretary of State in the state where the secured assets were physically located. Revised Article 9 of the Uniform Commercial Code, which was adopted by both Illinois and Iowa, became effective on July 1, 2001.2 810 *648ILCS § 5/9-101 et seq.; Iowa Code § 554.9101 et seq. One of the major revisions to Article 9 was a change in filing requirements. Under the new law, financing statements must now be filed in the state where the debtor is located. 810 ILCS § 5/9-301(1); Iowa Code § 554.9301(1). Further, under the new law, corporations are “located” in the state of their incorporation. 810 ILCS § 5/9-307(e); Iowa Code § 554.9307(5).
Because the change in filing requirements necessitated new filings being made in many cases, and because the intent of the drafters was to simplify procedures but not to disturb previously established priorities in specific transactions, transition rules were developed. The transition rules provided for the effectiveness or priority of financing statements properly filed in one state to continue upon the filing of proper documents in another state. The transition rules are set forth in Part 7 of Revised Article 9. The provisions relevant to the dispute before this Court are the following:
Security interest perfected before effective date
(1) Continuing priority over lien creditor-perfection requirements satisfied. A security interest that is enforceable immediately before July 1, 2001, and would have priority over the rights of a person that becomes a lien creditor at the time is a perfected security interest under this Act if, on July 1, 2001, the applicable requirements for enforceability and perfection under this Act are satisfied without further action.
(2) Continuing priority over lien creditor-perfection requirements not satisfied. Except as otherwise provided in section 554.9705, if, immediately before July 1, 2001, a security interest is enforceable and would have priority over the rights of a person that becomes a lien creditor at that time, but the applicable requirements for enforceability or perfection under this Act are not satisfied on July 1, 2001, the security interest:
(a) is a perfected security interest for one year after July 1, 2001;
(b) remains enforceable thereafter only if the security interest becomes enforceable under section 554.9203 before the year expires; and
(c) remains perfected thereafter only if the applicable requirements for perfection under this Act are satisfied before the year expires.
Iowa Code § 554.9703; see also 810 ILCS § 5/9-703 (parallel Illinois citation).
When initial financing statement suffices to continue effectiveness of financing statement.
(1) Initial financing statement in lieu of continuation statement. The filing of an initial financing statement in the office specified in section 554-9501 continues the effectiveness of a financing statement filed before July 1, 2001, if:
(a) the filing of an initial financing statement in that office would be effective to perfect a security interest under this Act;
(b) the pre-effective-date financing statement was filed in an office in *649another State or another office in this state; and
(c) the initial financing statement satisfies subsection (3).
(2) Period of continued effectiveness. The filing of an initial financing statement under subsection (1) continues the effectiveness of the pre-effective-date financing statement:
(a) if the initial financing statement is filed before July 1, 2001, for the period provided in section 554.9403, Code 2001, with respect to a financing statement; and
(b) if the initial financing statement is filed after July 1, 2001, for the period provided in section 554.9515 with respect to an initial financing statement.
(3) Requirements for initial financing statement under subsection (1). To be effective for purposes of subsection (1), an initial financing statement must:
(a) satisfy the requirements of part 5 for an initial financing statement;
(b) identify the pre-effective-date financing statement by indicating the office in which the financing statement was filed and providing the dates of filing and file numbers, if any, of the financing statement and of the most recent continuation statement filed with respect to the financing statement; and
(c) indicate that the pre-effective-date financing statement remains effective.
Iowa Code § 554.9706; see also 810 ILCS § 5/9-706 (parallel Illinois citation).
In summary, these provisions allow a financing statement properly filed under the old law to remain in full force and effect for a period of one year after the effective date of the new law. In order to maintain the priority established by the original financing statement, however, a new initial financing statement must be filed in the correct office under the new law and such new financing statement must comply with the requirements of Part 5 of Article 9 and must contain certain information about the prior filing.
It is undisputed that the original financing statement filed by SBA and assigned to and continued by Capital Crossing was properly filed in Illinois. Further, there is no dispute that the new initial financing statement was required to be filed by Capital Crossing in Iowa. Capital Crossing filed the new financing statement in the correct location within the requisite one-year period. Capital Crossing’s new financing statement filed in Iowa also contained all of the required information about the prior Illinois filing. The only dispute is whether the Iowa filing complied with Part 5 of Article 9.
Section 9-502 sets forth the requirements for an initial financing statement:
Contents of financing statement ...
(1) Sufficiency of financing statement. Subject to subsection (2), a financing statement is sufficient only if it:
(a) provides the name of the debt- or;
(b) provides the name of the secured party or a representative of the secured party; and
(c) indicates the collateral covered by the financing statement.
Iowa Code § 554.9502(1); see also 810 ILCS § 5/9-502(a) (parallel Illinois citation).
Duesterhaus complains that Capital Crossing failed to comply with the third requirement for a sufficient financing statement because it failed to include any indication of the collateral covered by the financing statement. Section 9-504 defines the term “Indication of Collateral”:
*650Indication of collateral
A financing statement sufficiently indicates the collateral that it covers if the financing statement provides:
(1) a description of the collateral pursuant to section 554-9108; or
(2) an indication that the financing statement covers all assets or all personal property.
Iowa Code § 554.9504; see also 810 ILCS § 5/9-504 (parallel Illinois citation).
Section 9-108 referred to in Section 9-504 provides in part:
Sufficiency of description
(a) Sufficiency of description. Except as otherwise provided in subsections (3), (4), and (5), a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.
(b) Examples of reasonable identification. Except as otherwise provided in subsection (4), a description of collateral reasonably identifies the collateral if it identifies the collateral by:
(a) specific listing;
(b) category;
(c) except as otherwise provided in subsection (5), a type of collateral defined in this chapter;
(d) quantity;
(e) computational or allocational formula or procedure; or
(f) except as otherwise provided in subsection (3), any other method, if the identity of the collateral is objectively determinable.
Iowa Code § 554.9108; see also 810 ILCS § 5/9-108 (parallel Illinois citation).
The question before the Court is whether the new financing statement filed by Capital Crossing in Iowa provided a sufficient indication of its collateral to comply with Iowa law. Duesterhaus asserts that there is no description whatsoever of Capital Crossing’s collateral included in the Iowa financing statement and, therefore, the financing statement fails to perfect an interest in any collateral. Capital Crossing counters that its reference to the prior Illinois financing and continuation statements was sufficient to lead searchers to a description of its collateral and, therefore, the financing statement continued the perfection of its secured interest. This Court agrees with Duesterhaus that the Iowa financing statement is defective and inadequate to perfect Capital Crossing’s secured interest in Duesterhaus’ assets.
Both parties focused on the transition rules in their briefs. As set forth above, the transition rules were created to allow creditors to maintain the continuity and priority of previously properly-filed financing statements. The transition rules also recognized, however, that the new filing in the new state would become the controlling filing and, therefore, that filing must consist of a complete financing statement rather than just an abbreviated continuation statement. Thus, the transition rules required the new financing statement to comply with all provisions of Part 5 of Article 9. Those provisions require an indication of the collateral to be included on the financing statement. Here, there is no indication of collateral whatsoever. Even the reference to the prior Illinois filing does not state that the collateral subject to the new filing is described on that prior filing. To find that the Iowa filing complies with Part 5 of Article 9 would require this Court to totally ignore the requirement of Section 9-502 that collateral be indicated on the financing statement. See Iowa Code § 554.9502(l)(c). This Court cannot ignore an entire portion of the statute.
This case appears to present an issue of first impression. The parties have not *651cited and this Court has not found any relevant cases decided under Revised Article 9. Several bankruptcy courts have, however, reviewed similar issues under the prior law and those cases provide some guidance here. In In re McCloy, 206 B.R. 428 (Bankr.N.D.Tex.1997), the court found that a continuation statement which did not contain a description of the collateral when such description was specifically required by Texas law was ineffective to continue perfection of the creditor’s lien. The court made this finding notwithstanding the fact that the continuation statement contained sufficient information to put searchers on notice of the original financing statement which did contain the collateral description. The court found that it could not ignore a mandatory requirement of the controlling statute.
Likewise, in In re Bailey, 228 B.R. 267 (Bankr.D.Kan.1998), the court found that a financing statement was no longer valid because it failed to contain a description of the collateral and referred only to a prior statement which had lapsed. Even though the prior statement could ultimately be found by searchers, the court found that the lapsed statement was not a proper reference to describe the collateral.
Both parties here have discussed PA Record Outlet, Inc. v. Mellon Bank, N.A. 894 F.2d 631 (3rd Cir.1990). In that case, the Court found that a continuation statement which referred to a financing statement for a collateral description was not defective. This case is distinguishable because continuation statements by definition “continue” the effectiveness of the original financing statement and keep that original statement from lapsing and being removed from the public record. Absent an express state law requirement that the continuation statement contain a description of the collateral, reference to another document in the same public record would appear to meet the notice requirements.
In the case before this Court, the controlling statute expressly requires a description of the collateral to be included in the financing statement filed in Iowa. Iowa Code § 554.9502(l)(e). Further, the documents referenced in the Iowa filing and claimed by Capital Crossing to be adequate to “indicate the collateral” lapsed before this case was filed. The last Illinois continuation statement was filed June, 1999, and would, therefore, have lapsed in June, 2004, absent further continuation. 810 ILCS § 5/9-515. No evidence of further continuation has been presented. Once lapsed, the Illinois Secretary of State is required to maintain records of the original filing for only one year. 810 ILCS § 5/9-522. The records of the original filing could have been destroyed in June, 2005. This case was filed in October, 2005.
Unlike PA Record Outlet, supra, the Iowa filing here does not reference a public document which would necessarily be maintained and available for public view for the duration of the existence of the Iowa filing. The transition rules do not provide for the continuance of the old filing for any period of time and there is no requirement of cross-filing to let those who maintain records in one state know that filings which appear to have lapsed according to their records have, in fact, been continued in another state. To the contrary, the new law anticipates that, after transition, the old filings will lapse and ultimately be destroyed. The new filings will control.
This Court simply cannot ignore the express requirement of Iowa law that the new, initial financing statement filed to comply with Revised Article 9 must contain an indication of Capital Crossing’s collateral. The reference to the old Illinois documents was insufficient to satisfy that *652requirement because those documents, although initially public, had lapsed and could have been destroyed prior to the time of this bankruptcy filing.
For the reasons set forth above, Capital Crossing’s Motion to Dismiss Count I is denied.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
IT IS SO ORDERED.
. Capital Crossing's Motion to Dismiss was also directed at Count II of the Complaint. The issues related to Count II will not be discussed in this Opinion. A separate Order will be entered denying the Motion to Dismiss as to Count II for the reasons stated in that Order.
. This case involves interpretation of both the Illinois and Iowa commercial codes, which *648were each adopted from the Uniform Commercial Code. No conflict of laws issues have been raised by the parties as the parties appear to agree on the law applicable in this case. That may be because all provisions of Illinois and Iowa law relevant to this case are virtually identical. Neither state has adopted any non-uniform amendments to the provisions of their commercial codes at issue here. Citation is made to both the Illinois and Iowa statutes as appropriate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494019/ | MEMORANDUM OPINION
PATRICK M. FLATLEY, Bankruptcy Judge.
The Chapter 11 trustee (the “Trustee”) for Rare Earth Minerals, Inc. (the “Debt- or”) seeks an order authorizing him to make a distribution to Michael Bialek, Sara and Stephen Mullins, and investors and the royalty interest owners in the Bialek # 1 Well. The Trustee also seeks payment of his commission on the amount distributed. Michael Bialek and Sara and Stephen Mullins'(the “objecting parties”) object to the amounts of the distributions in the Trustee’s proposal, and the court held a hearing on the matter on April 27, 2006.
When the Debtor filed its bankruptcy petition, it was in default on its lease with the objecting parties. An assumption of *803the lease was approved, and the Trustee proposes to pay the appropriate cure amounts in this distribution. The parties have agreed that the cure amounts are as follows:
1) Michael Bialek shall receive $3,405.81 as a cure amount
2) Michael Bialek shall receive $1,940.18 as interest on the cure amount.
3) Sara and Stephen Mullins shall receive $3,405.81 as a cure amount.
4) Sara and Stephen Mullins shall receive $1,940.18 as interest on the cure amount. The only remaining objection to the motion involves the amounts the Trustee proposes to distribute to the objecting parties for the 6.25% of royalty interest for the operation of the Bialek # 1 Well, which has accrued since the commencement of the case. The Trustee proposes to pay $4,851.32 to Michael Bialek and the same amount to Sara and Stephen Mullins. The parties object to this amount on the grounds that the Bialek # 1 Well production asserted by the Trustee in his proposal is unusually low for this particular well, and a faulty meter and lack of maintenance have resulted in the low production. The Trustee argues that the low production is a normal occurrence in the oil and gas business.
Generally, the burden of proof lies with the party who, absent meeting his burden, is not entitled to relief or would be unsuccessful if no evidence were introduced on either side. See 29 Am.Jur.2d Evidence § 158 (2006). In other words, the burden of proof rests with the party who is attempting to change the status quo or is asserting the claim. See 29 Am. Jur.2d Evidence § 158. Applying this standard to the present situation, the Trustee bears the initial burden of proving that the proposed distributions are the accurate amounts because absent any proof the Trustee would not be entitled to an order authorizing the distributions. Once the Trustee has met this burden, the objecting parties carry the burden of proving that the distributions are inaccurate because, absent evidence disputing the initial proof of the Trustee, the objecting parties would be unsuccessful.
The Trustee has met his initial burden by producing for the court’s review the production records of the Bialek # 1 Well. The objecting parties, however, have not carried their burden in offering evidence to dispute these production records. The objecting parties have offered a number of theories as to why the production of the Bialek # 1 Well was low during this period, primarily relating to a lack of maintenance and a faulty meter. The objecting parties, however, have offered insufficient proof in support of these theories. The Trustee has provided a significant number of possible explanations for the production anomalies of the Bialek # 1 Well during the period of time at issue. The explanations are based upon variances that are frequently associated with the extraction process and the oil and gas business, in general. For example, the Trustee asserts that the reduced production may be a result of the well “loading up” with fluid that is regularly produced as part of the gas and oil production process. The Trustee also asserts that the production anomalies of the Bialek # 1 Well may relate be a result of the abnormally high production volumes of another well in the same group. Abnormally high production by another well in the same group may result in the other wells being unable to feed into the pipeline. Furthermore, the Trustee has offered testimony to dispute the allegations of a faulty meter, as well as evidence demonstrating that the accuracy of the meter readings was better than ninety-five percent (95%).
*804The production records submitted by the Trustee are the only documentation the court has concerning the production of the Bialek # 1 Well. Although the objecting parties dispute the records, they offer no evidence, beyond speculation, to support their allegations. Furthermore, the court’s own examination of the production records indicates that the fluctuation in the Bialek # 1 Well’s production was in accord with the fluctuation in the production of the other wells in the same group. The objecting parties have failed to carry their burden of proof in disputing the production records, and therefore, the objections of Michael Bialek and Sara and Stephen Mullins are not adequately support and, therefore, must be rejected.
The court, therefore, grants the motion of the Trustee seeking an order authorizing distribution. A separate order will be entered pursuant to Fed. R. Bankr.P. 9021. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494020/ | MEMORANDUM OPINION, FINDINGS, CONCLUSIONS AND ORDER FOR PREPARATION AND PRESENTATION OF FORM OF JUDGMENT DISMISSING CLAIMS BY DORIS BARNES AGAINST DEFENDANT MDR, GRANTING JUDGMENT AGAINST DEFENDANT TAWES, AND PROVIDING FOR PAYMENT OF ROYALTIES ACCRUING AFTER FEBRUARY 2002
WESLEY W. STEEN, Bankruptcy Judge.
Doris Barnes (“Plaintiff’ or “Barnes”) seeks judgment against O. Lee Tawes III (“Tawes”) and Marlin Data Research (“MDR”), for royalties on mineral production from the Baker Barnes # 1 and # 2 wells for the period prior to February, 2002, and to recognize her right to royalties which have been suspended for production since that date. On stipulated facts, for reasons set forth in detail below, and by separate judgment to be provided by the parties consistent with this decision, the Court will issue judgment in favor of Barnes against Tawes, against Barnes in favor of MDR, and providing for release of funds from suspense.
FACTS
Plaintiff owned land in Lavaca County, Texas, and executed a mineral lease of that land in favor of American.1 Louis Dreyfus 2 acquired American’s interest and then conveyed that interest to Dominion.3
Moose4 leased adjacent land and assigned some of the leasehold interests to parties referred to in the stipulations as the Moose Assignees. Dominion, Moose, and the Moose Assignees entered into a Working Interest Unit Agreement and Joint Operating Agreement (JOA) that included Plaintiffs property. Tawes is a Moose Assignee, but MDR was not. Tawes signed the Working Interest Unit Agreement and the JOA in 1998, prior to the mineral production at issue in this adversary proceeding.5 Production was achieved from four wells. With respect to two of those wells (the Baker-Barnes # 1 and # 2 wells, the “Non-Consent Wells”) Moose and the Moose Assignees (including Tawes) were Consenting Parties to drilling the Non-Consent Wells and Dominion was a Non-Consenting Party. Under the terms of the JOA, Consenting Parties were responsible for the expenses of drilling the wells and were responsible for payment of royalties due with respect to leases contributed to the Unit by Non-Consenting Parties.6 Consenting Parties were entitled to recover 400% of their expenditures on the Non-Consent Wells *871before Non-Consent Parties were entitled to payment of any revenue from the wells.
February 13, 2002, at foreclosure sale, MDR and Tawes purchased Moose’s interest in the Baker Unit and specifically in the “Non-Consent Wells.” Production of those two wells after February 2002, has been suspended and is held in a Royalty Suspense Account and in a Working Interest Suspense Account.
As of February, 2002, Barnes undisputed royalty in the Non-Consent Wells was $291,846.00.
ISSUE
Plaintiff contends that she is entitled to recover all unpaid royalties from the Non-Consent Wells from both Tawes and MDR and from production payments due them that are being held in suspense by the operator of the wells. Defendants contend that they have neither privity of contract nor privity of estate with Plaintiff and therefore they are not personally liable to Plaintiff. Defendants further contend that their suspended production payments are not liable for that payment.
CONCLUSION
Judicial Estoppel
Tawes and MDR assert that Barnes is judicially estopped from asserting that they are liable to her. Tawes and MDR assert that Barnes argued that she had no privity of contract with any party other than Dominion and that the Court awarded her summary judgment on that allegation.
The most frequently cited definition in the Fifth Circuit for judicial estoppel is found in In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir.2004) where the Court of Appeals for the Fifth Circuit said:
This circuit, however, has recognized three particular requirements: (1) the party is judicially estopped only if its position is clearly inconsistent with the previous one; (2) the court must have accepted the previous position; and (3) the non-disclosure must not have been inadvertent. (Id. at 335.)
While it is true that Barnes argued privity of contract as the basis for recovery from her lessee, Dominion, that position is not clearly inconsistent with an argument that other parties are also liable. Two parties may be liable to a third party for the same debt, under different legal theories.7 That principle is too obvious to require extended discussion.
The second element for application of judicial estoppel is also not satisfied. Even assuming that Barnes argued that she had no privity of contract with any other party, the Court did not accept that argument and award relief based on that argument. The Court specifically stated that it was merely holding that Dominion was liable on a contract; the decision did *872not conclude that Dominion was liable because others were not.
The Court is merely ruling that the only summary judgment evidence produced by the parties to the cross-motions for summary judgment do not evidence any release of Dominion from its liability under the lease.8
Barnes contractual relationship with any other party, or the lack of any such relationship, was not the basis of the Court’s ruling.
Since the first two requirements are not satisfied, the Court finds that judicial es-toppel does not apply to preclude Barnes’ claims.
Tawes and MDR Are Not In Privity of Contract With Barnes on the Lease and Are Not In Privity of Estate Prior to February 13, 2002
Plaintiff has produced no evidence that Defendants assumed the Barnes lease. As regards Plaintiff, Defendants are working interest owners, liable only on their contracts as of the date that they signed the contract or succeeded to the interests of a predecessor in interest.
Under Texas law, unaccrued royalties on oil and gas are interests in realty. Accrued royalties, however, are interests in personal property. Oil and gas severed (extracted) from the land become personal property. Royalties accrue, and therefore become interests in personal property, at the time the minerals are severed from the land. It follows then that royalties become interests in personalty at the time the minerals for which they are owed become personalty. [Anadarko E & P v. Clear Lake Pines, Inc. et al 2005, 9 Tex.App. Lexis 5467, citations omitted.]
Since Defendants acquired Moose’s interest subsequent to severance of the minerals for which royalties are due, the Court sees no basis for imposing liability on them for payment of those royalties as assignees or successors to Moose.
Tex. Bus. & Com.Code § 9.313
In Anadarko the court expressly held that the acquiror of a lessee’s interest under a mineral lease is not per se a “first purchaser” of minerals. In addition, although not separately and specifically articulated in Anadarko the Court’s decision required a conclusion that the acquiror of the lessee interests under a mineral lease does not take the mineral estate subject to encumbrance for royalties that were payable on production that preceded the acquisition because upon severance the royalties became personalty and the royalty interest was no longer an encumbrance on the real property interest acquired by the acquiror.
Plaintiff argues in section 111(A) of his memorandum that “Elementary principles of Texas oil and gas law soundly reject Tawes and MDR’s claim and strongly support Mrs. Barnes’ claim to the production proceeds.” For that proposition, Plaintiff cites two authorities: (I) Tex. Bus. & Com. Code § 9.343, as interpreted by Stable Energy L.P. v. Newberry, 999 S.W.2d 538 (Tex.App.-Austin 1999, pet den.), and (ii) In re Tri-Union Dev. Corp., 253 B.R. 808, 814 (Bankr.S.D.Tex.2000).
The Court recognizes these authorities as giving a statutory right to payment of royalties out of production as it is severed from the real property. The Court sees no authority in these citations for payment of royalties out of production that occurs substantially later than the date on which *873the minerals were severed from the land and converted to personalty.
The Tri-Union case is materially different from the situation under consideration here. Judge Greendyke was dealing with cash held by a bankruptcy estate, for which the estate had recognized liability to the royalty owner. The facts of Tri-Un-ion involved payment of assets of a bankruptcy estate, not suspended payments under Texas law.
In short, the Court does not understand Tawes and MDR to be “purchasers” of oil and gas proceeds as defined in the statute. Liability of Tawes to Barnes as a Third Party Beneficiary
In the Joint Operating Agreement (JOA), Dominion and Moose agreed that
During the period of time Consenting Parties are entitled to receive Non-Consenting Party’s share of production, or the proceeds therefrom, Consenting Parties shall be responsible for the payment of all ... all royalty ... and other burdens applicable to Non-Consenting Party’s share of production ... 9
As the Tawes memorandum asserts:
To be a third party beneficiary of a contract under Texas law, a party must establish both that (1) the contracting party intended to confer some benefit to the third party; and (2) the contracting party entered in the contract directly for the third party’s benefit. Refinery Holding Co., L.P. v. TRMI Holdings, Inc. (In re El Paso Refinery, L.P.), 302 F.3d 343, 354 (5th Cir.2002), citing MCI Telecommunications Corp. v. Texas Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999). The intent to benefit a third party must be clear from the language of the agreement. El Paso Refinery, 302 F.3d at 354. Persons who benefit only incidentally by the performance of the contract are not third party beneficiaries.10
In the MCI Telecommunications case cited by the Fifth Circuit, the owner of a power line right-of-way, (“TU”), sued MCI, owner of a telecommunications right-of-way, because MCI damaged TU’s power poles. Both TU and MCI were licensees of the railroad. TU merely owned a right to joint use of the right-of-way; it did not have any right to payment or other affirmative performance from the railroad. MCI agreed not to interfere with the rights of other right-of-way licensees, but did not affirmatively agree to perform any duty owed by the railroad.11 In addition, the contract specifically stated:
... [NJeither this Agreement, nor any term or provision hereof, nor any inclusion by reference, shall be construed as being for the benefit of any party not in signatory hereto.12
The Texas Supreme Court stated:
To qualify as one for whose benefit the contract was made, the third party must show that he is either a donee or creditor beneficiary of, and not one who is benefited (sic) only incidentally by the performance of, the contract ... If ... performance will come to him in satisfaction of a legal duty owed to him by the promisee, he is a creditor beneficiary ... this duty may be an “indebtedness, contractual obligation or other legally *874enforceable commitment” owed to the third party.13
As the Court determined by prior decision, Dominion (a Non-Consenting Party) owed royalties to Barnes. It was an “... indebtedness, a contractual obligation, or other legally enforceable commitment. ...” Those royalties would normally be payable out of Dominion’s share of production, but since Dominion was a Non-Consent Party, the Consent Parties had the right to the revenues. As part of that agreement, the Consent Parties (including Tawes) agreed to perform Dominion’s legal obligations. It all seems quite logical, and within the contemplation of the jurisprudence in concluding that an agreement to perform an obligation of another is legally binding. Therefore, the Court concludes that Barnes is the third party beneficiary of Tawes’ obligations under the JOA to pay royalties owed by Dominion as a Non-Consent Party.
The JOA does not limit the liability of the Consenting Parties to their percentage working interests. Therefore, Tawes is liable for all of Barnes’ unpaid royalty from the Non-Consent Wells.
Royalties Due After February, 2002
Barnes argues that both Tawes and MDR became liable to pay her royalties as a result of the foreclosure sale under which they purchased Moose’s working interests in the wells. The Court concludes that Barnes’ right to collect royalties that accrued subsequent to February, 2002, arise from the privity of estate that occurs by virtue of the foreclosure sale in February. Those royalties are suspended and thus no personal judgment against Tawes or MDR is required.
FORM OF JUDGMENT
Tawes is liable to Barnes for royalties due from production from the Non-Consent Wells prior to the date that royalties were suspended, but MDR is not. Since Tawes is liable to Barnes as a third party beneficiary, the Court will issue a judgment in favor of Barnes against Tawes for unpaid royalty that is not suspended. But the Court has been cited to no authority for award of attorneys fees or for distribution to Barnes of funds held in suspense for Tawes.
Because there does not appear to be any dispute about payment of royalties subsequent to the date that royalties were suspended, the judgment will recognize the obligation to pay Barnes royalties that have been suspended.
The Court directs counsel for Barnes to prepare a form of judgment consistent with this opinion and to confer with counsel for Tawes and MDR to try to resolve any objections to the form of judgment (reserving to Tawes and MDR the right to appeal the judgment). Barnes’ right to appeal the judgment is also reserved. Both counsel are directed to present the proposed form of judgment to the Court on September 18, 2006, at 3:00 PM. Counsel should deliver to the Court’s chambers a courtesy copy of the proposed form of judgment and any objection (in writing) on or before September 11.
. American. Exploration Company.
. Louis Dreyfus Natural Gas Corp.
. Dominion Oklahoma Texas Exploration & Production, Inc.
. Moose Oil and Gas Company and Moose Operating Company, Inc.
. Joint Stipulation, docket # 184 (“Joint Stipulation”) paragraph 11.
. Docket # 185, Exhibit 6, lines 39-42 of page Bates marked LDNG-000068.
. In the Tawes/MDR memorandum, counsel states: "Her current claim that Tawes and Marlin assumed the obligations of the Barnes lease by virtue of their being parties to the 'Dominion-Moose Agreements,' is irreconcilable with her repeated allegations when seeking judgment against Dominion that 'Dreyfus [Dominion] and Moose agreed to share the cost of the first well to be drilled under the Dreyfus-Moose Agreement, but Dreyfus remained responsible for payment of the Barnes royalty under the Barnes lease’.'' The Court does not see these allegations as irreconcilable. Assumption of a contractual liability by a third party does not necessarily relieve the original obligor of liability. Tawes and MDR recognize this in their memorandum: "Generally, the assignor of a contract remains liable for performance of the obligations which he assumed therein, even after it is assigned. Potts v. Burkett, 278 S.W. 471, 473 (Tex.Civ. App.-Eastland 1926, no writ).” (Tawes/MDR Memorandum of Authorities, Docket # 192, paragraphs 22, 28).
. Docket # 93, page 4.
. Docket # 185, Exhibit 6, lines 39-42 of page Bates marked LDNG-000068.
. Docket # 192, paragraph 31.
. "MCI hereby agrees to exercise the herein granted rights in such a manner as not to interfere in any way with any existing prior rights.” MCI at 649.
. Id.
. Id. at 651 (citations omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494021/ | MEMORANDUM ON OBJECTION TO DEBTORS’ CLAIM OF EXEMPTION
RICHARD STAIR, JR., Bankruptcy Judge.
This contested matter is before the court on the Objection to Debtor’s [sic] Claim of Exemption (Objection) filed on May 3, 2006, by the Chapter 7 Trustee, Ann Mostoller (Trustee), objecting to the Debtors’ claimed homestead exemption in a tract of land adjoining their residence. A preliminary hearing on the Objection was held on May 25, 2006, at which time the parties agreed that an evidentiary hearing was not necessary, and the matter could be decided upon written stipulations and briefs. Pursuant to the court’s Order entered on May 26, 2006, the parties filed Joint Stipulations on June 23, 2006, containing undisputed facts, stipulated documents, and an Affidavit of each Debtor. The Debtors’ Brief in Opposition to Objection to Homestead Exemption by Trustee was filed on July 6, 2006, and the Brief of Ann Mostoller, Trustee, was filed on July 7, 2006. The court also takes judicial notice of relevant documents of record in the Debtors’ bankruptcy case file pursuant to Rule 201 of the Federal Rules of Evidence.
The issue before the court is whether the Debtors are entitled to claim a $2,500.00 homestead exemption pursuant to Tennessee Code Annotated section 26-2-301 (Supp.2005) in a five-acre tract that adjoins their house located at 7725 Walter Road, Corryton, Tennessee.
This is a core proceeding. 28 U.S.C. § 157(b)(2)(B) (2005).
I
The Debtors filed the Voluntary Petition commencing their Chapter 7 bankruptcy case on March 3, 2006. On Schedule A, they listed two tracts of real property: a “Mouse and 4.8 acres located at 7725 Walter Road[,] Corrytonf,] TN 37721” (Residence) and an “[a]djoining 5 acres of land located at 7725 Walter Road[,] Corryton[,] TN 37721” (Adjoining Property). The Debtors assigned the Residence a “Current Value” of $115,000.00, subject to secured claims in the amount of $116,198.34. They assigned the Adjoining Property a “Current Value” of $2,500.00 and state that it is unencumbered.
The following facts are undisputed. The Debtors purchased the Residence by Warranty Deed recorded on June 9, 1986. See Stip. Ex. C. The Debtors purchased 27.72 acres from Aurora Loan Services, Inc., by Special Warranty Deed recorded on July 12, 2000. See Stip. Ex. D. A Plat Map dated April 16, 2001, shows the real property owned by the Debtors on that date, totaling approximately 35.73 acres, was subdivided into Tract 1, consisting of real property known as 7737 Walter Road, Cor-ryton, Tennessee 37721, which was subse*882quently sold by the Debtors to William J. and Joy Betz Powers via a Warranty Deed recorded May 8, 2001; Tract 2, consisting of the back property, a portion of which is the Adjoining Property at issue in this contested matter; and Tract 8, consisting of the Residence. See Step. Ex. I. By Warranty Deed recorded December 7, 2004, the Debtors transferred Tract 2 to Christopher Tolliver and Bobby R. and Melanie J. Brown. See Stip. Ex. F. Thereafter, by Quit Claim Deed recorded April 15, 2005, Christopher Tolliver and Bobby R. and Melanie J. Brown reconveyed the Adjoining Property to the Debtors. See Stip. Ex. G.
In summary, the Debtors acquired the Residence on or about June 9, 1986. They originally acquired the Adjoining Property as part of a larger tract on or about July 12, 2000. The Adjoining Property was sold by the Debtors on December 7, 2004, and reacquired by them on or about April 15, 2005.
The Debtors separately listed the Residence and Adjoining Property on Schedule C, claiming an exemption in each under Tennessee Code Annotated section 26-2-301 (Homestead Statute). They claimed a $5,000.00 homestead exemption in the Residence and a $2,500.00 homestead exemption in the Adjoining Property, which is known as Mountain Top Lane.1 See T. Wilson AffY 5. The Trustee filed her Objection, arguing that the Debtors may not claim a homestead exemption in the Adjoining Property under the Homestead Statute. The Debtors argue that they are entitled to claim a portion of their homestead exemption in the Adjoining Property, along with the Residence, because they use both tracts of land as their primary residence.
II
The filing of a bankruptcy petition creates the bankruptcy estate, and all property and interests in property owned by the debtor becomes property of the estate. 11 U.S.C. § 541 (2005). A debtor may, however, exempt certain property interests by virtue of 11 U.S.C. § 522, which states, in material part:
(b)(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection.
(2) Property listed in this paragraph is property that is specified under subsection (d), unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize.
(3) Property listed in this paragraph is—
(A) subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor’s domicile has been located for the 730 days immediately preceding the date of the filing of the petition or if the debtor’s domicile has not been located at a single State for such 730-day period, the place in which the debtor’s domicile was located for 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place; [and]
*883(B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law[.]
11 U.S.C. § 522 (2005). Exempted property “is subtracted from the bankruptcy estate and not distributed to creditors ... [to ensure that the debtor] retains sufficient property to obtain a fresh start[.]” In re Arwood, 289 B.R. 889, 892 (Bankr. E.D.Tenn.2003) (quoting Lawrence v. John (In re Lawrence), 219 B.R. 786, 792 (E.D.Tenn.1998)). Therefore, exemptions, which are determined as of the date upon which the bankruptcy case is commenced, are construed liberally in favor of debtors. In re Nipper, 243 B.R. 33, 35 (Bankr. E.D.Tenn.1999). In order to take exemptions, debtors are required to file a statement listing the property claimed as exempt, along with the amount of the claimed exemption and the statutory basis therefore. See Fed. R. Bankr. P. 4003(a).
Any party in interest may object to the exemptions claimed by a debtor, although that party bears the burden of proof that exemptions are improperly claimed. Fed. R. Bankr. P. 4003(b), (c). If the objecting party fails to establish by a preponderance of the evidence that an exemption is improperly claimed, the exemption will retain its prima facie presumption of correctness and will stand. In re Mann, 201 B.R. 910, 915 (Bankr.E.D.Mich. 1996). Objections to exemptions must be filed “within 30 days after the meeting of creditors ... is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later.” Interim Fed. R. Bankr. P. 4003(b)(1).
Section 522(b) is the “opt out” provision, allowing states to require the use of then-own exemptions rather than the federal exemptions enumerated in § 522(d). Tennessee has elected to “opt out” of the federal exemptions, as codified in Tennessee Code Annotated section 26-2-112:
Exemptions for the purpose of bankruptcy. — The personal property exemptions as provided for in this part, and the other exemptions as provided in other sections of the Tennessee Code Annotated for the citizens of Tennessee, are hereby declared adequate and the citizens of Tennessee, pursuant to section 522(b)(1), Public Law 95-598 known as the Bankruptcy Reform Act of 1978, Title 11 USC, section 522(b)(1), are not authorized to claim as exempt the property described in the Bankruptcy Reform Act of 1978,11 USC 522(d).
Tenn.Code Ann. § 26-2-112 (2000). See also Rhodes v. Stewart, 705 F.2d 159, 161— 62 (6th Cir.1983) (finding that Tennessee’s “opt-out” statute is constitutional).2
As material to this bankruptcy case, Tennessee’s Homestead Statute provides:
(a) An individual, whether a head of family or not, shall be entitled to a *884homestead exemption upon real property which is owned by the individual and used by the individual or the individual’s spouse or dependent, as a principal place of residence. The aggregate value of such homestead exemption shall not exceed five thousand dollars ($5,000); provided, individuals who jointly own and use real property as them principal place of residence shall be entitled to homestead exemptions, the aggregate value of which exemptions combined shall not exceed seven thousand five hundred dollars ($7,500), which shall be divided equally among them in the event the homestead exemptions are claimed in the same proceeding.
Tenn.Code Ann. § 26-2-301 (Supp.2005). Accordingly, the Debtors are entitled to claim a $7,500.00 exemption in real property 3 that they own and which they use as a principal place of residence, and the Trustee has not challenged exemption allowance for the Residence as that property clearly fits within the scope of the Homestead Statute. The dispute arises, however, as to the Adjoining Property.
The Debtors argue that they use the Adjoining Property as if it were their backyard, and therefore, they should be entitled to the claimed exemption. In their Affidavits filed in support of the exemption, the Debtors offer the following examples: (1) they mow the entire area an average of once per week; (2) their family uses a pond stocked with catfish, bass, carp, and bluegill for recreational purposes; (3) they occasionally add copper sulfate to the pond to control the algae; (4) they have erected a storage building in which their lawn and fishing equipment are kept; (5) they pick blackberries from the bushes located there; and (6) they cut firewood off the property for use in the wintertime. T. Wilson Aff. ¶¶ 7 — 14; S. Wilson Aff. ¶¶ 7 — 14.
The Debtors cite the court to Moses v. Groner, a case decided by the Tennessee Supreme Court in 1900, which answered in the affirmative the question of whether the complainant was entitled to claim a homestead exemption in four unimproved lots that were not contiguous. Stating that the case law was “conclusive of this question,” and citing Smith v. Carter Bros. & Co., 84 Tenn. 527 (1886), and First Nat’l Bank v. Meachem, 36 S.W. 724 (Ct.Chanc.App.1896), the Supreme Court applied the homestead statute, as it existed at that time to allow the exemption. Moses v. Groner, 106 Tenn. 121, 60 S.W. 497 (1900). The primary problem with relying upon these cases, however, is that the statute at the time was quite different from the statute as it exists today. As it existed in 1900, the homestead statute “exempt[ed] $1,000 of real estate belonging to the head of a family, whether living upon it or not.” Meachem, 36 S.W. at 726. The “head of a family” and “non-residency” provisions were in effect until 1978, when the General Assembly revised that portion of the Homestead Statute to provide as it does today.
The residency issue was addressed in In re Sivley, wherein the following observations with respect to Tennessee’s homestead exemption were articulated:
Prior to the 1978 amendments, the Tennessee Constitution and statutes provided a homestead exemption in real property belonging to the head of a family. *885The 1978 amendments changed the constitution provision so that a homestead exemption of at least $5,000 must be provided but on terms set by the legislature.
The legislature broadened the class of persons entitled to the homestead exemption by dropping the “head of a family” requirement. But the new statute narrowed the kinds of property which can be exempt by imposing the requirement that the property be used as a principal place of residence. Formerly, the debtor did not have to occupy the property as a residence. It is the residency requirement that raises the first question as to Mrs. Sivley’s rights at the time of her bankruptcy.
The residency requirement defines homestead more strictly than it has been defined in over a century. It is a return to the earlier concept of a homestead as a residence. The deletion of the head of a family requirement and the addition of the residency requirement show a clear legislative intent. The exemption is meant to protect the home of any person who owns one; the exemption is no longer an exemption for any real estate.
In re Sivley, 14 B.R. 905, 907-08 (Bankr. E.D.Tenn.1981) (internal citations and footnote omitted); see also In re Linger-felt, 180 B.R. 502, 503 (Bankr.E.D.Tenn. 1995) (“Today the claimant must own the property and actually use it as a residence[J”).
“The most basic principle of statutory construction is to ascertain and give effect to the legislative intent without unduly restricting or expanding a statute’s coverage beyond its intended scope.” Owens v. State, 908 S.W.2d 923, 926 (Tenn. 1995). When the parties derive different interpretations from the statutory language, the court must determine if the language of the statute, after applying its ordinary and plain meaning, is ambiguous. Parks v. Tenn. Mun. League Risk Mgmt. Pool, 974 S.W.2d 677, 679 (Tenn.1998). In its current form, the Homestead Statute clearly limits application of the exemption to a “principal place of residence,” which is not a defined term in the Tennessee Code Annotated. Nevertheless, the term is not ambiguous.
As stated by the Sivley court, “[w]hat is the debtor’s principal residence depends both on the debtor’s use and intent.” Sivley, 14 B.R. at 908.
The word “residence” has been defined as “a place where one dwells, where a person lives in settled abode, the place where a person lives with the intention of making it his home, and to which, whenever he is absent, he has the intention of returning. Residence is also defined to mean the principal domestic establishment of an individual, the place which he makes the chief seat of his affairs and interests.”
McDonough v. State Farm Mut. Auto. Ins. Co., 755 S.W.2d 57, 67 (Tenn.Ct.App. 1988) (quoting 77 CJS Residence at 300, 301). “Residence” is defined by Black’s Law Dictionary as “[p]lace where one actually lives or has his home; a person’s dwelling place or place of habitation; an abode; house where one’s home is; a dwelling house.” Black’s Law Dictionary 1308-09 (6th ed.1990); see also In re Hall, 31 B.R. 42, 44 (Bankr.E.D.Tenn.1983) (“ ‘Residence’ is defined as a ‘factual place of abode.’ ”) (quoting Black’s Law Dictionary 1473 (4th ed.1951)). The Bankruptcy Code defines “debtor’s principal residence” as “a residential structure, including incidental property, without regard to whether that structure is attached to real property[.]” 11 U.S.C. § 101(13A)(A) (2005). Generally, the court finds that a debtor’s “principal place of residence” is his or her home, the place where the debtor lives *886with his family, inclusive of any real property acquired therewith.
Here, the Debtors are clearly entitled to claim the homestead exemption in the Residence. Their house, within which they and their children reside, is located upon the 4.8 acre tract acquired under the Warranty Deed recorded on June 9, 1986. They are not, however, entitled to a homestead exemption in the Adjoining Property because it is not the Debtors’ “principal place of residence.” It is merely a second tract of land owned by the Debtors and used for recreational purposes. They do not reside upon it, and that fact removes the Adjoining Property from the scope of the Homestead Statute.
The Adjoining Property was purchased separately from the Residence, originally as part of the 27.72-acre Tract 2 on or about July 12, 2000, all of which the Debtors sold on December 7, 2004. The Debtors then re-acquired the Adjoining Property through the Quit Claim Deed recorded on April 15, 2005. The Adjoining Property, known as Mountain Top Lane, is identified as a different tract from the Residence on the Plat Map.4 It has a property description separate from that of the Residence. The Debtors do not reside on the Adjoining Property, and irrespective of the recreational activities that they engage in thereon, the Adjoining Property is not part of their Residence.
The most compelling argument in support of the Trustee’s Objection are the statements and schedules filed by the Debtors. In the first place, Tennessee Code Annotated section 26-2-301 authorizes an individual to claim the homestead exemption in real property used by the individual “as a principal place of residence.” Here, the Debtors in both Schedules A and C to their petition separately list the Residence and Adjoining Property, thereby distinguishing between their “principal place of residence” and the contiguous Adjoining Property. The distinction between the Residence and Adjoining Property is further acknowledged by the Debtors in their attempt to claim a homestead exemption in each of the two properties. As the Debtors can only have one “principal place of residence,” their claim to a homestead exemption in the Adjoining Property is, on its face, improper.
An order sustaining the Trustee’s Objection will be entered.
ORDER
For the reasons stated in the Memorandum on Objection to Debtors’ Claim of Exemption filed this date, the court directs that the Objection to Debtor’s [sic] Claim of Exemption filed by the Chapter 7 trustee, Ann Mostoller, on May 3, 2006, is SUSTAINED. The Debtors’ claimed $2500.00 exemption pursuant to Tenn. Code Ann. § 26-2-301 in the “adjoining 5 acres of land located at 7725 Walter Road[J Corryton[,] TN 37721” property is DISALLOWED.
. Although the Debtors listed the Adjoining Property with a street address identical to that of the Residence, 7725 Walter Road, it does not appear from the record that the Adjoining Property, in fact, fronts on Walter Road.
. Section 522 was considerably impacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which applies to all bankruptcy cases filed on and after October 17, 2005, by the expansion of § 522(b)’s pre-existing requirements concerning a debtor's domicile and the addition of language exempting qualifying retirement funds from property of a debtor’s estate. For the purposes of the "opt out” statute and the issue being addressed in this contested matter, however, BAPCPA did not alter application of § 522(b), nor did it render any of the prior case law concerning that subsection moot. Accordingly, all statutes and cases relied upon by the court in making its determination in this contested matter are pre-BAPC-PA, but they are nevertheless still applicable to this BAPCPA case.
. Because the maximum homestead exemption claimed by the Debtors is, as authorized under Tennessee Code Annotated section 26-2-301 (a), $7,500.00, the court presumes that the stepped-up exemption allowed under Tennessee Code Annotated section 26-2-301(e) (Supp.2005) to individuals sixty-two years of age or older, has no application to these Debtors.
. The Debtors' assignment in their statements and schedules of identical addresses for the Residence and Adjoining Property appears wholly self serving and designed to erroneously characterize the two properties as a single parcel of land. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494022/ | MEMORANDUM OF DECISION
TERRY L. MYERS, Chief Judge.
BACKGROUND AND FACTS
On December 9, 2004, Bill Walker (“Debtor”) filed a voluntary chapter 7 bankruptcy petition commencing this case. Doc. No. 1. His petition says he lives at 3875 W. Cedar, Vale, Oregon. Id.1 Debt- or’s schedule A (real property) says that he is a “co-owner” of this property,2 that it is worth $76,750.00, and that there is a $49,694.06 claim secured by this property. Id. On his original schedule C, Debtor claimed an exemption in this property under O.R.S. § 23.240 and § 23.250 in the amount of $33,000.00. Id. An amended schedule C changed the basis of this homestead exemption claim to O.R.S. § 18.395 and § 18.402. See Doc. No. 5.
Creditor Howard Cockeram (“Creditor”) filed an objection to the homestead exemption. Doc. No. 9. Creditor argues that the statute under which Debtor claims his homestead is inapplicable. He also contends that Debtor owns two separate parcels of real property; that one has a mobile home on it and that Debtor resides there; that the homestead exemption must be limited to this property; and that, under what Creditor views as the applicable Oregon statute, the exemption is capped at a lesser amount than what Debtor claimed.3
The objection was heard on February 14, 2005, the record closed, and the matter submitted. The objection was taken under advisement upon the conclusion of post-hearing briefing on March 4.
The parties’ attempts at producing evidence at the hearing were not particularly effective or productive. Subsequent to the matter being taken under advisement, the chapter 7 trustee, Debtor and Creditor stipulated that the Court could “consider the documents attached to Debtor’s memorandum brief and the documents attached *898to Creditor’s Motion to Augment Record as exhibits in this case.” See Doc. No. 22.4
Debtor’s testimony at the hearing gave a little background. The real property at 3875 W. Cedar Road is about 3.5 miles outside the city limits of Vale, Oregon. Debtor states that he acquired about .66 acres of the property through a “lease-option” agreement in 1991. There was a shop on this parcel that was damaged in a fire several years ago. Debtor acquired additional, adjacent property, about 5.5 acres in size, through a separate contract in 1992. This property contained a gravel pit but no structures at the time of purchase.5
Debtor got a “mobile home permit” in 1991. He said the permit was for placing the mobile home on the larger parcel, though this seems a little inconsistent with the fact that the larger parcel was only acquired the following year. He was not particularly firm in his recollection of the details, and questioning did not clarify the situation to any significant degree.
The additional documentation provided under the parties’ stipulation does not establish with certainty whether the mobile home Debtor presently resides in6 sits on the smaller parcel (apparently Tax Lot # 600) or on the adjacent larger parcel (apparently Tax Lot # 519). The “summary” County assessor data that Creditor’s counsel accessed on the Internet appears to reflect the mobile home sits on the smaller parcel, Tax Lot # 600, though the County’s website contains an admonition that the information is for convenience only and is not guaranteed to be accurate.
The tax assessment records later submitted after hearing appear to show that the taxes assessed on the “structure” (apparently but not clearly the mobile home) are contained in the bills for Tax Lot # 600. The assessments on Tax Lot # 519 appear to be for “farm use” and show no assessments for any structures.
Interestingly, the Greenpoint Credit deed of trust on the mobile home, obtained in October, 2000 when Debtor says he “refinanced” the debt, identifies both parcels in its legal description.
The ambiguity in the records is disheartening. One would think that, if this matter is worth litigating, it is worth determining the precise facts and properly presenting them to the Court. Ultimately, however, the Court concludes that it can address the legal issue presented without resolving the testimonial and/or documentary confusion.
CONTENTIONS OF THE PARTIES
Debtor argues that both parcels are now under his ownership and are used collectively by him as a homestead. He believes he is entitled to an exemption under O.R.S. § 18.395 in the amount of $33,000.00, and his amended schedule C so asserts. Creditor objects to that asserted exemption, arguing that the homestead exemption can apply only to the smaller parcel (where Creditor believes, and the present weight of the evidence would indicate, Debtor lives), and not at all to the larger parcel. *899Creditor also feels the homestead exemption can be properly claimed only under O.R.S. § 18.428, and that such an exemption is limited to $23,000.00.7
DISCUSSION AND DISPOSITION
Oregon has “opted out” of the federal exemption scheme under § 522 of the Bankruptcy Code, and exemptions for Oregon residents are determined under Oregon state law. Sticka v. Casserino (In re Casserino), 290 B.R. 735, 738 (9th Cir. BAP2003); Sticka v. United States (In re Sturgill), 217 B.R. 291, 294 (Bankr.D.Or. 1998). Oregon courts apply a liberal interpretation of Oregon’s exemption statutes in favor of debtors. Casserino, 290 B.R. at 739-40. However, courts may not disregard the plain and unambiguous language of the statutes. Fleischhauer v. Bilstad, 233 Or. 578, 379 P.2d 880, 886 (1963).
Despite the parties’ arguments over parcels, tax lots and acreage, Oregon’s homestead exemption exempts value, not the property in and of itself. Sturgill, 217 B.R. at 294. Debtor owns (or at least jointly owns) both parcels.8 Greenpoint is secured on both parcels. Creditor is alleged to have a judgment lien on both parcels. The more apt question, under Sturgill, appears to be what is the value or amount of the homestead exemption to which Debtor is entitled.
To answer that question, one must turn to the statutes. O.R.S. § 18.395 is the general homestead statute.9 It provides an exemption to a single owner/debt- or in the amount of $25,000.00. It further provides that, “[w]hen two or more members of a household are debtors whose interests in the homestead are subject to sale on execution, ... their combined exemptions under this section shall not exceed $33,000.00[.]”
A separate statute, O.R.S. § 18.428, provides for a homestead exemption in a mobile home and the property on which it sits. It provides in pertinent part:
18.428. Mobile home and property on which situated
(1) A mobile home, and the property upon which the mobile home is situated, that is the actual abode of and occupied by the owner, or the owner’s spouse, parent or child, when that mobile home is occupied as a sole residence and no other homestead exemption exists, shall be exempt from execution and from liability in any form for the debts of the owner to the value of $23,000, except as otherwise provided by law. When two or more members of a household are debtors whose interests in the homestead are subject to sale on execution, the lien of a judgment or liability in any form, their combined exemptions under *900this section may not exceed $30,000. The exception shall be effective without the necessity of a claim thereof by the judgment debtor.
O.R.S. § 18.428(1) (formerly O.R.S. § 23.164(1)).
Debtor argues that the words “and no other homestead exists” as contained in § 18.428 is an indication that he is entitled to claim the benefit of § 18.395. The Court concludes he is in error.
First, logic dictates that the more specific statute should control over the more general, provided that, as true here, Debtor qualifies under the more specific one. It is not just a question of logic, however. In In re Marriage of Salchen-berg, 126 Or.App. 338, 868 P.2d 772 (1994), the court stated:
On appeal, the parties focus exclusively on ORS 23.240 [now O.R.S. § 18.395], the homestead exemption statute. However, because the residence on the property is a mobile home, the applicable exemption statute is ORS 23.164 [now O.R.S. § 18.428][.]
868 P.2d at 772-73.10 Thus, because Debt- or’s residence is a mobile home, § 18.428 must be used.
Second, Debtor has pointed to no authority that supports his interpretation that the language of § 18.428(1) allows him to elect to claim a § 18.395(1) exemption when he lives in a mobile home.
Third, Debtor’s testimony and the rest of the “proof’ in this case indicates Debtor owns no residence other than the mobile home. Absent a mobile home exemption under § 18.428, Debtor would presumptively be unable to claim any exemption under § 18.395 as that statute requires an actual homestead that is “the actual abode of and occupied by the owner.” Accord In re Thurmond, 71 B.R. 596, 598 (Bankr. D.Or.1987) (debtor could not claim a § 23.240 (now § 18.395) exemption on property not occupied or constituting actual abode).
CONCLUSION
Creditor objects to Debtor’s use of O.R.S. § 18.395. Under Oregon law, Creditor is correct. The objection will therefore be sustained, and the exemption claimed under § 18.395 in amended schedule C will be disallowed. This ruling will be without prejudice to an amended claim of exemption under O.R.S. § 18.428.11
*901Creditor may prepare a form of order sustaining its objection and disallowing the exemption claimed under O.R.S. § 18.395.
. This is in Malheur County, Oregon. By agreement with the District of Oregon, this Court administers bankruptcy cases from that county.
. Schedule A says Debtor’s interest in this real property is "joint.” Schedule H indicates "Ann Justus" is a co-debtor on an obligation owed secured creditor Greenpoint Credit. Greenpoint Credit has a deed of trust on real property and a mobile home, and Justus as well as Debtor signed that deed of trust. The nature of Justus' interest is not explained. Debtor’s schedules indicate he is a 70 year old single man. See Doc. No. 1 at schedule I.
.The objection assailed some other claimed exemptions, in addition to the homestead. The matter submitted at the conclusion of the hearing held herein was limited to the homestead, and that is all the Court addresses in this Decision.
. This stipulation makes it unnecessary for the Court to rule upon the propriety of Debtor simply attaching materials to a brief as a way of creating a factual record, or to rule on Creditor's request to "augment” the eviden-tiary record.
. The pit was inactive for several years, and Debtor at some point "reclaimed” the land by filling in the pit and turning it into pasture land.
.It is clear that Debtor presently lives in a mobile home. This is not very likely the same unit involved in the 1991 permit as the Green-point Credit security interest is in a 1996 Fleetwood.
. This debate relates not just to the allowance of the exemption but also to a § 522(f)(1)(A) motion to avoid Creditor's judgment lien as impairing Debtor's exemption, which waits in the wings. The parties vacated a hearing on the § 522(f) motion by agreement, pending the outcome of this instant dispute.
. The nature of the "joint" ownership is not at all clear. But the Court need not resolve the ambiguities today.
. O.R.S. § 18.395 states in pertinent part:
(1) A homestead shall be exempt from sale on execution, from the lien of every judgment and from liability in any form for the debts of the owner to the amount in value of $25,000, except as otherwise provided by law. The exemption shall be effective without the necessity of a claim thereof by the judgment debtor. When two or more members of a household are debtors whose interests in the homestead are subject to sale on execution, the lien of a judgment or liability in any form, their combined exemptions under this section shall not exceed $33,000. The homestead must be the actual abode of and occupied by the owner, or the owner's spouse, parent or child ...[.]
. That Salchenberg refers to the former versions of the Oregon statutes is of no consequence. Debtor has not identified any material difference in the versions before and after recodification, and the Court finds none. And, in Premier West Bank v. GSA Wholesale, LLC, 196 Or.App. 640, 103 P.3d 1169 (2004), the court noted that in construing the state’s statutes, the best evidence of legislative intent is the text of the statute itself, and the statute’s context includes prior enacted versions of that statute. Id. at 1175.
. One would hope that, if and when any amended claim of exemption is asserted, some greater attention will be paid to the details. For example, determining where the mobile home is located may be important under § 18.428, which indicates the exemption value runs to the "mobile home, and the property upon which the mobile home is situated[.]” See O.R.S. § 18.428(1). Debtor's current reliance on O.R.S. § 18.402 as a means of determining the "quantity of land” subject to the exemption is not well taken, since § 18.402 is, by its terms, limited to the exemption provided in O.R.S. § 18.395. Additionally, it would be advisable to give some attention to the nature of Debtor’s interests in the real property and the "joint” interests of others. Debtor, as a single debtor in this bankruptcy case, is presumptively entitled to only a $23,000.00 exemption under § 18.428(1), rather than the slightly larger $30,000.00 exemption amount for "two or more members of a household [who] are debtors” of the sort there described. Debtor has not, as yet, established that the higher amount is applicable. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494023/ | MEMORANDUM OPINION AND ORDER
TAMARA O. MITCHELL, Bankruptcy Judge.
This contested matter is before the Court following a hearing on June 22, 2005, on the Objection to Claim filed by the Debtor, Mike Maher Al-Sedah (the “Debtor”) and the Objection to Confirmation and Motion to Dismiss filed by Linda B. Gore, the Chapter 13 Trustee (“Trustee”). Appearing at the hearing were: Luther Abel, attorney for the Debtor; David Avery, III, attorney for the Claimant, the State of Alabama Department of Revenue (“Revenue Department”) and the Trustee. The Court has jurisdiction pursuant to 28 U.S.C. §§ 151, 157(a) and 1334(b) and the United States District Court for the Northern District of Alabama’s General Order Of Reference Dated July 16, 1984, As Amended July 17, 1984.1 This is a core proceeding as defined in 28 U.S.C. §§ 157(b)(2)(B) & (L).2 The Court has considered the pleadings, the briefs, the arguments of counsel and the law and fords and concludes as follows.3
I. FACTUAL BACKGROUND
The Debtor owned and operated three convenience stores located in Etowah *903County, Alabama. Following a 2003 audit by the Revenue Department, the Debtor was assessed sales tax on the businesses for October 1996 through December 2002. The Revenue Department entered a Final Assessment (“Final Assessment”) of the taxes due on July 9, 2003.
The Debtor sought an administrative review of the Revenue Department’s Final Assessment by appealing to the Revenue Department’s Administrative Law Division pursuant to Ala.Code § 40-2A-7(b)(5)a.4 A hearing on the Debtor’s appeal was held before the Chief Administrative Law Judge Bill Thompson on August 12, 2004. On November 3, 2004, a ten-page Final Order was entered affirming the Final Assessment and entering a judgment against the Debtor for “[s]tate sales tax, penalty, and interest of $498,169.86.”5 The Final Order also stated “[additional interest is also due from the date of entry of the final assessment, July 9, 2003.”
The Debtor filed a Motion to Amend, Alter or Vacate or in the Alternative for a New Trial on November 24, 2004. Judge Thompson denied the motion because it was not filed within 15-days from entry of the Final Order as required by Ala Code § 40-2A-9(f).6
The Debtor filed this Chapter 13 bankruptcy case on December 2, 2004. The Debtor scheduled the Revenue Department as having an unsecured priority claim of $498,170.00. According to the Debtor’s schedules his total unsecured debt was $677,494.94 at the time of filing.
The Revenue Department filed a proof of claim for $516,101.46 on May 4, 2005. The claim was broken down into unsecured priority ($286,434.70 in tax and $86,246.93 in prepetition interest) and unsecured non-priority ($143,419.80 in unsecured penalty) portions. The Debtor filed an Objection to Claim (“Objection”) on May 13, 2005 which was set for hearing on June 22, 2005. As grounds for the Objection the Debtor stated “non-priority amounts are included such as interest and penalties ... also the tax claimed is disputed.” In the Objection the Debtor admitted to owing $90,000.00. The Revenue Department filed a Response to Objection to Claim on June 1, 2005.
Following the June 22, 2005, hearing the Debtor filed a Brief in Support of Rebuttal of Presumption of Correctness and Objection to Claim (“Brief’) on June 28, 2005. In the Brief the Debtor argues the Final Order is “based on error [and is] excessive,” alleging several procedural and evidentiary errors made by the administrative law judge. He also claims to be “effectively prevented ... from applying for judicial review in Circuit Court” because he is unable to either fully pay the tax or post a supersedeas bond in double the amount of the assessment as required by AlaCode § 40-2A-9(g)(l). The Brief concludes that “[t]he effective denial of further Judicial review and obvious and well documented errors [by the administrative law judge] should allow the [Debtor] to use the powers of the U.S. *904Bankruptcy Court to arrive at the correct priority amount” and requests a “judicial review” by this Court to “determine the proper amount of the priority debt and the non-priority debt and that [sic] the court award.” The Revenue Department filed a Response to Brief of Debtor on June 30, 2005.
The Trustee filed an Objection to Confirmation of Plan and Motion to Dismiss on May 18, 2005 arguing, inter alia, the Debtor is not eligible to be a Chapter 13 debtor because his unsecured debt exceeds the statutory limit under 11 U.S.C. § 109(e). The Trustee’s Objection to Confirmation and Motion to Dismiss were both heard by the Court at the June 22, 2005 hearing.
II. CONCLUSIONS OF LAW
A. The Rooker-Feldman doctrine
Under the Rooker-Feldman doctrine, lower federal courts lack jurisdiction to engage in appellate review of state court determinations. See, e.g., Greenberg v. Zingale, 2005 WL 1432471, at *3 (11th Cir. June 20, 2005)(citing Powell v. Powell, 80 F.3d 464, 466 (11th Cir.1996)). Simply put, the Rooker-Feldman doctrine is applied to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 125 S.Ct. 1517, 1521, 161 L.Ed.2d 454 (2005).
A final order entered by an administrative law judge has the “the same force and effect as a final order issued by a circuit judge sitting in Alabama” unless it is altered or amended on appeal. Ala. Code § 40-2A-9(e) (1975). Therefore, collateral attack of orders by administrative law judges is also barred by the Rooker-Feld-man doctrine.
The Rooker-Feldman doctrine is applicable in bankruptcy proceedings. See, e.g., Goetzman v. Agribank, FCB (In re Goetzman), 91 F.3d 1173 (8th Cir.1996); Besing v. Hawthorne (Matter of Besing), 981 F.2d 1488 (5th Cir.1993); In re Flury, 310 B.R. 659 (Bankr.M.D.Fla.2004); Fowler v. Jenkins (In re Fowler), 258 B.R. 251, 262 (Bankr.N.D.Ala.2001); In re Optical Tech., Inc., 272 B.R. 771 (Bankr.M.D.Fla. 2001); In re Johnson, 210 B.R. 1004 (Bankr.W.D.Tenn.1997). Application of the Rooker-Feldman doctrine is especially applicable in the claims litigation process. Where a debtor objects to a claim that is based on a state court judgment, thereby attempting to collaterally attack the judgment in bankruptcy court, the Rooker-Feldman doctrine bars that attack. See In re Audre, Inc., 202 B.R. 490, 494-99 (Bankr.S.D.Cal.1996); Johnson, 210 B.R. at 1007 (Rooker-Feldman doctrine bars court from hearing debtor’s objection to claim where claim is based on a valid administrative order).
The relief sought by the Debtor is exactly what is prohibited by the Rooker-Feldman doctrine. His Objection is based solely on alleged errors made by the administrative law judge in affirming the Final Assessment. He is, in no uncertain terms, asking this federal Court to act as an appellate court and review the Final Order entered by the state administrative law judge. In fact, he requests a “judicial review” of the Final Order to determine the “proper amount” of the Final Assessment because of the alleged procedural and evidentiary errors. If the administrative law judge erred to the extent claimed by the Debtor, relief is available through the Alabama state courts. This Court is not the proper forum for such relief.
*905B. Chapter 13 eligibility under 11 U.S.C. § 109(e)
Section 109(e) of the Bankruptcy Code provides in pertinent part “[o]nly an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $307,675 ... may be a debtor under chapter 13 of this title.” 11 U.S.C. § 109(e). Therefore, if a debtor’s noncon-tingent, liquidated, unsecured debts are greater than $307,675.00 he is not eligible to be a debtor under chapter 13.
“[Sjection 109(e) provides that the eligibility computation is based on the date of the filing of the petition; it states nothing about computing eligibility after a hearing on the merits of the claim.” In re Hutchens, 69 B.R. 806, 810 (Bankr.E.D.Tenn. 1987). Both the Revenue Department’s claim and the Debtor’s schedules list unsecured debt owed to the Revenue Department in excess of the $307,675.00 maximum for unsecured debts allowed under § 109(e). Arguing the Final Assessment is flawed does not remove it from consideration for Chapter 13 eligibility.
It is clear the Debtor’s liability to the Revenue Department was both noncontin-gent and liquidated on December 2, 2004, the date this bankruptcy case was filed, notwithstanding the current dispute. The Final Assessment was entered on July 9, 2003 and affirmed by order of an administrative law judge on November 3, 2004. Thus, the liability represented a fixed, legal obligation of the debtor at the time of filing.
Therefore, this Court finds the debt owed to the Revenue Department is a liquidated, noncontingent, unsecured debt in excess of $307,675.00. Consequently, pursuant to the requirements of § 109(e), the Debtor is not eligible to be a debtor under Chapter 13 of the Bankruptcy Code and this case must be dismissed.
III. CONCLUSION
The Debtor’s Objection essentially asks this federal Court to engage in appellate review of a determination made by an Alabama state court. However, under the Rooker-Feldman doctrine, this Court lacks jurisdiction to engage in appellate review of that decision. Further, because the Debtor’s noncontingent, liquidated, unsecured debts exceed $307,675.00 he is not eligible to be a debtor under Chapter 13 of the Bankruptcy Code. Accordingly it is hereby
ORDERED, ADJUDGED, AND DECREED that the Objection to Claim filed by the Debtor, Mike Maher Al-Sedah, is OVERRULED. Accordingly, the State of Alabama Department of Revenue’s Proof of Claim for $516,101.46 is deemed ALLOWED.
It if further ORDERED, ADJUDGED, AND DECREED that because the Debt- or, Mike Maher Al-Sedah, is not eligible to be a debtor under Chapter 13 of the Bankruptcy Code pursuant to 11 U.S.C. § 109(e) the Trustee’s Motion to Dismiss is GRANTED and this case is DISMISSED.
ORDER
In conformity with the Memorandum Opinion entered contemporaneously herewith, it is hereby
ORDERED, ADJUDGED, AND DECREED that the Objection to Claim filed by the Debtor, Mike Maher Al-Sedah, is OVERRULED. Accordingly, the State of Alabama Department of Revenue’s Proof of Claim for $516,101.46 is deemed ALLOWED.
It if further ORDERED, ADJUDGED, AND DECREED that because the Debt- or, Mike Maher Al-Sedah, is not eligible to *906be a debtor under Chapter 13 of the Bankruptcy Code pursuant to 11 U.S.C. § 109(e) the Trustee’s Motion to Dismiss is GRANTED and this case is DISMISSED.
.28 U.S.C. § 151 provides:
In each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or order of the district court.
28 U.S.C. § 157(a) provides:
Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.
28 U.S.C. § 1334(b) provides:
Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.
The General Order of Reference as amended provides:
The general order of reference entered July 16, 1984 is hereby amended to add that there be hereby referred to the Bankruptcy Judges for this district all cases, and matters and proceedings in cases, under the Bankruptcy Act.
. 28 U.S.C. § 157(b)(2)(B) & (L) provide:
(b)(2)Core proceedings include, but are not limited to—
(B) allowance or disallowance of claims against the estate or exemptions from properly of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11; ... (L) confirmation of plans.
. This Memorandum Opinion constitutes findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, applicable to adversary proceedings in bankruptcy pursuant to Federal Rule of Bankruptcy Procedure 7052.
. Ala.Code § 40-2A-7(b)(5)a provides:
A taxpayer may appeal from any final assessment entered by the department by filing a notice of appeal with the Administrative Law Division within 30 days from the date of entry of the final assessment, and the appeal, if timely filed, shall proceed as herein provided for appeals to the Administrative Law Division.
. The Final Order included an extensive recitation of the underlying facts and a detailed legal analysis.
. Ala.Code § 40~2A-9(f) provides in pertinent part:
Either the taxpayer or the department may file an application for rehearing within 15 days from the date of entry of a final order by the administrative law judge. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494024/ | MEMORANDUM AND ORDER
ALAN H.W. SHIFF, Bankruptcy Judge.
The plaintiff seeks a determination that a debt allegedly owed to it by the defendants is nondischargeable under 11 U.S.C. § 523(a)(2)(B). For the reasons that follow, judgment shall enter in favor of the plaintiff.
BACKGROUND
The plaintiff contends that the defendants submitted an application for a car loan which contained deceptive and materially false statements upon which it relied. See Complaint, Count II.1 The defendants have admitted that on or about May 12, 2000, they submitted a written loan application. See plaintiffs Exh 1; see also Count II, ¶ 3 and corresponding answer. The defendants also have admitted that the plaintiff loaned them $20,585.56 to be paid in monthly installments of $510.42, including accrued interest at the rate of 8.75 percent per year. Count II ¶ 4 and corresponding answer.
The loan application provided a space for the defendants to disclose any outstanding judgments. Id.; see also Tr. p. 13. The defendants left that space blank. Tr. p. 13. Schedule B of the defendants’ June 28, 2002 bankruptcy petition, howev*8er, stated that there were pending judgments against them as of the time they submitted their application, to wit: a judgment lien in favor of New Milford Orthopedic Associates, dated August 21, 1996 in the amount of $735.20; a judgment lien in favor of Sears, Roebuck & Co., dated June 14, 1999 in the amount of $2,186.69; a judgment lien in favor of Moots, Pelligrini, Spillane & Mannion, P.C., dated March 28, 2000, in the amount of $3,570.64; and a judgment lien in favor of Danbury Internal Medical Association, dated April 28, 2000 in the amount of $358.00. See plaintiffs Exh 2, Schedule B.
At trial, Jessica Keizer, plaintiffs manager and chief executive officer, testified as to the factors upon which the plaintiff relies when considering a loan application, including whether an applicant has any outstanding judgments. Tr. at pp. 13-14. She testified that at the time the defendants’ loan application was considered, the plaintiff was not aware of any of the judgments listed on Schedule B. Tr at p. 10-11. She further testified that the plaintiff would not have approved the loan application if it had known about the outstanding judgments. Id. at p. 14.
On June 1, 2004, the plaintiff served requests for admissions by the defendants. See Fed.R.Civ.P. 36, made applicable by Bankr.R. 7036.2 Specifically, the plaintiff requested that the defendants either admit or deny that “the statement that the [defendants] had no judgments outstanding against them on May 12, 2000 was an intentional and knowing misstatement of facts as to the defendants’ financial condition.” Tr at p. 25; see also plaintiffs Exh 5,¶ 23. The defendants did not respond. Tr at p. 17. Accordingly, at trial, the court granted the plaintiffs motion that the defendants admitted that they intentionally and knowingly misstated facts as to their financial condition. See id.3
The plaintiff produced an affidavit of debt, quantifying the amount of the adjustments to the initial $20,585.56 loan. See plaintiffs Exh 4 at ¶¶ 2-8. As disclosed by that document, the adjusted debt, after subtracting the net proceeds from the sale of the repossessed vehicle, the collateral for the loan, and adding interest and attorneys’ fees was $21,078.75. See id. at ¶¶ 2-8.
The defendants neglected to timely file witness or exhibit lists, pursuant to the May 10, 2006 Fourth Amended Pretrial Order. See ¶ 4; see also Tr at p. 35. Hence, the defendants could not and indeed did not make any effort to offer any witnesses or exhibits of their own at trial. Id. Moreover, the defendants’ attorney did not cross examine the plaintiffs witness on the reasonableness of the amount of the alleged debt.
DISCUSSION
Code section 523(a)(2)(B) provides in relevant part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt (2) for money ... to the extent obtained by (B) use of a statement in writing
(i) that is materially false;
(ii) respecting the debtor’s ... financial condition;
(iii) on which the creditor to whom the debtor is liable for such money ... reasonably relied; and,
*9(iv) that the debtor caused to be made or published with intent to deceive.
A creditor seeking a determination of non-dischargeability must prove “each element of the statute by a preponderance of the evidence.” AT & T Universal Card Sens. Corp. v. Williams {In re Williams), 214 B.R. 433, 435 (Bankr.D.Conn.1997) (citing Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 659-60, 112 L.Ed.2d 755 (1991)). As noted, the plaintiff has established that it lent money to the defendants on the basis of a written loan application which was materially false. See supra pp. 7-8. The plaintiff offered evidence that it reasonably relied on that materially false loan application to its detriment. That assertion was not challenged. The final element for a determination of non-discharge-ability under § 523(a)(2)(B) is the intent to deceive. Such intent may be inferred from the surrounding circumstances. In re Graham, 11 B.R. 701, 703 (Bankr.D.Conn.1981). Here, the loan application sought a disclosure regarding any judgments against the defendants. As noted, the defendants fraudulently failed to disclose the existence of the judgment liens they acknowledged on their Schedule B. See supra at 7. Moreover, the defendants have been deemed to have admitted that they intentionally deceived the plaintiff. See supra at 8. Therefore, the court concludes that the false financial statement submitted by the defendants was intended to deceive the plaintiff. See In re Graham, 11 B.R. 701, 704 (Bankr.D.Conn.1981) (citing In re Rickey, 8 B.R. 860, 863 (Bankr.M.D.Fla.1981)).
Accordingly, the debt in the amount of $21,078.75, owed by the defendants to the plaintiff is nondischargeable, and
IT IS SO ORDERED.
. Count I was withdrawn. See Tr May 23, 2006, p. 3.
. See note 3.
. Rule 36 provides that “A party may serve upon any other party a written request for the admission ... of the truth of any matters within the scope of Rule 26(b)(1).... The matter is admitted unless, within 30 days after service of the request, ... the party to whom the request is directed serves upon the party requesting the admission a written answer or objection addressed to the matter.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494025/ | MEMORANDUM OF DECISION ON APPLICATIONS FOR PREJUDGMENT REMEDIES
ALBERT S. DABROWSKI, Chief Judge.
I. INTRODUCTION
Before the Court at this time are two Applications for Prejudgment Remedies (hereafter, “Applications”) filed by the Plaintiff. The Applications require the Court to determine whether the Plaintiff has demonstrated “probable cause” that it will prevail on the merits at trial against Defendants Steven and Amy Sullivan and MJCC Realty, L.P. On the record as a whole, and for the reasons stated more fully below, this Court concludes that the Plaintiff has failed to meet its burden in the instant matters.
II. FACTUAL BACKGROUND
The following facts, which the Court deems material to its ruling in the instant matters, are derived from the record of a two-day evidentiary hearing, as well as this Court’s review and noticing of the official files and records of the instant adversary proceeding and underlying bankruptcy case.
Prior to the commencement of the underlying bankruptcy case, the Cadle Company and/or D.A.N. Joint Venture (hereafter collectively referred to as “Cadle”) purchased a delinquent debt instrument(s) on which Charles Atwood Flanagan (hereafter, “Flanagan”) was an obligor. Cadle then obtained a judgment against Flanagan, and aggressively pursued collection of the same for several years. Flanagan, in turn, engaged in an evasive course of conduct designed to preserve his lifestyle by *85preventing Cadle from executing upon any of his property.
Flanagan’s evasive conduct appears to have included the creation and funding of a limited partnership — M.J.C.C. Realty L.P. (hereafter, “MJCC”) — which purchased and/or held legal title to at least two parcels of Connecticut real property in which Flanagan arguably held equitable interests, namely (i) 230 Millbrook Road in the Town of North Haven (hereafter, the “Millbrook Property”), and (ii) 25 Queach Road in the Town of Branford (hereafter, the “Queach Property”).
The principal of MJCC was Angela Cim-ino Burr (hereafter, “Burr”) — Flanagan’s mother-in-law. According to Burr’s testimony, her role with MJCC was merely one of a figurehead. While she was nominally the general partner of MJCC, and owned at least 95% of its equity, in reality Flanagan supplied all of the capital for its activities, and solely directed its management. Burr further testified that she undertook her nominal role with MJCC out of love and concern for her daughter and grandchildren.
On February 17, 1999, Flanagan commenced the underlying bankruptcy case through the filing of a voluntary petition under Chapter 11. Although the fact and circumstances of Flanagan’s alleged equitable interest in MJCC, and its real estate holdings, were known to Flanagan, his attorney, and the Official Unsecured Creditors’ Committee (hereafter, the “Committee”), during the pendency of the Chapter 11 case neither the Committee nor Flanagan as debtor-in-possession ever pursued an action to bring MJCC and/or its assets into the bankruptcy estate.
On January 16, 2003, Flanagan’s Chapter 11 case was converted to a case under Chapter 7. Bonnie Mangan (hereafter, the “Trustee”) was thereupon appointed trustee of Flanagan’s bankruptcy estate. Almost immediately upon her appointment the Trustee became aware of Flanagan’s putative interest in MJCC and its assets. The Trustee declined to initiate an adversary proceeding in pursuit of MJCC or its assets for the benefit of the bankruptcy estate. Instead, on August 4, 2004, she sold “any and all interest ... which [she] ... may have ... in and to MJCC ... together with any and all interest which ... [she] may have ... in [the Millbrook and Queach Properties]” to Titan Real Estate Ventures, LLC — the Plaintiff here (hereafter, “Titan” or “Plaintiff’) — for the sum of $15,000.00 cash and 2.5% of “any net recovery ... [Titan] receives as a direct result of its purchase of’ the subject rights and interests.
Meanwhile Cadle had become increasingly frustrated by Flanagan’s evasive conduct, and the failure of bankruptcy estate fiduciaries to pursue MJCC or its assets for the benefit of the bankruptcy estate. Among other things, Cadle commenced litigation in the United States District Court for the District of Connecticut, on or about April 4, 2001, in which it sued some 13 defendants on civil RICO claims, alleging that the defendants were co-conspirators in an effort to assist Flanagan in evading Cadle’s judgment execution activity (hereafter, the “RICO Litigation”).
One of the defendants in the RICO Litigation was Burr. In or about January 2003, Cadle settled its RICO claims against Burr in the following manner: in exchange for a full release of any and all claims Cadle had against her, Burr agreed to assign to Cadle her interest in MJCC. By virtue of that assignment Cadle achieved control over MJCC and its assets, and, through MJCC, began a process of marketing those assets to compensate for its losses vis-a-vis Flanagan.
*86On or about March 30, 2004, Cadle, through MJCC, sold the Millbrook Property to Defendants Steven and Amy Sullivan (hereafter, the “Sullivans”) for approximately $475,000.00. With respect to the Queaeh Property, Cadle, through MJCC, has attempted to evict a tenant there in a preliminary step toward its intended marketing and sale of that property. The Queaeh Property tenant is one William Nygard (hereafter, “Nygard”), who is the former owner of that Property. Flanagan and/or MJCC (while under Flanagan’s control) purchased the Queaeh Property from Nygard, but granted a 15-year lease to allow him to remain in possession of the property.
As assignee of the Trustee’s rights, Titan now seeks to recover the Millbrook and Queaeh Properties, or their value, for its own benefit. As Plaintiff here, Titan is prosecuting claims against MJCC and the Sullivans, inter alia, via a Second Amended Complaint (hereafter, the “Complaint”). The pending Applications represent the Plaintiffs effort to secure, through prejudgment attachment, what it hopes will be a judgment rendered in its favor after a trial on the merits.
The parties to the Applications conducted a two-day evidentiary hearing before the Court, followed by extensive briefing. The Court having now fully reviewed the evidentiary record, as well as the oral and written arguments of the parties, provides the following observations in connection with its ruling.
III. DISCUSSION
A. Legal Standards.
Connecticut prejudgment remedies are generally available to litigants in federal court through Fed.R.Civ.P. 64’s incorporation of state law rights and procedures.1 Under Connecticut General Statutes § 52-278d(a) prejudgment remedies are available only if, inter alia, “the plaintiff has shown probable cause that ... a judgment will be rendered in the matter in the plaintiffs favor.... ” Thus, the Plaintiff, as applicant, must shoulder the burden of demonstrating the requisite “probable cause”. E.g., Bosco v. Arrowhead by the Lake, Inc., 53 Conn.App. 873, 875, 732 A.2d 205 (Conn.App.1999).
The Court’s function in a prejudgment remedy dispute is not to provide a final ruling on the merits, but “to determine whether there is probable cause to believe that a judgment will be rendered in favor of the plaintiff in a trial on the merits.” Bank of Boston Connecticut v. Schlesinger, 220 Conn. 152, 156, 595 A.2d 872 (1991) (emphasis supplied). In this respect, the Court enjoys broad discretion. E.g., Nash v. Weed & Duryea Co., 236 Conn. 746, 749, 674 A.2d 849 (1996).
B. Analysis.
The starting point for an analysis of probable cause is necessarily an assessment of the claims made by the Plaintiff against those parties from whom prejudgment relief is sought. The 12-count Complaint states five such claims — (i) “piercing the corporate veil”, (ii) turnover, (iii) con*87version, (iv) unjust enrichment, and (v) constructive trust (hereafter, the “Titan Claims”).
As noted in the Factual Background, above, the Titan Claims are derivative of the rights of the Trustee. That means that the Plaintiff will prevail here only if, and to the extent that, the Trustee would have prevailed on such claims at a point in time immediately prior to her assignment of rights and interests to the Plaintiff. Accordingly, the Court now turns to an analysis of the viability of the Titan Claims in the hands of the Trustee.
1. “Piercing the Corporate Veil”.
The claim denominated as “piercing the corporate veil” in Count Eleven of the Complaint is a bit of a misnomer. In fact, that claim does not involve a corporate entity; it more accurately concerns “piercing the veil” of an individual — Flanagan— to access the assets of MJCC — -a limited partnership allegedly under his complete dominion and control. This type of action is sometimes referred to as “reverse piercing”.
In the classic corporate veil piercing scenario the proponent seeks to disregard an entity’s nominal (corporate) form and subject the estate of a shareholder, or other equitable owner, to claims against the (corporate) entity. By contrast, in the present case of reverse piercing, an attempt is being made to render the assets of an entity — the limited partnership, MJCC — subject to the obligations of its alleged equitable owner — Flanagan.
“Reverse piercing” claims have been recognized as viable causes of action in Connecticut. See, e.g., Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133, 151, 799 A.2d 298, cert. denied, 261 Conn. 911, 806 A.2d 49 (2002). Indeed, the same equitable principles supporting traditional “piercing” can be present in the context of “reverse piercing” as well. On the record presented before this Court to date, it appears that equity would compel the marshaling of the assets of MJCC to account for the debts of Flanagan. Nonetheless, for the reasons that follow, inter alia, the Court concludes that the Plaintiff has not demonstrated probable cause that it will prevail on its “reverse piercing” claim.
The Defendants argue, inter alia, that the “piercing” claim (hereafter referred to as the “Alter Ego Claim”) was lost by operation of the statute of limitations of Bankruptcy Code Section 546(a), inter alia, prior to the Trustee’s assignment of that claim to the Plaintiff. Bankruptcy Code Section 546(a) states, inter alia, that a trustee may not commence an “action or proceeding under section 544, 545, 547, 548, or 553” after, at the latest, “1 year after the appointment or election of the first trustee under section 702. ...” On the record of this case and adversary proceeding it appears beyond dispute that Section 546(a)’s limitations period expired prior to the Trustee’s assignment to Titan.2 Thus, if the Alter Ego Claim is subject to Section 546(a)’s limitations, Titan received a stale claim from the Trustee.
The Plaintiffs response to this limitations defense is two-pronged, to wit: (i) that because Flanagan allegedly made no transfers in connection with his acquisition of control over the Millbrook and Queach Properties, the Alter Ego Claim was not subject to the temporal limitations of Section 546 in the hands of the Trustee; and (ii) that the Alter Ego Claim actually *88arises under Section 541 of the Bankruptcy Code — a Code section not subject to the limitations provisions of Section 546.
a. The necessity of transfers.
The Plaintiff asserts that Section 546(a) limits only the Trustee’s transfer-avoidance actions, and because Flanagan allegedly made no transfers in connection with the assets of MJCC, the Trustee’s piercing claims were not subject to temporal limitation under Section 546. Unfortunately for the Plaintiff, its premise is faulty — Section 546(a) concerns more than transfer avoidance actions. The Bankruptcy Code sections enumerated there— i.e. Sections 544, 545, 547, 548, and 553— create and authorize, inter alia, non-transfer-related trustee actions, equitable in nature, which may be possessed by hypothetical creditors of a debtor. Specifically, one of the enumerated provisions, Section 544(a), provides, inter alia, that—
“[t]he trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of ... (2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists.... ”
(emphasis supplied).
The Alter Ego Claim is certainly the sort of equitable action — whether involving a transfer or not — which could have been pursued by an unsatisfied execution creditor of the Debtor outside the context of bankruptcy. See, e.g., Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339, 1345 (7th Cir.1987) (“... alter ego theory is an equitable, remedial doctrine that may be asserted by any creditor without regard to the specific nature of his relationship with the ... [debtor] and its alleged alter ego.”). Therefore, to the extent that the Alter Ego Claim is premised upon Section 544(a)(2), or any other section enumerated in Section 546(a), it is probable that even if the Trustee possessed that claim, she lost it by virtue of the limitation of 546(a) prior to her assignment to Titan.
b. Claim arising under Section 541.
In further response to the Defendants’ limitation argument, the Plaintiff asserts that its Alter Ego Claim arises under Section 541 — a section not enumerated in Section 546(a) — and therefore is not subject to the limitations of Section 546(a).
As noted above, it seems certain that the Alter Ego Claim is a cause of action that can be asserted by an unsatisfied judgment creditor, and thus, in that respect, owes its bankruptcy viability to Section 544(a)(2). See, e.g., id.; see also, Boyce, Steven E., Koch Refining and In Re Ozark: The Chapter 7 Trustee’s Standing to Assert an Alter Ego Cause of Action, Am. Bank. Law J. (Summer 1990). The question raised by the Plaintiff is whether a trustee may also derive her rights in an alter ego claim by virtue of Section 541.
Section 541(a)(1) provides that the bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” Further, Second Circuit authority suggests that alter ego claims may arise under Section 541. In Pepsico, Inc. v. Banner Industries, Inc., the Court of Appeals, considering bankruptcy trustee rights in an alter ego claim, observed that “[u]nder the Bankruptcy Code, the trustee may bring claims founded, inter alia, on the rights of the debtor ..., see, e.g., 11 U.S.C. § ... 541....” 884 F.2d 688, 700 (2d Cir.1989). Thus, it follows that the Trustee could have possessed the Alter Ego Claim by *89virtue of Section 541, but only if, at the time he filed his bankruptcy case, Flanagan himself had a recoverable “equitable interest” in MJCC, and/or its property, within the meaning of Section 541(a)(1). In other words, outside the context of bankruptcy, would Connecticut law have afforded Flanagan the right, in essence, to pierce his own “veil” and have MJCC declared his alter ego? This Court determines that it would not.
First, the Plaintiff has not cited, and the Court cannot locate, any Connecticut authority permitting a debtor — corporate or otherwise — to pierce his/its own veil. Even if such an equitable action existed in favor of a debtor, that action would be subject to any equitable defenses that are suggested by the facts. Chief among these defenses in the present context is the in pari delecto doctrine.
The in pari delecto doctrine is a well-recognized defense under Connecticut law. The doctrine provides that actions brought on illegal or corrupt bargains cannot prevail if the parties are in pari delic-to, i.e. where the plaintiff is a significant participant in the wrongdoing, bearing at least equal responsibility for the violations he seeks to redress. See, e.g., Greenberg v. Evening Post Association, 91 Conn. 371, 375, 99 A. 1037 (1917). “The real objection is not to one man’s unclean hands but to the whole enterprise. The court does not want to touch an unlawful transaction with a ten-foot pole. It always refuses to help carry it out, and it often refuses to pick up the pieces after the enterprise has fallen apart. Courts were set up to enforce the law, not to enforce violations of law.” Zappone v. Zappone, 8 Conn. L. Rptr. 449, 1993 WL 73674, *5 (Conn.Super.1993). When the parties are involved in an illegal transaction, the court will leave the parties where it finds them. Funk v. Gallivan, 49 Conn. 124, 1881 WL 2156 (1881). The following language of Funk is particularly apropos under the facts that necessarily underlie the Alter Ego Claim, if asserted under Code Section 541: “In such cases the defense of illegality prevails, not as a protection to the defendant, but as a disability in the plaintiff. Upon this principle!,] possession acquired ... will often avail the parties holding it as a sufficient title ... the transaction takes effect from the disability of the parties to assert any right to the contrary. The court does not give it effect, but simply refuses to aid to undo what the parties have already done.” Id., at 129.
Nor does it appear that any principle of bankruptcy law would immunize the Trustee — whose Section 541(a)(1) rights are derived directly from the pre-petition property rights and disabilities of Flanagan. See, e.g., Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145, 1150-52 (11th Cir.2006); cf. Official Committee of Unsecured Creditors of Color Tile v. Coopers & Lybrand, LLP, 322 F.3d 147, 158-66 (2d Cir.2003).
Here, the facts as known to the Court at this time portend that because of his apparent wrongdoing in the formation, funding and operation of MJCC, Flanagan would not have had a legally-enforceable pre-petition right to pierce his own veil to bring the assets of MJCC into his own estate. Further, the Plaintiff here has not demonstrated any fact or legal principle that would nonetheless have permitted the Trustee to pursue what is essentially the identical claim — the Alter Ego Claim— pursuant to Section 541.
Because the existing record suggests that it is more probable than not that the Trustee (i) could not have prosecuted the Alter Ego Claim under Section 541, and (ii) failed to commence the Alter Ego Claim pursuant to Section 544 within one year of her appointment, the Plaintiff, *90whose rights are derived directly from those of the Trustee, has not demonstrated probable cause that it will prevail on the Alter Ego Claim.
2. Turnover.
In the Third, Fourth and Fifth Counts of the Complaint, the Plaintiff seeks turnover from MJCC and the Sullivans of the Queach Property and the Millbrook Property, or the proceeds or income therefrom.
Code Section 542(a) provides in relevant part that “... an entity ... in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 ..., shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.” (emphasis supplied).
Under Section 363(b), the Trustee may only “use, sell, or lease ... property of the estate.” (emphasis supplied). For the Millbrook Property and/or Queach Property to become property of Flanagan’s bankruptcy estate the Trustee would first have to prevail on a declaratory cause of action such as the Alter Ego Claim. See, e.g., 11 U.S.C. §§ 541(a)(1), (3), (7). For the reasons stated in Section III.B.l. of this Memorandum of Decision, the Plaintiff has not demonstrated probable cause that it will prevail on a prerequisite action of that nature. Thus there is necessarily a lack of probable cause that it will prevail on a turnover claim.
3. Conversion.
In the Sixth and Seventh Counts of the Complaint, the Plaintiff seeks to hold MJCC liable for conversion with respect to the Millbrook and Queach Properties.
Conversion under Connecticut law is an unauthorized assumption and exercise of the right of ownership over property belonging to another, to the exclusion of the owner’s rights. See, e.g., Aetna Life and Cas. Co. v. Union Trust Co., 230 Conn. 779, 790, 646 A.2d 799, 804 (1994). Thus, if the Trustee lost her rights, if any, in the assets of MJCC prior to her assignment to Titan, there is no basis for a conversion claim since the Trustee would then have had no ownership rights to be offended.
For the reasons stated in Section III. B.l. of this Memorandum of Decision, the Plaintiff has not demonstrated probable cause that it will overcome MJCC’s Section 546(a) defense to the Alter Ego Claim. Thus there is necessarily a lack of probable cause that it will prevail on a conversion claim.
4.Unjust Enrichment.
In the Eighth, Ninth and Tenth Counts, the Plaintiff seeks to recover from MJCC for “unjust enrichment” with respect to the Millbrook and Queach Properties.
“A right of recovery under the doctrine of unjust enrichment is essentially equitable, its basis being that in a given situation it is contrary to equity and good conscience for one to retain a benefit which has come to him at the expense of another.” Providence Electric Co., Inc. v. Sutton Place, Inc., 161 Conn. 242, 246, 287 A.2d 379 (1971) (internal citations omitted). “It is clear that in order to recover on the basis of unjust enrichment, it is necessary for a plaintiff to demonstrate two aspects of the transaction. First, it must be shown that the defendant was benefited [sic]; that is, he has received something of value. And second, it must be shown that the benefit was unjust; that it was not paid for by the defendant, to the detriment of the plaintiff.” Id.
Putting aside the preliminary question of whether unjust enrichment *91doctrine applies outside the context of contractual relations or some other form of direct privity between the parties,3 there is at present an insufficient factual record for this Court to conclude that MJCC was unjustly enriched. Once again, this begs the question of the viability of the Alter Ego Claim, for if the Trustee lost that Claim under Section 546(a), then the subject assets did not come under MJCC’s control “at the expense of’ the Trustee.
5. Constructive Trust.
In the First and Second Counts, the Plaintiff seeks to have MJCC declared to be a constructive trustee of the Queach and Millbrook Properties; and in the Twelfth Count, the Plaintiff seeks to have the Sullivans declared to be constructive trustees of the Millbrook Property.
In Connecticut, “a constructive trust arises ... against one, who by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in any way against equity and good conscience, either has obtained or holds legal title to property which he ought not, in equity and good conscience, hold and enjoy.” Zack v. Guzauskas, 171 Conn. 98, 103, 368 A.2d 193 (1976).
The Plaintiffs constructive trust claim also begs the question of the viability of the Alter Ego Claim, for if the Trustee lost that Claim under Section 546(a), then arguably it would not be “against equity and good conscience”, vis-a-vis the Trustee, for another to obtain control over the subject assets.
IY. CONCLUSION
For the foregoing reasons the pending Applications for Prejudgment Remedies shall be DENIED by separate orders.
. Fed. R. Bank. P. 7064 provides that "Rule 64 F.R. Civ. P. applies in adversary proceedings.” Fed.R.Civ.P. 64 provides in pertinent part as follows:
At the commencement of and during the course of an action, all remedies providing for seizure of ... property for the purpose of securing satisfaction of the judgment ultimately to be entered in the action are available under the circumstances and in the manner provided by the law of the state in which the district court is held, existing at the time the remedy is sought.... The remedies thus available include ... attachment. ...
. It is also possible, if not likely, that the limitations period of Section 546(a) ran during the Chapter 11 phase of Flanagan’s bankruptcy case. See 11 U.S.C. § 546(a)(1)(A).
. "Unjust enrichment applies 'where ever justice requires compensation to be given for property or services rendered under a contract, and no remedy is available by an action on the contract.’ 5 Williston Contracts (Rev. Ed.) § 1479.” Providence Electric Co., supra, 161 Conn, at 246, 287 A.2d 379. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494026/ | DECISION DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
THOMAS F. WALDRON, Bankruptcy Judge.
Background
On February 24, 2006, the Plaintiff, American Express Centurion Bank, filed a complaint to determine that debts on a credit card account were non-dischargea-ble pursuant to 11 U.S.C. § 523(a)(2)(A) and (C). (Doc. 1) On March 23, 2006, the Debtors filed an answer which denied the essential allegations of the complaint. (Doc. 3) On May 9, 2006, the court issued an Order: Governing Pretrial and Trial Procedures, Fixing Dates for filing LBR Form 7016-1-PPS and Motions Pursuant to 28 U.S.C. § 157 and 28 U.S.C. § 133Jp, and Ordering Other Matters. (Doc. 7) The Plaintiff filed a Pretrial Statement (Doc. 14) and an Amended Pretrial Statement. (Doc. 15) On June 19, 2006, the Debtors filed a pretrial statement, which the court notes was untimely, denying that the debt to the Plaintiff was non-dis-ehargeable.1
On May 30, 2006, the Plaintiff filed a Motion for Summary Judgment Pursuant to Fed.R.Civ.P. 56 and Fed. R. Bankr.P. 7056 (Doc. 9), a separate Brief in Support of Plaintiffs Motion for Summary Judgment (Doc. 10) and a Notice Deeming Plainitjfs First Request for Admissions Admitted. (Doc. 12). The Plaintiff attached support2 that on April 3, 2006, the *770Plaintiff served the Debtors with admissions, interrogatories and requests for production of documents. The Debtors did not request an extension nor reply to the discovery within the required 30 days. See Federal Rule of Civil Procedure 36(a), applicable by Bankruptcy Rule 7036.
On June 19, 2006, the Debtors filed a Response (Doc. 16) to the Plaintiffs Motion (Doc. 9). Counsel for the Debtors conceded the failure to timely respond to the discovery. Counsel for the Debtors stated the failure was “due solely to the mistake of counsel.” The explanation afforded for the mistake is poor communications within the Debtors’ counsel’s office. The Debtors have represented to the court that responses (Exhibit 1 to Doc. 16) were sent to the Plaintiffs counsel on June 19, 2006. In a reply brief, the Plaintiff notes that counsel for the Debtors’ internal office management issues do not constitute “excusable neglect” under the standard pronounced by the United States Supreme Court in Pioneer Inv. Svcs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993).
As the court will detail, the result in this case is not governed by Pioneer, which addresses Bankruptcy Rules 9006(b) and 9024, but instead the decision of the Sixth Circuit in Kerry Steel, Inc. v. Paragon Indus., Inc., 106 F.3d 147 (6th Cir.1997), which interprets Federal Rule of Civil Procedure 36 (applicable by Bankruptcy Rule 7036). The court concludes, in the totality of the circumstances of this adversary proceeding, the Plaintiffs motion will be DENIED.
Law and Analysis
In Kerry Steel, the court noted that a formal motion to withdraw admissions was not required. Id. at 153-54. This court deems that the Debtors’ filings amount to a motion to have all the admissions admitted by Federal Rule of Civil Procedure 36(b) (applicable by Bankruptcy Rule 7036) withdrawn. The court has “considerable discretion” in whether to permit admissions to be withdrawn. Id. at 154. The Kerry court, in granting the motion to withdraw the admissions, stated:
[I]t does not seem to us that the district abused its discretion in deeming the admission withdrawn. A “district court has considerable discretion over whether to permit withdrawal or amendment of admissions.” American Auto. [Ass’n v. AAA Legal Clinic of Jefferson Crooke, P.C.], 930 F.2d [1117]at 1119 [(5th Cir.1991)]. The court’s discretion must be exercised in light of Rule 36(b), which permits withdrawal (1) “when the presentation of the merits of the action will be subserved thereby,” and (2) “when the party who obtained the admission fails to satisfy the court that withdrawal or amendment will prejudice that party in maintaining the action or defense on the merits.” Here there can be no doubt that the presentation of the merits of the jurisdictional issue was served by allowing the withdrawal of the admission. In regard to prejudice, “[t]he prejudice contemplated by [Rule 36(b) ] is not simply that the party who initially obtained the admission will now have to convince the fact finder of its truth.” Brook Village North Assoc. v. General Elec. Co., 686 F.2d 66, 70 (1st Cir.1982). Prejudice under Rule 36(b), rather, “relates to special difficulties a party may face caused by a sudden need to obtain evidence upon withdrawal or amendment of an admission.” American Auto., 930 F.2d at 1120. Kerry Steel has not shown prejudice of the sort required by the rule.
Id. See also Smith Road Furniture, Inc. v. Able Computer Sys. (In re Smith Road Furniture, Inc.), 304 B.R. 790, 791-93 (Bankr.S.D.Ohio 2003) (following Kerry); In re Haas, 292 B.R. 167,172 fn. 3 (Bankr.S.D.Ohio 2003) (same).
*771At this early stage in this case, the court finds no prejudice to the Plaintiff in withdrawing the admissions and denying the Plaintiffs Motion (Doc. 9). Additionally, the court does not believe denying the Plaintiffs Motion (Doc. 9) will prejudice a ruling on the merits. Indeed, today’s ruling ensures this adversary proceeding can be decided on a merit basis. The court reaches this conclusion in recognition of the letter and spirit of the Sixth Circuit’s decision in Kerry and not as an endorsement of the practices of Debtors’ counsel.
Conclusion
The Plaintiffs Motion for Summary Judgment Pursuant to Fed.R.Civ.P. 56 and Fed. R. Bankr.P. 7056 (Doc. 9) is DENIED. The Debtors’ June 19, 2006 responses to the April 3, 2006 admission requests are deemed responses by the Debtors.
The court has by a separate order scheduled a pretrial conference.
An order consistent with this decision is separately entered.
. The court notes, consistent with counsel for the Debtors’ concession, that counsel for the Debtors has unnecessarily increased the work load in this adversary for both the Plaintiff and this Court.
. The court notes the attachments are not properly submitted as evidentiary material because there are not accompanied by an affidavit. See Federal Rule of Civil Procedure 56(e) and (f), applicable by Bankruptcy Rule 7056; Honorable Barry Russell, Bankruptcy Evidence Manual, § 101.1, pages 483-91 (2004 ed.). However, the Debtors concede the operative facts concerning the failure to timely respond to the April 3, 2006 discovery. (Doc. 16) Without regard to the evidentiary concerns, the Debtor rejects the Plaintiff's separate argument (See Pages 5-6 of Doc. 10) that based on the Debtor's answer to the complaint, the Plaintiff should be awarded summaiy judgment. The court concludes that whether any or all of the purchases were luxuiy goods within the meaning of 11 U.S.C. § 523(a)(2)(C) is a factual issue which cannot be determined based on the current state of the record. Without the necessary admissions, none of the holdings of the cases cited by the Plaintiff support granting summary judgment based on 11 U.S.C. § 523(a)(2)(C). Finally, based on this decision, whether the Plaintiff complied with Local Rule 7026-1 is a moot issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494027/ | MEMORANDUM OPINION
DAVID P. McDONALD, Bankruptcy Judge.
Jerome Ruffin filed this adversary complaint requesting the Court to determine that the debt Larry and Josephine Soberg (collectively the “Sobergs”) owe him is excepted from discharge under 11 U.S.C. § 523(a)(2). The Sobergs filed a motion for summary judgment asserting that they are not liable for the underlying debt in question. The Court agrees with the So-bergs’ contention and will grant their motion.
JURISDICTION AND VENUE
This Court has jurisdiction over the parties and subject matter of this proceeding under 28 U.S.C. §§ 1334, 151, and 157 and Local Rule 9.01(B) of the United States District Court for the Eastern District of Missouri. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I), which the Court may hear and determine. Venue is proper in this District under 28 U.S.C. § 1409(a).
FINDINGS OF FACT
The Sobergs were the sole shareholders of SSD Classic Builders, Ltd. (“SSD Classic”), a Missouri corporation. SSD Classic conducted business as Classic Builders, which SSD Classic registered as a fictitious name with the Missouri Secretary of State. SSD Classic was in the business of installing dry wall.
SSD Classic entered into a contract with Jerome Ruffin on September 30, 2004 to install drywall in Ruffin’s residence in exchange for $29,800.00. (the “Contract”). Ruffin tendered two checks to SSD Classic in October 2004. One of the checks was in the amount of $2,980.00, which was a 10% deposit of the total contract price. Ruffin tendered the other cheek to SSD Classic in the amount of $11,920.00 upon SSD Classic’s delivery of the dry wall material to Ruffin’s residence. Larry Soberg endorsed the checks on behalf of SSD Classic and deposited both checks into SSD Classic’s general checking account.
SSD Classic completed a significant amount of work on the project prior to November 2004. This work included obtaining a permit from the City of St. Louis; ordering and delivering the dry wall; and procuring a dumpster for the project. SSD Classic also hired and paid laborers to work on the project. The City of St. Louis, however, halted SSD Classic’s work on November 1, 2004 because the City required Ruffin to complete the electrical and plumbing work before SSD Classic could install the drywall. Ruffin completed the electrical and plumbing work sometime in early 2005.
SSD Classic was experiencing cash flow problems at the time it executed the Contract. The Sobergs attempted to bolster the corporation’s finances by making two loans to it in October 2004 totaling $30,000.00. The Sobergs’ loans allowed SSD Classic to continue to operate and meet its obligations in the short-term. But by the time Ruffin completed the electrical and plumbing work in early 2005, SSD Classic’s financial condition had deteriorated to the point it could no longer operate. SSD Classic, therefore, was unable to fulfill its obligations under the Contract.
Both SSD Classic and the Sobergs filed for relief under Chapter 7 of the Bankruptcy Code on April 27, 2005. Ruffin argues in the instant adversary complaint that the two payments that he tendered to *3SSD Classic totaling $14,900.00 constitute a debt of the Sobergs that is excepted from discharge under 11 U.S.C. § 523(a)(2)(A).
The Sobergs filed this motion for summary judgment under Fed.R.Civ.P. 56, made applicable to this proceeding by Bankr.R. 7056. The Sobergs argue in their motion that SSD Classic is the only entity responsible for any debt to Ruffin. The Sobergs submitted the affidavit of Larry Soberg in support of their motion. Ruffin failed to either file a response to the Sobergs’ motion for summary judgment or to produce any evidence that controverted the factual allegations in Larry Soberg’s affidavit.
The Court finds that the undisputed facts in the summary judgment record establish that the Sobergs are not individually liable for any debt that SSD Classic may owe to Ruffin. Thus, the Court will grant the Sobergs’ motion for summary judgment.
CONCLUSIONS OF LAW
Summary judgment is appropriate when the evidence, viewed in the light most favorable to the non-moving party, demonstrates that there is no genuine issue of material fact so the moving party is entitled to judgment as a matter of law. Freyermuth v. Credit Bureau Serv., Inc., 248 F.3d 767, 770 (8th Cir.2001); Fed. R.Civ.P. 56(c). Once the moving party establishes by affidavit or otherwise that there are no material facts in dispute, the burden shifts to the non-movant to produce evidence, beyond the allegations in its pleadings, that creates a material issue of fact for trial. Gilooly v. Missouri Dep’t. of Health & Senior Serv., 421 F.3d 734, 738 (8th Cir.2005). Thus, if the non-moving party fails to respond to a motion for summary judgment, the court will deem the factual allegations contained in the motion and any supporting affidavit as admitted. Reasonover v. St. Louis County, 447 F.3d 569, 579 (8th Cir.2006); Fed.R.Civ.P. 56(e).
Here, Ruffin failed to respond to the Sobergs’ motion for summary judgment or to offer any evidence that controverted the evidence in Larry Soberg’s affidavit. The Court, therefore, will treat the factual allegations contained in the Sobergs’ motion and Larry Soberg’s supporting affidavit as admitted. The Court finds that these undisputed facts establish as a matter of law that the Sobergs have no individual liability under the Contract to Ruffin.
The determination of whether to hold individual shareholders liable for a corporation’s debt is a matter of state law. Aoki v. Atto Corp., 323 B.R. 803, 811 (1st Cir. BAP 2005). Ordinarily, Missouri law treats a corporation as a distinct legal entity separate from its shareholders. A & E Enter., Inc. v. Clairsin, Inc., 169 S.W.3d 884, 887 (Mo.Ct.App.2005). Thus, generally a corporation’s shareholders are not liable for its debts under Missouri law. Drummond Co. v. St. Louis Coke & Foundry Supply Co., 181 S.W.3d 99, 103 (Mo.Ct.App.2005).
Missouri law, however, allows a court to pierce a corporation’s veil and hold its shareholders liable for its debts in narrow circumstances. Bank of Belton v. Bogar Farms, Inc., 154 S.W.3d 518, 520 (Mo.Ct.App.2005). Namely, a third-party seeking to pierce the corporation’s veil must demonstrate that: (1) the shareholders effectively controlled the corporation so that the corporation had no independent existence; (2) the shareholders used that control to perpetrate a fraud or other wrong on the third-party; and (3) the shareholders’ wrongful action was the proximate cause of the third-party’s injury. Id. Here, there is insufficient evidence in the summary judgment record to create a *4material issue of fact that the Sobergs used their control of SSD Classic to perpetrate any wrong on Ruffin.
Ruffin alleges in his complaint that the Sobergs used their control of SSD Classic to deplete its assets by diverting the $14,900.00 that Ruffin paid SSD Classic for the Sobergs’ personal use. Missouri law does hold that a plaintiff may establish that a shareholder perpetrated a fraud on the plaintiff by stripping the corporation’s assets for the shareholder’s individual benefit. Mobius Management Sys. v. W. Physician Search, LLC, 175 S.W.3d 186, 188-89 (Mo.Ct.App.2005). The undisputed facts in the summary judgment record here, however, establish that the So-bergs did not deplete SSD Classic’s assets for two reasons.
First, the Sobergs provided SSD Classic with $30,000.00 in cash just after it executed the Contract. Thus, the Sobergs were actually attempting to bolster SSD Classic’s financial condition, not depleting its assets, at the time SSD Classic entered into the Contract with Ruffin.
Second, Larry Soberg deposited the $14,900.00 that Ruffin remitted to SSD Classic into SSD Classic’s general checking account. SSD expended the funds in its general checking account to meet its obligations to Ruffin under the Contract by: (1) purchasing and delivering the drywall to Ruffin’s residence; (2) procuring a permit from the City of St. Louis for its portion of the project; (3) obtaining a dumpster; and (4) paying laborers for work on the project. This evidence demonstrates that the Sobergs utilized the $14,900.00 that Ruffin tendered to SSD Classic to perform SSD Classic’s duties under the Contract.
Viewing this evidentiary record in the light most favorable to Ruffin, the Court finds that the Sobergs did not use their control of SSD Classic to deplete SSD Classic’s assets. The Sobergs, therefore have demonstrated that they are not liable as a matter of law for any debt that SSD Classic may owe to Ruffin. Accordingly, the Sobergs do not owe a debt to Ruffin that could be excepted from discharge under 11 U.S.C. § 523(a)(2). Thus, the So-bergs are entitled to judgment as a matter of law on Ruffin’s adversary complaint and the Court will grant their motion for summary judgment.
An Order consistent with this Memorandum Opinion will be entered this date. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494028/ | MEMORANDUM DECISION
MICHAEL S. McMANUS, Chief Judge.
On or about October 9,1997, the debtors created a trust, the Robert P. Bogetti and Deolinda M. Bogetti Retirement Plan and Trust. The res of the trust includes real property located at 3950 W. Durham Ferry Road, Tracy, California (“the property”). The debtors were both the settlors and the beneficiaries of the trust.
On May 16, 2000, Bank of America (“BofA”) obtained a judgment against the debtors in the amount of $2,621,081.03. BofA recorded an abstract of the judgment in San Joaquin County on May 24, 2000 and again on May 25, 2000. The resulting judicial liens retroactively attached to the property by virtue of a writ of attachment identifying the property and recorded on or about December 2,1998.
On June 26, 2000, the debtors filed this bankruptcy case. The debtors claimed the property as exempt pursuant to Cal.Civ. Proc.Code § 704.730(a)(3). They also claimed their interest in the trust, as well as the property, exempt under Cal.Civ. Proc.Code § 704.115(b).
The debtors argued in an adversary proceeding, Adv. No. 01-2122, that BofA’s judicial hen was avoidable for reasons having nothing to do with 11 U.S.C. § 522(f)(1)(A). In that proceeding, the debtors maintained that the writ of attachment was defective, thereby preventing the relation back of the abstracts of judgment. This allegedly meant that the abstracts became effective within 90 days of the filing of the petition, making the resulting judicial liens avoidable as preferential transfers. See 11 U.S.C. § 547(b).
On BofA’ motion, however, the court dismissed the adversary proceeding on July 9, 2001, ruling:
The debtors have an interest in the trust but not in the res of the trust. The *16property of the trust is owned by the trustees [of the Bogetti’s trust] ... The real property is not now property of the estate and an action under 11 U.S.C. § 547 cannot lie. The motion will be granted. Because it is yet possible for the [property in the trust] to become property of the estate, the complaint will be dismissed without prejudice.
See Minutes of Hearing, July 9, 2001. An appeal of the dismissal followed but it was voluntarily dismissed by the debtors.
Next, the United States Trustee and BofA objected to the debtors’ claims of exemptions. On October 4, 2001, the court issued a Memorandum Decision, sustaining the objection to the section 704.115 exemptions and overruling the objection to the section 704.730 exemptions.
As to the $125,000 homestead exemption claimed pursuant to section 704.730 in connection with the property, the court concluded:
1. The trust held legal title to the property.
2. The debtors, as beneficiaries of the trust, held a beneficial interest in the trust but not in the property in the trust. This interest is property of the bankruptcy estate even though the trust instrument contained a spendthrift provision. If enforceable, this provision would prevent the debtors’ beneficial interest in the trust from becoming property of the estate. However, the spendthrift provision was unenforceable under California law because the settlors and the beneficiaries were the same persons. See Cal. Probate Code § 15304(a) (making self-settled spendthrift trusts unenforceable).
3. The debtors, as settlors of the trust, had a beneficial interest in the property held in trust even though the trust purported to be irrevocable. In substance, the trust was revocable because the debtors were the only beneficiaries and Cal. Probate Code § 15403(a) permits all beneficiaries to agree to terminate an irrevocable trust. As a result, the property held in trust remained subject to the claims of the debtors’ creditors. See Cal. Probate Code §§ 18200. Further, the invalidity of the spendthrift provision also meant that the creditors of the debtors/settlors, but for the bankruptcy petition, could satisfy them claims against the property and the other trust assets. See Cal. Probate Code § 15304(a).
4. Because the interest of the debtors as settlors of the trust in trust assets could be reached by their creditors, those assets are also subject to the reach of the bankruptcy trustee.
5. However, because the property and other trust assets are subject to claims of creditors and the trustee, the debtors, as settlors of the trust, are entitled to claim exemptions in the trust property. See Cal. Probate Code § 18201.
6. Therefore, the court overruled the objections to the debtors’ homestead exemption pursuant to Cal.Civ.Proc.Code § 704.730(a)(3) in the amount of $125,000.1
The debtors appealed this court’s order, contending that its earlier dismissal of Adv. Pro. 01-2122 on the ground that the legal interest in the trust property was not property of the estate meant that the debtors’ beneficial interest in the trust and in the trust property also was not property of the estate.
The Bankruptcy Appellate Panel rejected this assertion, and in affirming the deci*17sion of this court, concluded on May 14, 2002:
... The question, for purposes of determining property of the estate, is whether debtors have a legal or beneficial interest in the property. Because the legal and beneficial interests in trust property are held by separate entities, it was not error for the bankruptcy court to determine whether each of those interests is property of the estate.
A debtor’s beneficial interest in property is property of the estate, unless excluded because it is subject to an antialienation clause that is enforceable under nonbankruptcy law. [Citations omitted.] The trust in this case contains an antialienation provision. However, because debtors are the settlors of the trust, as well as its beneficiaries, the provision restraining alienation is unenforceable under California law. Cal. Probate Code § 15304(a). As a result, debtors’ beneficial interest in the trust or the trust corpus is property of the estate.
The decision of the Bankruptcy Appellate Panel was affirmed by the Ninth Circuit on August 18, 2003.
The debtors now move to avoid BofA’s judicial lien pursuant to 11 U.S.C. § 522(f)(1)(A). Given the court’s prior conclusion that the debtors could claim a homestead exemption, the avoidability of BofA’s judicial lien pursuant to section 522(f)(1)(A) is ripe for decision.
The court first must decide the extent of the debtors’ interest in the property they have exempted.
BofA maintains that the debtors’ interest is limited to just $125,000 of equity in the property. On the date of the petition, the remainder of the property was owned by the trust, not the debtors. Consequently, just as the debtors could not avoid the transfer of an interest in the property under section 547(b) they did not own that property, they cannot avoid a judicial lien encumbering the property under section 522(f)(1)(A) .because it belonged to the trust when the petition was filed.
The debtors counter that they had, on the date of the petition, and continue to have, a beneficial- interest in the entire property. Therefore, the value of the entire property as of the petition date, not just $125,000, must be determined. If the unavoidable liens plus their homestead exemption exceed that value, then the arithmetical formula in 11 U.S.C. § 522(f)(2)(A) requires BofA’s judicial lien be avoided in its entirety and stripped from the property.
As noted above, the court previously determined that the trust, despite its ostensible irrevocability, was in fact revocable.
Had the trust been irrevocable, the debtors would have had no right to exempt any portion -of the trust property.2 Only when a trust is revocable may the creditors of the settlor satisfy their claims from the property contributed to the trust by the settlor. See Cal. Probate Code § 18200. Only if it is subject to the claims of creditors, the settlor may exempt the trust property to the extent allowed by Cal.Civ.Proc.Code §§ 703.101, et seq. See Cal. Probate Code § 18201.
*18Assuming that the trust is revocable, as the court previously determined, what interest did the debtors have in the property when they filed their petition?
Under California law, a settlor’s right to revoke a trust is not inconsistent with the establishment of the trust and the right does not make the trust void. The right to revoke is a mere privilege and it does not prevent the vesting of legal title of the trust res in the trust. See Estate of Willey, 128 Cal. 1, 9-10, 60 P. 471 (1900). The trust remains operative and absolute until the right to revoke is exercised. Id. Until a trust is revoked, it or its trustee owns the trust res.
So, on the date the debtors filed their bankruptcy petition, the trust owned the property. Nonetheless, the debtors also had an interest in the property but their interest was limited, as BofA maintains, to the $125,000 exemption.
When the petition was filed, the bankruptcy trustee3 acquired the status of “a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien.. 11 U.S.C. § 544(a)(1). See, also In re Kelley, 300 B.R. 11, 17 (9th Cir. BAP 2003); In re Pike, 243 B.R. 66, 70 (9th Cir. BAP 1999) (holding that the filing of a bankruptcy petition constitutes a “forced sale” for purposes of the California’s homestead exemption laws).
As noted above, California law permits a creditor of a settlor of a revocable trust to satisfy a claim against the settlor from property held by the trust. This right, by virtue of section 544(a)(1), gave the bankruptcy estate an interest in the property.4 The interest of the estate also triggered the debtors the right to claim a homestead exemption in the property. But, the debtors can claim nothing more in the property. The remaining interest in the property, as well as other nonexempt trust property, remains property of the trust subject to the claims of the bankruptcy estate.
BofA’s judicial lien, as it concedes, is subject to the debtors’ $125,000 homestead exemption, whether the exemption is asserted in or out of bankruptcy court. Even without this concession, it is unnecessary . to grant the debtors’ motion in order to establish that their exemption is allowed. The court has already allowed their homestead exemption.
This motion is necessary only insofar as it is possible to avoid the fixing of the judicial lien on the real property. Because the debtors did not own that property when the petition was filed, this is not possible. The debtors may not utilize section 522(f)(1)(A) to avoid a judicial lien that encumbers property owned by another.
BofA also maintains that it holds a post-petition claim for approximately $50,000 that is secured by the property and must be deducted from the debtors’ $125,000 homestead exemption. Because the court cannot grant the debtor’s motion, there is no need to decide this issue.
A separate order will be entered.
. The court sustained other objections to exemptions other than the homestead exemption. However, those exemptions and objections are not germane to the motion now before the court.
. At oral argument, counsel for the debtor suggested that the court had not previously determined that the trust was revocable. In fact, the court did come to that conclusion in its Memorandum Decision dated October 4, 2001. The court has not, as yet, determined that the trust has been revoked. If the court had not decided the issue of the trust’s revocability, and if the trust is irrevocable, the debtors could not claim an exemption in the trust res. See Cal. Probate Code §§ 18200.
. This case was originally filed under chapter 11 and the debtors remained in possession. Nonetheless, a debtor in possession is a trustee for purposes of section 544(a). See 11 U.S.C. § 1107(a).
. The fact that bankruptcy estate succeeds to any right of the debtors, as the trust’s settlors and beneficiaries, to revoke the trust, also gives the estate an interest in the property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494029/ | MEMORANDUM OF DECISION
TERRY L. MYERS, Chief Judge.
INTRODUCTION AND PROCEDURAL BACKGROUND
On September 17, 2003, Alex Smith (“Debtor”) filed a voluntary chapter 13 petition. Doc. No. 1. Prior to this filing, Debtor commenced litigation against family members, closely-held family corporations, and others in the Idaho state courts. See, e.g., Doc. No. 5 (referencing Eugene I. Annis, Guardian Ad Litem for Alex R. Smith v. Dave Smith Chevrolet Oldsmobile Pontiac Cadillac, Inc., et al, Case No. CV 03-1818, First Judicial District, State of Idaho, in and for Kootenai County (the ‘,‘State Court Action”)).
The chapter 13 trustee, C. Barry Zimmerman (“Trustee”), in conjunction with Debtor and Debtor’s first bankruptcy attorney, sought approval of the employment of special counsel, on a contingency fee *29basis, to represent the interests of Debtor and the bankruptcy estate in the State Court Action. See Doc. Nos. 7, 8. By an order entered in October, 2003, the Court approved the employment of Charles R. Dean, Jr. (“Special Counsel”) under § 327(e) to handle the State Court Action for the Debtor and estate. See Doc. No. 31. The State Court Action continued. See Doc. No. 33 (order terminating stay).
At a hearing on November 20, 2003, Debtor was found to be ineligible for chapter 13 relief, and the Court indicated that the case would be converted to a chapter 7 liquidation unless Debtor sought conversion to chapter 11 instead. See Doc. No. 40. Debtor requested such a conversion to chapter 11, see Doc. No. 42, and that matter was heard on December 22. By ruling entered the following day, the Court denied Debtor’s request, and converted the case to chapter 7. See Doc. Nos. 60, 62. The chapter 13 trustee, Mr. Zimmerman, was appointed as the chapter 7 trustee.
Trustee requested that the employment of Special Counsel be continued. See Doc. No. 67. Over objection, that request was granted in March, 2004. See Doc. Nos. 81, 82.
The State Court Action progressed further. An attempted mediation was unsuccessful.
On December 3, 2004, Trustee filed a Notice of Sale and Compromise of Claim. See Doc. No. 88 (the “Notice”).1 The Notice indicates Trustee’s intent and request that he be allowed to sell all the estate’s interests in Dave Smith Chevrolet Oldsmobile Pontiac Cadillac, Inc. (“Dave Smith Motors”), Frontier Leasing & Sales, Inc. (“Frontier”), River Management, LLC (“River”), and “any related or affiliated entities” and to compromise the estate’s claims in the State Court Action for the sum of $2,000,000. Id. at 1-2.
The Notice further indicates that $1,000,000 would be paid immediately upon requisite Court approval, with a promissory note provided for the remaining $1,000,000. That note would be payable with interest at 4.73% per annum in monthly installments in the amount of $10,475.07. Id. at 2. The term of the note is not disclosed, though the information provided supports the conclusion that it would be a 10 year term (120 months).
The compromise of the litigation involves the defendants in the State Court Action, including Dave Smith Motors, Frontier, and River. The sale would be to Dave Smith Motors or its assigns. The note would be signed by Ken Smith as “accommodation maker.” Id. at 2.
Debtor objects to the proposed sale and compromise. Doc. No. 93. An evidentiary hearing on the matter was held on February 1, 2005. Trustee’s request was taken under advisement on February 11, upon submission of post-hearing briefing.
The Court concludes that, under applicable precedent, Trustee did not meet his burden of showing that the suggested compromise is fair and equitable and should be approved. His request for Court approval of that compromise, and the conjoined re*30quest for approval of sale of property of the estate, will be denied.
FACTS
The evidence presented at the hearing establishes the following.2
Dave Smith Motors is a closely-held family corporation that operates a new car dealership in Kellogg, Idaho, a small town in Idaho’s panhandle. The now-deceased founder of the enterprise, Dave Smith, was Debtor’s father. Debtor’s brother, Kenneth Smith, is the current president of the corporation and chief operations manager of the business. He owns 55% of Dave Smith Motors. Debtor owns 30% of that corporation. Other family members own the remaining 15% of the company.
Though located in a remote and sparsely populated area, Dave Smith Motors has developed into one of the most successful car dealerships in the Pacific Northwest. Recent press reports, validated by Kenneth Smith’s testimony, reflect gross sales of $350,000,000.00 last year, an increase of $50,000,000.00 over the prior year. Testimony indicated that the corporation’s balance sheet in 2003 showed a net worth of $10,900,000.00.
Kenneth Smith, Debtor and other Smith family members who hold stock in Dave Smith Motors do not receive dividends or other similar distributions from this highly successful endeavor. Kenneth Smith testified that it was his father’s intent and design that family members be paid “salaries” for services they rendered to the dealership, but that all profits are otherwise reinvested into the business. He indicates that this situation will continue until such time as the amount of cash flow equals the amount of the business’ inventory, something he expects will not occur for a number of years.
The amount of these salaries, like other significant corporate decisions, are made by the shareholders. Kenneth Smith controls those decisions given his majority ownership and his role as managing officer. His salary in 2004 was approximately $1,700,000.3 Kenneth Smith viewed this as commensurate with his services and efforts and his success in running the business. Kenneth Smith’s wife received $150,000. Other family members, other than Debtor, apparently received some compensation. Debtor received none that year, though he had received compensation in prior years.4
Dave Smith Motors operates its dealership on real property in Kellogg, Idaho owned by River. The evidence regarding River’s value indicated the land was worth in excess of $660,0005 against which exist*31ed a secured indebtedness of around $199,000. Dave Smith Motors pays rent to River in the amount of $9,000 per month.6 However, River’s required debt service is only $4,000 to $5,000 per month. Kenneth Smith testified that the excess cash flowing to River had been used by River to prepay principal on the mortgage debt. Kenneth was unclear as to whether this occurred only once a year from accumulated cash reserves or irregularly throughout the year.
Like Dave Smith Motors, River pays no dividends or other distributions of profit to its owners. Debtor owns 32.95% of River. Kenneth Smith owns the rest and controls its business and financial operations.
Frontier is a related operation, selling used cars and trucks on property in Coeur d’Alene, Idaho. It provides a means for Dave Smith Motors to liquidate used car inventory taken as trade-in vehicles upon its sale of new cars and trucks. Book value of Frontier was allegedly around $800,000.00. Debtor owns 25% of Frontier. Like Dave Smith Motors and River, no distributions of profits are made to shareholders through dividends.
As noted, the Notice contemplates Trustee’s sale (to Dave Smith Motors or its assignee) of Debtor’s interests (now the estate’s interests) in Dave Smith Motors, Frontier and River. Trustee and the defendants in the State Court Action, who had negotiated this sale and the related settlement with Trustee, presented two expert witnesses at hearing to testify about the value of Debtor’s minority interests in the three corporations.7
One of these witnesses, Ms. Anderson, opined that Debtor’s 30% stock ownership in Dave Smith Motors, 25% stock ownership in Frontier and 32.95% membership interest in River were collectively worth between $1,780,000 and $2,280,000, with the bulk of the value attributed to the stock in Dave Smith Motors. The other witness, Mr. Boyd, pegged the aggregate value of Debtor’s minority interests at $1,250,000.
Both witnesses emphasized the difficulties involved in attempting to value minority interests in closely-held corporations, and in marketing such interests. Various “lack of marketability discounts” or “minority share discounts” were thus applied to reach their respective conclusions.
These witnesses addressed only the calculation of a value or range of values for Debtor’s ownership in the three businesses. They did not attempt to render opinions on the values of the three entities as a whole. Nor did they address any of the issues, other than the value of Debtor’s minority interests, being litigated in the State Court Action.
In regard to the merits and value of Debtor’s claims in the State Court Action, Trustee called one of the attorneys for the defendants in that litigation, Harvey Rich-man. Mr. Richman denigrated the strength of the complaint and Debtor’s chances of success. He was obviously, *32however, not impartial. Mr. Richman is defending the State Court Action, and his clients are the ones attempting to settle with Trustee under the Notice.
As noted earlier, Trustee retained Special Counsel to represent the interests of the estate in the State Court Action. After the failure of mediation, the State Court Action was scheduled for trial in May, 2005.8 Special Counsel is handling the matter on a contingency fee basis.
Trustee conceded that he did not consult with Special Counsel on the merits of the proposed compromise of the litigation.9 In point of fact, Special Counsel appeared at hearing and vigorously opposed the suggested settlement, contending that it did not appropriately account for either the value of Debtor’s stake in the three corporations or the potential recoveries in the litigation.10
In addition to Special Counsel, Debtor appeared through his current bankruptcy counsel11 and objected to the sale of assets and compromise of litigation. Debtor’s standing to do so is inescapable. The total claims asserted in this chapter 7 case are far less than the suggested amount of the settlement, and it appears that Trustee would be able to fully pay all administrative expenses and creditor claims from the $1,000,000 cash component of the settlement.12 Thus, under § 726(a)(6), the balance of the property of the estate remaining will be distributed to Debtor.13
*33Finally, it can be noted that Debtor previously signed a “consent” to the sale and compromise. See Doc. No. 90. But it must also be noted that he mailed that consent to the Court along with a handwritten letter expressing a belief that the interests in the businesses were worth considerably more than what was being offered, and that his consent was in part based on his brother’s promise that Debtor would be given a job. See Doc. No. 89. Debtor indicated that he was “scared to death that [he] might make a[w]rong decision” and that the Court might approve the $2,000,000 settlement and Debtor would have neither a job nor a relationship with his family. Id. In addition, there was testimony that the consent was obtained simultaneously with or in close proximity to a payment of $2,000 in cash to Debtor by or on behalf of Kenneth Smith, though Kenneth Smith characterized this payment as merely a “Christmas present” to Debt- or.
DISCUSSION AND DISPOSITION
A. Standards
This Court stated in In re Marples, 266 B.R. 202, 01.3 I.B.C.R. 116 (Bankr.D.Idaho 2001):
Trustees are generally and properly given broad discretion to decide how to perform the myriad duties imposed on them by the Bankruptcy Code. Among these discretionary powers is the ability to negotiate settlements and compromises of disputes.
However, the Trastee is a representative of all the creditors of the estate. For that reason, his ability to settle and the bounds of his discretion are not limitless. Rule 9019(a) recognizes that the Court’s approval of the proposed compromise or settlement is necessary and that such approval can occur only after notice has been provided to creditors and other parties in interest.
The standards which guide the Court in fulfilling its role in reviewing compromise proposals are well settled. In re Lake City R. V., Inc. 226 B.R. 241, 98.4 I.B.C.R. 104 (Bankr.D.Idaho 1998) held:
The Court may approve a compromise only if it is “fair and equitable” and that determination must be supported by a sufficient factual foundation. [Martin v. Kane (In re A & C Properties), 784 F.2d 1377 (9th Cir.1986)] at 1383.
In determining the fairness, reasonableness and adequacy of a proposed settlement agreement, the court must consider:
(a) The probability of success in the litigation;
(b) the difficulties, if any, to be encountered in the matter of collection;
(c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it;
(d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises. In re Flight Transp. Corp. Secs. Litig., 730 F.2d 1128, 1135 (8th Cir.1984) (citations omitted), cert. denied, 469 U.S. 1207, 105 S.Ct. 1169, 84 L.Ed.2d 320 (1985).
A & C, 784 F.2d at 1381. This standard has been expressly recognized in this District. In re Pintlar/In re Gulf USA Corp., 94 I.B.C.R. 76, 77 (Bankr.D.Idaho 1994). “The trustee, as the party proposing the compromise, has the burden *34of persuading the bankruptcy court that the compromise is fair and equitable and should be approved.” A & C, 784 F.2d at 1381.
226 B.R. at 243-44; 98.4 I.B.C.R. at 105. See also, In re Western Appliance, Inc., 96.1 I.B.C.R. 32, 33-34 (Bankr.D.Idaho 1996). Accord, Martinson v. Michael (In re Michael), 183 B.R. 230, 233, 238-39 (Bankr.D.Mont.1995).
266 B.R. at 206. Both proponents and opponents of the compromise have identified this controlling authority. They differ markedly on its application to the Notice.
B. Issues and factors related to the compromise
1. Probability of success in the litigation
This element is inevitably a matter of some conjecture. Litigation is by its nature unpredictable. The Court is required to evaluate any objective factors shown by the evidence that might arguably relate to the possibilities of success or failure should the suit be tried rather than settled.
Trustee’s reliance on the testimony of Mr. Richman in support of this element left something to be desired. Mr. Rich-man is, no doubt, an effective and zealous advocate. However, most of what he provided in the context of the instant matter was subjective opinion if not hyperbole.14
Serious issues are raised in the State Court Action regarding Debtor’s interests in the three closely-held entities and the conduct of Kenneth Smith and others toward Debtor. The State Court has granted summary judgment to the defendants on certain causes of action. But it has denied summary judgment on several others.15
The Court was provided only limited evidence at the February 1 hearing upon which to evaluate the dynamics and likely outcome of the remaining portions of the litigation.16
As noted, the trial is scheduled for May 23 of this year. Both parties have indicated that they are prepared to proceed, and indicate that the State Court has the matter scheduled in such a way that it is unlikely to be vacated in favor of other *35matters. One readily concludes that both sides are confident, and believe their positions -will be effectively, indeed successfully, presented at trial.
Defendants may hold the upper hand insofar as expert witnesses are concerned, something not all that surprising given the tremendously disparate financial resources of the litigants. However, how that testimony plays out and is evaluated by the trier of fact obviously remains to be seen.
Ultimately, the probability of “success” in the suit, and the economic magnitude of such success, was not shown. But neither was it shown that the litigation was valueless.
2. Difficulties to be encountered in collection
All the parties are in essential agreement that, were Debtor to prevail in the State Court Action, there would be little difficulty in collecting a judgment. The defendants in the State Court Action have significant resources, as the evidence at hearing amply established.
3. Complexity of litigation, and expense and delay attending it
The State Court Action is complex and presents numerous issues of fact and law. Still, it is slated to be tried within just a few months, and there is not much delay before the matter is presented for decision. Naturally, there may be some delay from the submission of evidence to a final trial court decision, and there is always the possibility of appeal.
Expense of the litigation to the estate is limited by the contingency fee agreement under which Special Counsel represents the estate. Proponents of the settlement argued that the estate could be exposed to an award of costs and fees against it, and perhaps affirmative relief on counterclaims. Neither the likelihood of such recovery nor its magnitude was established.
4.The interests of creditors (and others)
Marples noted that the interests of creditors can at times be hard to ascertain, especially when creditors decline to express their views. 266 B.R. at 207. Here, all creditors — save the defendants in the State Court Action' — have remained silent.
Trustee suggests, however, that because the settlement’s cash component is sufficient to fully pay all creditors, it is thus safe to surmise their support of the agreement from the lack of objection. That appears sensible under the circumstances. The settlement would provide for sufficient cash to pay all creditors in full with interest within a relatively short period of time. The interests of creditors generally would support settlement.
But the case is unique. Even if the Court limited its focus to just the $1,000,000 cash component of the settlement, Debtor also has an unarguable stake. Under § 726(a)(6), Debtor will receive whatever surplus exists after administrative expenses, creditor claims (timely or untimely filed), and interest on claims are paid. The Court does not read the case law, in speaking of the interest of creditors and a deference to their views, as unequivocally excluding the interests of the debtor where the estate is solvent or the proposed settlement would make the estate solvent.
The views of those who are to receive the benefit of a settlement, or who would bear.the exposure of potential loss if the cause is unsuccessfully tried, should be considered with appropriate deference. Creditors’ interest in the prompt and full cash payment of their claims is self-evident. However, Debtor feels the settlement does not adequately compensate him *36for his interest in the three businesses or for the claims to damages and other relief asserted in the litigation. Though he stands last in the § 726(a) line, perhaps half or more of the $1,000,000 cash component of the settlement and all the deferred settlement distributed under the note will go to him.
5. Other considerations
There is a tendency when considering “factors” to approach the analytical exercise mathematically, toting on a scorecard the factors that either support approval on the one hand or caution against it on the other. The tendency should be avoided. Little in life, much less litigation, is susceptible to such simple arithmetic.
Proof of this can be seen in the foregoing discussion. Certain factors tilt decidedly in favor of the proposal, and others in the opposite direction. Still others add little to the balance, as they are inherently equivocal in nature or inadequately proven. At best, such factors provide analytic tools by which proof can be sifted and weighed, assisting the Court in appropriately exercising its discretion.
While the Court “must consider” the four factors, see A & C, 784 F.2d at 1381, it concludes that it should not reflexively reject any other fact or factor that relates to whether the compromise is “fair and equitable.” There are such factors here.
The Notice reflects that of the $2,000,000 the parties deem sufficient to (a) buy Debtor’s interests in the businesses and (b) settle his litigation claims, $1,000,000 will be paid in cash. Trustee’s submissions and arguments reflect his intention to use these funds to satisfy his administrative obligations and all creditor claims. His Notice does not specifically address who receives the 10 year note, though one must assume it to be Debtor. That Trustee would keep the estate open and administer the payments on the note is highly unlikely.
Given the nature of the underlying litigation, the history of family discord, and Debtor’s opposition to the settlement, approving a settlement that requires Debtor to accept a note payable over ten years by his brother has not been shown to be reasonable.
Nor has Trustee justified the use of a note at all. The inability of the settling parties to fund the entire settlement in cash was not established. The evidence (including gross annual sales figures for Dave Smith Motors, income figures for Kenneth Smith, and some discussion of the assets, balance sheets, and net values of all three businesses) would indicate that the defendants either have the necessary resources to support a cash settlement or could readily obtain additional required amounts.
Finally, Trustee has failed to justify that the terms of the note are fair and equitable. First, the ten year term appears unduly long and is unexplained. Second, the note appears to be unsecured, and the reasons why are not explained. Third, the note bears interest at a rate of 4.73% per annum on the unpaid obligation. With the reported prime rate17 at 5.50%, the reasonableness of requiring Debtor to accept a stream of payments at this rate, not to mention a fixed rate over ten years, is unexplained.
The Court concludes from the entirety of the evidence that credible and legitimate concerns are presented regarding the fairness and adequacy of the settlement, and that Trustee did not sustain his burden.
*37C. Issues related to sale
Trustee is not just settling litigation. He is also proposing to sell Debtor’s interests in Dave Smith Motors, Frontier and River. Some of the issues related to sale are interwoven with those of settlement discussed above. But the presence of the proposed sale implicates additional authorities and considerations.
The first are procedural. Sales by a trustee of property of the bankruptcy estate are authorized by § 363, and implemented through Fed. R. Bankr.P. 6004. As previously noted, Fed. R. Bankr.P. 2002(a)(2) requires notice to be provided to creditors.
In this District, sales are also subject to the provisions of Local Bankruptcy Rule 2002.1. In order to comply with this Rule, the notice of sale must include, inter alia, a description of the property to be sold; the time and place of sale; the terms of sale; whether the property is to be sold free and clear of liens; the estimated fair market value of the property and a brief statement of the basis for the estimate. See LBR 2002. l(b)(l)(A)-(E). The Notice did not comply with LBR 2002.1 in several important regards.
First, in describing the property to be sold, Trustee did not specify the nature of the interests Debtor held in the three business entities. Moreover, he indicated that the sale would include Debtor’s interests in “any and all related or affiliated entities” but he provided no explanation of what this referenced. Further, even if limited to just the three businesses, Trustee did not indicate in his Notice the estimated fair market value of the property to be sold, nor did he identify the basis for his estimate. LBR 2002. l(b)(E).
The evidence on the value of Debtor’s minority holdings in Dave Smith Motors, Frontier and River came primarily from the experts retained by the settling defendants/proposed purchasers. Trustee, during his testimony, did not present any other or different basis for advancing the idea that the estate’s significant minority stake in these successful businesses should be something less than $2,000,000.
The more persuasive of the two defendant-retained experts, Ms. Anderson, opined that after “lack of marketability discounts” and “minority shareholder discounts,” the value of Debtor’s interests in the three business was in the range of $1,780,000 to $2,280,000, and that the acquisition of the interests for $2,000,000 would be within her analysis.18
That the purchasing parties’ retained expert would validate the proposed purchase amount is not surprising. And that a trustee might wish to give some weight to the opinion of the purchaser is not improper or objectionable. However, a trustee’s duty to the creditors and estate requires more than mere adoption of the position advanced by the party on the other side of the negotiating table.
It is true that Trustee here testified that, in his years of experience, minority positions in closely-held corporations are difficult to sell. He also indicated that, if sold, they often bring less than the amount mathematically derived from multiplying the holder’s percentage interest by the book or other value of the corporation. He further testified that, when dealing with car dealerships, the nature of franchise and similar agreements with automobile companies complicate matters further *38and reduce the value of the minority interests. These observations are certainly entitled to some deference.
At the same time, Trustee indicated that he had not reviewed the franchise, dealer or other agreements applicable here. Nor had he reviewed current financial statements, documents and information for the entities. Kenneth Smith’s testimony validated Debtor’s assertion that Dave Smith Motors had significant gains in gross sales in 2003 and 2004. But, the most recent balance sheet Trustee reviewed was for 2002, and he had not asked for or reviewed tax returns.
Trustee did not evaluate River’s real estate documents. Debtor’s interest in that limited liability company is 32.95% which is a larger (though still minority) share than he holds in Frontier or Dave Smith Motors. River does not appear to present the franchise or dealer agreement issues that concern Trustee. River holds property, with a value substantially in excess of debt, and has a triple net lease more than sufficient to cover debt service. Whatever impediments might exist to the attempted sale of a minority interest in Dave Smith Motors or Frontier, Trustee did not show similar sorts of issues were present in regard to a sale of Debtor’s interest in River.
Trustee also indicated that he had not communicated with his Special Counsel, relying instead on his primary bankruptcy counsel to do so. Special Counsel is certainly in a position to provide access to information related to the valuation of the estate’s interests in the businesses, even if Trustee were to believe that Special Counsel (like Richman) would mostly advance an advocate’s view. Under the circumstances, Trustee should consult with the estate’s Special Counsel and address candidly the specific facts and issues related to Debtor’s minority interests in the businesses as well as those related to other aspects of the litigation.
These several factors go to the Trustee’s estimate of the value of the estate’s interests in the entities and his informed basis for that valuation. They lead the Court to the conclusion that Trustee’s sale request and the portion of the Notice addressing sale of property of the estate are, at present, procedurally and substantively inadequate. This is an additional reason to withhold approval of the compromise.
CONCLUSION
A trustee is given broad discretion to negotiate compromises and to propose sales of estate assets. The Court harbors no doubt that Trustee here has the interests of the estate and its creditors firmly in mind, and believes the suggested sale and settlement appropriate. Certain of the factors identified by Trustee are credible and support a settlement, particularly one that in a “universal” sense resolves both the litigation and the treatment and bankruptcy administration of Debtor’s minority interests in the family businesses.
However, several key factors do not support the arrangement set forth in the Notice. Insufficient evidence was presented to support a judicial validation of Trustee’s judgment that this particular sale of estate assets and compromise of estate claims is fair and equitable and should be approved. An appropriate order will be entered.
. Trustee's Notice views the relief requested as comprising both a sale of estate assets and a compromise of disputes. Ordinarily, sales under § 363 are advanced through notice, see Fed. R. Bankr.P. 6004 and LBR 2002.1, while proposed compromises and settlements are advanced by motion, see Fed. R. Bankr.P. 9019(a). Trustee, however, scheduled the Notice for hearing on February 1, 2005 and provided ample time and opportunity for parties to appear and be heard. Accord Fed. R. Bankr.P.2002(a)(2), (a)(3) (requiring 20 day notice of, respectively, proposed sales and hearing on approval of compromises). The fact that Doc. No. 88 was not identified or filed as a Rule 9019 “motion” is not deemed to be significant.
. The Court's findings of fact and conclusions of law, required on the contested matter under Fed. R. Bank. P. 9014 and 7052, are set forth in this Decision. All factual findings based on testimony include the Court's evaluation of witnesses' credibility, and of the weight to be accorded their testimony. The Court emphasizes that these findings relate only to the submissions made in support of or in opposition to the suggested compromise. They are based on the limited evidence produced at the hearing on February 1. Ultimate fact finding is obviously the province of the state court, should the matter be tried.
. Kenneth Smith testified that he receives no "bonus” in addition to his salary. However, the salary is variable and reflects the business’ success. A business appraiser retained by Dave Smith Motors and related parties testified that her review of financial data for the years 1999 through 2003 reflected a range for Kenneth Smith's annual salary of $625,000 to $1,841,000 with an average during that period of $1,300,000.
. That the amounts of these “salaries” were commensurate with market compensation for the amount and type of work performed was not addressed.
. The basis for this value appeared to be an appraisal in 1998 at the time Dave Smith passed away.
. The evidence indicates, but did not establish, that this was a "triple net” lease, years 1999
. Debtor and Special Counsel, who opposed the sale and settlement, called no witnesses at the February 1 hearing other than Kenneth Smith as an adverse witness. They attempt to rely on an affidavit of Darrel K. Chapman that was attached to Debtor's objection, Doc. No. 93, as affirmative evidence regarding the businesses’ valuation. See, e.g., Doc. No. 101 (Closing Brief) at 5-6. The affidavit may not be considered. Fed. R. Bankr.P. 9014(d) establishes that "[tjestimony of witnesses with respect to disputed material factual issues [in contested matters] shall be taken in the same manner as testimony in an adversary proceeding."
. Both Mr. Richman and Special Counsel indicated the cause was "first set” and they expected it to be tried as scheduled.
. Trustee, when questioned why he would not solicit and consider the opinions of his own retained advocate, indicated that he talked instead with his general bankruptcy counsel, Mr. Appleton, and relied on that attorney to communicate with Special Counsel and gain Special Counsel's input. The nature and magnitude of consultation between lead counsel and Special Counsel was not addressed in the evidence.
. The Court is aware that, like Mr. Richman, Special Counsel is not impartial. The Court has attempted to cull from the testimony of Mr. Richman, and the questioning by and arguments of Special Counsel, those matters regarding the suit that can properly be considered and are probative of the issues this Court must presently decide. The subjective opinions of such attorneys, regardless how sincerely held, that the State Court Action either wholly lacks merit or has substantial merit are not such matters.
. Ms. Grewal replaced Debtor's initial attorney, Mr. Garbrecht.
. As of the date of this Decision, the "claims register" maintained by the Clerk indicates that 18 claims have been filed, totaling $568,565.92. Of this amount, $9,000.00 is asserted as a priority unsecured claim; the balance are nonpriority unsecured claims. Two of the nonpriority unsecured claims, totaling $62,428.68, appear to be duplicates, leaving $497,137.24. Two claims were filed by Dave Smith Motors, totaling $278,802.22 (about 56% of the total nonpriority claims). Neither claim contains sufficient information or documentation to establish a basis for giving it prima facie evidentiary effect. See Hilton v. Hongisto (In re Hongisto), 293 B.R. 45, 50 (N.D.Cal.2003) (discussing sufficiency of averments in proof of claim necessary to obtain such status under Fed. R. Bankr.P. 3001(f), citing In re Consolidated Pioneer Mortgage, 178 B.R. 222 (9th Cir. BAP 1995)). Importantly, the Notice is silent as to whether this settling defendant will waive these alleged claims (or that they are within the "counterclaims” being resolved by the settlement of the State Court Action) or whether it will, in effect, expect to receive payment from the estate on these proofs of claim. If the latter, fully one-fourth of the $1,000,000 cash component of the settlement will go back to Dave Smith Motors, and the amount of the cash component of the settlement that Debtor might expect to receive will likewise be reduced.
.How the 10-year note would be treated in estate administration or closing is a somewhat open question; it was not addressed in the Notice and not specifically discussed at the hearing. To the extent it is contemplated *33that Debtor will receive this note as a portion of his § 726(a)(6) distribution, he clearly has standing.
. The brief of the settling defendants chastises the affidavit of Special Counsel for essentially the same lack of objectivity, calling his subjective opinions "meritless”. Doc. No. 97 at 2, 6.
. The Court has considered the written decisions entered by Judge Luster in the State Court Action, though it has done so based on what Judge Luster actually said and held, and not based on how the litigants have attempted to construe or characterize his rulings. For example, Judge Luster noted that in the State Court Action:
there were twenty-eight (28) causes of action. Defendants' Motion for Summary Judgement has been granted to Defendants on twelve (12) of the causes of action, but it was denied on sixteen (16) of the causes of action. ... Plaintiff’s and Defendants’ Motions for Partial Summary Judgment and Summary Judgment narrowed the focus, but did not eliminate all of the issues. This case involves complicated facts and an intertwined and complex set of business enterprises. At the heart of the matter are allegations regarding the duties owed by Kenneth Smith and others to Plaintiff and the decisions made by Kenneth Smith and others.
Doc. No. 91, Attach. 7 at 6 (Mem. Op. & Order: Recons. (Second)).
.Trustee’s proof consisted of Mr. Richman’s testimony and Trustee’s testimony that he had evaluated the matter with his counsel, Mr. Appleton who had in turn, Trustee said, talked to Special Counsel. As noted, Debtor provided no affirmative evidence at hearing. Instead, Debtor relied upon cross-examination of Trustee's witnesses and, ultimately, on the fact that Trustee bears the burden of proof and persuasion that the compromise is fair and equitable and should be approved.
. See www.Bankrate.com (last visited February 25, 2005).
. Ms. Anderson's expertise is in the area of valuation of auto dealerships and interests therein. River is not such an entity. Her opinions as to the value of River were outside her specialty. The foundation and methodology for her conclusions regarding River were not particularly clear. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494030/ | MEMORANDUM OF DECISION
JIM D. PAPPAS, Bankruptcy Judge.
Background
The Chapter 7 Trustee, R. Sam Hopkins, filed an objection to Debtor Gary Moore’s claim of exemption as to his woodworking tools as “tools of the trade” under Idaho Code § 11-605(3). Docket No. 15. The crux of Trustee’s argument is that Debtor, a former self-employed furniture maker, no longer works in that trade. Debtor responded by arguing that he had been a woodworker for thirty years, and his current job selling windows is temporary, so he should be allowed to exempt his tools. Docket No. 16. The Court conducted a hearing on May 23, 2005, at which the parties appeared and presented evidence and testimony. Docket No. 20. At the conclusion of the hearing, the Court took the issues under advisement. Minutes, Docket No. 20.1
Facts
Debtor supported his family for over thirty years by designing and making furniture for a living. During his career, Debtor accumulated a variety of tools that he used to create the pieces he sold.2 Debtor rented shop space in which to work. Although he earned only a modest annual income of, at most, $24,000, see Response to Question No. 1, Statement of Financial Affairs, Docket No. 11, Debtor enjoyed his work.
Unfortunately, Debtor injured his shoulders in 2003. As a result, his business suffered financially and he fell behind on his shop rent in 2004. To overcome those problems, Debtor accepted a position as a window salesman at Glass Masters in October 2004. Debtor continued to build furniture in his shop, working nights and weekends, until his landlord evicted him in *46December 2004 because he could not pay the rent. Without shop space, Debtor put his tools in storage and discontinued his furniture business. He filed for relief under Chapter 7 of the Bankruptcy Code on January 24, 2005.
Debtor continues to work at Glass Masters and currently earns over $50,000 per year, more than he ever earned as a self-employed carpenter. Schedule I, Docket No. 11. But Debtor testified he derives little enjoyment from his job selling windows and desires to return to carpentry. Although he has not done so yet, Debtor hopes to find another shop to rent and to rebuild his furniture business. His plan is to keep his job at Glass Masters and work nights and weekends until his carpentry business is again profitable enough to support him.3 At that point, he says he will leave his job at Glass Masters.
However, there are complications surrounding Debtor’s plan to return to carpentry. He underwent rotator cuff surgery on both shoulders on February 22, 2005, and although he reports that he is feeling better, Debtor’s physician has not released him to return to carpentry work. Debtor may be required to undergo physical therapy before he can regain full function in his shoulders. And although Debt- or feels there will be a high demand for his skills, he currently has no firm commitments from prospective clients.
Disposition
Idaho has “opted-out” of the federal bankruptcy exemptions, and its citizens are limited to the exemptions allowed under state law. 11 U.S.C. § 522(b); Idaho Code § 11-609. While exemption statutes are to be liberally construed in favor of the debtor, In re Duman, 00.3 I.B.C.R 137, 137 (Bankr.D.Idaho 2000), the statutory language may not be “tortured” in the guise of liberal construction. In re Collins, 97.3 I.B.C.R. 78, 79 (Bankr.D.Idaho 1997). As the objecting party, Trustee bears the burden of proving the claimed exemption is not proper. Fed. R. Bankr.P. 4003(c)
In Idaho, an individual may claim an exemption “not exceeding one thousand five hundred dollars ($1,500) in aggregate value, of implements, professional books, and tools of the trade.... ” Idaho Code § 11-605(3). Debtor argues that his carpentry tools should be exempt as tools of his trade, even though he was working, quite successfully, as a window salesman on the date he filed for bankruptcy. He asserts that his present job is merely temporary, while his work as a carpenter is a lifelong occupation to which he intends to return as soon as he is physically and financially able. Trustee’s position is that because Debtor currently earns a substantial income, more than he ever did as a carpenter, Debtor’s plan to return to carpentry is unrealistic and not necessary for Debtor’s continued financial support.
Prior decisions of this Court support Trustee’s position that one of the primary components in analyzing whether a debtor is entitled to exempt tools of the trade is whether the debtor truly needs those tools for the debtor’s financial support. For example, in In re Fancher, 94 I.B.C.R. 39, 39 (Bankr.D.Idaho 1994), the Court explained that while the exemption statute must be liberally construed in the debtor’s favor, an item claimed as exempt must be actually utilized by the debtor in earning a living and it must be necessary for the debtor to participate in a trade or profession. Of course, the extent of the “necessity” requirement depends upon the debtor’s particular employment circumstances and financial needs.
*47When the debtor’s occupation is easily defined by reference to a single pursuit, the Court has considered whether the item is “necessary for the debtor’s continued employment.” In re Biancavilla, 94 I.B.C.R. 150, 151-52, 173 B.R. 930, 933 (Bankr.D.Idaho 1994) (citing In re Ackerman, 91 I.B.C.R. 26, 27-28 (Bankr.D.Idaho 1991)). In Biancavilla, the debtor worked as an engineer for a computer firm. The debtor’s employer provided the software that he used on his personal computer so he could work at home, and the debtor actually used his home computer for that purpose. In that case, the Court allowed the debtor to exempt his home computer because the debtor’s employer provided the software and expected the debtor to utilize his computer to work at home. Therefore, the Court concluded that the computer was necessary for the debtor’s continued employment. Biancavilla, 94 I.B.C.R. at 152, 173 B.R. 930. See also Fancher, 94 I.B.C.R. at 39 (holding that a Karaoke machine was not necessary in connection with the debtor’s occupation as a bar or restaurant manager); In re Moon, 89 I.B.C.R. 26, 29 (Bankr.D.Idaho 1989) (holding that a VCR, television and video tapes were exempt tools of the trade when the debtor operated a day care facility out of her home and demonstrated that these items were necessary for her business).
In cases where a debtor has more than one trade or occupation, the Court has required not only that the tools in question be necessary for the debtor to continue in a chosen occupation, but also that the income generated from the occupation in which the tools are used be necessary for the debtor’s continued financial support. In In re Liebe, 92 I.B.C.R. 145, 146 (Bankr.D.Idaho 1992), the debtor held two jobs. While the debtor had worked primarily as a school teacher for many years, he supplemented his teaching income by working as a carpenter on the weekends and during the summer. Holding that the debtor’s carpentry tools were exempt, the Court explained that the tools of the trade exemption was “designed to protect a debtor’s ability to earn a living ... Exemptions are important to a debt- or’s ability to achieve a fresh start under the bankruptcy laws ... [, but should not be used to] ‘subvert the legislature’s intent that this fresh start not be at the expense of the debtor’s creditors.’ ” Liebe, 92 I.B.C.R. at 146 (internal citations omitted).
The Court relied upon the Liebe reasoning in In re Sievers, 96.1 I.B.C.R. 5 (Bankr.D.Idaho 1996). There, the debtor supplemented the income she earned as a full-time employee at a computer firm by providing lawn care services on the weekends. She sought to exempt a lawn mower, a “weed-eater” and computer equipment. Because the debtor demonstrated she required the extra income for her financial support, the Court decided the Idaho statute allowed her to exempt her lawn mower and trimmer as tools of the trade, since those items were necessary to her continued employment as a lawn care provider. Sievers, 96.1 I.B.C.R. at 5. However, the Court denied the debtor’s exemption claim in a computer, printer and desk, even though she used those items in her business, because while helpful, those items were not actually necessary for her to maintain the small amount of paperwork the lawn care business generated. Id. See also In re Robinson, 206 F. 176, 178 (D.Idaho 1913) (allowing an exemption in a variety of tools used to perform several trades because the debtor was a “jack of all trades” and his livelihood depended upon his earnings in all of his occupations); In re Luther, 80 I.B.C.R. 16, 17 (Bankr.D.Idaho 1980) (disallowing an exemption claimed in a boat as a tool of the *48trade when river touring was not the debt- or’s principal occupation).
Debtor’s thirty-year employment history as a furniture builder can not be overlooked. When the facts are viewed fairly, Debtor has established that he has two “trades.” Debtor is not only a window salesman, he is also a carpenter. And the record is clear that the tools in question are essential, and that he actually used them, to pursue his career as a carpenter.
Even so, in this context, Debtor suffers from his good fortune. Debtor’s employment selling windows is decidedly more lucrative than his furniture business has ever been. And while Debtor may enjoy carpentry more than window sales, Debtor has not shown that any income he may derive from a return to woodworking is necessary to his ability to earn a living. In other words, the evidence shows that by continuing in his present position at Glass Masters, Debtor can clearly achieve the fresh start that the Bankruptcy Code and the Idaho exemption statutes were designed to promote, without any need that Debtor operate a carpentry business.
In addition, the evidence demonstrates that Debtor’s prospects for returning to his woodworking business are, at this point, indefinite. Debtor was not engaged in his woodworking business at the time of filing for bankruptcy because he had no shop and his physician had not approved his return to physical labor. While the Court shares Debtor’s hopes to the contrary, as a result of his surgery Debtor may not ever be able physically to generate an adequate income as a carpenter. He testified that he will probably undergo physical therapy, with no guarantee that he would return to previous production levels because of his physical limitations. And even if his health allows him to build furniture at some future point, Debtor has not located alternative shop space and has received only a few inquiries about his work. Given the evidence, the Court is not persuaded that Debtor’s prospects for a return to woodworking are good.
Conclusion
Debtor deserves no criticism for his desire to pursue the trade he loves, even at a reduced income. But while Debtor can choose personal satisfaction over financial rewards, his creditors should not be compelled to finance his decision. The Bankruptcy Code and exemption statutes guarantee Debtor a fresh start. In this case, Debtor can realize that goal without his carpentry tools.
Trustee’s objection to Debtor’s claim of exemption in his carpentry tools as exempt “tools of the trade” will be sustained and the exemption claim will be disallowed by separate order.
. This Memorandum constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052; 9014. In making its findings of fact, the Court relied upon its opportunity to observe Debtor testify, and has assessed his credibility and assigned the proper weight to that testimony.
. The tools Debtor claimed as exempt include air compressors, various saws, sanders, planers, drills, nail guns, a joiner, a lathe, and office equipment that includes a computer, filing cabinet, microwave and an office refrigerator. Schedule C, Docket No. 11; Obj., Docket No. 15.
. Debtor has no dependents. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494031/ | MEMORANDUM OF DECISION
TERRY L. MYERS, Chief Judge.
INTRODUCTION AND BACKGROUND
Jan and Mark Thorien (“Debtors”) filed a chapter 11 bankruptcy petition on February 8, 2006. Doc. No. I.1 Prior to filing their chapter 11 petition, Debtors defaulted on their home mortgage with the holder of a first priority deed of trust, Washington Mutual Bank (“WaMu”). Though there were several attempts to cure or negotiate a resolution of the default, a deed of trust foreclosure and trustee’s sale occurred on September 29, 2005, in which BARO Enterprises, LLC (“BARO”) was the successful bidder. A trustee’s deed to BARO was recorded the same day.
*61In October, 2005, Debtors filed a complaint against BARO, WaMu, and First American Title Co. (“FATCo”) in the District Court for the Fourth Judicial District of the State of Idaho in and for Ada County (“State Court”) contesting the propriety of the sale. In State Court, Debtors sought to obtain a preliminary injunction to prevent BARO from evicting them, set aside the foreclosure sale, obtain damages against WaMu for breach of a forbearance plan and require FATCo to effectuate any set aside order. See Doc. No. 8 at attach, (amended State Court complaint). BARO counterclaimed in State Court alleging that, as the successful purchaser at the trustee’s sale, it was entitled to possession of the premises. Id. at attach. (State Court answer and counterclaim). It later sought a preliminary injunction requiring Debtors to pay “rent” pendente lite and filed motions for judgment on the pleadings and for summary judgment.
On January 10, 2006, the State Court ordered Debtors to make monthly payments to BARO,2 and on February 2, 2006, the State Court scheduled a hearing on BARO’s summary judgment motion for February 9, 2006. Debtors filed their chapter 11 petition the day before that State Court hearing was scheduled to occur.
On February 9, 2006, BARO filed a motion for relief from the automatic stay to proceed with its State Court counterclaim and summary judgment hearing. See Doc. No. 8 (“Stay Motion”). Debtors not only objected to stay relief, Doc. No. 16, they filed the present adversary proceeding, No. 06-06019-TLM, on February 22, 2006. Adv. Doc. No. 1.
The adversary proceeding concerns the same events and the same claims pleaded and involved in Debtors’ State Court action regarding the alleged procedural and substantive defects in the deed of trust foreclosure. However, Debtors allege additional causes of action for fraudulent conveyance under § 548 of the Bankruptcy Code3 and include as additional defendants junior secured creditors Key Bank and U.S. Bank so as to clarify all lien rights on the real property at issue.
On March 2, 2006, BARO filed a motion to dismiss the adversary proceeding (the “Dismissal Motion”). See Adv. Doc. No. 9. Given the arguments advanced and the entirety of the record, the Court views the Dismissal Motion as a request to dismiss or, alternatively, as one seeking permissive abstention. See 28 U.S.C. § 1884(c)(1).
Toward the end of March, 2006, WaMu and FATCo joined BARO’s Dismissal Motion, requesting dismissal for failure to state a claim and citing the State Court action as an alternative forum addressing the same transactions and causes of action. See Adv. Doc. Nos. 19, 20.4
An April 10, 2006 joint hearing was held in the chapter 11 case and the adversary proceeding on the Stay Motion and the Dismissal Motion. After considering the oral arguments and briefing, the record, and applicable authorities, the Court con-*62eludes the Stay Motion and the Dismissal Motion will be denied. The following constitutes the Court’s findings of fact and conclusions of law as required by Rule. Fed. R. Bankr.P. 7052, 9014.
DISCUSSION AND DISPOSITION
A. The Dismissal Motion
1. Bankruptcy Rule 7012
Three of the adversary defendants seek dismissal under Fed. R. Bankr.P. 7012 which incorporates Fed.R.Civ.P. 12(b)(6). The Fed.R.Civ.P. 12(b)(6) standard is very difficult to meet. See, e.g., Quad-Cities Constr., Inc. v. Advanta Bus. Servs. Corp. (In re Quad-Cities Constr., Inc.), 254 B.R. 459, 465, 00.4 I.B.C.R. 190, 191 (Bankr.D.Idaho 2000). Under this standard, the Court must construe the complaint in the plaintiffs favor, assume the truth of its factual allegations, and dismiss the complaint only if it appears “beyond doubt” that the plaintiff could prove no set of facts that would entitle it to relief. Id. at 465-66.
BARO submitted several affidavits and exhibits with its motion to dismiss. In addition, BARO submitted a statement of undisputed facts. Debtors also filed several affidavits.5 Fed.R.Civ.P. 12(b) states, in pertinent part:
If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
BARO asserts that this Court may consider “documents the complaint references, and matters of which the court may take judicial notice” under Fed.R.Civ.P. 12(b)(6) without requiring disposition of the Dismissal Motion as one for summary judgment. See Adv. Doc. No. 12 at 2-3 (citing Anderson v. Clow (In re Stac Elecs. Sec. Litig.), 89 F.3d 1399, 1405 n. 4 (9th Cir.1996)). While BARO is correct, the documents and matters it, and Debtors, submitted for the Court’s possible review go beyond documents referenced in the complaint or matters of which the Court can properly take judicial notice under Fed. R.Evid. 201.
The Court has a choice: it may either consider the materials outside the pleadings, and treat the motion as one for summary judgment, or it may decline to consider the materials proffered and exclude them, proceeding then to address the motion under Fed.R.Civ.P. 12(b)(6) standards. See Fed.R.Civ.P. 12(b) (“If ... matters outside of the pleadings are presented to and not excluded by the court”).
BARO’s submissions, in effect if not by design, lead the Court to treat the matter as a summary judgment. Debtors appear to embrace that approach, as they refer to BARO’s motion as one for summary judgment and submit their own affidavits, exhibits and response to BARO’s statement of undisputed facts. The Court will therefore consider the non-pleading materials, and consequently will treat the Dismissal Motion as one for summary judgment.
2. Bankruptcy Rule 7056
A motion for summary judgment is addressed under Fed. R. Bankr.P. 7056, which incorporates Fed.R.Civ.P. 56. The *63duties upon a party opposing summary judgment are set forth in Fed.R.Civ.P. 56(e):
(e) Form of Affidavits; Further Testimony; Defense Required. Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith. The court may permit affidavits to be supplemented or opposed by depositions, answers to interrogatories, or further affidavits. When 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). The standards guiding the Court in consideration of a motion for summary judgment are well settled. Summary judgment may be granted if, when the evidence is viewed in a light most favorable to the nonmoving party, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(e); Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir.2001).
Further, the Court does not weigh the evidence in considering summary judgment. It determines only whether a material factual dispute remains for trial. Covey v. Hollydale Mobilehome Estates, 116 F.3d 830, 834 (9th Cir.1997). An issue is “genuine” only if there is sufficient evidence for a reasonable fact finder to find in favor of the non-moving party, and a fact is “material” if it might affect the outcome of the case. Far Out Prods., 247 F.3d at 992 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
The initial burden of showing there is no genuine issue of material fact rests on the moving party. Esposito v. Noyes (In re Lake Country Invs.), 255 B.R. 588, 597, 00.4 I.B.C.R. 175, 178 (Bankr.D.Idaho 2000) (citing Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir.1998)). If the non-moving party bears the ultimate burden of proof on an element at trial, that party must make a showing sufficient to establish the existence of that element in order to survive a motion for summary judgment. Id. (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).
Here, Debtors filed affidavits stating, inter alia, that there was no default because there was a “workout” agreement in place, that the notice of default was inaccurate and misstated, and there was insufficient notice of the September 29, 2006, foreclosure sale pursuant to Idaho Code § 45-1506. These are factual assertions 6 which, if proven, may support Debtors’ contentions that the sale was invalid under Idaho law and, consequently in Debtors’ view, that BARO’s purchase at that sale did not provide them with “reasonably equivalent value” such that the transfer of their property was a fraudulent *64conveyance. See BFP v. Resolution Trust Corp., 511 U.S. 531, 545-46, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) (“Any irregularity in the conduct of the sale that would permit judicial invalidation of the sale under applicable state law deprives the sale price of its conclusive force under § 548(a)(2)(A), and the transfer may be avoided if the price received was not reasonably equivalent to the property’s actual value at the time of the sale (which we think would be the price that would have been received if the foreclosure sale had proceeded according to law).”).
The Court appreciates that much remains to be said on the subject of the alleged lack of notice and other asserted errors in the foreclosure process. But the summary judgment standard requires only a genuine issue of fact on a material issue. Summary judgment is best designed for eases where parties agree on the operative facts, or at least where no credible factual issue is posited, and where the parties agree that only legal issues are presented. This is not such a case. The Dismissal Motion (and joinders), treated as a summary judgment motion under the Rules, will be denied.
B. Abstention
As noted, the Dismissal Motion at least implicitly raises the question of whether this Court should abstain and allow the State Court action to proceed. The arguments of the parties at hearing addressed this question. The Court would also have the ability to consider abstention sua sponte. See § 105(a).
28 U.S.C. § 1334(c)(1) governs permissive abstention, and allows the bankruptcy court “in the interest of justice, or in the interest of comity with State courts or respect for State law” to abstain from hearing a particular proceeding arising under, arising in, or related to a case under Title ll.7 In deciding whether to abstain, the Ninth Circuit has instructed that several factors, while not a comprehensive list, should be considered by the Court. These include:
(1) the effect or lack thereof on the efficient administration of the estate if a Court recommends abstention, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable law, (4) the presence of a related proceeding commenced in state court or other nonbankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334, (6) the degree of relatedness or remoteness of the proceeding to the 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, and (12) the presence in the proceedings of non-debtor parties.
Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166-67 (9th Cir.1990) (quoting In re Republic Reader’s Serv., Inc., 81 B.R. 422, 429 (Bankr.S.D.Tex.1987)). See also Agincourt, L.L.C. v. Stewart (In re Lake Country Invs., L.L.C.) 00.3 I.B.C.R. 138, 142-43 (Bankr.D.Idaho 2000) (citing Bowen Corp., Inc. v. Sec. Pac. Bank Idaho, FSB (In re Bowen Corp., Inc.), 150 B.R. 777, 784, 93 I.B.C.R. 54, 58-59 *65(Bankr.D.Idaho 1993) and applying the Tucson factors).8
Here, the Court concludes that judicial economy favors denial of the request to abstain. Though the bankruptcy relief Debtors seek relies on state law and, in fact, state law issues might be viewed as predominating, there is a significant possibility that the parties would be required to return to this Court to deal with the consequences of any judgment rendered by the State Court. Trying all the issues before a single court in a single proceeding fosters judicial economy and is in the economic interests of the litigants as well.
The Court appreciates that the State Court action is already somewhat advanced. Debtors’ bankruptcy was filed the day before a summary judgment hearing was scheduled in State Court. However, the State Court case is not all that old, and the State Court’s rulings to this point relate only to payments required to protect BARO while Debtors sought to advance their claims. Nothing submitted indicates that the State Court was particularly close to a resolution of the primary issues or, for that matter, that summary judgment would be any more likely in State Court than here.
BARO argues that with the large number of pre-BAPCPA cases currently crowding this Court’s docket, the State Court may be more expeditious. The Court appreciates the concern, and can attest to its own heavy workload. However, several trials have been held by this Court in post-October 17, 2005 cases, and adversary proceedings are being regularly set for prompt trial. The Court has little doubt that it can manage this action and ensure an appropriately and expeditiously scheduled trial date.
Without belaboring the discussion further, the Court has considered all the Tucson Estates factors and the interests of justice in this case, and concludes that it will decline the suggestion that it permissively abstain from hearing the adversary proceeding.
C. The Stay Motion
The § 362(a) automatic stay precludes continuation of BARO’s State Court counterclaim for judicial ejectment and resolution of the issues therein because it is a “judicial proceeding against the debt- or.” See § 362(a)(1). Thus, BARO requests relief from the stay in order to continue with its State Court counterclaim against Debtors. See § 362(d)(1).9
Since this Court has concluded that permissive abstention is unwarranted, the impetus behind stay relief “for cause” in order to allow the State Court action to continue becomes fairly weak. The Court *66concludes that BARO’s motion for relief from the automatic stay to allow the parties to proceed in State Court will be denied, but the denial will be conditional.
This Court has the ability under § 362(d) to grant relief from the stay “by terminating, annulling, modifying, or conditioning” such stay. Often, the automatic stay may remain in place on the condition that the debtor provide adequate protection of the interests of the moving creditor. Such a condition is appropriate here.
The State Court found that BARO was entitled to payments from Debtors while the question of the regularity and propriety of the foreclosure sale and trustee’s deed was litigated.10 This Court will order, as a condition of denial of the Stay Motion, that such payments continue. Debtors’ failure to make such payments will entitle BARO to return to this Court upon shortened notice11 to renew its request for termination of the stay.
CONCLUSION
The Dismissal Motion will be denied. Any related abstention request will also be denied. The Stay Motion will be denied, but on the condition noted. Appropriate orders will be entered in the adversary proceeding file and in the chapter 11 case file.
. Because matters are raised in both the chapter 11 case and in the adversary proceeding, and since this Decision is simultaneously entered in both files, pleadings in Case No. 06-00081-TLM are identified by “Doc. No.” and pleadings in Adversary Case No. 06-06019-TLM are identified as "Adv. Doc. No.”.
. See Doc. No. 8 at attach. (State Court order requiring Debtors to pay $1,500.00 per month by the 10th day of each month); see also Adv. Doc. No. 11 at attach. (First Aff. of Barb Malmstrom, filed by Debtors in State Court, asserting $1,500.00 per month was fair market rental value for the property).
. Title 11, U.S.Code, was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, 119 Stat. 23 (2005) ("BAPCPA”), effective October 17, 2005. As this case was filed after October 17, 2005, BAPCPA applies.
.The Court’s use of "Dismissal Motion” in this Decision encompasses the joinders and/or similar motions of WaMu and FATCo.
. Some of these documents were improperly filed in the chapter 11 case, rather than in the adversary proceeding. However, given the consolidated nature of the hearing and the interrelationship of the two Motions, the defect is not viewed as critical.
. The last may be a mixed question of fact and law, but nonetheless has material factual components.
. So-called "mandatory” abstention under 28 U.S.C. § 1334(c)(2) is not implicated.
. Cases listing factors are tools to assist the Court, and not mere "scorecards” leading to mechanical results based on the sum of favorable, unfavorable and neutral factors. See Fjeldsted v. Lien (In re Fjeldsted), 293 B.R. 12, 25 (9th Cir.BAP2003) ("[L]ists [of factors] are capable of being misconstrued as inviting arithmetic reasoning, [and therefore] we emphasize that these items are merely a framework for analysis and not a scorecard. In any given case, one factor may so outweigh the others as to be dispositive.").
. BARO was clearly entitled to ask for such relief. See In re Estep, 98.3 I.B.C.R. 73 (Bankr.D.Idaho 1998) (holding that "in circumstances where a claimant against the debtor estate has sought relief from the stay to pursue a cause of action in a non-bankruptcy forum, Congress has stated: ‘[I]t will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from many duties that may be handled elsewhere.' ”). Of course, entitlement to seek relief does not necessarily mean that it will be granted.
. See Doc. No. 8 at attach. (State Court order) (establishing monthly payments of $1,500.00 due not later than the 10th of each month to be paid to BARO and to be held in trust).
. The Court will allow the matter to come on for hearing on ten (10) days notice, and will allow BARO to schedule such hearing notwithstanding the usual operation of LBR 4001.2. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494032/ | MEMORANDUM OF DECISION
TERRY L. MYERS, Chief Judge.
Plaintiff Rickey Errol Owen (“Owen”) filed a petition for bankruptcy relief on November 18, 2003. Prior to filing his bankruptcy petition, Owen was involved in state court litigation with Defendant Jill Lundstrom (“Lundstrom”). Owen listed Lundstrom as a secured creditor on his schedules, but noted the obligation was disputed and that she had an “unsubstantiated claim of lien” in a 1977 GMC, a 1986 Isuzu, and a 1982 Yamaha (the “vehicles”). See Doc. No. 1 at Schedule D,1 Owen amended his schedules several times to list the vehicles and claim them as exempt. See Doc. No. 1, 11 and 22. The chapter 7 trustee did not object to Owen’s claimed exemptions and his bankruptcy case was closed on April 27, 2006.
In August, 2004, Owen initiated the present adversary proceeding against Lundstrom and the Idaho Transportation *68Department (“ITD”), seeking the return of the certificates of title from Lundstrom and an order directing the ITD to issue new certificates of title for the vehicles.2 After many procedural hurdles, a trial was held on June 1, 2006.3 Lundstrom and Owen submitted written closing arguments on June 8, 2006, and the matter was taken under advisement. The following constitutes the Court’s findings of fact and conclusions of law as required by Fed. R. Bankr.P. 7052.
FACTS
Owen and Lundstrom lived together between the fall of 2001 and the summer of 2002. During that time, Lundstrom loaned Owen money on three separate occasions. Lundstrom did not request promissory notes, IOUs or any form of collateral at the time she loaned the money. However, as time went by without payment, Lundstrom decided documentation and security were needed. Owen thereafter signed three separate IOUs.4 See Ex. 1, Exs I, J, K. The parties dispute whether Owen also gave Lundstrom a security interest in the vehicles to ensure payment of the IOUs.5
According to Lundstrom, Owen also agreed to give her a security interest in the vehicles collateralizing the IOUs. While no document entitled “Security Agreement” was signed by Owen, Lundstrom contends Owen signed off on and gave her the certificates of title for the three vehicles, intending to provide her with a security interest in those vehicles. Lundstrom later placed her name in the lienholder section on the Owen-signed certificates of title and took them to the Department of Motor Vehicles in Bonner *69County where she applied for new titles naming her as a lienholder.
Owen disagrees with Lundstrom’s version of events. He claims the vehicle titles were signed to provide security to a different creditor (Smythe) who ultimately decided Owen should keep the titles. Owen claims the signed certificates of title were in his files and that Lundstrom took them without his permission after the parties terminated their living arrangement. Owen further claims he never intended to provide Lundstrom with a security interest in the vehicles.
Owen argues Lundstrom was and is an unsecured creditor and that her claim was discharged. He further argues that her refusal to return the certificates of title and remove her name as lienholder violates the discharge injunction.6 Owen seeks a “declaratory decree” regarding Lundstrom’s status as a lienholder, issuance of new certificates of title eliminating Lundstrom as a lienholder, and an award of costs and fees.
DISCUSSION AND DISPOSITION
Generally, liens that are not avoided pass through bankruptcy unaffected. See In re Watson, 192 B.R. 739, 749 n. 8 (9th Cir. BAP 1996) (citing Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992)); Elsaesser v. Crossland Mtg. Corp (In re Tondee), 01.3 I.B.C.R. 113, 115 (Bankr.D.Idaho 2001); In re Koski, 93 I.B.C.R. 8, 9 (Bankr.D.Idaho 1993). Thus, a secured creditor may enforce its lien against encumbered property post-petition (once the stay has been terminated). However, like unsecured creditors, a secured creditor is enjoined from collecting any amount from the debt- or as a personal liability. See Tondee, 01.3 I.B.C.R. at 115. Here, Owen alleges Lundstrom is an unsecured creditor while Lundstrom asserts she is a secured creditor based on the signed certificates of title she says were delivered to her by Owen. See Exs. E, F, G.
The nature and extent of security interests are determined by state law. Philip Morris Capital Corp. v. Bering Trader, Inc. (In re Bering Trader, Inc.), 944 F.2d 500, 502 (9th Cir.1991). With respect to motor vehicles, the attachment of a security interest is governed by Revised Article Nine of the Uniform Commercial Code as codified in Idaho Code § 28-9-101 et. seq.7 Perfection of that interest is governed by the Idaho Vehicle Titles Act, Idaho Code §§ 49-501-530.8 See Simplot v. Owens, 119 Idaho 243, 805 P.2d 449, 450 (1990), Simplot v. Owens, 119 Idaho 271, 805 P.2d 477, 479-80 (1990) (citing Idaho Code § 49-512).
Under Idaho Code § 28-9-203, a security interest attaches to collateral and becomes enforceable against the debtor and third parties when “(1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) ... (A) the debtor has authenticated a security agreement that provides a description of the collateral .... ” Idaho Code § 28-9-203.9
*70It is clear that some form of writing or record is required to satisfy these requirements. See Idaho Code § 28-9-203 cmt. 3 (explaining that “enforceability requires the debtor’s security agreement and compliance with an evidentiary requirement in the nature of a Statute of Frauds.”). The Idaho Code defines “security agreement” as “an agreement that creates or provides for a security interest.” Idaho Code § 28-9-102(73). “Agreement” is then defined as “the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance[.]” Idaho Code § 28-1-201(3). And “security interest” is defined as “an interest in personal property or fixtures which secures payment or performance of an obligation.” Idaho Code § 28-1-201(37).
The parties agree that there is no document entitled “Security Agreement.” Instead, we have writings (the certificates of title) that specifically identify the collateral (the vehicles). Owen signed the certificates of title in a section transferring his interest in the vehicles.10 Such signatures are ambiguous as to what was intended by the parties. Whether Owen intended to transfer his complete ownership interest in the vehicles or transfer a partial, lien interest is not clear. Thus the question before the Court is whether the debtor-signed certificates of title present in this case are sufficient to constitute a security agreement under Idaho law.
Idaho courts take a liberal view of the elements required to create an enforceable security agreement, but have not yet determined if a certificate of title, signed by the debtor, satisfies the UCC’s minimal requirements.11 The most closely analogous Idaho case is Simplot. There, two promissory notes containing the words *71“SECURITY: 1956 GMC bus.” were signed by the debtor. Simplot, 805 P.2d at 449. As in the current ease, the debtor, as owner of the vehicle, signed the certificate of title on the line labeled “transfer of title.” See Simplot, 805 P.2d at 479 (Idaho Ct.App.). The Idaho Supreme Court held that the simple notation in the promissory notes that a particular bus was “security” together with the endorsement and delivery of the certificate of title, satisfied Idaho Code § 28-9-203 and constituted an enforceable security agreement. 805 P.2d at 450-51.
The Idaho Supreme Court explained that:
[N]o magic words are necessary to create a security interest and ... the agreement itself need not even contain the term “security interest.” This is in keeping with the policy of the code that form should not prevail over substance and that, whenever possible, effect should be given to the parties’ intent.
Simplot, 805 P.2d at 452 (quoting Idaho Bank & Trust Co. v. Cargill, 105 Idaho 83, 665 P.2d 1093, 1097 (1983)) (emphasis added).
In Simplot, the Idaho Supreme Court' noted that “ ‘the principal test for determining whether a transaction is to be treated as [creating] a security interest is: [I]s the transaction intended to have effect as security.’ ” 805 P.2d at 451 (quoting In re Miller, 545 F.2d 916, 918 (5th Cir.1977)). In other words, did the parties create or provide for a security interest.
A leading treatise is consistent in its analysis, describing the purpose of a written security agreement and noting that 9-203 of the UCC “merely contemplates objective indicia of the possibility of an underlying actual agreement — here an agreement for security.” White & Summers, Uniform Commercial Code, § 31-3 (5th ed.2002) (emphasis added).
The Court must decide if, under Idaho law, the signed certificates of title were intended to have effect as security. As noted, Owen’s signature is ambiguous. It may have been intended to transfer his entire ownership interest; it may have been intended to provide a lien; it may have been affixed in error and not intended to do anything. However, it does provide an indication of the possibility of a security agreement. Thus, the Court must turn to parol evidence to determine the parties’ intent behind the signed document. See Idaho Code § 28-9-203 cmt. 3 (allowing a party to introduce parol evidence to determine the intent behind a transfer that is absolute on its face); see also White & Summers, § 31-3 (“[I]n problem cases, the writing may barely meet the objective test, leaving for further factual inquiry the question whether the parties also actually intended to create a security interest.”).
Owen argues that he did not deliver the certificates of title to Lundstrom and that he did not enter Lundstrom’s name on the certificates. Instead, he claims he signed the certificates as security for another creditor and Lundstrom stole the signed certificates of title. He disputes that the parties intended to create a security interest on his debts to Lundstrom evidenced by the IOUs.
However, Lundstrom testified that Owen handed her the signed certificates of title as security for the debts he owed to her, and that she later perfected her lien by placing her name in the “lienholder” section and submitting applications for certificates of title to the Department of Motor Vehicles. Lundstrom also produced testimony from several witnesses, including some of Owen’s friends, to the effect that Owen stated he intended to provide Lundstrom with a security interest in the *72vehicles and he gave her the vehicle titles to hold until he could pay her back.
Moreover, Lundstrom introduced a set of state court interrogatories from Owen himself, in which he requested:
REQUEST FOR ADMISSION NO. 79: Please admit that the vehicle titles were provided as a good faith gesture for restoring her [Lundstrom’s] trust in Plaintiff [Owen], which were concerns emanating from the relationship counsel- or you [Lundstrom] were seeing.
Ex. 9 at 14. At trial, Owen denied delivering the signed certificates of title. He provides no cogent explanation, in light of that denial, for issuing the above request for admission. The testimony of Lundstrom and her witnesses is, on the other hand, consistent. The Court concludes on a preponderance of the evidence that the parties intended to create a security agreement granting Lundstrom a security interest in the vehicles.
CONCLUSION
Though the Owen-signed certificates of title are ambiguous, the balance of the evidence supports the conclusion that they satisfy the minimal requirements of I.C. § 28-9-203. The whole of the evidence establishes that Owen intended the vehicles to be security for his debt to Lundstrom evidenced by the IOUs.12 Therefore, Lundstrom holds valid and perfected liens on the vehicles. Such liens pass through bankruptcy unaffected by Owen’s discharge. Therefore, Owen’s complaint shall be dismissed and Owen shall take nothing thereby.13
The Court will enter a separate judgment consistent with this Decision.
. The Court takes judicial notice of its records in both the adversary proceeding and the bankruptcy case pursuant to Fed.R.Evid. 201. When referencing the adversary proceeding, the Court will refer to filed pleadings and papers as “Adv. Doc. No__" and when referencing the bankruptcy case, the Court will refer to them as “Doc. No.___”
. Owen, further requested the Court order ITD to place William Arthur Smyth as lienholder on the certificates of title. See Doc. No. 1. However, given the Court's April 8, 2004 Order denying the proposed reaffirmation between Owen and Smyth, such a request must be denied. See Doc. No. 25.
. ITD filed a “Notice of Non-Participation” and did not participate at trial. See Doc. No. 69. While it asserted immunity from suit under the Idaho Tort Claims Act as an affirmative defense, see Adv. Doc. No. 4 (ITD answer), it did not move for summary judgment based on such a defense nor did it appear at trial and advance its defense. The party asserting an affirmative defense has the burden of proof on that defense. See Fox v. Citicorp Credit Srvs., Inc., 15 F.3d 1507, 1514 (9th Cir.1994); Womack v. Eggebrecht (In re Demis), 191 B.R. 851, 857 (Bankr.D.Mont. 1996). By choosing not to participate at trial, the ITD risked entry of an adverse judgment. ITD may have viewed the lawsuit as a matter “between the Lien-holder, Defendant: Lundstrom and the Plaintiff, Debtor” but Owen’s complaint named ITD as a defendant and sought "costs including filing fees, service fees, legal research and secretarial work, copies and transcribing” and other relief as the Court determined just and equitable. See Adv. Doc. No. 69 at 2; Adv. Doc. No. 1 at 5. Such, relief was sought against both defendants, and Owen argued throughout the litigation the ITD's actions warranted entry of a monetary judgment for various costs and punitive damages. See Adv. Doc. No. 93 at 8-12. The ITD’s approach to this case was a risky one at best, and not one the Court commends.
. The original, aggregate debt on the three IOUs was $3,545.00. The IOUs do not provide for interest accrual, and as of August 27,2002, the parties agree the balance due on the IOUs was $2,920.01. See Ex. 1, Exs I, J, K. There was inadequate proof as to any other payments. In addition, Owen’s assertion that his tender of payment in sealed envelopes addressed to Lundstrom which were returned unopened extinguished the debts is without merit.
. The parties spent a great deal of time arguing about whether money was also owed to Lundstrom for living expenses, or to Owen for work performed around the residence. As Lundstrom did not prove the vehicles were intended to be security for any debt other then the documented IOUs, the debate is not relevant to the matter before the Court.
. While Owen makes these arguments, his complaint does not raise the issue of violation of the discharge injunction. See e.g. Adv. Doc. No. 93 at 5-6.
. Revised Article Nine, effective July 1, 2002, controls the determination of secured status in this case. See In re Wiersma, 283 B.R. 294, 299, 02.3 I.B.C.R. 143, 144 (Bankr.D.Idaho 2002) (explaining the effective dates and application of Revised Article Nine).
. An exception exists if the vehicles are held as inventory for sale. The exception is inapplicable here.
. Only the third requirement is at issue in this case. Under the UCC, "authentication” means either "to sign” or to "otherwise adopt *70a symbol, or encrypt or similarly process a record ...Idaho Code § 28-9-102(7). The term "authenticate” generally replaces the language in Former Article Nine requiring debtors to "sign” a written security agreement so as to now include all authenticed records, including intangible computer generated records and not just tangible writings, within the concept of a security agreement. Idaho Code § 28-9-102 cmt. 9(b).
. Owen argues in his closing brief that Darlene Spade, as an employee of the Department of Motor Vehicles testified that "the signature of the Certificate of Titles did not mean that the Plaintiff release [sic ] his ownership to the Defendant.” The Court has reviewed Ms. Spade’s testimony, she actually testified that "by signing where [Owen] did [he] released his interest in [the vehicles].” She did not speculate to whom Owen released his interest in the vehicles or why.
. The Court is aware that other courts have arrived at differing conclusions when faced with the question of whether a signed certificate of title or subsequent application for title met the requirements of § 9-203. Compare Hall v. Hopkins (In re Jacobs), No. 05-8078-JDP (Bankr.D.Idaho Feb. 10, 2006) (holding a signed vehicle application and other supporting documents satisfied Idaho Code § 28-9-203); Roan v. Murray, 219 Mich.App. 562, 556 N.W.2d 893, 895 (1996) (holding that a debtor-signed application for a certificate of title constitutes a security agreement); Winshall v. McCormick, (In re McCormick), 24 B.R. 718 (Bankr.E.D.Mich.1982) (same); Kreiger v. Hartig, 11 Wash.App. 898, 527 P.2d 483 (1974) (same); Clark v. Vaughn, 504 S.W.2d 550 (Tex.Civ.App.1973) (holding a debtor signed certificate of title sufficient to constitute a security agreement); with Wyatt v. Nowlin, 338 B.R. 76 (Bankr.W.D.Mo.2006) (finding a bill of sale and certificate of title listing creditor as a lienholder insufficient to satisfy § 9-203); Yoppolo v. Trombley (In re De Vincent), 238 B.R. 722 (Bankr.N.D.Ohio 1999) (finding no security agreement when presented with only debtor signed application for certificate of title) and White v. Household Fin. Corp., 158 Ind.App. 394, 302 N.E.2d 828 (1973) (same). While these authorities are helpful, it is the Court's duty to determine how Idaho state courts would resolve the question as presented on the instant facts.
. The parties did not establish that the vehicles were security for any debt other then the IOUs, thus Lundstrom’s liens on the vehicles are limited to the amount that remains due and owing under those documents.
. The determination that Lundstrom holds a valid lien necessarily results in dismissal of the complaint against her, and it also requires dismissal of the complaint against the absent ITD. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494033/ | DECISION DENYING PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT
LAWRENCE S. WALTER, Bankruptcy Judge.
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This matter is before the court on the motion for partial summary judgment filed by Plaintiff Trustee Thomas R. Noland [Adv. Doc. 36]; the responsive memorandum filed in opposition by Defendant Wilmington Savings Bank [Adv. Doc. 45]; and Plaintiffs reply memorandum [Adv. Doc. 64].
The Trustee seeks to avoid a prepetition security interest held by Wilmington Savings Bank in the Debtor’s 3/8th interest in an airplane and to avoid and recover post-petition payments on the secured debt. Essentially, the Trustee alleges that a postpetition loan transaction between the Debtor, the Debtor’s principals, and Wilmington Savings Bank was not a renewal or consolidation of the secured prepetition obligation, but was a new distinct loan or novation that paid off the prepetition loan and consequently released the security in*172terest. Further, the Trustee argues that the loan documents themselves manifest the parties’ intent to create a new loan and that the parol evidence rule prevents any extrinsic evidence to the contrary.
The court determines that the parol evidence rule is inapplicable and that there remain genuine issues of material fact, particularly with respect to the intent of the parties. Therefore, the Trustee’s motion for partial summary judgment must be denied.
FACTUAL BACKGROUND
The parties have filed an “Agreed Stipulation of Facts” [Adv. Doc. 44] as well as an “Agreed Stipulation” [Adv. Doc. 34] pertaining to the admissibility of numerous documents. These stipulated facts together with the content of the documents provide the primary factual basis for the court’s decision, supplemented by uncontested facts contained in various pleadings and schedules in the record. A summary of those facts, organized chronologically, is set forth below.
D & K Aviation, Inc. (“D & K”)1, a Delaware' corporation, is the debtor and defendant in this proceeding. More than three years prior to its chapter 11 bankruptcy filing, D & K executed and delivered to Wilmington Savings Bank (“WSB”) a “HomeLine” Note dated July 19, 2000, bearing account number 70253411, in the principal amount of $2,100,000.00, with an interest rate of 9.5% per annum, and a maturity date of July 19, 2003 (“Note 411”). Lee F. Webb, the principal shareholder and treasurer of D & K, signed a personal guaranty of Note 411. The proceeds of Note 411 were to purchase a 3/8th interest in an airplane. Consequently, on the same date, D & K also executed a Security Agreement (the “411 Agreement”) identifying a “Cessna Citation Bravo FAA Registration # N417KW, Aircraft Serial # 550-0933” (the “Airplane”) as the collateral securing repayment of Note 411. D & K also executed an Aircraft Security Agreement dated July 19, 2000 which was properly recorded2 with the Federal Aviation Administration (“FAA”). This lien was not released until D & K’s interest in the Airplane was subject to an Agreed Order entered November 24, 2004 [Case Doc. 156] to sell the Airplane pursuant to § 363(f) of the Bankruptcy Code.
D & K also executed and delivered to WSB a “Universal” Note dated August 1, 2000, bearing account number 70553445, in the principal amount of $400,000.00, with an interest rate of 9.75% per annum, and a maturity date of December 1, 2000 (later extended to July 15, 2001) (“Note 445”). The note was guaranteed by Lee F. Webb but was otherwise unsecured.
Lee Webb and his wife, Janet Webb (the “Webbs”), personally borrowed $200,000.00 from WSB as evidenced by a “Home Equity Line of Credit” note dated March 20, 2002, bearing account number 70254807, with interest charged at the prime rate, and a maturity of April 26, 2012 (“Note 807”). This note was secured by a properly recorded “Open-End Mortgage” on the Webbs’ residence located at 331 Todd’s Ridge Road, Wilmington, Ohio.
D & K filed its petition under chapter 11 of the Bankruptcy Code on October 14, 2003 (the “D & K Bankruptcy”). No cash collateral order was ever entered in the case in favor of WSB. A chapter 11 plan was proposed but not confirmed, and the *173case was converted to a case under chapter 7 on August 18, 2004. WSB filed two proofs of claim in the bankruptcy case on February 3, 2004. One cited Note 411 with a balance due of $2,098,020.05 secured by the Airplane. The other cited Note 445 with an unsecured balance of $252,70.20.
Of particular importance to this case is another “Home Equity Line of Credit” note executed and delivered to WSB by the Webbs subsequent to the filing of the D & K Bankruptcy. This note was dated February 7, 2004, bore account number 71250002, had a credit limit of $2,650,000, charged interest at the prime rate plus two percent per annum but never lower than six percent per annum, and had a maturity date of February 12, 2007 (“Note 002”). D & K was neither an obligor nor guarantor of Note 002. However, Lee F. Webb, signing on behalf of D & K in his capacity as treasurer of the corporation, executed and delivered to WSB a “Commercial Security Agreement” dated February 7, 2004 specifying the Airplane as security for Note 002 (the “002 Agreement”). The 002 Agreement was not filed or registered with the FAA and no FAA form “Aircraft Security Agreement” was executed with respect to Note 002.
The Airplane was not the only collateral referenced by the 002 Agreement. In fact, both Note 002 and the 002 Agreement contain specific references to “Exhibit A” and “Exhibit B” as containing descriptions of the property serving as security. The exhibits attached to each document are identical. Exhibit B is merely a legal description relative to one of the items listed on Exhibit A. Exhibit A, fully transcribed below, purports to describe all of the security for Note 002:
EXHIBIT A
SECURITY DESCRIPTIONS
PROPERTY 1: 311 TODDS RIDGE ROAD, WILMINGTON, OHIO 45177
PROPERTY 2: 7949 HICKORY avenue, RUS-SELLS POINT, OHIO 43348
SECURITY: ASSIGNMENT OF MORTGAGE AT 1665 WEST MAIN STREET, WILMINGTON, OHIO, MORTGAGE RECORDED AT VOLUME 222, PAGE 342, OFFICIAL RECORDS, CLINTON COUNTY, OHIO RECORDER, DATED FEBRUARY 7, 1997
SECURITY: ASSIGNMENT OF LEASE AT A SPECIFIC HANGAR AT CLINTON COUNTY REGIONAL AIRPORT AUTHORITY, 1581 NORTH CURRY ROAD, WILMINGON, OHIO, LEASE RECORDED AT VOLUME 276, PAGE 268, OFFICIAL RECORDS, CLINTON COUNTY, OHIO RECORDER, DATED FEBRUARY 27, 2002, see “exhibit b” for legal DESCRIPTION.
SECURITY: UNDIVIDED 3/8 OWNERSHIP, CESSNA CITATION BRAVO 550, FAA REGISTRATION # N417KW, AIRCRAFT SERIAL # 550-0933
SECURITY: UNDIVIDED 3/8 OWNERSHIP, ENGINE — LEFT—PRATT-WHITNEY, MODEL PW530a, SERIAL # PCE-DA0280
SECURITY: UNDIVIDED 3/8 OWNERSHIP, ENGINE — RIGHT—PRATT-WHITNEY, MODEL pw530a, serial # pce-da0278
REFERENCE: ORIGINAL SECURITY AGREEMENT ON CESSNA CITATION, DATED JULY 19, 2000, BY D & K AVIATION, INC. AND NEW COMMERCIAL SECURITY AGREEMENT DATED FEBRUARY 12, 2004
Mortgages and assignment documents were executed on or shortly after February 7, 2004 and subsequently recorded to perfect WSB’s interests in these additional items of security for Note 002. One piece of collateral was not included on “Exhibit A.” On July 20, 2004, the Webbs granted WSB a security interest in their 2003 Dutch Star Motor Home which was likewise properly documented and certified as a lien under Ohio law.
In conjunction with the Note 002 closing, the Webbs executed a settlement *174statement dated February 12, 2004 (“Settlement Statement”). The Settlement Statement appears to indicate that the proceeds of Note 002 were applied to “payoff’ the balances of Note 411, Note 445, and Note 807. Beginning March 16, 2004, five monthly checks aggregating $56,036.03 were written on the D & K debtor in possession account payable to WSB and were applied to payment of Note 002.
SUMMARY JUDGMENT STANDARD
The appropriate standard to address the Trustee’s motion for summary judgment filed in this adversary proceeding is contained in Fed.R.Civ.P. 56(c) and incorporated in bankruptcy adversary proceedings by reference in Fed. R. Bankr.P. 7056. Rule 56(c) states in part that a court must grant summary judgment to the moving party if:
the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
Fed.R.Civ.P. 56(c). In order to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). If the burden is on the nonmoving party at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the non-moving party’s claim; or 2) demonstrate to the court that the nonmoving party’s evidence is insufficient to establish an essential element of the nonmoving party’s claim. Id. at 331-32, 106 S.Ct. 2548. Thereafter, the opposing party “must come forward with ‘specific facts showing that there is a genuine issue for trial.’ ” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-251, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-88, 106 S.Ct. 1348.
LEGAL ANALYSIS
Choice of Law
Generally, property interests are defined by state law, so the court must necessarily look to state law to interpret the various notes and agreements central to this matter. See, Nobelman v. American Savings Bank, 508 U.S. 324, 329-330, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993); Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). The Federal Aviation Act governs perfection of a security interest in aircraft and other matters regarding registration and recording of title instruments, but does not pertain to determination of the construction or validity of loan and security documentation. See 49 U.S.C. §§ 44101^4113; In re Utah Aircraft Alliance, 342 B.R. 327, 334 n. 21 (10th Cir. BAP 2006) (and cases cited therein); Bank of Lexington v. Jack Adams Aircraft Sales, Inc., 570 F.2d 1220, 1224 (5th Cir.1978). The parties have not addressed the issue of which state’s laws apply, but all of the significant indicia point to Ohio law. D & K is a Delaware corporation located and doing business in Ohio; WSB is located in Ohio; all of the loan transactions occurred in Ohio; and all of the loan documents containing choice of law provisions either directly or indirectly specify Ohio law. Consequently, the court will look to Ohio law in interpreting the loan transaction in this case.
*175
Renewal or Novation?
In the Trustee’s view, Note 002 was the product of a new transaction; it was a new independent note, the proceeds of which were intended by the parties to pay off Note 411 which in turn extinguished WSB’s security interest in the Airplane because it was specific to Note 411. The Trustee separately argues that this new Note 002 transaction constituted a novation because the Webbs were substituted for D & K as obligors. But under the facts of this case, the concept of novation adds nothing to the analysis and is in effect the same argument with a different name. A novation occurs “where a previous valid obligation is extinguished by a new valid contract, accomplished by substitution of parties or of the undertaking, with the consent of all the parties, and based on valid consideration.” McGlothin v. Huffman, 94 Ohio App.3d 240, 640 N.E.2d 598, 601 (1994). As the Trustee correctly notes, a novation requires the clear and definitive intent of the parties to extinguish the former obligation and substitute the new one. Citizens State Bank v. Richart, 16 Ohio App.3d 445, 476 N.E.2d 383, 385 (1984); 11 Am.Jur.2d Bills and Notes § 398. So, in effect, the Trustee is arguing that the parties either intended to satisfy the Note 411 obligation from the proceeds of Note 002 or intended to substitute Note 002 (and the Webbs as obligors) for Note 411, both of which would have the effect of extinguishing any obligation under Note 411.
Semantics aside, ascertaining the intent of the parties is the crux of this matter.3 WSB vehemently asserts that Note 002 was not a new note or a substituted note intended by the parties to extinguish the earlier note, but was merely a renewal of Note 411, part of a consolidation of various loans to D & K and the Webbs.
It is a fundamental commercial principle that satisfaction of an underlying debt extinguishes the corresponding security interest. See Ohio Rev.Code Ann. § 1309.203 (requiring “value” to be given for a security interest to be enforceable); Ohio Rev.Code Ann. § 1309.513 (requiring secured party to file termination of financing statement where the collateral no longer secures an obligation); Bank of Lexington, 570 F.2d at 1225 (“A security interest ... has no validity absent its underlying obligation; the satisfaction of that obligation extinguishes the security interest.”); In re Spaniak, 221 B.R. 732, 735 (Bankr.W.D.Mich.1998) (“When a debt is extinguished, an attendant security interest is also extinguished.”); Commerce Fed. Sav. Bank v. FDIC, 872 F.2d 1240, 1245 (6th Cir.1989); Rozen v. North Carolina Nat. Bank, 588 F.2d 83, 86 (4th Cir.1978).
It is also fundamental and undisputed that the Trustee has the statutory power to avoid unperfected or improper security interests under 11 U.S.C. § 544, recover for the benefit of the estate such avoided transfers under 11 U.S.C. § 550, and obtain disallowance of the claim of a creditor that is liable for an avoided transfer under 11 U.S.C. § 502(d). The only real issue in contention here is whether the underlying debt has indeed been satisfied or otherwise extinguished.
The Trustee’s primary argument is that, without a clear manifestation by the parties that the first note, Note 411, was to be renewed, the payment of that loan with the proceeds of a separate loan is decisive evidence that the parties have extin*176guished the first obligation.4 That clear manifestation, according to the Trustee, must appear exclusively in the loan documents themselves. In that regard, the Trustee cites Harder v. United States, 1993 WL 667770 (D.Mass. Aug.18, 1993).
The Harder court correctly noted that it is the “manifest intent” of the parties that generally determines whether a new loan transaction discharges a prior debt and its corresponding security, or is merely a renewal of the original debt that retains the same security. Id. at *7. It then examined a number of cases with facts “indistinguishable” from that before the court and concluded that a determination that the first obligation is extinguished rather than renewed is compelled where there is absolutely no manifestation to the contrary:
These eases together stand for the proposition that paying off a first loan with the proceeds of a second, without any manifestation that the parties intended simply to renew the first, is decisive evidence that the parties have extinguished the first obligation. The courts treated the transactions themselves, and not later subjective statements by the parties as to prior state of mind, as dispositive of intent.
Id. at *8.
In the Harder case, and the cases it cites for purposes of comparison, the court found virtually no evidence derived from the loan documents or transaction to support the notion that a renewal was intended. In addition, there was some evidence in each case that the parties intended to extinguish the earlier obligation. Of particular significance in Harder was the fact that the lender had cancelled the original note. Id. See also, Peterson v. Crown Financial Corporation, 661 F.2d 287, 292 (3rd Cir.1981) (fact that bank cancelled and returned original note is determinative of intent to extinguish obligation; evidence of subjective intent precluded). Under the Uniform Commercial Code effective in most states, cancellation of an instrument is an effective discharge of the underlying obligation. See, e.g., Ohio Rev.Code Ann. § 1303.69 (UCC 3-604) 5; Huntington National Bank v. Mark, 2004 WL 1627029, at *2 (Ohio Ct.App. July 14, 2004); Kinney v. Columbus Temperature Control Co., 2 Ohio App.3d 396, 442 N.E.2d 465, 466 (1981). The facts before the Harder court clearly compelled its decision.
In a commercial context, great deference must be given to the documents the parties have executed and the manifestations of intent observable from the transaction itself rather than subsequent statements as to subjective intent. Safe *177Deposit Bank and Trust Co. v. Berman, 393 F.2d 401, 404 (1st Cir.1968) (“In a commercial world dependent upon the necessity to rely upon documents meaning what they say, the explicit recitals on forms, without requiring for their correct interpretation other documents not referred to, would seem to be a dominant consideration.”); Harder, 1993 WL 667770, at *9 (“Insistence on giving formalities dispositive significance is salutary in the commercial world.”); Peterson, 661 F.2d at 292. To the extent that these objective manifestations of intent are unequivocal as in the Peterson or Harder cases, then the intent of the parties may be determined as a matter of law without resort to further evidence.
However, the general rule of construction is not, as suggested by the Trustee, that intent must always be exclusively derived from the documents. Generally, courts determine whether the parties intended a new note to extinguish a prior note by analyzing the facts and circumstances surrounding the transaction. In re Wyse Laboratories, Inc., 55 Ohio Law Abs. 321, 1949 WL 6591, at *2 (S.D.Ohio July 14, 1949); Peterson, 661 F.2d at 291; In re Lambert Enterprises, Inc., 21 B.R. 529, 530 (Bankr.Va.1982). Such an intention is not presumed and the party alleging the extinguishment has the burden of proof. Peterson, 661 F.2d at 291.
Ohio law goes a step further in that it provides for a presumption in favor of renewal where a new note has been executed by the parties. In re Holland, 16 B.R. 83, 87-88 (Bankr.N.D.Ohio 1981); Madlener v. Greathouse, 31 Ohio Law Abs. 434, 439, 1939 WL 3309 (Ohio Ct.App. 1939). The Holland decision contains a particularly comprehensive recitation of Ohio case law on this point:
It is well settled in Ohio that renewals of notes, or changes in the form of the evidence of a precedent debt, do not create a new debt, or operate as a discharge or satisfaction of the old debt, unless it is expressly agreed between the parties. Hauenschild v. Standard Coffin Co., 10 Ohio Dec. 536, 8 Ohio N.P. 124, 124 — 125[, 1900 WL 1249] (Super.Ct.Cincinnati, 1900). See also, Beals v. Lewis, 43 Ohio St. 220, 1 N.E. 641 (1885); First National Bank v. Patton Co., 13 Ohio C.C. (n.s.) 289, 32 Ohio C.C. Dec. 627[, 1910 WL 663] (Hamilton County Cir.Ct.1910). Cf., In re Wyse Laboratories, Inc., 55 Ohio Law Abst. 321, 323[, 1949 WL 6591] (S.D.Ohio 1949); Madlener v. Greathouse, 31 Ohio Law Abst. 434, 439[, 1939 WL 3309] (Montgomery County Ct.App.1939); 40 O.Jur.2d 300, Negotiable Instruments and other Commercial Paper, s 247. The presumption is that it is a conditional, not an absolute, payment of the obligation. Madlener, supra at 439; Kuerze v. Western German Bank, 12 Ohio App. 412[, 1919 WL 181] (Hamilton County Ct.App.) aff'd, 100 Ohio St. 547, 127 N.E. 924 (1919). Furthermore, one Court has held the evidence must affirmatively and clearly show such to have been the agreement of the parties. Hauenschild v. Standard Coffin Co., supra 10 Ohio Dec. at 536, 8 Ohio N.P. 124[, 1900 WL 1249].
Holland, 16 B.R. at 87-88. Consequently, it is the Trustee’s burden to overcome this presumption and prove that the parties intended to extinguish Note 411 (and the security interest in the Airplane) when they executed Note 002.
In an alternative attempt to restrict the scope of review to the documents themselves, the Trustee argues that the parol evidence rule prohibits all extrinsic evidence of intent. The parol evidence *178rule renders extrinsic evidence inadmissible “to interpret, vary or add to the terms of an unambiguous written instrument.” Baker Perkins, Inc. v. Midland Moving and Storage Company, 920 F.2d 1301, 1305 (6th Cir.1990). See also, Ed Schory & Sons, Inc. v. Society National Bank, 75 Ohio St.3d 433, 662 N.E.2d 1074, 1080 (1996); Glazer v. Lehman Brothers, Inc., 394 F.3d 444, 455 (6th Cir.2005), cert. denied, — U.S. -, 126 S.Ct. 1429, 164 L.Ed.2d 132 (2006). But the central problem in this case is to determine what effect Note 002 was intended to have on Note 411, or, expressed more broadly, what purpose this transaction involving several disconnected and ill-suited documents was intended to implement. See Galmish v. Cicchini, 90 Ohio St.3d 22, 734 N.E.2d 782, 791 (2000) (evidence of circumstances surrounding contract formation allowed to show intent of contracting party). The documents are devoid of terms or provisions that address these issues, so clearly there can be no prohibited attempt to interpret, vary or add to them. Furthermore, as addressed more fully below, the documents are sufficiently ambiguous that the parol evidence rule cannot pertain. Charles A. Burton, Inc. v. Durkee, 158 Ohio St. 313, 109 N.E.2d 265, 271 (1952) (citing “well established rules” to the effect that parol evidence is admissible for the purpose of clarifying ambiguous contract language). Without extrinsic evidence, the intent of the parties remains a mystery.
Nevertheless, as discussed previously, our analysis must begin, but not necessarily end, with the commercial documents themselves. To say that the loan documentation relating to Note 002 is unartful is to be unduly kind. WSB obviously used preprinted form documents inapplicable to this commercial transaction and failed to clarify the relationship among the disparate documents or to articulate the purpose of the transaction by means of a loan agreement or otherwise.
Note 411 is written on a home equity line of credit form. It references no other documents, but cryptically notes that it is secured by: “Airplane Described As.” The corresponding security agreement, the 411 Agreement, inaccurately refers to Note 411 as the “Universal Note,” which is actually Note 445, but correctly states the execution date, principal amount, and term of Note 411. Perhaps more importantly, the 411 Agreement indicates that the collateral (the Airplane) is intended to secure not only the specific note, but “all extensions, renewals, refinancings, modifications and replacements of the debt, liability or obligation.” This general language does not prove that Note 411 was renewed or refinanced by Note 002, but it does make it clear that, contrary to the Trustee’s argument, the security agreement is not “note-specific” but would apply to any subsequent refinancing of the obligation or a replacement note.
Note 002 is likewise written on a home equity line of credit form. Note 002 and all other loan or security documents executed as part of the same transaction are devoid of any reference to an extension or renewal of Note 411 or any other prior obligation. However, Exhibit A to the note describes the security for the obligation, including a direct reference to the 411 Agreement:
REFERENCE: ORIGINAL SECURITY AGREEMENT ON CESSNA CITATION. DATED JULY 19, 2000, BY D & K AVIATION, INC. AND NEW COMMERCIAL SECURITY AGREEMENT DATED FEBRUARY 12, 2004
At a minimum, this reference to an ostensibly unrelated security agreement executed by a party not obligated on Note 002, creates an ambiguity as to the intent of the parties. Construed more favorably to *179WSB, it suggests that Note 002 might be intended to incorporate or renew Note 411. The fact that D & K executed a new, but unperfected, security agreement on the Airplane that references Note 002 as well as the 411 Agreement, might reinforce this view, but it also adds another layer of ambiguity.
The Trustee argues that the significant differences between Note 411 and Note 002 make it preposterous to suppose that the latter is a renewal of the former. He points out that Note 002 is for a greater principal amount, at a higher interest rate, with a different obligor, and additional collateral. However, the Trustee has cited no authority to the effect that these differences preclude the possibility of a renewal or consolidation of loans. There certainly is a line of cases where these kind of differences between an original loan and a refinancing or consolidation has substantive effect. These cases are concerned with a determination of whether a loan refinancing transforms a purchase-money security interest into an avoidable nonpurchase-money security interest. See, e.g., Matthews v. Transamerica Financial Services (In re Matthews), 724 F.2d 798 (9th Cir.1984); In re Keeton, 161 B.R. 410 (Bankr.S.D.Ohio). The analysis in these cases is heavily reliant upon statutory interpretation and is not concerned with whether the parties intended to extinguish the prior obligation. Even in the context of recharacterizing purchase-money security interests, however, some courts have held that changes in amount, interest rate, and collateral are not determinative. See, e.g., In re Krueger, 172 B.R. 572, 574-575 (Bankr.N.D.Ohio 1994) (additional advanees and increased interest rate); In re Georgia, 22 B.R. 31 (Bankr.S.D.Ohio 1982) (altered terms, interest rate, and signatory); In re Parsley, 104 B.R. 72 (Bankr.S.D.Ind.1988) (cross-collateralization).
In our case, attempting to determine whether the parties intended a renewal or a novation, such factors are only slightly relevant as among the facts and circumstances to be considered in discerning intent. See, In re Cantrill Construction Co., 418 F.2d 705, 707 (6th Cir.1969), cert. denied, 397 U.S. 990, 90 S.Ct. 1124, 25 L.Ed.2d 398 (1970) (raised interest rate insufficient to affect conclusion that parties intended renewal of loan). While it might seem at first blush that a change of obligor on a note is inconsistent with a renewal, it is not necessarily inconsistent with a renewal in the form of a loan consolidation which amalgamates several notes, guarantees and security interests into a single transaction.6
Moving from the language of the loan documents to the other evidence generated contemporaneously with the transaction, the manifestations of intent remain mixed. The Trustee understandably emphasizes the Settlement Statement and related bank records which appear to support his argument that Note 411 was paid and satisfied with the proceeds of Note 002. WSB, on the other hand, points to the deposition testimony of bank officers to the effect that Note 411 and the other notes were not actually paid off and no one intended that they be paid off in this transaction. In particular, WSB stresses that Note 411 was never cancelled or returned to D & K and remains in the possession of *180WSB. As noted previously, cancellation of a note is highly significant evidence of an intent to extinguish the corresponding obligation. Peterson, 661 F.2d at 292. Conversely, retention of a note rather than cancellation is some evidence of an intent not to extinguish the underlying obligation. Gross v. Fizet, 2001 WL 1667864, at *5 (Ohio Ct.App. Dec. 18, 2001); In re Thayer, 38 B.R. 412, 419 (Bankr.Vt.1984).
That WSB did not release its security interest in the Airplane as required by federal regulation upon satisfaction of the debt is further circumstantial evidence that WSB did not regard the debt as satisfied and believed it still had a valid security interest.7 Also, it seems highly improbable that a lender in such a commercial transaction would actually intend to release a corporate obligor together with its most significant collateral in return for a couple of residential mortgages, an assignment of lease, and a lien on a motor home. While perhaps not probative in itself, this observation is certainly consistent with the Ohio presumption in favor of renewal. Should this court avoid WSB’s security interest in the Airplane, WSB will likely be substantially prejudiced and the Trustee and the estate will receive an equally substantial windfall. This result, demonstrably at odds with the equities of the situation, demands clear proof that such was the intent of the parties. See Rinn v. First Union National Bank of Maryland, 176 B.R. 401, 415 (D.Md.1995).
It serves no purpose to delve further into the extrinsic evidence. The Trustee’s case for summary judgment with respect to the novation issue depends upon the exclusion of any evidence beyond the language of the documents together with a restrictive reading of those documents. But the documents are ambiguous and inconclusive and, when viewed more favorably to the non-moving party, tend to suggest a loan consolidation rather than a novation. Because the intentions of the parties as to the effect of Note 002 on Note 411 are not manifest from the documents or from the limited stipulations, there remain genuine issues of material fact to be resolved at trial.
Other Issues Raised by the Trustee
The remaining issues raised by the Trustee on summary judgment must also fail, primarily because they are dependent upon his prevailing on the novation issue. The Trustee seeks to avoid and recover certain postpetition transfers by D & K including the payments applied to Note 002 and the execution of the new security agreement, the 002 Agreement. But, the nature and propriety of those transfers will not be sufficiently established until a final determination is made as to the intended effect of Note 002. It remains unclear whether the obligation memorialized by Note 002 is prepetition or postpetition, secured or unsecured. The intended purpose of the 002 Agreement likewise remains unresolved. D & K, a non-signatory of Note 002, executed the 002 Agreement; the agreement was arguably unnecessary and redundant; and it was never properly perfected despite the obvious institutional knowledge of how to perfect security interests in aircraft. These unresolved fact issues are not only material, they are fundamental to understanding the purpose for which the transfers were made.
The Trustee also alleges that the actions of WSB violated the automatic stay imposed by 11 U.S.C. § 362. Again, this matter is premature and certainly not appropriate for summary judgment where *181the central issue in the case remains unresolved. It is quite possible that WSB may have violated the automatic stay. Construing the established facts favorably to the Trustee’s position, it appears that WSB and the Webbs, willfully and without court approval or notice to anyone, may have attempted to extend WSB’s security interest to otherwise unsecured debts of D & K, encumber estate property with personal debts of the Webbs, inappropriately pay postpetition interest on an undersecured debt, and make payments on the prepetition claim of WSB. These are serious allegations. But, in making its determination on a motion for summary judgment, this court is bound to view the underlying facts in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-88, 106 S.Ct. 1348. In this case, the facts pertaining to the Note 002 transaction are sufficiently obscure that the court, viewing the facts more favorably to WSB, is unable to discern exactly what was intended, whether such conduct was willful, and what damages would be appropriate.
Based upon the same facts, the Trustee has alleged that WSB’s culpable conduct and bad faith warrant cancellation and/or subordination of its claims. But again, such culpability or bad faith cannot be ascertained without further evidence of what was intended and what actually transpired. Even the postpetition payments of D & K to WSB, while well-documented, may or may not have been made in the ordinary course of business depending upon the circumstances, including whether the payments were applied to a secured or unsecured claim. The loan documents together with the limited stipulated facts before the court simply do not provide sufficient basis for a final determination by this court.
CONCLUSION
For the foregoing reasons, the Trustee’s Motion for Partial Summary Judgment is hereby denied.
IT IS SO ORDERED.
. For consistency and clarity, the Court shall adopt the same abbreviations used by the parties in their stipulations.
. The parties have stipulated that the Aircraft Security Agreement was properly recorded, and the Trustee has not otherwise alleged that WSB’s security interest in the Airplane relative to Note 411 was not properly perfected.
. Because the Trustee's alternate arguments are so closely aligned as to be inseparable, being based on precisely the same facts, the court for convenience will generally refer to them jointly as “novation” or the “novation issue.”
. Additionally, the Trustee emphasizes that D & K failed to comply with federal regulations mandating the release of its security interest filed with the FAA. This argument begs the question. The obligation to release the documented security interest is in no way probative of the satisfaction of the underlying obligation, but presupposes it.
. Ohio Rev.Code Ann. § 1303.69 reads as follows:
1303.69 Discharge by cancellation or renunciation
(A) A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument in either of the following ways:
(1) By surrender of the instrument to the party, destruction, mutilation, or cancellation of the instrument, cancellation or striking out of the party's signature, the addition of words to the instrument indicating discharge, or any other intentional voluntary act;
(2) By agreeing not to sue or otherwise renouncing rights against the party by a signed writing.
(B) Cancellation or striking out of an indorsement pursuant to division (A) does not affect the status and rights of a party derived from the indorsement.
. The court uses the phrase "loan consolidation" loosely to mean a combination of several loans, guarantees, and security interests into a single, more manageable package without paying them off. See, In re Box, 324 B.R. 290, 296 (Bankr.S.D.Tex.2005). This is to be distinguished from the consolidation loan in which a new borrowing occurs to pay off several smaller loans and create a more manageable single loan. See, In re Harrison, 272 B.R. 857, 861 (Bankr.D.N.J.2001).
. In addition, because the security interest remained of record, any intervening creditor would be on notice of the prior interest and, therefore, not be prejudiced. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494034/ | ORDER ON DEFENDANTS’ MOTIONS FOR CONTINUATION OF MONTHLY LIVING EXPENSES
ROBERT E. NUGENT, Chief Judge.
On May 11, 2006, chapter 7 debtor Gary Krause filed a motion to extend the $3,700 monthly living allowance previously entered by the Court for an additional three months, through July, 2006.1 On May 25, 2006, defendant Richard Krause, as trustee of the Kansas Children’s Trusts (KCT) I, II, III, IV, and V, the Gary E. Krause Trust (GKT) and the Krause Irrevocable Trust, filed a motion on behalf of trust beneficiaries Richard and Drake Krause (Gary’s children) for continued authority to withdraw funds from the KCTs to pay *257private school tuition for the 2006-07 school year, and for authority to reimburse debtor Gary Krause for certain expenses paid for the children, as well as for certain anticipated future expenditures.2 Both the case trustee and the Government object.3 The Court conducted an evidentiary hearing on the motions on June 15, 2006 and took them under advisement, together with the other pending motions relating to the parties’ attorneys fees, attorney fee budgets, and the adequacy of the debtor’s asset disclosures. The Court will issue a separate order on those issues.
Procedural Background
This adversary proceeding was filed by the Government on November 1, 2005. The Government seeks inter alia a declaration that certain trusts and entities are nominees of Gary and subject to federal tax liens. Gary is indebted to the United States for unpaid income taxes for 1975, 1978-1983,1986,1994, and 1995. The Government has filed proofs of claim seeking in excess of $3.0 million in taxes, interest, and penalties. Both the Tax Court and Tenth Circuit Court of Appeals have held that Gary evaded paying these taxes by establishing abusive tax shelters. Only after seeking to quash a collection summons served by the IRS did Gary file his bankruptcy case on October 10, 2005. On November 21, 2005 the Government sought and obtained an ex parte temporary restraining order (TRO) to prevent Gary and Richard from spending, depleting or transferring the assets of the KCTs, the GKT, and certain other entities: PHR, LLC (PHR), Drake Enterprises, Inc. (DEI), Financial Investment Management Corporation (FIMCO), and Federal Gasohol Corporation (FGC). The TRO effectively froze all accounts held by the trusts and entities, allegedly the only sources of funds available to Gary. The case trustee intervened in this proceeding asserting that if the Government prevailed on its nominee theory, the assets held by the trusts and entities were property of the bankruptcy estate to be administered by her.4
Following a hearing on December 1 and 2, 2005, the Court issued a preliminary injunction that continued the TRO with a slight modification allowing Richard to pay the boys’ December school tuition totaling $2,000 at Wichita Collegiate High School and Wichita Independent School from KCT I. The Court further permitted Gary to submit a budget request for use of the frozen funds of the GKT to pay necessary monthly living expenses.5 On December 19 and 21, 2005 respectively, Gary and Richard, on behalf of the trust beneficiaries, filed motions for monthly living expenses.6 The Government and trustee filed written objections thereto.7
The Court convened a hearing on January 19, 2006, treating the motions as ones to use cash collateral. By that time, the parties had reached agreement on most living expense items. The Court ruled on the remaining contested living expenses, namely the number of vehicles Gary would be permitted to keep and insurance issues. The Order on monthly living expenses, essentially an agreed order, was entered February 6, 2006.8
The effect of the Order was to modify the preliminary injunction in the following *258manner. Gary was allowed $8,700 per month from the GKT to pay monthly living expenses for the months of December 2005 through April 2006. The monthly allowance provided for the following expenses: electricity and heat, water, telephone/cell, home maintenance, food, clothing, laundry, uninsured prescription drugs, health insurance and transportation. In addition, the Order authorized Richard to pay the boys’ tuition from the KCT I in the monthly amount of $2,000 from January 2006 through April 2006. The Order expressly states that “[t]he parties do not agree to the payment of any tuition after April 30, 2006.” The Order further permitted a one-time withdrawal ($5,072.28) from the KCT I to pay the 2005 real estate taxes on the family home at 7711 Oneida Court. The Order required debtor to present a monthly accounting of the funds spent and set out the conditions under which the trustee and Government agreed to payment of monthly living expenses as follows:
The United States and the bankruptcy trustee have agreed to the relief in this Order to prevent injury to debtor and his minor children, and it is conditioned upon debtor’s cooperation in identifying the assets of the estate, the alleged assets of the estate, and the assets of alleged nominees, and in liquidating the assets of the estate that he has not claimed to be exempt. In the event that additional assets of the estate are identified, that provide current monthly income to the debtor, or debtor finds employment or receives income from any source, the debtor will refund any money withdrawn from the accounts pursuant to this order. Furthermore, in the event debtor obtains employment, the parties agree to reduce the monthly payments authorized by this order in an amount equal to that income.9
Gary established a bank account with Equity Bank for the deposit of the authorized monthly funds and from which to pay monthly living expenses. He has provided accountings for the months of February, March and April.10 A summary of those expenditures and the Court’s effort to categorize the expenses paid is attached as Appendix A.
The Court has reviewed those accountings and notes that a number of expenditures paid were outside what the Court considers to be necessary monthly living expenses. For example, Gary has continued to maintain a héalth club membership at Genesis Health Club at the rate of nearly $100 per month, plus incidental charges for drinks and tennis academy. Gary has also paid himself $1,000 per month, thereby giving himself access to cash of over one-fourth of the total monthly living expense allowance. The Court is unable to determine exactly how Gary fully spent this amount and the accountings do not readily indicate such.11
In addition, some of the monthly living expenses appear to be unreasonably high. In some instances such as utilities, the expense paid includes substantial past due amounts. In other instances, the nature of the services provided goes beyond basic service and is excessive. For example, the telephone bill from AT & T for the month of April references charges for no less *259than four numbers for residential service. The Sprint bill for the month of April, presumably cell phone service, was $248. The full copy of the Sprint bill has not been provided so the Court is unable to determine the basic service charge for cell phone service, the number of cell phones on the Sprint account, or the contract terms. The Court notes that the Sprint bill consists of 53 pages and lists total usage of 5,361 minutes for a thirty day period, or over 178 minutes per day ... just on cell phone(s). In all, however, the actual telephone/cell expenses average almost $450 per month.
Further factual background and information can be found in this Court’s April 14, 2006 Memorandum Opinion and the Court may refer to such information and facts as they pertain to the current motion. Additional facts will be set forth below in the discussion of the motions as warranted. Discussion
The Government contends that there is no legal basis for the bankruptcy court to allow a debtor use of estate assets to pay post-petition living expenses and, as a general proposition, the Court agrees.12 What gives the Court pause here is that this adversary proceeding is only at the preliminary injunction stage and, while this Court has determined that the Government’s allegations are “serious, substantial, and difficult” and “deserving of more deliberate investigation,” the ownership and encumbrance status of these assets has yet to be finally determined.13 None of the cases cited by the Government features a similar situation, but all of the cases are most persuasive on the point that estate assets are not available to pay a chapter 7 debtor’s post-petition living expenses.14 If Gary ultimately prevails on this issue and the trusts and entities legitimately own the assets they hold, then the assets are not property of his bankruptcy estate and, arguably, not even subject to this Court’s jurisdiction. On the other hand, if the Government prevails on this issue, the assets of the trusts and entities are property of the bankruptcy estate and may not be used to pay Gary’s and his sons’ post-petition living expenses. Until this issue is finally determined, the Court is left to balance these two divergent positions while this case pends.
In this regard, the Court finds In re Walter15 somewhat instructive. In that case, the bankruptcy court issued a temporary restraining order prohibiting the chapter 11 debtor from withdrawing further funds from his pension plan until his *260contested claimed exemption was determined.16 Debtors claimed exempt a pension plan valued at approximately $1.2 million that had been established in a previous real estate business. An unsecured creditor objected to the claimed exemption. Debtors claimed authority as debtors in possession and under § 363(b) of the Bankruptcy Code to dispose of or use estate property.17 The objecting creditor noted the conflict of interest that debtor was in.
... Mr. Walter as a bankrupt and debt- or in possession is in a situation of conflict of interest, wanting the money for himself, while at the same time, having to protect the estate. The [objecting creditor] maintains that Mr. Walter should be allowed to withdraw no money from the pension plan so that the estate will be protected.18
Walter is distinguishable from the instant case for two reasons, first that Walter was a chapter 11 debtor in possession while Krause is a debtor in a chapter 7 liquidations, and, second, that in Walter, the parties agreed that “until the court rules on this objection [to exemption], the [pension] plan is to be considered property of the estate.”19 While there is no such agreement here, the Court has made a preliminary determination that the Government is likely to succeed on the merits of its claim that the assets held by the trusts and entities are property of the estate.
In addressing the debtors’ argument under § 363 in Walter, the Ninth Circuit BAP agreed with the objecting creditor’s contention that it does not allow use of estate property for personal purposes. The court held that in order for a debtor in possession or trustee to use estate property, an articulated business justification must be made. The Ninth Circuit BAP concluded that the bankruptcy court properly exercised its discretion in prohibiting future withdrawals where it was shown “that a substantial asset of the estate may be jeopardized by continued withdrawals.” 20 This reasoning is even more persuasive in the chapter 7 context. Were the trustee here to seek to use the assets of the alleged nominee trusts and entities for the benefit of the debtor and his children, that motion would meet a similar fate, particularly where the assets are substantial and in this case, the only potential property of the estate. The Court cannot fathom that a trustee would pursue such a motion in a chapter 7 setting. If such a course of action were pursued by the trustee it would likely constitute a breach of the trustee’s duty owed to debtor’s creditors.21
Initially, the Court intended that the allowance of monthly living expenses operate as an incentive for Gary to cooperate with the trustee in disclosing and sorting *261through the myriad of trusts, entities, and transactions spanning a time period of nearly twenty years in some instances. The Court believed such cooperation and full disclosure would confer a substantial benefit upon the estate and move this proceeding toward final resolution more efficiently. Moreover, this Court has always intended that should the Government prevail, Gary would be required to repay whatever he used, analogous to a debtor whose adequate protection of a creditor’s security has failed. Instead, after now having two separate occasions to view Gary’s demeanor and hear his testimony, the Court’s expectations remain unmet. Exactly the opposite has occurred.
Gary had the security blanket of the $3,700 monthly allowance and admits he has made no effort to obtain employment. The Government complains that Gary has been less than forthcoming in discovery and the court-ordered disclosure of assets. Gary’s cooperation was a condition to allowing a reasonable monthly living expense under the February Order. The Court heard evidence on June 15, 2006 that Gary has not met that condition. He omitted certain property and interests from his court-ordered disclosures including storage units containing his personal effects; rental income from an unidentified tenant farmer on the 15 acres owned by Development Associates (wholly owned by the GKT); a safe deposit box held by DEI; a receivable resulting from a mortgage on an oil tanker (the balance of which is uncertain); and a hunting lodge or Gary’s interest therein through Quivera Associates, Inc. (Gary is the named insured on the hunting lodge).22 According to the Government, the slow progress in discovery and Gary’s recalcitrance has necessitated the extension of discovery and the scheduling deadlines.
Gary has offered no security or any other form of adequate protection of the funds expended for living expenses in the event the Court should finally determine that the assets are indeed property of the estate. The Court concludes that as long as Gary has this allowance, his only incentive to cooperate is the risk of being denied a discharge. Even that threat is somewhat hollow. Given the fact that the Tenth Circuit Court of Appeals has already concluded that he evaded taxes, the Government’s dischargeability complaint has considerable promise of success. Gary has everything to gain from delay and nothing to lose by defending the complaint.
I. Gary’s Motion for Continuation of Necessary Monthly Living Expenses
Gary seeks to continue the $3,700 monthly allowance for “necessary” living expenses through July 2006. According to Gary’s motion, “[t]he requested allowance is for food, utility, auto and medical expenses on behalf of the Debtor and his children.”23 But the attached budget to support the $3,700 monthly allowance includes other expenditures. Gary allocates the monthly living expenses as follows:
Food • $ 500.00
Utilities (includes gas, water, electricity, trash, and telephone) $1,025.00
Auto/Transportation (includes gas, repairs, tags, and taxes) 24 $ 480.00
Medical Expenses (includes health insurance and prescription drug insurance premiums, prescription drugs, dental expenses, and “other medical”) $1,270.00
Allowance for boys $ 160.00
*262Home maintenance 25 $ 200.00
Entertainment/Recreation $ 100.00
Incidental $ 465.00
Total $4,200.00 26
Gary asserts that this figure is reasonable because it is less than the $56,386 median annual income for a family of three in Kansas.27
The Government and the trustee object to continuation of any further monthly living expense allowance for Gary, arguing that Gary has made no effort to find employment and earn an income. He has submitted no plan to repay the monthly living expenses and seemingly contemplates that the monthly living allowance will continue for the duration of his bankruptcy. The trustee does concede that it is appropriate to insure the assets that may ultimately be deemed to be property of the estate (i.e. the house and vehicles). At most, the Government argues, Gary should be entitled to no more that the Internal Revenue Service standards, a sum which the Government calculates as $1,629 per month, allocated as follows:
Food, Clothing and other items $ 835.00
Transportation (operating costs) $ 384.00
Housing and Utilities (non-ownership $ 400.00 costs)
Total $1,619.00 28
This amount, the Government maintains, is sufficient to cover “necessary” monthly living expenses. The Court observes that the Government’s proposed monthly allowance for Gary and his sons makes no allowance for health insurance or unreimbursed health care expenses.29
The Court considers a number of factors pertinent to the determination of whether the $3,700 monthly living allowance should continue.
A. Gary’s Unemployment
This is not a situation where the debtor has made effort to find employment but has failed in his search or the debtor is lacking in skills or education necessary to obtain a job. Gary has utterly failed to seek any employment. The Court never contemplated that the monthly living allowance would be a substitute for Gary obtaining gainful employment.
In the event that additional assets of the estate are identified, that provide current monthly income to the debtor, or debtor finds employment or receives income from any source, the debtor will refund any money withdrawn from the *263accounts pursuant to this order. Furthermore, in the event debtor obtains employment, the parties agree to reduce the monthly payments authorized by this order in an amount equal to that income.30
Gary says that he has not looked for employment because “no one will hire a 58 year old man with a heart condition.” There is no medical evidence that his health precludes him from working to earn a living. The Court knows many men of Gary’s age and older who are burdened with heart problems, but are gainfully employed. Given his law degree, entrepreneurial skills, and his apparent extensive business and management experience (in a variety of industries and enterprises), the Court believes that Gary has marketable skills. Gary’s excuses for not searching for outside employment are unacceptable. Gary chose to file a chapter 7 case, the purpose of which is to give the honest but unfortunate debtor a “fresh start.”31 Chapter 7 is not a means to sustain the lifestyle to which the debtor had become accustomed before filing bankruptcy. The Court is left with the conclusion that so long as the $3,700 monthly allowance is in place, Gary has little incentive to search for outside employment and begin his “fresh start.”
B. Necessity and Reasonableness of Gary’s Budgeted Monthly Living Expenses
The Court has reviewed the initial order allowing monthly living expenses of $3,700. The language of that order is consistent with the Court’s recollection that the monthly allowance was for payment of reasonable and necessary post-petition living expenses, not every expenditure incurred by Gary. The order states that the monthly allowance “shall be utilized for the payment of pro forma expenses as set forth below.”32 The enumerated expense categories are: electricity and heat, water, telephone/cell, home maintenance, food, clothing, laundry, uninsured prescription drug costs, health insurance and transportation. In his own motion for continuation of the $3,700 allowance, Gary represents that the monthly allowance is for “food, utility, auto and medical expenses” on behalf of himself and his sons.33
The Court concludes that Gary’s budgeted request for the boys’ allowance ($160), entertainment and recreation ($100), and incidentals ($465) are not necessary expenses and should not be paid out of the frozen funds. Gary testified that his sons have summer jobs and are earning some income; this offsets the allowance. Those expense items will be disallowed.
A review of Gary’s Schedule J is somewhat revealing of Gary’s current situation. *264While the evidence at the preliminary injunction hearing indicated that FIMCO paid nearly all of Gary’s monthly living expenses (explaining a number of significant monthly expenses being zero), he lists an additional $2,171 of monthly expenses of which $600 is for a loan payment on a vehicle that Gary has since surrendered. A comparison of the figures for some of the expense categories on Schedule J, Gary’s budget or requested allowance, and actual expenditures, is enlightening.
Expense Item Schedule J Budget Actual 34
Utilities (electricity, gas, water, telephone, trash) $ 0.00 35 $1,025.00 $983.28
Transportation (operating costs: gas, repairs, and taxes) $150.00 $ 480.00 $390.37
Home Maintenance (repairs and upkeep) $ 25.00 $ 200.00 $115.74
Food $400.00 $ 500.00 $392.32
Rent (includes taxes' and insurance) $371.00 $ 50.00 $ 50.00
Health/Drug Insurance $ 0.00 36 $ 690.00 $674.50
Medical/Dental Expenses $300.00 $ 580.00 $384.20
The Court concludes that these expenses, while necessary, are unreasonable in amount, especially for a chapter 7 debt- or who is seeking to fund them with putative estate assets. A $450 monthly telephone expense is questionable under the circumstances here. The actual phone expense far exceeds the requested allowance of $200. To the extent the telephone expense is attributable to the number of land lines or cell phones utilized by debtor and his sons, the Court suggests that the number of lines and/or phones be reduced. Similarly, the gas costs for two vehicles seems somewhat high given the fact that Gary has no travel to and from a place of employment. Likewise, the car repair/routine maintenance allowance appears to be high in the absence of evidence that there have been mechanical problems with the two SUVs — a 1999 Dodge Duran-go and a 2000 Ford Explorer. Depending upon the health insurance plan covering Gary and his sons, and the applicable deductibles and co-pays, an unspecified monthly medical expense of $580 (in addition to health insurance premiums of $674.50) is high. The Court assumes that this medical expense is an unreimbursed, out-of-pocket cost above and beyond the covered medical expenses incurred. Likewise, the home maintenance figure of $200 per month appears high. The Court heard no evidence of necessary repairs or maintenance required on the 7711 Oneida property, other than the unsubstantiated testimony of Gary that the air conditioning unit(s) are not functioning properly.
As suggested by the Government, the Court will apply IRS standards for food, clothing and other items ($835); transportation ($384); and housing/utility expense ($400). With respect to medical expenses the Court will allow $675 for health insurance and prescription drug insurance premiums and $130 for prescription drug copay or unreimbursed expense. The $400 budgeted by Gary for “other medical” will be disallowed.
The Court thus allows Gary a monthly living expense of $2,424 for the months of May, June and July, 2006.
C.. Unsubstantiated Expenses
Gary’s budget requests for incidentals ($465), other medical ($400) and home maintenance ($200) are unsubstantiated. *265Gary offers no detail as to what specific expense is entailed in the figures requested. Absent some degree of specification and itemization, these expenses are disallowed.
In addition, what the Court would interpret as “incidentals” would be subsumed in the allowance for “food, clothing and other items” provided above. Likewise, a portion of the IRS housing allowance provided above is attributable to routine maintenance and upkeep.
In reviewing the accountings for February, March and April furnished by Gary pursuant to the February 6 order, the Court notes that Gary has paid himself $1,000 a month from the $3,700 allowance.37 Presumably Gary used these funds to pay some expenses with cash. However, the accountings do not fully show what monthly living expenses, if any, were actually paid by Gary using these funds.
Finally, the Court questions the propriety of including medical expenses attributable to the boys in Gary’s budget request. The better approach would be to have the KCT trustee request payment of the boys’ unreimbursed or out-of-pocket medical expenses directly from the KCT 1. The Court would expect the trustee to submit an insurance benefits statement from the health insurer setting forth what portion of the medical expense was covered by the health insurance and what portion of the medical expense is the responsibility of the insured or patient as a non-covered service, deductible, or co-pay. The monthly living expense budget requested by Gary should come from the GKT.
D. Repayment of Estate Property or Adequate Protection for Use
Nowhere in Gary’s motion does he offer or propose to repay the frozen funds utilized to pay his monthly living expense allowance. Pursuant to the February 6, 2006 order, the frozen funds have now been used to pay five months of living expenses ($18,500), plus substantial additional “one-time” expenditures and tuition expense ($10,000).
Gary has shown no indication that he will earn an income in the future to potentially repay the estate. He has not sought employment. Nor does the Court place much credence in Gary’s potential source of income through an alleged anti-aging project that Gary has referenced from time to time. Gary has supplied the Court with no information concerning this alleged “anti-aging project.” The Court does not know at what stage of development the alleged anti-aging product is in. No business plan or financial projections have been provided with regard to the project. It is not even clear what Gary’s role in the project is. The Court views the anti-aging project as a speculative means of repayment at best.
E. Conclusion as to Gary’s Motion
Based on the foregoing, Gary will be permitted to withdraw the amount of $2,424 from the GKT for monthly living expenses for the months of May, June and July. Said funds shall only be utilized for the monthly living expenses allowed (ie. food, clothing, transportation, housing and utilities, health insurance and unreimbursed medical expenses). The Court further orders that no monthly living expenses will be paid from the frozen assets after July 31, 2006 and the Court will entertain no further motion for continuation of monthly living expenses. The debt- or is strongly encouraged to commence his “fresh start” by obtaining gainful employ*266ment. This Court' is not inclined to require the creditors to finance the debtor’s speculative ventures with estate assets.
II. Richard’s Motion for Continuation of Monthly Living Expenses
Richard seeks authority to continue paying $2,000 per month for the sons’ private school tuition for the upcoming 2006-07 school year (including $550 tuition deposits at each school) and to reimburse Gary for miscellaneous expenditures he has paid on behalf of his sons or is expected to incur.38 The expenditures already incurred by Gary include annual renewal of vehicle registration and personal property taxes on the Durango and Explorer totaling $375 in late May39 and psychological testing of Drake in the amount of $800 in March.40 Richard requests authority to pay for Drake’s scheduled deviated septum surgery in June and to repair or replace the air conditioning system at 7711 Oneida (with an anticipated cost as high as $4,000).41
The Government objects to Richard’s motion on much of the same grounds as asserted in opposition to Gary’s motion for continuation of monthly living expenses. The Government made it known when it agreed in January to the payment of the boys’ tuition that it would oppose payment of tuition beyond the current academic year. The intent was to provide debtor and his family with a reasonable transition period.
Richard’s motion for continuation of necessary monthly living expenses on behalf of trust beneficiaries Drake and Rick stands on slightly different footing from Gary’s motion. Neither Drake nor Rick are providing any services to the bankruptcy estate. The Court can conceive of no possible benefit to the estate. The Court initially allowed the payment of the boys’ tuition to avoid harm to the boys and because the funds were froze in the middle of the school year, to complete their tuition obligations for the school year.
On the other hand, the KCT I arguably presents the strongest case that this trust, at least when initially created in 1988, was a .valid trust created by Gary for the boys’ benefits, and not a sham trust. The Court is mindful of the 1986 antenuptial agreement between Gary and his former wife, Teresa Briggs, whereupon the birth of children Gary was to establish the Krause Children Trust.42 The trust was to be initially funded with $50,000. Upon the birth of the second child, an additional $50,000 was to be added to the trust corpus. Gary’s total cash contribution obligation to the Krause Children Trust under the antenuptial agreement was $150,000.43 *267While subsequent events indicate that not all terms of the antenuptial agreement were strictly adhered to as it concerns the Krause Children Trust, it nonetheless casts some doubt on the Government’s nominee theory, at least where the KCT I is concerned.44 Nevertheless, the evasive and incomplete nature of the financial disclosures made by Gary in Richard’s name reinforce the Court’s earlier determination that there is a strong likelihood that these assets will be found to be those of Gary, and hence, of the estate and should therefore be protected pending the outcome of this case.
With the above considerations in mind, the Court now turns to the specific funding requests made by Richard on behalf of the boys, Drake and Rick.
A. Private School Tuition
The $2,000 monthly allowance from the KCT I for Drake’s and Rick’s tuition at Wichita Collegiate High School and Wichita Independent School for the 2006-07 academic year is denied as is the request to fund or reimburse Gary for any corresponding tuition deposit from the KCT I. The Government correctly notes that the boys can obtain a public education for substantially less. The Court agrees that the requested tuition expense is both unnecessary and excessive. No doubt many debtors whose chapter 7 and 13 cases are pending in this Court would very much like their children to receive an expensive private education, but those desires should not be funded by estate assets, particularly when there is no statutory justification whatever for such an expenditure in the Code. While the Court empathizes with the debtor’s children being uprooted in this way, support of a debtor’s dependents with assets that are potential property of the bankruptcy estate is simply without a legal basis. Gary’s financial activities and the activities of the KCTs draw legitimate suspicion as to their legitimacy, requiring the Court to take what may appear to be draconian measures to protect the interests of the creditors at the cost of the debtor’s children. In a similar vein, had Richard administered the KCT I in his sole discretion as contemplated by the trust instrument, rather than as Gary’s cats-paw, there would be little doubt of the validity of the KCTs. Richard’s request for a monthly tuition allowance of $2,000 for Drake and Rick is DENIED.
B. Vehicle Registration and Taxes.
Richard also seeks authority to reimburse Gary for the annual registration fee and taxes on the Durango and Explorer totaling $375. The Court is troubled by the still-existing inconsistency of ownership of these vehicles.45 Moreover, the Court considers the request duplicative of the transportation expenses previously provided Gary in the $3,700 monthly allowance and subsumed in that category of expense. As noted above, Gary will be allowed a monthly transportation expense of $384 for May, June and July. This will be paid from the GKT. Richard’s request *268to, in addition, reimburse Gary for this annual expense from the KCT I is DENIED.
C.Psychological Testing of Drake
Richard seeks authority of the Court to reimburse Gary $800 for psychological testing of Drake on March 1, 2006. It is unclear whether this medical expense was a covered service under Gary’s health insurance plan and whether it was reimbursed by insurance. No statement from the insurer has been provided by Richard to demonstrate that this service is not payable by the health insurer. To the extent that the psychological testing is a covered service under Gary’s plan, then Richard has provided no explanation why the service could not have been provided by a contracting provider. In addition, if the medical expense was not covered by the $3,700 monthly allowance, Richard has provided no explanation why he did not seek approval of the Court prior to incurring the medical expense and justify the necessity of the medical service. In the Court’s experience, a diagnosis of ADHD and dyslexia is ordinarily made early in a child’s student life and not when the child nears high school graduation. In the absence of answers to these questions and based upon the limited record before it, the Court DENIES Richard’s request to reimburse Gary for this medical expense from the KCT I. This expense item is clearly in the nature of support for the debtor’s dependent without any provision in the Bankruptcy Code for its payment out of assets of the bankruptcy estate.
D. Drake’s Deviated Septum Surgery
Richard seeks authority of the Court to reimburse or pay for any uninsured or unreimbursed medical expenses associated with Drake’s surgery for a deviated septum scheduled on June 1. At this point, Richard has presented the Court with no documentation to establish what amount this may be and whether this medical service is covered by Gary’s health insurer. Nor has Richard presented the Court with any evidence from a health care provider that the surgery is necessary. If the surgery has already taken place, this information should be readily available. Absent this additional information, Richard’s request is premature and temporarily DENIED. Like the psychological testing, this medical expense should be paid from the debtor’s future earnings.
E. Air Conditioning Repair or Replacement
Richard seeks authority to repair or replace the air conditioning system at debtor’s home, 7711 Oneida Court. Gary projects that this expense may be as high as $4,000 and requests that it be paid from funds held by a KCT. Conceivably, this expenditure could preserve a potential asset of the bankruptcy estate.46 Once again, however, Richard has provided no evidence to the Court describing the nature of the problem nor bids to repair or replace the air conditioning system, if necessary. In addition, the original $3,700 monthly allowance included a-provision for home maintenance which the Court believes includes this expense item. The monthly living expense allowance going *269forward for the months of May, June and July includes an allowance for maintenance which is included in the housing and utilities allocation of $400. Absent Richard providing further evidence substantiating the problem and bids to repair or replace, Richard’s request is DENIED.
Conclusion
At the preliminary injunction hearing in December, the Court admonished the debtor to bear in mind the purpose, effect, and benefits of filing a chapter 7 case and that those benefits do not come without cost:
The United States of America, Mr. Krause, and your creditors are not going to finance a lifestyle of the expanse that you currently enjoy. You said that you entered bankruptcy to put it behind you, and I want you to understand, Mr. Krause, when you’re in a bankruptcy you take your financial past and you lay it on the table and a very bright light shines upon it. And you have an absolute duty to be candid with the Court and be candid with the Trustee and to be candid with your creditors to reveal whatever it is they ask of you. It is not, as so often happens out in the non-bankruptcy world, a situation where the race is to the swiftest or the cleverest debtor; it’s a different deal in Bankruptcy Court.... [Y]ou should not be surprised to learn that everything that you’ve been up to is going to be under significant scrutiny going forward ... 47
This Court will not speculate on Gary’s motives in choosing the liquidation chapter over filing a chapter 11 in which he arguably could have acted as a debtor in possession of his assets. Having selected chapter 7 however, he can not reasonably expect to have the use of these assets for living expenses pending the outcome of this litigation. Gary must look to his own lights for his and his family’s support. The Bankruptcy Code affords him nothing more.
Gary’s motion for continuation of monthly living expenses is GRANTED IN PART AND DENIED IN PART. Gary will be permitted to withdraw monthly from the GKT the sum of $2,424 for the monthly living expenses described herein for the months of May, June and July. Gary will be permitted no monthly living expense allowance after July 31, 2006. Richard’s motion for continuation of payment of private school tuition and for payment or reimbursement of Gary for the other expenses enumerated above from the KCT I is DENIED.
Appendix A
Court’s Analysis of Gary Krause’s February, March, and April 2006 Expense Reports
In support of his Report of February 2006 Expenditures (Dkt. 76) and Report of March and April 2006 Expenditures (Dkt. 99), Gary provided copies of various bank statements, checks, utility bills, receipts, and hand-written ledgers for cash expenditures. The Court notes that full copies of the utilities bills were not provided. In addition, Gary did not produce a copy of each utility (i.e., gas, electric, etc.) bill for each month. Gary also did not provide copies of all checks referenced in the bank statements. The figures shown below are supported by a either a utility bill, check, or receipt. Receipts for unknown items were excluded. The Court has adjusted various figures to account for certain anomalies and includes other explanatory notes by footnote reference where appropriate.
*270Expense Description February March April Monthly Average
Utilities Gas 396.12 315.851 197.94 303.30
Electric 130.12 202.90 93.36 142.13
Water 68.65 76.II2 46.52 63.76
Phone3 579.734 373.455 391.926 448.37
Trash 7 77.18 25.73
Total — Utilities 1251.80 968.31 729.74 983.28
Auto Gas 224.298 234.079 265.6310 241.33
Repairs 0 447.13 0 149.04
Tags & Taxes _0 _0 _0 _0
Total — auto 224.29 681.20 265.63 390.37
Home Repairs 276.2511 55.42 110.56
Upkeep 15.56 5.19
Total for Home 0 291.81 55.42 115.74
Health/Rx Insurance 12 674.50 674.50 674.50 674.50
Out-of-Pocket Medical Expenses (OOPME):
Rx 288.98
Dr. Stone 800.0013
Dentist 111.00 111.00
*271Misc. 5.74 58.78
Glasses 170.34
WichitaClinie _ _ 406.75 _
Total OOPME_116.74_458.76_577.09_384.20
Food14_366.33_418.31_140.3415_392.3216
TOTAL Monthly Avg_$2940.41
Cash Flow Analysis
Cash withdrawn by Gary (February-April):_
Description_;_Amount
Check # 1012 (2/16/06)_._$ 500
Check # 1016 (2/28/06)_i_$ 500
Check # 1027 (3/16/06)_$ 500
Check # 1035 (3/24/06)_$ 500
Check # 1042 (4/05/06)_$ 500
Check # 1044 (4/20/06)_$ 500
ATM withdrawal (2/28/06)_;_$ 30
Total_$3030
Cash Expenditures (February-April):_
Description_Amount
Allowance for Drake_240
Allowance for Rick_240
School lunch money (Drake only)_225
Haircuts (Drake & Rick)_90
Gas Allowance (Drake & Rick)_400
Food paid by cash_590.71
Gas paid by cash_323.99
Total_$2109.70
* See discussion on page 5 of Monthly Living Expense Order: “Gary has also paid himself $1,000 per month, thereby giving himself access to cash of over one-fourth of the total monthly living expense allowance. The Court is unable to determine exactly how Gary spent this amount and the accountings do not readily indicate such.” Approximately $920 cash is unaccounted for.
. Dkt. 96.
. Dkt. 109.
. Dkt. 110, 113, 114.
. Dkt. 25.
. Dkt. 12.
. Dkt. 22 and 24.
. Dkt. 36-39.
.Dkt. 66.
. Dkt. 66, ¶ 9.
. Dkt. 76 and 99
. The accounting for February contains a handwritten ledger purporting to show out-of-pocket amounts Gary paid to Drake and Rick for allowances, gas for vehicles, lunch money, and haircuts. These presumably were paid by Gary with the cash he obtained. They total $490 for the month of February. There is no evidence before the Court that Drake and Rick actually used the cash for the purposes indicated. See Dkt. 76.
. See Dkt. 36 and 113 and cases cited therein.
. Dkt. 80, p. 16; Greater Yellowstone Coalition v. Flowers, 321 F.3d 1250, 1261-62 (10th Cir.2003).
. See In re Thomas, 91 B.R. 731 (N.D.Tex.1988) (Government denied stay relief to offset post-petition crop disaster payments against debtor’s pre-petition obligations to government agencies because debtor did not have rights in the post-petition crop disaster payments at the time he hied bankruptcy); In re Peterson Distributing, Inc., 82 F.3d 956 (10th Cir.1996) (creditor sought to setoff credit card invoices against it’s claim in debtor’s bankruptcy under § 553); United States v. Sutton, 786 F.2d 1305 (5th Cir.1986) (No provision in bankruptcy code authorizes a family support allowance in a chapter 11 reorganization where spouse had no matured claim for support and did not provide services to the estate; bankruptcy court lacked equitable authority under § 105 to award monthly support of $1,500 to debtor’s wife and children); In re Vincent, 4 B.R. 21 (Bankr.M.D.Tenn. 1979) (No provision in Bankruptcy Code authorizes payment of chapter 11 debtor’s necessary living expenses from the estate; payment of necessary living expenses had to come from employment from the trustee or other sources.).
.83 B.R. 14 (9th Cir. BAP 1988).
. After debtors filed their chapter 11 petition, debtors withdrew $10,000 per month from the pension plan for family living expenses. At the time of the hearing, debtors had withdrawn $90,000 from the pension plan.
. Under § 363(b) a debtor in possession or trustee must articulate a business justification for using or selling estate property outside the ordinary course of business. See In re Continental Air Lines, Inc., 780 F.2d 1223 (5th cir.1986) (listing relevant factors forjudge to consider to decide whether use or sale of estate property furthers the diverse interests of debtors, creditors, and equity holders). A debtor in possession has many of the same rights as a trustee. See 11 U.S.C. § 1107.
. 83 B.R. at 19.
. Id.
. Id. at 20.
. See 11 U.S.C. § 704(a).
. The Court will more fully discuss the adequacy of these asset disclosures in a separate order.
. Dkt. 96. ¶ 3.
. Gary and his sons use two vehicles — a 2000 Ford Explorer and a 1999 Dodge Durango, both of which are fully paid.
. The home in which Gary and his sons reside, 7711 Oneida Court, is unencumbered so Gary has no mortgage payment. For tax year 2005, it appraised at $392,000. In the initial February 6, 2006 Order, the Court authorized Gary to pay the 2005 real estate taxes on the home in the amount of $5,072.28. Dkt. 66. According to the Government, the 2005 taxes on the Oneida property remain unpaid.
. According to the Court's calculations, Gary’s itemized monthly budget totals $4,200, not $3,700.
. As the Government points out in its response, this figure is a pre-tax figure. The Court agrees. For purposes of means testing under the Bankruptcy Abuse Prevention and Consumer Protection Act effective October 17, 2005 (BAPCPA), the determination of current monthly income is based upon average gross monthly income and annualized to compare to the annual median family income. Taxes are a separate deduction. See Form B22A, lines 3, 13, 14 and 25.
. The Court’s calculation of these monthly expenses totals $1,619, not $1,629.
. The Court notes that the IRS standard for food and clothing utilized for means testing under BAPCPA § 707(b) and Form B22A does not include an allowance for health care costs. Health insurance premiums and unreimbursed health care expenses are separately-listed deductions. See Form B22A, lines 31 and 34.
. Dkt. 66, ¶ 9.
. See Dalton v. I.R.S., 77 F.3d 1297, 1300 (10th Cir.1996) (The purpose of the Bankruptcy Code is to provide the honest, but unfortunate, debtor a fresh start); Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) (“This purpose ... gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.”); Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (In the same breath that the courts have invoked the "fresh start” policy, they have been careful to explain that the Code limits the opportunity for a completely unencumbered new beginning to the honest but unfortunate debtor, citing Local Loan Co. v. Hunt, supra).
. Dkt. 66, ¶ 6.a.
. Dkt. 96, ¶ 3.
. See Appendix A attached. This column represents the Court’s calculation of the average monthly expense for the months of February, March, and April as gleaned from the accountings filed by Gary.
. These pre-filing expenses were paid by FIMCO.
. This pre-filing expense was paid by FIM-CO.
. See Dkt. 76, check # 1012; Dkt. 99, check # 1016, 1027, 1035, 1042, 1044.
. Dkt. 109.
. According to the vehicle registration application signed by Gary in May of 2006 and attached to Richard’s motion, the Durango and Explorer are owned by FIMCO. Dkt. 109. But Gary’s asset disclosures filed May 11, 2006 show that the vehicles are owned by the KCT I. See Dkt. 98.
. Based upon the documents attached to Richard’s motion, the psychological testing related to Drake's dyslexia, ADHD, and other learning disorders. It is unclear from the record whether Drake, who will be a senior in high school, was diagnosed with those disorders for the first time as a result of that testing.
. According to Gary’s asset disclosures, the 7711 Oneida property is owned by PHR which in turn is owned by the KCT I, II and V. See Dkt. 98.
. See Krause Exhibit 1, ¶ 12 admitted by stipulation of the parlies at the hearing on the preliminary injunction, December 1, 2005.
. Gary suggested that his ex-wife Teresa contributed some of the cash to the KCTs, but the court has not been provided with financial records of the trusts showing the amount, *267date, or source of original cash contributions to the KCTs.
. The KCT I was established December 5, 1988 approximately seven months after Drake's birth. The antenuptial agreement does not appear to contemplate multiple KCTs. The antenuptial agreement contemplates that there would be three trustees, not a single trustee, of the Krause Children Trust to be created. At this stage of the proceedings, the record before the Court has not been sufficiently developed to determine whether the initial funding requirements of the KCT I or any of the other trust terms were consistent with the antenuptial agreement.
. See note 39, supra.
. The Court notes that its February 6, 2006 order authorized Richard to deposit the necessary funds into Gary's counsel’s trust account to pay the 2005 real estate taxes on 7711 Oneida in the amount of $5,072.28 from KCT I. According to the Government in argument and its written objection, Richard has not paid the taxes, but the Court received no evidence of that. If the Government's representation is correct, this only adds to the Court’s many serious concerns about the future of this case.
. Dkt. 17, Tr. of Ruling, p. 8-9.
. Gary has two phone service providers: AT & T for his land lines and Sprint for his cell phones. Full copies of the telephone bills were not provided. As far as the Court can discern, Gary has 4 land lines. It is unclear the number of cell phones for which Sprint provides service.
. The trash service is billed quarterly.
. This figure represents $205.12 for SBC (n/ k/a AT & T) and $374.61 for Sprint.
. Gary had a past due balance and paid $620.28 to Kansas Gas Service in March. Current charges for March were $315.85.
. Gary issued two checks to the City of Wichita Water Department in March. The actual bills were not attached.
. This figure represents $189.84 for AT & T and $183.61 for Sprint.
. This figure represents $194.41 for AT & T and $197.51 for Sprint.
. This figure represents $200 cash allowance to the boys for gas and 2 receipts for gas totaling $24.29 (paid in cash). The Court recognizes that the attached receipts may have been paid using the "gas cash allowance” and may thus be duplicative. Calculating gas expenditures based on receipts only, however, results in an unreasonably low figure.
. This figure represents $100 cash allowance to the boys for gas and 4 receipts for gas totaling $134.07 (paid in cash). See fn.8, supra.
. This figure represents $100 cash allowance to the boys for gas and 7 receipts for gas totaling $165.63 (paid in cash). See fn.8, supra.
. This figure represents a check to Sears for $211.90 (no receipt/bill) and a cash receipt for $64.35 to Home Depot for a pump.
. These figures represent $634.50 to Preferred Health Systems for health insurance and $40.00 to Maxor Plus for prescription drug coverage.
. The Court excluded the $800 paid to Dr. Stone for psychological testing of Drake in its average calculation as it is unclear whether this medical expense was a covered service under Gary's health insurance plan and whether it was reimbursed by insurance. Moreover, defendants should have sought *271court approval prior to incurring this expense.
.These figures were obtained by adding the receipts for groceries. Receipts with unknown items were excluded.
. Debtor submitted only two receipts for groceries for the month of April.
. Because the figure for April is clearly low, the Court averaged food expense for February and March only. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494035/ | ORDER ON (1) ADEQUACY OF DEFENDANTS’ ASSET DISCLOSURES (Dkt. 98, 100 and 108); (2) DEFENDANT RICHARD KRAUSE’S APPLICATION TO EMPLOY LAW OFFICES OF BRIAN G. GRACE (Dkt. 102) AND APPLICATION FOR COMPENSATION FOR ATTORNEY FEES AND EXPENSES (Dkt. 103 and 104); (3) DEFENDANT GARY KRAUSE’S APPLICATION FOR ENGAGEMENT OF REDMOND & NAZAR, L.L.P. AS SPECIAL COUNSEL TO THE TRUSTEE (Dkt. 28); (4) DEFENDANT GARY KRAUSE’S APPLICATION FOR INTERIM FEES AND EXPENSES (Dkt. 26 and 29); and (5) DEFENDANT GARY KRAUSE’S MOTION FOR APPROVAL OF BUDGET FOR ATTORNEY FEES (Dkt. 27)
ROBERT E. NUGENT, Chief Judge.
The Court conducted an evidentiary hearing on the above matters on June 15, 2006, after receiving the United States of America’s (“Government”) comment on the court-ordered asset disclosures provided by defendants and the Government’s and chapter 7 trustee’s objections to the other motions. The Court has previously ruled on the defendants’ motions for continuation of monthly living expenses that were heard the same date.1 The Government appeared by Janene M. Marasciullo of the U.S. Department of Justice, Washington, D.C. Debtor Gary Krause appeared by Edward J. Nazar. Mr. Nazar also appeared for his firm, Redmond & Nazar, L.L.P., Wichita, Kansas (“Nazar Firm”). Defendant Richard Krause appeared by Mark D. Kieffer of Law Offices of Brian Grace, Wichita, Kansas (“Grace Firm”). Mr. Kieffer also appeared in support of his firm’s application decided here today. The trustee, Linda S. Parks appeared by her counsel, Scott Hill of Hite, Fanning & Honeyman, Wichita, Kansas. The Court is now prepared to rule on the remaining motions heard on June 15, 2006.
Background
For the sake of brevity, the Court will refrain from an extended recitation of the procedural history and factual background of this adversary proceeding. For a thorough recitation of those matters, the Court directs readers to its April 14, 2006 Memorandum Opinion2 (“April Opinion”) and its July 21, 2006 Order on Defendants’ Motions for Continuation of Monthly Living Expenses3 (“July Order”) where the procedure and facts are set forth with considerably more particularity.
For purposes of this Order, the Court notes that the remaining matters are presently before the Court pursuant to its directives and orders contained in the April Opinion which modified in part the preliminary injunction entered in this case in December 2005 enjoining the transfer or use of cash, property, assets, or bank accounts of the following trusts and entities: Krause Children Trust (KCT) Nos. I, II, III, IV, V; the Gary Krause Trust (GKT); PHR, LLC (PHR); Drake Enterprises, Inc. (DEI); Financial Investment Management Corporation (FIMCO); and Federal *275Gasohol Corporation (FGC).4 Because the Court only preliminarily determined that the assets held by the above trusts and entities were held as nominees of debtor Gary Krause, the Court modified the preliminary injunction to permit defendants to make application to the Court for payment of their attorney fees with frozen funds pending a dispositive finding concerning the nature and ownership of the assets held by the trusts and entities. Due largely to the Court’s belief that debtor’s ability to defend the claims of the Government would be severely hampered without compensated counsel and that the bankruptcy process would likely suffer as well, the Court agreed to entertain motions for payment of attorney fees utilizing the frozen funds during the pendency of the adversary proceeding, under the following conditions: (1) Defendants would make complete, sworn disclosures of all assets owned or controlled by the named trusts and entities, including any other entities with lohich Gary had a connection of any kind (“Asset Disclosures”); (2) Defendants’ counsel would submit proposed budgets for fees and expenses earned to date and anticipated through trial (“Fee Budget”); (3) Defendants’ counsel would make interim applications for attorney fees and expenses (“Fee Applications”); and (4) Gary’s counsel would make application to be employed as special counsel to the trustee (“Employment”).5
In its April Opinion, the Court stressed that defendants’ full compliance with these conditions was imperative:
Gary Krause’s ability to retain and pay Mr. Nazar (or any other lawyer) from the GKT trust assets is strictly conditioned upon his faultless compliance with the conditions enumerated above.6
The Court also clearly expressed its intent to preserve and protect the estate and the Government’s position in this case pending a final determination of the claims and issues:
If, at the conclusion of this adversary proceeding, the Court determines that the property of the GKT, the KCTs or the Krause Family Trust is in fact Gary’s property and is legally encumbered by the Government’s tax liens, Richard and Gary will be required to repay any and all withdrawals authorized under this Order to the Government or the estate, as their interests shall appear, as a condition to Gary receiving a discharge in this case.7
Having refreshed its recollection of the terms of the April Opinion and having independently reviewed the defendants’ submissions, the Court now addresses defendants’ compliance with each of the conditions and rules on the various applications.
Discussion
Because the use of frozen funds to pay attorney fees was conditioned upon the defendants’ Asset Disclosures, the Court will first address their sufficiency. Only Gary and Revenue Agent Marsha Waterbury testified at the June 15, 2006 hearing. The Court received into evidence Government’s Exhibits 2, 4, 5, 6, 18, 19, 20, 21, 22 and 23; Debtor’s Exhibits A and B; and Richard Krause’s Exhibits A-E.
1. Debtor’s Court-Ordered Asset Disclosures
Because Richard’s disclosures are identical to the disclosures filed by Gary on May *27611, 2006 regarding the trusts and entities, the court will focus its attention on Gary’s disclosures.8 Gary declared that the following entities own or control the following assets:
Entity_Asset_
1. FIMCO a. Bank account (1) at Commerce Bank
(FIMCO is wholly owned by KFIT) b. 43% membership interest in Live Wire Media Partners, LLC
c.43% membership interest in K Mountain _LLC_
2. Polo Executive Rentals a. checking account at Farmers Bank and
Trust (in name only, account owned by KCT _Ü_
3. PHR_a. 7711 Oneida Court property_
4. DEI_No assets._
a. bank account (1) at Commerce Bank 5. FGC
b. bank account (1) at Southwest National Bank (FGC is wholly owned by GKT)
c. account (1) at Merrill Lynch
d. account (1) at UBS Paine Weber
e. 500 shares of Lifeline Therapeutics
f. account (1) at Charles Schwab
g. account (1) at Smith Barney
h. 83 shares of Ramp Corp.
i. account (1) at Vanguard
j. account at Terra Nova Trading
k. 1000 shares of Facekey Corp.
l. 1000 shares of LJ International
m. 1000 shares of Northern Orion Res.
6. Development Associates Inc. a. 15 + acres in Reno County
(Development Associates Inc. is wholly owned by GKT)_
7. GKT a. bank account (1) at Southwest National Bank
b. money market account at Farmers Bank and Trust
c. CD at Farmers Bank and Trust
d. account with Jordan Index Fund
e. 90,000 shares (100%) of FGC
f. 1100 shares (100%) of Development _Associates Inc._
8. Krause Family Irrevocable Trust a. 5000 shares (100%) of FIMCO
b. bank account at Commerce Bank
c. 43% interest in LiveWire Media Partners LLC
_d. 43% interest in K Mountain LLC_
9. KCT I a. bank account at Southwest National Bank
b. checking account at Bank of America
c. CD at Bank of America
*277d. account at Farmers Bank and Trust (in name of Polo Executive Rentals)
e. account at Merrill Lynch
f. 7 life insurance policies on Gary, Drake, and Richard L.
g. gold coins
h. 100 shares (100%) of Barton Oil Corporation
i. 15.2% ownership of PHR (7711 Oneida)
j. 2000 Ford Explorer
_k. 1999 Dodge Durango_
10. KCT II a. bank account at SW National Bank
b. CD at Farmers Bank and Trust
c. CD at First Kansas Bank
d. 2 life insurance policies on Richard L
e. gold coins
f. 7.6% ownership in PHR (7711 Oneida _Court)_
11. KCT III a. bank account at SW National Bank
b. CD at UMB National Bank of America
c. CD at Farmers Bank and Trust
d. a life insurance policy on Gary and one _on Drake _
12. KCT IV_a. 7 life insurance polices on Gary_
13. KCT V a. 77.2% ownership in PHR (7711 Oneida Court)
b. Mortgage on 7711 Oneida
c. 2 life insurance policies on Teresa Briggs
The Government contends that Gary has omitted assets that he or one of the entities he has a connection with owns or controls: (1) a hunting lodge in Reno County; (2) a safe deposit box in the name of DEI; (3) several storage units at Security Self Storage; (4) a receivable of FGC generated by a mortgage on an oil tanker; and (5) rental income generated from 15 acres of land owned by Development Associates. The Government also suggested that Gary has failed to disclose information regarding several off-shore bank accounts.
a. Hunting Lodge
The hunting lodge is described as “house at 160 acres NW 1/4 sec 31, town 2, Stafford Township, KS.”9 It is owned by Quivera Associates, Inc. (“Quivera”).
Gary testified that neither he, the GKT, nor the KCTs own any part of Quivera. He explained that Quivera was formed in 1986 or 1987. It was initially owned by Kansel Corporation (owned by Gary), Richard Krause and Southwest Property Inc. (owned by one Kent Walmer). Each owned a one-third interest in Quivera. In 1988 or 1989, Walmer no longer wanted his interest in the hunting lodge so Quivera bought Southwest Property Inc.’s shares, leaving 8000 shares outstanding between Richard and Gary (Kansel). Sometime thereafter, Gary gave his shares to his wife, Teresa Briggs, who then gave the stock to their sons, Drake and Rick.10 *278Quivera’s 2002 tax return, however, lists Richard D. Krause and the GKT as equal owners of Quivera.11
Notwithstanding the question of Quivera’s ownership, the hunting lodge should have been listed in Gary’s disclosures in some fashion as Gary had some kind of connection with Quivera. At one point, he admittedly had an ownership interest in Quivera. Moreover, he maintained the property insurance on the hunting lodge and is currently the named insured for the hunting lodge.12
Ultimately, the hunting lodge was not listed among the assets owned or controlled by the GKT. Indeed, it was not listed at all. Gary failed to make any disclosures relating to Quivera or the hunting lodge.
b. Drake Enterprise, Inc.’s (DEI) Safe Deposit Box
Gary declared that DEI had no assets.13 DEI, however, has a safe deposit box and it was not listed as an asset of DEI. Gary admits he failed to do so. He argues, however, the safe deposit box is not an asset, but a liability since it is an expense. He explains he simply forgot to list the safe deposit box because it only comes to his attention once a year when he receives an invoice for the annual rent. Its contents are unknown. Although Gary has paid the rent for the safe deposit box, he claims he has not opened it for years. The existence of the safe deposit box and its contents should nonetheless have been disclosed.
c. Storage Units
Gary currently leases and controls 2 storage units. Gary testified he leased these storage units in May 2005 in order to get the Oneida property, where he currently resides, presentable for sale. His real estate agent advised him to clear out the “junk” in the house. According to Gary, the storage units contain yard tools and equipment, exercise equipment, holiday decorations, boxes of clothes, boxes of books, and one filing cabinet of old business records unrelated to the Government’s document requests. While he concedes the storage units were not disclosed, he freely offered at trial to make their contents available to the Government.
Revenue Agent Waterbury testified that the Government has been unable to gain access to the storage units to determine their contents. During her review of various bank records obtained by the Government, however, she noted that FIMCO and FGC had paid for storage units since 1999 or 2000. It is not apparent from the record whether these are the same storage units.
WTiile Gary testified that he provided a copy of the storage unit lease agreement to the Government in response to a docu*279ment request, neither lease documents nor lease payment records were offered at the hearing. Whatever the value, if any, the contents may have, the storage units do contain assets and property that purportedly belong to Gary and the units are controlled by Gary. Certainly the existence of the storage units and a description of their contents should have been disclosed.
d. Tanker Mortgage
FGC owns or held a mortgage on an oil tanker called the MV Sillery (the Sillery).14 In 1995, FGC made a substantial loan in the amount of $320,000 on the Sillery. The tanker was owned by Trafalgar Marine, but was operated and managed by Carribean Atlantic Petroleum Company (“CAPCo”). FGC acted as a passive mortgage lien holder, earning a substantial interest rate and some profit sharing (2 cents a gallon for every gallon that went through the tanker).
In 1997, Gary was contacted by the head of CAPCo. He was advised that CAPCo could not make its mortgage payment and to “come get your collateral.” Gary went to St. Thomas and met with CAPCo representatives. He investigated why CAPCo could not make the mortgage payments and concluded that with a little tighter management, the tanker could be profitable. FGC negotiated to provide additional working capital in exchange for some managerial control.15
In 2000, FGC began ridding itself of management intensive investments in contemplation of the retirement of Norris Taylor, president and co-owner of FIMCO, and disposed of its operating interest in the Sillery. FGC turned over control of the ship and released the mortgage. The obligor on the mortgage was Overseas Trust Company and the loan was guaranteed by Carribean Bunkers. The carry-back note was for $400,000 or $500,000. It included management fees that FGC earned, accrued, and declared as income. Since 2000, FGC has been receiving annual payments contracted in the mortgage. FGC received a payment last year. When pressed about the nondisclosure of this receivable, Gary indicated that the mortgage is “pretty close to being paid” although he could not give a dollar amount of the balance. Gary explained the lack of reference to the Sillery mortgage leads him to believe that the mortgage has been paid in full.
He further claims the mortgage was disclosed as an asset on FGC’s balance sheet and on its tax returns as notes receivable, both of which he contends have previously been provided to the Government. Even if true, this did not excuse Gary’s nondisclosure of the tanker mortgage note on the one-page disclosure for FGC.
e. Tenant Farmer on Development Associates’ 15 Acres
Gary disclosed that Development Associates 16 owns approximately 15 acres in Reno County and has no other assets. *280There, however, appears to be rental income from a tenant farmer on the 15 acres. Gary testified that a “guy” rents the property every other year. This rent was not disclosed. Gary testified that he did not think to disclose it because the rent is so de minimus. No evidence was presented, however, regarding the identity of the tenant, the amount of the rent and to whom it is actually paid. The Court’s April Opinion did not contain a threshold amount of materiality for disclosure; the rental income generated from the tenant should have been disclosed.
The Government presented evidence suggesting that this property possibly generated income through participation in farm subsidy programs from the United States Department of Agriculture.17 Gary testified that Development Associates has not entered into an agreement with the Farm Service Agency (FSA). No documentary evidence was presented of a signed agreement between Development Associates and the FSA to indicate this acreage was enrolled in a farm program. The Court finds there is insufficient information to conclude Development Associates owns or controls a government program subsidy and that Gary has failed to disclose it as an asset of Development Associates.
f. Off-Shore Bank Accounts
Agent Waterbury testified that when she reviewed FGC’s bank records, she noted several wire transfers which she was unable to trace. She volunteered her suspicion that these wire transfers occurred to or from off-shore accounts. Agent Waterbury was not examined further regarding her suspicions, the wire transfers, or the suggested off-shore accounts. And the Government did not question Gary concerning the existence of any off-shore accounts under his control or other entities’ control. No evidence was presented regarding these suspicioned off-shore accounts. The Court finds there is insufficient evidence to conclude that Gary or any of his entities own or control any offshore accounts that were omitted from his Asset Disclosures.
g. General Comment Concerning the Record
The Court is compelled to comment on the state of the evidentiary record and ongoing disputes between the Government and Gary concerning document production. For Gary’s part, he claims to have previously produced documents containing information that was omitted from his Asset Disclosures. In the Court’s view this is irrelevant. The April Opinion made no provision for excluding disclosures if the information was previously provided to the Government or shown on documents produced or previous filings. Nor does it matter whether the Government has previously requested the information or documents.18
*281For the Government’s part, it alludes to Gary’s noncompliance with requests for production of documents.19 But the Court has never been provided with the document requests the Government has served upon Gary nor provided with a log of the documents it has in its possession. It is also apparent from Agent Waterbury’s testimony that the Government has not retained a copy of all documents made available by Gary, exercising its judgment as to what documents are relevant to the issues at hand. The Court senses that the Government has introduced into evidence very little of its arsenal of documents it has obtained in this proceeding. If there are compliance issues or other discovery disputes, the Court would expect the Government to bring those to the Court’s attention as provided by the rules if they cannot first be resolved among the parties.20 In the absence of a motion to compel, the Court has no way of knowing whether the information or document was in fact requested by the Government and whether Gary complied with the request, particularly when neither party presents the document at hearing. In the future, the Court suggests that if there are outstanding discovery issues, the parties bring them to the Court’s attention in a timely fashion or run the risk that their discovery complaints have be waived.21
Conclusion as to Asset Disclosures
Despite Gary’s repeated statements of his intent to comply with discovery and provide full disclosures, the Court is not convinced he has done so. Gary’s Asset Disclosures omit: (1) his connection to the hunting lodge, (2) DEI’s safe deposit box, (3) storage units and contents, (4) FGC’s tanker mortgage, and (5) Development Associates’ rental income. His proffered excuses, inadvertence and the alleged de minimus nature of the omitted assets, are untenable in light of the Court’s admonition to Gary that his ability to use the frozen assets to pay his bankruptcy counsel would be conditioned on his faultless compliance with the April Opinion. This has not occurred.
2. Employment of Redmond & Nazar, L.L.P. as Special Counsel to the Trustee and the Nazar Firm’s Application for Interim Compensation from Frozen Assets
As invited by the Court’s April Opinion, the Nazar Firm filed its application to be engaged as special counsel to the trustee pursuant to 11 U.S.C. § 327(e).22 The Nazar Firm states that it will
“assist the Trustee in the administration of the estate, [ ] represent the interest of the Debtor in pending adversary actions, and [] identify and determine assets of the bankruptcy estate under 11 U.S.C. § 541. The representation of the Debt- or should also include any defense necessary under an action brought under 11 U.S.C. § 523, as well as any defenses under 11 U.S.C. § 548.”23
The Nazar Firm alleges that it does not represent any creditors of the debtor or hold any interest adverse to the debtor.
*282As this Court noted in the April Opinion, Gary’s expressed need to utilize some of the frozen assets for his attorneys fees in this adversary proceeding is troubling. The request implicates alternative bodies of the law. Determining the applicable law depends upon what this, or some other court, ultimately determines the true nature of the frozen assets to be. The frozen assets are either actually Gary’s or they are, for the most part, assets owned in some manner by spendthrift trusts. To the extent they are Gary’s assets and he owned them pre-petition, the frozen assets are assets of the bankruptcy estate. Their use is subject to the provisions of the Bankruptcy Code as it has been interpreted by the United States Supreme Court in Lamie v. United States Trustee.24 However, if the frozen assets are the property of these trusts and other entities, and if the trusts and entities are otherwise legitimate, the assets are excluded from the property of the estate under § 541(c)(2) and their use is not subject to the Code. But even if that is the case, the assets likely remain subject to the Government’s tax liens (at least as to the GKT of which Gary is a beneficiary) whether or not they make up the corpus of valid spendthrift trusts.25 Assuming this Court even has jurisdiction to allow their use for any purpose, any such use could only be predicated on some form of protection being offered the Government as lienholder. The forms of protection could be many; security interests in other property, 'collateral pledges by third parties, or bonds are but three of the options available to Gary here.
This Court has some reservations about denuding Mr. Krause of the ability to defend himself in this adversary when this Court has yet to make a dispositive determination of the true ownership nature of the frozen assets. While neither party has provided any citation to a case in which a bankruptcy judge has grappled with the use of similar funds in a preliminary injunction context, the Court’s research uncovered a number of non-bankruptcy cases in which judges considered the use of frozen assets for attorneys fees. Cases allowing such use are few and far-between26 while those denying use are legion. The leading ease is Commodity Futures Trading Com’n v. Noble Metals, Inc.27 In Noble Metals, the Court of Appeals for the Ninth Circuit held that a district judge has discretion to limit or forbid attorneys fees payments in asset freeze situations.28 This is particularly so where, as in the present circumstances, the frozen assets will not be sufficient to compensate the defendant’s victims or customers for their alleged loss.29 The Ninth Circuit added that the discretion accorded the district judge must be exercised in light of the fact that the alleged wrongdoing has yet to be proven.30 The Noble Metals court placed the burden *283on the defendant to show that he can only secure counsel if use of the frozen assets is permitted.
A number of district judges have grappled with this problem, particularly in securities cases, with varying outcomes. In S.E.C. v. Duclaud Gonzalez de Castilla, the court denied use of the frozen funds for living expenses, but permitted them to be used for attorneys fees on a limited basis because no clear showing of wrongdoing had been necessary to sustain the preliminary injunction and asset freeze for violating the securities laws.31 Another district judge held that a modification of the preliminary injunction to allow frozen assets to be used for fees must be in the interest of defrauded investors and pointed out that civil defendants have no right to use the funds of others to defray legal expenses.32 In the tax collection context, the Seventh Circuit has allowed the release of frozen funds for criminal defense fees, but not for defense of a civil forfeiture action.33 Finally, the Court notes that the Internal Revenue Code provides for fee-shifting in the event a taxpayer prevails in a tax collection controversy with the IRS and then demonstrates the absence of a substantial basis for the Government’s claim.34
The “rules” with respect to non-bankruptcy cases seem to be that courts have discretion to allow the use of frozen funds and that discretion must be exercised in light of the fact that the freeze is often a provisional remedy. At the same time, where there is insufficient property to compensate one’s victims or repay one’s creditors, courts are entirely justified in exercising their discretion to deny use of frozen funds for attorney’s fees. Moreover, allowing the usage for fees must be in the interest of those investors or creditors for whose benefit the fees were frozen in the first instance.
Here, the Court takes to heart the admonition that its discretion must be carefully exercised because the freeze is, at this point, a provisional remedy. The Court must also consider the fact that the frozen assets are worth far less than the Government’s claims. As noted in the Appendix, the total liquid assets of the trusts and entities is approximately $767,000. The Government’s filed claims seek in excess of $3 million. While there is no doubt that the involvement of competent counsel on all sides will advance the search for the truth in this case, or at least facilitate it, the contemplated arrangement will not benefit the creditors if what little they can hope to recover will be entirely dissipated in defending Gary’s position. Thus, even if none of these assets turns out to be property of his estate, the Court considers it well within the bounds of permissible choice to deny Gary the use of these funds for this purpose at this time.
If the frozen assets are indeed Gary’s property, and hence property of the estate, § 327 applies to determine whether the Nazar Firm may act as special counsel to the trustee in these circumstances. Section 327(e) provides in part:
The trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attor*284ney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.
The Court concludes that as to this adversary proceeding, the Nazar Firm’s representation of the debtor is in direct conflict with and adverse to the estate. Debtor’s defense of this adversary, and indeed the defenses likely to be asserted against the Government’s § 523 and § 548 claims, do not benefit the estate in any fashion.35 Similarly, in defending against the Government’s declaratory count and nominee theory, the Nazar Firm’s representation and services will benefit the debtor, not the estate.36 Simply put, debtor’s interest in this adversary is not aligned with the chapter 7 trustee or the estate, and is in fact, in direct conflict with the trustee’s and estate’s interest in collecting and distributing property of the estate to debtor’s creditors. In a case where the debtor’s principal creditor is the plaintiff, the debtor is the defendant, and the parties are fighting over what property is in the estate, debt- or’s counsel is in the position of representing an interest adverse to the estate with respect to the matter for which he seeks to be employed. And where the trustee has aligned herself with the plaintiff on the issue, one cannot fathom a more adversarial relationship.
The United States Supreme Court succinctly explained the purpose of obtaining approval for employment under § 327 in Lamie v. United States Trustee:
Section 327’s limitation on debtors’ incurring debts for professional services without the Chapter 7 trustee’s approval is not absurd. In the context of a Chapter 7 liquidation it advances the trustee’s responsibility for preserving the estate.37
If anything, Gary’s vigorous defense of the Government’s claims is likely to deplete the estate and delay its administration. Section 330’s requirement that the attorney’s services must benefit the estate exists to prevent the unfairness of allowing the debtor to deplete the estate by pursuing his interests to the detriment of his creditors.38 Here, if Gary prevails on his contention that the trusts in question are spendthrift trusts and not property of the estate under § 541(c)(2), he will confer no benefit on the estate; rather, he will personally benefit, much like a debtor whose *285attorney’s services protect an exemption.39
Additionally troubling is the fact that Gary has made no offer or proposal to secure the repayment of estate funds should the Government ultimately prevail on its claims. Because he has wholly failed to offer any material assurance of repayment, the contemplated expenditures will not benefit the estate; they will deplete it. Moreover, Gary is himself a lawyer and has the ability, if not the will, to assist the trustee in identifying assets of the estate. Indeed, that is one of his duties as a chapter 7 debtor under § 521.
The Court recognizes the value to the process of having Gary expertly represented. Nevertheless, having concluded that the Nazar Firms’s representation of debt- or in this adversary proceeding does not benefit the estate and is in fact adverse to the estate’s interests, the Court cannot approve the Nazar Firm’s employment as special counsel to the trustee. Albeit with no small regret, the Nazar Firm’s employment application (Dkt. 28) must be DENIED.
With equal regret, the Court must also deny the Nazar Firm’s requested compensation earned to date in this difficult case. The denial of the firm’s engagement as special counsel pursuant to § 327(e) implicates Lamie, where the Supreme Court held that:
§ 330(a)(1) does not authorize compensation awards to debtors’ attorneys from estate funds, unless they are employed as authorized by § 327. If the attorney is to be paid from estate funds under § 330(a)(1) in a Chapter 7 case, he must be employed by the trustee and approved by the court.40
The Court notes that like the debtor’s attorney in Lamie, the Nazar Firm could have ensured it would be compensated before filing Gary’s chapter 7 bankruptcy.41 For whatever reason, the firm failed to do so. But the mandate of Lamie is crystal clear: absent approval of Nazar’s employment pursuant to § 327, he cannot be compensated from estate funds.42 This determination obviously does not preclude debtor from paying his attorney with post-petition earnings, as many of this Court’s chapter 7 debtors do who find themselves the subject of an adversary proceeding, or with other sources. The Court notes that during the pendency of these very proceedings, Gary has found the means to retain a criminal lawyer to represent him in his ongoing tax controversy with the Government.43 If Gary wishes to mount a vigorous defense to the current proceedings, he clearly has other options that will not be at the expense of the estate or his creditors.
*286Given this Court’s conclusion that Gary’s Asset Disclosures were deficient and that Lamie prohibits the payment of debtor’s attorney fees from assets of the bankruptcy estate, the Court finds it unnecessary to address in detail Gary’s proposed Fee Budget (Dkt. 27) or Nazar’s interim Fee Application (Dkt. 29). Both are summarily DENIED.
3. Defendant Richard Krause’s Application to Employ Law Offices of Brian G. Grace and Grace’s Application for Compensation from Frozen Assets
Defendant Richard Krause (“Richard”) has also filed an application to employ the Grace Firm to represent him in his capacity as the trustee of the KCT I-Y and the GKT (Dkt.102) and to compensate Grace with the frozen assets of the KCT IV. Richard does not indicate that his application is based on § 327(a) or (e).44 Indeed, Richard has identified no provision of the Bankruptcy Code under which he proceeds.45 The Court construes his application as seeking to pay his attorneys with potential estate assets under § 330(a)(1). Section 330(a)(1) requires an attorney to be employed pursuant to § 327 in order to be compensated from the estate. Section 330 also restricts compensation to services that benefit the estate. Section 330(a)(4)(A) provides:
Except as provided in subparagraph (B) [not applicable here], the court shall not allow compensation for — ...
(ii) services that were not-
(I) reasonably likely to benefit the debtor’s estate; or
(II) necessary to the administration of the case.
A Grace Firm application for an administrative expense under § 503(b)(2) would be similarly flawed.46 That section makes compensation awarded under § 330(a) an administrative expense, but as noted previously, § 330(a) requires the attorney or professional person to be employed under § 327. In short, there is no authority under the Bankruptcy Code to compensate the Grace Firm for attorney services rendered on behalf of Richard under the circumstances here where Richard is neither the debtor, the case trustee, or a creditor47 and the Grace Firm has not been, nor could it be, employed under § 327.
The Grace Firm’s proposed legal representation of Richard, both in responding to the initial IRS summons served on him and in defending this adversary proceeding, will not benefit the estate. Richard admits that the Grace Firm’s representation of him is in his capacity as trustee of the various trusts and his application specifically acknowledges that Grace’s representation “is necessary to represent the interests and honor the fiduciary duties of [Richard] to defend the Trusts from the claims made [by the Government and the estate] in this adversary action.”48 In short, the Grace Firm does not even purport to represent the estate. Rather than benefit the estate, Richard’s position in this adversary is to oppose its claims, asserting that the trust assets are not prop*287erty of the estate and that the trusts are not Gary’s nominees as the Government and the trustee contend. In other words, the Grace Firm’s representation of Richard in this proceeding is to defeat the Government’s and the trustee’s claim that the trust assets are property of the estate. Accordingly, it falls prey to the same conflict issues noted in the Court’s discussion of the Nazar Firms application.
In addition, the Grace Firm’s representation is not necessary to administer the case. As evidenced by Richard’s testimony at the preliminary injunction hearing, Richard has at best a sketchy understanding of the trusts’ origination, their funding, their current holdings, and their administration. His actions have largely been driven by Gary. The Grace Firm’s instructions appear to have come primarily from Gary, not Richard. In these circumstances, the Court cannot approve Richard’s application to employ the Grace Firm and to pay its attorney fees and expenses with the frozen trust assets — potential estate property.49
Richard is in the same position as any other unwilling participant in litigation and is responsible for attorney fees he incurs, even where those fees and expenses are incurred in his capacity as trustee of the KCT I-V and the GKT. And as the Government points out, Richard’s personal asset disclosures demonstrate an ability to pay his own fees in connection with this litigation. Moreover, the Court sees little need for much additional involvement or participation on the part of Richard in these proceedings. Richard is closely aligned with Gary and most likely will ride his coattails. If Richard does not want to be saddled with the attorney fees and expenses of this litigation, he can end his financial exposure by resigning as trustee of the various trusts.
Richard’s application to employ the Grace Firm (Dkt.102) and to pay the Grace Firm’s attorney fees and expenses from frozen assets of the KCT I-V (Dkt. 103) are DENIED. In light of these determinations, the Court need not reach the merits either of the Grace Firm’s fee application (Dkt. 103 and 104) or its fee budget going forward (Dkt. 103).
Conclusion
The Court finds that Gary’s court-ordered asset disclosures are deficient in material respects. Complete disclosure was a preliminary condition to use of the funds and assets frozen by this Court’s preliminary injunction. Gary’s application to employ the Nazar Firm as special counsel to the trustee is DENIED. The Nazar Firm’s application for interim compensation for attorney fees and expenses from frozen assets is DENIED. The Nazar Firm may request argument on its pending motion to withdraw as Gary’s counsel. Gary’s proposed fee budget is DENIED AS MOOT. Richard’s application to employ the Grace Firm and to compensate the Grace Firm from frozen assets is DENIED. Grace’s interim fee application and proposed fee budget are DENIED AS MOOT.
*288APPENDIX
Asset Disclosures Analysis
All of the values or amounts shown for the assets listed were derived from Richard’s and Gary’s Asset Disclosures (Dkt. 98 and 100), with the exception of the value of the Oneida property. The value of the Oneida property is the 2005 appraised value as determined by the Sedgwick County Appraiser’s office (Dkt. 22, Ex. A). The Court has not attempted to place a value on various ownership interests or units in LLCs or other entities held by the trusts or entities listed. Nor has the Court valued the approximate 15 acres of undeveloped land held by Development Associates, Inc.
DESCRIPTION ACCOUNT NO. AMOUNT TOTALS
LIQUID ASSETS:
FIMCO: Commerce Bank 670040113 5.808.34
FIMCO subtotal $ 5.808.34
FGC: Commerce Bank 670040071 8,879.50
FGC: SW National Bank 2619695 1.498.31
FGC: Merrill Lynch 24,499.03
FGC: UBS Paine Weber WT1829140 8,566.19
FGC: Lifeline Therapeutics 500 shares 1,125.00
FGC: Charles Schwab 3226-1961 1,629.50
FGC: Smith Barney 185-15399-14117 3,963.66
FGC: Vanguard 0050/09877867914 14,073.62
FGC: Terra Nova Trading 32012928 413.40
FGC: TNT. .Facekey Corn 1000 shares 52.00
FGC: TNT. ,LJ International 1000 shares 3,690.00
FGC: TNT.. Northern Orion Res 1000 shares 4,520.00
FGC subtotal 72.910.21
GKT: SW National Bank_2634619_72.81_
GKT: Farmers Bank & Trust (money 370429 16,403.08 market account)_
GKT: Farmers Bank & Trust (CD)_1012123 42,195.56_
GKT: Jordan Index Fund_34,577.87_
GKT subtotal_$ 93,249.32
KCT I: SW National Bank 2634511 18.799.24
KCT I: Bank of America (checking) 2860792763 13,342.37
KCT I: Bank of America (CD) 91000014240247 67,918.00
KCT I: Farmers Bank & Trust (aka Polo Executive Rentals)_ 8135292 1,410.3
KCT I: Merrill Lynch 278-5011438-6 8,163.61
KCT I: Gold coins 70,106.20
KCT I subtotal 179.739.75
KCT II: Sw National Bank 2634538 2,210.15
KCT II: Farmers Bank & Trust (CD) 000 101 0658 104,167.00
KCT II: First Kansas Bank (CD) 12721 89,299.23
KCT II: Gold coins 19.317.00
KCT II subtotal 214,993.38
*289DESCRIPTION ACCOUNT NO. AMOUNT TOTALS
KCT III: SW National Bank_2634546 17,676.45_
KCT III: UMB National Bank of America 369242430 102,675.00 (CD)_
KCT III: Farmers Bank & Trust (CD)_000 101 QUO 79.934.15_
KCT III subtotal_$ 200,285.60
No bank accounts for KCT IV or V
TOTAL LIQUID ASSETS_$ 766.986.60
NON-LIQUID ASSETS:
Cash Value of Life Ins. Policies
Met Life 2526725 8.492.23
Met Life 6070162 4,208.36
Met Life 6688112 2,016.04
Met Life 6162499 3,526.11
Met Life 6615461 3,538.54
Met Life 8392342 3,296.08
Aurora C11555384L 15.026.70
Aurora C11324399L 96,391.39
Pacific Life 047137500M 13.539.75
Pacific Life 047626700M 4,521.42
Reassure N7001592 35.201.00
Reassure 4110925 4.597.36
Reassure N7001622 33.981.83
Reassure 4108193 36,048.00
Prudential 31889322 4,387.59
Lincoln Benefit Life F0090505 3425.16
Lincoln Benefit Life F0090504 3425.16
Life Ins. Cash Value Subtotal 275.622,72
Real Property:1
. 7711 Oneida Court residence2 $392,000.00
Real Property Subtotal 392.000.00
Personal Property:
2000 Ford Explorer (KCT I) $5.500.00
1999 Dodge Durango (KCT I) $5.000.00
Personal Property Subtotal 10.500.00
*290DESCRIPTION ACCOUNT NO. AMOUNT TOTALS
TOTAL NON-LIQUID ASSETS $ 678,122.72
TOTAL ASSETS $1,445,109.32
. Dkt. 123.
. Dkt. 80.
.Dkt. 123.
. Dkt. 12.
. See Dkt. 80, April Opinion, pp. 25-29.
. Id. at 26.
. Id. at 29.
. See Dkt. 98 and 100. Richard filed disclosures of his personal assets and interests on May 24, 2006. See Dkt. 108.
. Gov’t Ex. 20.
. No monetary consideration was given for Gary’s 50% interest in Quivera in either transfer. Gary claims he has the stock certificates for the boys. These transfers took place while Gary’s Tax Court case was in controversy.
. See Gov't Ex. 21. Quivera’s tax return was prepared by FIMCO. Gary claims the tax return is incorrect in stating that the GKT is a 50% owner of Quivera. Richard Krause disclosed his 50% interest in Quivira. See Dkt. 108, Ex. A.
. The hunting lodge is insured through Madrigal & Associates, Inc., the same company Gary uses to insure all his other properties. Gary, however, insists that Quivera paid the property insurance and taxes for the hunting lodge. He acknowledges he received the bills for the property and paid it, but claims he was subsequently reimbursed by Quivera. He claims he only obtained property insurance for the property because his brother was unable to and his sons owned 50% of it. See Gov’t Ex. 20.
.DEI is an S corporation. Drake is the sole owner. Teresa Briggs was the founder, president and 100% shareholder from its inception until 1998 when she turned over the stock to Drake. Gary became president of DEI in 1998.
. FGC is wholly owned by the GKT. See Dkt. 98. In his Statement of Financial Affairs, Gary described FGC’s nature of business as “management.” FGC has been in existence since 1980.
. According to Gary's previous testimony at the preliminary injunction hearing, FGC subcontracted management of the tanker to FIM-CO. FIMCO earned management fees from FGC which it was still receiving periodically. See April Opinion, n. 22. No mention of these management fees was made in Gary's disclosures.
.Development Associates is wholly owned by the GKT. See Dkt. 98. It is a Subchapter S or C corporation. It is not in good standing and according to Gary, it has substantial liabilities.
. See Govt. Ex. 2. This document purports to be notification to the producer, Developers [sic] Associates, that the crop base acreage must be reduced under then existing regulations to participate in a farm program. It sets forth the producer's rights to appeal the county committee’s determination. No evidence was presented that Development Associates took any action with respect to the notice.
. The Court's directive to make full disclosure of assets is not tied in any manner to requests for production of documents that may have been served by the Government on Gary. The Court has not seen the Government's document requests. Indeed, the scope of the Government’s requests may differ from the scope of the Court's April Opinion. The Court's April Opinion is focused on the assets currently held by Gary or the trusts or entities with which he has a connection. For in*281stance, the Court is not interested in a bank account that was closed 15 years ago and would not expect Gary to disclose all assets ever held at any time.
.The Court reminds Gary of his continuing duty to supplement incomplete or incorrect discovery responses under Fed. R. Bankr.P. 7026 and Fed.R.Civ.P. 26(e).
. See Fed. R. Bankr.P. 7037; Fed.R.Civ.P. 37; D. Kan. LBR 7026.1.
. See D. Kan. Rule 37.1(b).
. Dkt. 28, Case No. 05-17429.
. Id., p. 2.
. 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004)
. See United States v. Craft, 535 U.S. 274, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002); Drye v. United States, 528 U.S. 49, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999); In re Orr, 180 F.3d 656 (5th Cir.1999); Bank One Ohio Trust Co. v. United States, 80 F.3d 173 (6th Cir.1996); Leuschner v. First Western Bank & Trust Co., 261 F.2d 705 (9th Cir.1958).
. See S.E.C. v. Dowdell, 175 F.Supp.2d 850 (W.D.Va.2001).
. 67 F.3d 766 (9th Cir.1995).
. Id. at 775.
. Id., citing Federal Trade Com'n v. World Wide Factors, Ltd., 882 F.2d 344, 347 (9th Cir.1989).
. FSLIC v. Dixon, 835 F.2d 554, 565 (5th Cir.1987) (Adversary system threatened when one party gains control of the other party’s means of defense).
. 170 F.Supp.2d 427, 430 (S.D.N.Y.2001).
. S.E.C. v. Grossman, 887 F.Supp. 649, 661 (S.D.N.Y.1995).
. United States v. Michelle’s Lounge, 126 F.3d 1006, 1009-1010, (7th Cir.1997).
. 26 U.S.C. § 7430. See United States v. Guess, 390 F.Supp.2d 979 (S.D.Cal.2005).
. See Section V.D.3., Professional Fee and Expense Guidelines in Bankruptcy Cases Pending Before the Honorable Robert E. Nu-gent, effective January 31, 2002. See also In re Kingsbury, 146 B.R. 581 (Bankr.D.Me.1992) (Attorney fees incurred by chapter 7 debtors in defending two § 523 dischargeability complaints were not recoverable as administrative expense where debtors benefitted from their attorney's services.).
. See In re Ewing, 167 B.R. 233 (Bankr. D.N.M.1994) (Attorney's services that benefit the estate and are compensable are those that protect or increase available assets or decrease debtor’s indebtedness.); In re Hanson, 172 B.R. 67 (9th Cir. BAP 1994) (denying debtor's counsel application for compensation where services rendered were in direct opposition to the actions of the trustee in pursuing his § 704 duties; debtor's counsel opposed trustee’s motion to sell debtor's residence to protect debtor's homestead exemption.); In re Estes, 152 B.R. 32, 34 (Bankr.W.D.N.Y.1993) (reaffirmation of debt does not benefit the estate if creditor is unlikely to share in the distribution.); In re Kohl, 95 F.3d 713 (8th Cir. 1996) (Attorney’s services rendered in pri- or chapter 7 and conversion to chapter 11 were not beneficial to estate where attorney should have known that reorganization was not feasible.).
. 540 U.S. 526, 537, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004).
. See Hanson, 172 B.R. at 74.
. See In re Hanson, supra.
. 540 U.S. 526, 538-39, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (Emphasis added).
. The Supreme Court recognized the practice, not prohibited by § 330(a)(1), of a debtor retaining counsel and paying reasonable compensation in advance of filing for bankruptcy. Id. at 537-38, 124 S.Ct. 1023.
. See In re Weinschneider, 395 F.3d 401 (7th Cir.2005) (attorney's claim for fees incurred in successfully resisting trustee’s turnover motion as an administrative expense was denied; if an attorney is to be paid from estate funds under § 330(a)(1) in a chapter 7 case, the attorney must be employed by the trustee and approved by the court).
. See In re Engel, 124 F.3d 567 (3rd Cir.1997) (Attorney employed by chapter 11 debt- or in possession as special criminal counsel under § 327(e) was not entitled to be paid attorney fees from estate; even if attorney’s retention as special counsel is approved by the bankruptcy court, attorney must still show that his services were necessary and benefit-ted the estate under § 330.).
. Section 327 contemplates that the trustee may employ an attorney for the estate. Here, however, the trustee objects to Grace’s employment. Dkt. 111.
. Since Richard is not the debtor in this chapter 7 case, and is a party defendant only in this adversary proceeding, § 329 does not apply.
. Section 507(a)(1) permits the estate to pay priority administrative expenses that are allowed under § 503(b).
. See § 503(b)(4).
. Dkt. 102, ¶ 3.
. Should Gary and Richard prevail in this adversary proceeding and the Court ultimately rule in their favor that the trust property is not property of the bankruptcy estate, Richard and Gary may seek reimbursement of fees and expenses from the trust funds. That, however, is not a matter for this Court. If the trust funds are not property of Gary’s bankruptcy estate, this Court has no power with respect to the trusts. See 28 U.S.C. § 1334(e).
. The GKT, through Development Associates, Inc., owns 15+ acres in Reno County. Because there is no evidence on the value of this property, the Court has not included it in its analysis.
. This property is owned by PHR, LLC. KCT I, II and V share ownership interest in PHR. KCT V has an alleged $305,000 mortgage on this property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494037/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JERRY A. FUNK, Bankruptcy Judge.
This proceeding came before the Court on the Complaint filed by Plaintiff, Judy Ann Keeter (“Plaintiff’) seeking to determine the dischargeability of debt owed to her by Debtor, Joe B. Naranjo (“Debtor”), pursuant to 11 U.S.C. § 523(a)(6), and denial of Debtor’s discharge pursuant to 11 U.S.C. § 727. The trial of this adversary proceeding was held on June 7, 2006, and at its conclusion the Court ruled that Plaintiff failed by a preponderance of the evidence to prove Count II of her Complaint, to wit, that the Debtor should be denied discharge pursuant to 11 U.S.C. § 727. The Court then elected to take Count I under advisement. In lieu of oral argument, the Court directed the parties to submit memoranda in support of their respective positions. Upon the evidence presented and the arguments of the parties, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
Debtor leased certain residential premises, 3162 Herring Street, Jacksonville, Florida (the “Property”), from Plaintiff and occupied the same from 2003 through May, 2005. During Debtor’s tenancy, he failed to make timely rent payments. Plaintiff initiated eviction proceedings, after which Debtor vacated the Property and agreed in writing to pay for any damages to the Property from his security deposit. After vacating the Property, Plaintiff informed Debtor that she would in fact with*306hold his security deposit, due to the immensely deteriorated condition of the Property. The damage included, but was not limited to, holes in the walls, damage to the central heat and air due to failure to replace the air filter, removal of the front storm door, and stripping of the new polyurethane of the hardwood floors. Debtor filed suit against Plaintiff in the County Court for a refund of his security deposit and Plaintiff counter-sued for damage to the Property.
On September 9, 2005, Debtor filed a petition for protection under Chapter 7 of the Bankruptcy Code. On or about the same date, Plaintiff filed a motion to amend her counterclaim or for attorney’s fees in the state court proceeding. (Debt- or’s Ex. 2.) On October 23, 2005, the County Court entéred a judgment in favor of Plaintiff and awarded her $1,558.20 for damages to her property, and further held that Debtor gets credit for $975.00, his security deposit withheld by the Plaintiff. (Debtor’s Ex. 1.) Subsequently, Debtor filed a suggestion of bankruptcy in the state court proceeding, and Plaintiff filed this adversary proceeding. Plaintiff seeks a judgment that the damages awarded to her by the state court should be held nondischargeable pursuant to 11 U.S.C. § 523(a)(6) and, additionally, seeks attorney’s fees for the state court proceeding.
CONCLUSIONS OF LAW
Pursuant to 11 U.S.C. § 523(a)(6), the debt owed as a result of willful and malicious injury by the debtor to another entity or to the property of another entity is excepted from the debt- or’s discharge. However, in order for a particular debt to be excepted from discharge under this section, the plaintiff carries the burden to prove by a preponderance of the evidence that the debtor’s actions fit within the exception. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Furthermore, the objections to discharge are to be strictly construed against the creditor and liberally construed in favor of the debtor. Schweig v. Hunter (In re Hunter), 780 F.2d 1577, 1579 (11th Cir.1986).
The United States Supreme Court has ruled that as a prerequisite for establishing willful and malicious intent of 11 U.S.C. § 523(a)(6), the plaintiff must prove that the injury was intentional and the debtor intended the consequences of his act or omission. Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998); see also Ford v. Pupello (In re Pupello), 281 B.R. 763, 768 (Bankr.M.D.Fla.2002). A mere deliberate or intentional act that leads to injury is not sufficient to except a debt from discharge. Id.
Plaintiff alleges that, among other things, Debtor damaged the leased premises by knocking holes in the walls, failing to change the air filters for the air conditioning system, and destroying light fixtures. Plaintiff further alleges that pursuant to 11 U.S.C. § 523(a)(6), the monetary damages awarded to her by the state court should be excepted from discharge.
Plaintiff failed to prove malicious or willful intent as established by the United States Supreme Court. The evidence Plaintiff presented at trial supports inferences of damage, but it does not support her contentions that Debtor acted intentionally. Furthermore, the state court’s judgment on Plaintiffs counter-claim, in which she was awarded certain monetary award, does not infer that Debtor acted willfully. Thus, Debtor’s debt to Plaintiff is not excepted from discharge pursuant to 11 U.S.C. § 523(a)(6).
Plaintiff also seeks attorney’s fees for her representation in the state court *307proceeding. Plaintiff made the same prayer in the state court proceeding by filing a motion to amend counterclaim or for attorney’s fees. However, the state court judgment only awarded the Plaintiff monetary damages and no attorney’s fees. The state court’s judgment has res judicata effect on this proceeding and pursuant to the full faith and credit clause of the United States Constitution, the Court is bound to give that judgment full credit. The Court has no authority to award attorney’s fees, and even if it did, the attorney’s fees would not be excepted from discharge.
CONCLUSION
For the foregoing reasons, the Court finds that Debtor did not willfully and maliciously injure Plaintiffs property. Therefore, Debtor’s debt to Plaintiff does not fall under the 11 U.S.C. § 523(a)(6) exception to discharge, and the debt will be discharged pursuant to 11 U.S.C. § 727, et. seq. The Court will enter a separate Judgment in accordance with these Findings of Facts and Conclusions of Law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494038/ | ORDER
ARTHUR B. BRISKMAN, Bankruptcy Judge.
This matter came before the Court on the Application by General Electric Capital Corporation for an Order Allowing Administrative Expense Claim, Setting Priority of Such Claim and Directing Prompt Payment of Such Expenses in the Amount of $858,303.28 (Doc. No. 215) (“Application”) filed by General Electric Capital Corporation (“GE”) and the Motion by Debtor to Strike Application for Administrative Expense Claim by General Electric (Doc. No. 222) (“Motion to Strike”) filed by Dynamic Tours & Transportation, Inc., the reorganized Debtor herein (“Debtor”).
A hearing was held on May 24, 2006, at which the Debtor, counsel for the Debtor, and counsel for GE appeared. The parties were granted fourteen days to submit supplemental briefs in support of their positions. The Court makes the following Findings of Fact and Conclusions of Law after reviewing the pleadings and evidence, hearing live argument, and being otherwise fully advised in the premises.
FINDINGS OF FACT
Case Background: Pre-confirmation Events
The Debtor filed this voluntary Chapter 11 case on February 25, 2004 (“Petition Date”). The Debtor was in the business of providing bus transportation on the Petition Date and continues to operate and manage its business as a reorganized debt- or. The Debtor utilized a fleet of buses with twelve of the buses leased from GE (the “Buses”) pursuant to certain Commercial Transportation Lease Agreements executed by the Debtor and GE prepetition. The Debtor utilized the GE Buses pre- and post-petition. GE was an active participant throughout this bankruptcy case.
A disagreement existed from the onset of this case as to whether the leases constituted true leases or financing agreements. The determination of this issue would establish the nature of GE’s claim rights. GE would have a secured claim if the leases were disguised financing agreements. If they were true leases, GE would have an unsecured claim for rejection damages upon the Debtor’s rejection of the leases or cure and adequate assurance rights upon assumption of the leases.
GE filed its original claim, Claim No. 13, on May 3, 2004 as a prophylactic measure while the lease issue was pending. The claim is for the amount of $3,277,317.50, consisting of an unsecured priority amount of $70,872.34 and an unsecured nonpriority amount of $3,206,445.16. GE sets forth in a Rider attached to the claim: “This proof of claim is filed for the purpose of preserving GE Capital’s right to assert this claim for rejection damages in the event the Leases are rejected and for priority treatment of post-petition rents due under the Leases.... ” The Rider includes a reservation of rights clause: “GE Capital reserves its right to amend this proof of claim and this rider as may be necessary to adjust the amount asserted herein, the priority of any amounts due, or to supplement this claim in any way.”
The lease issue was resolved by the November 19, 2004 Order (Doc. No. 148) *310in which the leases were determined to be true leases. The Order Conditionally Approving Disclosure Statement (Doc. No. 149) was entered on that same date and set the deadline for filing administrative claims fourteen days before January 18, 2005, the date of the confirmation hearing. Order at ¶¶ 2, 8. GE did not timely file an administrative claim nor did it seek an extension of the administrative claims bar date.
The Debtor’s Chapter 11 Plan of Reorganization as Modified (Doc. No. 157) (“Plan”) was confirmed on February 2, 2005 (Doc. No. 184) (“Confirmation Order”). The Confirmation Order provides the Debtor’s unsecured creditors, with filed claims totaling approximately $1,211,000, shall receive a pro rata distribution of at least 31% of their allowed claims and in no event shall the amount disbursed be less than $387,133.12. Confirmation Order at ¶ 3. The Plan put GE on notice the Debtor was contemplating rejecting the GE leases.1 The Plan contains an injunction in Paragraph A of Article IX enjoining all persons and entities that have held, currently hold, or may hold a claim that is discharged or terminated by the Plan from taking any action against the Debtor to attempt to collect such claim. The Debtor had significant secured debts, which are being paid pursuant to the Plan.
The Debtor had not assumed or rejected the GE leases as of the entry of the Confirmation Order and had not reached an agreement with GE regarding the calculation or treatment of GE’s cure amount, if applicable through assumption of the leases. Jurisdiction was reserved to consider a motion by the Debtor to assume the GE leases “at a later date under separate order.”2 Jurisdiction was also broadly reserved to address “any and all matters that may come before the Court in the administration of the Plan and pursuant to the Confirmation Order ....”3
Confirmation of the Debtor’s Plan discharged the Debtor from any debt that arose before the date of confirmation and any debt arising from the rejection of an executory contract or unexpired lease of the Debtor. A discharge injunction arose upon confirmation of the Plan, pursuant to the terms of the Plan and Sections 1141 and 524(a) of the Bankruptcy Code, protecting the Debtor from any act to collect a discharged debt. The confirmed Plan is binding upon the Debtor and every creditor.
Case Background: Post-confirmation Events
The Debtor rejected the GE leases post-confirmation. GE and the Debtor entered into a Stipulation and Agreed Order for the Rejection of General Electric Capital Corporation’s Leases on April 13, 2005 (Doc. No. 190) (“Stipulation”), which the Court approved on April 25, 2005 (Doc. No. 191) (“Stipulation Order”). The Stipulation provides, among other things: (i) the GE leases were rejected by the Debtor effective as of the date of entry of the Stipulation Order; (ii) the Debtor would return the Buses to GE’s agent ABC Companies located in Winter Garden, Florida within seven days of entry of the Stipulation Order; (iii) the returned buses would be applied to GE’s rejection damages claim; (iv) the allowance of an administrative claim in favor of GE in the amount of $375,313.34 to be paid by the reorganized Debtor in installments through May 2005; and (v) “For purposes of facilitating the *311Debtor moving forward to entry of a Final Decree, GE Capital, within twenty (20) days of this Stipulation and Agreed Order, shall provide the Debtor with a reasonable estimate of its unsecured claim, and shall provide a final and amended claim within 150 days after entry of the Final Decree and provide notice of same to counsel for the Debtor and the Debtor.” Stipulation at pp. 5-6.
A rejection damages claim arose in favor of GE upon entry of the Stipulation Order. The Debtor returned the Buses to GE’s agent ABC Companies. GE’s records reflect the Buses were received by ABC Companies from April 14, 2005 to May 19, 2005.4 GE knew the condition of the Buses on June 7, 2005, if not earlier. GE’s agent ABC Companies prepared GE Bus Condition Reports for each bus (with the reports dated June 7, 2005 and June 8, 2005) containing detailed descriptions and photographs of the Buses.5
GE filed Claim No. 29 on August 22, 2005, which amends Claim No. 13, for the unsecured nonpriority amount of $2,759,244.32. The Rider to Claim No. 29 states: “This proof of claim is filed to assert GE Capital’s claim for damages due as a result of the rejection of the Leases, and failure to return the subject equipment in accordance with the terms set forth in the Leases.” The Rider further providés: “GE Capital reserves its right to amend this proof of claim and this rider as may be necessary to adjust the amount asserted herein, or to supplement this claim in any way, as to amount and/or priority.”
GE filed another claim on September 12, 2005, Claim No. 30, which amends Claim No. 29. Claim No. 30 was executed by GE’s Litigation Specialist on August 10, 2005. It asserts an unsecured nonpriority claim for $3,013,882.17. The Rider to Claim No. 30 contains the same language contained in the Rider to Claim No. 29: “This proof of claim is filed to assert GE Capital’s claim for damages due as a result of the rejection of the Leases, and failure to return the subject equipment in accordance with the terms set forth in the Leases .... GE Capital reserves its right to amend this proof of claim and this rider as may be necessary to adjust the amount asserted herein, or to supplement this claim in any way, as to amount and/or priority.”
The Rider contains a detailed breakdown of lease amounts including the .line item “Cost to Repair Damage to Leased Equipment” of $858,303.28. Rider at p. 2. The repair amount of $858,303.28 is unequivocally a component of the total unsecured nonpriority claim amount of $3,013,882.17. GE did not designate the $858,303.28 repair figure as anything other than a general unsecured nonpriority debt. The Debtor does not agree with the damage repair claim of $858,303.28, but he did not object to Claim No. 30 because an objection had no practical benefit. Claim No. 30 was a general unsecured claim subject to pro rata distribution and its allowance would not adversely affect performance of the Plan.
GE specifically recognized in the Stipulation the importance of moving the case to conclusion: “For purposes of facilitating the Debtor moving forward to entry of a Final Decree, GE Capital, within twenty (20) days of this Stipulation and Agreed Order, shall provide the Debtor with a reasonable estimate of its unsecured claim, and shall provide a final and amended claim within 150 days after entry of the Final Decree.... ” Stipulation at ¶ 3. *312Claim No. 29 was GE’s “reasonable estimate of its unsecured claim” and Claim No. 30 was its “final and amended claim,” based upon the plain and unambiguous language of the Stipulation and the Stipulation Order and the sequence of events after entry of the Stipulation Order.
All Buses had been returned by the Debtor and detailed inspections of the vehicles had been documented well before GE filed Claim Nos. 29 and 30. GE knew the condition of the Buses when it filed Claims 29 and 30. GE had calculated and included its damages resulting from the Debtor’s rejection of the leases in Claim No. 30. Claim No. 30 contains, as a component of rejection damages, the repair damages of $858,303.28. GE knew as early as August 10, 2005 (the date Claim No. 30 was executed) the exact amount of repair costs for the Buses.
All amounts contained in Claim No. 30, including all rejection damages and repair costs, are unsecured nonpriority debts. GE did not file or seek leave to file an administrative claim for repair costs. The only administrative expense claim GE was entitled to was the administrative claim set forth in the Stipulation. Claim No. 30 was GE’s final claim and it contained all amounts for damages relating to the Buses.
GE’s inclusion of a reservation of rights provision in Claim No. 30 does not negate the finding of finality. GE included identical reservation of rights provisions in Claim Nos. 13, 29, and 30. The reservation of rights language does not create a perpetual opportunity for GE to revise its claims. The computation of GE’s rejection damages claim could not remain an open issue forever. There must be finality to the reorganization process and both parties recognized the need for finality. GE’s actions clearly establish GE filed Claim No. 30 as its final claim.
The Debtor accepted Claim No. 30 as GE’s final claim. The Debtor and the other creditors relied on the claim and had no reason to expect an amendment. Claim No. 30 constituted an allowed claim which the Debtor agreed to pay as a general unsecured claim pursuant to the terms of the Plan and Confirmation Order. GE is a general unsecured creditor by virtue of Claim No. 30 and is entitled to a pro rata distribution of its unsecured nonpriority claim.
The Final Decree was entered on August 31, 2005 (Doc. No. 196) without objection. This case was closed on September 16, 2005. GE’s failure to oppose the entry of the Final Decree or the closing of the case is further evidence of the finality of Claim No. 30 and that GE considered all matters resolved. All debts forming the basis of Claim No. 30, including the $858,303.28 damage component, were discharged. The discharge injunction of the Bankruptcy Code and the injunction contained in the Debtor’s confirmed Plan forever prevent GE from taking any action to attempt to collect the discharged debts.
District Court Litigation and Reopening of Bankruptcy Case
GE filed a civil suit against the reorganized Debtor in the United States District Court for the Middle District of Florida, Orlando Division, on October 11, 2005 captioned General Electric Capital Corporation v. Dynamic Tours and Transportation, Inc., Case No. 6:05-cv-01515-JA-KRS (the “District Court Litigation”). GE seeks to obtain a judgment against the Debtor for $858,303.28. GE contends the Buses were “cannibalized” by the Debtor and it incurred expenses of $858,303.28 to repair the vehicles. The Debtor sought and obtained a stay of the District Court Litigation.
*313The Debtor filed an emergency motion to reopen this case for the purpose of determining whether GE violated the discharge injunction (“Motion for Sanctions”) (Doc. No. 216). ■ The Debtor contends GE’s District Court Litigation is for recovery of a debt that was discharged in the Debtor’s bankruptcy case. GE opposed the reopening of this case. (Doc. Nos. 200, 202). This case was reopened on January 20, 2006 for the limited purpose of determining whether GE violated the permanent discharge injunction of §§ 1141 and 524 of the Bankruptcy Code (Doc. No. 212).
GE’s Application and Claim No. 31
GE, on January 27, 2006, filed the Application asserting an administrative priority claim of $858,303.28 and a new claim, Claim No. 31, for $2,155,578.89.6 GE, in Claim No. 31, removed the amount of $858,303.28 from the claim explaining:
This Third and Final Amended Proof of Claim has been amended to subtract the amount of $858,303.28, the estimated cost to repair the damage to the returned equipment, which had been included in the Second Amended Proof of Claim filed on or about September 12, 2005 to provide Debtor with notice of this additional post-petition claim. GE Capital’s inclusion of this post-petition (and potentially postconfirmation) claim amount in the Second Amended Proof of Claim was not intended to be included in its pre-petition, unsecured claim amount.
Claim No. 31 at p. 2 of Rider. GE contends Claim No. 31 and its Application were timely filed pursuant to the Stipulation because they were filed within 150 days of the execution of the Stipulation. GE further contends the costs to repair the Buses “are recoverable damages under breach of contract claim and/or conversion theories under governing principles of state law.” Id. The Debtor disputes GE’s contentions and filed a motion seeking sanctions against GE (Doc. No. 216) (“Motion for Sanctions”).
The Court conducted an evidentiary hearing on the Debtor’s Motion for Sanctions and GE’s Application on April 3, 2006 and found GE had violated the discharge injunction of §§ 1141 and 524 of the Bankruptcy Code by instituting the District Court Litigation. An assessment of damages suffered by the Debtor as a result of the violation was deferred. The Debtor was granted leave to file any appropriate motions to address procedural issues so the Application and all pending matters could be addressed globally and efficiently.
Pending Matters
The Debtor filed the Motion to Strike seeking to have the Application stricken. The Debtor contends the Application goes beyond the narrow issue (and the basis for reopening this case) of whether GE violated the discharge injunction and resulting damages from any violation. GE will simply move to reopen the case if the Application is stricken and the case is thereafter closed. Jurisdiction was raised by GE.
The parties agreed, to avoid having to go back to square one and allow for the efficient, global resolution of all pending issues, to construe GE’s Application as containing a request to reopen this case. The request to reopen is due to be granted. The case shall remain open to resolve GE’s Application, Claim No. 31, the Motion to Strike, and any assessment of damages resulting from GE’s violation of the discharge injunction. The Application will be resolved by this Order. The Debtor’s Motion to Strike is due to be denied.
*314GE seeks in its Application to have the repair claim of $858,303.28 deemed an administrative expense claim pursuant to §§ 507(a)(1) and 503(b)(1)(A) of the Bankruptcy Code. GE contends: (i) the Court does not have jurisdiction over this post-confirmation dispute and it should be decided by the District Court; and (ii) the claim of $858,303.28 should be treated as an administrative expense because it is based upon the actual and necessary costs of preserving the estate. GE contends the Debtor tortiously damaged the Buses post-petition and GE “received repair estimates in the amount of $858,303.28____” Application at ¶ 14.
GE presents conflicting arguments in the Application. It contends it was not aware of the alleged damage post-confirmation. Application at ¶ 15. It then contends it was aware of the damage at the time it filed Claim No. 30 and included the figure of $858,303.28 in the claim “to ensure that Debtor received notice that GE Capital intended to seek administrative reimbursement for the damages to the equipment.” Application at ¶ 16. GE’s own exhibits establish GE was aware post-confirmation, as early as June 7, 2005 and perhaps earlier, of the condition of the Buses. GE believed the repairs would cost $858,303.28 and included that figure as an unsecured nonpriority damage claim in Claim No. 30. GE did not in any way designate such figure as anything other than a general unsecured claim or imply that Claim No. 30 was anything other than a final claim.
Factual Conclusions
This Court has jurisdiction over all pending matters in this case. The issues directly relate to the Debtor’s rejection of GE’s leases, the claims filed by GE, the effect of confirmation of the Plan, administration of the Plan, and the discharge injunction. The pending matters all relate to, arise under, and/or arise in connection with the Plan and this Chapter 11 case. Jurisdiction was specifically retained for these matters pursuant to the Confirmation Order.7 Jurisdiction exists pursuant to Article X of the Plan.8 GE, by entering an appearance in this case and filing claims, consented to jurisdiction “for all purposes with respect to any and all matters relating to, arising under or in connection with the Plan or the Chapter 11 Case, including the matters and purposes set forth in Article II of the Plan.”9
Confirmation of the Debtor’s plan discharged the Debtor “from any debt that arose before the date of confirmation” and any debt arising from the rejection of an executory contract or unexpired lease of the Debtor pursuant to § 1141(d)(A) of the Bankruptcy Code. Confirmation of the Plan, pursuant to the statutory provisions of the Bankruptcy Code and Article IX of the Plan, gave rise to a discharge injunction protecting the Debtor from any act to collect a discharged debt.
The Debtor rejected GE’s leases and created a rejection damages claim in favor of GE pursuant to the Stipulation Order. GE filed Claim No. 30, a general unsecured non-priority claim in the amount of *315$3,013,882.17, as its final claim in this case. All damages related to the rejection of the leases are included within that claim. GE knew the exact cost of repairs to be $858,303.28 on August 10, 2005 when its Litigation Specialist executed Claim No. 30. Claim No. 30 was an allowed claim and was discharged in its entirety pursuant to the Plan and the statutory provisions of the Bankruptcy Code. GE is entitled to payment of Claim No. 30 on a pro rata basis with the Debtor’s other general unsecured creditors pursuant to the terms of the Plan.
GE instituted the District Court Litigation seeking judgment against the reorganized Debtor for $858,303.28 — the exact amount contained in Claim No. 30 for repair costs. GE made no attempt prior to instituting the District Court Litigation to determine if the repair claim had been discharged or the status of that claim. GE filed no motion seeking to reopen this case, no motions seeking a determination of the status of the repair claim, and no motions to amend Claim No. 30 or seeking other relief. GE embarked on a course of action that violated the provisions of the confirmed Plan and the Debtor’s discharge injunction.
GE, unhappy with its status as a general unsecured creditor, has extracted the $858,303.28 repair figure from Claim No. 30 to create Claim No. 31. It is attempting to elevate the $858,303.28 figure from a general unsecured nonpriority claim to a priority administrative claim. GE is attempting to recharacterize the discharged unsecured nonpriority claim as an administrative claim. It is not amending the previous claim, but is presenting an entirely new claim. The presentation of the new claim is not timely. No cause, legal or equitable, exists for allowing the Application. There is no basis for allowing the new claim. The Application and Claim No. 31 are due to be disallowed.
CONCLUSIONS OF LAW
The pending matters all relate to, arise under, and/or arise in connection with the Plan and this Chapter 11 case. There is jurisdiction for the pending matters pursuant to the terms of Article X of the Plan and the Confirmation Order. GE, by entering an appearance and filing claims, consented to the jurisdiction pursuant to Article XI of the Plan. Plan at Article XI, HI.
Discharge and the Discharge Injunction
Confirmation of the Debtor’s Plan discharged the Debtor from any debt that arose before the date of confirmation and any debt arising from the rejection of an executory contract or unexpired lease of the Debtor. 11 U.S.C. §§ 1141(d), 502(g) (2005). Confirmation of the Plan gave rise to a discharge injunction protecting the debtor from any act to collect a discharged debt. 11 U.S.C. § 524(a); Plan at Article IX, ¶A. The provisions of the confirmed Plan bind the Debtor and all creditors. 11 U.S.C. § 1141(a).
Section 502(g) allows for a claim arising from the rejection of an unexpired lease pursuant to § 365 “and shall be allowed ... the same as if such claim had arisen before the date of the filing of the petition.” 11 U.S.C. § 502(g). The Debtor’s rejection of the GE leases caused a rejection damages claim to arise in favor of GE upon entry of the Stipulation Order. 11 U.S.C. § 502(g); Stipulation at p. 5, ¶ 1. GE, pursuant to the Stipulation, filed two proofs of claim setting forth its rejection damages claim. Claim No. 29 was GE’s “reasonable estimate of its unsecured claim” and Claim No. 30 was its “final and amended claim” pursuant to the Stipulation.
*316Claim No. 30 was an unsecured nonpriority claim for $3,013,882.17 and contained the amount of $858,303.28 for repairs of the Buses. Claim No. 30 was accepted by the Debtor and became an allowed claim, as defined by the Plan and 11 U.S.C. § 502(a). The Debtor and the other creditors relied on the claim and had no reason to expect amendment. Finality is essential to the reorganization process. “Absent finality, reorganization would be impossible.” In re Drexel Burnham, Lambert Group, Inc., 129 B.R. 22, 26 (Bankr.S.D.N.Y.1991). GE is entitled to payment of Claim No. 30 on a pro rata basis with the Debtor’s other general unsecured creditors pursuant to the terms of the Plan.
Claim No. 30 contains amounts relating to prepetition debts and rejection damages. All debts contained in Claim No. 30 were discharged pursuant to the terms of the Plan and 11 U.S.C. § 1141(d). The discharge injunction of 11 U.S.C. § 524(a) and Article IX, ¶A of the Plan forever barred GE from attempting to collect any discharged debt from the Debtor. GE violated the discharge injunction by instituting the District Court Litigation. GE seeks to recover the amount of $858,303.28 from the Debtor in the District Court Litigation. Such amount was contained in GE’s Claim No. 30 as an unsecured nonpriority component of the total claim amount of $3,013,882.17. All debts contained within Claim No. 30 were discharged in their entirety.
GE’s Application and Claim No. 31
GE contends it reserved its rights to amend Claim No. 30 and timely filed an amendment within the 150-day Stipulation period. No provision of the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure addresses amendment of proofs of claim. Most courts, in analyzing post-bar date amendments, apply a “nexus” test, which focuses on the connection between the original claim and the amendment. See In re International Horizons, Inc., 751 F.2d 1213, 1216 (11th Cir.1985) (looking to Fed. R. Bankr.P. 7015 and Fed.R.Civ.P. 15(b) as requiring the amendment arise from the “same conduct, transaction or occurrence”). The nexus test requires the amendment be to cure a defect, provide a more particular description of the claim or plead a new theory of recovery on facts stated in the original claim. Id.
An “amendment” to a claim must be distinguished from a “new” claim. “[T]he court must subject post bar date amendments to careful scrutiny to assure that there was no attempt to file a new claim under the guise of amendment.” In re International Horizons, 751 F.2d at 1216. The assertion of a “new” claim after the bar date is governed by Federal Rules of Bankruptcy Procedure 3002, 3003, 3004 or 3005, and will be permitted, if at all, to the extent timely filings are allowable.
The nexus test is not relevant to this matter. GE is not seeking to amend Claim No. 30 through its Application and Claim No. 31. GE is attempting to convert the discharged unsecured nonpriority debt of $858,303.28 contained within Claim No. 30 into an administrative priority claim. It is seeking to assert an entirely new claim. In re National Merchandise Co., Inc., 206 B.R. 993, 999 (Bankr.M.D.Fla.1997). Changing a claim from an unsecured status to a priority status “quite obviously sets forth a new claim.” In re Alliance Operating Corp., 173 B.R. 326, 329 (E.D.La.1994).
GE is not entitled to relief because its assertion of a new claim is not timely. GE did not timely file the Application and Claim No. 31. Filing the Application and Claim No. 31 before the 150-day Stipulation period expired does not constitute a *317timely filing. GE’s actions establish Claim No. 30 was its final claim encompassing any and all damages relating to the rejection of the leases. The Debtor accepted that claim as a final claim and commenced to carry out the provisions of the Plan. GE did nothing to call into question the finality of the claim and did not challenge the Final Decree or the closing of the case.
Section 503(a) provides an entity “may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause.” 11 U.S.C. § 503(a). No cause exists to allow the filing of an administrative claim or amendment of Claim No. 30 byGE.
GE contends it is entitled to a priority administrative claim based on equitable principles. GE cites ease law in support of the proposition innocent victims of an estate’s tortious conduct are to be granted priority status for their damages claims. Equitable principles do not favor GE in this matter. GE had written reports with photographs detailing the condition of each Bus by June 7, 2005. GE, by August 10, 2005, had calculated with specificity the costs to repair the Buses. It included the repair costs of $858,303.28 as a line item in Claim No. 30. Claim No. 30 was GE’s final claim and the parties relied on it as such. The filing of the Application at this late date is an attempt to counteract the missteps GE made in the District Court Litigation. GE is bound by Claim No. 30. All debts between GE and the Debtor have been discharged.
Accordingly, it is
ORDERED, ADJUDGED and DECREED that GE’s pleadings are hereby construed to include a request to reopen this case and such request is hereby GRANTED; and it is further
ORDERED, ADJUDGED and DECREED that the Debtor’s Motion to Strike is hereby DENIED; and it is further
ORDERED, ADJUDGED and DECREED that GE’s Application and Claim No. 31 are hereby DISALLOWED.
. Doc. No. 166 atpp. 4-6.
. Confirmation Order at ¶ B. 1.
.Id. at pp. 4-5.
. Doc. No. 231, Exh. No. 1.
. Doc. No. 229, Exh. Nos. 1,2.
. Curiously, GE asserts in the first page of Claim No. 31 that it had "never received any notices from the bankruptcy court in this case.” Such assertion is clearly incorrect.
. Confirmation Order at pp. 4-5.
. "[T]he Bankruptcy Court shall retain the fullest and most expansive jurisdiction that is permitted under applicable law to issue any order or process to carry out the provisions of the Plan, including, but not limited to, determine all claims, enforce all obligations established in the Plan and the Confirmation Order ... to enforce and interpret the Plan and to resolve any dispute and questions of any kind arising in connection with any act arising out of or contemplated by the Plan and the rights created herein or in the Confirmation Order.” Plan at Article X.
.Plan at Article XI, ¶ I. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494039/ | ORDER DENYING MOTION TO AVOID LIEN OF CAROCH PROPERTIES IMPAIRING DEBTOR’S EXEMPTION
STEVEN H. FRIEDMAN, Bankruptcy Judge.
THIS CAUSE came on to be heard on July 18, 2006 upon the debtor’s Motion to Avoid Lien Impairing Debtor’s Exemption (“Motion to Avoid Lien” — C. P. 15). Upon review by the Court of the Motion to Avoid Lien, and upon review of the debtor’s bankruptcy schedules (C.P. 1), and the record of this case, the Court entered its July 3, 2006 Order Deeming Property as Homestead and Determining that Recorded Judgment does not Create Lien (“Order Deeming Property as Homestead” — C. P. 16). On July 10, 2006, Caroeh Properties, Inc. filed its Motion to Vacate Order Deeming Property as Homestead and Determining that Recorded Judgment does not Create Lien (“Motion to Vacate” — C. P. 18), on the basis that Caroeh Properties, Inc. (“Caroeh”) had not been afforded due process, as the July 3, 2006 Order Deeming Property as Homestead was entered without notice or hearing. Upon review of the Motion to Vacate, the Court entered its July 13, 2006 Order Vacating July 3, 2006 Order Deeming Property as Homestead and Determining that Recorded Judgment does not Create Lien (“Order Vacating July 3 Order” — C. P. 21), by which order the Court scheduled the July 18, 2006 hearing to consider the Motion to Avoid Lien. Having now considered the merits of the debtor’s Motion to Avoid Lien, together with argument of counsel, the debtor’s Motion to Avoid Lien is denied, for the reasons set forth below.
By way of the filing of her Motion to Avoid Lien, the debtor seeks to “avoid” the lien ostensibly created by the recording of a certified copy of the “Final Judgment on Count II against Tension Fabric Structures and Count III against Kenneth and Marilyn Pearlstein”, entered in the state court action styled Caroch Properties v. Tension Fabric Structures, Inc., Kenneth Pearlstein, and Marilyn Pearlstein, Case No. 01-21241(07) in the Circuit Court of the 17th Judicial Circuit, in and for Bro-ward County, Florida. In her Motion to Avoid Lien, the debtor contends that the recording of the referenced Final Judgment “... has the effect of creating a judicial lien that impairs an exemption to which the Debtor is entitled under 11 U.S.C. § 522(b) in that the Debtor is attempting to refinance her homestead but the cloud upon the title will prevent her from doing so” (paragraph 5. of Motion to Avoid Lien).
*319The undersigned has previously expressed his opinion that, notwithstanding the language contained in 11 U.S.C. § 522(f)(1)(A), which provides that a debt- or “... may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is a judicial lien ...,” this Court may not “avoid” such a “judicial lien”. This Court reaches its conclusion based upon the well-established legal tenet that, in the State of Florida, the recording of a certified copy of a final judgment in the county in which a debtor’s real property is located does not create a lien against, or impose a lien upon, the legitimate homestead of a Florida resident. In re Epstein, 298 B.R. 917 (Bankr.S.D.Fla.2003). Article 10, § 4(a)(1) of the Florida Constitution provides that homestead property “shall be exempt from forced sale under process of any court and no judgment, decree, or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement, or repair thereof, or obligations contracted for ... labor performed on the realty[.]” Almost a century ago, the Florida Supreme Court held that no judgment creates a lien against homestead property unless the judgment falls within the three stated exceptions contained within Florida’s homestead provisions. Milton v. Milton, 63 Fla. 533, 58 So. 718 (1912). Nothing has changed since that pronouncement. See Cannon v. Cannon, 254 B.R. 773, 778 (S.D.Fla.2000). “Other than the three exceptions provided in Florida’s Constitution and the occasional equitable hen imposed on a debtor’s home, a debtor’s homestead exemption is inviolable.” In re Potter, 320 B.R. 753, 759 (Bankr.M.D.Fla.2005). Accord., See in re Persaud, 222 B.R. 659 (Bankr.S.D.Fla.1998); In re Goodwin, 82 B.R. 616 (Bankr.S.D.Fla.1988).
As noted in Prieto v. Eastern Nat’l Bank, 719 So.2d 1264, 1266 (Fla. 3rd DCA 1998), “... the law has long since recognized the right of judgment debtors to bring a declaratory or other equitable actions for a judicial determination that would remove any appearances that a judgment lien is valid and/or effectual” (citations omitted). It would seem that such an action for declaratory relief or equitable relief could be initiated in this Court pursuant to Bankruptcy Rule 7001. Alternatively, a debtor could obtain relief as to a judgment of record by the filing of a petition with the state court in which the judgment was entered “... to cancel or discharge such judgment.” Fla. Stats. § 55.145. However, the filing in this Court of a motion to avoid or remove a “judgment lien”, pursuant to 11 U.S.C. § 522(f)(1)(A), against a homestead as to which the recording of a certified copy of such judgment could not, as a matter of law, create a lien, cannot be employed in an attempt to remove any appearance that a so-called “judgment lien” is “valid or effectual.” Accordingly, the debtor’s Motion to Avoid Lien Impairing Debtor’s Exemption is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494040/ | MEMORANDUM OPINION
DOUGLAS D. DODD, Bankruptcy Judge.
LTSGO, L.L.C. (“LTSGO”) sued debtor Peter W. Bassil for a declaration under 11 U.S.C. § 523(a)(2)(A) that Bassil’s debt to it is nondischargeable. The Court concludes in this memorandum opinion that Bassil’s debt to LTSGO is dischargeable.
Facts
This dispute grew out of debtor Peter Bassil’s plan to enter the video poker truck stop business in 1999. He became interested in a truck stop in Port Fourchon, Louisiana owned and operated by Kajun Truck Plaza, L.L.C. (“Plaza”), which held the truck stop property under a lease with the Greater Lafourche Port Commission.1 Bassil met Anthony Toups,2 the father of the owner(s) of the facility, through Patrick McGinity, Toups’s criminal lawyer, *477and expressed his interest in taking over the operation in 2000. Bassil loaned the Toupses $30,000 to meet unspecified truck stop obligations in the hope of improving his chances in the bidding to take over the truck stop operation from its operator at the time, Expert Management (“Expert”). Expert had filed for bankruptcy relief in Shreveport. Eventually, Toups’s daughters agreed that Bassil could take over the truck stop operation once Expert no longer occupied the premises.
I. Commercial Sublease between Plaza and Bayou Gaming Management, L.L.C.
Bassil’s relationship with the truckstop began with a sublease3 between Kajun and Bayou Gaming Management, L.L.C. (“Bayou”) for a term beginning December 1, 2000. Jenny Toups Bousegard (“Jenny Toups” or “Toups”) signed the sublease on Plaza’s behalf. Bassil signed on behalf of Bayou. He represented himself as Bayou’s sole owner, and claimed to be its president and chief executive officer. Bassil claimed that he and Gregory G. Faia, his lawyer, friend, confidant and one-time business associate, previously had acquired Bayou from Robert Moloney, Jr.4 Bassil believed that operating the truck stop through Bayou would make it easier to obtain video gaming licenses for the facility because Bayou already had successfully completed the licensing process in connection with another venture, Ditcharo’s Restaurant in New Orleans.
The commercial sublease required Bayou as lessee to use the premises for a convenience store, video poker game room and truck stop offering fuel services for trucks and automobiles, retail sales of groceries and sundries, and a restaurant.5 Bayou was supposed to take over operation of the truck stop on December 1, 2000, though Jenny Toups could not recall when the management actually changed.
II. Provenance of the Lease Assignment
Because plaintiff claims that Bassil’s debt to it must be declared nondischargeable rest principally on the basis of an assignment of the commercial sublease to Kajun Truckstop & Casino, L.L.C. (“Kajun”), the assignment’s origin is of special significance to this dispute.
After Bassil took over the truck stop operation at the end of 2000, he and the operators of the truck stop convenience store had serious disagreements concerning the operators’ sublease, the value of its inventory and store accounting. Their disputes came to a head in March 2001 when Bassil concluded that the store operators were diverting receipts from the truck stop. The problems caused Bassil to decide to operate the truck stop through Kajun, a limited liability company he already had formed in December 2000.6
*478Bassil’s decision to operate through Kajun necessitated his obtaining new state and local licenses and permits in the limited liability company’s name for various components of the truck stop business. Bassil drove to Thibodaux to obtain the permits, where an unspecified parish government employee asked him for a copy of the premises lease. Because the commercial sublease was between Bayou and Plaza (the Toupses’ company), rather than Kajun (Bassil’s company) and Plaza, Bassil testified that he called Gregory Faia for advice. According to Bassil’s testimony, Faia told Bassil that he (Faia) could resolve the problem, and Faia’s office then faxed him an Assignment of Lease7 from Bayou to Kajun. Bassil testified that he then telephoned Tish Goldsmith (who at that time owned a 50% interest in Plaza with her sister, Jenny Toups) to advise that he was sending her the assignment document to resolve the lease issue. No independent evidence corroborated Bassil’s claim that Faia’s office had faxed him the assignment.
Jenny Toups’ testimony regarding the lease assignment was not illuminating or credible. Toups, who was running the truck stop in 2001, testified that she was not familiar with Kajun. She said she thought that Bassil was operating the truck stop through Bayou, and claimed to have learned of Kajun’s role only when the Orleans Parish District Attorney contacted her in April 2002 concerning a criminal investigation of Bassil for allegedly having forged her signature on the lease assignment. However, her claim of ignorance is inconsistent with other evidence. Specifically, in August 2001, several months before Jenny Toups’s contact with the Orleans Parish authorities, she signed papers under penalty of perjury in support of Kajun’s application for a Louisiana video gaming license.8 Moreover, correspondence from Laris Insurance Agency, Inc., to Anthony Toups, Jenny Toups’s father, confirmed that Toups knew that Bassil had been doing business under the name Kajun Truckstop & Casino, Inc. by September 18, 2001 at the latest.9
III. LTSGO’s Agreement with Bassil and Kajun
LTSGO became involved with Bassil and the Port Fourchon truck stop project while the debtor was finalizing arrangements necessary to secure control of the premises for video poker operations.
At some point after Kajun began operating the track stop in December 2000, Bassil and Robert Moloney, who already were friends, began discussing whether LTSGO would advance “bait money,” as Bassil described it, to participate in the truck stop project. Moloney testified that he approached the other owners of LTSGO about financing the initial development of the truck stop. Bassil claimed to have legal right to occupy the track stop premises, and Moloney in fact insisted that Bassil showed him a lease from the Toupses to “Bassil’s company.”10 Bassil, on the other *479hand, testified that he showed Moloney only the sublease from Plaza to Bayou.
In any case, long before any documents allowing LTSGO to operate video poker at the truck stop came into being, LTSGO advanced money to Bassil. Bassil testified that LTSGO advanced $20,000 in December 2000 in connection with his truck stop operation.11 Moreover, he acknowledged on cross-examination that he signed a $20,000 note on behalf of Port Fourchon Truckstop, the “d/b/a” of Kajun Truckstop, on December 8, 2000, before that entity even existed.12
By early 2001, Bassil concluded that he no longer had an agreement to acquire assets from the Expert bankruptcy trustee. He then began interviewing candidates, including LTSGO, to conduct video poker gaming at the truck stop. According to Kurt Moloney, Robert’s brother and manager of LTSGO,13 Bassil told Moloney that he (Bassil) had lawful possession of the truck stop. As proof, Bassil showed Kurt Moloney the December 2000 lease assignment from Bayou to Kajun (Plaintiffs Exhibit 2).
Bassil eventually entered into an agreement with LTSGO to install and operate video poker machines at the truck stop.14 Kurt Moloney testified that by the time he, as LTSGO’s manager, had signed the July 2001 agreement with Kajun, he had been given both the lease assignment and the sublease between Plaza and Bayou. Kurt Moloney also stated that he and other LTSGO employees had received the lease assignment and sublease while preparing Kajun’s Louisiana video poker license application.15 Nevertheless, although LTSGO had received a copy of the sublease from Plaza to Bayou, Kurt Moloney admitted on cross-examination that he had not asked his brother Robert how Bayou came to have a lease with the Toupses’ company.
IV. Pre-Bankruptcy State Court Litigation
Several months after their July 2001 agreement, the parties’ plans for the truck *480stop began to unwind. In early April 2002, Jenny Toups relayed to Kurt Moloney what she learned about Bassil’s alleged forgery of the lease assignment from the Orleans Parish District Attorney. Toups afterward decided not to allow LTSGO to continue operations at the truck stop, though her specific reasons for doing so were not made clear at trial.
On April 19, 2002, Bayou sued to evict Kajun and Bassil from the truck stop16 to try to salvage its investment in the project. The record did not establish the outcome of that proceeding, but it is essentially irrelevant to this dispute, because Plaza obtained a judgment evicting Bayou from the truck stop in August 2002.17 Bayou’s eviction would have terminated Kajun’s right to continue occupancy of the premises even if Bayou had validly assigned its sublease to Kajun.
Eventually, LTSGO sued Bassil and Kajun for damages. That litigation culminated in a settlement18 and consent judgment 19 in LTSGO’s favor and against Bassil and Kajun. The judgment awarded LTSGO $131,779.58 on promissory notes and $76,013.91 for legal fees precipitated by the eviction proceeding, as well as other sums.20 The settlement agreement reserved LTSGO’s right to challenge the dischargeability of Bassil’s liability on the judgment as having resulted from fraud.21
Analysis
I. Burden of Proof and Elements under 11 U.S.C. § 523(a)(2)(A)
To succeed under section 523(a)(2)(A), the plaintiff must prove that: (1) the debtor made representations; (2) at the time the representations were made the debtor knew they were false; (3) the debtor made the representations with the intention and purpose to deceive the creditor; (4) the creditor relied on the representations; and (5) the creditor sustained losses as a proximate result of the representations. In re Quinlivan, 434 F.3d 314, 317 (5th Cir.2005), quoting RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1293 (5th Cir.1995).
Debts falling within the ambit of section 523(a)(2)(A) are those obtained by fraud “involving moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made.” In re Martin, 963 F.2d 809, 813 (5th Cir.1992) (citation omitted). Although intent to deceive may be inferred from a “reckless disregard for the truth or falsity of a statement ...,” In re Acosta, 406 F.3d 367, 372 (5th Cir.2005), a debtor’s “honest belief, even if unreasonable, that a representation is true and that the [debtor] has information to justify it does not amount to an intent to deceive.” Id. (citation omitted).
*481Section 523(a)(2)(A) also requires that a creditor justifiably rely on the debt- or’s misrepresentations. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Justifiable reliance “ ‘is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct to all cases.’ ” In re Mercer, 246 F.3d 391, 418 (5th Cir.2001), quoting Field, 516 U.S. at 70-71, 116 S.Ct. 437 (quoting Restatement (Second) of Torts § 545A comment b (1976)) (emphasis in original) Though Mercer dealt with the discharge-ability of credit card debt, its discussion of justifiable reliance applies to all actions under § 523(a)(2)(A).
A creditor who is “the recipient of a fraudulent misrepresentation may justifiably rely on it unless its falsity is obvious or there are ‘red flags’ indicating such reliance is unwarranted.” Id., quoting Field, 516 U.S. at 71-72, 116 S.Ct. 437 (quoting W. PROSSER, LAW OF TORTS § 108, p. 718 (4th ed.1971)). Where, under the particular circumstances, the facts relating to the alleged misrepresentation “ ‘should be apparent’ ” to a person of the creditor’s knowledge and intelligence upon a cursory glance, or where the creditor “ ‘has discovered something which should serve as a warning that he is being deceived,’ ” the creditor is required to make an independent investigation. Id.
II. Bassil’s Misrepresentations
a. Bassil lacked authority to act on behalf of Bayou.
Peter Bassil’s claim on direct examination in plaintiffs case in chief that he and Gregory Faia bought Bayou in 1998 was not substantiated. Robert Moloney testified that he has been the sole owner of Bayou since its inception, and that he has always been its sole officer and director. Moloney testified that he orally had agreed to sell Bassil or Faia part of Bayou in the future if they secured more locations in which Bayou could arrange to install and operate video poker devices, but no evidence supports a finding that ever happened.
At trial Bassil deflected most questions regarding documents relating to his alleged ownership of Bayou by claiming that his lawyer, Faia, prepared all the documents; that he (Bassil) “had no reason to involve himself in that side of the business”; and that he consulted Faia on everything he did. Yet, Bassil did not call Greg Faia as a witness or subpoena him to testify at trial, which supports an inference that Faia would not have corroborated Bassil’s claims.22
Bassil also admitted that he never received any income from Bayou. Moreover, despite insisting on the stand that Bayou’s tax returns incorrectly reflected that Robert Moloney was its sole owner, Bassil conceded that he never complained to the Internal Revenue Service about the alleged error.
The only independent evidence supporting Bassil’s claim of ownership of any interest in Bayou is the November 1997 resolution relating to bank accounts that he, Faia and Robert Moloney executed.23 *482This document does not support a finding or conclusion that Bassil had authority to sign the Commercial Sublease on behalf of Bayou.
The evidence supports a finding and conclusion that Bassil had no authority to act for Bayou with regard to the Port Fourchon truckstop, and specifically that he had no authority to sign the assignment of sublease on Bayou’s behalf.
b. Bassil misrepresented to LTSGO that Kajun had a valid assignment of Bayou’s interest in the commercial sublease.
Bassil was neither an owner of Bayou, nor empowered by Robert Moloney, Jr., Bayou’s sole owner, to sign the lease assignment on Bayou’s behalf. Thus, Bassil had no authority to consent to an assignment of the commercial sublease to Kajun, and falsely represented to- LTSGO, through use of the assignment of the commercial sublease, that his limited liability company lawfully held the truck stop premises.
Further, the circumstances surrounding the origin and execution of the assignment of lease are suspicious. Bassil testified that Faia’s office faxed it to him at a parish government office (the local health department) in Thibodaux. He said that the document had been signed and notarized before it was faxed, and lacked only his signature to be complete. However, the credible evidence established that the signatures on the lease assignment were unauthorized, and likely were forgeries. Jenny Toups denied signing the lease assignment on Plaza’s behalf, and denied ever being asked to consent to Bayou’s assignment of the lease. Additionally, though the assignment recites that Patrick McGinity, a lawyer, was the notary public before whom the document was signed, Mr. McGinity testified at trial that he had not signed or notarized any version of the document. Considering this evidence, Peter Bassil’s testimony that he was “pretty sure” he’d seen McGinity’s signature on one version of the document is not credible, especially given the defendant’s failure to offer any independent evidence corroborating his version of the events.
Additionally, Peter Bassil’s explanation of the reason Bayou assigned the lease to Kajun is totally implausible. If, as Bassil initially testified, he caused Bayou to enter into the commercial sublease in order to simplify licensing of the truck stop for video poker, it made absolutely no sense for Bayou to assign its rights under the commercial sublease to Kajun, because that newly-formed limited liability company did not have a video poker license and therefore would not previously have been found to be eligible for licensing by the Louisiana video poker authorities.
In sum, Bassil’s version of the relevant events is not credible.
Accordingly, LTSGO has established by a preponderance of the evidence that the assignment of lease was not legitimate, and its use was a misrepresentation by the debtor. The evidence established that Bassil either made the representation to LTSGO in reckless disregard for the truth, or with actual intent to defraud LTSGO. In either case, Bassil intended to deceive LTSGO concerning Kajun’s contractual relationship with Plaza and its right to occupy the truckstop premises.
*483III. LTSGO Did Not Justifiably Rely on Bassil’s Misrepresentations
a. LTSGO did not establish that it actually and justifiably relied on the lease assignment in making the initial advance.
Bassil’s misrepresentation does not prove LTSGO’s case in chief, however.
LTSGO contends that had it known that the lease assignment was invalid, it would not have entered into the July 9, 2001 agreement with Bassil’s limited liability company and presumably would not have loaned the company any money in December 2000.
However, LTSGO advanced $20,000 to Bassil on December 8, 2000, before the lease assignment from Bayou to Kajun could have been effective. Kajun was not even organized until December 19, 2000. Therefore, LTSGO has not proven that it actually and justifiably relied on any misrepresentation by Bassil about the lease assignment when it first advanced funds to Bassil and his company. Quinlivan, 434 F.3d at 317.
b. LTSGO also did not establish its justifiable reliance on Bassil’s misrepresentations before it made the additional advances.
Both Robert and Kurt Moloney testified that LTSGO relied on Bassil’s representations that he had legal possession of the truck stop when Bassil came to LTSGO with the truck stop proposal and request that LTSGO fund its continued operations. Peter Bassil actually gave Kurt Moloney a copy of the lease assignment that Bassil claimed established his right to possession. Moreover, Kurt Moloney also testified that LTSGO would not have entered into the agreement with Kajun Truckstop had it known the lease assignment had not been validly executed, with properly notarized signatures.
Although these facts establish LTSGO’s actual reliance on Bassil’s misrepresentations regarding his company’s right to occupy the truck stop premises, LTSGO’s reliance must have been justifiable to render Bassil’s debt non-dischargeable under Bankruptcy Code section 523(a)(2)(A). Specifically, LTSGO’s reliance on Bassil’s misleading statements was justifiable unless, based on the knowledge of its representatives and under the particular circumstances of this case, the representations regarding Kajun’s right to lease the truck stop from the Toupses’ company were obviously false or there were “red flags” as to the truth of those representations. See Mercer, 246 F.3d at 418. If LTSGO learned facts that should have warned it that Bassil’s representations may have been false before it entered the agreement with Kajun and advanced funds pursuant to the agreement, its reliance on Bassil’s misrepresentations, without further investigation, was not justifiable. See Mercer, 246 F.3d at 418.
The evidence supports a finding and conclusion that LTSGO did not justifiably rely on Bassil’s claim that he or his company lawfully held the truck stop premises. Specifically, Bassil approached Robert Moloney in December 2000 with his initial proposal that LTSGO advance money to Bassil’s company in connection with the Port Fourchon operation. Robert Moloney, who previously had dealt with Bassil, apparently did not question Bassil’s representation that he lawfully occupied the truck stop, since Moloney did not bother to verify it. Had the parties stopped there, and LTSGO proceeded with the parties’ arrangement without more information, LTSGO may have justifiably relied on the information Bassil conveyed to it. Howev*484er, Kurt Moloney, LTSGO’s manager, had received both the lease assignment and the original sublease before LTSGO entered the July 2001 agreement with Kajun. Bayou was a party to both the sublease and the lease assignment. Yet, for some reason, Kurt did not question Robert about Bayou’s assignment of the lease to Kajun, though he admitted knowing that the assignor was Bayou, his brother’s company.
Moreover, Kurt Moloney stated that he and LTSGO’s employees had obtained both the original sublease and the lease assignment to prepare Kajun’s August 2001 video poker license application. The March 30, 2001 letter from LTSGO to Bassil requesting additional materials for the video poker licensing application indicates that the “lease agreement” had already been provided to LTSGO.
LTSGO’s access to this information before finalizing its deal with Bassil and Kajun should have caused Moloney to investigate Bassil’s statements. Plus, the Moloneys were experienced enough in the video gaming business to know that it was crucial to the application process to have a valid lease of the premises.
Because the Moloneys and LTSGO had knowledge of facts relevant to the truth of Bassil’s claim that Kajun was legally occupying the truck stop before the July 9, 2001 agreement, before the August 2001 application and before the additional advances in October 2001, its reliance on Bassil’s misrepresentations regarding Kajun’s right to legal possession of the Port Fourchon truck stop premises was not justifiable.
Conclusion
The evidence established that LTSGO did not justifiably rely on Bassil’s misrepresentations concerning Kajun’s possession and occupancy of the truck stop premises. Accordingly, Peter Bassil’s debt to LTSGO is dischargeable. By separate Judgment, LTSGO’s Complaint will be dismissed.
. July 1, 1997 Contract of Lease between Greater Lafourche Port Commission and Kajun Truck Plaza, L.L.C. (Defendant’s Exhibit 2, pp. D00261 — 00278).
. Kajun Truck Plaza, L.L.C. owned the truck stop. Anthony Toups’s daughters, Jenny Toups Bousegard and Tish Goldsmith, were the only members of the limited liability company. Each owned a one-half interest in Kajun at times relevant to this opinion.
.Three different versions of the commercial sublease were admitted into evidence as Plaintiff's Exhibits 6, 7 and 8. Peter Bassil did not know why the documents differed. All three versions of the sublease recite that their term commences December 1, 2000, but dates on the documents differ. Specifically, the signatures on Exhibit 6 all are dated December 15, 2000; but Bassil’s signature on Exhibit 7 (the only dated signature on that document) is dated December 1, 2000. The signatures on Exhibit 8 are undated.
. Moloney, his parents and siblings own plaintiff LTSGO. Kurt Moloney, Robert's brother, is LTSGO's manager.
. Commercial sublease, ¶ 5 (Plaintiff's Exhibit 6).
. See December 19, 2000 Articles of Organization and Initial Report of Kajun Truckstop & Casino, L.L.C. ( Defendant’s Exhibit 3, pp. D00413 — 00418).
. Assignment of Lease (Plaintiff's Exhibit 2). Though the assignment is dated December 1, 2000, Bassil admitted that it was not signed on that date.
. Video Poker Application for Kajun Truck Stop & Casino, L.L.C. (Defendant's Exhibit 3 in globo).
. September 18, 2001 fax from Laris Insurance Agency, Inc. to Anthony Toups (Defendant's Exhibit 1, pp. D00001 — 2). Bassil testified that the fax number on the document was for the machine at the truck stop. His testimony was not contradicted.
.March 15, 2006 trial transcript, p. 58, line 9-11. No evidence corroborated Robert Moloney's testimony that Plaza and Kajun were parties to a lease.
. Defendant’s Exhibit 11 (the promissory note for LTSGO's advance to Bassil and Kajun Truckstop) is dated December 8, 2000— months before the date of LTSGO’s agreement with Kajun Truckstop. Both Moloney brothers’ testimony concerning the reasons LTSGO advanced funds to Kajun nearly six months before LTSGO’s agreement to operate video poker gaming at the truck stop was vague.
. The Articles of Organization for Kajun were filed December 19, 2000 (Defendant's Exhibit 3 in globo). Other exhibits such as the checks for Kajun (Defendant’s Exhibit 7), the Financial Questionnaire submitted by Kajun to the Louisiana Gaming Control Board (Defendant's Exhibit 3 in globo) and Kajun's letterhead (Defendant's Exhibit 6) evidence that Port Fourchon Truckstop was Kajun's assumed name or "d/b/a.”
. Both Robert and Kurt Moloney had been involved in the video poker gaming business since at least 1996. Robert Moloney testified that Bayou had acquired its video poker device owner’s license about 1996 and Kurt Moloney testified that LTSGO had been in the business of placing video gaming machines since about 1992 or 1993.
. Agreement dated July 9, 2001 between LTSGO, LLC and Kajun Truckstop & Casino, LLC d/b/a Port Fourchon Truckstop & Casino (Plaintiff's Exhibit 3). The agreement provided for additional loans of up to $150,000 from LTSGO to Kajun. Bassil testified that LTSGO also advanced a total of about $80,000 in connection with the operation, including $10,000 for the video poker license and concrete testing. Kajun executed a Promissory Note for $92,165.88 payable to LTSGO on October 26, 2001 (Plaintiff’s Exhibit 1).
. LTSGO sent Bassil on March 30, 2001 a checklist of materials needed to complete the video poker license application. (Defendant’s Exhibit 5). On that list, "Lease Agreement” is checked off as already having been provided.
. Excerpts of record of "Bayou Gaming Management, L.L.C. v. Kajun Truckstop & Casino, L.L.C.," No. 93612 in the 17th Judicial District Court for the Parish of Lafourche, State of Louisiana (Plaintiff's Exhibit 10).
. Excerpts of record of "Kajun Truck Plaza, L.L.C. v. Bayou Gaming Management, L.L.C.," No. 94234 in the 17th Judicial District Court for the Parish of Lafourche, State of Louisiana (Plaintiff's Exhibit 11).
. April 14, 2004 Settlement Agreement (Plaintiff's Exhibit 5).
. May 10, 2004 Judgment in "LTSGO, LLC v. Kajun Truckstop & Casino, L.L.C. and Peter W. Bassil," No. 579-914 in the 24th Judicial District Court for Parish of Jefferson, State of Louisiana (included in Plaintiff's Exhibit 4).
. First Supplemental and Amending Petition on Promissory Note, ¶ 15 (Plaintiff's Exhibit 5).
. Settlement Agreement, ¶ 3 (Plaintiff's Exhibit 6).
. Bassil testified on cross-examination during plaintiff’s case in chief that he did not subpoena Faia because he expected LTSGO to do so. However, on re-direct examination in his own case in chief Bassil asserted that Faia would lie if called to testify on his behalf, and would not support Bassil's claims.
. Resolution of Members of Bayou Gaming (Defendant’s Exhibit 12). Robert Moloney admitted on cross-examination that Bassil did have some authority to act for Bayou in connection with the video poker machines installed at Ditcharo’s, a New Orleans restaurant in which Bassil acquired an interest in 1991. *482However, Moloney disputed the effect of the November 11, 1997 resolution. That bank form resolution only authorized Bassil, "Maloney” (sic) and Faia to conduct bank transactions on behalf of the company. In any case, it does not establish Bassil’s status as an officer because limited liability companies do not have officers. See La. R.S. 12:1311, 1312. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494043/ | DECISION
WILLIAM L. EDMONDS, Bankruptcy Judge.
Habbo G. Fokkena, the United States trustee, objects to debtor’s discharge. Trial was held June 29, 2006 in Council Bluffs. John F. Schmillen appeared as attorney for Fokkena. Lloyd R. Bergantzel appeared as attorney for the debtor, Kelli J. Huff. This is a core proceeding under 28 U.S.C. § 157(b)(2)(J).
Huff is 36 years old. She is divorced and has three children. Her son is 11 years old and lives with his father. The other two children, daughters ages 10 and 5, live with Huff in Treynor, Iowa.
Huff graduated from Nishna Valley Senior High School. She attended Wayne State College in Nebraska for one year and Northwest Missouri State University for two and one-half years. She studied accounting, but did not graduate. She says she has one year left to graduate.
She has been self-employed as a medical records transcriptionist. She transcribes medical notes dictated by the doctors contracting for her services. Prior to March 2004 she had five accounts. She supplied the recording devices to the doctors; some were hand-held tape recorders, others were hand-held digital recorders.
In 1994 or 1995, Huff and her then-husband, Brent Huff, began farming her parents’ farmground in Mills County, Iowa. Huffs father had had a stroke and could no longer farm the 180 acres. Kelli and Brent Huff farmed the land together through 2002, the year of their divorce.
In 2004, Huff farmed the ground with a friend, Rod Frink. They farmed the land on a 50/50 basis, dividing expenses and profit equally. Huff and Frink had a dispute over the profit. Frink threatened a lawsuit against Huff. She scheduled his claim in the amount of $25,000, and dis*589closed a suit in her statement of affairs. She is uncertain whether he filed a lawsuit.
Huffs mother, Sharon Smith, also called Anne Smith, charges cash rent by the number of farmable, tillable acres. Although the farm is 180 acres, normally only 165 are tillable, and the amount of tillable acres in any year can vary by the amount of unfarmable, wet bottom ground.
Huff was seriously injured in an automobile accident in March 2004. She incurred nearly $200,000.00 in medical bills and had no insurance. After she was injured, she had difficulty in keeping up with her transcription work. She lost all but one account.
Huff alone farmed her mother’s farm-ground in 2005. Her mother charged her $85.00 per acre for approximately 165 acres, for a total payment of $14,025.00. They executed a lease on February 23, 2005 (exhibit 4). Huff was required to pay half of the total rent on March 1, 2005 ($7,012.50) and the remaining half after the crop had been harvested. On April 6 she paid $6,715.00 to her mother (exhibit 7). Also on February 23, 2005, Smith signed a lease of a grain bin to Huff for eight cents per bushel of stored grain. Huff did not sign the lease document, but she does not dispute it.
Huff did not farm the ground herself; she hired a custom operator named Merton Richter. Richter’s work was to include planting, spraying and combining; it did not include hauling harvested crops.
In order to farm in 2005, Huff obtained a line of credit from Houghton State Bank in Red Oak, Iowa. On April 1, 2005, Huff and her mother signed a line of credit agreement and a security agreement (exhibits 9 and 8). Smith was listed as a “borrower” on the documents, not merely as an accommodation party (id.). The line of credit was for $25,000.00 (exhibit 9). Advances on the line of credit were to be jointly approved by Huff and Smith (id.).
The first advance was on April 1, 2005 for $6,715.00 (exhibit 10). The loan proceeds were deposited in a joint account at the Houghton State Bank. Huff says that checks drawing on funds in the account required the signatures of both Huff and Smith. During 2005, loan advances were made on the following dates:
April 1 $6,715.00
April 13 7,100.00
April 18 2,923.00
June 20 5,000.00
July 13 669.00
September 1 250.00
September 6 1,500.00
(exhibit 10).
Prior to Huffs filing bankruptcy, the following checks were drawn on the account for the purposes shown:
April 6 Anne Smith 1st half cash rent
April 7 Pioneer corn and bean seed
April 18 Farm Service Co. anhydrous ammonia
June 17 Anne Smith 2nd half cash rent
July 12 Farm Bureau insurance
(exhibit 14). Each of the checks was signed by Huff and Smith. Smith had possession of the checkbook, and according to Huff, Smith handled the “business side” of Huffs farming operation. I infer that to mean the “paperwork side,” as Huff testified she herself made purchasing and sales decisions, selected the crops, and applied for government programs. Huff said she signed blank checks for her mother to use to pay bills.
Huff repaired her motor vehicle after the accident in 2004. She had a subsequent accident; the vehicle was a total loss. Her mother bought a new pickup truck in June 2005 and provided it to Huff for her use. Smith obtained a loan to purchase the pickup truck, and she makes the loan payments. On June 25, 2005, Huff and Smith signed an “addendum to the original farm contract” which provided that “proceeds from the farm” would be used to make Smith’s annual payment of $7,479.51 on the vehicle (exhibit 6).
*590Huff filed her chapter 7 petition on July-14, 2005. By that time her crops of corn and beans were growing. Nothing in Huffs schedules indicated her 2005 farming operation. Her schedule of real property showed only her home in Hastings, Iowa. Her schedule of personal property listed only household goods valued at $2,565.00. She claimed the homestead and the household goods as exempt. She also claimed as exempt $1,000.00 in unpaid wages and tax refunds. However neither was listed on her schedule of personalty.
In her schedule of creditors holding secured claims, Huff listed the mortgagee on the homestead and her former husband who had obtained a lien against the home in the couple’s dissolution proceeding. Among her unsecured debts, she listed Rodney Frink’s claim from the 2004 crop year. Nowhere did the schedules show any assets or debts related to the 2005 farming operation. She did not list the unexpired leases on the land or the pickup. She did not list any debt to Houghton State Bank. She did not list her mother as a co-debtor to the bank. She did not list growing crops as an asset. She did not list the joint farm bank account. In her schedule of monthly expenses, she did not list expenses from the operation of a business, profession or farm. The only reference to farming was the disclosure in the statement of affairs that she had earned $23,000.00 from farming in 2004.
The meeting of creditors in Huffs case was held August 24, 2005. Attending the meeting besides Huff were her attorney Lloyd Bergantzel, Deborah Petersen the trustee, Brent Huff, her former husband, and Rodney Frink.
Deborah Petersen, the trustee, examined Huff. Huff said she received paperwork from her attorney regarding the bankruptcy information and that she filled it out. She confirmed that she reviewed the finished forms before she signed them and that they were true and correct. She testified that she listed all her assets and debts. The trustee began asking Huff whether she had specific assets. She responded that she owned a watch, clothing, and a camera. Petersen asked if Huff had any office supplies or furnishings for her business. Huff said she had digital recorders), a laptop computer, phones, and supplies. She estimated the value of the business items at $5,500.00. That was the amount paid for the items approximately two years before. Huff said she had no bank accounts. On examination by the attorney for her former husband, Huff testified she had bank accounts with her children, and that the accounts belonged to her children.
Petersen asked if Huff had any crops or farm equipment. Huff said she had crops — 70 acres of corn and 80 acres of beans. She explained that she cash-rented the land from her mother and hired a custom operator, Merton Richter, to farm it. Huff said no one had a lien against the crops. She also disclosed that she had paid half of the rent on the land, that she had paid for the seed and for the custom planting. The trustee asked Huff to amend her schedules to show the unlisted assets. The trustee also informed Huff that the crops were not exempt and that the money made on the crops would be used to pay creditors.
On September 20, 2005, Huff filed a motion to dismiss her case. The trustee objected. Huff testified that she filed the motion because she had obtained a new transcription contract with a medical group in Des Moines, and she believed she was getting back on her feet — that she “could do it.” The motion was denied on October 12, 2005.
On October 18, 2005, Huff filed amended schedules (exhibit 2). She listed her *591clothes, watch, and camera. She listed a computer and eight digital recorders used in her transcription business. Huff also scheduled the growing crops of corn and beans; she showed them at an “unknown” value. Huff claimed the clothes, computer and recorders as exempt.
On her schedules of debts, Huff added her mother to the creditors holding secured claims. She scheduled the debt at $19,500.00. She also added Houghton State Bank on the crop loan and showed the amount of the claim as $25,000.00. Also, Huff listed Sharon Smith on amended schedule G regarding the leased farm-ground.
By the time Huff amended her schedules, she had harvested all the beans. In a letter by her attorney, attached to the amended schedules, it was disclosed to the trustee that Huff had sold 2,039 bushels of beans and had received $10,363.79. She had also sold 1,000 bushels of beans at $5.42 per bushel for December delivery. She sold 500 bushels of beans at $5.59 also for December delivery. The latter two sales grossed $8,215.00. Huff also obtained a Loan Deficiency Payment from the Commodity Credit Corporation based on 7,500 bushels of the corn crop. The payment was $3,750.00. She turned it over to the trustee. She also turned over to the trustee farm program payments she received on October 11,12 and 14.
Out of the cash bean sales, Huff paid for trucking and also paid Houghton State Bank on the secured crop loan. The beans harvested for December delivery were stored in the bins leased from Smith.
In the letter dated October 11, Huffs lawyer informed Petersen that Huff still owed the following debts: Smith for the balance due on the cash rent; Houghton State Bank for the balance of the crop loan; Farm Bureau in the amount of $888.00 for “revenue assurance” and $669.00 for hail insurance; and the custom operator for combining in the amount of $1,936.00 (exhibit 2, pp. 8-10).
Bergantzel said that Huff would take no further steps regarding the crops until Petersen made a decision regarding her position on the crops (id.).
Notwithstanding the information in the attorney’s letter attachment, the check register from the farm account (exhibit 7) shows a July 12 payment to Farm Bureau for $669.00 and a September 6 payment to Richter for $6,511.17. I cannot determine from the evidence whether the balances shown in Bergantzel’s letter are correct in light of the post-petition payments from the joint farm bank account. Grain proceeds checks net of all expenses totaled $26,248.94 (exhibit 15).
At trial, Huff had explanations for some, but not all, of the omissions from her schedules. She said she forgot about the recorders used in her transcription business. In September 2005, she obtained a job as a medical records transcriptionist with a group of orthopedic doctors in Des Moines. She supplies them with digital recorders. Huff says the tape recorders she had previously used in the business are obsolete and at the time she filed bankruptcy, were not being used. After her first accident, she stored them in her basement. When she filed bankruptcy, she had forgotten about them.
Huff testified that she did not schedule the joint bank account because her mother had the checkbook and handled the business aspects of the farming operation. She said the bank statements went to her mother.
As to her failure to list the crop in her bankruptcy schedules, she explained that she did not know if there would be a crop, that a farmer does not have a crop until it is in the truck or the bin. This is so *592because of risks to the crop until it is harvested. She said she would not have known what value to place on the crop until it was harvested. Conversely, she said she did not think of it.
She said also that she did not think of her loan from the Houghton State Bank. She testified that she kept farm matters separate, and that the banking matters were handled by her mother. As to the bank’s lien on the crop, she said she did not list the bank as secured because she did not believe it had a lien; at trial she still did not think so. She said a farmer borrows money from a bank and agrees to pay it back. She explained, “I get money from the crop and I pay the bank; it’s not a lien; it’s a loan.”
Huff testified that she spent her own time and money in an effort to get the crop harvested and sold in order to pay the trustee. She said that it was she who obtained the Loan Deficiency Payment, which would not have otherwise been obtained by the trustee.
Petersen, the trustee, testified that she did not ask for Huffs help with the harvest and sale of the crops. Petersen said she had conversations with Smith, and they agreed that Smith would arrange for harvest and hauling. Smith also made arrangements for crop proceeds to go to the Houghton State Bank to be held for the trustee’s administration. Petersen testified that she had trouble getting information from Huffs attorney. She said she had no direct contact with Huff. Petersen said she advised Bergantzel that all of the crops were property of the estate and that Huff was not to receive or dispose of the proceeds of the sales of the crops.
Discussion
The trustee contends that Huffs discharge should be denied because she gave false information under oath on her schedules of assets and debts. Huff responds that the omissions in her schedules were not knowing and fraudulent. Moreover, Huff says that when asked by the trustee at the meeting of creditors about the existence of property, she immediately reported owning the assets in question, including the crop, transcription equipment, and her personal items. She reinforces the absence of fraud by pointing out that after the crop had matured, she expended her time and efforts to turn the crop into money and to obtain government payments for the bankruptcy estate.
Debtor shall be granted a discharge unless, “the debtor knowingly and fraudulently, in ... the case — made a false oath.” 11 U.S.C. § 727(a)(4)(A). Huffs bankruptcy schedules were signed under penalty of perjury. The schedules, as such, are “written declarations which have the force and effect of oaths.” Jordan v. Bren (In re Bren), 303 B.R. 610, 613 (8th Cir. BAP 2004), rev’d in part on other grounds, 122 Fed.Appx. 285 (8th Cir.2005). To bar discharge, the false statement must be material. Mertz v. Rott, 955 F.2d 596, 598 (8th Cir.1992). The subject matter is material if it relates to the debtor’s business transactions or estate, or if the subject matter concerns the debtor’s assets or business operations. Palatine National Bank of Palatine, Illinois v. Olson (In re Olson), 916 F.2d 481, 484 (8th Cir.1990). “Deliberate omissions by the debtor may ... result in the denial of a discharge.” Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir.1984). The objector need not show detriment to creditors, nor does it matter whether or not the debtor intended to injure his or her creditors. Id. It is necessary only that debtor told an intentional untruth in a matter material to the case. See Aronofsky v. Bostian, 133 F.2d 290, 292 (8th Cir. 1943)(an Act case).
*593Full disclosure is a prerequisite to the debtor’s obtaining a discharge. American State Bank v. Montgomery (In re Montgomery), 86 B.R. 948, 956 (Bankr.N.D.Ind.1988). To a great extent, the system depends on debtors voluntarily telling the truth. There are insufficient resources in the bankruptcy system to check every schedule for accuracy or to complete an inventory of every debtor’s assets.
The burden of proof is on the objecting party. Korte v. United States (In re Korte), 262 B.R. 464, 471 (8th Cir. BAP 2001); Fed.R.Bankr.P. 4005. The objector must prove each element of the objection by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 285, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
The United States trustee has met his burden on each element. Huffs discharge should be denied.
The omissions from Huffs schedules were many. The more significant omissions from the schedule of personal property involved Huffs business assets. Most significant was Huffs failure to disclose any assets related to her farming operation — her farm lease with her mother, her growing crops, the lease of the new pickup truck, and the farm bank account. As to debts, the schedules omitted the identification as creditors of Huffs mother and the Houghton State Bank. Huffs amended schedules list the bank as having a claim of $25,000.00 and her mother as having a claim for $19,500.00.
With regard to her medical transcription business, Huff failed to list her laptop computer and the recorders. Although the failure to list the obsolete recorders might be understandable, the failure to list the laptop is not. Huff was engaged in transcription at the time she filed. She showed her occupation as a medical transcriptionist on her schedule I, and listed her monthly income as $700.00. It is difficult to believe she merely forgot about the laptop, as she appears to have been using it regularly at the time of filing.
The omission of the farm assets and liabilities and of the laptop were material. Huffs verified schedules were false. The false statements were material because they related to significant assets, liabilities, and business transactions.
Huff knew that her listing of assets and liabilities was false. She made the false statements with fraudulent intent.
Her most significant asset and main source of income was the crop. She explained that she did not think about the crop as an asset because she was unable to place a value on it until it was harvested, and until harvested, she did not know if there would be a crop. Huffs professed, personal inability to estimate the value of the crops in the field is no excuse for failing to list her interest in the crop, even with a zero value. The schedule itself directs a debtor to list “crops, growing or harvested” (exhibit 1, Schedule B-30).
Fraudulent intent may be established by circumstantial evidence. In re Korte, 262 B.R. at 474. The number and significance of omissions from the schedules, and the fact that they all involved Huffs farming operation support an inference of fraudulent intent.
Huff explains the omission by saying the crop had no value until harvested, but that does not explain her omission of the bank and her mother as creditors. She knew she owed them money. Indeed, they were two of her largest creditors. Moreover, her explanation of the omission of the crop (which I do not find credible) does not explain the failure to list the lease of the land and the lease of the pickup truck. Huffs failure to list any information with regard to the 2005 farming operation is *594significant evidence of fraudulent intent. The omissions go beyond the schedules of assets and debts. On her Schedules I and J, Huff failed to identify herself as a farmer. Even if she considered she had no current income from farming, she failed to list regular expenses from farming on Schedule J.
Huff’ contends that when the trustee inquired about assets at the meeting of creditors, she reported the crops right away. But Huff did not volunteer omitted assets at the outset without questioning by the trustee. The trustee had to run down a list of assets to obtain the information. Also, I view Huffs admissions at the meeting of creditors not as an indication of honest intent, but rather as an unavoidable result of two knowledgeable creditors being present at the meeting — her former husband and Frink, the man she farmed with in 2004. Both knew of her past farming activities. It is not unlikely they knew of her 2005 farming. In my view, their presence at the meeting detracts from her contention that she was forthcoming with information to the trustee.
Huffs discharge will be denied under 11 U.S.C. § 727(a)(4)(A). I do not reach the U.S. trustee’s allegations under 11 U.S.C. § 727(a)(2).
IT IS ORDERED that judgment shall enter that the discharge of Kelli J. Huff is denied under 11 U.S.C. § 727(a)(4)(A). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494044/ | MEMORANDUM OF DECISION RE MOTION TO DISMISS CASE WITH PREJUDICE
LESLIE TCHAIKOVSKY, Bankruptcy Judge.
On May 26, 2006, debtors Johnathan and Aurora Cortez (“Debtors”) moved to dismiss the above-captioned chapter 13 ease.1 At that time, creditor Cedar Associates (“Cedar”) filed a response in which it urged the Court to dismiss the case with prejudice. In order to give the Debtors an adequate opportunity to respond to Cedar’s request, the Court granted the Debtors’ motion to dismiss on May 31, 2006, but retained jurisdiction to consider a motion filed by Cedar or the chapter 13 trustee (“Trustee”) within thirty days, requesting that the dismissal be made with prejudice.
The Trustee subsequently made a timely motion to dismiss the ease with prejudice, and Cedar joined in the motion. Having considered the papers and arguments submitted, the motion to dismiss the case with prejudice is granted.
BACKGROUND
Prior to October 15, 2004, Debtors owned their residence located at 3254 Ursa Way in Hayward, California (the “Residence”) as joint tenants. On October 15, 2004, Debtors executed a grant deed, which transferred a joint tenancy interest in the Residence to their son Eric Cortez (“Erie”), in order to qualify for refinancing.
In November of 2004, Mr. Cortez transferred his interest in the Residence to Eric. Debtors testified that the second transfer was made for “estate planning” purposes because Mr. Cortez was in bad health and wanted to ensure that Eric eventually received the Residence. Debtors also testified that they understood that, under a joint tenancy, the Residence would pass to the surviving joint tenants.
In December of 2004, a refinancing agreement was entered into with Countrywide Home Loans (“Countrywide”). Although the promissory note has never been produced, both Eric and Mrs. Cortez were named as borrowers on an Alliance Title closing statement, and they both signed, as borrowers, documents giving Countrywide first and second deeds of trust on the Residence.
The proceeds of the refinance amounted to $138,000. A check for that amount was issued in Eric’s name only. Eric opened a checking account in his name at Technology Credit Union (the “Technology Account”), into which he deposited the check. Debtors testified that they did not put the check into their own account in part because the check was in Eric’s name and in part to avoid the levies of their creditors.
Nevertheless, Eric testified that he considered the funds in the Technology Account to belong to the Debtors. Mrs. Cortez maintained possession of the Technology Account’s check register in which *611she made all of the entries;2 she wrote the checks on the Technology Account and presented them to Eric for his signature.
The money in the Technology Account was used to pay the Debtors’ bills, including the mortgage payments, property taxes, and a judgment awarded against the Debtors. Debtors loaned about $60,000 to Compleat Visions Unlimited, Inc. (“Com-pleat”), the business owned and operated by the Debtors. Additionally, the Debtors spent approximately $43,000 to remodel the kitchen of the Residence. The remodeling began in July of 2005 and was completed pre-petition. On the petition date, $20,136 remained in the Technology Account. However, Mrs. Cortez wrote at least one check to a contractor and one check to an appliance store post-petition to pay for the pre-petition remodeling.
On August 1, 2005, Compleat filed a chapter 11 petition. Debtors filed a chapter 13 petition on October 14, 2005. In the petition, they indicated that neither they nor any affiliates had a previous or pending bankruptcy case.
On October 31, 2005, Debtors filed Schedules A through J. In their schedule of real property, Debtors listed a fee interest in the Residence.3 They valued this interest at $113,000, and did not list any encumbrances against the property. In their schedule of personal property, Debtors listed two accounts at Bank of the West, one account at East Bay Postal Credit, two IRA accounts, two vehicles, household goods and furnishings, and clothing. Debtors scheduled two secured creditors (each with a security interest in Debtors’ vehicles), no priority creditors, and a number of unsecured creditors (including Cedar).4 Debtors did not list any co-debtors on Schedule H. Finally, Debtors’ schedule of income indicated that Mr. Cortez received disability income in the amount of $1,505 per month, and Mrs. Cortez received $1,800 per month from her wages as a bookkeeper for Compleat. Their expense schedule, which did not include mortgage payments, taxes, or insurance, listed $2,242 in expenses, leaving excess income of $1,063.
Along with their schedules, Debtors filed a Statement of Financial Affairs; however, sections nineteen through twenty-five were missing. In the section titled “Nature, location and name of business,” Debtors indicated that they operated and received wages from Compleat. In the section titled “Other Transfers,” Debtors indicated that they had transferred one half of their interest in the Residence to their son Eric Cortez (“Eric”) on December 1, 2004, for no value.
Also on October 31, 2005 Debtors proposed a plan, pursuant to which they would make forty-two monthly payments in the amount of $1,050, paying 10% on unsecured claims.5 Mr. Cortez filed a declaration in support of this plan. He explained that the Residence had been refinanced in December of 2004, and the Debtors received proceeds in the amount *612of $125,000, which they used to pay medical bills and general creditors and funded Compleat.6 Mr. Cortez stated neither his nor Mrs. Cortez’s name was on the mortgage — the new first and second deeds of trust were in Eric’s name only. Eric made the mortgage payments in lieu of paying rent. Mr. Cortez expressly stated that the Debtors considered all of the equity in the property to be theirs.
In December of 2005, Mr. Cortez’s mother gave Debtors a check for $25,000 as a gift. Mrs. Cortez deposited this sum into the Technology Account.
The Debtors attended the initial meeting of creditors on December 29, 2005. Debtors did not volunteer any information regarding the Residence or the refinance at the meeting. They did, however, respond to questions from Cedar’s counsel. The Trustee learned of the refinance for the first time at this meeting.
Debtors subsequently amended their schedules. On March 3, 2006, they amended schedule A to list themselves as co-owners of the Residence, to increase the value from $113,000 to $650,000, and to include an encumbrance in the amount of $519,000. On April 12, 2006, Debtors amended schedule B to include the Technology Account with a balance of $20,136. They amended schedule D to include Countrywide as a secured creditor. They also amended schedule I to provide that Mrs. Cortez received net wages of $1,000 per month as bookkeeper for an accountant named Raymond Young and that Mr. Cortez received a contribution of $800 per month from his mother.
The Trustee and Cedar objected to confirmation of the plan on grounds of bad faith and feasibility. They requested that the case be converted to chapter 7.7 The Court conducted an evidentiary hearing on the issue of bad faith at which the Debtors and Eric testified.
Based on the evidence presented, the Court concluded that Debtors had acted in bad faith, and consequently, cause existed under section 1307(c) to convert the case to chapter 7. However, before converting the case, the Court gave the Debtors seven days to request that the case be dismissed.
As noted above, Debtors moved to dismiss the case. Cedar filed a “response” in which it requested that the dismissal be granted with prejudice. The Court granted the dismissal but gave the Trustee and Cedar thirty days to file a motion to order the dismissal with prejudice. The Trustee filed such a motion, and Cedar joined in the motion. A hearing was held on August 18, 2006, and the Court took the matter under submission.
DISCUSSION
The dismissal of bankruptcy cases with and without prejudice is authorized by section 349(a). Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1223 (9th Cir.1999). Section 349 provides:
Unless the court, for cause, orders otherwise, the dismissal of a case under this title does not bar the discharge, in a later case under this title, of debts that were dischargeable in the case dismissed; nor does the dismissal of a case under this title prejudice the debtor with regard to the filing of a subsequent petition under this title, except as provided in section 109(g) of this title.
*61311 U.S.C. § 349(a). Consequently, unless a court orders otherwise, dismissals are ordered without prejudice. Id.; Leavitt, 171 F.3d at 1223.
“A dismissal with prejudice bars further bankruptcy proceedings between the parties and is a complete adjudication of the issues.” Leavitt, 171 F.3d at 1223-24. “Cause” for dismissal with prejudice under section 349(a) is not defined by the Bankruptcy Code. Id. at 1224. In Leavitt, the Ninth Circuit held that “bad faith is ‘cause’ for a dismissal of a Chapter 13 case with prejudice under § 349(a) and § 1307(c).” Id. The court reasoned that, under section 1307(c), bad faith is “cause” for dismissal. Id. (citing In re Eisen, 14 F.3d 469, 470 (9th Cir.1994)). “Therefore, it follows that a finding of bad faith based on egregious behavior can justify dismissal with prejudice.” Id.
Determining whether bad faith exists “involves the application of the ‘totality of the circumstances’ test.” Id. A bankruptcy court should consider the following factors:
1. Whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his chapter 13 petition or plan in an inequitable manner.
2. The debtor’s history of filings and dismissals.
3. Whether the debtor only intended to defeat state court litigation.
4. Whether egregious behavior is present.
Id. A finding of bad faith does not require fraudulent intent, malice, or malfeasance on the part of the debtor. Id. at 1224-25.
In Leavitt, the first factor was satisfied when the debtor failed to fully disclose his assets and financial dealings; undervalued some assets; inflated his expenses; offered nothing to the largest unsecured creditor in his first plan; ignored the bankruptcy court’s order to amend the plan to include at least a thirty percent payment to creditors; and failed to disclose the receipt of $36,000 and his purchase of a new home during the case. Id. at 1225. With respect to the second factor, the debtor had filed two bankruptcy cases in six years, and he went on to file three more with the goal of avoiding the judgment of his largest unsecured creditor. Id. This motive and the timing of the debtor’s first filing — within two weeks of a judgment being issued against him — satisfied the third factor. Id. Finally, the court concluded that the debtor’s behavior was egregious because he offered no excuse for his actions, and his clear intention was to use bankruptcy to avoid payment of the judgment. Id. at 1226.
The Ninth Circuit also noted that less offensive conduct had constituted grounds for dismissal with prejudice. For example, in In re Morimoto, 171 B.R. 85 (9th Cir. BAP 1994), the debtor, a tax protestor, filed her petition with the intent of avoiding payment of federal income taxes. In In re Hopkins, 201 B.R. 993, 995 (D.Nev.1996), the debtors failed to file proper income tax returns, and indicated zero taxable income despite W-2 forms showing substantial wages earned. In In re Tomlin, 105 F.3d 933 (4th Cir.1997), the debtor failed to attend the initial creditors’ meeting or to timely file schedules. The Ninth Circuit expressly noted these cases would have all been properly dismissed under the Leavitt standard. Leavitt, 171 F.3d at 1226.
Here, the Court has previously determined that the Debtors acted in bad faith. Application of the Leavitt factors reinforces this conclusion.
*614The Debtors have made numerous misrepresentations in their petition, plan, and schedules. First, in their petition, the Debtors indicated that none of their affiliates were involved in a pending bankruptcy. However, Compleat had filed a chapter 11 petition on August 1, 2005, and that case was still pending as of the date the Debtors filed their petition, October 14, 2005.
In their original schedule of real property, Debtors listed themselves as the fee owners of the Residence, which they valued at $113,000 and they listed no encumbrances. However, after Cedar and the Trustee objected to plan confirmation, the Debtors amended schedule A to indicate that Mrs. Cortez co-owned the Residence with Eric; the value of the Residence was at least $650,000; and the Residence was encumbered to the extent of $519,000. Thereafter, contrary to these amendments, Mr. Cortez indicated in his declaration accompanying the Debtors’ original chapter 13 plan, he and his wife considered all of the equity in the Residence to be theirs.
Debtors did not reveal their interest in the Technology Account in their schedule of personal property. Although it was in Eric’s name, Eric testified that he considered the money in the Technology Account to belong to the Debtors. The funds in the Technology Account were used solely to pay Debtors’ bills. Mrs. Cortez appears to have exercised sole control over the Technology Account, its checks, and its check register. Further, although Debtors maintained possession of the check register, their counsel told counsel for Cedar that they did not.
Debtors did not reveal their ownership of any stock in either their schedule of personal property or Statement of Financial Affairs. However, Debtors own 100 percent of the stock of Compleat.
Debtors did not originally schedule Countrywide as a secured creditor. Although Debtors claimed they were not obligated on the debt to Countrywide, evidence has been introduced to the contrary. Both Mrs. Cortez and Eric were listed as the borrowers on the Alliance Title closing statement and both signed the documents granting Countrywide deeds of trust. Debtors did not produce the promissory note to support their contention nor did they explain their failure to do so.
Debtors did not schedule any priority claims. Specifically, while the Debtors acknowledged liability as guarantors for Compleat’s debt — including its taxes— Debtors did not schedule any taxes owed. However, the Internal Revenue Service subsequently filed a priority claim for taxes in the amount of $58,000.
Debtors did not list any co-debtors in schedule H. As noted above, however, the Court believes that both Eric and Mrs. Cortez are obligated on the mortgage to Countrywide.
Debtors’ original schedule of income did not accurately reflect their sources of income. Although they first indicated that Mrs. Cortez was receiving net wages of $1,800 per month from Compleat, she later revealed that she was actually receiving net wages of $1,000 per month from another employer. Additionally, Debtors later indicated that they received monthly contributions in the amount of $800 from Mr. Cortez’s mother. Debtors also received $300 each month from Eric, but never included this amount in their schedules.
In their schedule of expenses, Debtors did not list any mortgage payments. Debtors contended that Eric made the mortgage payments in lieu of paying rent. However, Debtors and Eric subsequently testified that Eric did not use his own *615funds to pay the mortgage.8 Rather, Mrs. Cortez prepared checks from the Technology Account for Eric’s signature to make the monthly mortgage payments. Tellingly, Mrs. Cortez appeared to be extremely familiar with the amounts of and recent changes to the mortgage payments while Eric was completely unfamiliar with these issues.
Debtors’ Statement of Financial Affairs is incomplete. However, in the portion they provided, Debtors indicated that the only payments .aggregating more than $600 that they had made to creditors within the ninety days prior to the petition date were to American Honda Finance and Volkswagen Credit. However, Debtors had paid over $30,000 to Countrywide and for remodeling the kitchen of the Residence during the ninety-day period.
Also in their Statement of Financial Affairs, Debtors indicated that they had only made one transfer of property within one year of the petition date: i.e., a one-half interest in the Residence to Eric. This was both inaccurate and incomplete. The first transfer to Eric was of a joint tenancy interest: i.e., after this transfer Eric, Mr. Cortez, and Mrs. Cortez each owned an undivided one-third interest in the Residence. The second transfer to Eric occurred when Mr. Cortez transferred his interest in the Residence to Eric. The result of this transfer was that, nominally, at least, Eric owned a two-thirds interest in the Residence and Mrs. Cortez owned a one-third interest.9 Finally, pursuant to the refinancing agreement with Countrywide, Mrs. Cortez and Eric transferred a first and second deed of trust in the Residence to Countrywide.
Debtors failed to disclose the receipt of $25,000 as a gift from Mr. Cortez’s mother in December 2005. This money was deposited into the Technology Account.
Debtors also dealt unfairly or inequitably with their Creditors. First, Debtors paid at least $38,000 post-petition to selected creditors for work performed pre-petition. Second, Debtors omitted at least two major creditors from their original schedules — Countrywide and the IRS. Finally, as noted above, Debtors indicated that one reason for putting the refinance proceeds into the Technology Account, which was in Eric’s name only, was to avoid the reach of Debtors’ creditors. Debtors subsequently omitted the Technology Account from their schedule of personal property. For these reasons, the first Leavitt factor appears to be satisfied: i.e., misrepresentations, manipulation, and/or inequitable conduct in connection with the bankruptcy case.
The second and third factors do not apply here as Debtors have not had any prior bankruptcy cases, and Debtors do not appear to have been motivated to commence the instant case solely to defeat a state court judgment. However, the Court believes that the Debtors’ behavior is egregious enough to satisfy the fourth Leavitt factor. They made a number of material misrepresentations or omissions and paid substantial sums of money to selected prepetition creditors post-petition without court approval.
*616Debtors also argue that the case should not be dismissed with prejudice because the second and third factors are not met. All four factors do not need to be satisfied, however. The Ninth Circuit was clear that the test for determining the existence of bad faith is a totality of the circumstances test. Further, not all of the factors were satisfied in the cases cited as examples by the Ninth Circuit in Leavitt.
Debtors argue that the Debtors’ acts were not as egregious as those of the debtor in Leavitt. There are in fact a number of similarities between case and Leavitt. In both cases, the debtors failed to fully disclose assets and financial dealings; undervalued some assets; omitted their largest creditors; and failed to disclose the receipt of a significant sum of money and the purchase or, here, the remodeling of a home during the ease. Nevertheless, the Ninth Circuit noted in Leavitt that less offensive conduct had constituted sufficient grounds for dismissal with prejudice. In the Court’s view, this case lies somewhere between Leavitt and the cases cited therein.
CONCLUSION
For the above reasons, the Court believes that the totality of the circumstances demonstrate that the Debtors have acted in bad faith. Consequently, Debtors case may and should be dismissed with prejudice. The motion of the Trustee and Cedar is granted.
Counsel for Trustee is directed to submit a proposed form of order in accordance with this decision.
. All title, chapter, and section references are to title 11 of the United States Code unless otherwise indicated.
. Evidence was presented at trial that, after the meeting of creditors, counsel for Cedar wrote to Debtors’ counsel, asking if they maintained a check register for the Technology Account. Debtors’ counsel responded that they did not.
. Debtors also claimed a homestead exemption in the Residence under Cal.Civ.Proc. Code § 704.730(a)(3) in the amount of $113,000. On March 3, 2006, Debtors amended schedule C to increase the amount of the claimed homestead exemption to $131,000.
. Debtors amended Schedule F to add several unsecured creditors on December 12, 2005.
. Debtors amended their plan three times, eventually providing for a sixty-month plan paying unsecured creditors pro tanto.
. Debtors subsequently testified that none of the funds in the Technology Account were used to pay medical bills.
. VW Credit, Inc. objected to confirmation on other grounds but later withdrew its objection. Cedar also objected to Debtors' claimed homestead objection.
. Debtors and Eric testified that he contributes $300 per month from his own funds for household expenses.
. Debtors may not have been entirely forthcoming about their purpose in executing the second transfer. They stated it was done for estate planning purposes. However, the Debtors and Eric held the Residence as joint tenants. The Debtors testified that they realized that a deceased joint tenant's interest would pass to the surviving joint tenants. Eric is the natural son of both Debtors. Debtors offered no explanation as to why the transfer was actually necessary to further their stated goal of estate planning. | 01-04-2023 | 11-22-2022 |
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